Long After the Demise of Heritage Bank, Patty and FDIC Remain at War

Doug Patty never liked traditional bankers. And the feeling was mutual.

He believes, however, that he is fighting for all bankers when he goes up against the Federal Deposit Insurance Corp., which seized the bank he built and declared it insolvent nearly three years ago.

Heritage Bank, the Anaheim institution that Patty built into a powerhouse in Orange County and now stands accused of destroying, was closed by regulators in March, 1984.

The FDIC is pursuing Patty with a $150-million Superior Court civil lawsuit that claimed he and other Heritage directors and officers are liable for fraud, negligence and other misdeeds in operating the bank. Patty has sued the FDIC in U.S. District Court, seeking $54 million for alleged breaches of contract and other improprieties.

The litigation is in its infancy, but that is not stopping the longtime Costa Mesa builder and developer from predicting the outcome.

“There’s no question I’m going to win,” he said in a recent interview. “I’m going to get my pound of flesh in court. I think I’ve given the FDIC enough to think about over the years. . . . I think that if it weren’t for guys like me, there’d be three times as many independent banks closing.”

Arrogant, egotistical, belligerent, Douglas E. Patty, 46, has hardly changed since the days he was lord of Heritage. He still combs his thinning hair forward and wears his $45,000 worth of jewelry--including a thick gold chain with a diamond-studded DP inlaid on a gold medallion--to offset his open-neck pullover shirt and casual slacks. That’s the way he dressed as a banker, too, and that aggravated some customers and many longtime bankers.

Patty also is ambitious, idealistic, persuasive, even charming in a rough-hewn way, and it’s easy to believe him when he says he can’t wait to get into court and fight the FDIC.

The FDIC probably can’t wait either. It has a list of alleged violations of federal laws and regulations, including approving large loans for favored customers who weren’t paying off current loans, lending money to customers to buy stock in the parent company and lending money to directors and officers for risky projects at rates more favorable than anyone else could get.

Before they tangle over the merits of that case, however, they have to face Patty’s federal court suit, which could nullify the big battle.

Patty is arguing that an agreement he signed with the FDIC in August, 1983--seven months before the bank was seized--not only removed him as a bank director and officer but also released him from any liability for his actions at the bank. The agreement states that the FDIC will take “no further action” against Patty based on its allegations.

If Patty gets his way, sighs of relief will spread throughout the banking and insurance world.

The insurance and the banking industries are watching “every phase” of Patty’s lawsuit because it is so unusual and can affect similar agreements, said Wayland M. Mead, general counsel of American International Group in New York. The organization is the parent of National Union Fire Insurance Co. in Pittsburgh, which is paying most of Patty’s legal costs and is a major carrier of director and officer insurance nationwide.

Mead has no illusions, however, about the effects of a possible Patty victory. “The FDIC will simply adopt different tactics,” he said.

In its heyday, Heritage Bank was regarded as the biggest and most prestigious Orange County bank, with $291 million in assets at its high point during 1982.

Patty went about his task of building the bank with a style and panache that angered regulators and most traditional bankers but apparently won customers.

Started in a trailer in Anaheim in 1975, Heritage was mainly the dream of Stanley Pawlowski, its first chairman, president and chief executive.

$2 Million Invested

Patty, a customer of Pawlowski at Imperial Bank, put up $17,000 in front money, and they both got friends and associates to invest a total of $2 million to start the bank. Nobody owned more than 6% of the bank, and Patty did not play a particularly active role in bank affairs.

As Patty’s stake in Heritage grew--eventually to about 20%--he “decided he wanted to be a banker” and began to assert himself, Pawlowski said.

Their friendship fell apart in 1978 over football and the bank’s direction.

Patty was angered when Pawlowski, as an Anaheim Stadium commission member, voted to bring the Los Angeles Rams to the stadium.

Patty had owned part of the California Sun in the short-lived World Football League and lost $800,000 when the league folded in 1975. He had been lobbying the National Football League for a franchise in Anaheim, but the commission’s vote killed any hope for Patty’s team.

Patty even sued to block the Rams’ move, but he soon dropped the action and became one of the team’s biggest boosters. He also became one of the club’s bankers.

Later in the year, a dispute over the bank’s direction erupted. Pawlowski was content to have the bank grow slowly--it had assets of $85.3 million at the end of 1978--but Patty and a few other directors wanted to grow faster, like so many financial institutions at the time.

