George Hyman Construction Co. filed a lawsuit against National Bank of Washington, claiming that the bank defrauded its customers by investing their funds in parent Washington Bancorporation's high-risk, uninsured commercial debt.
The lawsuit, which was filed Friday against both Washington Bancorporation (WBC) and National Bank of Washington (NBW), is the first such action since the bank company announced one month ago that it had defaulted on $25.8 million of commercial paper, or debt. Attorneys familiar with WBC's problems said they expect the lawsuit to prompt other paper holders to take similar action.
Hyman Construction holds $4.8 million of WBC debt. Hyman is one of the bank's premier customers, with tens of millions of dollars in bank accounts dating back to the late 1960s. In 1987, the construction company asked NBW to invest its excess money overnight and over the weekend in "safe, low-risk and high-quality securities."
According to the lawsuit, NBW agreed to invest the funds "in accordance with those investment objectives." And, contrary to that agreement, NBW began in October 1989 to make "unauthorized transactions with the funds" that were in Hyman's accounts and to invest those funds in WBC commercial paper, the lawsuit said.
The lawsuit said that NBW executives were aware of its parent company's problems and knew the commercial paper was "becoming increasingly unsafe and risky." Nonetheless, NBW invested the funds in WBC commercial paper on the Friday before the bank company defaulted on the debt, the lawsuit said.
"NBW and Washington Bancorp knew that they were taking the funds ... for the use of Washington Bancorp and that in all likelihood they could not and would not repay such funds," the lawsuit said.
WBC Chairman John J. Mason, who just assumed that position last week, said the lawsuit comes as no surprise.
"I'm sorry that Hyman wasn't a bit more patient with the bank," Mason said. The lawsuit "is not worthy, in our judgment, of any definitive replies. We really believe that by the time we're required to reply, the question will be moot and the problems will be resolved."
WBC said last week that it was working on a plan to pay off its creditors. Private investors, including Mason and WBC's largest shareholder, Wafic Said, would provide $45 million to the company in exchange for bonds and the right to acquire a major stock interest in WBC.
Mason said yesterday that he is "making a lot of progress on the bank's refinancing program." WBC has said it expects the refinancing to be completed in a few weeks and that creditors will receive full repayment, including the interest they are owed.