Claybrook v. United States, No. 10-734T

Decision Date18 April 2012
Docket NumberNo. 10-734T
PartiesMONTAGUE S. CLAYBROOK, in his capacity as the Chapter 7 Trustee for the Estate of DOWNEY FINANCIAL CORP., Plaintiff, v. THE UNITED STATES, Defendant.
CourtU.S. Court of Appeals — District of Columbia Circuit

Bankruptcy Act, 11 U.S.C. §§ 701-85 (2006);

Federal Deposit Insurance Act, 12 U.S.C. §

1821(d)(11)(A)(ii) (2006) (authorizing the

Federal Deposit Insurance Corporation to

act as a receiver);

Home Owners Loan Act, 12 U.S.C. §

1464(d)(2)(A) (2006);

Net Operating Loss;

Tax Refund;

Worker, Homeownership and Business

Assistance Act of 2009, Pub. L. No. 111-

92, 123 Stat. 29840 (2009);

26 U.S.C. § 165(g) (2006) (Ordinary Loss);

26 U.S.C. §§ 1501-02 (2006) (parent of a

consolidated tax group);

26 U.S.C. § 6402(a) & (k) (2006 & Supp. III

2009) (federal tax refund may be paid to a

fiduciary of an insolvent corporation);

26 U.S.C. 6511 (a) (2006) (statute of

limitations for filing a federal tax refund);

26 U.S.C. § 6611 (2006) (Statutory Interest);

26 U.S.C. § 7422(a) (2006) (jurisdictional

requirement before seeking an

adjudication of a federal tax refund);

Treas. Reg. § 1.1502-77(a) (2011) (the

common parent for a consolidated return is

the sole agent for each member of a

consolidated tax group);

Treas. Reg. § 301.6402-7 (2011) (permitting

fiduciaries of insolvent financial

institutions to file alternate tax returns);

RCFC 19, Motion For Joinder;

RCFC 24, Motion To Intervene;

Form 1120X (Amended Claims For Refund);

Form 1139 (Application for Tentative


Jerald David August, Peter C. Buckley, William H. Stassen, Raymond M. Patella, Fox Rothschild LLP, Philadelphia, Pennsylvania, Counsel for Plaintiff.

Fredrick C. Crombie, John A. DiCicco, Steven I. Frahm, G. Robson Stewart, United States Department of Justice, Washington, D.C., Counsel for Defendant.

Melanie L. Cyganowski, Peter Feldman, Lloyd M. Green, Otterbourg, Steindler, Houston, and Rosen, P.C., New York, New York, Counsel for Intervenor.


BRADEN, Judge.

The pending motions concern whether the Federal Deposit Insurance Corporation ("FDIC"), in its capacity as receiver ("FDIC-R"), is entitled to intervene in this federal tax refund case or should be joined as a party.


Downey Financial Corporation ("DFC"), a Delaware corporation, is the parent of a Consolidated Tax Group, formed pursuant to 26 U.S.C. §§ 1501-02 (the "Consolidated Tax Group"). Compl. ¶¶ 1, 8. DFC is also the sole shareholder and owner of Downey Savings & Loan Association ("DSL"), a member of the Consolidated Tax Group.2 Compl. ¶ 8. Since December 31, 1995, DFC has filed consolidated federal income tax returns with the Internal Revenue Service ("IRS") on behalf of DSL and other members of the Consolidated Tax Group. Compl. ¶¶ 9-10.

On February 29, 2000, DFC, DSL, and the other members of the Consolidated Tax Group signed an amended private Tax Sharing Agreement (the "Tax Sharing Agreement"), under which DFC was afforded "sole discretion" as to when and how to file federal income tax returns on behalf of the Consolidated Tax Group. FDIC-R Mot., Ex. C ¶ 2.4(a). Pursuant to that Tax Sharing Agreement, from 2003 to 2008, DFC filed federal income tax returns with the IRS on behalf of the Consolidated Tax Group and paid all amounts due in full. Compl. ¶¶ 13, 57, 67, 77,87, 97.3 During that time, DSL generated "all or substantially all" of the Consolidated Tax Group's income. FDIC-R Compl. ¶ 12.

On November 21, 2008, the United States Department of Treasury's Office of Thrift Supervision ("OTS") determined that, because of the number of risky adjustable rate mortgages held by DSL, it "has incurred or is likely to incur losses that will deplete all or substantially all of its capital, and there is no reasonable prospect for the institution to become adequately capitalized without Federal assistance." OTS Order No. 2008-49, 2008 WL 4989081 (Nov. 21, 2008) (reproduced at FDIC-R Mot., Ex. B at 5). Accordingly, pursuant to the Federal Deposit Insurance Act, 12 U.S.C. § 1821(c)(5) (2006) and the Home Owners Loan Act, 12 U.S.C. § 1464(d)(2)(A) (2006), OTS closed DSL's banking and business operations and transferred ownership of DSL's assets to the FDIC-R. OTS Order No. 2008-49, 2008 WL 4989081. On the same day, more than $12 billion of DSL's assets were sold to U.S. Bank National Association ("U.S. Bank"). Gov't Mot., Ex. 3 at 000046. As part of the transaction and to induce U.S. Bank to enter into the purchase agreement, the FDIC-R and U.S. Bank entered into a loss-sharing agreement. Gov't Mot., Ex. 3 at 000046. Thereunder, U.S. Bank committed to assume the first $1.5 billion of DSL's expected losses; the FDIC-R promised to assume a certain portion of any remaining losses. Gov't Mot., Ex. 3 at 000046. As of November 21, 2008, the FDIC-R estimated that the FDIC's Deposit Insurance Fund ("DIF") would be liable for $1.4 billion of DSL's losses. Gov't Mot., Ex. 2 at 000040.4 The FDIC-R, however, has retained certain assetsto offset these potential losses, including "the rights to any and all tax refunds to which [DSL] is entitled." FDIC-R Mot. at 4.