Patty refused to back Pawlowski, who was forced to resign. With his increased power base and influence, Patty took over as chairman and chief executive. Robert Hoyt, then the mayor of Orange, was brought in as president.

Assets Shot Up

Heritage Bank’s growth soared. In the next two years, assets more than doubled to $193.4 million. By the end of 1981, Heritage had nine branches and $262.6 million in assets and Hoyt had resigned.

The more Patty’s influence grew in the bank, the more visible he became publicly.

He openly stated that he hired only young, good-looking women because “you wouldn’t go back to a restaurant if the waitresses were 80 and ugly.” He threw Valentine’s Day parties for his largest depositors, spending $30,000 one year to fete 1,500 customers with wine, food and strolling minstrels. He maintained a VIP lounge where major depositors could conduct business and that cost $30,000 to decorate.

Ever hustling, Patty had grand ideas. For instance, he wanted his own Riverboat Queen--complete with vault, tellers and other services--so he could float from slip to slip in affluent Huntington Harbour and capture the market on the canals. He also wanted to expand his VIP lounge into a private restaurant called the “500 Club” at a proposed branch. The club would be for directors, officers and customers with $500,000 in a Heritage account. Regulators rejected both ideas.

As Patty’s stature grew, so did his already large ego.

“He made it very clear he thought his ideas and his concepts on providing financial services were at the front of a new wave,” said Thomas C. Stickel, a financial institutions consultant and chairman of TCS Enterprises in San Diego. “Patty was not only flamboyant, but he always let you know he was the smartest business person who ever lived.”

One Heritage insider said Patty had “delusions of grandeur” and dissuaded most of the “yes-people” he hired from bringing him any bad news.

“Yeah, I would say it was an ego trip,” Patty said in a recent interview. “But I wasn’t at the point where I wouldn’t talk to people. . . . As far as the financial world at that time, I was viewed differently than I’m viewed as today. Today, I’m viewed as a rebel, a real maverick, a guy that nobody really understands. (Back then) I think I was viewed more as a genius in the operation of the bank.”

Looked At as Rule Breaker

Bankers scoff at that latter self-perception. “He was viewed as somewhat of a maverick and a rebel back then: He played the piano on the cracks rather than on the keys,” said Paige V. Simpson, the dean of Orange County bankers, with 43 years in the industry, including 13 at Citizens Bank of Costa Mesa, where he is president and chief executive.

Simpson said most bankers viewed Patty as someone “who would determine ways to circumvent restrictions.”

Patty figures that the traditional bankers were upset with him because he was stealing their customers from them.

The way Patty sees it, he first got into trouble with the FDIC because he began spouting off about the mounting unpaid foreign debt owed to major U.S. banks, something that was not receiving much attention in 1979-1980.

He saw a double standard. The regulators allowed the huge multinational banks to carry as current on their books billions of dollars in past-due unsecured loans to foreign governments. But the regulators required small community banks to write down domestic real estate loans without allowing enough time for the property to appreciate in value.

“I didn’t realize the importance of the story,” Patty said. “I mean, Bo Derek banked with me. Cary Grant would call to know if he could sit in the box to see a Rams game. I’m not trying to name-drop, (but) I got to thinking I was so important that, hey, what’s this crap about little foreign loans?”

He wrote to most of the U.S. senators and representatives. He even framed some of the responses, including a May, 1983, letter from Sen. Jake Garn (R-Utah), who chaired the Senate banking committee. The lawmakers, of course, shared Patty’s concern over the effects of foreign loans on large domestic banks.

Still, as early as 1981, Patty said, state and federal regulators began telling him to stop talking about the foreign loan problem, saying he was being unpatriotic and was harming national security.

Echoes of Patty’s complaints reverberate still. A recent book, entitled “Bail Out: An Insider’s Account of Bank Failures and Rescues,” by Irvine H. Sprague, a former FDIC chairman, claims that regulators treat small banks unfairly, holding them to higher and stricter supervision and requirements.

Put Money in Real Estate

Regulators, however, have a different view.

Patty pumped money into the booming real estate market. With no previous experience as a banker, he worked in the area he knew best, building and developing real estate. From 1981 through 1983, the bank had 60% to 70% of its assets in real estate loans, twice what an average California bank at the time had in the market.

