Federal Deposit Insurance Corporation v. FBOP Corporation et al
Filing
205
MEMORANDUM Opinion and Order: For the reasons set forth in the attached Memorandum Opinion and Order: (1) the FBOP Defendants' motion for partial judgment on the pleadings as to Counts I-II, III-VII, and XIX-XXII of the FDIC's complaint #139 , is denied; (2) the FDIC's motion for partial judgment on the pleadings on counts I and II, #150 , is entered and continued; and (3) the FBOP Defendants' motion for judgment on the pleadings as to PBGC's Intervenor Complaint, #162 , is denied without prejudice as moot. Signed by the Honorable Thomas M. Durkin on 5/12/2017:Mailed notice(srn, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
FEDERAL DEPOSIT INSURANCE,
CORPORATION, as a separate and distinct
Receiver of Bank USA, N.A., California National
Bank, Citizens National, Bank of Teague,
Madisonville State Bank, North, Houston Bank,
Pacific National Bank, Park National Bank,
and San Diego National Bank,
PLAINTIFF,
vs.
FBOP CORPORATION; PATRICK D.
CAVANAUGH, of High Ridge Partners, Inc.,
not individually, but solely as Trustee-Assignee
under FBOP Corporation’s Trust Agreement
and Assignment for the Benefit of Creditors;
JPMORGAN CHASE BANK, N.A., as Agent;
BMO HARRIS BANK, N.A., as successor in
interest to M&I Marshall & Ilsley Bank;
ORE HILL HUB FUND LTD.; CANYON
BALANCED MASTER FUND, LTD.; CANYON
GRF MASTER FUND, L.P.; MARINER
TRICADA CREDIT STRATEGIES MASTER
FUND, LTD.; PMT CREDIT OPPORTUNITIES
FUND LTD.; PROSPECT MOUNTAIN FUND
LIMITED; STRUCTURED CREDIT
OPPORTUNITIES FUND II, LP; and
GORDON C. WATSON,
DEFENDANTS.
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Case No. 14 CV 4307
Judge Thomas M. Durkin
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PENSION BENEFIT GUARANTY
CORPORATION,
PLAINTIFF-INTERVENOR,
vs.
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Case No. 14 CV 4307
Judge Thomas M. Durkin
FBOP CORPORATION; PATRICK D.
CAVANAUGH of High Ridge Partners, Inc.,
solely in his capacity as Trustee-Assignee under
FBOP Corporation’s Trust Agreement and
Assignment for the Benefit of Creditors;
FEDERAL DEPOSIT INSURANCE
CORPORATION, as Receiver for Bank USA, N.A.,
California National Bank, Citizens National
Bank of Teague, Madisonville State Bank,
North Houston Bank, Pacific National Bank,
Park National Bank, and San Diego National
Bank; WELLS FARGO BANK, N.A., as escrow
agent pursuant to the escrow agreement among
the Federal Deposit Insurance Corporation,
FBOP Corporation and Wells Fargo Bank, N.A.,
DEFENDANTS.
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MEMORANDUM OPINION AND ORDER
INTRODUCTION
STANDARD OF REVIEW
BACKGROUND
A.
THE RISE AND FALL OF FBOP AND THE BANKS
B.
THE CORPORATE DEBT OF FBOP AND THE PERSONAL DEBT OF
ITS CHAIRMAN
C.
THE $10.3 MILLION IN NON-ESCROWED REFUNDS
D.
FBOP’S SETTLEMENT OF ITS UNSECURED CREDITORS’ CLAIMS
E.
THE $265.3 MILLION IN ESCROWED REFUNDS
F.
CURRENT LITIGATION
DISCUSSION
I.
CHOICE OF LAW
II.
RULES OF CONTRACT INTERPRETATION
2
III.
THE FBOP DEFENDANTS’ RULE 12(c) MOTION FOR JUDGMENT AS A MATTER
OF LAW ON COUNTS I-II
A.
THE “DEFAULT” RULE REGARDING OWNERSHIP OF TAX REFUNDS
1.
2.
THE BOB RICHARDS CASE
3.
