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7 years after bank's failure, holdco's fight against regulators resumes

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7 years after bank's failure, holdco's fight against regulators resumes

Theholding company for a bank shuttered by the Utah Department of FinancialInstitutions during the throes of the financial crisis has rekindled ayears-long legal battle against the regulator as the seventh anniversary of theinstitution's failure approaches.

onMarch 23 filed an amended complaint in Utah's 3rd Judicial District Court forSalt Lake County against the State of Utah and the state's Commissioner ofFinancial Institutions G. Edward Leary seeking an unspecified amount ofmonetary relief for claims of breach of contract, breach of the duty of goodfaith and fair dealing, violations of procedural and substantive due process,and taking of private property without just compensation as a result of theregulator's May 1, 2009, closure of Layton, Utah-based . The defendantssubsequently removed the case to the U.S. District Court for the District ofUtah on April 21.

DouglasDurbano, the plaintiff's legal counsel, said the amended complaint representedthe latest step in a "long and complicated legal process that startedwithin the applicable statute of limitations."

AmericaWest Bank Members filed the original action, which contained a series ofsimilar claims against the state, Leary and Utah Supervisor of Banks Tom Bay,in Utah state court in June 2011. After the lower court granted the defendants'motion to dismiss the complaint, the plaintiffs appealed the matter to the UtahSupreme Court in May 2012.

Althoughthat court affirmed the dismissal of America West Bank Members' claims onappeal, it took issue in an October 2014 opinion with the dismissal of theprocedural and substantive due process claim with prejudice. It directed thedistrict court to enter a judgment of dismissal without prejudice — consistentwith the lower court's action with respect to the dismissal of the other claimsthe plaintiff had pursued.

Durbanosaid that the Utah Supreme Court's ruling had the effect of authorizing theplaintiff to file a new complaint, which ultimately materialized in March.

Theplaintiffs alleged in the suit that the bank's relationship with the FDIC andUtah Department of Financial Institutions had become "aggressive andhostile" beginning in early 2008 at the same time it had been seeking toimplement a business model that combined "the best aspects" of banksand credit unions. The plan would have given the bank the ability to distributeearnings to member owners while avoiding the corporate-level tax of a bank.

Theplaintiffs alleged that the regulators changed their standard accountingprocedures in evaluating the bank, doing so from a liquidation perspective asopposed to a going concern.

"TheBank argued with the regulators about these characterizations, and objected totheir validity, but the regulators were unyielding in adhering to their plan touse such methodology," they alleged.

Theplaintiffs further claimed that the regulators had employed those measures"with the specific objective of manufacturing a supposedly data-drivenexcuse to justify a decision that had already been made to shut down theBank." And, they alleged, the bank had been treated differently than itspeers.

"Upon information andbelief, any bank in Utah could have been demonized by the regulators if such amethodology were applied in the same manner to their portfolios," theplaintiffs alleged in the suit. "… Instead, on information and belief, thediffering treatment was done to further the intent of killing the Bank toprevent its new banking model from seeing the light of day." Theplaintiffs took further issue with the regulators' concerns about a high levelof brokered deposits at the bank, arguing that the presence of those depositshad promoted stability.

TheFDIC's Office of Inspector General in a December 2009 on America WestBank's failure presented a different perspective, attributing the institution'sdemise to management's deviation from the bank's business plan and an inabilityto effectively manage risks associated with rapid growth in commercial realestate and acquisition, development and construction lending. It posited thatthe bank's board and management "were not always responsive to examiners,and the bank consistently exhibited an appetite for high risk." The reviewreported that examiners had begun identifying problems with the bank's constructionloan portfolio by late 2007 that included certain loan policy exceptions.

TheMay 2009 closure resulted from the bank's "severely deteriorated financialcondition" and its inability to raise additional capital, the report found.

When the Utah Department ofFinancial Institutions announced the seizure, it reported that America WestBank was "insolvent and not in a safe and sound condition to transactbusiness." The plaintiffs countered in the complaint that the bank hadsufficient capital to operate and had been in a stable and profitablecondition, and it alleged that the commissioner had based his decision onreports that "relied on a new and a faulty methodology which the Bank hadvigorously opposed as being factually and legally incorrect." Further, theplaintiffs argued that the commissioner should have known that the bank wouldhave had "the potential to raise significant amounts of capital quickly ifallowed to do so and given the tools to do so."

Learyhas served as commissioner of the Utah Department of Financial Institutionssince 1992. His office declined comment on the case.

The plaintiffs said that theyhad become aware of the history of several of the loans it had originated priorto the failure and that they have seen "a consistent pattern of theseassets realizing at least as much as the Bank had valued them." Logan,Utah-based Cache ValleyBank, a Logan, Utah-based unit of Cache Valley Banking Co. acquired certain of America West Bank'sassets and assumed the bank's deposits upon the seizure.

"Theseizure of the Bank affected a massive reallocation of wealth, as those whopurchased the Bank's assets experienced significant profits from theirresale," the plaintiffs alleged. "The assets resold for a healthyprofit and within a time period the Bank could have profitably realized uponthe assets if it had not been seized."

Inremoving the case to the U.S. District Court, the defendants argued that theamended complaint includes causes of action for alleged violations of federalcivil rights, giving the federal court original jurisdiction in the matter.They have asked the federal court for a 14-day extension for submitting theiranswer to the amended complaint, which had been due April 27.