Federal Deposit Ins. Corp. v. Colonial BancGroup Inc. (In re Colonial BancGroup Inc.)

• Decision Date: 04 January 2012
• Docket Number: CIVIL ACTION NO. 2:11cv133
• Parties: IN RE THE COLONIAL BANCGROUP, INC., Debtor. FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver for Colonial Bank, Appellant, v. THE COLONIAL BANCGROUP, INC., et al., Appellees,
• Court: U.S. Bankruptcy Court — Middle District of Alabama

IN RE THE COLONIAL BANCGROUP, INC., Debtor.FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver for Colonial Bank, Appellant,

v.THE COLONIAL BANCGROUP, INC., et al., Appellees,

CIVIL ACTION NO. 2:11cv133

DISTRICT COURT OF THE UNITED STATES FOR THE MIDDLE DISTRICT OF ALABAMA, NORTHERN DIVISION

Dated: January 4, 2012

(WO)

JUDGMENT

In accordance with the memorandum opinion entered this date, it is the ORDER, JUDGMENT, and DECREE of the court as follows:

(1) The opinion and orders of the Bankruptcy Court of the Middle District of Alabama, entered in this case on January 24 and 25, 2011 (Doc. Nos. 2-49, 2-50, and 2-51), are vacated.

(2) This case is remanded to the bankruptcy court for further proceedings in accordance with the opinion of this court entered today.

It is further ORDERED that the parties are to bear their own costs.

The clerk of this court is DIRECTED to enter this document on the civil docket as a final judgment pursuant to Rule 58 of the Federal Rules of Civil Procedure.

This case is closed.

Myron H. Thompson

UNITED STATES DISTRICT JUDGE

IN RE THE COLONIAL BANCGROUP, INC., Debtor.

FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver for Colonial Bank, Appellant,

v.

THE COLONIAL BANCGROUP, INC., et al., Appellees,

CIVIL ACTION NO. 2:11cv133

(WO)

OPINION

Appellant Federal Deposit Insurance Corporation ("FDIC"), in its capacity as receiver for Colonial Bank, appeals two decisions of the Bankruptcy Court of the Middle District of Alabama, entered on January 24 and 25, 2011, based on a finding that the FDIC-Receiver may not exercise setoff rights in six demand-deposit accounts owned by appellee Colonial BancGroup, Inc., thebankruptcy debtor, and transferred by the FDIC-Receiver to appellee Branch Banking and Trust Company ("BB&T"). The January 24 decision denied the receiver's motion for relief from automatic stay, and the January 25 one granted BancGroup's motion to use cash in one of these accounts to pay BancGroup's operating expenses and the fees and expenses of professionals. The jurisdiction of this court is invoked pursuant to 28 U.S.C. § 158. For the reasons that follow, the bankruptcy court's decisions will be vacated.

I. STANDARD OF REVIEW

On appeal from the bankruptcy court, the district court functions as an appellate court in reviewing the bankruptcy court's decision. See Enron Corp. v. The New Power Co. (In re New Power Co.), 438 F.3d 1113, 1117 (11th Cir. 2006). In this capacity, the district court reviews the bankruptcy court's conclusions of law de novo and factual findings for clear error. Id.

II. BACKGROUND

Colonial Bank was the largest bank to fail in 2009, and the FDIC estimates that the failure of the bank and its holding company BancGroup will cost the FDIC and American taxpayers approximately $ 5 billion. BancGroup's principal place of business was in Montgomery, Alabama, and its principal operating subsidy was, at 99.3 % of its consolidated assets, Colonial Bank.

On August 14, 2009, Colonial Bank was closed by its state regulatory authorities, and the FDIC was appointed its receiver. With this appointment, the FDIC-Receiver succeeded by operation of law to "all rights, titles, powers, and privileges of" the bank. 12 U.S.C. § 1821(d)(2)(A)(i). That same day, the FDIC-Receiver entered into a purchase and assumption agreement ("P&A Agreement") with the FDIC (in its corporate capacity) and BB&T. Pursuant to the P&A Agreement, the FDIC-Receiver transferred nearly all of Colonial Bank's assets to BB&T. Among these assets were six demand-deposit accounts ownedby BancGroup, with the largest being BancGroup's so-called "operating account." On August 17, the first business day following the bank's shut-down, the FDIC-Receiver placed an administrative hold on all six accounts.

On August 25, just eleven days after Colonial Bank failed, BancGroup filed a voluntary petition for Chapter 11 bankruptcy. In addition to the administrative hold the FDIC-Receiver had already entered, an automatic stay was placed on the demand-deposit accounts. See 11 U.S.C. § 362(a). As of the petition date, the holding company's deposit accounts totaled approximately $ 38.41 million, and the "operating" account, in particular, had a balance of approximately $ 14.38 million.

On October 5, 2009, the FDIC-Receiver filed a motion seeking relief from the automatic stay, see 11 U.S.C. § 362(d), so as to exercise rights against the deposit balances in these accounts pursuant to 11 U.S.C. § 365(o). The bankruptcy court denied the motion onAugust 31, 2010, In Re Colonial BancGroup, Inc., 436 B.R. 713 (2010) (Williams, B.J.), and the FDIC-Receiver's appeal of that order is pending before this court in a separate action. FDIC v. The Colonial BancGroup, Inc., 2:10cv877 (M.D. Ala.) (Thompson, J.).

