Capitol Bancorp's potential investment partner has backed out.

The $1.75 billion-asset company disclosed late last week that its purchase agreements with ValStone Partners, a private-equity firm in Michigan, had been terminated. Calls to Capitol (CBCRQ) and ValStone were not immediately returned.

The terminations could be a serious blow to Capitol, as they were the first of such definitive agreements in the more than three years that the company has been looking for ways to stay afloat. The agreements were also an integral part of the company's bankruptcy plan.

In October, the firm and Capitol entered into two contracts. The first was a securities purchase, which called for ValStone to invest $50 million into the troubled company in exchange for common and preferred shares. Also, the firm agreed to buy $207 million of the Lansing, Mich., banking company's nonperforming assets.

In August, Capitol filed for Chapter 11 bankruptcy protection with the hope of converting all debt and equity to a 53% equity stake. The goal is to simplify the capital structure so that new capital could enter and recapitalize the company's undercapitalized banks. Capitol is looking to give new investors a 47% stake in the company in exchange for $70 million to $115 million.

The agreements allowed ValStone to terminate the agreements at any point prior to a due diligence period that ended on Nov. 30, Capitol said in a regulatory filing Thursday. ValStone, however, never began its due diligence. "Due to regulatory complications with the corporation's legal inability to advance due diligence expenses and attorney fees to the purchaser, the purchaser did not undertake the diligence review," the filing said.

Capitol also pointed at the regulatory delay late last month when it asked the U.S. Bankruptcy Court for the Eastern District of Michigan to push back its confirmation hearing to January. In its request, Capitol said that its new investors were on pace to finish their due diligence by late January. The court hearing, which determines if the bankruptcy plan is feasible, was set for Dec. 4.

Meanwhile, the New Mexico Regulation and Licensing Department told Capitol in September that its Sunrise Bank of Albuquerque is operating with an unsafe level of capital and that the agency has the authority to seize it if the problems are not fixed by Dec. 20. One failure could be disastrous to any of the other 11 fragile banks that Capitol owns, because the Federal Deposit Insurance Corp. has the ability to put the cost of failures on related banks.

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