A legal dispute between two Myrtle Beach area banks is providing a glimpse into the complicated negotiations that take place when a failed financial institution is taken over by the federal government.
It also shows how the fallout from a failed bank can linger in the court system for years after the street-front signs have been changed and the old letterhead replaced with the takeover bank’s logo.
Horry County State Bank last week filed a breach of contract lawsuit against Bank of North Carolina, or BNC, over a seven-year-old, $2.7 million loan that was made to state Sen. Ray Cleary and his Waterfall Investors LLC by the now-closed Beach First National Bank.
Richard Smith, a Pawleys Island lawyer representing Horry County State Bank, declined to comment on the case. Clay Custer, a Greenville lawyer representing BNC, said the bank intends to defend itself against the lawsuit and he does not believe Horry County State Bank is entitled to any damages.
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BNC assumed Beach First’s liabilities and purchased its assets in April 2010 through an agreement with the Federal Deposit Insurance Corp., which shut down Beach First that month in the wake of the nation’s real estate bust.
Among the assets BNC purchased was a portion of the 2007 loan Beach First made to Cleary, a Surfside Beach dentist and Republican state senator from Murrells Inlet, and his wholly-owned Waterfall corporation. The $2.7 million was supposed to be used to develop a 160-acre tract off S.C. 90, but there turned out to be too much wetlands to make development practical.
The loan and the property it was tied to have been mired in lawsuits since 2011, when Cleary stopped making payments and BNC filed a foreclosure action.
Horry County State Bank’s role in the legal mess stems from its decision in 2008 to purchase a 30 percent interest in the Cleary loan through a “participation agreement.” Such agreements are common for large commercial loans, allowing several banks to share in the profits and potential risks.
The purchase agreement called for Horry County State Bank to get its payments first, with all of the principal paid by Cleary going to pay back the bank’s 30 percent interest in the loan before Beach First – which had retained 70 percent of the loan – got any of its principal payments.
When Beach First went bust, however, so did the agreement.
BNC’s acqusition of Beach First’s assets – including the 70 percent interest in the Cleary loan – was covered by the bank’s “purchase and assumption agreement” with the FDIC.
Under that agreement, the FDIC pays 80 percent of a bad loan’s book value to BNC, with the understanding that any money BNC later recovers through foreclosure or other legal action must be paid back to the federal government.
It is not clear how much money BNC received for the loan from the FDIC, but Horry County State Bank now wants some of it.
Trouble is, Custer said, banks that take a participating role in loans – Horry County State Bank, in this case – aren’t covered by agreements between the FDIC and a bank that takes over a failed financial institution.
That potentially leaves Horry County State Bank – which has its own financial problems and is under a consent order with federal regulators to raise capital – without a normal route to recover its minority interest in the loan. Which is why Horry County State Bank is going after Beach First’s successor.
BNC hasn’t filed a response to the lawsuit and no court dates are pending.
In the meantime, BNC has taken back the Waterfall property as the highest bidder in a foreclosure auction. It is trying to market the property, but so far there have been no takers. Any money BNC makes when it sells the property likely will go to repay the FDIC.
And as the property sits idle, lawyer bills are piling up – approaching $280,000 as of June, according to court documents.
Some of those lawyer fees are associated with a lawsuit Cleary filed against BNC as successor to Beach First – a bank Cleary helped to found and served as the chairman of its board of directors.
Cleary claims Beach First defrauded him on the property deal by providing him with a property appraisal that overstated the value of land and understated the amount of undevelopable wetlands on the property. A jury last year ruled in favor of BNC and Cleary has filed a pending appeal with the South Carolina Court of Appeals.
There is an uncollected $2.9 million judgment against Cleary in that case. If BNC eventually wins the appeal, it is likely the bank would have to use money collected from that judgment to help pay back the FDIC.
Rick Gleissner, a Columbia lawyer representing Cleary, said he has filed initial brief in the appeal but it is not clear when oral arguments might be scheduled.