NEW YORK -(Dow Jones)- The Federal Deposit Insurance Corp. is objecting to Colonial BancGroup Inc.'s (CBCGQ) bankruptcy-exit plan, saying the proposal is "premature" considering the FDIC is appealing a case in which it says the bank-holding company owes it more than $900 million.
The FDIC, which was rebuffed by a bankruptcy judge last September when it tried to sue Colonial for not keeping its bank's capital levels up, said in a court filing Monday that Colonial's liquidation plan "surprisingly" doesn't bring up that an FDIC win on appeal would likely render its plan unconfirmable.
"If the FDIC-Receiver is successful in this appeal, the debtor will be required, in order to remain in Chapter 11, to immediately cure its capital maintenance commitments, as required under [the Bankruptcy Code]," the FDIC said in its filing. It adds that the amount could exceed $900 million and that Colonial's case would have to be converted to a Chapter 7 liquidation if FDIC wins an appeal.
At the very least, the FDIC says, Colonial's plan to exit bankruptcy and so-called disclosure statement--or plain language reading that creditors must vote on--should contain a discussion about the pending litigation.
"There can be no doubt that the outcome of the litigation pending between the debtor and the FDIC-Receiver will materially impact the course of this case," the FDIC says in its filing. A hearing to decide on whether creditors can vote on the plan is set for Thursday.
Judge Dwight H. Williams Jr. of U.S. Bankruptcy Court in Montgomery, Ala., in September granted summary judgment to Colonial Bank's ex-corporate parent, citing "unambiguous language" of agreements between Colonial's parent and federal and state bank regulators. The failed thrift's parent "did not make a commitment to maintain the capital of Colonial Bank," Williams said in his ruling.
Last week, Williams sided with the bank-holding company in another dispute with the FDIC, allowing Colonial to access millions of dollars in an account holding cash that the FDIC said it had the right to.
The decision represented another setback for the FDIC in bankruptcy court, where the agency, as receiver, has sparred with a number of bank-holding companies that are under Chapter 11 protection as the result of hundreds of bank closures by regulators in recent years.
Many of these cases, including those of holding companies Corus Bankshares Inc. (CORSQ) and BankUnited Financial Corp. (BKUNQ), involve litigation with the FDIC over capital commitments and the ownership of various assets.
At issue in Colonial's case is more than $1 billion in disputed assets, which include transfers from the holding company to the bank, tax refunds, additional bank-account balances and other property.
In many cases, bankruptcy courts have been receptive to the arguments of bank-holding companies and their creditors, but as the FDIC recently noted in court filings, appellate courts have not agreed with the lower court rulings.
The FDIC was named receiver of Colonial Bank after regulators seized the Montgomery, Ala., bank in the summer of 2009 and transferred its assets to BB&T Corp (BBT). Colonial, which had $25 billion in assets and $20 billion in deposits, was the biggest bank failure of 2009. The FDIC estimates Colonial's collapse will cost its insurance fund $3.8 billion, making it one of the most expensive bank failures in U.S. history.
Colonial's failure was tied to the collapse of mortgage lender Taylor Bean & Whitaker Mortgage Corp., which is also in bankruptcy. The two firms had a close relationship.
As Colonial's troubles grew in 2009, Taylor Bean and a group of other investors had sought to pump $300 million into Colonial, which would have enabled Colonial to become eligible for a $550 million federal bailout. But the two sides failed to get regulatory approvals, and that plan was scuttled.
Lee Farkas, Taylor Bean's former chairman, is awaiting trial on charges that he orchestrated a seven-year, multibillion-dollar fraud that contributed to Colonial's collapse. Farkas has pleaded not guilty to the charges. His trial is slated to begin later this year.
Colonial has acknowledged it is the target of a criminal probe by the U.S. Justice Department in relation to its mortgage warehouse lending division and alleged accounting irregularities.
(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection.)
(Patrick Fitzgerald contributed to this article.)
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