Vineyard National Bancorp v. Federal Deposit Insurance Corporation, Receiver fo

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UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
LOS ANGELES DIVISION
In re
VINEYARD NATIONAL BANCORP,
Debtor.
Case No.: 2:10-BK-21661RN
Chapter 11
BRADLEY SHARP, AS LIQUIDATING
TRUSTEE OF THE LIQUIDATING
TRUST OF VINEYARD NATIONAL
BANCORP,
Plaintiff and
Counter-Defendant,
v.
FEDERAL DEPOSIT INSURANCE
CORPORATION, in its capacity
as receiver for Vineyard
Bank, National Association,
Defendant and
Counter-Plaintiff.
Adv. No.: 2:10-AP-01815RN
MEMORANDUM OF DECISION AFTER
TRIAL ON (i) COUNT IV OF THE
COMPLAINT; AND (ii) COUNT I OF
THE AMENDED COUNTERCLAIM
DATE: January 29, 2014
TIME: 9:00 a.m.
PLACE: Courtroom 1645
INTRODUCTION
Bradley Sharp, as Liquidating Trustee of the Liquidating Trust
of Vineyard National Bancorp (“Plaintiff”), commenced this action on
May 5, 2010 raising five claims for relief that seek to disallow the
FILED & ENTERED
MAR 28 2014
CLERK U.S. BANKRUPTCY COURT
Central District of California
BY DEPUTY CLERK	gae
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claim of Defendant and Counter-Plaintiff FDIC-R (“Defendant” or
“FDIC-R”), as receiver for Vineyard Bank, N.A. (“Bank”), against the
chapter 11 estate of Vineyard National Bancorp (“Debtor”). Among
other things, Count IV of the complaint asserts the Debtor’s
entitlement to certain tax refunds in connection with the Debtor and
the Bank’s consolidated tax returns for the tax year 2008.3 (Compl.
¶¶ 50-66.) With its Amended Counterclaim to the Complaint (“Am.
Countercl.”), the FDIC-R rejects Plaintiff’s position that the FDIC-
R is merely an unsecured creditor of the Debtor’s estate on account
of the Bank’s entitlement to the tax refunds and instead, asserts
its right to the said tax refunds as property of the FDIC-R. (Am.
Countercl. ¶¶ 5-14.)
On May 3, 2013, this Court issued its Memorandum of Decision
Re: (1) Motion of the Federal Deposit Insurance Corporation, as
Receiver for Vineyard Bank, N.A., to Dismiss Count IV of the
Adversary Complaint; and (2) Plaintiff’s Motion for Partial Summary
Judgment as to (I) Capital Maintenance Claim Asserted by FDIC-R; and
(II) Ownership of Tax Refunds (“MOD”). The MOD, inter alia, denied
Plaintiff’s motion for partial summary judgment on the issue
concerning the ownership of the 2008 tax refunds finding that a
material factual dispute exists on whether an enforceable Tax
Sharing Agreement (“TSA”) was operative in 2008 and whether a signed
TSA had to be renewed every year since 2005 for the agreement to be
enforceable. (Mem. Of Decision, May 3, 2013.)
3 The complaint further alleges FDIC-R was instrumental in causing the diminution of Debtor’s capital by requiring the
Debtor to infuse at least $1 million to the Bank between May 2008 and February 2009 that was intended to benefit the
Bank and deplete Debtor’s estate. Thus, its claim ought to be subordinated. (Compl. ¶¶ 23-29.)
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In Courtroom 1645 of the above entitled Court, the Honorable
Richard M. Neiter, United States Bankruptcy Judge presiding,
conducted a two-day bench trial on January 29 and 30, 2014. Rolf S.
Woolner, Esq. and William R. Shafton, Esq. of Winston & Strawn, LLP
appeared on behalf of the Plaintiff and David A. Kettel, Esq. and
Jessica Mickelsen, Esq. of Katten Muchin Roseman, LLP appeared on
behalf of the Defendant. No other appearances were made.
