June 24, 2018
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Federal suit against former Maine bank officials, accountant moved to Bangor court

By Matt Wickenheiser, BDN Staff

BANGOR, Maine — A federal lawsuit filed by a Connecticut bank seeking to recoup at least $9 million from former executives of a Maine bank and its accountant has landed in Bangor.

Connecticut-based Bankers’ Bank Northeast in February 2011 sued the former president and directors of the former Savings Bank of Maine, now called Bank of Maine. After a long series of court motions and postponements, the judge in the case moved the lawsuit to U.S. District Court in Bangor in response to a court motion by one of the defendants, Arthur C. Markos, asking that the case be dismissed because of jurisdictional questions. The case arrived Tuesday and provides a look behind the scenes at what was happening in the banking industry as it neared collapse.

Bankers’ Bank says in the lawsuit that it loaned $18 million to Savings Bank in 2008. However, it says it made the loan on the strength of the Maine bank’s 2007 financial sheets, which Bankers’ Bank says were “false” and “dramatically overstated” Savings Banks’ financial position.

In 2009, the federal Office of Thrift Supervision charged that the Savings Bank of Maine had operated under “unsafe or unsound practices,” largely because of the number of high-risk loans it approved and not having enough money to cover loans that went bad.

The federal office forced the bank into a “corrective action” to increase its cash holdings, impose tighter lending restrictions and otherwise improve its internal controls.

In early 2010, a group of investors led by Yorkshire Capital took over the bank, an action the lawsuit noted as a “voluntary supervisory conversion, a type of takeover signifying that SBM was going to collapse absent some sort of recapitalization.”

As part of the takeover, the new group and Bankers’ Bank worked out a deal that forgave $9 million of the Connecticut bank’s $18 million in debt. In that deal, Bankers’ Bank agreed not to pursue further legal action against the Maine bank. But it reserved the right to go after the bank’s board of directors, its accountant and any insurance policies that covered them.

The lawsuit names former Savings Bank of Maine directors Everett L. Ayer, Richard Goodwin, Al C. Graceffa, George W. Heselton, Daniel F. Hollingdale, Robert P. Lacasse, Paul F. McClay and John G. Rizzo as well as former bank president Markos. It also names Berry, Dunn, McNeil & Parker, the Portland accountant firm that audited Savings Bank of Maine’s books.

According to the lawsuit, the 2007 audited financial statements that Bankers’ Bank received “depicted SBM as a successful bank with a profitable lending business, a strong balance sheet and a high ratio of capital to assets.”

“Problem loans appeared to be well controlled, representing a small portion of SBM’s loan portfolio. SBM was purportedly well capitalized and SBM’s lending business was apparently highly profitable,” the suit said. “Despite the rosy representation by SBM and Berry Dunn, the 2007 Audited Financial Statements were false and dramatically overstated SBM’s financial position and results of operations.”

Savings Bank of Maine had loaned out more than $700 million and had about $79 million in capital at the end of 2007, according to the lawsuit.

Savings Bank’s management “was supposed to closely monitor SBM’s loan portfolio and determine what losses were ‘probable’ based on ‘historical experience, the nature and volume portfolio, adverse situations that may affect borrowers’ ability to repay, estimated value of any underlying collateral and prevailing economic conditions,” the lawsuit noted.

Berry Dunn has a duty to audit the calculations and processes used by Savings Bank’s management, Bankers’ Bank asserted.

“… SBN’s derelict loan department had no internal mechanisms to collect and/or maintain information about SBM’s loan portfolio that would allow for the assessment of whether a loan loss was ‘probable,’” the lawsuit said. “SBM regularly failed to collect information about borrowers’ cash flow and business prospects. SBM regularly failed to meet even rudimentary lending standards such as obtaining appraisals for property used as collateral for loans.

“Without this basic information, SBM and Berry Dunn were ‘flying blind’ regarding what losses SBM would likely sustain from its loan portfolio.”

Based on the financial documents provided by Savings Bank of Maine, Bankers’ Bank decided to make the $18 million loan. Bankers’ Bank is claiming negligent misrepresentation against all defendants, breach of good faith and fair dealing against the former Savings Bank executives and professional malpractice on the part of Berry Dunn.

Berry Dunn’s attorney in the case declined to comment. Other attorneys for the defendants and for Bankers’ Bank did not return calls for comment.

In its answer to the charges filed last May, Berry Dunn said it “denies that it engaged in any misrepresentation or professional malpractice as alleged, and otherwise lacks knowledge or information sufficient to form a belief as to the truth of the remaining allegations.”

In filings, the former directors deny the allegations laid out against them, page after page, and said they “specifically deny that SBM’s loan portfolio was in a ‘decrepit state’ and that SBM had an ‘utter inability’ to maintain adequate information about the credit status of loans in its portfolio.”

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