Federal Deposit Insurance Corporation, as Receiver for Colonial Bank v. The Colonial BancGroup, Inc.

Filing 57

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
BANCGROUP, INC.,

)
)
)
)

Debtor.

FEDERAL DEPOSIT INSURANCE
CORPORATION, as Receiver
for Colonial Bank,
Appellant,
v.
THE COLONIAL BANCGROUP,
INC., et al.,
Appellees,

)
)
)
)
)
)
)
)
)
)
)
)

CIVIL ACTION NO.
2:11cv133
(WO)

OPINION
Appellant

Federal

Deposit

Insurance

Corporation

(“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
owned

by

appellee

Colonial

BancGroup,

Inc.,

the

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
relief

from

automatic

stay,

and

the

January

25

one

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.

For

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.

2

Id.

II. BACKGROUND
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
American

taxpayers

BancGroup’s

approximately

principal

place

of

$

5

billion.

business

was

in

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
its receiver.

With this appointment, the FDIC-Receiver

succeeded by operation of law to “all rights, titles,
powers,

and

privileges

§ 1821(d)(2)(A)(i).

of”

the

bank.

12

U.S.C.

That same day, the FDIC-Receiver

entered into a purchase and assumption agreement (“P&A
Agreement”) with the FDIC (in its corporate capacity) and
BB&T.

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

3

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

placed

an

administrative

hold

on

all

six

accounts.
On August 25, just eleven days after Colonial Bank
failed, BancGroup filed a voluntary petition for Chapter
11 bankruptcy.

In addition to the administrative hold

the FDIC-Receiver had already entered, an automatic stay
was placed on the demand-deposit accounts.
§ 362(a).

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
balances
§ 365(o).

in

these

accounts

pursuant

to

11

U.S.C.

The bankruptcy court denied the motion on

4

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
separate action.

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,
J.).

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.
Though

the

amount

of

the

FDIC-Receiver’s

claim

far

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
deposit

balances

that

are

not

needed

to

pay

BB&T’s

security claim (which, by agreement, is in the other

5

accounts and not the operating account at issue here, see
BB&T Br. 3 (Doc. No. 25, at 6)).

The FDIC-Receiver seeks

to

operating

setoff

the

amount

in

the

account

and

whatever money, if any, would be left-over in the case
that BB&T is over-secured by the balances in the other
accounts.

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)

6

(Williams,

B.J.).

The

next

day,

on

January

25,

the

bankruptcy court granted BancGroup’s motion “to use cash
in [BancGroup]’s operating account to pay [BancGroup]’s
operating

expenses

professionals.”

and

the

fees

and

expenses

of

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.”
The

FDIC-Receiver

has

now

Id.

appealed

from

the

bankruptcy court’s January 24 and 25 decisions.

III. DISCUSSION
As a prelude, it should be remembered that this
appeal

of

the

bankruptcy

court’s

January

24

and

25

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

7

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
such

creditor

to

the

debtor

that

arose

before

the

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.”

Therefore,

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
obligation exists.”

Patterson, 967 F.2d at 509.

8

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
at 509.

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
law.

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

Specifically,

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
§ 553.
9

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,
which

is

not

offset

against

a

claim

due

from

such

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).

As other

courts have acknowledged, this statute “has been found to
create a federal statutory right to setoff.”

Villafañe

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.
§ 1822(d).”).

10

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

petition.

A. Mutuality
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
parties

acting

in

the

same

capacity.

See,

e.g.,

Westinghouse Credit Corp. v. D’Urso, 278 F.3d 138, 149 (2d
Cir. 2002).

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.
11

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.”

Bank of

Marin v. England, 385 U.S. 99, 101 (1966); see also Parker
v.

Community

First

Bank

(In

re

Bakersfield

Westar

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.

As a

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).
12

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
obligation

“comes

into

existence,”

a

creditor-debtor

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
fully-insured deposits.

