Lawsuit hits Beach First's directors

A bankruptcy trustee has filed a lawsuit against Beach First National Bank's directors, saying their reckless mismanagement of the Myrtle Beach-based bank led to its failure in April.

Michelle Vieira - trustee for the bankruptcy estate of Beach First National Bancshares, the bank's parent company - wants the directors and Walt Standish, the bank's former chief executive, to pay unspecified actual and punitive damages stemming from their negligence and breach of fiduciary duty, according to a complaint filed last week.

Vieira declined to comment on the lawsuit, saying it is her policy not to talk about pending cases.

The directors and Standish have not filed a response to the complaint.

Standish declined to comment on the lawsuit and Ray Cleary, a bank director who has been the board's spokesman, did not return a telephone call to The Sun News.

Robert Long, an Atlanta lawyer who is representing the directors, said the allegations "are without merit and we intend to defend against them vigorously."

Long declined to address specific allegations in Vieira's complaint.

A banking expert, however, said the lawsuit is "business as usual" whenever a bank files for bankruptcy protection.

"It's the duty of the trustee to maximize the value of the estate for the unsecured creditors," said Richard Lovelace, a Conway lawyer who specializes in banking and real estate law. "This was inevitable."

Lovelace said the trustee likely will try to recover money from the bank's directors-and-officers liability insurance, which protects top executives from legal action that stems from the performance of their jobs.

Ronald Jones, a Charleston lawyer who is representing the bank in its bankruptcy case, said Beach First has a directors-and-officers insurance policy but he is not sure how much coverage is available.

Kevin LaCroix, an expert in such insurance policies, said he would expect a bank the size of Beach First - which reported assets of about $660 million in the year before its failure - to have between $5 million and $15 million worth of insurance coverage.

LaCroix, an author and partner in Ohio-based OakBridge Insurance Services, said directors-and-officers policies cannot be used to directly pay creditors. He said that is why the trustee is suing the directors for monetary damages that would go to the bankruptcy estate.

"The end game will be getting to a settlement that can partially fund the unsecured creditors," LaCroix said.

There will be about $10 million in unsecured debt remaining after the trustee sells Beach First's two-thirds ownership of its former headquarters on Robert Grissom Parkway, according to bankruptcy filings.

Vieira obtained the court's permission last week to sell the building to Bank of North Carolina, the Thomasville, N.C.-based bank that assumed all of Beach First's deposits in an agreement arranged by the Federal Deposit Insurance Corp.

The bankruptcy trustee might not be the only entity interested in Beach First's directors-and-officers insurance, according to court filings.

Law firms representing Beach First told the bankruptcy court that it is difficult to estimate how much money they will charge in the case because "there are various regulatory agencies which may investigate" the bank.

The FDIC has routinely assigned its lawyers to investigate whether to take action against directors and officers following a bank's failure, according to American Banker magazine. Such a lawsuit by the FDIC would take precedent over the trustee's case.

In addition, shareholders who lost money when their Beach First stock plummeted could file lawsuits.

"There is a long road ahead," Lovelace said, referring to the potential legal action.

Directors-and-officers insurance also pays the legal costs of defending the bank's directors and executives.

Vieira's complaint said there were "serious deficiencies related to the operation and management" of Beach First, including a lack of oversight by the board of directors.

She said most of the directors lacked any prior experience running a financial institution and their dual roles as directors of the bank and its holding company created a conflict of interest.

Vieira also accused the directors of allowing the bank "to engage in unsafe and unsound lending." She said the directors did not follow the bank's loan policies and Beach First allowed a large number of risky timeshare loans and "stated income" loans in which the borrower does not have to prove any income.

Lovelace said it could be difficult for Vieira to prove that claim because banks aren't always strictly bound by their policies.

"There are two sides of the story, and there may be a plausible business reason why they didn't follow policy in some cases," he said. "The variations could be justified."

Proving negligence also could be difficult, he said, because Beach First's financial track record was sound until the national real estate crisis wiped out the economy.

For example, the bank's net income grew from $1 million in 2003 to nearly $6.2 million in 2006, and its stock price increased by more than 50 percent during that period.

"What is the timeline between when they could have discovered that things were crashing and when they tightened up" on their lending practices, Lovelace said. "There might not have been any time because the market was in a freefall. Proving negligence is a fairly steep incline."

Beach First was founded in 1996 by a group of local business people - many in the tourism and real estate industries - interested in having a bank that could help small- to medium-size businesses. Its success - and ultimate failure - was based on the loans it made in the local real estate market.

The FDIC shut down the bank in April, and Bank of North Carolina assumed its deposits and office space. Beach First filed for a Chapter 7 bankruptcy liquidation in May.

In addition to Standish, the directors named in the bankruptcy trustee's complaint are: Bert Anderson; Bart Buie; Cleary; Thomas Fulmer; Michael Harrington; Joe Jarrett Jr.; Richard Lester; Leigh Meese; Rick Seagroves; Don Smith; Samuel Spann Jr.; Larkin Spivey Jr.; and James Yahnis.