The Colonial BancGroup, Inc.: FDIC Denied Right to Setoff Against Demand Deposit Accounts

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On January 24, 2011, the Honorable Dwight H. Williams, Jr. of the U.S. Bankruptcy Court for the Middle District of Alabama denied the Federal Deposit Insurance Corporation’s (“FDIC”) request for relief from the automatic stay in the Colonial BancGroup, Inc. case.1 The FDIC, in its capacity as receiver for Colonial BancGroup’s failed banking subsidiary, Colonial Bank, sought to lift the automatic stay to setoff balances held in various demand deposit accounts (collectively, the “DDAs”) held by Colonial BancGroup (the “Debtor”) totaling approximately $38.4 million at Branch Banking and Trust Company (“BB&T”). Approximately one and a half years earlier, when the Alabama state banking regulator closed Colonial Bank on August 14, 2009,2 BB&T had entered into a Purchase and Assumption Agreement (the “Agreement”) with the FDIC Receiver and the FDIC.

The key issue before the court was whether BB&T assumed the DDAs when it purchased and assumed all of the deposits of Colonial Bank. For reasons noted below, the FDIC’s position was that BB&T did not assume the DDAs under the Agreement, and, therefore, the FDIC remained liable to the Debtor for the deposit balances. The FDIC estimated that its claims against the Debtor—which are the subject of pending proceedings on appeal to the district court3—totaled several hundred million dollars. The FDIC hoped to partially setoff such amounts with balances held in the DDAs. In the alternative, the FDIC argued that even if BB&T assumed the DDAs, the FDIC had the contractual right to assume the DDAs and offset the debt under section 553 of the Bankruptcy Code.

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