FEDERAL COMMON LAW ARGUMENT
4.
UNITED DOMINION ARGUMENT
5.
B.
ILLINOIS LAW: TAX REFUNDS OF JOINT FILERS
BELONG TO THE TAXPAYER WHO PAID THE TAXES
UNJUST ENRICHMENT ARGUMENT
THE TAA
1.
SURROUNDING CIRCUMSTANCES SUPPORT
DEFAULT TAX REFUND OWNERSHIP RULE
2.
THE TAA DOES NOT CLEARLY REPUDIATE THE
DEFAULT TAX REFUND OWNERSHIP RULE
a.
b.
DEBTOR-CREDITOR TERMINOLOGY
c.
ABSENCE OF TRUST PROVISIONS
d.
3.
TAX ALLOCATION
PROVISIONS
PRINCIPAL-AGENT ISSUE
AND
PAYMENT
THE
TAA
AFFIRMATIVELY
REFLECTS
A
CONTRACTUAL INTENT TO MAINTAIN THE DEFAULT
TAX REFUND OWNERSHIP RULE
a.
IV.
NO LESS FAVORABLE PRINCIPLE
b.
4.
THE
THE 1998 POLICY STATEMENT
PAROL EVIDENCE ISSUES
THE FDIC’S RULE 12(c) MOTION FOR JUDGMENT AS A MATTER OF LAW ON
COUNTS I-II
3
V.
THE FBOP DEFENDANTS’ RULE 12(c) MOTION ON THE FDIC’S ALTERNATIVE
LEGAL AND EQUITABLE CLAIMS--COUNTS III-IV
VI.
THE FBOP DEFENDANTS’ RULE 12(c) MOTION ON THE FDIC’S CLAIMS TO
RECOVER THE NON-ESCROWED REFUNDS--COUNTS XIX-XXII
VII.
THE FBOP DEFENDANTS’ RULE 12(c) MOTION ON PBGC’S INTERVENOR
COMPLAINT
CONCLUSION
INTRODUCTION
This litigation involves a dispute over $265.3 million in tax refunds currently
being held in escrow (the “Escrowed Refunds”). An additional $10.3 million in tax
refunds not held in escrow also are at issue (the “Non-Escrowed Refunds”). The
Federal Deposit Insurance Corporation (“FDIC”) claims entitlement to the tax
refunds 1 by virtue of its appointment as the separate receiver 2 for each of eight failed
banks, 3 which the FDIC alleges earned the income, paid the taxes, and sustained the
losses from which the tax refunds are derived. Defendant FBOP Corporation
(“FBOP”) is the parent company of the Banks, and received the refunds from the
Internal Revenue Service (“IRS”) as the appointed agent for a consolidated tax group
The general term “tax refunds” will be used to refer to both the Escrowed Refunds
and the Non-Escrowed Refunds.
1
The parties use the designation “FDIC-R” to indicate that the FDIC is acting in its
receivership capacity, as opposed to its corporate capacity. See Miller v. Fed. Deposit
Ins. Corp., 738 F.3d 836, 838 n.1 (7th Cir. 2013) (“[i]t is well-settled that the FDIC
operates in two separate and legally distinct capacities, each with very different
responsibilities”) (internal quotation marks and citation omitted).
2
The eight banks (hereinafter “the Banks”) include Bank USA, N.A., California
National Bank, Citizens National Bank of Teague, Madisonville State Bank, North
Houston Bank, Pacific National Bank, Park National Bank, and San Diego National
Bank.
3
4
consisting of itself and its subsidiary corporations (the Banks and approximately 80
non-banking subsidiaries) (hereinafter the “Consolidated Group”). 4 As will be
explained in more detail later, FBOP became insolvent and assigned all of its assets,
including whatever interest it may have had in the tax refunds, to the Trustee of the
FBOP Corporation Trust Agreement and Assignment for the Benefit of Creditors
(hereinafter the “Assignment”) for the purpose of applying the property or proceeds
thereof to the payment of FBOP’s debts. FBOP and the Trustee (collectively referred
to as the “FBOP Defendants”) claim ownership of the tax refunds pursuant to an
agreement between FBOP and the Banks concerning the allocation of tax liabilities
and benefits among members of the Consolidated Group (hereinafter the “TAA” or
the “Agreement”).
