Ex-Parent of Colonial Bank Sues BB&T for Return of $300M

Colonial BancGroup is suing BB&T Corp., which took over Colonial Bank after it was seized by regulators, to recover some $300 million in preferred stock in a real estate investment trust that it says was wrongly transferred BB&T.

In a lawsuit filed Friday in U.S. Bankruptcy Court in Montgomery, Ala., Colonial BancGroup, the former parent of Colonial Bank, sought the return of 300,000 shares of preferred stock in CBG Florida REIT Corp., an indirect subsidiary of Colonial Bank and its former parent. Colonial BancGroup says the shares were wrongly transferred to BB&T when BB&T bought the bank's assets from the Federal Deposit Insurance Corp.

Alternatively it's seeking $300 million from BB&T as a fraudulent transfer under federal and Alabama law. Bankruptcy law allows a debtor in Chapter 11 to unwind so-called fraudulent transactions within two years of a bankruptcy filing if they provided no benefit to the business and the debtor was insolvent at the time the transfer occurred.

At issue is $300 million in preferred securities issued by the REIT in 2007. Colonial BancGroup eventually used proceeds from the sale of the securities to buy a Florida bank holding company called Commercial Bankshares Inc.

Under the terms of an exchange agreement involving the REIT, investors could exchange their preferred shares in the REIT for preferred shares in the holding company parent in the event that banking regulators found Colonial Bank to be undercapitalized. The parent was then supposed to transfer the shares to the bank to boost its reserves.

This final transfer never happened, according to lawyers for the parent, and BB&T took control of property belonging to Colonial BancGroup. Even if a legal transfer did take place, the parent argues, it can be unwound as a fraudulent transfer.

A spokeswoman for BB&T couldn't immediately comment on the suit.

The holding company's lawsuit against BB&T is the second such filing against the Winston Salem, N.C.-based bank in Colonial's Chapter 11 case in less than a week. Last Tuesday the bank holding company sued BB&T to claw back some $24 million it pledged as collateral for loans made by its former subsidiary before it was taken over.

Colonial BancGroup's sparring with BB&T is essentially a footnote in a series of larger legal disputes between the bankruptcy estate and the Federal Deposit Insurance Corp. over disputed assets stemming from the collapse of Colonial Bank. After regulators shut down the bank, the FDIC sold Colonial's assets to BB&T.

Colonial BancGroup has 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 claims it has dibs on the assets.

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 that year.

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.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER