The Colonial BancGroup, Inc (fka CBCGQ)

[Enterprising Investor]

Colonial Seeks OK For $15M Loan To Fight FDIC Claims

By Daniel Wilson

Law360, New York (August 06, 2012, 9:18 PM ET) -- Bankrupt Colonial BancGroup Inc. asked an Alabama bankruptcy court Wednesday to approve a $15 million financing agreement with three hedge funds, which the defunct bank holding company will partly use to fund a $610 million dispute with the Federal Deposit Insurance Corp. over tax refund and securities claims.
Colonial needs the funding after an Alabama federal court in January vacated a bankruptcy court order allowing the bank access to disputed accounts, according to its motion to approve the term loans. Under the terms of the deal with New York-based hedge funds Owl Creek Asset Management LP, Stonehill Institutional Partners LP and Tenor Special Situation II LLC, Colonial will receive $7.5 million to fund the FDIC litigation and $7.5 million to implement its Chapter 11 plan, the bank said.

The dispute between the bank holding company and the FDIC, receiver for Colonial Bank, involves $260 million in tax refunds, $300 million in CBG Florida REIT Corp. securities and more than $50 million in fidelity bond insurance coverage claims against Federal Insurance Co., the bank said.

Despite a “strong majority view” among several courts that a bank holding company, not a bank, is the owner of any tax refund due and that a bank only has a claim in a holding company bankruptcy case, the FDIC had taken an “uncompromising” stance toward tax refund litigation involving several other banks, according to Colonial.

“The FDIC-receiver's litigation stance not only means that the debtor must litigate its claims to final judgments but also that this litigation is likely to be protracted and expensive,” Colonial said. “Both the debtor and the FDIC-receiver can be expected to appeal adverse decisions.”

The FDIC litigation financing is interest-free, with repayment to come from any proceeds of the litigation — 27.5 percent of any recoveries without an appeal, 33.3 percent if the case involves an appeal and a 5.8 percent reduction on those figures for any settlement within 90 days of the closing of the finance agreement — according to Colonial.

The plan financing agreement is mostly subject to a 15 percent annual interest rate, with repayments spread over three years, the bank said. Any portion used to pay a pending Alabama Department of Revenue settlement is subject to a 7.5 percent interest rate, according to Colonial.

If the financing agreements aren’t consummated, the bank will owe collateral agent Wilmington Trust Co. $675,000 and up to $300,000 for legal expenses, Colonial said. The plan trustee had explored alternative funding proposals, but the hedge funds’ proposal was the only funding source of the size to properly pursue the FDIC litigation, according to the bank.

Colonial filed for Chapter 11 bankruptcy in August 2009, after a multibillion-dollar collapse, prompted by the purchase of more than $1 billion in fraudulent mortgages from the also-defunct Taylor, Bean & Whitaker Mortgage Corp., led Colonial Bank into FDIC receivership. Its amended Chapter 11 liquidation plan was approved in June 2011 after an initial rejection by U.S. Bankruptcy Judge Dwight H. Williams Jr., despite the FDIC arguing the case should be converted to a Chapter 7 liquidation to improve the take for creditors.

Colonial’s suit against the FDIC over the refund and securities claims, filed in 2009, was transferred from the bankruptcy court to Alabama federal court in May 2010. The FDIC moved for dismissal of the case in June 2010. That motion was still pending when U.S. District Judge Myron H. Thompson stayed the case in October 2010 to allow other claims between the two parties to play out. The FDIC and Colonial engaged in settlement talks, but these collapsed in September 2011 and the FDIC refused to mediate, Colonial said. The case is still stayed.

The FDIC was not immediately available for comment Monday.

Colonial is represented by Nicholas DiCarlo and Christopher Caserta of DiCarlo Caserta McKeighan & Phelps PLC and Andrew P. Campbell and Caroline Smith Gidiere of Leitman Siegal Payne & Campbell PC.

The hedge funds are represented by Schulte Roth & Zabel LLP and Burr & Forman LLP.

The case against the FDIC is The Colonial BancGroup Inc. v. Federal Deposit Insurance Corp., case number 2:10-cv-00410, in the U.S. District Court for the Middle District of Alabama.

The bankruptcy case is In re: The Colonial BancGroup Inc., case number 2:09-bk-32303, in the U.S. Bankruptcy Court for the Middle District of Alabama.

--Additional reporting by Ian Thoms. Editing by Lindsay Naylor.

http://www.law360.com/articles/367048/colonial-seeks-ok-for-15m-loan-to-fight-fdic-claims

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