A bankruptcy judge approved First Mariner Bancorp's request to auction off its Baltimore bank quickly, a process that drew heated objections from creditors and the U.S. trustee.
Judge David E. Rice set the deadline to bid on 1st Mariner Bank for April 7, with the auction to be held three days later if any bids come through. In an order filed over the weekend, he wrote that the bank's parent company "articulated good and sufficient reasons" for the timing and other procedures.
The bank isn't part of the bankruptcy case, and its parent has stressed that bank deposits, contracts and other business will not be affected.
First Mariner filed for bankruptcy protection Feb. 10, capping its years-long struggle to get back on solid footing after residential loans soured during the housing bust. It has operated under a federal regulatory order to increase its capital level since 2009. And it couldn't pay millions of dollars in interest payments due in December on trust preferred securities.
Wilmington Trust, a trustee in two of those trust preferred securities deals, said the bond-stock hybrids account for a substantial part of what First Mariner owes. Wilmington Trust objected to the proposed sale, saying in a court filing that it "will likely leave all creditors out of the money or, at best, provide fractional recoveries."
The bank represents nearly all of First Mariner's assets, and the initial bid for it — worked out in a deal with a group of investors led by New York investment firm Priam Capital — is set at just under $4.8 million. First Mariner estimated in February that its obligations to creditors exceed $60 million.
The Official Committee of Unsecured Creditors called the process a "lightning-quick private sale disguised as" an auction.
"Rather than encouraging competition among potential buyers for the Debtor's assets, the Auction Procedures — and their condensed timeframes, excessive breakup fees, and preclusive requirements for competing bidders — foreclose any realistic possibility of a competing bid," the committee's attorneys said in a court filing March 1.
An attorney for the U.S. Trustee Program — which oversees the administration of bankruptcy cases — called the terms and conditions "onerous" in an objection last week and said "the overall transaction bears the character of a 'lock-up.'"
"It is because of the built-in, trip-wire aspects of the proposed arrangement that the U.S. Trustee is required to object, so that the integrity of the bankruptcy process is maintained," attorney Edmund A. Goldberg wrote.
First Mariner declined to comment. But the company's attorneys, Lawrence J. Yumkas and Robert T. Schmidt, argued in court documents last week that efforts to market the bank for a sale or other type of transaction had been "extensive" over the past four years. The company reached out to more than 130 potential investors, and only one group was willing to strike a deal, they said.
The First Mariner attorneys said the auction timeline was "well in line" with the average among eight other bank holding companies.
They wrote in their filing that the company's "fragile financial and regulatory position and history of failed transactions counsel in favor of an expeditious sale and due deference to the reasonable and customary protections required by the Stalking Horse Bidder."
That bidder is the group led by Priam Capital, with investors largely from New York and the Baltimore area. It would receive a $1 million break-up fee and an expense reimbursement of up to $1,750,000 if it doesn't prevail in the auction.
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Part of the group's offer is to infuse 1st Mariner Bank with $85 million to $100 million in cash to recapitalize the bank.
Gary Leibowitz, a corporate bankruptcy attorney at law firm Cole Schotz's Baltimore office, said he wasn't surprised to see objections about the auction terms and timeline. The date set to close the deal, April 30, would be an "extremely aggressive" deadline for any new bidders, he said.
But he also wasn't surprised the judge approved the process, given First Mariner's efforts to market itself before bankruptcy and how common fast auction timelines have become.
"There has been less liquidity in the markets for debtor-in-possession financing, so what you generally see, and it's what you have here — you've got a very small DIP loan with a short runway that only provides enough money to keep the debtor alive to a quick sale process," said Leibowitz, a past president of the Bankruptcy Bar Association for the District of Maryland.
First Mariner stock — which once traded above $20 a share — closed at 7 cents per share Monday, up 2 cents.