In Re The Colonial Bancgroup Inc.
| Decision Date | 01 September 2010 |
| Docket Number | No. 09-32303-DHW.,09-32303-DHW. |
| Citation | 436 B.R. 713 |
| Parties | In re the COLONIAL BANCGROUP, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Middle District of Alabama |
OPINION TEXT STARTS HERE
COPYRIGHT MATERIAL OMITTED.
C. Edward Dobbs, Rufus T. Dorsey, IV, Parker, Hudson, Rainer & Dobbs, LLP, Atlanta, GA, W. Clark Watson, Balch & Bingham LLP, Birmingham, AL, for Debtor.
AMENDED MEMORANDUM OPINION
The Federal Deposit Insurance Corporation (“FDIC”) filed a motion on November 5, 2009 to require the Debtor to immediately cure the deficit under an alleged commitment to maintain the capital of Colonial Bank or, in the alternative, to convert the case to a case under chapter 7 of the Bankruptcy Code. The FDIC calculates the deficit at $904,954,360-an amount far in excess of the Debtor's ability to pay. The FDIC also filed a motion for relief from the automatic stay to collect the deficit in part by exercising setoff rights against the balances of the Debtor in certain demand deposit accounts. 1
The Debtor filed a motion for summary judgment on each of the FDIC's motions, and the motions for summary judgment came on for hearing on May 26, 2010. The Committee of Unsecured Creditors (“Committee”) filed briefs in support of the Debtor's motions. Following the hearing, the parties submitted the deposition testimony of seven witnesses. Upon consideration of the briefs and oral arguments of counsel, the verified materials of record, and the deposition testimony, the court concludes that there is no genuine issue of material fact and that the Debtor is entitled to summary judgment on both motions as a matter of law.
The court's jurisdiction over this disputed matter is derived from 28 U.S.C. § 1334 and from an order of the United States District Court for this district referring jurisdiction of title 11 matters to the Bankruptcy Court. See General Order of Reference of Bankruptcy Matters (M.D.Ala. Apr. 25, 1985). Further, this is a core proceeding, pursuant to 28 U.S.C. § 157(b)(2)(B) and (G), thereby extending this court's jurisdiction to the entry of a final order or judgment.
The Debtor and the FDIC filed separate statements of fact. However, there are no genuine issues of material fact, and the material facts, as adopted from the briefs of the parties, are set forth below.
Prior to August 14, 2009, the Debtor was a bank holding company that owned Colonial Bank. The Debtor also owned certain non-banking, non-debtor subsidiaries. In its Form 10-K for 2008, the Debtor reported that the Bank accounted for approximately 99.3% of the Debtor's consolidated assets.
On June 10, 2008, Colonial Bank converted from a national bank to an Alabama state-chartered, non-member bank, and its name was changed from Colonial Bank, N.A. to Colonial Bank. As a result of this conversion, the Bank's chartering authority and its principal regulator changed from the Office of the Comptroller of the Currency to the Alabama State Banking Department (“ASBD”). At the same time, the Bank's principal federal regulator became the Federal Deposit Insurance Corporation (“FDIC”).
In a letter dated October 9, 2008, the FDIC and the ASBD notified Colonial Bank's board of directors (“Bank Directors”) that the regulators were downgrading the Bank's composite rating to a “3” due to declining trends in asset quality and the results of targeted reviews since the conversion.
In a letter dated November 7, 2008, the Federal Reserve Board informed the Debtor's board of directors (“Debtor Directors”) that due to the Bank's ratings downgrade, the Debtor was not in compliance with requirements of the Bank Holding Company Act and the Federal Reserve Board's Regulation Y, which among other things require holding companies to maintain their depository institution subsidiaries in a well-capitalized and well-managed condition. As a result, the Debtor would be required under section 4(m)(2) of the Act to execute an agreement acceptable to the Board of Governors to correct the management deficiencies at the Bank.
On December 15, 2008, the Bank Directors entered into a Memorandum of Understanding (“Bank MOU”) with the Regional Director of the Atlanta Division of the FDIC and the Superintendent of Banks for the Alabama State Banking Department. By its terms and design, the Bank MOU is an agreement of the Bank Directors regarding a program of “corrective action” for the Bank in a number of areas.
