Judge dismisses lawsuit against former Cooperative Bank CEO

Sept. 22--A federal judge has dismissed a U.S. bank regulator's lawsuit against former Cooperative Bank CEO Frederick Willetts III and former directors of the Wilmington institution that failed in 2009.

The 2011 suit by the Federal Deposit Insurance Corp. sought to recoup more than $30 million and charged Willetts and the board members with neglect of duty and gross negligence in approving loans in a lot loan program that by September 2008 comprised 52 percent of Cooperative's tier one capital, the core measure of a bank's financial strength.

But in an order , U.S. District Court Judge Terrence W. Boyle held that Willetts and the other defendants used a rational process in making the lot loans, and that the mere existence of risk "cannot be said, in hindsight, to constitute irrationality."

Boyle dismissed the FDIC's charges of negligence and breach of fiduciary duty. He also dismissed charges of gross negligence, saying the defendants did not disregard the bank's well-being.

The suit charged that Cooperative's board failed to manage the inherent risks associated with its "excessive" strategy to grow assets to $1 billion by 2005 and that it failed to follow its own lending rules.

Cooperative failed June 19, 2009, when the FDIC took control of its $774 million deposits. It then was taken over by First Bank in a loss-share agreement with the federal regulator.

Also included as defendants in the FDIC suit were former directors Paul. G. Burton, James D. Hundley, Horace Thompson King III, Ottis Richard Wright Jr,, Richard Allen Rippy, Francis Peter Fensel Jr,, Dickson B. Bridger and Otto C "Buddy" Burrell Jr.

"We are obviously gratified that (the judge) reached that decision. It's the positions that we had maintained all along. It was a long time in coming," Willetts said Monday, declining further comment.

"We are delighted about the outcome for these individuals, many of whom devoted decades to the well-being of Cooperative Bank of Wilmington," said Thomas Gilbertsen, who with Meredith Boylan were lead attorneys for the Washington-based Venable law firm in representing Willetts and the former board members.

"The decision confirms the long-standing principle that directors and officers who exercise their business judgment in making decisions, even if those decisions later turn out to be problematic, will not be held personally liable," the law firm said.

The FDIC plans to appeal the ruling, according to a report in the New York Times.

The defendants' attorneys said they had not yet heard from the FDIC but pointed out that it has about 60 days from the final order to file a notice of appeal.

FDIC spokesman Greg Hernandez said Monday that the regulator doesn't comment on pending litigation.

The FDIC had sought to recoup about $14.45 million in Cooperative's losses on 78 lots in 12 developments. It also sought about $20 million for nine failed commercial real estate loans.

The lot loans were no-equity loans that required interest-only payments, the FDIC said. The loans also were so-called no-doc loans, which didn't require the borrower to provide financial statements or tax returns, the suit said.

Many of the lot loan deals soured as the housing market and the economy tanked.

The FDIC suit said that the bank failed to monitor risks of highly speculative lending, that Willetts and the directors permitted a lax loan approval process that was "grossly negligent," and that the bank violated its own loan policy in approving them. The suit said that was "exactly what FDIC examiners were concerned about."

In February 2009, regulators said the bank was in "troubled condition" and undercapitalized.

A 2010 report by the FDIC Inspector General's Office said an FDIC examination in July 2006 contained 64 recommendations to address the bank's weak risk management practices.

But in September 2007, bank examiners found that Cooperative had failed to correct a number of those problems.

The FDIC said in its suit that state and federal regulators repeatedly warned Cooperative's management and board about the risks associated with its high concentration in speculative loans and weaknesses in its lending function.

But Judge Boyle said the examiners still graded the bank's management, asset quality and sensitivity to risks as satisfactory and not requiring material changes.

"The process that defendants used to make the challenged loans were expressly reviewed, addressed and graded by FDIC regulators in their 2006 examination," Boyle said. The same underwriting and credit administration processes were also reviewed in 2006, 2007 and 2008 by independent auditors, Boyle said.

Cooperative was the second locally based bank to fail in 2009.

On April 10, 2009, the FDIC and the N.C. Commissioner or Banks closed Cape Fear Bank. It was taken over by First Federal Savings and Loan Association of Charleston, now South State Bank.

On June 8, 2012, Whiteville-based Waccamaw Bank was closed and its deposits taken over by First Community Bank.

Wayne Faulkner: 343-2329

On Twitter: @bizniznews

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