A judge has named Deerwood Bank winner of the bankruptcy auction for American Bank of St. Paul, in the first test of involuntary bankruptcy as a means of resolving trust-preferred debt.

The $250 million-asset Deerwood, Minn., lender bid $17 million for the $302 million-asset American Bank, according to court documents. Judge Katherine Constantine of the U.S. bankruptcy court for Minnesota approved Deerwood's bid on Tuesday, overruling an objection by University Financial Corp. of St. Paul, Minn.

American Bank's parent, American Bancorp, was pushed into Chapter 11 bankruptcy in May over $48.1 million in trust-preferred debt, which triggered the sale of the bank. It was the first time a group of trust-preferred creditors has used involuntary bankruptcy to force a bank sale, a technique that could become more common as banks continue to default on their trust-preferred debt.

The price Deerwood ultimately pays will be affected by loan-loss calculations at the time of the sale, documents show. American Bancorp's loan-servicing subsidiary, AmeriNational Community Services, will be sold to a company called OSP, LLC, for $15.2 million.

The runner-up bidder for American Bank was the $175 million-asset Premier Bank Minnesota in Farmington. University Financial submitted the highest bid to buy American and the loan-servicer together. University argued that it should be named the auction winner, despite its slightly lower bid, because closing a single transaction would be easier and cheaper than closing two, among other reasons.

American Bank of St. Paul earned $2.9 million through September and has seven branches, according to the Federal Deposit Insurance Corp.

While American is so far the only holding company to involuntarily liquidate over trust-preferred debt, FMB Bancshares in Georgia could be next. FMB's creditors filed for involuntary bankruptcy in June, but the $566 million-asset lender objected, arguing that the creditors have no right to force liquidation. The judge ruled in the creditors' favor, but FMB has not been ordered to liquidate.

 

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