Federal Deposit Insurance Corporation, as Receiver for Colonial Bank v. The Colonial BancGroup, Inc.
OPINION. Signed by Honorable Judge Myron H. Thompson on 1/4/2012. (jg, )
IN THE DISTRICT COURT OF THE UNITED STATES FOR THE
MIDDLE DISTRICT OF ALABAMA, NORTHERN DIVISION
IN RE THE COLONIAL
FEDERAL DEPOSIT INSURANCE
CORPORATION, as Receiver
for Colonial Bank,
THE COLONIAL BANCGROUP,
INC., et al.,
CIVIL ACTION NO.
(“FDIC”), in its capacity as receiver for Colonial Bank,
appeals two decisions of the Bankruptcy Court of the
Middle District of Alabama, entered on January 24 and 25,
2011, based on a finding that the FDIC-Receiver may not
exercise setoff rights in six demand-deposit accounts
bankruptcy debtor, and transferred by the FDIC-Receiver
to appellee Branch Banking and Trust Company (“BB&T”).
The January 24 decision denied the receiver’s motion for
granted BancGroup’s motion to use cash in one of these
accounts to pay BancGroup’s operating expenses and the
fees and expenses of professionals.
The jurisdiction of
this court is invoked pursuant to 28 U.S.C. § 158.
the reasons that follow, the bankruptcy court’s decisions
will be vacated.
I. STANDARD OF REVIEW
On appeal from the bankruptcy court, the district
court functions as an appellate court in reviewing the
bankruptcy court’s decision.
See Enron Corp. v. The New
Power Co. (In re New Power Co.), 438 F.3d 1113, 1117
(11th Cir. 2006).
In this capacity, the district court
reviews the bankruptcy court’s conclusions of law de novo
and factual findings for clear error.
Colonial Bank was the largest bank to fail in 2009,
and the FDIC estimates that the failure of the bank and
its holding company BancGroup will cost the FDIC and
Montgomery, Alabama, and its principal operating subsidy
was, at 99.3 % of its consolidated assets, Colonial Bank.
On August 14, 2009, Colonial Bank was closed by its
state regulatory authorities, and the FDIC was appointed
With this appointment, the FDIC-Receiver
succeeded by operation of law to “all rights, titles,
That same day, the FDIC-Receiver
entered into a purchase and assumption agreement (“P&A
Agreement”) with the FDIC (in its corporate capacity) and
Pursuant to the P&A Agreement, the FDIC-Receiver
transferred nearly all of Colonial Bank’s assets to BB&T.
Among these assets were six demand-deposit accounts owned
by BancGroup, with the largest being BancGroup’s socalled “operating account.”
On August 17, the first
business day following the bank’s shut-down, the FDICReceiver
On August 25, just eleven days after Colonial Bank
failed, BancGroup filed a voluntary petition for Chapter
In addition to the administrative hold
the FDIC-Receiver had already entered, an automatic stay
was placed on the demand-deposit accounts.
See 11 U.S.C.
As of the petition date, the holding company’s
deposit accounts totaled approximately $ 38.41 million,
and the “operating” account, in particular, had a balance
of approximately $ 14.38 million.
On October 5, 2009, the FDIC-Receiver filed a motion
seeking relief from the automatic stay, see 11 U.S.C.
§ 362(d), so as to exercise rights against the deposit
The bankruptcy court denied the motion on
August 31, 2010, In Re Colonial BancGroup, Inc., 436 B.R.
713 (2010) (Williams, B.J.), and the FDIC-Receiver’s
appeal of that order is pending before this court in a
FDIC v. The Colonial BancGroup, Inc.,
2:10cv877 (M.D. Ala.) (Thompson, J.).
In the meantime, the FDIC-Receiver filed a proof of
claim against BancGroup on November 30, 2009, and that
matter remains pending before this court.
In re The
Colonial BancGroup, Inc, 10cv409 (M.D. Ala.) (Thompson,
The rights asserted in the FDIC-Receiver’s proof
of claim form the basis for its second, and currently
pending before this court, motion for relief from the
automatic stay, which was submitted in September of 2010.
exceeds the aggregate deposit balances of all of the
accounts, BB&T did not object to the FDIC-Receiver’s
motion because it was limited to the portion of the
security claim (which, by agreement, is in the other
accounts and not the operating account at issue here, see
BB&T Br. 3 (Doc. No. 25, at 6)).
The FDIC-Receiver seeks
whatever money, if any, would be left-over in the case
that BB&T is over-secured by the balances in the other
In response, BancGroup sought to use deposit
balances in the operating account to pay administrative
expenses, which the FDIC-Receiver opposed.
On January 24, 2011, the bankruptcy court denied the
FDIC-Receiver’s second motion for relief and held that the
receiver did not have a right to setoff BancGroup’s debts
with the deposit accounts because the receiver lost the
“mutuality” required to have a setoff once it transferred
BancGroup’s accounts to BB&T.