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
13

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,”
a

“transfer,”

or

a

“delegation”

of

the

account--one

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.
14

important

fact

is

clear:

the

P&A

Agreement

did

not

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
contract

law

compel

the

conclusion

that

the

FDIC-

Receiver’s liability to BancGroup was not addressed in the
agreement and could not be addressed in the agreement, for
BancGroup

was

not

a

party

to

the

agreement.

As

explained, BancGroup and the FDIC-Receiver had a creditordebtor relationship, with BancGroup as the creditor and

4.
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.
15

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.
The
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
(continued...)
16

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
obligations
contract’”

to

the

(quoting

other
Am.

party

Jur.

2d,

under

the

assigned

Assignments

§

129

(2000)); In re Washington Capital Aviation & Leasing, 156
B.R. 167, 175 n.3 (Bankr. E.D. Va. 1993) (Tice, B.J.)

(A

“party subject to a contractually created obligation
ordinarily

cannot

divest

itself

of

liability

by

substituting another in its place without the consent of
the party owed the duty.

While the assignee may be

5(...continued)
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.).
17

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
contract.”).
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
transfer.”
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
(continued...)
18

Second,
contract,

even

a

if,

despite

the

general

purchase-and-assumption

laws

agreement

of

could

pursuant to federal or state law alter the FDIC-Receiver’s
liability

to

a

deposit

holder

without

that

holder’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.
reaching

this

description
agreement:

of

conclusion,
certain

the

court

relevant

begins

provisions

with
in

In
a
the

Articles I, II, and IX.

Article I:

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).

In

turn, “‘Deposit’ means a deposit as defined in 12 U.S.C.

6(...continued)
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.”).
19

Section 1813(l), including without limitation, outstanding
cashier’s

checks

and

other

official

checks

and

all

uncollected items included in the depositors’ balances and
credited on the books and records of the Failed Bank.”
Id.

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
any

depositor

to

the

Failed

Bank

or

the

Receiver,

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.”
Id.
Article II:

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
20

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.

Schedule 2.19

does not list any deposits that were excluded from the
initial assumption.
Article

IX:

This

article

of

the

P&A

Agreement

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
deposit liability.”

Id. at 29.
21

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.”
Id.
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
actions.

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
22

‘withheld payment’ status of any such
deposit balance until directed in
writing
by
the
Receiver
or
the
Corporation as to its disposition.”
Id.

at 29-30.
Second,

the

FDIC-Receiver

may

request

that

the

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.”

Id. at

30.
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

23

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,
provisions

in

Articles

I,

Id.

it is apparent from these
II,

and

IX

that

the

P&A

Agreement did not extinguish the FDIC-Receiver’s liability
to BancGroup.

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
liability

arising

from

an

unauthorized

or

unlawful

transaction, or (ii) may be needed to provide payment of
any liability of any depositor to the Failed Bank or the
Receiver.”
retained

Id. at 30.

the

right,

The fact that the FDIC-Receiver
as

a

matter

of

discretion,

to

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.
24

Second,

§

depositors

9.4

of

making

the

P&A

claims

Agreement

against

the

contemplates
FDIC-Receiver

directly: “In the event any depositor 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 Deposit Liability,” the assuming
bank will provide funds for this claim.
(emphasis added).

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
liability
Section

for

9.4

that

debt

therefore

has

indicates

not

been

that,

discharged.

regardless

of

whatever else the P&A Agreement did, it did not extinguish
the FDIC-Receiver’s liability on the deposit accounts
transferred to BB&T.

25

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.
gave

the

Instead, § 9.5 of the agreement

FDIC-Receiver

affirmative

rights

over

the

accounts despite their physical transfer to BB&T.

As

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.

The fact

that the FDIC-Receiver retained the option to withhold
payment once it has been determined that the assets are
required

to

cover

those

needed

for

a

failing

bank

indicates that, at a minimum, its liability had not been
extinguished through the assumption agreement here.

Yet,

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
26

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
BancGroup.

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.
27

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.

Cooper-

“[F]or purposes of setoff, a

debt arises when all transactions necessary for liability
have

occurred,

regardless

of

whether

contingent when the petition was filed.”

the

claim

was

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
petition date.”

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,
28

B.J.) (similar).
follows:

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.

