A lender-liability lawsuit is threatening to derail a $100 million merger of two Los Angeles-area banks.
Western Bancorp of Newport Beach and Bank of Los Angeles of West Hollywood said Wednesday that they would delay the merger of Bank of Los Angeles and Santa Monica Bank, a unit of Western, until Oct. 30. The deal, which was approved by Bank of Los Angeles shareholders Sept. 23, was expected to close last week.
The setback relates to a $30 million lawsuit filed against Bank of Los Angeles in September 1997 that has yet to be settled. The trial is set for Nov. 2.
Bank of Los Angeles, with $275 million of assets, became involved in the matter under litigation when it bought Beverly Hills-based World Trade Bank in 1995.
According to documents filed in Los Angeles County Superior Court, World Trade agreed in April 1995 to extend a $500,000 working capital loan to Smart Clothes Inc., of Gardena, Calif.
But under its agreement to buy World Trade, Bank of Los Angeles ordered it to find another bank to fund half the loan.
World Trade found one, according to the suit, but that agreement collapsed late in the summer of 1995, leaving World Trade to finance just $250,000.
Smart Clothes claims in court documents that it was never advised that the loan would be shared by two banks. With only half the expected loan, Smart Clothes said it could not meet payments to suppliers and was forced to cancel many of its fall and spring purchases.
By late October 1995, Smart Clothes said it had run out of money. It ultimately received the second $250,000 installment from World Trade that November, but by then it had lost "credibility with its suppliers, customers, and employees," the suit alleges.
Smart Clothes is seeking damages of $30 million, based upon business and marketing plans showing net profits of more than $20 million over five years.
Bank of Los Angeles contends that the lawsuit is "without merit" and would not comment further.
Western, which learned of the suit during due diligence, said it was postponing the merger to give it time to evaluate the charges.
"This gives us time to walk all the way around it," said Julius Christensen, general counsel at Western.
Bank of Los Angeles Chairman Adriana M. Boeka said she hopes the transaction goes through. "Both of us are working diligently to resolve the issues and close the deal," she said.
If a settlement is not negotiated, banking sources and attorneys say Western may walk away. David H. Winton, an analyst at Keefe, Bruyette & Woods Inc., said the in-market transaction was intended to help create cost savings and would not have extended Western's geographic reach in Southern California.
Western, the 13th-largest bank in California, has the backing of well- heeled investor John Eggemeyer. It has been on an acquisition spree since 1996, growing from $70 million of assets to more than $2.1 billion.