BankAtlantic Bancorp's hopes to move forward with its planned sale without the interference of its debt holders have been squashed by a Delaware judge.

On Tuesday, Delaware Court of Chancery Judge J. Travis Laster denied the $3.7 billion-asset company's motion to dismiss a lawsuit brought by the holders of its trust-preferred securities, namely New York hedge fund Hildene Capital Management Inc., to stop BankAtlantic's plans to sell the best of its Fort Lauderdale, Fla.-based operations to BB&T Corp., while retaining the problem assets.

The debt holders argued in a November lawsuit the transaction with BB&T violates a clause in the indenture that says a buyer of all or substantially all of BankAtlantic would have assume the trups debt, too.

In a transcript, the judge said part of his decision to deny the motion to dismiss was based on that covenant.

"I also think that there is a decent argument that it's legally irrelevant because the bondholders obtained a covenant against sales of substantially all assets," Laster said. "My focus is going to be on the contract rights that are in the indentures. I think it would be beyond my purview to look beyond that to try to consider whether some exception to the contract rights should be made because of some overarching regulatory scheme. For all those reasons, I'm denying the motion to dismiss."

On Nov. 1, BankAtlantic announced after a few years of struggling with problem assets, that it had struck a deal to sell essentially all of the operations of its thrift unit to BB&T for $300 million. BankAtlantic would retain about $624 million in nonperforming and underperforming loans and plans to reinvent itself as a specialty finance company.

The vocal Hildene quickly sprung to action and by the end of November sued the company, saying the $237 million in trups issued by BankAtlantic were to support a bank, not a "ragtag group of assets."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.