FDIC Suit Hits Failed Bank’s Ex-Officers : U.S. Says Faulty Policies Doomed Garden Grove Community

The Federal Deposit Insurance Corp. filed suit Tuesday against 14 former officers and directors of Garden Grove Community Bank, alleging that the management team’s “fatally defective” lending policies led to the bank’s failure and subsequent government seizure in June, 1984.

The suit, filed in U.S. District Court in Los Angeles, seeks $5 million in damages. It alleges that the officers and directors were negligent and breached their fiduciary duties by making “imprudent and improvident loans.”

State regulators seized the bank on June 1, 1984, and named the FDIC as receiver. Many of the bank’s assets and operations subsequently were taken over by Capital Bank of Downey.

Garden Grove Community, which opened in April, 1979, had $40 million in total assets as of May 30, 1984. More than $19 million of the bank’s deposits were in accounts placed by commercial money brokers, a sign that the bank had lost its ability to draw from a local customer base, according to state banking officials interviewed at the time of the seizure.

Laws ‘Repeatedly Violated’

The FDIC suit, filed nearly two years after the bank’s collapse, alleges that the officers and directors “repeatedly violated applicable state and federal laws . . . as well as written loan policies of the bank.” The bank’s “overly liberal credit policies resulted in an abnormal percentage of bad loans,” the suit said.

None of the former bank officials named in the suit could be reached for comment late Tuesday.

Bank President Perry Carter and the other officers and directors repeatedly were warned by state banking officials that there were serious problems, but these warnings went unheeded, the suit alleges.

Between May and January, 1983, the bank’s leasing division loaned $9 million--about 20% of the bank’s total assets, according to the suit. However, the bank did not establish a leasing policy until January, 1984, “after devastating losses had already been suffered.”

The suit includes a list of bad loans made to 27 individuals and businesses, most from Orange County. It also alleges that officials of the bank accepted inadequate property appraisals, failed to require proper loan documentation and repeatedly violated its own lending limits.