Further, the bankruptcy
court found that any attempt to get that money back,
through provisions of the P&A Agreement, would constitute
a post-petition incurrence of liability and be therefore
ineligible for setoff.
In re The Colonial BancGroup,
Inc., 2011 WL 239201 (Bankr. M.D. Ala. Jan. 24, 2011)
bankruptcy court granted BancGroup’s motion “to use cash
in [BancGroup]’s operating account to pay [BancGroup]’s
Cash Collateral Order (Doc. No. 2-51).
The bankruptcy court briefly reasoned that, by its
January 24 decision, it had “held that the FDIC has no
right to offset the funds in the account.”
bankruptcy court’s January 24 and 25 decisions.
As a prelude, it should be remembered that this
decisions addresses the FDIC-Receiver’s right of setoff,
not whether the receiver is actually entitled to setoff.
The Bankruptcy Code preserves the right of setoff for
mutual debts incurred before the bankruptcy petition was
filed. “Setoff is an established creditor’s right to
cancel out mutual debts against one another in full or in
part,” the purpose of which is to avoid “‘the absurdity
of making A pay B when B owes A.’”
B.F. Goodrich Emps.
Fed. Credit Union v. Patterson (In re Patterson), 967 F.2d
505, 508 (11th Cir. 1992) (quoting Studley v. Boylston
Nat’l Bank, 229 U.S. 523, 528 (1913)); see also Dzikowski
v. No. Trust Bank of Fla., N.A. (In re Prudential of Fla.
Leasing, Inc.), 478 F.3d 1291, 1297 (11th Cir. 2007).
11 U.S.C. § 553 provides that bankruptcy does not “affect
any right of a creditor to offset a mutual debt owing by
commencement of the case under [the Bankruptcy Code]
against a claim of such creditor against the debtor that
arose before the commencement of the case.”
a setoff in a bankruptcy proceeding “requires that the
obligation between the debtor and creditor arose before
filing the bankruptcy petition and that mutuality of
Patterson, 967 F.2d at 509.
However, while § 553 preserves a right to setoff, it
does not create that right.
See Citizens Bank of Md. v.
Strumpf, 516 U.S. 16, 19-20 (1995); Patterson, 967 F.2d
A right to setoff must be found in another
substantive area of law.
While state law is frequently
the source of a right to offset, Prudential of Florida,
478 F.3d at 1297; see also, e.g., Woodrum v. Ford Motor
Credit Co. (In re Dillard Ford, Inc). 940 F.2d 1507, 1512
(11th Cir. 1991), the right may also be found in federal
See, e.g., STM Microelectronics, N.V. v. Credit
Suisse Securities (USA) LLC, 648 F.3d 68, 82 (2d Cir.
2011); Prudential of Florida, 478 F.3d at 1300.
Here, the FDIC-Receiver points to federal law, 12
U.S.C. § 1822(d), where Congress has determined that the
FDIC is empowered to offset mutual debts.1
1. The FDIC-Receiver asserts a right to setoff under
Alabama law, but the court need not reach this source of
law to resolve this case. In addition, it appears that
Alabama law would permit setoff where there is no mutual
debt, see Winecoff v. Compass Bank, 876 So.2d 1145, 1151
(Ala. Civ. App. 2003), which goes beyond the ambit of
under § 1822(d), the FDIC may “withhold payment of such
portion of the insured deposit of any depositor in a
depository institution in default as may be required to
provide for the payment of any liability of such depositor
to the depository institution in default or its receiver,
depository institution, pending the determination and
payment of such liability by such depositor or any other
person liable therefor.”
12 U.S.C. § 1822(d).
courts have acknowledged, this statute “has been found to
create a federal statutory right to setoff.”
Neris v. Citibank, N.A., 845 F. Supp. 930, 934 (D.P.R.
1994) (Fuste, J.); see also Abrams v. FDIC, 944 F.2d 307,
311 (6th Cir. 1991) (treating § 1822(d) as a right to
setoff); Northern Trust Co. V. FDIC, 619 F. Supp. 1340,
1342 (W.D. Okla. 1985) (Russell, J.) (“Setoffs by the FDIC
as Receiver are specifically authorized by ... 12 U.S.C.
Section 1822(d) does not add substantive criteria to
those necessary for offset already embodied in § 553.
Here, that means the court must inquire whether (1) there
are mutual debts between the FDIC-Receiver and BancGroup,
and (2) if they arose before the filing of the bankruptcy
Dillard Ford, 940 F.2d at 1512.2
Essential to setoff, and a prerequisite to a claim
under § 553, is that liabilities be “mutual”: A owes B and
B owes A.
