As a key trustee for pooled trust-preferred securities, Bank of New York Mellon Corp. has often been accused of inaction.

That has not been the case for Builders Financial Corp.'s bankruptcy proceeding. Last summer the struggling Chicago bank holding company filed for bankruptcy protection with the intention of reducing the debt on its $40 million of trust-preferred securities to $4.5 million, which would be paid over the next 10 years. The plan would preserve the equity of Mitchell Saywitz, the company's chief executive and sole shareholder. No immediate plans are in the offing for more capital to flow into the company.

Bank of New York Mellon, the trustee for half of the securities, voted against the reorganization plan. Then last week, after the $337 million-asset company Builders attempted to invalidate the trustee's vote as a creditor, Bank of New York Mellon filed an objection. On Thursday, Bruce Black, a judge for the U.S. Bankruptcy Court for the Northern District of Illinois, continued the case to March 17.

Several lawyers said Builders Financial's bankruptcy plan is thin and that getting it completed would be very difficult.

"I think it is interesting what they are trying to do, but it doesn't appear to make good economic sense except for the equity holder," said Chip MacDonald, a partner at Jones Day in Atlanta. "For the creditors, there is hardly any reason for them to take this. It doesn't guarantee any new capital."

Bank holding company bankruptcies have had a lot of buzz since December, when the $1.5 billion-asset AmericanWest Bancorp of Spokane, Wash., successfully navigated the process, saving its bank from seizure by selling it in a court auction. Builders Financial's bankruptcy plan does not call for such an auction.

In recapitalizations, trustees of pooled trust-preferred securities have been a powerful blockade, as they have asserted that their role is merely administrative. The allure of bankruptcy, lawyers said, is that it compels the trustee to act.

"Trust-preferreds remain a huge obstacle to the recapitalization of distressed banks. The holders have a habit of just saying 'no' and sometimes you can't even identify who is holding the debt," said Van Durrer, a partner at Skadden Arps, which represented SKBHC Holdings LLC , the bank holding company that successfully bid on AmericanWest's bank.

"Like it or not, bankruptcy forces the issue, and allows a sale and recapitalization transaction to proceed provided it is supported by business judgment and presented in good faith," Durrer said.

Bankruptcy lawyers said that in the Builders Financial case, it appears the company wants relief from its trust-preferred debt, but was hoping the trustees would not show up.

Builders Financial and Bank of New York Mellon declined to comment. In an objection filed Feb. 14, Bank of New York Mellon claimed the bankruptcy was filed in bad faith. The trustee claimed that, on the eve of the bankruptcy filing, Builders Financial borrowed $40,000 from three creditors, with Saywitz personally guaranteeing the loans.

In court documents, Builders Financial said the $40,000 is being used to fund operations, such as financing the bankruptcy. Bankruptcy lawyers said the amount is possibly enough for a retainer.

Bank of New York Mellon accuses the company of borrowing the money to "gerrymander acceptance of the plan."

Three creditors with a $40,000 stake pale in comparison to the $40 million of trust-preferred debt, with Bank of New York Mellon representing about half of that. Wilmington Trust Corp. is the trustee for the rest of the trust-preferred securities, but apparently did not participate in the creditor's vote.

Five creditors voted, with Bank of New York Mellon serving as the only dissident. Based on the bankruptcy code, since the amount of Bank of New York Mellon's claim exceeded two-thirds of the total claims held by the voters, the plan should have been rejected.

Things got tricky, demonstrating the complexity of unraveling the collateralized-debt obligations that experts said were built without an easy way to handle default.

According to Builders Financial, Bank of New York Mellon's interest was as trustee of Builders Capital Trust I. Bank of New York Mellon filed its vote as the trustee for MM Community Funding Ltd., which Builders Financial recognizes as a creditor of a creditor.

Bank of New York Mellon's court documents claim that Builders Financial is trying to find ways to block its vote. "The tactics the Debtor used in this instance are merely an attempt to confuse the process in hopes of distracting the Court and moving forward with an unconfirmable plan," the trustee said in its claim.

Bank of New York Mellon also filed a motion to have its ballot deemed properly filed. The trustee is asking the court to disqualify the other votes because one is from the company's bank and the others have personal guarantees.

Lawyers said Bank of New York Mellon's efforts to have its vote counted will likely succeed and Builders Financial would need to submit a new plan. Experts said Builders Financial would have to make drastic changes, namely identifying capital that would dilute Saywitz's interest and would fix the ailing bank.

"Chapter 11 offers a valuable approach for struggling banks. But they need to have an economic deal that ensures that the business will be well capitalized and remain in business," said J. Mark Fisher, a partner at Schiff Hardin LLP in Chicago. "It needs a plan that is ... free of execution risk."

In its complaint, Bank of New York Mellon called the existing plan not feasible because Builders Financial "has provided no evidence that it will have sufficient funds to fulfill its obligations under the plan."

Justin Barr, a managing principal at Loan Workout Advisers LLC, which assists in bank turnarounds, said in an e-mail that a lack of capital is not only holding up the bankruptcy, but could put the bank on a path to seizure.

At Dec. 31, noncurrent loans made up 34.89% of assets and its total risk-based capital ratio was 12.23%, making the bank still well capitalized. Barr said the bank's Texas ratio, which measures problem assets against capital and reserves, was 450%. In general, analysts deem ratios above 100% to be an indication that the bank is in danger of failing.

"Builder's Bank was heavily involved in construction and development lending," Barr said. "The bank is among the most distressed in the Chicago area."

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