The Federal Deposit Insurance Corp. (FDIC) has sued a law firm in Henry County, Georgia, and one of its partners, accusing them of professional negligence, legal malpractice and other misconduct related to multi-million dollar real estate loans that contributed to the 2009 collapse of Neighborhood Community Bank (NCB) in Newman.

In a complaint filed on Feb. 7, the FDIC said that Smith Welch & Brittain LLP and one of its partners, Joseph Mark Brittain, had committed legal malpractice by closing loans for NCB while also representing Jeff Grant, a developer client, from 2005 to 2007.

The lawsuit alleges that Grant routinely artificially inflated and overstated the value of the properties he was acquiring to the bank and, with the hep of the law firm, he either diverted the excess cash to his companies or himself or used them to buy certificates of deposit (CD) that the bank had required him to purchase as security on the loans.

In one case, the complaint alleges, Grant was to acquire a property for $3.36 million, with $625,960 needed to be deposited in a CD account. But the actual purchase price was $2.64 million, and the difference was used to fund the deposit and for one of Grant's companies, the complaint said.

At no point of time, the law firm alerted the bank of Grant's scheme despite the fact that it was critical to a variety of decisions by NCB, including whether to report Grant to criminal authorities, whether to file reports with various government regulatory agencies, whether to declare the loan in default and begin recovery efforts, and whether to do any further business with Grant, the complaint said, adding that Brittain created two conflicting sets of settlement statements to facilitate the plan.

The wrongdoing came to light after Grant defaulted on various loans.

The FDIC is seeking damages in excess of $6 million, plus legal fees. It is acting as the receiver for NCB, which closed on June 30, 2009. The failure of NCB had cost the FDIC's insurance fund an estimated $66.7 million.

Rickman Brown, an attorney with Dietrick, Evans, Scholz & Williams, who is representing the FDIC in the case said the claims are meritorious.

However, Christine Mast, the defendants' attorney, said NCB is solely responsible for its failure and unfortunately the deep pockets lawyers are now being targeted as if they stood as guarantors for the success of the loans. Smith Welch & Brittain is the largest law firm in Henry County.

Mast also said the loans were at risk for default from the beginning.

The lawsuit is FDIC v. Smith, Welch & Brittain and Joseph Mark Brittain, No. 1:11-cv-0372 (N.D. Ga.). It is the fourth brought by the FDIC in the wake of the state's 55 bank failures, the most in any state since mid-2008. Three of the four lawsuits are against law firms or lawyers.

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