Prudential of Florida, 478 F.3d at 1297, 1299.
Therefore, as a general matter, it is well-settled that
debts are considered mutual when they are between the same
Westinghouse Credit Corp. v. D’Urso, 278 F.3d 138, 149 (2d
2. There are exceptions to the right of setoff in
§ 553, see Dillard Ford, 940 F.2d at 1513, but those
exceptions, to the extent applicable (if at all), are not
before the court.
With bank accounts, establishment of mutuality is
straightforward, though counterintuitive.
As a bank-
account holder may be shocked to learn, a bank account
does not actually consist “of money belonging to the
depositor and held by the bank.” Strumpf, 516 U.S. at 21.
Instead, a bank account “consists of nothing more or less
than a promise to pay, from the bank to the depositor,”
id., and the “relationship of bank and depositor is that
of debtor and creditor, founded upon contract.”
Marin v. England, 385 U.S. 99, 101 (1966); see also Parker
Ambulance, Inc.), 123 F.3d 1243, 1246 (9th Cir. 1997).
Therefore, the deposit of cash into a bank account creates
nothing other than a debtor-creditor relationship, with
the bank as debtor and the depositor as creditor.
consequence, “[o]rdinarily, funds in a general deposit
account can be used to setoff debts owed to the bank.”
Official Committee of Unsecured Creditors v. Manufacturers
& Traders Trust Co. (In re Bennett Funding Group, Inc.),
146 F.3d 136, 139 (2d Cir. 1998).
It is undisputed that, as receiver for Colonial, the
FDIC had a mutual debt with BancGroup before it entered
into the P&A Agreement with BB&T.
Because a “debt
arises” for purposes of section 553(a) at the time the
relationship arose when BancGroup departed with its funds
and placed them into the six accounts at Colonial Bank.
Cf. Bennett Funding, 146 F.3d at 139; Cooper-Jarrett, Inc.
v. Cent. Transp., Inc., 726 F.2d 93, 96 (3d Cir. 1984)).
The rub, then, is whether anything in the P&A Agreement
destroyed mutuality by extinguishing the FDIC-receiver’s
liability on BancGroup’s deposit accounts.
The bankruptcy court concluded that the P&A Agreement
extinguished the FDIC-Receiver’s liability as follows:
When “the FDIC was appointed as the receiver for Colonial
Bank, the FDIC had liability for the debtor’s accounts as
At that time, the FDIC had a
right under 12 U.S.C. § 1822(d) to offset the mutual debt.
However, when BB&T assumed liability for the deposits
under the P&A Agreement dated August 14,2009, mutuality
ceased to exist.”
In re The Colonial BancGroup, Inc.,
2011 WL 239201, at *8.
The bankruptcy court appears to
have viewed the issue of mutuality to turn on whether BB&T
was liable on the transferred accounts.
See id. at *9
(“Because BB&T and not the FDIC is liable for the amount
of the debtor’s deposits, the deposits cannot serve as a
basis for setoff by the FDIC under 11 U.S.C. § 553.”).
As this court will explain, the issue is instead, simply
put, whether the FDIC-Receiver is liable on the accounts
despite the transfer; whether BB&T is liable, in addition
to or instead, is immaterial.3
The court holds that, regardless of the terminology
employed--whether the P&A Agreement was an “assignment,”
3. It appears that the bankruptcy court may have
improperly viewed the issue as an either-or situation:
Either the FDIC-Receiver or BB&T was liable to BancGroup,
with the result that if one was liable the other was not.
However, the FDIC-Receiver’s liability did not turn on
BB&T’s liability. Indeed, it could be argued that the
FDIC-Receiver and BB&T were liable together on the
accounts, but that is not the issue for this court;
rather the sole issue for this court is the FDICReceiver’s liability.
extinguish the FDIC-Receiver’s liability in the deposit
accounts to BancGroup.4
First and most obviously and
compellingly, application of the basic principles of
Receiver’s liability to BancGroup was not addressed in the
agreement and could not be addressed in the agreement, for
explained, BancGroup and the FDIC-Receiver had a creditordebtor relationship, with BancGroup as the creditor and
In reaching this conclusion, this court is
focused on the FDIC-Receiver’s right to setoff, not
whether the transfer of the accounts was sufficient to
create mutuality for BB&T. While courts generally agree
that assignment may create a right to offset a debt,
Mayco Plastics, inc. v. TRW Vehicle Sysafety Systems,
Inc. (In Re Mayco Plastics, Inc.), 389 B.R. 7, 31 (Bankr.
E.D. Mich. 2008) (Shefferly, B.J.); U.S. Aeroteam, Inc.
v. Delphi Auto Sys. (In re U.S. Aeroteam, Inc.), 327 B.R.
