Squire Sanders Prevails on Behalf of AmFin Financial Corporation In Precedent-Setting US$500 Million Regulatory Dispute

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    A federal judge, following the recommendation of an advisory jury, ruled in favor of AmFin Financial Corporation (AFC) in a case of first impression nationally with significant implications for federal bank regulators that attempt to make holding companies responsible for maintaining the capital of a failed bank or savings and loan association. AFC, the savings and loan holding company formerly known as AmTrust Financial Corporation, is represented by Squire, Sanders & Dempsey.

    US District Court Judge Donald C. Nugent ruled AFC did not make any commitment to maintain the capital of its former subsidiary, as alleged by the Federal Deposit Insurance Company (FDIC). This is the first case in the nation to go to trial over the issue of whether a holding company that later filed for bankruptcy was responsible for maintaining the capital of its savings and loan subsidiary. Notably, after the FDIC rested its case, AFC decided not to call any witnesses to refute the FDIC’s claim, instead successfully arguing that the FDIC failed to meet its burden to establish the existence of any commitment by AFC to its regulator, the Office of Thrift Supervision (OTS), to maintain the capital of AmTrust Bank.

    Squire Sanders lawyers Philip M. Oliss, Stephen J. Lerner and G. Christopher Meyer represent AFC.

    The dispute arose in AFC’s Chapter 11 case, which was filed in November 2009, shortly before its then wholly owned subsidiary, AmTrust Bank, was placed into receivership by the OTS. The FDIC, which was appointed receiver, claimed AFC breached a commitment under section 365(o) of the Bankruptcy Code to maintain AmTrust Bank’s capital when AFC stipulated to an OTS cease and desist order. The FDIC sought approximately US$500 million in damages as a priority claim in the AFC bankruptcy. AFC claimed that no such commitment was made or intended by AFC or the OTS, and that the FDIC’s case rested on its own interpretation of documents that contained no capital guarantee. The parties made their cases to Judge Nugent and a 12-member advisory jury during a four-day trial. The advisory jury found for AFC on April 23. On June 6, Judge Nugent entered judgment in favor of AFC, expressly finding that “[t]he documents that the FDIC alleged to contain capital maintenance commitments . . . do not contain a commitment to maintain the capital of the bank that is enforceable under 11 U.S.C. § 365(o).” Acknowledging the unanimous jury’s conclusion, Judge Nugent noted that “[t]he Court is not bound by the advisory jury’s determination, but finds that it comports fully with the weight of the evidence presented at trial.”

    The case centered on a question of fact – did AFC make a commitment to the OTS to maintain the capital of AmTrust Bank? The jury and Judge Nugent considered the facts and both concluded that the evidence did not support the existence of such a commitment.

    The case creates precedent limiting federal regulators' ability to enforce alleged capital commitments in the absence of unambiguous documents clearly demonstrating the intent to enter into a specific commitment.

    The case is also notable for the court’s innovative use of an advisory jury to assist in resolving core questions of fact.

    Ronald L. Glass, AFC’s Chief Executive Officer and a founder of GlassRatner Advisory & Capital Group in Atlanta, said he is gratified by the conclusion drawn by Judge Nugent and by the advisory jury.

    “This decision emphatically validates AFC’s position that at no time had it made or intended to make a commitment to capitalize AmTrust Bank and that AFC’s prior management and board made every effort to avoid the bank’s failure,” Glass said.

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