The admitted facts in the parties’ Pretrial Stipulation
approved on December 26, 2013 (“Admitted Fact(s)”), the Trial
Documents from both parties, the testimony of witnesses and the
stipulated exhibits for trial (collectively, “Stipulated
Exhibit(s)”) admitted into evidence at trial govern the facts of
this case.4 The following witnesses testified at trial:
(1) Mr. Norman Morales5 (“Morales”),
(2) Mr. James LeSieur6 (“LeSieur”),
(3) Mr. Gordon Fong7 (“Fong”),
(4) Mr. Donald Henry Pelgrim, Jr.8 (“Pelgrim”),
(5) Ms. Jessica Mickelsen (“Mickelsen”),
(6) Mr. Joel Herbert Ravitz (“Ravitz”), and
(7) Mr. Chuck Lawrence Keagle.
4 Defendant’s Exhibits Q and DD were excluded from trial while Defendant’s Exhibits J, J1, K, L, M, and N were
admitted subject to Plaintiff’s evidentiary objections.
5 Mr. Morales was the Debtor’s President and CEO until January 2008 when Mr. LeSieur took over the CEO position.
6 Mr. LeSieur was the Chairman of the Debtor’s Board of Directors from January 2007 to August 2008; the Vice
Chairman of the Board of Directors from October 2008 until the Debtor’s chapter 11 petition on July 21, 2009; the interim
CEO from January 2008 until the fall 2008; and interim CFO from December until the postpetition period of the Debtor’s
bankruptcy case. He held the same positions with the Bank during the same time he was an officer and director of the
Debtor until the Bank was taken over by the FDIC-R.
7 Mr. Fong was the CFO and former Executive Vice President of the Bank and the Debtor.
8 Mr. Pelgrim was a former chief administrative officer for the Debtor.
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Witnesses were cross-examined accordingly.
The Court has carefully considered the Admitted Facts, the
findings made in this Court’s decision entered on May 3, 2013, the
testimonies and all exhibits admitted into evidence. The Court has
also considered the legal arguments made in the Plaintiff’s Trial
Brief, the Trial Brief of the Federal Deposit Insurance Corporation,
as Receiver for Vineyard Bank, and the Plaintiff’s Reply Trial
Brief. After trial, the Court took this matter under submission and
now renders its Memorandum of Decision containing its findings of
fact and conclusions of law as required under Fed. R. Bankr. P.
7052.
JURISDICTION
This Court’s jurisdiction is established under 28 U.S.C. §§
157(b)(2)(B) and 1334, and as determined by this Court’s Memorandum
of Decision issued on May 3, 2013.
ISSUES
The trial focused on the factual issue concerning the intent of
the parties to continue enforcing the terms of the TSA in 2008. A
factual determination of this issue would result in this Court
deciding whether the holding in In re Bob Richards Chrysler-Plymouth
Corp., Inc., 473 F.2d 262 (9th Cir. 1973), applies in this case in
the absence of a signed TSA applicable in 2008 thereby determining
ownership of the 2008 tax refunds.
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STATEMENT OF EVIDENTIARY FACTS
Debtor is the parent-holding company of the Bank. (Admitted
Fact ¶ 1.) The Vineyard National Bancorp and Subsidiary Corporate
Income Tax Sharing Agreement (as previously defined, “TSA”) between
the Bank and the Debtor was created on January 31, 2005 and signed
by Mr. Norman Morales as President and Mr. Gordon Fong as Senior
Vice President of both the Debtor and the Bank. (Id. ¶ 2; Pl.
Stipulated Ex. 2 and Def. Stipulated Ex. A.) The respective boards
of directors of the Debtor and of the Bank adopted the TSA as
reflected in the minutes of the meeting on April 27, 2005.
(Admitted Fact ¶ 2; Pl. Stipulated Ex. 3.) Identical versions of
the TSA were signed by Mr. Morales and Mr. Fong on behalf of the
Bank and the Debtor in 2006 and 2007. (Admitted Fact ¶ 3; Pl.
Stipulated Exs. 4 and 5 and Def. Stipulated Ex. A.) However, there
were no minutes of either board of directors’ meeting reflecting
their approval of the TSA signed in 2006 and 2007. (Admitted Fact ¶
3.)
The TSA provides in pertinent part:
“[T]he ultimate responsibility to make timely
estimated federal income and state franchise tax
payments rests with the Company [Debtor]. It has
been the policy and practice of both the Company
and the Bank to have the Bank make the timely
quarterly consolidated estimated Federal income
and state franchise tax payments on behalf of
both the Company and the Bank to the taxing
authorities.
. . .