A consolidated tax group consists of affiliated corporations that have elected to file
their tax returns as a consolidated group, subjecting the entire group to one annual
tax liability. See 26 U.S.C. §§ 1501-1504; 26 C.F.R. § 1.1502-75. “Those who file
consolidated returns are ‘treated as a single entity for income tax purposes as if they
were, in fact, one corporation.’” Exxon Corp. v. United States, 785 F.2d 277, 280 (Fed.
Cir. 1986)) (citation omitted). Losses in one company can be offset against profits in
another for purposes of computing this tax liability. 26 C.F.R. § 1.1502-21; see
Superintendent of Ins. of N.Y. v. First Cent. Fin. Corp. (In re First Cent. Fin. Corp.),
269 Bankr. 481, 488-89 (Bankr. E.D.N.Y. 2001) (“Net operating loss carryback is a
form of income averaging that permits a taxpayer to use current losses to reduce
taxable income in prior years. If a consolidated group has net operating losses
(‘NOLs’) to offset income earned in the previous taxable years, the consolidated group
as a whole will be entitled to a refund of taxes paid on those years . . . .”), aff’d, 377
F.3d 209 (2d Cir. 2004). The group’s parent corporation files the return, pays the tax,
receives any refunds, and deals with the IRS generally. See 26 C.F.R. § 1.1502-77(a),
(c) & (d). Members of the consolidated group other than the parent are prohibited for
the most part from representing themselves separately with the IRS, id., § 1.150277(e), but nevertheless remain severally liable for the entire amount of the tax, id.,
§ 1.1502-6(a).
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The TAA sets forth the applicable rules to which, prior to FBOP’s insolvency,
FBOP and the Banks agreed for allocating the tax benefits and burdens of the
Consolidated Group. It is assumed for purposes of the present motions that the TAA
obligated FBOP to distribute the tax savings represented by the tax refunds to the
Banks. The issue to be decided is whether the Banks’ entitlement to those tax
savings is a property right or a contractual right. If the Banks have a property right,
then FBOP must turn the tax refunds over to the FDIC. 5 If the Banks’ right is
contractual, however, then the tax refunds now belong to the Trustee, as the assignee
of FBOP, who is charged with distributing them among FBOP’s creditors. 6
The FDIC and the FBOP Defendants have presented the ownership issue
through cross-motions for partial judgment on the pleadings under Federal Rule of
Civil Procedure 12(c). For the reasons that follow, the Court holds that the Banks’
right to receive the tax refunds is a property right. Therefore, the FBOP Defendants’
motion for partial judgment on the pleadings is denied. Although the Court holds
that the Banks have property rights in the tax refunds, the Court cannot tell from
the parties’ arguments if a disputed issue of fact exists over whether the TAA
required FBOP to distribute the entire amount of the Escrowed Refunds to the
Banks, and whether the Banks paid the entire amount of the original taxes that led
See 12 U.S.C. § 1821(d)(2)(A)(i) (providing that the FDIC, “as receiver, and by
operation of law, succeeds to—(i) all rights, titles, powers, and privileges of the
insured depository institution . . . and the assets of the institution”).
5
See generally Bogert, THE LAW OF TRUSTS AND TRUSTEES § 22 (explaining that
certain cases may require a decision whether an agent, who is employed to collect
choses in action owned by the principal and to remit those sums collected to the
principal, was a trustee of the sums held or a debtor of the principal).
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to the Escrowed Refunds. Therefore, the Court will withhold ruling on the FDIC’s
cross-motion for partial judgment on the pleadings until the parties file a joint report
regarding the question of whether the FDIC’s Rule 12(c) motion must be converted to
a summary judgment motion for purposes of determining the amount of the
Escrowed Refunds to which the Banks, given their property rights as set forth
herein, are entitled.
