Victory Claim, High Legal Fees Cloud Heritage Bank Settlement

As with so many other things involving defunct Heritage Bank of Anaheim, a proposed $10-million settlement of a $154-million negligence suit against the bank’s former officers and directors raises as many questions and as much dissention as it resolves.

Henry Rossbacher, the private attorney who handled the Federal Deposit Insurance Corp.’s civil suit, has claimed an outright victory in the case, which has drawn considerable attention in banking and insurance circles in the three years it has been winding its way to trial.

“This is the big one,” he said. “It means a substantial recovery (of money for the bank’s estate and) a drastic narrowing down of the litigation to just a few remaining parties.”

But attorneys for several of the defendants said the FDIC’s legal bills will eat up most of the settlement.

The attorneys said the FDIC will receive an $8-million payment from National Union Fire Insurance Co. of Pittsburgh, which underwrote a policy shielding the bank’s directors and officers from liability for negligent actions.

About $2 million more is to be received from liability insurers for policies covering several companies controlled by former Heritage directors, they said. Those companies were also named as defendants by the FDIC.

Of that $10 million, an estimated $5 million to $8 million will be used by the FDIC to pay the law firms that represented the agency in the Heritage case.

Additionally, the attorneys said that National Union had already paid its lawyers about $8 million before deciding to settle the case.

If those figures are correct, the legal fees for both sides exceed $13 million. And the FDIC, which acts as receiver for the Heritage Bank estate, will receive only $2 million to $5 million in proceeds from the settlement.

Rossbacher denied that the FDIC’s legal costs were as high as the figures cited by defense sources, but he declined to provide an alternative amount.

The fate of several counterclaims filed by former Heritage insiders against the FDIC also appears uncertain. Some of those claims--including one by Heritage Bancorp alleging that the agency and its attorneys are draining the estate’s assets by running up excessive legal fees--will not be automatically dropped, several defense lawyers and defendants said.

None of the defense attorneys would be quoted by name, all citing restrictions on public discussion of the terms of the proposed settlement.

Doug Patty, former chairman of Heritage, could not be reached for comment Tuesday. But Patty has said the suit was part of an FDIC vendetta motivated by his outspoken criticism in the early 1980s of the agency’s treatment of small community banks.

Patty filed a federal lawsuit against the FDIC last year, seeking $54 million in damages for the agency’s alleged breach of a 1983 agreement in which Patty resigned his bank positions in return for an FDIC promise to take no further action against him.

Rossbacher said Tuesday that Patty’s suit would be dropped as part of the settlement.

The FDIC’s suit was filed on March 15, 1985--one day short of the first anniversary of the closure of the bank, which at one time had been the largest in Orange County and one of the fastest-growing independent banks in the state. Heritage had about $158 million in assets when it was shut down by the FDIC.

State banking regulators, acting largely on information developed by the FDIC in a major audit of the bank, declared Heritage insolvent on March 16, 1984, and requested that the FDIC take over its affairs as receiver. After several days of screening potential purchasers, the agency announced that none were suitable and that the bank would be liquidated--the first liquidation in California since the 1920s.

Additionally, the FDIC used the Heritage closure to start a short-lived program in which it ended its longtime practice of covering all deposits, including those exceeding the official $100,000 FDIC insurance limit.

At the time of the closing, $6.5 million in deposits at Heritage were in accounts that exceeded $100,000. While some of that money has been paid out, the account holders still have not received about $2.5 million.

Kenneth Thompson, a former Heritage director, said of the proposed settlement: “Nobody won. We aren’t winners, they (the FDIC) aren’t winners. Everybody lost except the attorneys.”

In addition to the tentative settlement of the Heritage claims, National Union also Monday reached tentative agreement to settle FDIC claims against officers and directors of four smaller banks, including Newport Harbour National Bank, which was closed by regulators in March, 1983, and Garden Grove Community Bank, closed in June, 1984.

But Rossbacher, citing instructions from the FDIC, refused to comment on the settlement amounts. And National Union officials could not be reached for comment.

The other settlements, however, are believed to be considerably smaller than the Heritage payment.

Excluded from the preliminary agreement in the Heritage case were three law firms accused by the FDIC of legal malpractice for their roles in advising Heritage officials, and a building materials company owned by Thompson.

Thompson, who said he has spent about $140,000 on attorneys, will benefit from the settlement as an individual director but is still negotiating with the FDIC to settle claims against Thompson Building Materials.

He said he does not see the proposed settlement as a victory for the FDIC because “there was no agreement with the directors, no consent decrees that we did anything wrong, and Doug (Patty) did not drop his suit against FDIC. All this is,” he said, “is a settlement with the insurance carrier, which did not have to get our consent to make the offer.”

The three law firms excluded from the proposed settlement were added to the original negligence suit in an amendment filed in June, 1984. That amendment also leveled civil fraud allegations against most of the former officers and directors of the bank.

The fraud charges were later dismissed in Superior Court, but that ruling has been appealed by the FDIC; the appeal is still pending.

Rossbacher said the appeal would be dropped if a final settlement agreement is signed.

One of the law firms named in the suit, Knecht & Donahue-- which subsequently dissolved--was dismissed from the action more than a year ago. The FDIC has also appealed that decision, and a hearing is pending.

A second firm, Cohen & Ziskin--also dissolved after the suit was filed--is still involved in settlement discussions. Ken Ziskin, a well-known banking attorney now with the Los Angeles firm of Rosen, Wachtell & Gilbert, said Tuesday he does not believe his former firm has any liability in the Heritage case and will take the matter to trial unless the FDIC would settle for a “nominal amount.” It “would be criminal to go to the cost of a trial,” he said, if a token insurance payment would avoid one.

The third law firm--operated by former Heritage director Roger Saevig--is also negotiating a settlement, Saevig said.

Rossbacher would not comment on the likelihood of a settlement with any of the law firms. He maintained, however, that final agreement on the proposed settlement would “settle all (other) cases” in which the FDIC and Heritage Bank or former Heritage officials are involved.

He scoffed at defense claims that the settlement leaves unresolved a main issue raised by the suit: the defendants’ civil liability in the bank’s collapse.

Rossbacher cited as an indication of culpability a 1986 Securities and Exchange Commission suit against Patty, Thompson, Saevig and two other former Heritage insiders, alleging that they fraudulently manipulated the bank’s stock for more than 18 months while concealing the shaky financial status of the institution.

All but one of the defendants have signed consent decrees--documents in which, while not admiting wrongdoing, they agreed not to engage in such activity again.