852, 865-66 (Bankr. S.D. Ohio 2005) (Walter, B.J.), not
all forms of assignment create rights to setoff, which is
why courts typically use the term ‘may’ in this context.
Thus, this court’s conclusion that the FDIC-Receiver did
not discharge its liability does not necessarily mean
that BB&T also obtained a right to setoff or, conversely,
that BB&T did not obtain a right to setoff. That is a
different question not before the court.
the FDIC-Receiver as the debtor.
It goes without saying
that a debtor cannot unilaterally extinguish its debt.
Therefore, the P&A Agreement could not extinguish the
FDIC-Receiver’s liability to BancGroup in BancGroup’s
absence and without BancGroup’s agreement.
And that the P&A Agreement involved a transfer of a
debt from the creditor to another does not alter this
basic contractual principle.5
See, e.g., Bank of N.Y. v.
5. BancGroup argues that the court should treat this
argument as new on appeal.
The court disagrees.
contract-based argument responds to the reasoning of the
bankruptcy court, which held that the P&A Agreement
discharged the FDIC-Receiver’s liability in the deposit
accounts; in addition, the FDIC-Receiver has long
maintained that the court should look to contract
principles when addressing mutuality, which makes the
point proper for consideration.
See Yee v. City of
Escondido, 503 U.S. 519, 534 (1992) (“Once a federal
claim is properly presented, a party can make any
argument in support of that claim; parties are not
limited to the precise arguments they made below.”).
But, even if viewed as ‘new,’ and as a new ‘claim,’ the
point would still be considered.
There would be no
manifest injustice from its consideration because this
argument was fully briefed in supplemental briefing, the
issue is one of law alone, and it would do substantial
injustice to ignore this point, especially in a case of
as much public importance as this one. The argument is,
therefore, properly before the court. See Dean Witter
Sunshine-Jr. Stores, Inc. (In re Sunshine Jr. Stores),
Inc., 456 F.3d 1291, 1309 (11th Cir. 2006) (Under Florida
contract law, “[n]ormally, an assignment involves only the
assignee’s acquisition of rights under a contract and not
the assignor’s obligations, unless it is found that the
assignment was also a novation.”); Fair v. NationsBanc
Mortgage Corp. (In re Noletto), 280 B.R. 868, 872 (Bankr.
S.D. Ala. 2001) (Mahoney, B.J.) (explaining that a “‘mere
assignment does not release the assignor from his or her
(2000)); In re Washington Capital Aviation & Leasing, 156
B.R. 167, 175 n.3 (Bankr. E.D. Va. 1993) (Tice, B.J.)
“party subject to a contractually created obligation
substituting another in its place without the consent of
the party owed the duty.
While the assignee may be
Reynolds, Inc. v. Fernandez, 741 F.2d 355, 360 (11th Cir.
1984); Sundale, Ltd. v. Ocean Bank, 441 B.R. 384, 385-86
(Bankr. S.D. Fla. 2010) (Moreno, C.J.).
entitled to perform for the original obligor, the original
obligor remains ultimately liable until discharged by
performance or otherwise.” (internal citation omitted)).6
6. BancGroup does not claim that it has provided, or
that it has been given the opportunity to provide,
consent to the an assignment of its accounts that would
release the FDIC-Receiver from its liability in the
deposit accounts. Doing so, if it had the opportunity,
could have effected a novation and ended the FDICReceiver’s liability in the deposit accounts. See Golden
v. Bank of Tallassee, 639 So.2d 1366, 1369) (Ala. 1994)
(“[A] novation releases the party bound by the original
This is, in fact, another way mutuality
might be destroyed.
Once the obligor discharges the
assignor, its liability, and therefore mutual obligation,
ends. This has not happened here and it is unlikely that
the P&A Agreement would have allowed such a discharge of
liability to occur. BancGroup implicitly acknowledges as
much in another contested matter pending before this
court where it is pursuing a protective claim for the
balances in the deposit accounts “in the event the FDICReceiver purports to exercise any rights it may assert”
under the P&A Agreement. Amended Complaint ¶ 73, The
Colonial BancGroup, Inc. v. FDIC, 10cv198 (M.D. Ala.)
(Doc. No. 20, at 13).
In response, BancGroup points out that federal law
gives the FDIC-Receiver the right to “transfer any asset
or liability of the institution in default ... without
any approval, assignment, or consent with respect to such
12 U.S.C. § 1821(d)(2)(G)(i) (emphasis
added). This provision, however, does not relieve the
FDIC-Receiver from its retained liability under the
common law. See Waterview Mgmt. Co. v. FDIC, 105 F.3d
pursuant to federal or state law alter the FDIC-Receiver’s
consent, the language of the P&A Agreement here reflects
that it was not intended to extinguish the FDIC-Receiver’s
liability in the deposit accounts to BancGroup.
Articles I, II, and IX.
