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IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF SOUTH CAROLINA In re: Chapter 7 Beach First National Bancshares, Inc., Debtor. Case No. 10-03499-DD

MICHELLE L. VIEIRA, as Trustee for the Estate of Beach First National Bancshares, Inc, Plaintiff, Adversary Proceeding No.: 10-80143 vs. MICHAEL BERT ANDERSON, ORVIS BARTLETT BUIE, RAYMOND E. CLEARY, III, E. THOMAS FULMER, MICHAEL D. HARRINGTON, JOE N. JARRETT, JR., RICHARD E. LESTER, LEIGH AMMONS MEESE, RICK H. SEAGROVES, DON J. SMITH, SAMUEL ROBERT SPANN, JR., B. LARKIN SPIVEY, JR., WALTER E. STANDISH, III, AND JAMES C. YAHNIS, as Directors of Beach First National Bancshares, Inc.; and WALTER E. STANDISH, III, as President and Chief Executive Officer of Beach First National Bancshares, Inc., Defendants.

OBECTION OF PLAINTIFF/TRUSTEE TO DEFENDANTS MOTION TO WITHDRAW THE REREFERENCE OF ADVERSARY PROCEEDING NO. 10-80143 Plaintiff Michelle L. Vieira (the Plaintiff or Trustee), as Trustee for the Estate of Beach First National Bancshares, Inc., objects to Defendants Motion to Withdraw the Reference

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of Adversary Proceeding No. 10-80143 Pursuant to Rule 5011 of the Federal Rules of Bankruptcy Procedure (the Motion) filed by Defendants on December 1, 2010. In the Motion, Defendants seek to withdraw the reference of this Adversary Proceeding so that the case may be heard by the District Court. denied. BACKGROUND Beach First National Bancshares, Inc. (Bancshares) Bancshares was a publicly traded company was organized under the laws of the State of South Carolina for the purpose of operating as the bank holding company for its wholly-owned subsidiary bank, Beach First National Bank Myrtle Beach, SC (the Bank). As Bancshares wholly-owned subsidiary, the Bank operated as a national bank association incorporated under the laws of the United States and subject to examination by the United States Department of the Treasury, Office of the Comptroller of the Currency (OCC). On or around April 9, 2010, the OCC closed the Bank and named the Federal Deposit Insurance Corporation (FDIC-R) as its receiver. Bancshares filed a petition for bankruptcy and is currently the debtor in a bankruptcy case under Chapter 7 of Title 11 of the United States Code, 11 U.S.C. 101 et. seq., that is pending in the United States Bankruptcy Court for the District of South Carolina, Charleston Division, Case No. 10-03499-DD (the Bankruptcy Case). The Plaintiff was appointed to serve as the Chapter 7 bankruptcy trustee for Bancshares. On September 29, 2010, the Trustee, in her capacity as the Chapter 7 Trustee for Bancshares, commenced this Adversary Proceeding No. 10-80143 by filing the above-captioned Complaint asserting causes of action for breach of fiduciary duty and negligence against the directors and/or officers of Bancshares (the D&O Case). For the reasons discussed below, Defendants Motion should be

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The FDIC-R, as the Receiver for the Bank, filed a Proof of Claim in the Bankruptcy Case as a precautionary measure to preserve all of its rights under 12 U.S.C. 1821(d)(2)(A)(i) (the Financial Institutions, Reform, Recovery and Enforcement Act of 1989 or "FIRREA") and avoid any claim that it waived any of its rights under FIRREA regarding the D&O Case that has been asserted by the Trustee on behalf of Bancshares. To date the FDIC-R has not sought to intervene in D&O Case. On December 1, 2010, Defendants moved for the mandatory or permissive withdrawal of the reference of the Adversary Proceeding (i.e., the D&O Case) so that the case may be heard by the United States District Court for the District of South Carolina (the District Court). Defendants contend that the District Court must withdraw the reference to the Bankruptcy Court under both the mandatory and permissive withdrawal provision of 28 U.S.C. 157(d). DISCUSSION Title 28, Section 157(d) governs a district court's withdrawal of a reference to the Bankruptcy Court. Section 157(d) states: The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown. The district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce. 28 U.S.C. 157(d). This section contains both a permissive and a mandatory component, see Cooper v. Courtaulds Fibers, Inc. (In re Bulldog Trucking, Inc.), No. C-B-90-31936, 1993 WL 787584, at * 1 (W.D.N.C. Jan. 26, 1993), and the "burden of demonstrating both mandatory and discretionary withdrawal is on the movant." In re U.S. Airways Group, Inc., 296 B.R. 673, 677 (E.D. Va. 2003); see also In the Matter of Vicars Ins. Agency, Inc., 96 F.3d 949,955 (7th Cir. 1996) (discussing mandatory withdrawal).

