Las Vegas Business Press :: News : Community Bank hit with lawsuit over loan default in Lake Las Vegas

Community Bank hit with lawsuit over loan default in Lake Las Vegas

Borrower sues, claiming failure to lend $21 million caused ruin of The Bluffs

BY VALERIE MILLER

Economic times are punishing financial institutions, and now banks may be facing even more headaches.

In what some predict could be the first case in a slew of litigation, a borrower is suing a local bank for pulling the plug on its loan. The case filed recently by C.W. Capital Fund One against Community Bank of Nevada over a failed development in Lake Las Vegas is reminiscent of lawsuits unseen since the 1980s, a legal analyst said.

In the case, Community Bank is being sued by a project developer that claims the bank breached its contract for a $26 million loan. The developer alleges this caused the ruin of a planned housing development and forced the project's contractor into bankruptcy.

PHOTO BY MIKE STOTTS | BUSINESS PRESS
Community Bank is being sued by a project developer that claims it breached a contract for a $26 million loan.

C.W. Capital is suing the bank for breach of contract, claiming the bank only provided about $4.8 million of its $26.1 million in financing for construction of The Bluffs at Lake Las Vegas, because the bank said it was overextended. The lawsuit also seeks to stop Community Bank from foreclosing on land to which it may not have clear title.

The allegations in the case, which is being moved from District Court to federal court, surprised Nancy Rapoport, a University of Nevada, Las Vegas Boyd School of Law professor.

"This is juicy," she said. "If the allegations are true that the bank backed out of the loan because it had overextended itself, that bank is in serious jeopardy."

Community Bank, however, had not filed an official answer to the allegations at press time. Rapoport said the key to who prevails in the lawsuit may be found in the bank's ultimate legal response.

Ed Jamison, the president and CEO of Community Bancorp, the parent of Community Bank, denied C.W.'s claims.

"We will respond accordingly and defend ourselves vigorously," he said. "We believe it has no merit."

D. Lee Roberts, an attorney for C.W. Capital, said he could not comment because the litigation was pending.

The lawsuit against Community Bank does not name lender liability as a cause of action. Rapoport said she was "surprised" the complaint did not include the charge, since it reminded her of the lender lawsuits of the 1980s.

Others agreed the case was noteworthy.

"It is pretty significant," said Amstrong Teasdale attorney Bruce Leslie, who is not involved in the case. "C.W. is basically saying that Community Bank pulled the plug on them, went into default, and called in the loan. They are basically saying Community Bank had an obligation to proceed and they didn't. And we find out on the eve of foreclosure who is right and who is wrong."

Although he didn't want to address the lawsuit's specifics, Leslie said the case may prove to be the tip of the iceberg for litigation by borrowers against lenders.

"I think the litigation is going to become more commonplace," he said. "You'll have lenders stopping financing in the middle of the development process. (Lenders) will say there is a breach of the loan agreement. The breaches are (often) really driven by cost overruns and construction delays."

In September 2005, the complaint alleges, Community Bank agreed to the loan and C.W. entered a contract with a company, Engle Homes, to build The Bluffs. The development was to consist of 115 60-foot lots, 35 50-foot lots, 110 single-family lots, 195 condominium lots and 88 "residential cluster lots." Engle was to do grading and other work to prepare the site for construction.

In November 2006, Community Bank informed C.W. that it would no longer advance any loan proceeds because it believed it "overcommitted" itself when it agreed to the loan in the first place.

If the allegations about bankers admitting Community Bank was overextended are true, it could prove a huge problem for the bank, Rapoport said.

"Of all the things not to do, employees saying things like that is what opens companies up for liability," she said.

Community Bank's agreement to advance money from the loan was "mandatory," the lawsuits alleges. As of then, the bank had already provided close to $4.8 million for the project. "C.W. had complied fully with the loan agreement."

In some instances, a borrower may breach a loan agreement when the value of land plummets, resulting in the lack of required capitalization for the loan, Leslie said,

Despite C.W. attempts to obtain financing, Community Bank's refusal to loan the remaining $21 million caused the project to fail, the lawsuit, filed in mid-October, asserts.

C.W. suspended work on the project after the contractor filed for Chapter 11 bankruptcy.

C.W.'s also claims that Community Bank was one of a number of lenders on the project, and all had security interests in different portions of the land. The bank's foreclosure action involves deeds of trust which "no longer accurately describes property Community Bank claims a security interest in," the lawsuit claims.

The public may never know the outcome of this complicated legal action, Rapoport said.

"If these allegations are true, it will be settled before it goes to court," she said.

Contact reporter Valerie Miller at vmiller@lvbusinesspress.com or 702-387-5286.

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