Investors sue New Frontier directors
GREELEY - When industry regulators closed New Frontier Bank in April 2009, hundreds of shareholders lost hundreds of millions of dollars invested over the 11-year life of the institution. Now a handful of those shareholders are seeking to recover their losses from the directors and some officers of the bank, whom they claim were responsible for the failure.
On Dec. 15, nearly 60 former shareholders filed a civil lawsuit in Weld County District Court naming nine defendants - former New Frontier directors Tim Thissen, Robert Brunner, John Kammeier, Jack Renfroe, Donald Lawler, Rodney Dean Juhl and Larry Seastrom, who was also president of the bank, and bank officers Greg Bell and Jim Rutz. The shareholders represent around $13 million worth of investments made into the bank from the months before the bank opened in 1998 through October 2008.
When the bank failed, the shares essentially lost all value. The largest losses belonged to two equity investment funds with $2.4 million and $1.98 million invested, and one-time board member Carroll Miller, who had invested $1.35 million through a trust in his and his wife's names.
The suit alleges that the defendants permitted and encouraged policies and practices that led to the bank's failure, by:
- Extending as many loans as possible;
- Permitting and sometimes participating in lending transactions meant to circumvent federal lending limits;
- Focusing on a growth strategy that led to concentrations in specific industries and that required non-core funding;
- Encouraging an internal social policy in which the defendants and their affiliates contracted or dealt with the bank at below-market rates.
Peter G. Koclanes, attorney at Sherman & Howard LLC, is representing defendants Thissen, Seastrom, Brunner, Kammeier and Renfroe. He declined to elaborate on any particular allegations.
"We can't comment other than to say that the allegations are false, and we will address them in due course," he said.
Complaints and counterclaims
The lawsuit cites a complaint filed in February 2009 by New Frontier borrower John Johnson and his business, Johnson Dairy, as an example of circumvention of lending limits. To date, no judicial decision has been made on the Johnson Dairy complaint, but several counterclaims and a third-party complaint have also been filed. In December, a motion to dismiss claims on both sides was filed in light of a settlement agreement between Johnson and most of the defendants. An inquiry to Johnson's attorney about the status of the case was not returned in time for publication.
The shareholder suit also cites the material loss review from the Inspector General's Office of the Federal Deposit Insurance Corp., which was the regulator responsible for overseeing New Frontier's operations and which took the bank into receivership. The review specifically refers to failures by the bank's management:
"New Frontier failed because its board and management did not implement adequate risk management practices pertaining to rapid growth and significant concentrations of ADC (acquisition, development and construction) and agricultural loans, loan underwriting and credit administration, and heavy reliance on non-core funding sources."
The report also reveals that examiners expressed concern regarding the bank's rapid growth in the years before the failure. From 2005 to 2006, New Frontier nearly doubled its assets and passed the $1 billion mark. By the end of 2008, it had reached $2 billion. Examiners at the state and federal level expressed concern about New Frontier as early as 2004. Each report of examination issued to New Frontier from 2004 through 2006 reiterated the concern, and in November 2006 the bank's management was "reminded of the importance of sound loan underwriting and credit administration."
"In retrospect, a stronger supervisory response at earlier examinations may have been prudent in light of the extent and nature of the risks and the institution's lack of adequate or timely corrective action," the Inspector General reported. "Stronger supervisory action may have influenced New Frontier's board and management to constrain their excessive risk-taking during the institution's rapid growth period."
Chuck Brega, the attorney for the shareholders, said his law firm investigated the shareholders' case for several months. It is not a class-action suit because, according to Brega, limiting the number of plaintiffs will keep the case simple. It could also protect the potential recovery.
In some shareholder cases, the suit is filed on behalf of the corporation against the directors; these are called derivative lawsuits. In a derivative lawsuit, a trustee would have first right to recovery in order to distribute it, with expenses and creditors paid before shareholders. However, Brega pointed out, this case involves individual claims, and the FDIC, as trustee, would not likely have a claim to the recovery.
"You can never discount what an agency may try to do," he acknowledged.
The shareholder suit is in early stages, with the defendants only recently served. Brega said that a more in-depth discovery process, including depositions, will begin after the defendants are given a chance to respond.
If the case advances to trial, it could help define a seemingly gray area in Colorado law. In cases involving director liability, there is a standard of care applied - simple versus gross negligence. Mark Lowenstein, a professor of commercial law at the University of Colorado Law School, explained that simple negligence often applies in cases where a director might not take proper precautions or behave reasonably but not in a willful manner - due to lack of knowledge, for example. Gross negligence is harder to define, Lowenstein said. It typically involves a conscious and voluntary disregard for directorial duties.
In Colorado, the standard of care for director liability is gross negligence. However, there is an argument that directors of financial institutions should be held to a higher standard, a distinction that has been set out in many states. In Colorado the difference is still fuzzy.
"The law is a little undefined," Lowenstein said.
In a 1998 legal newsletter, Lowenstein detailed the lack of precedent. In the 1962 case of Holland v. American Founders Life Insurance Co., the court ruling made a distinction between directors at business corporations and directors of financial institutions:
"The directors of a business corporation other than a bank are not held responsible for mere errors of judgment or for want of prudence short of clear and gross negligence," the judge ruled.
The other case of bank director liability in Colorado was Resolution Trust Corp. v. Heiserman in 1993. According to Lowenstein's article, the case pointed to broad issues of negligence rather than a single or series of specific decisions. In that case, the court cited the Colorado Corporate Code in finding the directors liable of negligence. While the code addresses the issue of common-law negligence, it does not distinguish between directors at banks or at business corporations, Lowenstein pointed out.
"I don't think it's a well-established doctrine," Lowenstein said.
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