Settlement Reached in Fraud Suit Against Ex-Officers, Directors of Heritage Bank

The Federal Deposit Insurance Corp. has reached a preliminary settlement in a $150-million civil fraud lawsuit it filed against former directors, officers and lawyers of Anaheim-based Heritage Bank, an FDIC attorney said Monday.

In addition, the federal agency has settled similar suits filed in connection with the failures of the Garden Grove Community Bank and Newport Harbour National Bank.

Henry H. Rossbacher, an attorney with the law firm of Williams, Walsh & Sullivan in Los Angeles, said the Heritage Bank settlement was reached Monday in hearings before Superior Court Judge Jerrold Oliver in Santa Ana. Rossbacher’s firm represented the FDIC in the Heritage litigation.

Rossbacher said the settlement, which is subject to further court review, was reached with 13 former directors and officers of Heritage, including former chairman and co-founder Douglas A. Patty, and most other defendants in the lawsuit.

“The FDIC has reached a substantial settlement of its claims that Douglas Patty and the other officers and directors of Heritage Bank acted illegally and fraudulently,” Rossbacher said.

Rossbacher declined to disclose the amount of Wednesday’s settlement, but he said the FDIC expects to recover more than $10 million by the time the litigation process is completed.

“This is it. This is the big one,” Rossbacher said. “It means a substantial recovery for the receivership estate. . . . It means a drastic narrowing down of the litigation to just a few remaining parties.”

Heritage, which ranked as Orange County’s largest independent bank during its heyday in 1982, was declared insolvent and closed by federal regulators in March, 1984. The bank had assets of about $150 million when it was seized, including at least $50 million in bad loans, regulators said.

In March, 1985, the FDIC filed a civil fraud lawsuit accusing Patty and other former directors and officers of manipulating the bank’s stock price while concealing its shaky financial status.

Patty later filed a $54-million countersuit against the FDIC. Rossbacher said Patty has agreed to withdraw the suit as part of the settlement.

Rossbacher said one former board member, general counsel Roger Saevig, settled with the FDIC in his capacity as a director but not as an attorney. Also excluded from the settlement are two defunct Los Angeles law firms and Thompson Building Materials, an Orange County firm owned by former Heritage director Kenneth Thompson.

Rossbacher said the FDIC also has reached preliminary settlements of lawsuits filed in connection with the 1984 closing of Garden Grove Community Bank, the 1983 seizure of Newport Harbour National Bank and the failures of two out-of-state banks. He declined to disclose with the terms of the agreements.