Each quarterly amount advance or deducted by the
Bank on behalf of the Company will approximate
the estimated Federal income and state franchise
tax liability or benefit calculated by
multiplying the quarterly taxable income/loss of
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the Company by the appropriate income tax rate.
These tax remittances shall not exceed the amount
the Bank would have paid had it filed separately.
The Bank and Bancorp shall settle intercompany
taxes receivable/payable arising from these
estimated payments on a quarterly basis. Thus,
if the Bank incurs a tax loss it should receive a
refund in an amount no less than the amount the
Bank would have received as a separate entity,
regardless of whether the consolidated group is
receiving a refund.” (Pl. Stipulated Exs. 2, 4
and 5 and Def. Stipulated Ex. A (emphasis
added).)
There was no TSA signed in 2008—the tax year that resulted in the
disputed tax refunds. (Admitted Fact ¶ 3.)
A. A written Tax Sharing Agreement existed in 2008.
The collective testimonies from the directors and officers
of the Debtor support a finding that a TSA was in effect in 2008.
Most notable was Mr. Fong’s testimony that at the time he joined the
Debtor in 2002, the company already had a preexisting written tax
sharing agreement with the Bank. At the time the federal regulators
in 2005 were conducting an examination of the Bank’s financial
condition, Mr. Fong changed the existing tax sharing agreement
between the Bank and the Debtor into a policy by changing the title
of the document from an “agreement” to a “policy”. Defendant’s
Stipulated Exhibit C referred to this as the “Affiliate Transaction
Policy” which the regulators found not to be an acceptable tax
sharing agreement. As such, the regulators required that the tax
sharing arrangement between the Debtor and the Bank be in the form
of an agreement. To be in compliance, Mr. Fong testified that he
changed the title back to an agreement which became the 2005 TSA
that the regulators then deemed acceptable. Mr. Fong further
testified that the body of the 2005 TSA contained verbatim the
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language used in the tax sharing agreement that existed when he
joined the Debtor and the Bank. Defendant’s Stipulated Exhibit C
further stated that the federal regulators encouraged the Bank’s
management to review the TSA to incorporate, at a minimum, the
recommendations outlined in the Interagency Policy Statement on
Income Tax Allocation in a Holding Company Structure dated November
23, 1998 (“Interagency Policy Statement”). (Def. Stipulated Exs. C
and B.)
The TSA was then approved by the Bank’s and the Debtor’s
boards of directors in 2005. Mr. Fong further testified that in
2006 and 2007, he and Mr. Morales signed the same TSA to satisfy the
regulators. However, the boards of the Debtor and the Bank neither
approved nor disapproved the subsequent TSAs because, as Mr. Morales
testified, board approval was unnecessary unless the boards were
implementing a new policy. The TSA was considered to continue as
the standard operating procedure for an indefinite period of time
until modified or terminated. As a result, no board approval in
2006 and 2007 was required. Indeed, the TSA contained no
termination date or expiration date and the boards did not discuss a
termination date for the TSA at the meeting in 2005. There was no
requirement to approve the TSA and sign the document yearly absent a
statement that an annual review and approval was required for a
company policy. This was corroborated by similar testimony from Mr.
LeSieur. Mr. LeSieur further testified that there was no
requirement from a board to reexecute the same TSA every year and no
director sought to terminate or amend the existing TSA. Indeed, Mr.
Pelgrim testified he had no opinion as to why the TSA had to be
signed three years in a row.
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In explaining why a TSA was signed in 2006 and 2007, Mr.
Morales testified that Mr. Fong was a detailed and pragmatic person;
hence, while unnecessary, Mr. Fong had a checklist of regulatory
requirements and signed TSAs dated 2006 and 2007 were presented to
satisfy the regulators. In 2008, Mr. Fong testified a 2008 TSA was
not signed because the Bank was dealing with more important pressing
matters than worrying about a signed TSA. However, Messrs. Morales
and LeSieur believed the same TSA approved in 2005 was in effect in
2008. Consequently, Mr. LeSieur testified that he understood the
same TSA remained in effect for 2008-2009. He did not see the
reexecuted TSAs for 2006 and 2007. When preparing the 2008
consolidated tax returns, he referred to the same TSA without
focusing on the date or doubting its effectiveness.
The Court finds, therefore, that the TSA approved by the
two boards in 2005 remained enforceable in 2008 notwithstanding the
absence of a signed TSA for that year. A tax sharing agreement
existed at all relevant times between the Bank and the Debtor as
memorialized by the TSA that was signed and approved by the boards
in 2005. The Court further finds that the signing of an identical
TSA in 2006 and 2007 was a superfluous exercise by Messrs. Fong and
Morales in order to remain in compliance with the regulators’
requirements. Defendant’s Stipulated Exhibit C did not state that
the regulators informed management that the TSA had to be renewed
every year but only that management ensure the TSA was comprehensive
and that, at a minimum, the recommendations of the Interagency
Policy Statement were incorporated in the TSA.
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B. The terms of the Tax Sharing Agreement established a
creditor-debtor relationship.
This Court has ruled in its MOD that the terms of the TSA
were not vague. The four corners of the TSA determine the
relationship established by its terms.
The TSA provides that the Bank and the Debtor shall settle
intercompany taxes receivable/payable arising from the estimated tax
remittances made on a quarterly basis in the amount not to exceed
the Bank’s entitlement to a refund if it were to file a separate tax
return. (Pl. Stipulated Exs. 2, 4 and 5 and Def. Stipulated Ex. A.)
The TSA further provides that pursuant to this “true up”, the Bank
would be entitled to “receive” a refund equal to the amount it would
have received regardless if the consolidated group obtained a
refund. Id. The language of the TSA that refers to “intercompany
tax receivable/payable” establishes an obligation of the Debtor to
pay the Bank any amount owing based on the accounting framework set
forth in the TSA equal to the amount of the refund the Bank would
have received if it had filed its own tax return.
The Court rejects Defendant’s position that the terms of
the TSA created an agency relationship or a trust relationship
between the parties and finds the TSA established a creditor-debtor
relationship. Most telling of a creditor-debtor relationship is the
language in the TSA that entitles the Bank to payment even if the
consolidated group did not receive a refund so long as it would have
received a refund if the Bank had filed a separate tax return.
Under this requirement, the Debtor would have owed the Bank sums it
did not receive from the IRS if the Bank were entitled to receive a
refund based on a separate return. This is indicative of a debtor-
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creditor relationship because it established the Debtor’s obligation
irrespective of whether a refund was obtained. No trust or agency
relationship was created because no “res” existed that belonged to
the Bank under this circumstance. The Debtor will owe the Bank so
long as the Bank was entitled to a refund if the Bank had filed its
own tax return.
Additionally, the TSA simply required the Debtor to make a
payment to the Bank after a quarterly “true up”. The TSA did not
state unequivocally that the Debtor serves as an agent for the Bank
for purposes of collecting any tax refund. Nor did it set forth
parameters that are consistent with a trust agreement. There was no
requirement to segregate funds belonging to the Bank, no restriction
on how the Debtor could use the funds, no identification of a trust
res, and no express declaration of the intent to create a trust or
to hold the tax refunds in trust for the benefit of the Bank, the
consolidated group or anyone else. The TSA simply did not set
limitations or controls over the use of the funds obtained from the
IRS that were in Debtor’s possession including any fixed deadline
when the funds were to be paid to the Bank.
Instead, the terms “receivable” and “payable” in the
agreement and the requirement to pay the Bank its refund even if the
consolidated group did not receive a tax refund evidenced the intent
to create an obligation to the Bank in the form of a reimbursement
thereby establishing a debtor-creditor relationship. The Court
finds further that while the TSA was not a loan agreement or a
promissory note, its terms nevertheless established Debtor’s payment
obligation to the Bank for any tax refund to which the Bank was
entitled. This fungible obligation negates a finding that the Bank
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had an ownership right to the tax refunds. Accordingly, this Court
finds the terms of the TSA that were operative in 2008 evidence a
debtor-creditor relationship whereby the Debtor was obligated to pay
the Bank for any tax refund due to the Bank.
If any of the above findings of fact are subsequently
determined to be conclusions of law, they shall be deemed to be so
designated.
CONCLUSIONS OF LAW
Because an operative TSA was in effect in 2008, this Court
cannot reach the same holding as Bob Richards’ rendering it
inapplicable in this case. The Ninth Circuit’s decision in Bob
Richards advanced the principle that, “absent any differing
agreement, . . . a tax refund resulting solely from offsetting the
losses of one member of a consolidated filing group against the
income of that same member in a prior or subsequent year should
inure to the benefit of that member.” Id. at 265. The terms of the
TSA, which this Court finds unambiguous, control the relationship of
the parties in this case. When parties have elected to put an
agreement in writing, the unambiguous words of the agreement
control, and their actual intent is ineffective. See In re Nelco,
Ltd., 264 B.R. 790, 806-07 (Bankr. E.D. Va. 1999).
In concluding that the TSA establishes a creditor-debtor
relationship, this Court finds the Eleventh Circuit decisions in In
re NetBank, Inc.,729 F.3d 1344 (11th Cir. 2013), and In re BankUnited
Fin. Corp., 727 F.3d 1100 (11th Cir. 2013), distinguishable and its
decisions do not bind this Court. While this Court previously cited
to the lower courts’ decisions in BankUnited and NetBank in its MOD,
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the reversal of those decisions does not impact the conclusion
reached here.
For instance, in NetBank, the parent company had sole
responsibility for filing tax returns, and electing gains, losses,
deductions and credits on behalf of the consolidated group. 729
F.3d at 1347-48. Section §9 of the NetBank agreement expressly
stated “[e]ach Affiliate hereby irrevocably appoints NetBank as its
agent and attorney in fact. . .” The NetBank TSA further stated in
§ 10 the intent to allocate the tax liability in accordance with the
Interagency Policy Statement that establishes an agency
relationship. Id. at 1348. Unlike NetBank, the Debtor’s TSA did
not include express agency language such as that found in NetBank’s
tax sharing agreement.
At the same time, the Eleventh Circuit found NetBank’s
agreement to be ambiguous because it included express agency
language and the intention to comply with the Interagency Policy
Statement while also including language that established the
parent’s independent contractual obligation to pay the subsidiary
bank. 729 F.3d at 1349. Here, the Debtor’s TSA is unambiguous.
The language of the TSA clearly demonstrates an obligation to pay
the Bank for refunds it is due. The TSA does not refer to an agency
relationship and does not clearly express the intent of the parties
to comply with the Interagency Policy Statement.
Lastly, the Eleventh Circuit found that § 10 of NetBank’s TSA
explicitly stated that the tax settlements between the parties
“should result in no less favorable treatment to the affiliated
group than if it had filed its income tax return as a separate
entity” pursuant to the Interagency Policy Statement. 729 F.3d at
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1350. Requiring the subsidiary bank to seek payment as an unsecured
creditor from the bankruptcy estate of NetBank would be a less
favorable treatment because the Interagency Policy Statement
contains specific language that the parent serves as an agent on
behalf of the consolidated group. Id. Unlike NetBank, the TSA is
simply silent on this point. Determining the Debtor to be the owner
of the refund when the TSA lacked express language of an agency
relationship does not diminish the Bank’s entitlement to an amount
equal to its own refund.
The Eleventh Circuit’s decision in BankUnited is equally
distinguishable. In BankUnited, the subsidiary bank was tasked with
distributing the tax refunds and collecting the tax liabilities on
behalf of the consolidated group which the Eleventh Circuit deemed
crucial in determining that an agency relationship existed between
the parent and the subsidiary bank. To hold that the refund was
owned by the holding company would “frustrate the Bank's ability to
discharge its obligation to distribute to the members of the Group
the portion of the tax refunds to which they are entitled.”
BankUnited, 727 F.3d at 1108. Thus, the Eleventh Circuit found the
parties intended the TSA to require the holding company to forward
the tax refunds to the bank on receipt even without the express
language to do so. 727 F.3d at 1108.
Unlike BankUnited, the Bank is not tasked with the same
responsibility of collecting and distributing the tax refunds to the
consolidated group. Instead, the parties have a “true up” every
quarter to settle intercompany taxes receivable/payable arising from
the Bank’s estimated tax payments. (Pl. Stipulated Ex. 2 and Def.
Stipulated Ex. A.)
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As in NetBank, the Eleventh Circuit found BankUnited’s tax
sharing agreement to be ambiguous. This Court, however, has
consistently held that the TSA approved in 2005 contains no
ambiguity.