STANDARD OF REVIEW
Federal Rule of Civil Procedure 12(c) permits a party to move for judgment on
the pleadings after the parties have filed the complaint and answer. See BuchananMoore v. Cnty. of Milwaukee, 570 F.3d 824, 827 (7th Cir. 2009). The primary function
of a Rule 12(c) motion is to “dispos[e] of cases on the basis of the underlying
substantive merits of the parties’ claims and defenses as they are revealed in the
formal pleadings.” Wright & Miller, FEDERAL PRACTICE
AND
PROCEDURE, § 1367 (3d
ed.) (citing Alexander v. City of Chicago, 994 F.2d 333 (7th Cir. 1993)). The parties
disagree over whether the applicable standard for their Rule 12(c) motions is the
Rule 12(b)(6) standard for motions to dismiss or the Rule 56 standard for motions for
summary judgment. Which standard applies “is often a point of confusion in many
civil cases.” West v. Phillips, 883 F. Supp. 308, 313 n.1 (S.D. Ind. 1994). In United
States v. Wood, 925 F.2d 1580, 1581 (7th Cir. 1991) (per curiam), the Seventh Circuit
held that a motion for judgment on the pleadings should be analyzed according to the
same standard as a motion to dismiss. But in Alexander, the Seventh Circuit held
that the Rule 12(b)(6) standard should be applied only where the defendant “use[s] a
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rule 12(c) motion after the close of the pleadings to raise various rule 12(b) defenses
regarding procedural defects.” 994 F.2d at 336. Where a party “use[s] rule 12(c) in its
customary application to attempt to dispose of the case on the basis of the underlying
substantive merits,” the court said, “the appropriate standard is that applicable to
summary judgment, except that the court may consider only the contents of the
pleadings.” Id.
The Court need not choose between the motion to dismiss and summary
judgment standards here because the outcome of the parties’ Rule 12(c) cross-motions
does not turn on that selection. 7 In either case, the Court must take “all well-pleaded
allegations in the plaintiffs’ pleadings to be true, and [ ] view the facts and inferences
to be drawn from those allegations in the light most favorable to the plaintiffs.” Id. In
addition, applying either standard requires the Court to consider only the content of
the competing pleadings, exhibits thereto, matters incorporated by reference in the
pleadings, and any facts of which the district court will take judicial notice. Wright &
Miller, FEDERAL PRACTICE supra, § 1367. The Court cannot consider matters outside
these areas without converting the motion into one for summary judgment. See Fed.
R. Civ. P. 12(d); Omega Healthcare Investors, Inc. v. Res-Care, Inc., 475 F.3d 853, 856
The Court notes, however, that in recent opinions, the Seventh Circuit has stated
without qualification or citation to Alexander that the proper standard for a Rule
12(c) motion is the motion to dismiss standard. See, e.g., BBL, Inc. v. City of Angola,
809 F.3d 317, 325 (7th Cir. 2015) (“A motion for judgment on the pleadings under
Rule 12(c) of the Federal Rules of Civil Procedure is governed by the same standards
as a motion to dismiss for failure to state a claim under Rule 12(b)(6). A motion to
dismiss under Rule 12(b)(6) doesn’t permit piecemeal dismissals of parts of claims;
the question at this stage is simply whether the complaint includes factual
allegations that state a plausible claim for relief.”) (internal quotation marks and
citations omitted).
7
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n.3 (7th Cir. 2007). In addition, a Rule 12(c) motion is appropriate only when “it is
clear that the merits of the controversy can be fairly and fully decided in this
summary manner.” Wright & Miller, FEDERAL PRACTICE AND PROCEDURE, § 1369 (3d
ed.). Thus, if it appears that discovery is necessary to fairly resolve a claim on the
merits, then the motion for judgment on the pleadings must be denied. Id.; see also
Alexander, 994 F.2d at 336 (“We will not affirm the granting of the City’s 12(c)
motion unless no genuine issues of material fact remain to be resolved”).
BACKGROUND
The Amended Complaint, including reasonable inferences therefrom, and
matters of which the Court can take judicial notice, show the following facts.
A.
THE RISE AND FALL OF FBOP AND THE BANKS
FBOP is a privately held financial holding company headquartered in Illinois.