In the MOU, the Bank Directors agreed that “the Bank through its Board, will move in good faith to comply with the requirements of the Memorandum and eliminate the problems of the Bank.” Bank MOU at p. 1 (emphasis added). Paragraph 14 of the Bank MOU states: “By February 28, 2009, the Bank shall have a Tier 1 Leverage Capital ratio of not less than 8 percent and a Total Risk-Based Capital Ratio of not less than 12 percent.” 2
On January 6, 2009, Robert E. Lowder, who was the chairman and chief executive officer of the Debtor at the time, executed on behalf of the holding company an “Agreement Under the Bank Holding Company Act” with the Federal Reserve Bank of Atlanta (“4(m) Agreement”). Among other provisions, the 4(m) Agreement included the following paragraph:
By May 11, 2009 (or such additional time as the Board of Governors may permit), Colonial shall address the factors resulting in the less than satisfactory CAMELS composite and management component ratings assigned to the Bank by the FDIC and the SBD by taking steps designed to ensure that the Bank complies with the Memorandum of Understanding between the Bank and the FDIC, dated December 15, 2008,
and any other supervisory action regarding the Bank taken by the FDIC and SBD during the term of this agreement.
4(m) Agreement, ¶ 2. The Debtor later requested an extension of the May 11, 2009 deadline but received no response from the Federal Reserve Bank of Atlanta. The Debtor's chief financial officer is not aware of the agreement having been terminated.
On January 21, 2009, the Debtor and its directors signed a separate Memorandum of Understanding (“Debtor MOU”) with the Alabama Banking Department and the Federal Reserve Bank of Atlanta. The FDIC is not a party to the Debtor MOU. The Debtor MOU is an undertaking in “good faith” to implement a program of “corrective action” in a number of areas. Debtor MOU, p. 1. The corrective action program contemplated that the Debtor would “utilize its financial and managerial resources to assist its subsidiary bank in addressing weaknesses identified by its primary banking supervisors and achieving/maintaining compliance” with the Bank MOU. Debtor MOU, ¶ 1. The Debtor MOU states that it is “not a ‘written agreement’ for the purposes of Section 8 of the Federal Deposit Insurance Act, as amended.” Debtor MOU, p. 2. 3
On March 2, 2009, the Debtor filed its Form 10-K for 2008. In that filing, the Debtor informed investors that in agreements with regulators the Debtor had agreed to use its resources to support the Bank. FDIC App., p. 186. Similar disclosures were included in the Form 10-Q filed by the Debtor for the first quarter of 2009. Id. at 463. The Form 10-K also included the following language under a heading labeled Support of Subsidiary Bank:
Under Federal Reserve policy, BancGroup is expected to act as a source of financial strength to, and to commit resources to support, Colonial Bank. This support may be required at times when, absent such Federal Reserve policy, BancGroup might not otherwise be inclined to provide it. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
FDIC App., p. 181. In the Debtor's SEC filings in March and May of 2009, the Debtor informed investors about the two memoranda of understanding and stated that, “in the event the debtor is not successful in raising additional capital in the near term, both Colonial Bank and BancGroup would likely become subject to even greater regulatory supervision, which could result in additional restrictions.” FDIC App., p. 175. The restrictions could include “the imposition of a cease and desist order pursuant to Section of the [FDI] Act,” which could, in turn, preclude Colonial Bank from being considered well capitalized and/or impose other restrictions or prohibitions of certain activities by BancGroup or Colonial Bank.” FDIC App. pp. 187 and 298.
On May 13, 2009, the FDIC and the Alabama Banking Department informed Bank representatives that they intended to take formal supervisory action in the form of a cease and desist order. On or about June 3, 2009, the Bank entered into a stipulation and consent to the issuance of a cease and desist order with representatives of the Legal Division of the FDIC and the Alabama Banking Department. In connection with that consent, the FDIC confirmed in a letter dated June 5, 2009, that the cease and desist order would replace the Bank MOU.
On June 15, 2009, a cease and desist order was entered as to Colonial Bank (“Bank C & D”). Paragraph 3(a) of the Bank C & D states that “[b]y September 30, 2010, Bank shall have a Tier 1 Leverage Capital ratio of not less than 8 percent and a Total Risk-Based Capital Ratio of not less than 12 percent.” The target capital ratios in the Bank C & D were the same as the target capital ratios in the Bank MOU, but with a new deadline-September 30, 2009. Bank C & D, p. 6. The Bank C & D also required that “within 60 days from the effective date of this ORDER, the Bank shall submit to the Supervisory Authorities a written capital plan.” Id. at 7. The written capital plan was to detail the steps the Bank would take to achieve and maintain the target capital ratios. Because the effective date of the Bank C & D was June 15, 2009, the deadline for submission of the required capital plan was August 14, 2009.
On July 15, 2009, the...
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