A federal judge has rejected the Federal Deposit Insurance Corp.’s claim that it is owed more than $900 million from the former parent company of Colonial Bank, which was seized by banking regulators last year.
Judge Dwight H. Williams Jr. of U.S. Bankruptcy Court in Montgomery, Ala., granted summary judgment Tuesday to Colonial BancGroup Inc., the failed thrift’s corporate parent, in a ruling dismissing the FDIC’s attempt to go after the parent for failing to maintain capital levels at the bank.
The judge said the “unambiguous language” of agreements between the parent and federal and state bank regulators indicate that the holding company “did not make a commitment to maintain the capital of Colonial Bank.”
In addition, Williams ruled that, even had Colonial made such a commitment, it would not apply under bankruptcy law because it could not be “assumed and cured” since the bank was no longer in business. In other words, Williams wrote, once the bank was shut, the “purpose for the commitment could no longer be fulfilled, and performance under the commitment was impossible.”
The FDIC declined to comment on whether it would appeal. “We are currently analyzing the opinion to determine next steps,” said Andrew Gray, an agency spokesman.
The decision, according to Colonial BancGroup’s lawyer, C. Edward Dobbs, is a victory for bank holding companies and could have a big effect on creditor recoveries in other bank holding company bankruptcies.
“The court’s denial of a priority claim asserted by the FDIC in an amount just under $1 billion,” along with its rejection of the FDIC’s bid “to convert the Chapter 11 case to Chapter 7 is quite a significant ruling for bank holding company bankruptcy cases throughout the country,” said Dobbs of Atlanta’s Parker, Hudson, Rainer & Dobbs.
Indeed, the FDIC has argued in other such bankruptcies — for instance, in a case involving the parent of Cleveland’s failed AmTrust Bank — that its ability to go after bank parents is crucial if the government is to hold companies accountable for the commitments they make to regulators to maintain capital in the banks they own and control.
In Colonial’s case, the FDIC argued that the former parent owed it $909 million, equal to the gap between how much capital its bank was required to have and what it actually had on hand when it was seized by regulators in August 2009. The FDIC, the agency charged with managing the receiverships of failed banking institutions, said Colonial’s holding company in recent years made numerous commitments to regulators to shore up the bank’s capital.
The FDIC was appointed receiver of the estate of Colonial’s bank upon its collapse, and Colonial BancGroup filed for Chapter 11 bankruptcy protection as regulators sold substantially all of the bank’s assets to BB&T Corp.
Colonial, whose remaining assets include $38.4 million on deposit at BB&T, said it would be forced to liquidate if the FDIC succeeded. The result, according to Colonial’s lawyers, would be that the holding company would be forced to pull the plug on its Chapter 11 case and creditors owed about $400 million would be out of the money.
The dispute between Colonial BancGroup and the FDIC over capital commitments is just one of the disputes between the holding company and the regulator.
The holding company has sued the FDIC over 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.