From 1990 through sometime in 2007, FBOP successfully acquired troubled financial
institutions at attractive prices, resolved the acquired institutions’ problems, and
integrated them into the organization. As a result of this strategy, FBOP at one time
owned, in addition to its nonbank holdings, six national banks and two state banks
operating in California, Illinois, Arizona, and Texas (the Banks).
Beginning in the fourth quarter of 2008, the Banks’ (and, as a result, FBOP’s)
economic fortunes took a turn for the worse. Prior to that time, FBOP had
implemented a strategy to cause the Banks to heavily invest in the preferred stock of
Fannie Mae and Freddie Mac as well as in securities and corporate bonds of
Washington Mutual Bank (WAMU). In the third quarter of 2008, Fannie Mae and
9
Freddie Mac were placed into conservatorship and WAMU failed. As a result, the
Banks recognized a combined loss of approximately $838 million on their Fannie Mae
and Freddie Mac investments, and wrote down their holdings of WAMU bonds by
another $99 million. In addition, FBOP had caused the Banks to focus much of their
lending activity in the commercial real estate market, and the value of those loans
declined precipitously when the real estate market crashed in the same time period.
The net effect of these events was to cause the Banks to become severely
undercapitalized. In mid-November 2008, FBOP applied for federal funding under
the Troubled Asset Recovery Program (“TARP”) in an effort to relieve the Banks’
financial stress. While FBOP’s application for TARP funds was pending, however, the
condition of the Banks declined even further, which led federal regulators 8 to
determine in the Fall of 2009 that the Banks were no longer able to meet regulatory
approval standards. The Banks were placed into receivership, with the FDIC being
appointed the separate and independent receiver for each on October 30, 2009.
B.
THE CORPORATE DEBT
ITS CHAIRMAN
OF
FBOP AND THE PERSONAL DEBT OF
In the months prior to the FDIC’s appointment as receiver for the Banks,
FBOP began experiencing financial pressure from its creditors In particular, in June
2009, Defendant JPMorgan Chase, N.A. (“JPMorgan”), acting as agent for a number
of lenders that had extended unsecured credit to FBOP over the years, declared
Five of the Banks were federally insured and thus regulated primarily by the Office
of the Comptroller of Currency (“OCC”), while the other three Banks were statechartered banks subject to federal regulation primarily by the FDIC. See R. 179 at 3
n.2.
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FBOP in default on that debt and brought suit to recover the outstanding balance of
approximately $246 million. Two months later, in August 2009, the Chairman and
President of FBOP, Michael E. Kelly, withdrew money from FBOP for personal use
by causing FBOP to extend a personal loan to him for approximately $6 million. In
return for the loan, Kelly executed an unsecured promissory note (the “Kelly Note”)
in favor of FBOP, which Kelly signed as the debtor and also on behalf of FBOP in his
capacity as President of FBOP. In March 2010 (after the FDIC was appointed
receiver for the Banks), Defendant BMO Harris, N.A. (“BMO”) brought suit against
FBOP, claiming that FBOP owed BMO approximately $44 million as a result of an
earlier failed attempt by FBOP to acquire another bank subsidiary that had been
indebted to BMO. In addition to the debt FBOP owed to JPMorgan and BMO (its two
largest creditors), FBOP also owed collectively approximately $100 million to
numerous other creditors. 9 Like FBOP’s debt to JPMorgan and BMO, FBOP’s debt to
these other creditors also was unsecured.
C.
THE $10.3 MILLION IN NON-ESCROWED REFUNDS
Just before JPMorgan filed its lawsuit (and before the FDIC took over the
Banks), on or about April 15, 2009, the Consolidated Group made an estimated
quarterly tax payment to the IRS in the approximate amount of $10.3 million. This
payment was made by FBOP with funds transferred to it by the Banks for the
FBOP’s additional creditors included Defendants Ore Hill Hub Fund Ltd., Canyon
Balanced Master Fund, Ltd., Canyon GRF Master Fund, L.P., Mariner-Tricada
Credit Strategies Master Fund, Ltd., PMT Credit Opportunities Fund Ltd., Prospect
