The Federal Deposit Insurance Corp. is seeking $41 million in a lawsuit filed against two former executives of Lynnwood, Wash.-based City Bank, which failed in 2010.

The suit in U.S. District Court alleges Conrad D. Hanson, the former president, CEO and founder of City Bank, and Christopher B. Sheehan, a former senior vice president of the bank, "breached their fiduciary duties to City Bank and were negligent and grossly negligent by approving, in violation of the City Bank loan policy and prudent, safe and sound lending practices, at least 26 loans” to 14 unnamed borrowers from 2005 to 2008, according to The Herald Business Journal in Everett, Wash.

City Bank executives, according to the lawsuit, failed to heed repeated admonitions from bank examiners, who warned that the bank’s practices had led to “ongoing safety and soundness deficiencies that needed to be corrected.”

Even after the housing bubble burst in 2007, the lawsuit states, Hanson and Sheehan personally approved City Bank loans worth tens of millions of dollars for developments involving mostly single-family residences - often doing so with insufficiently documented due diligence and on behalf of borrowers who had few if any assets against which to secure the loans. Hanson and Sheehan could not be reached for comment on the case.

“Rather than exercising caution as they plunged the bank deeper and deeper into ADC lending,” the lawsuit states, “defendants instead relied upon informal and autocratic procedures to approve loans.

Hanson and Sheehan stated to bank underwriting personnel that City Bank was the ‘bank of last resort’ and that City Bank was ‘doing deals no one else would.’ In addition, Hanson and Sheehan told bank underwriting personnel that the two of them ‘knew the dirt’ and did not need appraisals.”

FDIC lawsuits against professionals and board members are unusual, although some 54 similar cases have been brought nationwide since the mortgage crisis. Two similar lawsuits in Washington state led to settlements last year surrounding the failures of Westsound Bank of Bremerton, Wash. and the Bank of Clark County in Vancouver, Wash.

Hanson received $3.7 million in performance bonuses from 2006 to 2008 along with a salary that ranged from $544,416 to $650,000 per year, the FDIC alleges. During the same period, Sheehan received bonuses totaling $653,000 on top of a salary that ranged from $158,108 to $182,108 per year.

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