In both decisions, the Eleventh Circuit discounted the lower
courts’ findings that the tax sharing agreements did not contain
elements of a trust or an agency relationship, particularly,
restrictions on control or use of funds. However, in the Ninth
Circuit and in California, the absence of restrictions on the use or
the commingling of funds has been found relevant and indicative of a
debtor-creditor relationship. See e.g., In re Coupon Clearing
Service, Inc., 113 F. 1091, 1099-1102 (9th Cir. 1996) (right to
control by the principal is sufficient to find an agency
relationship); Lonely Maiden Productions, LLC v. GoldenTree Asset
Management, LP, 201 Cal. App. 4th 368, 380 (2011) (citation omitted)
(if recipient of funds is not prohibited from using them as his own
and commingling them with his own monies, a debtor-creditor, not a
trust, relationship exists).
Conversely, the absence of a “fixed interest rate, a fixed
maturity date, or the ability to accelerate payment upon default” do
not negate finding a creditor-debtor relationship. Cf. BankUnited,
727 F.3d at 1108 (lack of fixed interest rate, maturity date or
default provision is evidence that no debtor-creditor relationship
exists). It simply shows that the TSA is not a loan but that it
created a different form of indebtedness under the parties’
contract.
Similar to the language used in the tax allocation agreement in
In re IndyMac Bancorp, Inc., the TSA referred to “intercompany tax
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receivable/payable” which established an obligation from the Debtor
to pay the Bank what was owed to it based on the parties’ accounting
procedures if the Bank filed its own tax return. See Siegel v. FDIC
(In re IndyMac Bancorp Inc.), 2012 LEXIS 1462 *3-4 (Bankr. C.D. Cal.
Mar. 29, 2012) as accepted by In re IndyMac Bancorp, Inc., 2012
LEXIS 88666 *13-17 (C.D. Cal. May 30, 2012).
As in IndyMac and In re Team Financials, Inc., 2010 WL 1730681
*3 (Bankr. D. Kan. Apr. 27, 2010), the TSA did not create an express
trust as it lacked the necessary language to create such a trust.
See Weststeyn Dairy 2 v. Eades Commodities Co., 280 F. Supp. 2d
1044, 1075 (E.D. Cal. 2003) (citation omitted) (voluntary trust
created by acts or words of the trustor indicated (1) an intention
to create a trust and (2) the subject, purpose, and beneficiary of
the trust); see also In re First Central Financial Corp., 377 F.3d
209 (9th Cir. 2004) (no constructive trust was created). The TSA did
not identify the Debtor as, and the Debtor did not assent to
becoming, a trustee. As this Court found above, the TSA had no
requirement to segregate funds belonging to the Bank, no restriction
on how the Debtor could use the funds, no identification of a trust
res, and no express declaration of the intent to create a trust or
to hold the tax refunds in trust for the benefit of the consolidated
group. Likewise, the TSA did not state unequivocally that the
Debtor agreed to serve as an agent for the Bank for purposes of
collecting any tax refund. Instead, the terms “receivable” and
“payable” evidence the intent to create an obligation to the
subsidiary in the form of a reimbursement thereby establishing a
debtor-creditor relationship.
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Lubin, a case cited by the FDIC-R, is consistent with this
principle. Lubin v. FDIC, 2011 WL 825751 *5 (N.D. Ga. 2011). The
bankruptcy court in Lubin found that the language of the existing
tax allocation agreement expressly provided:
“If the Holding Company receives a tax refund from a
taxing authority, these funds are obtained as agent of the
consolidated group on behalf of the individual group
members. This allocation agreement as well as other
corporate policies should not be intended to consider
refunds attributable to the subsidiary banks, which are
received by the Holding Company from the taxing authority,
as the property of the Holding Company.”
Lubin found it clear from the language of the tax allocation
agreement that an agency relationship was intended. Id. at *6.
Such is not the case here.
The U.S. Supreme Court’s decision in US Airways, Inc. v.
McCutchen, 133 U.S. 1537 (2013), does not defeat a finding that the
terms of the TSA establish a debtor-creditor relationship.
McCutchen’s holding does not support Defendant’s position that a TSA
must “expressly disavow” a default rule such as Bob Richards for Bob
Richards to be deemed inapplicable. McCutchen held that “default
rules” applied only in the absence of a clear expression of the
parties’ intent so that if the express terms of a contract
contradict the default rule, the agreement governs. 133 S.Ct. at
1549. Unlike McCutchen where the ERISA plan provisions were silent
in allocating the costs of obtaining a third-party recovery thereby
“leaving space for the common-fund rule to operate”, 133 S.Ct. at
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1549, the TSA is not vague and contains express provisions that
establish a debtor-creditor relationship as explained above.
