Summary: We previously reported on the Eleventh Circuit's decisions in BankUnited and NetBank in which the Eleventh Circuit held that tax refunds attributable to losses incurred by an insolvent bank but received by the bank's holding company belonged to the FDIC, as receiver for the bank, rather than to the holding company's bankruptcy estate. We noted in those reports that it remained to be seen whether these decisions would change the general direction of the law on this issue, or be viewed as limited to their facts. The Ninth Circuit's recent decision in the IndyMac Bancorp bankruptcy case, which holds that disputed tax refunds belong to the bankruptcy estate of holding company IndyMac Bancorp, rather than to the FDIC as the receiver for IndyMac Bank, suggests that courts may limit the Eleventh Circuit decisions to their facts.
In prior Client Alerts, we reported on two Eleventh Circuit
decisions, BankUnited and NetBank, in which the
Eleventh Circuit seemingly broke from prior precedent established
by lower courts and held that tax refunds attributable to losses
incurred by an insolvent bank, but received by the bank's
holding company, belonged to the FDIC, as receiver for the bank,
rather than to the bankruptcy estate of the holding
company. In those prior Client Alerts, we queried whether in
the future other courts would follow the Eleventh Circuit's
approach in BankUnited and NetBank or limit these
cases to their facts and continue to follow the earlier precedent.
The recent Ninth Circuit decision arising from the IndyMac Bancorp
("IndyMac") bankruptcy case, which—like the
decision of the Delaware bankruptcy court in In re Downey
Financial Corp., about which we also
reported—reaches the opposite result from the Eleventh
Circuit, suggests that courts may limit the Eleventh Circuit cases
to their facts. See In re IndyMac Bancorp, Inc., No.
12-02967, 2014 WL 1568759 (9th Cir. April 21, 2014).
Just as in the other cases on which we have reported, the Ninth
Circuit decision in the IndyMac case arose from a dispute
between the FDIC, as receiver for a subsidiary bank (in this case,
IndyMac Bank F.S.B. (the "Bank")), and the bankruptcy
estate of its holding company parent (in this case, IndyMac (the
"Holding Company")). As in the other cases, the dispute
concerned the ownership of tax refunds attributable to losses that
had been incurred by the Bank but paid to and received by the
Holding Company as the result of the Bank's and Holding
Company's decision to file a consolidated tax return. As
in BankUnited and NetBank, both the bankruptcy
court and the district court ruled that the tax refunds at issue
(more than $55 million) belonged to the Holding Company and
not to the Bank. And, as in those earlier cases, the
bankruptcy and district courts held that, while the FDIC as
receiver for the Bank had a claim against the Holding Company for
those refunds, the claim was merely a general unsecured
claim.
Unlike the Eleventh Circuit in BankUnited and
NetBank, however, the Ninth Circuit in IndyMac
affirmed the rulings of the lower courts. In doing so, it
relied on the terms of the Tax Sharing Agreement (the
"TSA") to which the Holding Company and the Bank
were parties, noting that the lower courts' findings that the
agreement was unambiguous had not been challenged by either party
on appeal. In a prior case, the Ninth Circuit had held that in the
absence of an explicit agreement between the parties to the
contrary, tax refunds attributable to losses incurred by a
subsidiary bank but paid to the parent holding company were the
property of the bank. See In re Bob Richards
Chrysler-Plymouth Corp., 473 F.2d 262, 264 (9th Cir.
1973). But, in the IndyMac case, the court held that
the TSA was just such an "explicit agreement." In
particular, it held that (i) the TSA provided for any refund to be
paid to the Holding Company, and (ii) when the Holding Company
received the tax refunds, it did not receive them as agent or
trustee for the Bank. Applying California law, the Ninth
Circuit concluded that the TSA did not establish a principal-agent
relationship between the Holding Company and the Bank because the
Bank did not exercise control over the Holding Company's
activities, and did not create a trust relationship because there
was no explicit language to that effect. Rather, under the TSA, the
funds became the Holding Company's property, and the Bank
simply became a general unsecured creditor of the Holding Company
for the amount of the refund.
Significantly, the Ninth Circuit concluded that it did not need to
address the Eleventh Circuit's decision in NetBank
because NetBank "involved a tax sharing agreement that
explicitly incorporated the Interagency Statement on Income Tax
Allocation in Holding Company Structure (which the TSA in this case
did not) . . . and involved the application of Georgia, not
California, state law." In re IndyMac Bancorp, 2014
WL 1568759, *2. (As we have previously reported, the
Interagency Statement on Income Tax Allocation provides that a
parent company receives refunds from a taxing authority as agent
for the members of the tax sharing group and counsels banks against
entering into tax allocation agreements that would grant the parent
company ownership of refunds attributable to losses of the
bank.). The court never mentioned the Eleventh Circuit's
BankUnited decision.
The Bottom Line
While the Ninth Circuit's decision in IndyMac will
almost certainly not be the final word on this issue, it does
suggest that the Eleventh Circuit's decisions in
BankUnited and NetBank may not lead to a general
shift in the direction of the law in this area. However, even
if subsequent courts continue to limit those decisions to their
facts, as the Ninth Circuit did in IndyMac (and as the
Delaware Bankruptcy Court did in Downey Financial), the
Eleventh Circuit decisions will continue to be important support
for the principle that clear and explicit language regarding the
ownership of any tax refunds in the tax sharing agreements between
banks and their non-bank affiliates will likely be controlling.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.