Mountain Fund Limited, Structured Credit Opportunities Fund II, LP, and Gordon
C. Watson.
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specific purpose of paying the Banks’ share of the 2009 quarterly estimated tax
payment. As it turned out, the Consolidated Group suffered a $1.12 million
consolidated net operating loss in 2009. Thus, in March 2010, the IRS issued a full
refund of the $10.3 million estimated tax payment. The refund was made payable to
FBOP. By the time FBOP received the $10.3 million tax refund, the Banks had been
closed and the FDIC had been appointed receiver. FBOP did not inform the FDIC
about the Consolidated Group’s tax refund, “[d]espite the fact that FBOP was in
discussions with the FDIC[ ] regarding ownership of tax refunds.” R. 35 (¶ 118). At
the time FBOP received the $10.3 million tax refund, both JPMorgan and BMO were
pursuing collection actions against it. The FDIC alleges upon information and belief
that FBOP transferred some or all of the $10.3 million tax refund to the Trustee or
one or more of its creditors.
D.
FBOP’S SETTLEMENT OF ITS UNSECURED CREDITORS’ CLAIMS
Approximately six months after its receipt of the $10.3 million tax refund from
the IRS, FBOP entered into settlement agreements with JPMorgan and BMO. As
part of the settlement agreements, FBOP pledged all of its assets as security for the
previously unsecured debt owed to those two creditors, including FBOP’s rights (if
any) to the $10.3 million tax refund it had received plus any other tax refunds FBOP
might receive from the IRS on behalf of the Consolidated Group. In addition, Kelly
promised to cooperate and assist in any efforts required to preserve the Consolidated
Group’s tax refunds for the benefit of JPMorgan and BMO to the exclusion of the
FDIC. In return for these pledges, JPMorgan and BMO gave FBOP permission to use
12
cash collateral to satisfy $13.7 million in purported deferred compensation claims
allegedly owed by FBOP to former officers of the Banks and high level officers of
FBOP. Additionally, JPMorgan agreed to acquire the Kelly Note and then forgive the
amounts owed by Kelly under that Note. This plan was to be carried out by the
Trustee acquiring the Kelly Note from FBOP through the Assignment, and then
transferring the Note to JPMorgan, which then was to forgive the debt.
Approximately three months after entering into the settlement agreements
with JPMorgan and BMO (hereinafter the “Senior Secured Creditors”), FBOP also
entered into settlement agreements with its other unsecured creditors, giving those
creditors security interests in FBOP’s assets that were subordinate to the security
interests FBOP had granted to the Senior Secured Creditors. The settlement
agreements between FBOP and these other creditors (collectively the “Sub-Debt
Holders”) further provided that the subordinate liens promised in the agreements
would be released if the Senior Secured Creditors’ liens were avoided as fraudulent
transfers. Like FBOP’s settlement agreements with the Senior Secured Creditors, the
settlement agreements with the Sub-Debt Holders required FBOP to use
commercially reasonable efforts to minimize the value of any payments made to the
FDIC on account of the Banks’ claimed interest in the tax refunds.
Not long after all of these settlement agreements were executed, FBOP
entered into the Assignment, pursuant to which FBOP assigned its assets and
property to the Trustee and granted the Trustee the power and duty, among other
things, to sue or be sued, and prosecute or defend any claims existing against or in
13
favor of FBOP. Included in the transfer of property under the Assignment is any
property interest FBOP has in the tax refunds.
E.
THE $265.3 MILLION IN ESCROWED REFUNDS
In November 2009, Congress enacted the Worker, Homeownership, and
Business Assurance Act (“WHBAA”), which extended the number of years businesses
were allowed to carry back net operating losses incurred in 2008 and 2009. Id.
(¶ 122). The Consolidated Group had a 2009 NOL of $1,120,632,424, of which
$1,027,845,581 was attributable to the Banks’ operating losses and $92,786,843 was
attributable to losses incurred by FBOP and its non-bank subsidiaries. R. 35 (¶¶ 108110). Thus, shortly after the FDIC was appointed as receiver for the Banks in
October 2009, it began negotiations with FBOP over the filing of amended tax
returns for the Consolidated Group to take advantage of the new carry-back rules.