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A.

Mandatory Withdrawal The provision governing mandatory withdrawal states: The district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce.

28 U.S.C. 157(d). "There is no controlling Fourth Circuit precedent construing 157(d)." U.S. Airways, 296 B.R. at 677. However, when confronted with this issue, the South Carolina

District Courts have uniformly construed the mandatory withdrawal provision of 157(d) to apply only in cases where substantial and material consideration of non-Bankruptcy Code federal statutes is necessary for the resolution of the proceeding, and the Court have determined that mandatory withdrawal is appropriate only when (1) the party seeking mandatory withdrawal files a timely motion, (2) the bankruptcy court is called upon to apply non-bankruptcy federal law, and (3) the application of non-bankruptcy federal law is essential to the bankruptcy proceeding. In re Marine Energy Systems Corp., 2010 WL 680328 (D.S.C. 2010) (Seymour, J.); Michelle L. Viera, as Trustee for the Estate of Worldwide Wholesale Lumber, Inc. v. AGM, II, LLC, 366 B.R. 532 (D.S.C. 2010) (Duffy, J.) Accordingly mandatory withdrawal is not

warranted unless the bankruptcy court must decide substantial and material questions of nonbankruptcy federal law in order to resolve the proceeding. Id. In the present matter, Defendants contend that mandatory withdrawal is required because resolution of the case will require substantial and material consideration of [FIRREA]. (Def. Motion 3). Contrary to Defendants assertion, however, the D&O Case brought by the Trustee involves question of state law and does not require the Court to decide questions of nonbankruptcy federal law in order to resolve the case. There is no diversity in the D&O Case and the case is based solely on state common law causes of action for negligence and breach of

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fiduciary duty. FIRREA does not apply to these state laws claims, and the only reason this case is in federal court is because of its relationship to the pending bankruptcy case. Defendants further contend that withdrawal is required because, in deciding this case, the Court will need to determine whether the alleged derivative claims belong exclusively to the [FDIC]. (Defs. Motion 3). As a threshold matter, Defendants incorrectly assert that the

Trustees Complaint in the D&O Case asserts claims against Defendants for actions taken while they were serving in their capacity as officers of the Bank. (Defs. Motion 4). To the contrary, the Complaint asserts that: At all times relevant to this action, the Defendants were corporate officers and/or members of the board of directors of Bancshares, and they are named in this action in their role and capacity as officers and directors of Bancshares. (Compl. 11) [emphasis added]. As such, the D&O Case is asserted against the Defendants based on their acts and omissions as officers and directors of Bancshares, and not in their role or capacity on behalf of the Bank. Moreover, the FDIC has not claimed a preemption or moved to intervene in the

case. Defendants preemption argument is based on an issue that does not exist. Furthermore, even assuming for purposes of discussion that certain of the claims in the D&O Case do belong to the FDIC-R under the FIRREAs preemption, the Trustee and FDIC-R have reached an agreement in principal to cooperate with each other in order to avoid duplication of efforts and to minimize costs. As part of that agreement, the FDIC-R will not seek to intervene in Trustees D&O Case and will assign it rights to the Trustee to avoid defenses based on preemption claims, and the Trustee shall prosecute the D&O Case for the benefit of both the bankruptcy estate and the FDIC-R, with the parties to share the proceeds of any recovery. The Trustee is in the process of reducing that agreement to writing.

