The Colonial BancGroup, Inc (fka CBCGQ)

[Noil1]

DJ Judge Halts Discovery In Legal Fight Between Colonial, FDIC
06/05/2011 18:32 | BB&T Corp



By Patrick Fitzgerald

Of DOW JONES DAILY BANKRUPTCY REVIEW



A federal judge agreed to a temporary halt in Colonial BancGroup Inc.'s upcoming trial with the Federal Deposit Insurance Corp. over more than $1.5 billion in disputed assets, allowing him to rule on the holding company's plan to exit bankruptcy.

Judge Dwight H. Williams Jr. of U.S. Bankruptcy Court in Montgomery, Ala., Thursday signed off on a consent order, staying discovery in the case through May 26. That's almost two weeks after the May 13 hearing at which Williams is set to consider confirmation of Colonial's Chapter 11 exit plan.

The FDIC agreed to the discovery extension despite sharply criticizing what it called Colonial's courtroom "gamesmanship" and "stalling tactics."

Williams acknowledged the FDIC's concerns regarding the pace of the case in his order, noting "the FDIC strongly objects to any extension of the trial and the discovery bar dates." But the judge also stressed that he has the "inherent power" to control the court's schedule.

Judge Myron H. Thompson of the U.S. District in Montgomery is overseeing Colonial's lawsuit against the FDIC. Thompson, however, referred all discovery-related issues to the bankruptcy court.

The FDIC, which is the receiver for Colonial Bank, has been sparring with the bank's parent since it took over the bank in 2009. Colonial BancGroup is suing the FDIC to recoup some $1.5 billion in funds transferred to its banking subsidiary in the months before it was taken over.

A trial on the dispute is slated to start this fall in federal court in Alabama, but Colonial had sought a stay of discovery pending the hearing on its plan to exit bankruptcy protection. That request, the FDIC argued, would throw off the trial schedule and should be rejected.

In a key ruling last fall, Williams rejected the FDIC's bid to hold the holding company accountable for failing to maintain capital levels at the bank.

The decision represented a setback for the FDIC in bankruptcy court, where the agency, as receiver, has sparred with a number of bank-holding companies that are under Chapter 11 protection as the result of hundreds of bank closures by regulators in recent years. The FDIC, however, says Williams erred and appealed the ruling.

In addition to the fight over capital commitments, two sides are also battling over tax refunds estimated at $253 million, real-estate investment trust preferred securities worth $300 million, insurance and other assets.

Colonial, which has no revenue or business prospects, isn't seeking to reorganize, according to the FDIC. Instead, the Chapter 11 bankruptcy has become a platform for creditors who bought debt at a deep discount to pursue "an aggressive litigation strategy" aimed mostly at the FDIC, the agency said recently.

The FDIC was named receiver of Colonial Bank after state regulators seized the Montgomery, Ala., bank. It then sold most of Colonial's holdings to North Carolina's BB&T Corp. (BBT).

Colonial, which had $25 billion in assets and $20 billion in deposits, was the biggest bank failure of 2009. 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.



(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]






(END) Dow Jones Newswires

May 06, 2011 13:32 ET (17:32 GMT)

Copyright (c) 2011 Dow Jones & Company, Inc.


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