Capitol Bancorp creditors, indenture trustee object to plan, statement

By Jim Witters

Wilmington, Del., Dec. 6 - Capitol Bancorp Ltd. and Financial Commerce Corp.'s plan of liquidation and disclosure statement drew fire from the official committee of unsecured creditors and two indenture trustees in a Dec. 6 filing with the U.S. Bankruptcy Court for the Eastern District of Michigan.

The committee and indenture trustees Wilmington Trust Co. and Manufacturers and Traders Trust Co. filed separate objections, but agreed on the reasons the court should not approve the disclosure statement or confirm the Chapter 11 plan.

"The plan suffers from two major - and fatal - flaws," the committee claimed.

First, the plan calls for a release for the debtors' insiders, including officers and directors, from liability for claims arising on or before the effective date of the plan. Such releases are prohibited in a plan of liquidation, "and their presence in the plan compels entry of an order denying confirmation of the plan."

Second, "the debtors have turned the Chapter 11 process on its head," the committee wrote.

"Eager to secure the third party releases discussed above, and for current management to maintain control of the debtors with little creditor oversight, the debtors have filed a Chapter 11 plan that punts the decision to liquidate or reorganize," the committee objection stated.

Capitol appears to have reserved its right to "toggle" from liquidation to reorganization should a court-approved sale of the debtors' remaining subsidiary banks to Talmer Bancorp, Inc. fail to close, the committee said.

"Furthermore, the plan contains a host of other objectionable provisions designed to protect insiders of the debtors or punish creditors," according to the filing.

The "toggle" option also argues against approval of the disclosure statement, because creditors cannot know what recovery they may receive on account of their claims.

"The plan was overwhelmingly voted down by the largest classes of non-insider creditors and is opposed by the indenture trustees for the trust preferred securities, which debt exceeds $150 million in principal amount," the committee said.

Suggested changes

The indenture trustees offered suggested changes to the amended plan to make it more acceptable to them.

Those changes include the following:

• Making clear that the indenture trustees are the disbursing agent for holders of TruPS claims;

• Making clear that the indenture trustees' charing liens are preserved;

• Modifying the provisions for cancellation of the trust documents to make clear that they do not cut off the rights of the indenture trustees;

• Ensuring that fees and expenses of the indenture trustees are not subordinated to senior note claims; and

• Clarifying that any equity securities issued to Holders of Class 2 claims are book entry and Depository Trust Co. eligible.

The plan of reorganization confirmation hearing is scheduled for Dec. 18.

Capitol, a Lansing, Mich.-based community banking company, filed for bankruptcy on Aug. 9, 2012. Its Chapter 11 case number is 12-58409.

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