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Preemption issues do not exist in this case, and the only legal issues presented are state common law claims for breach of fiduciary duty and negligence. This case does not require the Court to decide questions of non-bankruptcy federal law in order to resolve the case. Therefore, mandatory withdrawal is not required.

B.

Permissive Withdrawal

Defendants also contend that permissive withdrawal of the reference is appropriate. The District Court has discretionary power to withdraw the reference pursuant to 28 U. S. C. 157(d), which states: "The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown." Federal district courts may abstain from exercising jurisdiction over cases or proceedings related to a case under title 11 if abstention would be in the interest of justice, or in the interest of comity with State courts or respect for State law. 28 U.S.C. 1334(c)(1). A moveant seeking a discretionary withdrawal must demonstrate good cause for the withdrawal. 28 U.S.C. 157(d). The movant carries a heavy burden of showing that both elements of 157(d) have been meet. See Hatzel & Buehler, Inc. v. Central Hudson Gas & Electric, 106 B.R. 367, 370 (D. Del. 1989). A clear showing of cause is required before withdrawing a case from able judges of the bankruptcy court, especially in light of the presumption that bankruptcy matters should remain in the bankruptcy court, the legislative history of section 157(d), and judicial interpretation. U.S. v. Kaplan, 146 B.R. 500, 504-500 (D. Mass. 1992); see also In Re Onyx Motor Car Corp., 116 B.R. 89, 91 (S.D. Ohio 1990) (Let it be clear, without truly exceptional and compelling circumstances, a motion for withdrawal of reference will not be well received by this Court.); In re DeLorean Motor Co., 49 B.R. 900, 912 (Bankr. E.D. Mich. 1985) (stating an overriding

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interest must be shown to overcome the presumption that Congress intended to have bankruptcy proceedings adjudicated in bankruptcy court.). 1. The D&O Claim constitutes a core proceeding that should be decided by the Bankruptcy Court. Section 157(b)(1)(F) provides, in pertinent part, that: "Bankruptcy judges may hear and determine cases under title 11 and all core proceedings arising under title II, or arising in a case under title 11, . . . and may enter appropriate orders and judgments, subject to [ appellate] review under section 158 of this title." Bankruptcy Courts are particularly expert at hearing and

determining the types of matters that Congress has dubbed "core". Hearing core matters in a district court would be an inefficient allocation of judicial resources given that the bankruptcy court generally will be more familiar with the facts and issues. The D&O Case squarely falls into one or more of the expressly enumerated categories of "core proceedings" set forth in 28 U.S.C. 157(b)(2), which can and should be adjudicated by the Bankruptcy Court absent some truly extraordinary or compelling circumstances. See, e.g., Baldwin-United, 57 RR. at 756. For example, the D&O Case involves: "matters concerning administration of the estate, because resolution of the D&O Case will affect the amount of estate property available for distribution and will affect the allocation of Banchares property to creditors (see 157(b)(2)(A)); and "other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor relationship," because the ultimate resolution of the D&O Case will affect both the continued liquidation of Debtor's estate assets as well as the parties' debtor-creditor relationship (see 157(b)(2)(O).

Accordingly, because the D&O Case is a core proceeding, it should be timely adjudicated by the Bankruptcy Court, and Defendants request for permissive withdrawal to the district court should be denied.

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2. Other relevant factors weigh again permissive withdrawal The other factors relevant to determining whether good cause exists demonstrate that permissive withdrawal is not appropriate in this case. Again there is no controlling Fourth Circuit precedent construing the permissive withdrawal provision in 157(d), and the Bankruptcy Court for the District of South Carolina has adopted the following twelve factors to consider when deciding whether to exercise discretionary abstention. 1. The effect or lack thereof on the efficient administration of the estate if a Court recommends abstention; The extent to which state law issues predominate over bankruptcy issues; The difficulty or unsettled nature of the applicable state law; The presence of a related proceeding commenced in state court or other nonbankruptcy court; The jurisdictional basis, if any, other than 28 U.S.C. 1334; The degree of relatedness or remoteness of the proceeding to the main bankruptcy case; The substance rather than form of an asserted core proceeding; The feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the bankruptcy court; The burden of the bankruptcy court's docket;

2. 3. 4.

