Giuliano v. Fed. Deposit Ins. Corp. (In re Downey Fin. Corp.)

• Citation: 499 B.R. 439
• Decision Date: 08 October 2013
• Docket Number: Adv. Proc. No. 10–53731(CSS),Case No. 08–13041(CSS) Jointly Administered
• Parties: In re: Downey Financial Corp., Debtor. Alfred T. Giuliano, in his capacity as interim Chapter 7 Trustee for Downey Financial Corp., Plaintiff, and Wilmington Trust in its capacity as Indenture Trustee, as Intervening Plaintiff, v. Federal Deposit Insurance Corporation, in its capacity as Receiver For Downey Savings & Loan Association, F.A., Defendant.
• Court: U.S. Bankruptcy Court — District of Delaware

499 B.R. 439

In re: Downey Financial Corp., Debtor.Alfred T. Giuliano, in his capacity as interim Chapter 7 Trustee for Downey Financial Corp., Plaintiff,andWilmington Trust in its capacity as Indenture Trustee, as Intervening Plaintiff,

v.Federal Deposit Insurance Corporation, in its capacity as Receiver For Downey Savings & Loan Association, F.A., Defendant.

Case No. 08–13041(CSS) Jointly Administered

Adv. Proc. No. 10–53731(CSS)

United States Bankruptcy Court, D. Delaware.

October 8, 2013

Fox Rothschild LLP, L. John Bird, 919 North Market Street, Suite 1300, Wilmington, DE 19899, and Michael G. Menkowitz, William H. Stassen, 2000 Market Street, 10th Floor, Philadelphia, PA 19103–3291, and Raymond M. Patella, 1301 Atlantic Avenue, Midtown Building–Suite 400, Atlantic City, NJ 08401, Attorneys for Alfred T. Giuliano as interim Chapter 7 Trustee for the Estate of Downey Financial Corp.

Otterbourg, Steindler Houston & Rosen, P.C., Melanie L. Cyganowski, Peter Feldman, 230 Park Avenue, New York, New York 10169, and McCarter & English, LLP, William F. Taylor, Jr., Kate R. Buck, Renaissance Centre, 405 North King Street, 8^th Floor, Wilmington, DE 19801,

Federal Deposit Insurance Corporation, Federal Deposit Insurance Corporation, Legal Division, Kathryn R. Norcross, Sonya L. Levin, 3501 Fairfax Drive, Arlington, VA 2226, Counsel for the Federal Deposit Insurance Corporation, in its Capacity as Receiver.

Blank Rome LLP, Michael D. DeBaeke, Victoria Guilfoyle, 1201 Market Street, Suite 800, Wilmington, DE 19801, and Schulte Roth & Zabel LLP, Alan R. Glickman, Brian D. Pfeiffer, William H. Gussman, Jr., 919 Third Avenue, New York, N.Y. 10022, Counsel to Wilmington Trust Company As Indenture Trustee.

Chapter 7

RE: Adv. Docket Nos.: 79 and 81

OPINION¹

Sontchi, J.

INTRODUCTION

This matter requires the Court to determine whether a substantial tax refund is property of the estate due to a tax sharing agreement between the debtor, Downey Financing Corp. (“DFC” or the “Debtor”), and its non-debtor subsidiary, Downey Savings and Loan Association, F.A. (“Downey Bank”). The tax sharing agreement established a method for (i) allocating the consolidated tax liability, (ii) reimbursement and payment of such tax liability, and (iii) establishing procedures for filing tax returns. The Debtor and its affiliates, including Downey Bank, acted pursuant to the tax sharing agreement under which the Debtor filed returns, paid taxes, received refunds, etc. for many years prior to the Debtor's bankruptcy in November 2008. At or around the time of the Debtor's bankruptcy, the Federal Deposit Insurance Corporation was appointed as receiver (“FDIC–R”) for Downey Bank.

After the Debtor's bankruptcy, the Trustee for the Debtor's estate filed various tax returns that resulted in a substantialtax refund due from the carry-back of Downey Bank's net operating losses. Under the normal course of the tax sharing agreement, the Debtor would file the return and allocate the liability and/or refund relating to its various subsidiaries. In an instance such as this, the Debtor would then transfer to Downey Bank the amount of the refund allocated to it. The question here is whether the Debtor holds Downey Bank's (substantial) share of the refund in trust; thus, entitling Downey Bank to the entirety of the tax refund allocable to it, i.e., the res of the trust, or whether the refund is property of the estate and Downey Bank has a claim for its unpaid share of the refund. Such a claim would share pro rata with the Debtor's other liabilities, including a $200 million claim filed by Wilmington Trust Company as Indenture Trustee under certain Notes issued by the Debtor. Not surprisingly, the Trustee and the Indenture Trustee asserts that the tax refund is property of the estate and the FDIC–R argues to the contrary. As a result of the dispute, the Trustee filed a declaratory judgment action in this Court regarding, among other things, the ownership of the tax refunds.