On November 25, 2008, DFC filed a voluntary Petition for liquidation, pursuant to 11 U.S.C. §§ 701-85, in the United States Bankruptcy Court for the District of Delaware ("the Bankruptcy Court"). See In re Downey Financial Corp., Bk. No. 08-13041-CSS, Docket No. 1

(Bankr. D. Del. Nov. 25, 2008). On November 26, 2008, the Bankruptcy Court appointed Montague S. Claybrook as Trustee for DFC's estate ("the Trustee"). Compl. ¶ 2.

On September 15, 2009, the Trustee electronically filed a consolidated federal income tax return for the tax year 2008 for the Consolidated Tax Group with the IRS ("2008 Consolidated Return"). Compl. ¶ 32; see also Compl., Ex. A (the 2008 Consolidated Return). The IRS received the 2008 Consolidated Return the same day. Compl. ¶ 33.

The 2008 Consolidated Return set forth two separate grounds for a federal tax refund. First, DFC claimed an "ordinary loss" of $1,750,597,505, pursuant to I.R.C. § 165(g)(3) (2006), attributable to lost value of DSL stock held by DFC, caused by DSL's being placed into receivership (i.e., the "Worthless Stock Loss" theory). Compl. ¶¶ 13, 25; Compl., Ex. A at 8, l.23f. Subsequently, this loss was adjusted downwards by the Trustee to $1,592,067,979. Compl. ¶ 26. In the alternative, the 2008 Consolidated Return claimed that DSL incurred net operating losses of $1,617,774,904 in 2008 (i.e., the "Net Operating Loss" theory). Compl. ¶¶ 14, 29-30.

On September 16, 2009, the Trustee filed an IRS Form 1139, Application for Tentative Refund, to carry back DSL's net operating losses for two years, in the event that the IRS approved the 2008 Consolidated Return. Compl. ¶ 15; Compl., Ex. B. Specifically, the Trustee claimed a carryback of $107,170,297 for tax year 2006 and $38,009,110 for tax year 2007, resulting in a total refund claim due of $145,179,407, plus statutory interest. Compl. ¶ 15; Compl., Ex. B at 1, l.27.

On October 29, 2009, the FDIC-R filed a Proof Of Claim in the Bankruptcy Court,

asserting several claims against DFC. FDIC-R Mot., Ex. H. One claim concerned the FDIC-R's entitlement to any tax refund owed to DFC, as parent of the Consolidated Tax Group, as a result of losses attributed to DSL. FDIC-R Mot., Ex. H ¶¶ 13-23.

On November 6, 2009, Congress enacted the Worker, Homeownership and Business Assistance Act, extending the loss carryback provisions of the Internal Revenue Code from two years to five years. See Pub. L. No. 111-92 § 13, 123 Stat. 2984 (2009). To take advantage of this law, on December 31, 2009, the Trustee filed an amendment to the 2008 Consolidated Return, by filing five Form 1120X Amended Claims for Refunds on behalf of the ConsolidatedTax Group for the tax years 2003-2007. Compl. ¶¶ 34, 36, 38, 40, 42. The amended amount of the claimed overpayments was $312,955,826, plus statutory interest.5

On January 6, 2010, the IRS received the Trustee's December 31, 2009 Amended Claims for Refunds. Compl. ¶¶ 35, 37, 39, 41, 43.

On March 17, 2010, the Bankruptcy Court approved a Supplemental Stipulation between the FDIC-R and the Trustee, providing that any tax refund recognized by the IRS will be paid to the Trustee and deposited into an escrow account until the Bankruptcy Court makes a final ownership determination. FDIC-R Mot., Ex. I ¶ 4. The Supplemental Stipulation also contains a "Reservation of Rights" clause, under which both parties reserve all "rights, claims, defenses, and arguments with regard to the Federal Returns (or the tax return(s) which the FDIC-R asserts it could have filed)[.]" FDIC-R Mot., Ex. I ¶ 6; see also id. ¶¶ 7-8.

On August 30, 2010, the FDIC-R filed a motion in the Bankruptcy Court to lift the automatic stay to permit the FDIC-R to file an alternative tax return on behalf of the Consolidated Tax Group, pursuant to I.R.C. § 6402(k) and Treas. Reg. § 301.6402-7 (the "Dash 7 Regulation"). FDIC-R's Mot., Ex. J. The purpose of the alternative refund was to protect the FDIC-R's position that the Net Operating Loss theory is the only proper basis for a refund.

FDIC-R Mot. at 19.

On September 13, 2010, the Bankruptcy Court granted the FDIC-R's August 30, 2010 Motion To Lift The Automatic Stay. FDIC-R Mot., Ex. L. On or before September 15, 2010, the FDIC-R filed an alternate Form 1120 for tax year 2008, as well as five Form 1120X Claims for Refund to carry back the refund to tax years 2003-2007. FDIC-R Compl. ¶ 24; FDIC-R Mot., Ex. O. In the September 15, 2010 alternate Form 1120, the FDIC-R claimed a$1,855,123,698 loss, primarily attributable to DSL's net operating losses in 2008, resulting in a total requested refund of $373,791,733 after the loss was carried back...

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