Mercantile Bancorp TruPS committee says planned sale to 'appease FDIC'

By Jim Witters

Wilmington, Del., Sept. 10 - Mercantile Bancorp, Inc.'s official committee of trust preferred securities holders objects to the planned $22.3 million sale of its interests in Mercantile Bank, saying the sale is a "hail Mary" attempt to "appease" the Federal Deposit Insurance Corp. at the expense of the debtor's estate, according to a Sept. 10 filing with the U.S. Bankruptcy Court for the District of Delaware.

As previously reported, United Community Bancorp, Inc. is the stalking horse bidder for the debtor's assets, with an offer of $22.28 million in cash, minus all amounts owed by the bank to the FDIC in connection with a cross-guarantee liability attributable to Royal Palm Bank and Heartland Bank, all broker's fees and specified adjustments.

The sale also includes Mercantile's trademark "M" logo.

Debtor's attorney Stuart M. Brown said earlier that the holding company hopes to negotiate a reduction in an estimated $23 million cross-guarantee claim the FDIC is asserting against Mercantile.

If the negotiations prove successful, the sale to United Community or a higher bidder at auction could provide some recovery for unsecured creditors, Brown said.

A sale hearing is scheduled for 1 p.m. ET on Sept. 16.

TruPS objections

The TruPS committee said the proposed sale "will ultimately prove to be unclosable, will result in negative value to the debtor's estate" and is being sought "merely to appease the FDIC - a party that is not even a stakeholder in this case."

"The FDIC has not asserted a cross-guarantee claim and, in fact, has until approximately July 2014 to decide whether to assert a cross guarantee claim, and yet the debtor argues that the specter of the FDIC's assertion of the claim at any moment is driving the debtor to sell the bank-an otherwise healthy institution-through a lightning-quick sale process," the committee said.

All of the evidence indicates that the cross guarantee claim will exceed the maximum amount the purchaser has agreed to pay, a circumstance that would prevent the sale from closing, the filing stated.

The cross guarantee claim is a liability of the bank, not the debtor.

Despite the importance of establishing the amount of the cross guarantee claim, the debtor has made no effort to resolve the situation in the year since the banks were seized.

"This non-action is incredible given that obtaining the waiver is also a condition to closing the sale," the committee says.

If the sale cannot close, there exists "no sound business justification" to pursue the United Community transaction "merely on the unsupported speculation that the FDIC will suddenly become cooperative," the filing stated.

The committee is asking the court to either deny approve of the proposed sale or delay the sale hearing until the amount of the cross guarantee claim can be fixed.

"An adjournment will not allow the purchaser to walk away from the transaction, because the asset purchase agreement has no deadline for the sale hearing to occur, only a closing deadline of Dec. 1," the committee says.

At an earlier hearing, the TruPS committee said the proposed sale squanders about $30 million of net operating loss carry-forwards and fails to realize the true value of the Mercantile Bank assets.

Mercantile Bancorp, a Quincy, Ill., bank holding company, filed for bankruptcy on June 27. The Chapter 11 case number is 13-11634.

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