Bank Of America Sues Colonial

Bank of America Corp. (BAC) sued Colonial Bancgroup Inc. (CNB) to protect its claim on certain loans after the troubled company refused to return more than $1 billion it owed to Freddie Mac (FRE).

Bank of America filed the lawsuit at a federal court in Florida, asking for a temporary restraining order prohibiting Colonial from using the proceeds it received from Freddie Mac for buying mortgage and other loans owned by Ocala Funding LLC.

Bank of America was the collateral agent for the Ocala Funding loans and Colonial held them as custodian, agent and bailee. On the whole, Bank of America was a trustee to parties that provided financing for Colonial’s mortgage business.

On Thursday, the court decided in favor of Bank of America and ordered Colonial to freeze $1 billion in assets.

Colonial appears to be on the threshold of collapsing as a going concern and has reportedly been subject to criminal investigation for alleged accounting irregularities. The lawsuit is an additional concern for Colonial as it will face further financial trouble.

According to the Colonial management, the company will not be able to file its second-quarter financial report as alleged accounting irregularities now being investigated. The company has informed the Securities and Exchange Commission to this effect.

The Alabama State Banking Board is expected to ask Colonial for permission to allow the Federal Deposit Insurance Corporation (FDIC) to take it over. If the bank fails, the FDIC would find a new owner for it as quickly as possible. If Colonial collapses, it would be the largest bank failure this year. Its potential buyers include BB&T Corp. (BBT) and SunTrust Banks Inc. (STI).

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