Putting that many eggs in one basket isn’t prudent, the FDIC suit says, especially with signs indicating that the real estate market was going down. Lenders throughout the state were left with defaulted loans and over-valued property.

What was worse, according to the FDIC suit, was that Patty and his cohorts were engaged in a scheme of lending that would bankrupt the healthiest of institutions.

Patty and his staff often approved loans--primarily to friends and associates--for the entire value of the construction project and would charge fees and a full year of interest up front to show a large profit for the bank, according to the lawsuit.

Lenders typically approve loans of only 75% to 80% of the value of major projects.

The 100% loans by Heritage were so frequent that they accounted for more than $50 million in losses. The loans often were made with insufficient appraisals or no appraisals at all and with little or no inspection of the properties, the agency’s lawsuit charges.

And if the loans weren’t being repaid within a year, Heritage would roll them over, collecting more fees and interest payments and showing higher profits.

Allegations in Suit

At the same time, the FDIC claims, Patty and his fellow directors and officers were spending money frivolously, unreasonably and illegally. According to some of the allegations in the FDIC suit:

- Patty planned to move into lavish quarters near John Wayne Airport, less than a mile from an existing branch, at a time when the bank was having financial difficulties. The bank leased four floors of a high-rise building and planned part of it for its private 500 Club restaurant. Patty signed a chef to a yearlong contract and acquired $37,000 worth of wine, including bottles at more than $400 apiece. The total cost of the relocation was estimated at $1.3 million, and Heritage spent more than $340,000 before the state Banking Department denied the request to relocate the branch.

- Patty and others loaned more than $13.5 million to directors and officers, or their affiliates, at rates more favorable than those prevailing for comparable transactions with third parties. The amount included loans totaling $3.7 million to Patty or his private companies.

- Patty and others loaned $3.5 million at preferential rates to borrowers in 125 transactions for the purpose of purchasing 320,000 shares of stock in the bank’s parent holding company, Heritage Bancorp.

Last March, the Securities and Exchange Commission filed a lawsuit charging that Patty, his attorney, Roger Saevig, and three other Heritage officials used some of the same transactions--including approval of loans to pay for Heritage Bancorp stock--in an effort to manipulate the stock price.

In 9 1/2 months of trading, ending Feb. 12, 1982, the SEC said, the stock rose to $19.75 from $8 a share mainly because of the activities of Patty and the other defendants. Patty, without admitting liability, signed a consent order enjoining him from engaging in such practices in the future.

Patty claims that the 500 Club was a good promotional idea and that handling such customer needs as data processing was a good way to attract big accounts. He said loans were made to customers to buy Heritage stock only after his lending officers checked with state regulators.

He denied that Heritage directors received loans at favorable interest rates.

Blames FDIC for Demise

Concentrating the loans in real estate was a good idea, he said, because the loans were secured. “If I had loaned it unsecured, you could just kiss it goodby,” he said. “How do you liquidate Peru?”

He said he loved Heritage Bank and is irate over the FDIC’s actions in examining the bank for nearly two years, disrupting the operations and undermining public confidence in it. He said he doesn’t care about the more than $3 million he lost in the bank--his family was once reported to be worth $30 million--but thinks the federal agency is more to blame than he is for the loss of about $10 million to 2,300 investors.

He predicts, however, that the FDIC’s sale of bank assets, likely to continue another 15 months, will accumulate enough money to pay off depositors in full and bring investors $4 a share. Stock originally sold for $5 a share and reached $20 in 1979.

An FDIC official said continued liquidation efforts could result in a total payoff to all depositors, adding that “it’s too early to tell” if stockholders will get anything back.

Meanwhile, an FDIC ban on Patty’s serving on any bank board or as a bank officer ran out in August, and he didn’t waste time notifying the regulators.

“Being the cool guy I am,” Patty said, “I wrote them a certified letter telling them that I wanted to know if they had any problem with me going on a bank board. I said if I don’t hear from you by Oct. 1, I’ll just take it as a yes.”

The FDIC eventually wrote back, stating that he could not become a bank director, he said. But then, Patty has not yet found a bank board to join.

INSTITUTION: Heritage Bank, AnaheimTHE BEGINNING: Opened Aug. 20, 1975 with $2 million in capital THE GROWTH: Grew to $291 million in assets and nine branches during 1982 TAKEN OVER: Seized and closed March 16, 1984. Assets at $190 million