When East West Bank in Pasadena, Calif., was accused of causing a borrower's default and subsequent bankruptcy, the bank offered to settle for $20 million rather than take its chances with a jury.
But the borrower, a seafood importing company, took the case to court, asking for $40 million plus punitive damages.
The gamble did not pay off.
Last month, a Los Angeles jury unanimously ruled that East West, a unit of the $11.8 billion-asset East West Bancorp, was not responsible for Ocean Fresh Trading Inc.'s demise.
The bank prevailed, in part, because it did not try to hide a conflict of interest involving an employee, his wife, and an Ocean Fresh competitor.
"The lesson learned is that banks can get fair trials, too, but you've got to take the high road and be completely up front if something was amiss," said Skip Miller, a partner at Miller Barondess LLP in Los Angeles who represented East West in the case.
Walter G. Moeling 4th, a partner with the Atlanta law firm Powell Goldstein LLP, said the ruling is particularly important given the current environment; the subprime mortgage crisis, mounting foreclosures, and the credit crunch have tarnished the banking industry's reputation, making it potentially more difficult to win in front of a jury.
"In this market, there is a pent-up sentiment, 'I'm not happy with financial institutions,' and juries are skeptical whether a bank is being greedy," he said. "They think, 'If this bank isn't shooting straight, I'm going to nail them,' so banks are better off owning up to their mistakes."
Ocean Fresh Trading, an importer of frozen seafood from Asia and South America, was owned by three siblings. The suit stemmed from a decision by one of them, Jimmie Dang, to form his own company without the others' knowledge.
According to the lawsuit, Mr. Dang secretly diverted Ocean Fresh funds and seafood from warehouses to his new company, Seafresh Trading Inc. He was able to do this because he was in charge of Ocean Fresh's finances, the suit said.
He also opened a line of credit for Seafresh at East West Bank. His manager on the account was Marcus Kamarga, who also managed the Ocean Fresh account, and their relationship did not end there. Shortly after Seafresh opened for business, Mr. Kamarga's wife began working there.
In November 2006, Ocean Fresh was notified that it was nearing default on its line of credit. The notice led Mr. Dang's siblings to discover that he was diverting assets to Seafresh.
East West put Ocean Fresh's line of credit into default several months later. Ocean Fresh alleged in its suit that the default was unlawful, because East West falsely used the original loan terms, which would have required Ocean Fresh to maintain a higher balance. Instead, the suit said, East West should have used subsequent terms that Mr. Kamarga had devised to let Ocean Fresh to keep a lower balance.
When East West called the loan, on which Ocean Fresh still owed $2 million, it could not repay it. The company subsequently closed its doors early last year.
In the suit, Ocean Fresh claimed that East West caused the seafood company to go out of business, because Mr. Kamarga was allowed to "conspire" with Mr. Dang to transfer funds from Ocean Fresh's line of credit to Seafresh's.
East West has a different version of the story.
Douglas Krause, its general counsel, said that when it realized Ocean Fresh was nearing default, the bank gave the borrower more time to repay.
Several months later East West discovered that Mr. Dang's siblings were laying off employees, selling assets, and liquidating the company but were not using any of the proceeds to repay the loan, Mr. Krause said.
Consequently, East West had a right not only to call the loan, but also to rely on the original terms, because Ocean Fresh was "taking advantage" of the bank, he said.
East West argued in court that neither Mr. Kamarga nor the bank was liable for Mr. Dang's diverting assets from Ocean Fresh to Seafresh.
Moreover, according to Mr. Krause, East West argued that, like all banks, it has the right to offer services to competing businesses, so it did nothing wrong in opening a line of credit for Seafresh.
The jury agreed with the bank.
Mr. Miller acknowledged the risk in trying the case in front of a jury.
"It was an extremely dangerous case, and I was concerned about getting people who hated their boss and hated their bank," he said.
East West's offer to settle the case for $20 million was rejected because Ocean Fresh's attorneys "were so sure a downtown Los Angeles jury was going to kill a bank," Mr. Miller said.
According to Mr. Krause, East West's forthrightness about its failure to discover the conflict involving Mr. Kamarga's wife made a difference with the jury.
"We fessed up to our mistakes early on, but the conflict of interest really had nothing to do with the customer" going out of business, Mr. Krause said. "They could have gone elsewhere for a loan, and they could have stayed in business, but they didn't try."
As for Mr. Dang, the jury concluded that he had breached fiduciary duties at Ocean Fresh, but he was not ordered to pay damages.
Ocean Fresh's attorneys did not return calls for comment.