These negotiations took place over the course of the next two years and
culminated with FBOP’s filing, with the knowledge and consent of the FDIC, of a
2009 consolidated federal tax return and amended consolidated federal tax returns
for tax years 2004 through 2008. These consolidated tax filings were made on
September 11, 2011, around the same time as FBOP and the FDIC negotiated and
entered into the Escrow Agreement (dated September 30, 2011). The Escrow
Agreement acknowledged that the Consolidated Group expected to receive tax
refunds as a result of the September 11, 2011 tax filings, as well as possible future
tax filings yet to be made. The Escrow Agreement further acknowledged that the
FDIC and FBOP disagreed over who owned those anticipated tax refunds. Therefore,
14
the tax refunds were placed into an escrow account until the parties reached
agreement or until ownership of the funds was determined by an “order or judgment
of a federal court of competent jurisdiction in the Northern District of Illinois . . .
which is no longer subject to appeal and for which no appeal is pending.” R. 145 at 62
(¶ 1.1(x)).
The Consolidated Group’s amended tax returns resulted in tax refunds in the
total amount of $265,366,909. 10 The FDIC alleges that the entire amount of the tax
refunds generated by the Consolidated Group’s 2009 NOL is attributable to the
Banks. R. 35 (¶¶ 125-126). FBOP received the $265.3 million in tax refunds from the
IRS in December 2013 and January 2014, and placed them in escrow pursuant to the
terms of the Escrow Agreement. The FDIC and FBOP could not agree on ownership
of the Escrowed Refunds, and this lawsuit was filed.
F.
CURRENT LITIGATION
Discovery on the FDIC’s Amended Complaint has been stayed while the FDIC
and the FBOP Defendants seek a ruling from the Court on the tax refund ownership
question. The parties’ 11 Rule 12(c) cross-motions seek judgment on the pleadings as
to the following counts:
This aggregate amount allegedly is comprised of: (i) a $243,731,549 refund
resulting from the carryback NOLs incurred by the Banks; (ii) the return of
$13,108,773 in certain tax overpayments made by the Banks during the 2008 tax
year; and (iii) $8,526,587 in statutory interest. It also includes any state tax refund
attributable to the earnings history of the Banks. R. 35 (¶ 21).
10
Although the Senior Secured Creditors and the Sub-Debt Holders are also parties
to this case, the Court is referring only to the parties to the motions currently under
consideration.
11
15
•
Count I, in which the FDIC seeks a declaratory judgment that the
Escrowed Refunds are the property of the FDIC “as a matter of law,”
and Count II, in which the FDIC seeks a declaratory judgment that
the Escrowed Refunds are the property of the FDIC “under the Tax
Allocation Agreement.” R. 35 at 61-62. The Court interprets both the
FDIC’s and the FBOP Defendants’ motions as seeking judgment on
the pleadings as to these Counts. 12
•
Counts III through VII, in which the FDIC assumes that the TAA
accords ownership rights in the Escrowed Refunds to FBOP, and
then seeks alternative equitable and legal relief with regard to those
Funds. 13 The FBOP Defendants, but not the FDIC, have moved for
judgment on the pleadings as to these counts based on their
assertion that their ownership rights to the Escrowed Refunds
foreclose not only the declaratory relief sought in Counts I and II but
also the FDIC’s alternative claims in Counts III through VII.
•
Counts XIX through XXII, in which the FDIC seeks to recover the
Non-Escrowed Refunds under various legal and equitable theories. 14
Once again, the FDIC does not seek judgment on the pleadings on
The FDIC’s motion technically seeks judgment on the pleadings only as to Count I.
See R. 150. It is not clear why that is the case when Counts I and II appear to be
duplicative or at least involve overlapping legal and factual issues. Because those
issues have been fully briefed by the parties, the Court will treat the FDIC’s Rule
12(c) motion as seeking judgment on the pleadings as to both counts. See Flora v.
Home Fed. Sav. & Loan Ass’n, 685 F.2d 209, 212 (7th Cir. 1982) (citing Pofe v. Cont’l
Ins. Co. of N.Y., 161 F.2d 912 (7th Cir. 1947)).
