September 3, 2014
Authored by: Robert Klingler
On August 29, 2014, Judge John T. Laney, III, the Chief United States Bankruptcy Judge for the Middle District of Georgia, issued an order denying FMB Bancshares’ motion to dismiss the involuntary bankruptcy petition filed by its TruPS creditor, Trapeza CDO XII. Among other conclusions, Judge Lacey found that the restrictions contained in FMB Bancshares’ written agreement with the Federal Reserve constituted a a restriction on the company’s ability to pay, rather than its legal duty to pay. While detrimental to FMB Bancshares’ motion to dismiss, this conclusion should reinforce the ability of third parties to enter binding contractual arrangements with bank holding companies, which should be of great relief to those willing to lend to bank holding companies.
As reflected in the opinion and other court documents, FMB Bancshares issued $12 million in Trust Preferred Securities to Trapeza CDO XII in 2006. Starting in March 30, 2009, FMB Bancshares elected to defer payments under its TruPS, and on March 30, 2014, FMB Bancshares exhausted the twenty consecutive quarter deferral period. Trapeza has alleged that FMB Bancshares was non-responsive to Trapeza’s efforts to find an out-of-court solution, and declared the TruPS in default on April 7, 2014, causing an acceleration of all principal and interest. On June 9, 2014, Trapeza filed an involuntary bankruptcy petition for FMB Bancshares, indicating that it believed an auction under Section 363 of the Bankruptcy Code would maximize its return. On July 3, 2014, FMB Bancshares filed a motion to dismiss the bankruptcy petition, arguing (1) that Trapeza did not have the right (or standing) to institute an involuntary bankruptcy under the terms of the TruPS, (2) that FMB Bancshares was unable to pay because of its regulatory obligations with the Federal Reserve Bank of Atlanta, resulting in the debt being legally contingent, and (3) that the bankruptcy court was not the right venue for the disagreement.
In a 20-page opinion, Judge Laney succinctly rejected each of FMB Bancshares’ arguments.
With regard to Trapeza’s standing to institute the involuntary bankruptcy filing, Judge Laney found that the terms of both the Indenture and Amended Trust Agreement provided Trapeza CDO, as the the holders of the Trust Preferred Securities, with broad powers to enforce their rights against FMB Bancshares directly following the event of default (the occurrence of which was conceded by FMB Bancshares). Specifically, both the Indenture and Amended Trust Agreement provided, following an event of default, that any holder of TruPS had a contractual right to institute a suit or proceeding directly against FMB Bancshares for enforcement of payment. Judge Laney found that an involuntary bankruptcy case could be properly construed as a suit for enforcement of payment, noting that bankruptcy cases in other jurisdictions reached the same conclusion.
In its motion to dismiss, FMB Bancshares further argued that because FMB Bancshares was unable to pay without regulatory approval, the claims of Trapeza were made legally contingent and therefore Trapeza did not constitute a proper creditor for purposes of filing an involuntary bankruptcy petition. Specifically, FMB Bancshares relied on its subsidiary bank’s Prompt Corrective Action status, a written agreement that it had executed with the Federal Reserve Bank of Atlanta prohibiting payment of its TruPS, and a capital guarantee that the holding company had made in connection with its subsidiary bank’s capital plan. Judge Laney noted that “a claim is not contingent as to liability when all events have occurred which allow a court to adjudicate a claim and determine whether or not payment should be made” but that “a claim is not contingent merely because the debtor lacks the ability to pay.”
Judge Laney found that FMB Bancshares’ argument “concerns its ability to pay, rather than its legal duty to pay.” Judge Laney ruled that once the five year deferral period expired, and FMB Bancshares went into default on its TruPS, that liability was no longer contingent. FMB Bancshares’ “inability to pay, be it the result of the Federal Reserve Agreement or FMB [Bancshares’] lack of funds, does not make its debt to Trapeza ‘contingent as to liability.'” The Court specifically noted that the regulatory Written Agreement with the regulators, particularly one entered into after the issuance of the TruPS, does not supersede Trapeza’s contractual right to enforce the terms of the Indenture and to seek payment directly from FMB Bancshares. The Court recognized that FMB Bancshares was essentially asking the Court to favor one contractual obligation in favor of another, but the Court declined, noting that FMB Bancshares has legal obligations under both contracts.
FMB Bancshares finally asked the Court to exercise its discretion to dismiss the involuntary bankruptcy as not being in the best interests of the creditors and debtor. FMB Bancshares focused on the risk of regulatory entanglement, noting the extensive regulation of FMB Bancshares and its subsidiary bank, but Judge Laney was not convinced, noting that the Bankruptcy Court was not being used in an effort to prevent banking regulators from exercising their authority, but rather in an effort to resolve a contractual dispute between creditor and debtor. The mere fact that the banking industry is a regulatory environment does not make bankruptcy inappropriate. Without determining that the Bankruptcy Court was necessarily the best venue for the dispute, Judge Laney noted that Trapeza was a sophisticated party that had made a business decision to seek redress through the Bankruptcy Court, and Judge Laney refused to second guess Trapeza’s business judgement.
We continue to follow the case closely, as we expect this only marks the opening innings of what could prove to be a contentious resolution of a troubled bank holding company.