Contributed by Maurice Horwitz
In the world of bank holding company bankruptcies, often a dispute arises between the parent company and the FDIC (as receiver for parent’s failed bank subsidiary) over the ownership of the tax refunds issued to the bank’s consolidated group pursuant to a consolidated tax return. Generally, ownership of the refund turns on whether the parties had a debtor-creditor relationship (in which case, the parent owns the refund, and the subsidiary merely has a claim in the parent’s chapter 11 case) or an agency/trust relationship (in which case, the subsidiary owns the refund, which must be turned over by the parent). The FDIC has lost many of these battles when there was a tax sharing agreement (TSA) in place, because bankruptcy courts have tended to construe these agreements as creating a debtor-creditor relationship between the parent and the bank subsidiary. Last summer, however, as we reported here, the Eleventh Circuit Court of Appeals in In re BankUnited Financial Corp sided with the FDIC after determining that, upon closer scrutiny, the TSA was silent with respect to ownership of the refund. This month, the Sixth Circuit Court of Appeals issued a similar decision, adding to the growing body of case law on this topic and giving the FDIC some grist for the mill in future disputes.
The AmFin Financial Case
In FDIC v. AmFin Financial Corp., the parent company was a party to a TSA with its consolidated tax group, which included an insured depository institution. After the parent filed for chapter 11 in November of 2009, the federal Office of Thrift Supervision closed the subsidiary bank and placed it into FDIC receivership. The parent later filed a consolidated 2008 tax return on behalf of the group, showing a total net operating loss (“NOL”) of $805 million, $767 million of which was attributed to the bank’s losses. Ultimately, the IRS issued a refund of approximately $194 million, and the FDIC filed a complaint in the United States District Court for the Northern District of Ohio, seeking a declaratory judgment that the bank owned the refund. The parent made the argument to the district court that any refund formed part of parent’s bankruptcy estate. The FDIC, on the other hand, asserted that approximately $170 million of the refund belonged to the bank because that portion resulted solely from NOLs attributable to the bank’s losses in the prior year – a fact that the holding company did not dispute. The FDIC also sought to offer extrinsic evidence to support its argument that the parties had intended to create an agency or trust relationship under Ohio law.
Finding the TSA integrated and unambiguous, the district court held in favor of the parent without considering any of the extrinsic evidence proffered by the bank about the parties’ intent. Basing its analysis on the decision of the bankruptcy court in Spiegel v. FDIC (In re IndyMac BanCorp), the district court found that the TSA’s use of terms such as “reimbursement” and “payment” established a debtor-creditor relationship between the parent its subsidiaries as to tax refunds, thereby justifying an award of the refund to the parent’s bankruptcy estate.
On appeal, like the Eleventh Circuit in In re BankUnited Financial Corp, the Sixth Circuit read the TSA more closely and concluded that in fact, the TSA was silent as to who owned the tax refunds issued to the parent. The agreement allocated tax liability among members of the group, required members to pay their shares, and permitted members to use other members’ NOLs to reduce their tax liability; but none of the agreement’s provisions addressed the disposition or ownership of tax refunds. The Sixth Circuit also distinguished IndyMac BanCorp, noting that the TSA in that case “expressly stated the circumstances under which the parent corporation would disburse refunds to the group and gave the parent corporation discretion as to whether to distribute refunds at all.” Other cases relied upon by the holding company were also distinguishable because the TSAs in those cases “include language directly addressing the distribution of refunds,” while the TSA before the Sixth Circuit did not.
Finally, the Sixth Circuit invoked the recent decision of the Eleventh Circuit in In re BankUnited Financial Corp. In that case, the bankruptcy court held, much like the district court in AmFin Financial Corp,that “the TSA’s use of terms such as ‘payables’ and ‘receivables’ evidenced the parties’ unambiguous intent that a bank’s parent company would retain tax refunds generated by the bank with only a debtor’s obligation to repay the bank.” The Eleventh Circuit reversed, rejecting the bankruptcy court’s “terminology-based rationale” and finding that the TSA did not unambiguously confer ownership of the refund to the parent company. The Sixth Circuit found the case before it to be on all fours with In re BankUnited Financial Corp.: “Just so here: The TSA says nothing about tax refunds received by [the parent] on behalf of the group and includes no protections for the putative creditor, as one would expect if the parties intended a debtor-creditor relationship.” The Sixth Circuit reversed and remanded for the district court to consider whether, instead of a debtor-creditor relationship, an agency or trust relationship was created under Ohio law.
In reversing the district court, the Sixth Circuit in AmFin Financial Corp. joins the Eleventh Circuit in challenging the approach that some bankruptcy courts have taken in their consideration of TSAs. More importantly, these decisions send a strong signal to consolidated tax groups in any industry that they should review their tax allocation agreements to ensure that the agreements achieve the desired objectives of the group. In the case of bank groups, to the extent that their TSAs are reviewed in the wake of In re BankUnited Financial Corp. and AmFin Financial Corp., it can be expected that the FDIC may seek to ensure that these agreements provide for an agency relationship between the holding company and its subsidiary bank with respect to tax refunds.