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Just days after federal authorities launched a probe of alleged accounting irregularities at Colonial BancGroup Inc., its $25 billion-asset bank collapsed Friday.
August 14
A bankruptcy judge ruled that millions of dollars in deferred compensation owed to Colonial Bank's former employees belong to the shuttered bank's parent company.
Judge Dwight H. Williams, Jr. of the U.S. Bankruptcy Court in Montgomery, Ala., sided with Colonial Bancgroup Inc., the bank's former parent, that about $2 million in deferred compensation was the property of the parent's bankruptcy estate.
"Under the terms of both the plan and trust documents, the assets of the plan are general assets of the debtor, and the participants have merely a general unsecured claim for payment from the debtor," said Williams in an opinion issued Friday.
In siding with the bank's parent, Williams ruled the Colonial's deferred compensation plan was a so-called top hat plan. By definition, these unfunded plans are provided to high-level managers and highly paid employees and are exempt from certain legal provisions regarding vesting and fiduciary responsibility.
About 90 employees put money into the top hat plan as a way to defer paying income tax. But in return, the judge said, the participants had no ownership interests in the plan assets and only an unsecured claim against the parent.
"To exclude the assets of an unfunded plan from property of the estate and remove those assets from the reach of general unsecured creditors would therefore fly in the face of the very purpose, structure and function of a top hat plan," Williams said.
Colonial Bancgroup last year asked Williams to rule on ownership of the plan assets. A number of employees protested, arguing that because their deferred contributions had vested they didn't understand their funds were at risk in the event of bankruptcy.
But Williams rejected that argument, ruling that since a top hat plan was, by definition, unfunded, the employees' had a vested, but unsecured, claim and not an ownership interest in the funds.
As a result of Williams' decision, the $2 million at issue will flow into a pool of assets to be distributed to all of Colonial Bancgroup's unsecured creditors.
Whether these creditors will actually see any recovery remains to be seen. Colonial Bancgroup has been sparring with the Federal Deposit Insurance Corp. over the rights to hundreds of millions of dollars in disputed assets, among them tax refunds, proceeds from insurance policies and other property as well as capital contributions made to shore up the bank.
The FDIC was named receiver of Colonial Bank after regulators seized the Montgomery, Ala., bank in the summer of 2009 and sold its assets to BB&T Corp.
The federal agency, which is charged with managing the receiverships of failed banking institutions, claims the parent owes it $1 billion and estimates the bank's collapse will cost its insurance fund $3.8 billion, making it one of the most expensive bank failures in U.S. history.
Colonial Bancgroup has argued the FDIC's argument is "without merit," but if successful, the holding company will be forced to liquidate. The result, according to Colonial's lawyers, is that the FDIC will "reap the remaining benefits of the estate," leaving other creditors owed some $400 million out of the money.
