Bankruptcy Court Rejects FDIC's Claim for Capital Shortfall

The next few years will see the "redevelopment" of the law in two critical areas involving bank failures where the Federal Deposit Insurance Corpora-tion ("FDIC") is appointed receiver: (i) the relative rights and claims of creditors of a bank or savings and loan holding company, including the FDIC; and (ii) D&O and professional liability. Significant decisions are be-ginning to be issued with regard to the former.

The bankruptcy court overseeing the reorganiza-tion of Colonial BancGroup, Inc. ("BancGroup"), the former bank holding company for the failed Colonial Bank of Montgomery, Alabama ("Bank"), on August 31, 2010, rejected a $900 million claim of the FDIC, as receiver for the Bank, against BancGroup with respect to an alleged capital maintenance commitment BancGroup had and failed to honor.

Whether a bank or thrift holding company is obli-gated to cure a capital shortfall existing at a de-pository institution prior to the institution's failure, and the manner in which such an obligation can be enforced once the parent is in bankruptcy, have reemerged as contentious issues in connection with the current round of bank failures. Indeed, this and a handful of other core issues, such as competing claims over tax refunds and other tax benefits, may be critical to the value of both the holding company in bankruptcy and the depository institution's receivership.

The Colonial court distinguished this case from several others in which depository institution regulatory agencies successfully argued that a holding company had entered into a capital main-tenance commitment. Under Section 365(o) of the Bankruptcy Code, a holding company that is in Chapter 11 must immediately cure its default un-der a capital maintenance commitment or convert its case to Chapter 7. The court held that none of BancGroup's enforcement-related agreements with the Federal Reserve Bank of Atlanta constituted a commitment to maintain the capital of Colonial under Section 365(o), since BancGroup never spe-cifically agreed to make a capital...