Pending before the Court are two motions for summary judgment regarding the ownership of the tax refund. The resolution of the motions hinges on the language of the tax sharing agreement and, as mentioned above, whether it creates a debtor-creditor relationship between the parties or whether the tax sharing agreement creates an agency or trust relationship. Based upon the plain, unambiguous language of the tax sharing agreement, the Court finds, as a matter of law, that the tax sharing agreement creates a debtor-creditor relationship. Additionally, the Court finds that no resulting trust was created between the parties. As a result, the tax refund is property of the Debtor's estate. Summary judgment will be entered in favor of the Trustee and the Indenture Trustee.²

JURISDICTION

The Court has jurisdiction over the motions pursuant to 28 U.S.C. §§ 157 and 1334. Venue is proper in this District pursuant to 28 U.S.C. §§ 1408 and 1409. This is a “core” proceeding as that term is defined in 28 U.S.C. § 157(b). This Court has the judicial power to enter a final order.

BACKGROUND

A. The Parties

1.Downey Financial Corp.

DFC is a bank holding company. On or about January 23, 1995, DFC acquired all of the outstanding shares of Downey Bank, a federal chartered bank under the regulation of the Office of Thrift Supervision (“OTS”). Prior to the Receivership Date (described infra ), DFC was the parent corporation for its subsidiaries, including Downey Bank (collectively, the “Affiliated Group”). Other than its investment in Downey Bank, DFC had little other assets and a majority of its revenues were also generated by Downey Bank.

In DFC's own words:

We are a holding company and we conduct substantially all of our operations through ... [Downey] Bank and its subsidiaries, DSL Service Company. We derive substantially all of our revenues from, and substantially all of our ongoing operating assets are owned by ...[Downey] Bank. As a result, our cash flow and our ability to service our debt, including the notes, depend primarily on the results of ... [Downey] Bank and upon the ability of ... [Downey] Bank to provide us cash to pay amounts due on our obligations, including the notes . ³

2. The Trustee

On November 25, 2008, DFC filed a voluntary petition under Chapter 7 of Title 11 of the United States Code. The Office of the United States Trustee appointed Montague S. Claybrook as the Chapter 7 Trustee; thereafter Mr. Claybrook resigned and the Office of the United States Trustee appointed Alfred T. Giuliano as interim successor trustee ⁴ (hereinafter, the “Trustee”).

3. The Indentured Trustee

Wilmington Trust Company is the indenture trustee (the “Indenture Trustee”) with respect to certain 6 1/2% Senior Notes due on July 1, 2014 issued by DFC under that First Supplemental Indenture, dated as of June 23, 2004 (the “Notes”). The Indenture Trustee has filed a proof of claim on behalf of the Noteholders asserting, among other things, a claim for $200 million in principal amount outstanding under the Notes. The Noteholders' collective claim comprises substantially all of the Debtor's undisputed general unsecured claims.

4. The FDIC–R and Downey Bank

The Federal Deposit Insurance Corporation (“FDIC”) is a corporation organized and existing pursuant to the Federal Deposit Insurance Act.⁵ The FDIC acts in two capacities: in its corporate capacity as a regulator (FDIC) and in its capacity as a receiver for failed financial institutions (FDIC–R). In this action, FDIC–R has been sued in its capacity as receiver for Downey Bank.

On November 21, 2008 (the “Receivership Date”), the Director of Thrift Supervision appointed FDIC–R as the receiver of Downey Bank. Upon its appointment, FDIC–R sold substantially all of the former assets of Downey Bank to U.S. Bank National Association (“U.S.Bank”) under a purchase and assumption agreement dated November 21, 2008.

FDIC–R has filed a “protective” claim against DFC in an unliquidated amount for, among other things, its allocation of the Tax Refund.

B. Procedural Background

In October 2010, the Trustee commenced this adversary proceeding by filing a complaint (the “Complaint”) against FDIC–R seeking declaratory judgment regarding ownership of tax refunds under section 541 of the Bankruptcy Code. ⁶ Thereafter, FDICR filed an answer and counterclaims, which were subsequently amended (the “Counterclaims”).⁷ The Trustee filed its answer and affirmative defenses to FDIC–R's answer.⁸ On January 28, 2011, this Court allowed the Indenture Trustee to intervene as a plaintiff. ⁹

The Indenture Trustee and the Trustee filed motions for summary judgment as to the ownership of the Tax Refund and as to their allegations that FDIC–R violated the automatic stay.¹⁰ In addition, they seek summary judgment on FDIC–R's counterclaims seeking ownership of the Tax Refund.¹¹ The motions for summary judgment have been fully briefed ¹² and are ripe for the Court's consideration.

C. Factual Background1. The Tax Sharing Agreement.

On or about February 29, 2000, the Debtor and its affiliates, including Downey Bank, executed a Termination and Amendment Number 1 to Tax Sharing Agreement (hereinafter the “TSA”).¹³ The TSA allowed the Debtor and Downey Bank to take advantage of the beneficial tax treatment afforded to affiliated corporations that file consolidated tax returns, and to address inter-corporate tax policies and procedures. Consolidated tax returns permitted the Debtor to utilize losses by one group member to reduce the consolidated group's overall tax liability.

The TSA states:

It is the desire and intent of the parties to this [TSA] to establish a method for allocating the consolidated tax liability of each member among the Affiliated Group ... for reimbursing Financial ¹⁴ for payment of such tax liability, for compensating members of the Affiliated Group for use of their losses or tax credits, and to provide for the allocation and payment of any refund arising from a carry back of losses of tax...