Ruling Favors L.A. Bank Created to Aid Development After Riots

An appellate court has reversed an $11.7-million judgment against the beleaguered Los Angeles Community Development Bank, bringing some rare good news to the federally funded institution.

Bank Chief Executive William Chu, who has been directed by city officials to wean the institution of its public funding, welcomed the appellate ruling as critical to the bank’s survival. It is more likely that the bank will now be able to attract private capital, he said.

“The impressions flowing from the trial court’s erroneous decision, now reversed, did substantial harm to the bank’s financial well-being and reputation in the nonprofit lending community,” he said.

The unanimous 3-0 ruling last week by the 2nd District Court of Appeal came nearly three years after Superior Court Judge William J. Birney found that the bank had breached its contractual responsibility to Summit Industries, a borrower that manufactured counter tops and sinks, and “directly caused” the company’s ruin.

Summit, owned by Lindsey Austin of Orange County, had secured a $2.2-million loan from the bank, created in the wake of the 1992 riots to revitalize the city’s poorest pockets by providing jobs there. Austin’s lawsuit alleged that the bank bungled the loan, damaged his business, then pulled the plug on him after indicating it would help his company recover. The bank’s counsel argued an open-and-shut case of a borrower who had defaulted on his loan.

Birney ruled that, as a community development lender, the bank had obligations to its borrowers that exceeded those of conventional lenders, and that it had unofficially entered into an agreement to help Summit work through its problems. But the appellate panel last week found that Birney erred by imposing the higher standard of care on the bank.

Birney’s judgment -- $7.2 million plus $2 million in interest and $2.4 million in attorney fees -- came as a flurry of lawsuits was filed by former borrowers and just after the bank’s largest borrower defaulted on a $24-million loan. The bank’s funder, the U.S. Department of Housing and Urban Development, had indicated it would not cover the judgment against the bank, so the matter plunged it into financial uncertainty.

Austin’s attorney, Robert Lewin, could not be reached for comment Wednesday. But he told a legal journal that he plans to ask the Supreme Court to review the decision.