5. 6.

7. 8.

9.

10. The likelihood that the commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties; 11. The existence of a right to a jury trial; and 12. The presence in the proceeding of non-debtor parties. Am. Investors Life Ins. Co. v. Salinas (In re Salinas), 353 B.R. 124, 128 (Bankr.D.S.C.2006); see also In re BI-LO, LLC, 2010 WL 3938406 (D.S.C. 2010) (Floyd, J.); In re Marine Energy Systems Corp., 2010 WL 680328 (D.S.C. 2010) (Seymour, J.); Michelle L. Viera, as Trustee for

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the Estate of Worldwide Wholesale Lumber, Inc. v. AGM, II, LLC, 366 B.R. 532 (D.S.C. 2010) (Duffy, J.) ([D]iscretionary withdrawal of reference should be determined on a case-by-case basis by weighing all the factors presented in a particular case, including the core/non-core distinction) (quoting U.S. Airways at 682.) In the present matter, the goal of expediting the bankruptcy proceedings weighs against withdrawal. Because the D&O Case is a core proceeding, the Bankruptcy Court may adjudicate the claim therein and the District Court would have appellate, rather than de novo, review of the Bankruptcy Court's orders under 28 U.S.C. 158. Withdrawal would also not be an efficient use of judicial resources, because it would result in the bankruptcy proceedings being divided between the Bankruptcy Court and the District Court. Therefore, having the matter heard and determined by the Bankruptcy Court will avoid duplication of efforts and costs and will avoid delay. Further, withdrawal of the reference of the bankruptcy case will not bring uniformity to the administration of Debtor's estate, and withdrawal would promote, rather than prevent, forum shopping. Cf. COLLIER ON BANKRUPTCY (15 ed. rev.) 13.04[1][b] pp. 61-62 ("Believing that a motion to withdraw smacks of forum shopping, the district courts have generally not been receptive to motions to withdraw the reference."). Accordingly, Defendants request for a permissive withdrawal of the reference is not should be denied.

C. Defendants jury demand does not require immediate withdrawal of the reference to the Bankruptcy Court. Finally, Defendants have demanded a jury trial in the D&O Case and indicated that they refuse to consent to jury trial before the bankruptcy judge, notwithstanding that 28 U.S.C.

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157(e) and Bankruptcy Local Rule 9015-1 authorize bankruptcy judges to conduct jury trials with the consent of all parties if specially designated by the district court to do so. As threshold matter, Defendants unexplained refusal to allow the bankruptcy court to conduct their requested jury trial pursuant to 157(e) suggests that the Defendants are forum shopping, to which the District Courts should not be receptive. Moreover, Defendants jury demand does not require an immediate withdraw of the reference to the Bankruptcy Court. The United States District Court in Alabama recently examined this issue in detail in Tate v. Citimortgage, Inc., 2010 WL 320488 (S.D. Ala. 2010), and concluded that a jury trial demand does not require immediate withdrawal of the reference: [T]he mere presence of a jury demand would not justify withdrawal of the reference at this time. Federal courts have universally held that "a Seventh Amendment jury trial right does not mean the bankruptcy court must instantly give up jurisdiction and that the case must be transferred to the district court." In re Healthcentral.com, 504 F.3d 775, 787 (9th Cir. 2007) (collecting cases) [Footnote 15]. [Footnote 15] See also Murphy, 410 B.R. at 149 (demand for jury trial "does not compel withdrawing the reference, even in a noncore proceeding, until the case is ready to proceed to trial") (citation and internal quotation marks omitted); In re Centrix Financial, LLC, 2009 WL 1605826, *4 (D. Colo. June 8, 2009) ("allowing the bankruptcy court to supervise discovery, conduct pretrial conferences, and rule on pretrial motions including dispositive motions does not infringe on the right to trial by jury"); Levine, 400 B.R. at 207 ("The right to a jury trial does not preclude a bankruptcy court from resolving pre-trial dispositive motions."); American Classic, 337 B.R. at 512 ("Courts have ... recognized that it serves the interests of judicial economy and efficiency to keep an action in Bankruptcy Court for the resolution of pre-trial, managerial matters, even if the action will ultimately be transferred to a district court for trial.") (citations omitted); In re Enron Corp., 317 B.R. 232, 234-35 (S.D.N.Y. 2004) ("A rule that would require a district court to withdraw a reference simply because a party is entitled to a jury trial, regardless of how far along toward trial a case may be, runs counter to the policy of favoring judicial economy that underlies the statutory bankruptcy