This article defines relevant terms and
provides that “assumed deposits” simply means “deposits.”
P&A Agreement Art. I., at 4 (Doc. No. 3-1, at 22).
turn, “‘Deposit’ means a deposit as defined in 12 U.S.C.
696, 698 (D.C. Cir. 1997) (“Here state law defines the
scope of the pre-receivership contract asset held by the
failed institution. Federal law simply provides that the
[FDIC] can transfer the asset held by the failed
institution without consent. State contract law thus
defines the nature of the asset that federal law allows
the agency to transfer without consent.”).
Section 1813(l), including without limitation, outstanding
uncollected items included in the depositors’ balances and
credited on the books and records of the Failed Bank.”
This definition is augmented as follows: “the term
‘Deposit’ shall not include all or any portion of those
deposit balances which, in the discretion of the Receiver
or the Corporation, (i) may be required to satisfy it for
any liquidated or contingent liability of any depositor
arising from an unauthorized or unlawful transaction, or
(ii) may be needed to provide payment of any liability of
including the liability of any depositor as a director or
officer of the Failed Bank, whether or not the amount of
the liability is or can be determined as of Bank Closing.”
This article of the P&A Agreement sets
out the liabilities assumed by BB&T, the “assuming bank.”
In addition to a number of liabilities not relevant here,
§ 2.1(a) of the P&A Agreement provides that BB&T assumes
liability for all “Assumed Deposits, except those Deposits
specifically listed on Schedule 2.19(a); provided, that
as to any Deposits of public money which are Assumed
Deposits, the Assuming Bank agrees to properly secure such
Deposits with such of the Assets as appropriate which,
prior to Bank Closing, were pledged as security therefor
by the Failed Bank, or with assets of the Assuming bank,
if such securing Assets, if any, are insufficient to
properly secure such Deposits.”
Id. at 8.
does not list any deposits that were excluded from the
describes and defines areas of “continuing cooperation”
between the FDIC (in both its capacity as receiver and
corporation) and BB&T.
Section 9.4 concerns a potential
depositor who “does not accept the obligation of the
Assuming Bank to pay any Deposit liability of the Failed
Bank assumed by the Assuming Bank ... and asserts a claim
against the Receiver for all or any portion of any such
Id. at 29.
In such a case, BB&T
“agrees on demand to provide the Receiver funds sufficient
to pay such claim in an amount not in excess of the
Deposit liability,” which also discharges BB&T from “any
further obligation ... to pay any such depositor the
amount of such Deposit liability paid to the Receiver.”
Further, echoing the definition of “deposits”, § 9.5
of the P&A Agreement provides for “withheld payments.”
This section empowers the FDIC-Receiver to engage in three
First, is the actual withholding:
“At any time, the Receiver or the
Corporation may, in its discretion,
determine that all or any portion of any
deposit balance assumed by the Assuming
Bank pursuant to this Agreement does not
constitute a ‘Deposit’ (or otherwise, in
its discretion, determine that it is the
best interest of the Receiver or
Corporation to withhold all or any
portion of any deposit), and may direct
the Assuming Bank to withhold payment of
all or any portion of any such deposit
balance. Upon such direction, the
Assuming Bank agrees to hold such
deposit and not to make any payment of
such deposit balance to or on behalf of
the depositor, or to itself, whether by
way of transfer, set-off, or otherwise.
The Assuming Bank agrees to maintain the
‘withheld payment’ status of any such
deposit balance until directed in
Corporation as to its disposition.”
assuming bank do more than just “hold” a withheld deposit,
it can take the additional step of requiring the funds to
be physically returned.
Section 9.5 provides that, “At
the direction of the Receiver or the Corporation, the
Assuming Bank shall return all or any portion of such
deposit balance to the Receiver or the Corporation, as
appropriate, and thereupon the Assuming Bank shall be
discharged from any further liability to such depositor
with respect to such returned deposit balance.”
Third, § 9.5 provides the FDIC-Receiver with the
authority to demand money back should the assuming bank
defy its order: “The Assuming Bank shall be obligated to
reimburse the Corporation or the Receiver, as the case may
be, for the amount of any deposit balance or portion
thereof paid by the Assuming Bank in contravention of any
previous direction to withhold payment of such deposit
balance or return such deposit balance the payment of
which was withheld pursuant to this Section.”
For a number of reasons,
it is apparent from these
Agreement did not extinguish the FDIC-Receiver’s liability
For one, the definition of “deposits”
expressly excludes any deposit balances that, “in the
discretion of the Receiver or the Corporation, (i) may be
required to satisfy it for any liquidated or contingent
transaction, or (ii) may be needed to provide payment of
any liability of any depositor to the Failed Bank or the
Id. at 30.
