Colonial BancGroup Defeats FDIC Request for Infusion of Almost $1 Billion

Colonial BancGroup Inc., the bankrupt Montgomery, Alabama-based holding company, has defeated a bid by the Federal Deposit Insurance Corp. to force it to pay almost $1 billion because of the capital deficiency at its Colonial Bank.

U.S. Bankruptcy Judge Dwight H. Williams in Montgomery yesterday denied the FDIC’s bid to compel the bank to make up a capital deficit of $905 million, an amount he said was “far in excess” of the bank’s ability to pay.

Colonial Bank failed in 2009, with its deposits being transferred to Branch Banking & Trust Co.

In the year leading up to its collapse, the holding company signed a series of agreements with regulators under which it was obligated to increase the bank’s capital. The FDIC, in November, asked Williams to order the holding company to make up for the bank’s capital deficiency or convert the bankruptcy proceeding to a liquidation.

The FDIC, acting as receiver for the failed bank, had argued that, while it wasn’t a party to the holding company agreements, Colonial was the intended beneficiary of them.

The agreements didn’t “require the debtor to make a capital infusion, in any amount, in the bank,” Williams said in his ruling rejecting the agency’s request.

The judge also ruled that the agreements couldn’t be enforced because the bank already had been taken over when the holding company filed for bankruptcy under Chapter 11.

Had Colonial lost, the FDIC would have had a priority claim of almost $1 billion for the unpaid capital deficiency. That would have left the holding company’s unsecured creditors without any recovery.

When it filed for bankruptcy last year, the holding company listed assets of $45 million and debt of $380 million.

The case is In re Colonial BancGroup Inc., 09-32303, U.S. Bankruptcy Court, Middle District of Alabama (Montgomery).

To contact the reporters on this story: Andrew M. Harris in Chicago at aharris16@bloomberg.net; William Rochelle in New York at wrochelle@bloomberg.net.

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.