Similarly, BSD Bancorp, Inc. v. FDIC (In re BSD Bancorp, Inc.),
1995 U.S. Dist. LEXIS 22588 *10 and 14 (S.D. Cal. Feb. 28, 1995), is
distinguishable because again, BSD found the tax sharing agreement
to be vague and that it provided for the parent’s immediate
reimbursement of the bank’s tax refund— aspects which are not
present in the 2005 TSA. BSD court held the terms of the agreement
must expressly or impliedly override the gap-filling (default) rule
itself. Id. at *13. Here, there is no gap as the TSA is
unambiguous and the provisions of the TSA create a fungible
obligation to pay the Bank its refund even if the consolidated group
does not receive a refund thereby creating a debt independent of a
res.
The unambiguous terms of the TSA and the holdings of these
cases coalesce into the conclusion that the TSA overrides the
holding in Bob Richards that a principal-agent relationship is
established by the filing of a consolidated tax return. This Court
holds that the TSA created a debtor-creditor relationship whereby
the Debtor owes the Bank sums equal to the amount of the refunds the
Bank would have received if it had filed its own separate tax
return.
The Court rejects the FDIC-R’s position that the Interagency
Policy Statement must be given significant weight. The TSA is clear
and extrinsic evidence need not be considered. Moreover, the
District Court in Siegel v. FDIC, 20012 U.S. Dist. LEXIS 78418 *11
(C.D. Cal. 2011), found that the Interagency Policy Statement on
Income Tax Allocation in a Holding Company Structure, 63 Fed. Reg.
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64757, is a non-binding policy statement and is not material to
adjudicate ownership of the refund.
Team Financial reached the same finding that nothing in the
Interagency Policy Statement renders it legally binding or has the
force of law. 2010 WL1730681 *8. Furthermore, the Court agrees
with Team Financial that the use of “agency” in the Statement refers
to Treas. Reg. § 1.1502-77(a), the main purpose of which is to set
the ground rules for how the IRS would deal with consolidated tax
groups filing consolidated returns. 2010 WL 1730681 *6. The tax
regulation requires the parent to act as the sole agent to handle
all matters relating to the tax return.
However, these regulations are basically procedural in purpose
and were adopted solely for the convenience and protection of the
federal government. Bob Richards, 473 F.2d at 265. The Court finds
irrelevant that the estate, instead of the Bank, received the tax
refunds directly from the IRS. The Treasury Regulation requires
that the tax refund be paid to the entity that filed the claim. 26
C.F.R. § 1.1502-77(a)(2)(v). The IRS is not concerned with the
subsequent disposition of tax refunds and none of its regulations
must be construed to govern this issue. Bob Richards, 472 F.2d at
265; IndyMac, 2011 LEXIS 78418 *12-13 citing In re First Cent. Fin.
Corp., 269 B.R. 481, 489 (E.D.N.Y. 2001), aff'd, Superintend. of
Ins. v. Ochs, 377 F.3d 209 (2d Cir. 2004). Nothing in the Internal
Revenue Code or the regulations promulgated thereunder purports to
determine the relative rights of the members of a consolidated group
of companies with respect to tax refunds. Therefore, this Court is
unwilling to be bound by the Interagency Policy Statement.
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Likewise, this Court finds the rejection of the TSA by
operation of the Debtor’s confirmed plan did not extinguish the TSA.
Rejection of an executory contract results in a breach of such
contract but does not affect the substantive rights of the parties
under the rejected contract that was established at the time the
bankruptcy petition was filed. In re Pomona Valley Medical Group,
Inc., 476 F.3d 665, 673 (9th Cir. 2007).
If any of the above conclusions of law are subsequently
determined to be findings of fact, they shall be so designated.
CONCLUSION
For the reasons stated herein, the Court finds in favor of the
Plaintiff on Count IV of the Complaint and against the Defendant on
Count I of the Amended Counterclaim. The Debtor is entitled to the
tax refunds in question and the Defendant is entitled to a general
unsecured claim against the Debtor’s estate. A separate judgment
resolving all issues raised by the Complaint will be entered against
the Defendant upon the complete resolution of this proceeding.
###
Date: March 28, 2014
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