L.A. Community Development Bank Halves Staff

The beleaguered Los Angeles Community Development Bank has laid off half its staff and pared operations, the first steps in the radical restructuring it must undergo if it is to survive.

The bank’s financial crisis could worsen at the end of the week if settlement negotiations with a former borrower aren’t resolved. The borrower, attempting to collect on a $9-million judgment, has had the bank’s main operating account frozen, raising the possibility the bank will fail to make its payroll Friday.

William Chu, chief executive of the federally funded community development lender, called a meeting Monday and read the names of 13 employees who will work their last day Friday, leaving him with a staff of 14.

“We have a mission to help the community, but until we can really retrench and reinvent ourselves it’s not going to happen,” Chu said. “It’s painful but it has to be done.”

The cuts will allow the bank to “focus for the time being only on managing our existing portfolio, making sure borrowers are paying as agreed and making sure they are creating those jobs as promised,” he said. “We do not have sufficient capital to continue our work as we had originally planned for the year 2000 for obvious reasons.”

The bank, crafted in the wake of the 1992 riots to bring capital and jobs to the city’s most blighted neighborhoods, will no longer be making new direct loans, although it will continue to make some microloans through nonprofit organizations, he said.

Litigation by early borrowers and serious loan losses--most notably from one $24-million deal that soured--have left the bank strapped for cash. To survive, it must reel in at least $25 million in mostly private investment in the coming months. The Los Angeles City Council has ordered the bank to report regularly on its progress and draft a plan to phase out operations if the restructuring fails.

The layoffs weren’t unexpected, but they drive home the point that the bank is at a crossroads.

The bank also faces settlement negotiations with Summit Industries, which sued the bank for breach of contract and won a $9.2-million judgment in March. Negotiations faltered in recent weeks, and Summit attorney Robert S. Lewin had one of the bank’s key accounts attached.

As a result, the bank is “not paying any bills” now and may not be able to make payroll Friday, he said.

“We are sensitive to that,” Chu said. “We are working every day with Mr. Lewin to see if there is something we can do. . . . I sincerely want to negotiate in good faith so we can settle this and the bank can . . . serve the community.”

Those laid off include all business development officers--who searched for potential small-business borrowers in the 19-square-mile zone the bank serves--as well as the staff that marketed the bank’s programs and some clerical workers, Chu said.

The job cuts are expected to save the bank about $1 million a year. In addition, several top-level employees--including the general counsel and the chief credit officer--recently resigned. Those jobs will be filled on a contract basis, saving the bank an estimated $300,000 yearly, Chu said. The bank also will close its satellite offices in Watts and Pacoima and move its staff from the bank’s South Los Angeles headquarters into its East Los Angeles offices.

The bank has 160 outstanding loans and investments totaling $58 million, including about $20 million in venture capital invested through Zone Ventures, a Los Angeles-based venture fund.

Chu said laid-off workers will be offered a severance package of two weeks’ pay per year of service. While cutting jobs was not pleasant, “it should not be a surprise,” he said. But one laid-off worker complained that reading the names of those laid off was “tacky.” Furthermore, laid-off workers will receive their severance only if they sign a legal agreement not to sue the bank and never to speak to anyone--including family members--about the bank or make negative comments to “any third party.”

Although the release of liability is standard in such agreements, the clause prohibiting employees from discussing the bank is unusual, according to several employment attorneys. The agreement “is not tied in any way to the reason for termination. It is the kind of thing that’s almost impossible to enforce and the main purpose is to chill the expression of anything,” said Berkeley attorney Brad Seligman.

Chu said the clause was crafted by outside counsel and he did not have the legal expertise to comment on it.