NEW YORK — Bank of America Corp. on Thursday was granted a temporary restraining order to freeze $1 billion of Colonial BancGroup's assets, the latest blow for the Alabama bank in its struggle to survive.
Bank of America filed a lawsuit Wednesday against Colonial with the U.S. District Court of the Southern District of Florida, in Miami, to protect its claim on Colonial loans. In granting the restraining order Thursday afternoon, U.S. District Judge Adalberto Jordan said, "I find that Bank of America has met its burden in this case."
Bank of America, of Charlotte, acted as trustee for parties that provided funding for Colonial's mortgage business, which is deeply entangled with Taylor, Bean & Whitaker Mortgage Corp., a Florida home-loan provider that ceased most operations last week.
In its complaint, Bank of America said Colonial received from Freddie Mac proceeds in excess of $1 billion from loans funded with the help of Bank of America.
At the heart of Bank of America's complaint is Taylor Bean unit Ocala Funding LLC. Ocala holds residential mortgages that are sold to Freddie Mac, and Bank of America is Ocala's custodian, indenture trustee, and collateral agent.
Given the doubts about Colonial's ability to avoid bankruptcy, Bank of America demanded the Ocala loans, financed through Colonial, as collateral for the proceeds Colonial allegedly didn't pay. Colonial has so far refused to provide the loans, the complaint alleges.
A plaintiff's notice submitted with the suit filed by Bank of America's lawyers at Hunton & Williams LLP stated that, effective Aug. 11, the Federal Deposit Insurance Corp. ordered Colonial to "cease and desist its independent banking operations."
Mark King, a partner with Jones, Walker, Waechter, Poitevent, Carrère & Denègre LLP, the law firm representing Colonial, said the statement is "overly broad; it is not correct."
King noted that Colonial hasn't been taken into receivership and that "no such decision" has been communicated to the bank by Alabama's Superintendent of Banks, John D. Harrison.
The Alabama State Banking Board canceled a meeting that was scheduled for Wednesday to discuss the bank. It's unclear why the meeting did not take place.
Colonial is operating under separate cease and desist orders previously put in place by its regulators. Hunton & Williams said in its notice that it received a copy of the August 11 order but was "advised that the substance of the order should not be divulged as the terms require strict confidentiality."
The FDIC did not have an immediate comment about the matter.
With its suit, Bank of America isn't looking for cash, but wants to secure the loans as collateral in case of Colonial's bankruptcy. "We are doing our job as trustee," a Bank of America spokesman said.
Lisa Free, Colonial's director of investor relations, refused to comment.
Bank of America alleges, among other claims, breach of contract, unjust enrichment, and civil theft against Colonial and 10 individuals collectively referred to as John Doe.
Colonial is crucially short of capital and facing criminal charges by the Department of Justice, in addition to the cease-and-desist orders.
Over the past decade, Colonial grew from a small regional bank to one of the nation's largest providers of funds for real estate loans originated by other banks and mortgage firms. It forged a close relationship with Taylor Bean, which earlier this year was willing to provide Colonial with a capital infusion. The deal fell apart, and last week Taylor Bean closed its mortgage-lending business.
Colonial shares ended Thursday's session down 5 cents at 47 cents.