Lawsuit Accuses Bank Of Hiding Bad $8.7M Loan

By Tim McGlone

The Virginian-Pilot

VIRGINIA BEACH

A lawsuit filed by Southern Bank alleges that Community Bank hid a bad $8.7 million loan as it pursued a merger with a West Virginia bank.

Bank of the Commonwealth was a partner on the loan, which was used by a Chesapeake company to buy a Williamsburg hotel.

The lawsuit, filed Wednesday in Virginia Beach Circuit Court, is the latest legal entanglement involving an asset from the failed Bank of the Commonwealth. Regulators shut down the Norfolk-based bank last fall amid mounting losses.

Southern Bank purchased Commonwealth's assets through a loss- share agreement with the Federal Deposit Insurance Corp. Southern, based in Mount Olive, N.C., is seeking to recoup certain lost assets not covered by the FDIC through legal actions such as this one.

In 2005, Staunton-based Community Bank cut a deal to loan $8.7 million to Devi Holding Co. of Chesapeake. But because of its small size, lending rules required Community to team with other banks on the loan. Bank of the Commonwealth and Midlothian-based Village Bank joined in.

Bank of the Commonwealth put in $4 million of the $8.7 million, according to the loan agreement.

Devi, an affiliate of the hotel management company LTD Hospitality Group of Chesapeake, used the loan to purchase the Quality Inn & Suites hotel on Richmond Road in Williamsburg.

According to the lawsuit, by 2011, Devi had become delinquent on the loan. Full payment was due on Dec. 1. By then, Southern had taken over Bank of the Commonwealth.

"Southern had engaged in a variety of communications with Community about collecting the matured and unpaid Devi loan," the suit says.

Those discussions included negotiating terms for restructuring the loan. Southern insisted on certain terms, but Community balked at them, the suit says.

By this summer, Community restructured the loan without Southern's approval, disregarding Southern's objections, the suit says.

"Community's own interests and hidden agenda became readily apparent in short order," the suit continues.

Community, with two branches in Virginia Beach and the rest in the Shenandoah Valley, has assets of about $500 million and, like many banks, struggled through the recession.

By the end of June, the bank reported $22.7 million in nonperforming assets. It was not disclosed whether the bank included the Devi loan in that report.

On Aug. 2, Community Financial Corp., the parent of Community Bank, announced a merger with Charleston, W.Va.-based City Holding Co., the parent of City National Bank.

Southern alleges in the suit that Community was playing "a cat and mouse game" that was "driven by its overriding and self-serving desire to find a purchaser for itself."

Southern's lawyer in the suit, Jonathan Hauser of Troutman Sanders, citing the allegations in the suit, said Community needed to make the Devi loan look like a performing loan rather than a liability.

Had the true status of the loan been revealed, the deal might have been off, or the value of the deal greatly reduced, the suit concludes.

Executives at City Holding Co. did not return calls seeking comment.

John Maloney, a Community Bank vice president in Virginia Beach who is named in the suit as one of the loan officers on the Devi deal, declined to comment when reached Monday.

Southern is seeking the balance of its share of the loans - $3.4 million - plus interest and other charges. Community has not yet responded to the complaint.

Tim McGlone, 757-446-2343, [email protected]

about Community Bank

Based in Staunton, Community has two branches in Virginia Beach, while the rest are in the Shenandoah Valley. It has assets of about $500 million and like many banks has struggled during the recession. By the end of June, the bank reported $22.7 million in nonperforming assets.