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Friday, 06/03/2011 1:38:53 PM

Friday, June 03, 2011 1:38:53 PM

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Colonial Bank Bankruptcy Plan Wins Approval

http://online.wsj.com/article/SB10001424052702303657404576363551899748130.html

By PATRICK FITZGERALD

A federal judge approved Colonial BancGroup Inc.'s revamped Chapter 11 plan a week after the former Colonial Bank parent made changes to address the judge's criticism that the plan was "not in the best interests of creditors."

Judge Dwight H. Williams Jr., of the U.S. Bankruptcy Court in Montgomery, Ala., on Thursday signed off on Colonial BancGroup's Chapter 11 liquidation plan over the objection of the Federal Deposit Insurance Corp., the bank-holding company's longtime sparring partner. The Colonial BancGroup plan envisions paying off creditors by suing the FDIC.

The FDIC was named receiver of Colonial Bank in the summer of 2009, after state regulators seized the Alabama bank. It then sold most of Colonial's holdings to North Carolina's BB&T Corp.

Since then, the two sides have battled over creditors' efforts to recoup some $1.5 billion in funds the parent transferred to its struggling banking subsidiary in the months before it was seized.

"We are very pleased that the court has confirmed the Colonial's liquidation plan, which was supported overwhelmingly by those unsecured creditors holding allowed claims," said Colonial BancGroup's attorney C. Edward Dobbs, a partner at Atlanta's Parker, Hudson, Rainer & Dobbs.

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 hedge funds and other institutions that bought debt at a deep discount to pursue "an aggressive litigation strategy" aimed mostly at the FDIC, the agency said recently.

FDIC spokesman Andrew Gray couldn't immediately comment on the ruling.

The decision represents a reversal for Colonial's creditors and is another setback for the FDIC in bankruptcy court, where the agency, as receiver, has faced off against creditors of a number of bank holding companies that are under Chapter 11 protection as a result of the wave of bank closures by regulators in recent years.

Less than two weeks ago, Judge Williams sided with the FDIC, finding Colonial's Chapter 11 plan would be more expensive than Chapter 7 liquidation but would accomplish the same thing. The judge also faulted the plan for allowing a committee to decide what lawsuits to bring.

But that victory was short-lived. Colonial filed a new plan, saying it made changes to cure the problems identified by the judge and asking for a fast hearing to reconsider confirmation of the plan.

Those changes included a cut in the compensation structure for the Chapter 11 trustee, who will be paid under the same guidelines that apply to Chapter 7 trustees. Additionally, the company said it would give the judge the final word on what lawsuits are pursued after the bankruptcy plan is in place.

In a key ruling last fall, Judge Williams rejected the FDIC's bid to hold the holding company accountable for failing to maintain capital levels at the bank. The FDIC, however, said Judge Williams erred and appealed the ruling.

The fight over capital commitments adds to other battles between the two over tax refunds estimated at $253 million, real-estate investment trust preferred securities valued at $300 million, insurance and other assets. That litigation is pending in U.S. District Court in Montgomery.

According to court filings, the FDIC had offered to settle the Colonial litigation. The offer involved a carve-out of some $63 million in disputed assets—minus the fees and expenses racked up in the Chapter 11 case—to be earmarked for the estate's unsecured creditors. But no deal was ever reached, and the FDIC withdrew its settlement offer.

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.

Bobby Lowder, the so-called Auburn University "kingmaker" whom ESPN once called the most powerful booster in college sports, founded Colonial more than 20 years ago and built it into a regional banking power largely through mortgage-lending activities in the southeast.

The bank suffered big losses as the housing market cratered but its fate was sealed with the collapse of mortgage lender Taylor Bean & Whitaker Mortgage Corp., which filed for bankruptcy in August 2009. Colonial was Taylor Bean's main lender and the two firms had a close relationship.

Meanwhile Lee Farkas, Taylor Bean's former chairman, was convicted in April on criminal fraud charges related to a seven-year, multibillion-dollar scheme that contributed to Colonial's collapse. Mr. Farkas, who faces spending the rest of his life behind bars, is slated to be sentenced later this month.

Write to Patrick Fitzgerald at patrick.fitzgerald@dowjones.com
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