BNE Corp.'s Creditors May Sue Regulator
Faced with the prospect of dividing less than $100 million in assets, the holders of $725 million in Bank of New England Corp. debt have been angry for a long time. Now, they are preparing for a possible court battle.
The estate of Bank of New England Corp. will probably sue in the next several months on behalf of holding company bondholders and other beneficiaries, according to Ben Branch, trustee for the estate of the defunct banking company.
A lawsuit would charge that the Federal Deposit Insurance Corp. used fraudulent conveyance to shift assets out of the holding company and into subsidiary banks before the banks were seized in January.
"The issue we are investigating is the downstreaming of assets," said Mr. Branch.
This litigation would be the first test of regulators' freedom to use certain procedures to seize and sell bank assets under the Financial Institutions Reform, Recovery, and Enforcement Act, according to Gary Himber, a senior vice president at broker dealer Emanuel & Co. and adviser to the Bank of New England Corp. bondholders.
Following standard practice in bankruptcies, the Bank of New England Corp. estate has filed so-called proofs of claim with the FDIC, in which it stakes a claim to assets of the bankrupt entity. If the FDIC does not respond in a way satisfactory to bondholders, the estate may sue, according to Mr. Branch.
Asset Transfers Probed
The bondholders' representatives are investigating a number of asset transfers as possible instances of fraudulent conveyance, whereby assets are transferred from a holding company to an otherwise worthless subsidiary for free.
Bank regulators "claim they have a right to do this, but we are testing it," according to Mr. Himber.
For example, Bank of New England Corp.'s back-office servicing and processing operation was transferred from the holding company to the Massachusetts bank, and the Massachusetts bank does not appear to have paid anything for the new asset, Mr. Branch said.
Sales of Fed Funds
In addition, the subsidiary banks sold large amounts of fed funds to each other, and some of those transactions may have involved fraudulent conveyance.
This would not be the first time bank bondholders have sued regulators.
Lenders to the now defunct MCorp have also sued to recover assets, and that case is still making its way through the courts. And bondholders sued to recover assets in conjunction with the failure of First RepublicBank Corp., as well.
"It's the classic argument that the holding company fed the banks and the holding company should have a claim against the subsidiaries in bankruptcy," said one investor in distressed-company bonds.
The cross-guarantee provisions in FIRREA would be a point of dispute in any lawsuit, Mr. Branch said. Such provisions were used when regulators seized Bank of New England subsidiaries, he said.
The FDIC seized the insolvent Massachusetts bank, then turned to the solvent Maine subsidiary and demanded that it reimburse the FDIC for losses the regulatory agency sustained in seizing the Massachusetts bank. When the much smaller Maine bank was unable to do so, it, too, was seized, Mr. Branch said.