Court denies confirmation of Colonial BancGroup reorganization plan

By Caroline Salls

Pittsburgh, May 23 - Confirmation of Colonial BancGroup, Inc.'s plan of reorganization was denied Friday by the U.S. Bankruptcy Court for the Middle District of Alabama.

Judge Dwight H. Williams Jr. said the plan does not meet the "best interest of creditors" test.

The plan drew objection from Colonial Bank receiver the Federal Deposit Insurance Corp., Branch Banking and Trust Co. (BB&T), the lead plaintiffs in a consolidated securities class action and several individual shareholders.

According to Williams' opinion denying confirmation, the FDIC and BB&T argued that the plan does not meet the best interest of creditors test, which requires the company to prove that dissenting creditors will receive as much under the Chapter 11 plan as they would in a hypothetical Chapter 7 case.

Specifically, the FDIC and BB&T said the plan calls for significant administrative expenses to be incurred by both a plan trustee and a plan committee "that would be far more burdensome to the estate than the statutory commissions that would be payable to a Chapter 7 trustee in a converted case."

Williams said the Bankruptcy Code places a cap on fees paid to Chapter 7 trustees, but Colonial's plan would pay the plan trustee at a rate of $525 per hour, as well as an increasing contingent fee based on the amount distributed to creditors relative to the amount of their claims.

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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