Colonial BancGroup Sues FDIC Over Ownership of Assets

The former holding company for Colonial Bank, which was seized by federal regulators last year, is suing the Federal Deposit Insurance Corp. over the rights to millions of dollars in disputed assets.

In a lawsuit filed Thursday evening, bank holding company Colonial BancGroup Inc. (CBCGQ) sued the FDIC, the bank's receiver, 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, which sold Colonial's assets to BB&T Corp. (BBT), claims it has dibs on the assets.

The restructuring professionals overseeing Colonial BancGroup's Chapter 11 case are asking Judge Dwight H. Williams Jr. of the U.S. Bankruptcy Court in Montgomery, Ala., to decide whether the assets are property of the bankruptcy estate.

The FDIC was named receiver of Colonial Bank after regulators seized the Montgomery 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.

Colonial BancGroup is also asking Williams to deny the FDIC's claims, including fraudulent transfers, filed against the holding company.

In court papers, the holding company denied that any such fraudulent transfers occurred.

"To the contrary," lawyers for the estate said, "Colonial Bank was the recipient of numerous transfers of property...that constitute fraudulent or otherwise avoidable transfers."

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.

Among those transfers, lawyers for the parent said in court papers, is a $166 million tax refund the holding company received in June 2009. "All or a substantial part" of that went to Colonial Bank to shore up the bank's capital.

The holding company said it pumped some $121.5 million in cash and loan receivables into the bank. It also loaned $120.6 million to an affiliate to acquire a portfolio of subprime loans from the bank, loans that have "proven to be substantially uncollectable," according to court papers.

Colonial BancGroup and the FDIC declined to comment.

Under bankruptcy law, creditors can file lawsuits seeking to recoup payments a troubled company made in the months immediately before it filed for bankruptcy. Such lawsuits are common in Chapter 11 cases, as they often represent unsecured creditors' best shot at recovering what they're owed by a company in bankruptcy.

But in a recent bankruptcy-court filing, lawyers for the FDIC pointed to Colonial BancGroup's creditors committee as the force behind a "massive litigation 'support' effort."

The FDIC said that even if the committee succeeds in reclassifying the agency's claims to nonpriority unsecured claims, it wouldn't provide much benefit to unsecured creditors but would simply increase such claims to $1.25 billion from $350 million "for what may be a negligible amount of distributions."

The Alabama State Banking Department pulled Colonial Bank's charter, and the FDIC sold most of the assets to BB&T, which also took over all of Colonial Bank's deposits. Parent company Colonial BancGroup filed for bankruptcy protection 11 days later.

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