Litig. Trust for the Trust Beneficiaries of SNTL Corp. v. JP Morgan Chase, JP Morgan Chase Bank N.A. (In re Superior Nat'l Ins. GR)
| Decision Date | 08 May 2014 |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Central District of California |
| Parties | In re: Superior National Insurance Gr Debtor(s). The Litigation Trust for the Trust Beneficiaries of SNTL Corporation and Certain Affiliates Plaintiff(s), v. JP MORGAN CHASE, JP MORGAN CHASE BANK N.A., Defendant(s). |
Defendants JPMorgan Chase Bank, N.A. and JPMorgan Chase & Co. (collectively "Chase") bring a motion to dismiss the amended complaint ("AC") in this adversary proceeding.
SNTL Holdings Corp. ("SNTL") and its non-insurance subsidiaries (collectively with SNTL, the "Debtors") filed for chapter 11 relief on April 26, 2000 (# 00-bk-14099-GM). Also in 2000, SNTL's five insurance subsidiaries were seized and placed into conservatorships by state agencies in California and New York.
The Debtor's primary assets were over $1 billion of net operating loss carryforwards ("NOLs"). The largest claim against the Debtors was approximately $100 million of senior debt held by a lender group. Chase held about $19 million of this senior debt.
On June 21, 2002, the Debtors' Second Amended Chapter 11 Joint Plan of Reorganization as amended (the "Plan") was confirmed. Bankruptcy case, dkt.709-1; Exhibit 4 to Declaration of Glenn M. Kurtz filed in support of the Motion. The Plan was structured to realize value from the NOLs, and thus was shaped by the requirements of tax law. In essence, Chase acquired all equity in SNTL so that Chase could use the NOLs to offset its tax liability and then pay most of the value of those tax savings to a trust created for the benefit of the Debtors' stakeholders (the "Trust").
Specifically, the Plan provided that Chase would receive 100% of the common stock of SNTL (which would be converted to a Delaware LLC with the legal name of Cresta). Under a Second Tax Sharing Agreement ("STS Agreement") executed in connection with the Plan, Chase was identified as the sole owner of "all [NOLs], taxattributes and other income tax benefits attributable to or generated by the Parent [SNTL] or the Subsidiaries."
Chase issued an Earn Out Note ("EON"; Exhibit 3 to Kurtz Dec.) to the Trust. The EON provided for Chase to make payments to the Trust under a formula set forth in the Plan and the EON as the "NOL Utilization Value" (which was essentially designed to measure the benefit of the NOLs to Chase.) The NOL Utilization Value is defined in the Plan as:
The excess of (a) the amount of the SNTL Group's NOLs in existence and available immediately after the Effective Date (after taking into account adjustments required by reason of consummation of the Plan, including reductions required pursuant to Sections 108(b) and 382(l)(5) of the IRC) and subsequently utilized in JPMC's federal income tax return multiplied by the applicable federal income tax rate or rates with respect to the tax year or years in which such NOLs are utilized, over (b) the Turnaround Amount.
Plan at p. 18:1-7.
The Turnaround Amount was in turn defined as:
The amount determined by the SNTL Acquirer [JPMorgan Chase Bank] in its reasonable discretion, based on advice from KPMG, which is equivalent to the estimated future tax liability of, or arising from the ownership of, the SNTL Group, excluding (i) taxes attributable to operating earnings of the business of Reorganized SNTL (including the Other Subsidiaries)(the "Reorganized SNTL Business") and (ii) taxes attributable to the pre-tax economic profit from a sale or other disposition of the stock of Reorganized SNTL or the Reorganized SNTL Business.
Plan at p. 23:13-18.
On May 12, 2013, the Trust filed a complaint commencing this adversary proceeding (the "Complaint"). The Complaint alleged that Chase has had the benefit of over $2.2 billion in NOL's from the Debtors, which have resulted in tax savings to Chaseof over $775 million, yet Chase had not paid anything to the Trust under the EON. The Complaint sought recovery on:
Chase brought a motion to dismiss the Complaint. After extensive briefing and a hearing, on December 19, 2014 this Court entered an order and a memorandum of opinion (i) denying the motion as to counts two, three, four and six, (ii) granting the motion as to count one without leave to amend, and (iii) granting the motion as to count five with leave to amend to a claim for restitution regarding Later Recognized NOLS and Turned-Around NOLS (each as defined below).
The Trust filed the AC on January 7, 2014. The AC has the same counts as the Complaint, except Count Five has been changed to a claim for restitution as directed by the Court. These Counts are based on the following allegations contained in the AC (which are quite similar if not identical to the allegations in the original Complaint):
Chase falsely inflated the Turnaround Amount to reduce its payments under the EON. Chase has provided information to the Trust indicating that through 2017, Chase will use $1.35 billion of NOLs relating to losses recognized prior to the effective date of the Plan ("Pre-Effective Date NOLs"), with the vast majority used in 2002-2006. This use resulted in tax savings of $469 million, although Chase has calculated aTurnaround Amount of $370 million that will substantially reduce the NOL Utilization Value to be paid to the Trust under the EON. While the audit of Chase's tax returns for 2003, 2004 and 2005 has been completed, Chase is taking the position that no payment is due now on the $257 million of tax benefit that Chase received from the $737 million of Pre-Effective Date NOLs used in these years. Chase has managed its taxes to maximize its benefit from the NOLs at the expense of SNTL's stakeholders through its management of discharge cancellation of indebtedness (COD), misapplication of COD from California Insurance Guaranty Association ("CIGA"), treatment of reserve recapture, and lack of proper tax planning to mitigate the trigger of Excess Loss Accounts.
Additionally, Chase has received the advantage of $900 million of NOLs that were based on pre-petition operations (i.e., policies issued before the Effective Date), but were not known to exist at the time the Plan was negotiated and were not included in the NOL Utilization Value (the "Later Recognized NOLs"). In the post-Effective Date period, the insurance subsidiaries did not issue new policies, but did increase their loss reserves on existing policies, thus generating immediate tax savings for Chase. These $895 million of Later Recognized NOLs have generated approximately $300 million in tax savings to Chase. Even if, as Chase asserts, these NOLs provide only temporary benefits, the time benefit of this $300 million in savings over multiple years amounts to more than $130 million of value to Chase. Chase received $68 million in tax benefit fromthe $195 million of Later Recognized NOLs Chase used in years 2003-2005: none of this savings will be passed on to the Trust.
Furthermore, the Plan does not require Chase to pay interest on the portion of the NOLs that are ultimately turned around (and thus not included in the NOL Utilization Value), although Chase will benefit from the time value between utilization and turnaround. Chase received millions of dollars of time benefit on NOLs that were utilized by Chase but later subject to turnaround. (The Court will refer to these NOLs as "Turned-Around NOL's").
Chase filed this motion to dismiss the AC (the "Motion") on February 7, 2014, the Trust filed an opposition to the Motion (the "Opposition") on March 4, 2014 and Chase filed a reply to the Opposition (the "Reply") on March 21, 2014.
This motion to dismiss is brought under Fed. R. Civ. P. 12(b)(6), which applies to this adversary proceeding pursuant to Fed. R. Bankr. P. 7012(b).
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