FDIC v. Colonial BancGroup

November 30, 2010 at 4:35 pm Leave a comment

(Original E-Alert Dated October 4, 2010)

A September 1, 2010, United States Bankruptcy Court ruling could influence the FDIC’s attempt to collect billions of dollars on alleged capital maintenance commitments on behalf of various failed bank receiverships. 

In a case before the United States Bankruptcy Court for the Middle District of Alabama titled “In re Colonial BancGroup, Inc.,” the court examined the failure of Colonial Bank and the subsequent bankruptcy filing of its holding company, Colonial BancGroup, Inc. In the case, the FDIC claimed that Colonial BancGroup agreed to shore up the capital of its subsidiary under three separate agreements between the Bank and the FDIC.  The FDIC claimed there was a reserve deficiency of approximately $1 billion. The FDIC supported its claim by citing to portions of one of these agreements, which provided in relevant part, that Colonial BancGroup would make a “good faith” effort to take “corrective action” and to offer assistance to improve Colonial Bank’s declining status with the FDIC. In its request for relief, the FDIC asked the court to either require the Debtor to immediately pay a $1 billion deficiency in capital that the Bank was required to fund at the time of its failure or, in the alternative, convert the case to a Chapter 7 case under the Bankruptcy Code. Converting the case to a Chapter 7 would have required the liquidation of Colonial BancGroup’s assets. 

The United States Bankruptcy Court disagreed with the FDIC’s interpretation of the statements in the agreements it had entered into with Colonial BancGroup. The court held that the agreements thereby required Colonial BancGroup to provide assistance to its flagging bank and did not represent Colonial BancGroup’s assumption of Colonial Bank’s liabilities. Moreover, the court held that a memorandum of understanding entered into between Colonial BancGroup, the Federal Reserve and state banking authorities, “as an informal supervisory action is not enforceable, and violation of the same cannot serve as a basis for assessing civil monetary penalty.” The court did take some care in distinguishing this case from others involving the FDIC in which firm commitments were made. 

What this Means to You
Agreements between banks, holding companies, and either the FDIC, Federal Reserve Banks and state banking regulators will be under increased scrutiny for potential infirmities. Existing claims involving FDIC attempts to collect capital maintenance commitments may be affected. Moreover, future agreements between bank holding companies and federal authorities will need to be drafted with an eye towards this important case.

Entry filed under: Client Alerts.

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