For the past three years, Webster Bank has been in a place no bank wants to be – sitting before a jury in Ohio, far away from its Waterbury, Conn. home base, where it was just a faceless, out-of-state bank trying, and failing, to defend itself in front of the average Ohioan.

In a verdict this month, a jury of those average Ohioans, in the Franklin County Court of Common Pleas, smacked Webster with $6.8 million in damages and an additional $12.15 million in punitive damages. The jury sided with a local developer and a number of individual borrowers against Webster after a construction loan deal went sour.

The case illustrates some of the pitfalls of lending operations gone bad, particularly in an area – either geographically or product-wise – far outside a company’s usual comfort zone.

Today, Webster touts its commitment to becoming a major presence in New England, and has backed it up with a recent, high-profile push into the Boston market.

But this case stems from a time when Webster ventured into different types of lending outside its traditional footprint. The Ohio deal devolved into a lawsuit in 2007, and by the end of that year Webster announced it would discontinue warehouse and correspondent lending, and announced a renewed focus on retail activities “in its core New England franchise,” according to a press release at the time.

It’s a good idea to stick to familiar turf, said William Bouton, vice chairman of the corporate department of Boston law firm Hinckley, Allen & Snyder, who added that although he couldn’t comment on the specifics of the case, he knew Franklin County to be a fast-developing area prior to the recession, which might explain its appeal to Webster.

An Odd Deal

Boomtown or not, a far-off location can hold snares.

“The last place a bank, especially an out-of-state bank, wants to be is in front of a jury,” said Kathryn Murphy, partner with Boston law firm Krokidas & Bluestein. She and other attorneys acknowledged that, for banks, juries are uncomfortably unpredictable and tend to root for the home team.

The loan itself, which totaled $5 million before Webster backed out, appears to be rather unusual. According to the initial complaint filed by the developer’s lawyer, Webster agreed to make construction loans to 24 individuals who intended to renovate and own condo units in an 80-year-old residential building. Chief plaintiff Community Building Systems, the condo seller and redeveloper, essentially guaranteed the loans, agreeing to purchase the loans from Webster in the event of default.

But it appears as though the homeowners themselves, and not the developer, planned to withdraw money piecemeal to fund construction of their units, with dispersals contingent upon a set construction schedule.

As part of the contract, Webster agreed to lend further construction funds only after its own construction inspector looked over the unit’s progress and determined that work was being done on time.

Typically, according to John Steiner, attorney with Boston-based Sullivan & Worcester, the bank just lends to the developer, who turns around and sells to the owners.

“I’ve never heard of [condo owners] being directly involved in the financings,” he said.

About 40 other borrowers in the building had a similar deal worked out with Huntington National Bank, “which has fully performed its obligations,” according to the complaint.

But Webster did not hold up its end of the deal, argued plaintiff’s attorney Marlon H. Little Jr. of Columbus, Ohio’s, Zeiger, Tigges & Little.

‘Extremely Disappointed’

Borrowers argued they needed further loans to complete their work, but Webster refused to lend more and tried to recover its original amount, arguing that borrowers were in default because construction schedules went unmet. Untrue, Little wrote, adding that Webster undercut its own defense because the bank never sent borrowers notices of default in the first place.

The jury agreed, ruling that Community Buildling Systems should get $5.4 million in damages, with the condo owners getting $1.4 million. What’s more, jurors agreed that Webster damaged the credit of those individuals, “furnish[ing] false information to the credit reporting agencies with malice toward, or a willful intent to injure” the condo owners. Punitive damages were $9.9 million for Comnunity Building Systems and $2.25 million for the condo owners, for a total verdict worth almost $19 million.

Although Webster Bank wouldn’t furnish its own documents to rebut Little’s complaints, spokesman Ed Steadham told Banker & Tradesman that construction was indeed delayed. The bank made $5 million in loans in May 2006 for a project that was supposed to be finished by June 2007. As of April 2007, he said, the projects were only 35 percent complete.

“We tried to work with the developer, but the project was not completed and the loans were not repaid,” Steadham said. “We were extremely disappointed by the outcome, and surprised, given the facts of the case.”

Webster did not mention the case in its annual report or most recent quarterly filing, but noted the verdict in a separate filing this month. There, the bank reported that it expects to put the full $18.95 million judgement in reserve by the end of this month.

Webster plans to appeal the verdict, but said it “believes the appeals process will take up to several years to complete.”