In the meantime, the FDIC-Receiver filed a proof of claim against BancGroup on November 30, 2009, and that matter remains pending before this court. In re The Colonial BancGroup, Inc, 10cv409 (M.D. Ala.) (Thompson, J.). The rights asserted in the FDIC-Receiver's proof of claim form the basis for its second, and currently pending before this court, motion for relief from the automatic stay, which was submitted in September of 2010. Though the amount of the FDIC-Receiver's claim far exceeds the aggregate deposit balances of all of the accounts, BB&T did not object to the FDIC-Receiver's motion because it was limited to the portion of the deposit balances that are not needed to pay BB&T's security claim (which, by agreement, is in the otheraccounts and not the operating account at issue here, see BB&T Br. 3 (Doc. No. 25, at 6)). The FDIC-Receiver seeks to setoff the amount in the operating account and whatever money, if any, would be left-over in the case that BB&T is over-secured by the balances in the other accounts. In response, BancGroup sought to use deposit balances in the operating account to pay administrative expenses, which the FDIC-Receiver opposed.

On January 24, 2011, the bankruptcy court denied the FDIC-Receiver's second motion for relief and held that the receiver did not have a right to setoff BancGroup's debts with the deposit accounts because the receiver lost the "mutuality" required to have a setoff once it transferred BancGroup's accounts to BB&T. Further, the bankruptcy court found that any attempt to get that money back, through provisions of the P&A Agreement, would constitute a post-petition incurrence of liability and be therefore ineligible for setoff. In re The Colonial BancGroup, Inc., 2011 WL 239201 (Bankr. M.D. Ala. Jan. 24, 2011)(Williams, B.J.). The next day, on January 25, the bankruptcy court granted BancGroup's motion "to use cash in [BancGroup]'s operating account to pay [BancGroup]'s operating expenses and the fees and expenses of professionals." Cash Collateral Order (Doc. No. 2-51). The bankruptcy court briefly reasoned that, by its January 24 decision, it had "held that the FDIC has no right to offset the funds in the account." Id.

The FDIC-Receiver has now appealed from the bankruptcy court's January 24 and 25 decisions.

III. DISCUSSION

As a prelude, it should be remembered that this appeal of the bankruptcy court's January 24 and 25 decisions addresses the FDIC-Receiver's right of setoff, not whether the receiver is actually entitled to setoff.

The Bankruptcy Code preserves the right of setoff for mutual debts incurred before the bankruptcy petition was filed. "Setoff is an established creditor's right tocancel out mutual debts against one another in full or in part," the purpose of which is to avoid "'the absurdity of making A pay B when B owes A.'" B.F. Goodrich Emps. Fed. Credit Union v. Patterson (In re Patterson), 967 F.2d 505, 508 (11th Cir. 1992) (quoting Studley v. Boylston Nat'l Bank, 229 U.S. 523, 528 (1913)); see also Dzikowski v. No. Trust Bank of Fla., N.A. (In re Prudential of Fla. Leasing, Inc.), 478 F.3d 1291, 1297 (11th Cir. 2007). 11 U.S.C. § 553 provides that bankruptcy does not "affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under [the Bankruptcy Code] against a claim of such creditor against the debtor that arose before the commencement of the case." Therefore, a setoff in a bankruptcy proceeding "requires that the obligation between the debtor and creditor arose before filing the bankruptcy petition and that mutuality of obligation exists." Patterson, 967 F.2d at 509.

However, while § 553 preserves a right to setoff, it does not create that right. See Citizens Bank of Md. v. Strumpf, 516 U.S. 16, 19-20 (1995); Patterson, 967 F.2d at 509. A right to setoff must be found in another substantive area of law. While state law is frequently the source of a right to offset, Prudential of Florida, 478 F.3d at 1297; see also, e.g., Woodrum v. Ford Motor Credit Co. (In re Dillard Ford, Inc). 940 F.2d 1507, 1512 (11th Cir. 1991), the right may also be found in federal law. See, e.g., STM Microelectronics, N.V. v. Credit Suisse Securities (USA) LLC, 648 F.3d 68, 82 (2d Cir. 2011); Prudential of Florida, 478 F.3d at 1300.

Here, the FDIC-Receiver points to federal law, 12 U.S.C. § 1822(d), where Congress has determined that the FDIC is empowered to offset mutual debts.¹ Specifically,under § 1822(d), the FDIC may "withhold payment of such portion of the insured deposit of any depositor in a depository institution in default as may be required to provide for the payment of any liability of such depositor to the depository institution in default or its receiver, which is not offset against a claim due from such depository institution, pending the determination and payment of such liability by such depositor or any other person liable therefor." 12 U.S.C. § 1822(d). As other courts have acknowledged, this statute "has been found to create a federal statutory right to setoff." Villafañe Neris v. Citibank, N.A., 845 F. Supp. 930, 934 (D.P.R. 1994) (Fuste, J.); see also Abrams v. FDIC, 944 F.2d 307, 311 (6th...