A bankruptcy judge said Colonial BancGroup Inc.'s top executives, including founder Robert Lowder, can tap the bankrupt holding company's insurance to defend themselves from a wave of lawsuits filed by investors angry over the collapse of the company's bank.

Judge Dwight H. Williams Jr. of the U.S. Bankruptcy Court in Montgomery, Ala., said Thursday that Lowder, the company's former chief executive, and 20 other current or former Colonial BancGroup officials can tap an additional $1.5 million to pay for their defense. The executives have already exhausted that same amount.

The insured officials are facing numerous lawsuits, including one from shareholders alleging "fraud, deceit...unjust enrichment and breach of fiduciary duty," and another claiming officials lied to shareholders about the bank receiving federal bailout funds. The officials are subject to civil damages alleged to exceed $115 million.

Current and former members of Colonial's board and management team are also looking to use the funds to pay legal bills connected to an ongoing federal criminal probe.

Williams, the bankruptcy judge, initially allowed the group to tap proceeds from the Federal Insurance Co. policy in November. But that money is gone and the officials say they need more.

Colonial BancGroup served as the bank holding company for Colonial Bank until regulators closed it last August after the parent failed to raise the funds needed to keep it afloat.

The company had suffered losses related to its commercial real-estate lending. Colonial BancGroup filed for Chapter 11 protection shortly after.

Now, the bank holding company and some of its current and former officers and directors are "responding to various government investigations of it and others," the officers and directors said in court papers.

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.

Colonial's financial woes came amid problems with mortgage lender Taylor Bean & Whitaker Mortgage Corp., which is also in bankruptcy.

Last month, U.S. authorities arrested Lee Farkas, Taylor Bean's former chairman, and charged him with orchestrating a seven-year, multibillion-dollar fraud that contributed to Colonial's collapse.

On Friday, Farkas was in a federal courtroom in Alexandria, Va. He pleaded not guilty to the charges and demanded a jury trial, which is slated to begin in November, according to court papers.

Taylor Bean and Colonial 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.

Taylor Bean filed for bankruptcy protection in August 2009 after federal regulators froze its accounts and suspended its authority to make loans insured by the government agencies. Taylor Bean was forced to shut its doors after federal regulators and the Federal Bureau of Investigations raided its Ocala, Fla., offices at a time of reports that the company's accounting firm halted an audit after uncovering evidence of massive fraud.

The Federal Deposit Insurance Corp. is now the receiver for Colonial Bank. 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 Bank, which had $25 billion in assets and $20 billion in deposits, was the biggest bank failure of last year.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.