FDIC: Colonial Bancgroup not entitled to requested cash collateral

By Caroline Salls

Pittsburgh, Sept. 23 - The Federal Deposit Insurance Corp. objected to Colonial Bancgroup, Inc.'s motion to use cash collateral, arguing that the company "should not be permitted to use the minimal funds that remains after its financial collapse to hire professionals" who are likely to be the sole beneficiaries of the cash collateral.

"The [company] has no ongoing operations, generates no revenues and collapsed in the midst of a federal criminal investigation, leaving in its wake significant obligations to the FDIC-receiver and many other creditors," the FDIC said in its objection filed Wednesday with the U.S. Bankruptcy Court for the Middle District of Alabama.

The agency has been appointed as the receiver of Colonial Bancgroup subsidiary Colonial Bank.

The FDIC said Colonial Bank's failure was the largest bank failure to date in 2009, and the bank's collapse will cost the agency's deposit insurance fund an estimated $2.8 billion.

According to the objection, Colonial Bancgroup is not entitled to any of the funds it is requesting because all of the funds are subject to a valid blanket security interest that is held by the bank, for which FDIC has as the receiver.

In addition, the agency said Colonial Bancgroup owes about $1 billion of uncured capital maintenance obligations to Colonial Bank, and the FDIC's investigation of other possible claims is only in its earliest stages.

The FDIC said Colonial Bancgroup has made no attempt to prove that the interests of Colonial Bank or its receiver will be adequately protected if the company is granted access to the funds, "nor has it shown that it even has a valid property interest in the funds, given the blanket security interest it granted to Colonial Bank."

As previously reported, Colonial Bancgroup has asked the court to schedule an emergency hearing authorizing the company to use up to $743,950 of cash collateral.

Colonial Bancgroup said in its motion that the FDIC has placed a hold on its accounts, and it is unable to pay payroll and other business expenses, or proceed with its Chapter 11 cases.

Colonial BancGroup is the Montgomery, Ala.-based holding company for Colonial Bank. The company filed for bankruptcy on Aug. 25. Its Chapter 11 case number is 09-32303.

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