The fact that the FDIC-Receiver
determine that, though physically transferred, BB&T would
be prohibited from treating certain accounts as “deposits”
is a powerful indicium of the FDIC-Receiver’s liability
for these accounts.
directly: “In the event any depositor does not accept the
liability of the Failed Bank assumed by the Assuming Bank
... and asserts a claim against the Receiver for all or
any portion of any such Deposit Liability,” the assuming
bank will provide funds for this claim.
Id. at 29
Though BB&T is obligated, by § 9.4, to
reimburse the FDIC-Receiver for any deposit paid, the
language indicates the FDIC-Receiver’s liability to the
original depositor has not been extinguished; the fact
that a depositor can seek performance on its debt from the
FDIC-Receiver and expect satisfaction demonstrates that
whatever else the P&A Agreement did, it did not extinguish
the FDIC-Receiver’s liability on the deposit accounts
transferred to BB&T.
Third, and perhaps most significantly, the language
of the P&A Agreement indicates that the FDIC-Receiver did
not just passively retain liability by remaining liable
to depositors who, under § 9.4, might seek satisfaction
from the FDIC-Receiver.
Instead, § 9.5 of the agreement
accounts despite their physical transfer to BB&T.
explained, the FDIC-Receiver may require BB&T to withhold
payments of any account balance it deems no longer a
“deposit” within the meaning of the agreement.
that the FDIC-Receiver retained the option to withhold
payment once it has been determined that the assets are
indicates that, at a minimum, its liability had not been
extinguished through the assumption agreement here.
these affirmative rights go further: § 9.5 empowers the
FDIC-Receiver actually to extinguish BB&T’s obligation on
any account by demanding its return, and the FDIC-Receiver
may even penalize BB&T for wrongly distributing funds.
Unequivocally, therefore, these provisions demonstrate
that the FDIC-Receiver has not been discharged of its
liability for the demand-deposit accounts.7
For the above reasons, the court concludes that the
transfer of BancGroup’s demand-deposit accounts from the
FDIC-Receiver to BB&T pursuant to the P&A Agreement did
not destroy the mutuality between the FDIC-Receiver and
7. As evidence that the FDIC-Receiver discharged all
of its liabilities in these accounts, BancGroup and the
bankruptcy court point to the fact thatccounts were
listed on Schedule 2.19. This argument, however, misses
two other important facts. First, this schedule defined
the relationship between FDIC-Receiver and BB&T, not that
between FDIC-Receiver and BancGroup. What was included
or omitted from the schedule defined, at most, which
accounts or liabilities were assumed or not assumed
between FDIC-Receiver and BB&T. Because the schedule was
not between FDIC-Receiver and BancGroup, it could not
extinguish the former’s liability to the latter.
Moreover, though Article II of the P&A Agreement
contemplates initial liabilities definitely un-assumed by
BB&T, it does not, however, say anything about the FDIC
discharging its liability for accounts not listed on
Schedule 2.19, and subject to the definitional authority
retained in Article I and then affirmed in § 9.5. In
other words, while the FDIC could have listed accounts on
this schedule, it was not required to do so to prevent a
discharge of its own liability for the accounts.
B. Prepetition Liability
To be setoff under § 553, an obligation must arise
before the filing of the bankruptcy petition.
Jarrett, 726 F.2d at 96.
“[F]or purposes of setoff, a
debt arises when all transactions necessary for liability
contingent when the petition was filed.”
In re Lehman
Bros. Holdings Inc., 404 B.R. 752, 759 (Bankr. S.D. N.Y.
2009) (Peck, B.J.) (internal quotes and citation omitted).
Thus, the fact that post-petition litigation determines
the amount that will be due does “not affect mutuality”
if “all acts giving rise to liability arose before the
Id.; see also
Braniff Airways, Inc. v.
Exxon Co., 814 F.2d 1030, 1036 (5th Cir. 1987) (“[A]
contingent claim which arises prior to the commencement
of a bankruptcy case may be setoff against a pre-petition
claim of the debtor’s estate.”); Columbia Hosp. For Women
Med. Ctr., Inc. v. NCRIC, Inc. (In re columbia Hosp. For
Women Med. Ctr., Inc.), ____ B.R. ____, ____, 2011 WL
4578317, at *14 (Bankr. D.D.C. Sept. 21, 2011) (Teel,
Therefore, the “general rule” is as
A “claim is eligible for setoff even though
contingent at the time of the commencement of the case,
and even though the claim remains contingent until after
confirmation of the debtor’s plan. ... The fact that the
debtor’s liability may not ‘accrue’ or become ‘fixed’
until some point in the future owing to the occurrence of
some extrinsic event bearing on the debtor’s liability
does not mean that the liability is not a claim.
simply means that the liability is a contingent claim.”
