In what appears to be the first case of its kind, a Southern California bank is suing a rating company.
Inland Empire National Bank, a $68-million asset bank in Riverside, Calif., sued Bauer Financial Reports this month for branding the bank with one of its worst ratings.
The case is expected to go to trial next month in Vista, Calif., Superior Court.
Bauer, in Coral Gables, Fla., gave Inland Empire a one-star rating on its scale from zero to five stars. The safety and soundness ratings are based on a financial institution's capital and loan performance. The ratings are available for a free to anyone who calls its toll-free number.
Inland Empire says that Bauer was disseminating false information that prompted customers to withdraw deposits.
"We feel we were harmed by Bauer's rating," said Candace Smith, Inland's president.
Inland Contests Rating
Although Inland lost money last year, Ms. Smith said the bank is still well-capitalized and did not deserve the rating.
But Paul Bauer, president of the research company, disagreed.
"When I first heard about this (lawsuit) I thought it was a joke," he said.
Mr. Bauer said Inland Empire lost $2 million last year, continues to lose money, and 7.24% of its loans are nonperforming.
"What should I give them, a four-star?" Mr. Bauer said. "They're in bad shape."
Only 42 banks currently have a one-star mark, and 77 are in enough trouble to warrant a zero, Mr. Bauer said. By contrast, 80% of the industry has a four- or five-star rating.
If a bank believes its rating is unfair, Bauer will review the data. But Inland Empire, Mr. Bauer said, didn't call to question the rating before it sued.
Inland Empire also named a competitor, Fallbrook, Calif., in the suit, saying a Bauer press release lauding the bank for its five-star rating siphoned off business.
Mr. Bauer said he always sends a congratulatory release to four- and five-star rated banks.
This is the first time Bauer has been sued over a bank rating.
"Somebody just got angry," Mr. Bauer said. "So now they're going to go for the jugular."