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In re Beach First National Bancshares, No. 11-2019

Decided: December 28, 2012

This matter arose out of an action brought by the trustee in bankruptcy of Beach First National Bancshares, Inc. (the “Trustee” and “Bancshares,” respectively) against the former directors and officers of Bancshares (the “Directors”), who also all formerly served as the officers and directors of Bancshares’ wholly owned subsidiary, First National Bank of Myrtle Beach, SC (the “Bank”).  After the U.S. Office of the Comptroller of Currency (the “OCC”) closed the Bank in 2010 and named the Federal Deposit Insurance Corporation (the “FDIC”) as the Bank’s receiver and liquidated all of the Bank’s assets, Bancshares filed for bankruptcy under Chapter 7.  The Trustee subsequently filed claims against the Directors for breach of fiduciary duty and negligence in their capacity as the officers and directors of Bancshares.  The District Court for the District of South Carolina determined that the Trustee lacked standing to bring this action and granted the Directors’ motion to dismiss.  The Trustee then appealed to the Fourth Circuit.

On appeal, the Fourth Circuit applied South Carolina law to address the Trustee’s claims supporting her argument that the district court erred in granting the Directors’ motion to dismiss.  The Trustee first argued “that she did not plead derivative claims against the Directors, but instead asserted direct claims that do not fall within the purview of the FDIC.”  After initially recognizing that “[a] trustee in bankruptcy succeeds to all rights of the debtor, including the right to assert any causes of action belonging to the debtor,” the court determined that the “Trustee has the authority to assert any cause of action that Bancshares could have brought in its own right,” including “the right to assert derivatives claims of Bancshares (as the Bank’s sole shareholder) against the Directors in their capacity as officers and directors of the Bank.”  However, because the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) provides that “the FDIC, when appointed receiver of a bank, succeeds to ‘all rights, titles, powers, and privileges of the insured depository institution, and of any stockholder … of such institution …,” and because the court determined that “[t]he actual basis of liability the Trustee pled against the Directors … flows only from the duties the Directors may have violated in their operation and management of the Bank,” it found that “the Trustee has not pled a harm or an act that occurred at the Bancshares (parent) level that did not simultaneously and primarily occur at the Bank (subsidiary) level.”  Therefore, the court determined that “the Trustee has pled mainly claims deriving from defalcations at the Bank level, not a distinct and separate harm specific to Bancshares at the holding company level,” and as such “the Trustee lacked standing to pursue the derivative claims under FIRREA as the right to pursue such claims belongs to the FDIC.”

After rejecting the Trustee’s first argument on appeal, the court turned to the Trustee’s contention that “she ha[d] pled three particular acts by the Directors that caused distinct harm to Bancshares and that are sufficiently distinct from acts at the Bank level to be direct claims not within the ambit of the FDIC through FIRREA.”  The court rejected the Trustee’s first two claims that the “Directors breached a duty owed to Bancshares by appointing unqualified directors to the Bank’s board” and that “the Directors caused Bancshares to guarantee the Bank’s restoration plan while simultaneously failing to ensure that the Bank complied with OCC requirements” based on its determination that the Trustee lacked standing to bring these two claims.  With respect to the first claim, the court determined that any injury resulting from “the appointment of unqualified directors to the Bank’s board … primarily occurred to the Bank,” and as such the Trustee’s claim “[was] essentially a derivative claim that the Trustee lack[ed] standing to raise.”  As to the Trustee’s second claim, the court conceded that it could “envision circumstances where directors or officers could be liable in a direct claim for inappropriately causing the parent holding company to guarantee the debt of a subsidiary (like the Bank),” but it concluded that the Trustee “fail[ed] to plead the causal connection between the act of making the gauranty to ‘damages unique to’ Bancshares.”  Therefore, the court determined that the Trustee’s second claim was a “derivative claim of harm at the Bank level that the Trustee lack[ed] standing to bring.”

As to the Trustee’s third claim “that the Directors caused Bancshares to improperly subordinate its equity interest in the LLC that owned real property,” the court found that “[t]his particular act does indeed support a direct claim against the Directors, and the district court erred in granting the motion to dismiss as to that claim.”  The court determined that the Trustee “adequately [pled] direct harm to Bancshares unrelated to any defalcation at the Bank level,” and therefore, unlike the first two claims, this claim was not a derivative action and the Trustee could proceed with the claim in the district court.

Finally, the court considered the Trustee’s argument that “even if any or all of her claims are derivative, the statutory rights of the FDIC under FIRREA do not deprive her of standing against the Directors under the facts of this case.”  The Trustee argued that because the FDIC declined to take any civil action against the Directors, she “ha[d] full authority to proceed against the Directors on all derivative claims.”  The court rejected this argument, finding “no direct statutory authority [under FIRREA] by which the FDIC may transfer to another party its exclusive statutory rights.”  Additionally, the court noted that the Trustee presented no cases supporting her purported authority.  Finally, the court rejected the Trustee’s argument that a FDIC letter, which stated that the FDIC would not recommend that any claim be pursued against the directors or officers of Bancshares, served as proof that the FDIC had “defer[red] to her pursuit of the claims against the directors.”  The court found that “even if the FDIC had the authority to transfer its statutory rights to another party, the FDIC letter at issue [could not] properly be read to do any such thing.”

Based on the above, the court held “that the Trustee may pursue her claims only as to the Directors’ alleged improper subordination of Bancshares’ LLC interest,” and reversed and remanded the district court’s judgment as to that particular claim but affirmed its judgment in all other respects.

Full Opinion

– Allison Hite