5 Collier On Bankruptcy ¶ 553.03[h] (Alan N. Resnick
& Henry J. Sommer eds., 16th ed. 2011).
deposits included in the P&A Agreement, along with the
BancGroup counters that the
afforded by the P&A Agreement and actually deem the
balances of its deposit accounts no longer “deposits” or
“assumed deposits” is dispositive.
In BancGroup’s world,
the most relevant fact is that the money was held by BB&T
the day the bankruptcy petition was filed. The bankruptcy
court reached a similar conclusion: “[E]ven if the FDICReceiver implements Section 9.5 of the P&A Agreement by
requesting a return of the debtor’s deposit balances, the
debt incurred thereby would constitute a post petition
debt ineligible for setoff under 11 U.S.C. § 553.”
The Colonial BancGroup, Inc., 2011 WL 239201, at *10.
The FDIC-Receiver has the winning argument.
according to Article I of the P&A Agreement, “deposits”
do not include “all or any portion of those deposit
balances which, in the discretion of the Receiver or the
Corporation, ... may be needed to provide payment of any
liability of any depositor to the Failed Bank or the
Receiver, ... whether or not the amount of the liability
Agreement 4 (Doc. No. 3-1, at 22) (emphasis added).
Likewise, § 9.5 of the P&A Agreement’s allowance for
“withheld payments” provides that, “[a]t any time,” the
deposit balance is not a “deposit” and “may direct the
Assuming Bank to withhold such deposit and not make any
payment of such deposit balance to or on behalf of the
depositor, or to itself, whether by way of transfer, setoff, or otherwise.”
Id. at 29-30.
established pre-petition on August 14, 2009, when the P&A
Agreement was made, even though the amount or value of
those rights was not known the date the petition was
Specifically, the definition of deposit describes
a liability for funds “needed to provide payment of any
liability of any depositor to the Failed Bank,” and it
provides that this sort of deposit can burdened by the
FDIC “whether or not the amount of the liability is or can
determination might come postpetition, the amount of the
claim is based upon the liability of any depositor in the
failed bank, an event that was necessarily pre-petition
and occurred when the depositor departed with its funds
and placed them in an account.
In other words, the
definition of “deposits” creates a contingent liability
owing to the FDIC.
Section 9.5, which concerns the deposit accounts
already made, reflects a similar prepetition contingent
liability on behalf of the FDIC. The money in the deposit
accounts, which is what gave rise to the liability that
the FDIC-Receiver would owe by withholding payment, was
deposited well before the petition date, and the fact that
the actual amount the FDIC-Receiver might have a right to
offset was not established at the time the petition was
filed does not mean that the FDIC-Receiver has no claim.
The conclusion that the P&A Agreement sets forth a
liability that can be setoff under § 553 finds further
support in 12 U.S.C. § 1822(d). This provision represents
Congress’s determination that the FDIC be permitted to
offset debts when it acts as the receiver for a failed
bank: “The [FDIC] may withhold payment of such portion of
the insured deposit of any depository institution in
default as may be required to provide for the payment of
any liability of such depository institution in default
or its receiver, which is not offset against a claim due
depositor or any other person liable therefor.
§ 1822(d) (emphasis added).
The language “pending the
determination and payment of such liability” makes clear
that Congress recognized the liability created by the s
setoff right in § 1822(d) would frequently be contingent,
and the court finds it compelling that in many respects
the contingent language of § 1822(d) mirrors the language
of § 9.5 of the P&A Agreement.
More profoundly than it
determined that a certain creditor--the FDIC--should be
entitled to offset debt from the debtor’s estate without
bankruptcy distribution scheme.
The contingent nature of this liability is logical,
if not inevitable, in the context of a purchase and
assumption of a large bank like Colonial Bank. “When a
bank fails, the FDIC will generally be appointed as a
receiver” and will then “determine the future course for
the failed bank.”
(11th Cir. 1989).
FDIC v. Jenkins, 888 F.2d 1537, 1539
At this point, the FDIC has two
options: (1) close the bank (and engage in a “deposit
payoff” or liquidation of the bank by paying depositors
up to $100,000 per account out of the deposit insurance
fund) or (2) a purchase-and-assumption transaction (where
the FDIC “arranges for the sale of the failed bank’s
assets and deposit liabilities to another solvent bank”).
Id. at 1540; see also, Fed. Sav. & Loan Ins. Corp. v.
Falls Chase Special Taxing Dist., 983 F.2d 211, 213 (11th
Cir. 1993) (describing a purchase and assumption).
For a number of reasons, a purchase and assumption is
Jenkins, 888 F.2d at 1540.
As happened here,
the Monday after Colonial failed on a Friday, a “failed
bank reopens in the solvent bank’s name, and depositors
are benefitted by uninterrupted banking service.”
