By ARIELLE KASS
Publication: Crain's Cleveland Business
Date: Monday, April 26 2010
The Federal Deposit Insurance Corp. claims it is owed more than $500 million from the holding company of the former AmTrust Bank for failing to be a source of strength to the bank, a claim the FDIC and others say could have broad implications for banks nationwide.
In pleadings related to the bankruptcy case of AmTrust Financial Corp. - now known as AmFin Financial Corp. - FDIC attorneys said by agreeing to a Nov. 19, 2008, cease-and-desist order that required the bank to have a prescribed amount of capital, AmFin committed to keeping AmTrust Bank well-capitalized.
AmFin therefore should be on the hook for at least $518.5 million, which was AmTrust Bank's capital deficit as of Sept. 30, 2009, according to the FDIC. After its parent company filed for Chapter 11 bankruptcy protection last Nov. 30, AmTrust Bank - which now is known as Ohio Savings Bank in this area - failed and was taken over by New York Community Bank last Dec. 4 in a deal orchestrated by the FDIC.
Attorneys for AmFin disagree with the FDIC and say the government agency is owed nothing. They say the company made no promises to keep AmTrust Bank well-capitalized and that AmTrust Financial noteholders and others should receive priority over the government agency.
While the Office of Thrift Supervision, regulator of AmTrust Financial and AmTrust Bank, asked the holding company to sign a Savings Association Support Agreement for the bank, AmTrust Financial did not do so, according to AmFin's filings in U.S. Bankruptcy Court in Cleveland.
The capital plan that spelled out how AmTrust Financial would keep the bank above its required capital limits expressly stated that it was based on the assumption that no further capital contributions would be received from AFC (AmTrust Financial Corp.) or outside sources, according to a March 15 filing by AmFin attorneys in the bankruptcy case.
In the capital plan, which was to cover a period from Jan. 1, 2009, to June 2010, AmTrust Financial said it expected the bank's capital levels to decline at first. It intended to drastically shrink AmTrust Bank's balance sheet and its exposure to high-risk loans, strengthening the bank.
A Feb. 20, 2009, letter from the Office of Thrift Supervision, included with AmFin's bankruptcy pleadings, said the agency did not object to the plan AmTrust Financial filed in January of that year.
Follow the money
Christopher Meyer, a Squire, Sanders & Dempsey attorney who is representing AmFin, said that because the holding company likely has fewer assets than the FDIC is demanding, a decision about whether the claim is valid is key to how the rest of the bankruptcy case proceeds.
If the FDIC has the claim they assert they do, essentially, we should hand them the keys and go away, Mr. Meyer said. We believe several things indicate no such commitment was made.
Mr. Meyer said the value of the holding company doesn't exceed $500 million and that a good deal of the money is tied up in real estate - much of it in Florida - making it hard to estimate its worth. The company also is expecting a tax refund of more than $100 million to which the FDIC might make a claim, he said.
Mr. Meyer said there are roughly $170 million in claims against AmFin from other creditors.
Eric Goodman, an attorney with Baker Hostetler who is representing the FDIC, said because the agency's claim is based on Sept. 30, 2009, numbers, the amount the FDIC is owed might increase due to more losses that may have occurred before AmTrust Bank's Dec. 4 failure.
Because of the capital maintenance commitment to the Office of Thrift Supervision that the FDIC maintains was made when the holding company agreed to the cease-and-desist order, Mr. Goodman said, the holding company is required to immediately cure the deficit before it can move forward with the rest of the bankruptcy.
It's not a small matter, Mr. Goodman said. We're going to litigate over who gets the money.
A factor that makes the case somewhat unique, Mr. Goodman said, is the FDIC's reliance on the cease-and-desist order to establish that AmTrust Financial had an obligation to provide capital support to AmTrust Bank. In other cases, specific signed commitments have existed.
In an April 1, 2010, bankruptcy court filing, the FDIC said the case is bigger than just AmTrust Bank and its holding company and could impact how other holding companies deal with their own commitments to the agency. As such, the FDIC asked that only litigation related to the capital maintenance commitment be moved from bankruptcy court, where it is in front of Judge Pat E. Morgenstern-Clarren, to U.S. District Court in Cleveland.
The resolution of this case is of critical importance to the FDIC and the taxpayers of the United States because the Proceedings directly involve the FDIC's authority and obligation to hold bank holding companies accountable for the commitments they make to regulators to maintain the capital of the banks they own and control, the filing stated.
Given the stakes - to both the FDIC, the debtors, and their creditors - and the profound significance of these issues to the FDIC, an appeal is highly likely, and the District Court will be required to consider these matters in any event, the filing states.
Squire Sanders' Mr. Meyer said AmFin would like the issue to be decided in bankruptcy court because it is a key matter in the bankruptcy case.
Two banking attorneys - one from Ohio and the other from Washington, D.C. - who are not connected to the case but who both asked to remain anonymous said where the matter is decided is an important issue because there is a chance the district court will be more willing to consider the FDIC's argument than would the bankruptcy court.
While the Ohio attorney said he thought the FDIC made some very ingenious arguments, he said the claim was slender and not well-founded.
Although the FDIC has won similar cases when a financial institution explicitly did agree to back a bank in such a manner, this attorney said, this case seems as if FDIC attorneys are trying to stitch together an agreement that doesn't exist.
If the FDIC does get its way, it's going to alter the landscape of regulation and financing, the Ohio attorney said. It's the most aggressive I've ever seen them be.
The D.C. attorney said while there definitely is a dispute between the parties, he expects them to reach a settlement. He said while there is not a lot of history regarding what constitutes a capital maintenance commitment by a holding company to its bank, the issue is beginning to crop up more frequently as a result of the rising number of bank failures. As of April 22, there had been 50 bank failures in 2010 and 215 since 2008.
Kevin Jacques, the Boynton D. Murch chair in finance at Baldwin-Wallace College and a former economist for the U.S. Treasury Department and the Office of the Comptroller of the Currency, said he expects the resulting arguments to make for an interesting court battle.
If I'm a betting man, I'm betting the holding company's losing this one, Dr. Jacques said. Regulators have an awful lot of power here.
Dr. Jacques said if the holding company wins its argument, it could endanger the safety and soundness of the financial system because there would be no guarantee that a holding company would do what was in its bank's best interest. That outcome could lead regulators to be stricter in restricting banks' activities and shutting them down sooner than is currently the case - a scenario that could have serious ramifications on the country, Dr. Jacques said.
Any financial holding company could walk away from any bank when it's convenient, he said. The FDIC is clearly going to fight this, if that's what the holding company is aiming for. They'll fight it tooth and nail, as far as it needs to go.