Georgia Bank, Creditor End Trust-Preferred Bankruptcy Fight

A small Georgia lender has reached a deal to avoid a threatened involuntary bankruptcy, though the resolution is likely to leave key legal questions on trust-preferred debt and bankruptcy unresolved.

FMB Bancshares in Lakeland, Ga., and Trapeza Capital Management, a manager of trust-preferred securities, have reached an agreement to resolve FMB’s nearly $14 million of outstanding trust-preferred debt, according to a court filing. Trapeza on Thursday asked the U.S. bankruptcy court for Georgia’s middle district to dismiss a petition for involuntary bankruptcy that it filed in June, after FMB defaulted on the debt.

“Trapeza and FMB have resolved the issues giving rise to the involuntary petition; thus, proceeding with the involuntary petition at this point is thus no longer necessary or prudent,” the request for dismissal states. FMB “intends to deal with its other creditors outside of bankruptcy.”

The filing does not provide details on the financial terms of the settlement, and calls to FMB and Trapeza were not returned. The U.S. bankruptcy court will hold a hearing on Feb. 25 to consider the request to dismiss the bankruptcy.

The resolution of the dispute likely means the court will not rule on a key unresolved question for trust-preferred debtors: Whether creditors can force them into involuntary bankruptcy once they default on their debt.

FMB is the second lender to be hit with an involuntary bankruptcy over defaulted trust-preferred debt, following American Bancorp in St. Paul, Minn. Unlike American, however, FMB chose to fight the move, arguing that Trapeza had no authority to force it into bankruptcy.

A judge ruled in Trapeza’s favor in September, but FMB continued to challenge it and had not yet entered bankruptcy.

FMB is the parent of the $550 million-asset Farmers & Merchants Bank.