In addition to this benefit, the purchase and assumption
is preferred because completely closing bank accounts
undermines public confidence in the banking system; may
require depositors to wait to recover the insured portion
of their funds; harms depositors with over $ 100,000 who
typically much cheaper for taxpayers.
However, the advantages do not make a purchase and
assumption an easy task.
To achieve these benefits, the
FDIC must evaluate a failed bank’s assets “‘with great
speed, usually overnight, in order to preserve the going
concern value of the failed bank and avoid an interruption
in banking services.’”
Langley v. FDIC, 484 U.S. 86, 91
(1987) (quoting Gunter v. Hutcheson, 674 F.2d 862, 865
(11th Cir. 1982)); see also Villafañe Neris, 845 F. Supp.
at 933 (“In order to accomplish the purchase of the failed
bank by the assuming bank with as little disruption as
possible, P&A Agreements are carried out with great speed,
The need for speed, as it were,
means that the FDIC does not have time to analyze each
Jenkins, 888 F.2d at 1544 (discussing the fact that the
value of potential claims that must be adjudicated “cannot
be assessed during the quick review of a failed bank’s
transaction”). Indeed, and in the words of the bankruptcy
closing of a bank and the execution of a purchase and
assumption agreement” mean that there “simply is not
enough time for the FDIC to make a fully informed and
considered decisions regarding the deposits it retains.”
In re The Colonial BancGroup, Inc., 2011 WL 239201, at
But, as the bankruptcy court put it, provisions like
§ 9.5 “supply that needed margin of time” for the FDIC to
deal with the highly volatile nature of a bank failure.
These provisions do so by allowing the FDIC-Receiver
to retain an interest and ultimate authority (a liability)
over the accounts, should it later be determined that the
assets are needed to offset losses of a failed bank.
fact that provisions like § 9.5 embody this authority
indicates that they create a conditional liability on the
That liability is created at the
moment the purchase-and-assumption agreement is entered,
physically retain or service the accounts.
The bankruptcy court resisted the conclusion that
§ 9.5 establishes contingent liability, however. Instead,
according the bankruptcy court, “[u]nfortunately for the
FDIC, ... bankruptcy intervened.”
court read into § 9.5 a proviso to allow the FDIC-Receiver
to “‘unwind’ the assumption of a deposit by the assuming
bank,” id. at *10, and the court then concluded that “the
section makes clear that the liability of the assuming
bank to the depositor is not discharged until the deposit
balance is actually returned to the FDIC.”
several problems with this reading of the P&A Agreement.
expressly or implicitly, to suggest that an “unwinding”
is necessary; the proviso is not there, because it is
The unwinding proviso is a straw man.
Second, the bankruptcy court misses the fact that the
determined to be needed to account for debts of the failed
bank, assumed deposits, a form of contingent liability and
not the creation of a new claim.
Third, § 9.5 does not require that the FDIC-Receiver
actually order a return of the funds to deem a balance no
longer a “deposit” within the agreement. Instead, as with
withhold payment that may be subject to offset after the
claims are adjudicated.
See Gross v. Bell Savings Bank,
974 F.2d 403, 407 (3rd Cir. 1992).
Returning the funds
certainly discharges the assuming bank’s liability as to
the bank account, but that does not mean the FDIC-Receiver
had nothing before that moment; as discussed above, the
Fourth, as explained, it is not just § 9.5 that
contemplates this needed margin of time: Congress did so
Section 1822(d) creates a right of offset that
Congress recognized would rely heavily on contingent
As a consequence, and consistent with well-
established law regarding setoff, § 553 does not require
that the FDIC-Receiver identify and physically retain the
funds in a deposit account before a potentially failed
institution files for bankruptcy because the liability
created by those deposits arose the moment that the debtor
departed with the funds.
Bennett Funding, 146 F.3d at
139; Lehman Bros., 404 B.R. at 758.
In fact, such a
requirement would produce perverse incentives and possibly
undermine the right of setoff in § 1822(d) by giving
institutions and holding companies with banks that have
been purchased and assumed an incentive to race into
determines which of thousands (and potentially millions)
of bank accounts will be needed to offset liabilities
later and (2) has actually the money transferred back from
the assuming bank.
The FDIC need not engage in such a
§ 1822(d), provides the FDIC a pre-petition liability.
The court cannot say its conclusion that the P&A
Agreement did not destroy mutuality, in itself, means that
the bankruptcy court erred by denying the automatic stay
and by granting use of the operating account to pay
determinations are questions that belong in the bankruptcy
court in the first instance.
Accordingly, the bankruptcy
court’s decisions of January 24 and 25, 2011, will be
vacated and this case remanded to allow the bankruptcy
judge to reconsider and determine how, consistent with
this opinion, the case should proceed.
judgment will be entered.
DONE, this the 4th day of January, 2012.
/s/ Myron H. Thompson
UNITED STATES DISTRICT JUDGE
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?