Colonial BancGroup committee objects to conversion, cites FDIC suit

By Caroline Salls

Pittsburgh, May 5 - The Colonial BancGroup, Inc.'s official committee of unsecured creditors objected to the Federal Deposit Insurance Corp.'s motion for conversion of the company's Chapter 11 bankruptcy case to a Chapter 7 liquidation, according to a Wednesday filing with the U.S. Bankruptcy Court for the Middle District of Alabama.

The FDIC filed the motion as the receiver for Colonial Bank.

"From the outset of this Chapter 11 case, the debtor and the committee have been required to defend against a number of ill-founded claims and aggressive litigation tactics that the FDIC has pursued," the committee said in the objection.

"While defending against the FDIC's litigation efforts has come at a significant cost to the estate, the efforts of the debtor and committee have been highly successful."

For example, the committee said the FDIC's "attempt to manufacture a $900 million priority claim, which would have resulted in no distributions being made to general unsecured creditors in this case," was denied by this court.

"Ignoring the estate's successes in defeating its claims - and ignoring the fact that much of the estate's expenses were incurred because of those claims - the FDIC now has the temerity to assert that the administration of the estate has been a costly failure and that conversion to a Chapter 7 liquidation is required," the committee said in the motion.

"The FDIC's motion is not a good faith pleading filed by a creditor that has a legitimate complaint about the efforts made to date by the debtor and the committee.

"It is a tactical pleading filed by an adversary of the debtor and the committee in significant litigation."

In addition, the committee said the FDIC is trying to gain an advantage in the litigation by advocating for appointment of a Chapter 7 trustee instead of the proposed plan trustee, who has decades of experience in FDIC litigation tied to failed bank holding company cases.

The case conversion hearing is scheduled for May 11.

Colonial BancGroup is the Montgomery, Ala.-based holding company for Colonial Bank. The company filed for bankruptcy on Aug. 25, 2009. Its Chapter 11 case number is 09-32303.

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