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CBCGQ News Colonial Bank Parent Wins Bankruptcy Fight With FDIC


By Patrick Fitzgerald
Of DOW JONES DAILY BANKRUPTCY REVIEW


A federal judge has rejected the Federal Deposit Insurance Corp.'s claim that
it is owed more than $900 million from the former parent company of Colonial
Bank, which was seized by banking regulators last year.

Judge Dwight H. Williams Jr. of the U.S. Bankruptcy Court in Montgomery,
Ala., Tuesday granted summary judgment to Colonial BancGroup Inc. (CBCGQ), the
failed thrift's corporate parent, in a ruling dismissing the FDIC's attempt to
go after the parent for failure to maintain capital levels at the bank.

The judge said the "unambiguous language" of agreements between the parent
and federal and state bank regulators indicate the holding company "did not
make a commitment to maintain the capital of Colonial Bank."

In addition, Williams ruled that, even had Colonial made such a commitment,
it wouldn't apply under bankruptcy law because it couldn't be "assumed and
cured" since the bank was no longer in business. In other words, Williams said
in his decision, once the bank was closed, the "purpose for the commitment
could no longer be fulfilled, and performance under the commitment was
impossible."

The FDIC declined to comment on whether it would appeal the ruling.

"We are currently analyzing the opinion to determine next steps," said Andrew
Gray, a spokesman for the FDIC.

The decision, according to Colonial BancGroup's lawyer C. Edward Dobbs,
represents a win for bank-holding companies and could have a big impact on
creditor recoveries in other bank-holding company bankruptcy cases.

"The court's denial of a priority claim asserted by the FDIC in an amount
just under $1 billion" along with its rejection of the FDIC's bid "to convert
the Chapter 11 case to Chapter 7 is quite a significant ruling for bank-holding
company bankruptcy cases throughout the country," said Dobbs, an attorney at
Atlanta's Parker, Hudson, Rainer & Dobbs.

Indeed, the FDIC has argued in other bank-holding company bankruptcies--for
instance, in the bankruptcy case of the parent of Cleveland's failed AmTrust
Bank--that its ability to go after bank parents is critical if the government
is to hold companies accountable for the commitments they make to regulators to
maintain the capital of the banks they own and control.

In Colonial's case, the FDIC argued that the bank's former parent owed it
$909 million, an amount equal to the gap between how much capital its banking
subsidiary was required to have and what it actually had on hand when it was
seized by regulators in August 2009. The FDIC, the federal agency charged with
managing the receiverships of failed banking institutions, said Colonial's
holding company in recent years made numerous commitments to regulators to
shore up the bank's capital.

The FDIC was appointed receiver of the estate of Colonial's bank upon its
collapse last August, after which Colonial BancGroup filed for Chapter 11
bankruptcy protection and regulators sold substantially all of the bank's
assets to BB&T Corp. (BBT).

Colonial, whose remaining assets include $38.4 million on deposit at BB&T,
said it would be forced to liquidate if the FDIC were successful. The result,
according to Colonial's lawyers, would be that the holding company would be
forced to pull the plug on its Chapter 11 case and creditors owed some $400
million would be out of the money.

The fight between Colonial BancGroup and the FDIC over capital commitments is
just one of the disputes between the holding company and the regulator.

The holding company has sued the FDIC over the rights to a number of
assets--including tax refunds, proceeds from insurance policies and other
property--that it says belong to the bankruptcy estate. The FDIC claims it has
dibs on the assets.

At issue are assets that the parent company said it transferred to the bank
while it was insolvent. Such transfers, which could be worth hundreds of
millions of dollars, can sometimes be unwound under bankruptcy law.

The FDIC was named receiver of Colonial Bank after regulators seized the
Montgomery, Ala., bank in the summer of 2009. Colonial, which had $25 billion
in assets and $20 billion in deposits, was the biggest bank failure of last
year.

The FDIC estimates Colonial's collapse will cost its insurance fund $3.8
billion, making it one of the most expensive bank failures in U.S. history.

Colonial's failure was tied to the collapse of mortgage lender Taylor Bean &
Whitaker Mortgage Corp., which is also in bankruptcy. The two firms had a close
relationship.

As Colonial floundered, Taylor Bean and a group of other investors had sought
to pump $300 million into Colonial, which would have enabled Colonial to become
eligible for a $550 million federal bailout. But the two sides failed to get
regulatory approvals, and that plan was scuttled.

Lee Farkas, Taylor Bean's former chairman, is awaiting trial on charges that
he orchestrated a seven-year, multibillion-dollar fraud that contributed to
Colonial's collapse. Farkas has pleaded not guilty to the charges. His trial is
slated to begin in November.

Colonial, based in Montgomery, has acknowledged it is the target of a
criminal probe by the U.S. Justice Department in relation to its mortgage
warehouse lending division and alleged accounting irregularities.


(Dow Jones Daily Bankruptcy Review covers news about distressed companies and
those under bankruptcy protection.)


-By Patrick Fitzgerald, Dow Jones Daily Bankruptcy Review; 202-862-3544;
[e-mail]


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(END) Dow Jones Newswires

09-01-10 1152ET

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