It

simply means that the liability is a contingent claim.”
5 Collier On Bankruptcy ¶ 553.03[1][h] (Alan N. Resnick
& Henry J. Sommer eds., 16th ed. 2011).
The

FDIC-Receiver

argues

that

the

definition of

deposits included in the P&A Agreement, along with the
language

of

established

§
a

9.5

providing

pre-petition

demand-deposit accounts.
FDIC-Receiver’s

failure

for

withheld

liability

in

payments,

BancGroup’s

BancGroup counters that the
to

exercise

the

discretion

afforded by the P&A Agreement and actually deem the
balances of its deposit accounts no longer “deposits” or
29

“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.”

In re

The Colonial BancGroup, Inc., 2011 WL 239201, at *10.
The FDIC-Receiver has the winning argument.

First,

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
is

or

can

be

determined

as

of

Bank

Closing.”

P&A

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
30

FDIC-Receiver

may

determine

that

any

portion

of

any

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.”
The

rights

Id. at 29-30.

created

by

these

provisions

were

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
filed.

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
be

determined

as

of

Bank

Closing.”

While

this

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
31

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
32

any liability of such depository institution in default
or its receiver, which is not offset against a claim due
from

such

depository

determination

institution,

and

of

payment

such

pending

liability

depositor or any other person liable therefor.
§ 1822(d) (emphasis added).

by

the
such

12 U.S.C.

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.
did

when

bankruptcy

recognizing
proceedings

a

More profoundly than it

general
under

§

right

of

553,

setoff

Congress

in
has

determined that a certain creditor--the FDIC--should be
entitled to offset debt from the debtor’s estate without
proceeding

as

an

unsecured

creditor

in

the

general

bankruptcy distribution scheme.
The contingent nature of this liability is logical,
if not inevitable, in the context of a purchase and
33

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
preferred.

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.”

Id.

In addition to this benefit, the purchase and assumption
34

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
may

never

recover

the

uninsured

amounts;

and

it

is

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,
usually overnight.”).

The need for speed, as it were,

means that the FDIC does not have time to analyze each
account

fully,

or

make

a

final

35

decision

as

to

the

liabilities

associated

with

a

particular

asset.

See

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
books

which

occurs

during

a

purchase

and

assumption

transaction”). Indeed, and in the words of the bankruptcy
court,

these

“exigent

circumstances

surrounding

the

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
*11.
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.
Id.

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.
36

The

fact that provisions like § 9.5 embody this authority
indicates that they create a conditional liability on the
deposits transferred.

That liability is created at the

moment the purchase-and-assumption agreement is entered,
even

if

the

determined,

scope

and

even

of
if

those

liabilities

the

FDIC-Receiver

is

later

does

not

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.”

Id.

The bankruptcy

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.”

There are

several problems with this reading of the P&A Agreement.
First,

there

is

nothing

in

the

language

of

§

9.5,

expressly or implicitly, to suggest that an “unwinding”
37

is necessary; the proviso is not there, because it is
unnecessary.

The unwinding proviso is a straw man.

Second, the bankruptcy court misses the fact that the
deposits

by

definition

were

not,

if

they

are

later

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
similar
§

provisions

1822(d),

§

9.5

used
allows

by

its

predecessor

the

FDIC-Receiver

under

first

to

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
FDIC-Receiver

retained

substantial

deposit accounts.
38

liability

for

the

Fourth, as explained, it is not just § 9.5 that
contemplates this needed margin of time: Congress did so
as well.

Section 1822(d) creates a right of offset that

Congress recognized would rely heavily on contingent
liabilities.

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
bankruptcy

to

file

a

petition

before

the

FDIC

(1)

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
39

the assuming bank.
‘race,

for

a

The FDIC need not engage in such a

provision

like

§

9.5,

which

mirrors

§ 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
BancGroup’s

operating

expenses

and

fees.

These

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.

An appropriate

judgment will be entered.
DONE, this the 4th day of January, 2012.

40

/s/ Myron H. Thompson
UNITED STATES DISTRICT JUDGE