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scheme.") (citation omitted); Stein v. Miller, 158 B.R. 876, 880 (S.D. Fla. 1993) (bankruptcy court's ruling on dispositive motions does not trammel right to a jury trial); City Fire Equipment Co. v. Ansul Fire Protection Wormald U.S., Inc., 125 B.R. 645, 649 (N.D. Ala. 1989) (en banc) ("This court concludes that the mere filing of a jury demand does not cause the Bankruptcy Court to lose 'jurisdiction' of the action(s) or mandate that the reference be withdrawn."). Maintaining the referral to the Bankruptcy Court for adjudication of all pretrial matters does not curtail any party's Seventh Amendment right, but it does "promote[] judicial economy and efficiency by making use of the bankruptcy court's unique knowledge of Title 11 and familiarity with the actions before them." Id. at 787-88. [Footnote 16] [Footnote 16] See also City Fire, 125 B.R. at 649 (noting that "the Bankruptcy Court is uniquely qualified and has authority, even in actions such as this in which a jury trial has been demanded, to supervise discovery and conduct pre-trial conferences and rule on motions"); Centrix, 2009 WL 1605826, at *4 (because bankruptcy system promotes judicial economy and efficiency by harnessing bankruptcy court's unique knowledge of Title 11 and familiarity with actions before it, "district courts would undermine the statutory scheme by immediately withdrawing the bankruptcy court reference in every case merely because there is a right to jury trial"). Id. at *9. In the present matter, Defendants fail to address why withdrawal of the reference should be effectuated now, when any jury trial remains on the distant horizon, rather than allowing the Bankruptcy Court to retain jurisdiction and manage the Adversary Proceeding through discovery, dispositive motions, and other pretrial proceedings, until such time as that action is ready for trial. Further, as noted by the Defendants, certain of the Defendants have filed proof of claims in Bancshares bankruptcy case, which are equitable claims that the Bankruptcy Court is particularly expert at hearing and determining.

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Congress intended to have bankruptcy proceedings adjudicated in bankruptcy court. The jury trial demand does not require an immediate withdrawal of the reference, and it would serve the interests of judicial economy and efficiency to keep the D&O Case in the Bankruptcy Court for the resolution of discovery, pre-trial and managerial matters, even if the action will ultimately be transferred to a district court for trial. Accordingly, Defendants request for withdrawal of the reference should be denied at this time. CONCLUSION For the above reasons, Defendants Motion to Withdraw the Reference of Adversary Proceeding No. 10-80143 should be denied. Respectfully submitted,

/s/ David J. Parrish Richard L. Tapp, Jr. (Federal ID No. 5413) Email: rtapp@nexsenpruet.com David J. Parrish (Federal ID No. 6261) Email: dparrish@nexsenpruet.com Phone: 843.720.1771 Phone: 843.577.9440 NEXSEN PRUET, LLC Post Office Box 486 Charleston, South Carolina 29402 and Suzanne Taylor Graham Grigg (Fed ID No. 8064) NEXSEN PRUET, LLC Post Office Drawer 2426 Columbia, South Carolina 29202 Email: sgrigg@nexsenpruet.com Phone: 803.771.8900 January 4, 2010 Charleston, South Carolina Attorneys for Plaintiff