12
Specifically, the FDIC seeks a declaration that: (1) the TAA is unenforceable
against the FDIC pursuant to 12 U.S.C. § 1823(e) (Count III); (2) the TAA is
unenforceable against the FDIC because it violates Sections 23A and 23B of the
Federal Reserve Act, 12 U.S.C. § 371c and § 371c-1 (Count IV); (3) a resulting trust
should be recognized in favor of the FDIC (Count V); (4) a mutual mistake occurred
entitling the FDIC to rescission and/or reformation of the TAA (Count VI); and (5) a
constructive trust should be recognized in favor of the FDIC based on FBOP’s alleged
false statements to, or concealment of information from, the Banks and their federal
banking regulators regarding the effect of the TAA, which induced the Banks to enter
into the TAA (Count VII).
13
The theories under which the FDIC seeks to recover the Non-Escrowed Refunds
include: (1) conversion and/or restitution (Count XIX); (2) “money had and received”
and/or restitution (Count XX); (3) unjust enrichment/restitution (Count XXI); and
(4) breach of fiduciary duty/breach of trust (Count XXII).
14
16
these counts, see R. 166 at 6 n.2, while the FBOP Defendants do. The
FBOP Defendants argue that the Court should enter judgment
against the FDIC on its claims to recover the Non-Escrowed Refunds
because, just like the Escrowed Refunds, the FBOP Defendants, not
the Banks, are the owners of those refunds.
As shown by the above, the FBOP Defendants’ Rule 12(c) motion seeks to
deliver a fatal blow to virtually all of the FDIC’s claims in the Amended Complaint,
with Count VIII being the only claim left standing. 15 The FDIC, on the other hand,
has brought a targeted motion for judgment on the pleadings, which, if successful,
would render moot not only the FDIC’s alternative claims based on a ruling that
FBOP is the owner of the tax refunds, but also the FDIC’s claims not currently before
the Court against the Senior Secured Creditors and the Sub-Debt Holders to declare
those parties’ security interests in the tax refunds void under theories of fraudulent
conveyance. 16
DISCUSSION
The FBOP Defendants ask the Court to adopt the position taken by a number
of courts which have held that the parent company is the owner of the tax refunds of
a consolidated tax group and the individual group members’ rights to the tax refunds
under a tax allocation agreement is contractual in nature. The courts adopting this
view all address the tax refund issue in the context of the parent corporation’s
Count VIII seeks a declaration that the FDIC “holds valid general unsecured
claims against FBOP and the Trustee[ ] in an amount equal to the [Escrowed]
Refund[s].” R. 35 at 70 (¶ 482).
15
See R. 35 (Counts IX through XVIII). Prior to the case being transferred to the
undersigned judge, Judge Holderman denied the Senior Secured Creditors’ motion to
dismiss the FDIC’s fraudulent conveyance claims. See R. 110.
16
17
bankruptcy, and conclude that the tax refunds are property of the bankrupt estate
within the meaning of 11 U.S.C. § 541(a), such that the subsidiary’s recovery of its
contractual share of the tax refunds stands on the same footing as the recovery of any
other unsecured creditor of the parent company. 17 But not every court agrees. The
FDIC asks the Court to adopt the position of a competing line of cases, which hold on
similar facts either that the subsidiary banks have a property right in the tax
refunds or that the issue cannot be decided as a matter of law because the tax
allocation agreement on which the question turns is ambiguous. Included in this
group are the only published, and hence precedential, appellate decisions on the
issue. 18
See Cantor v. Fed. Deposit Ins. Corp. (In re Downey Fin. Corp.), 593 Fed. App’x 123
(3d Cir. 2015) (non-binding precedent pursuant to 3rd Circuit I.O.P. 5.7); Fed.
Deposit Ins. Corp. v. Siegel (In re IndyMac Bancorp, Inc.), 554 Fed. App’x 668 (9th
Cir. 2014) (non-binding precedent pursuant to 9th Cir. R. 36-3); Imperial Capital
Bancorp, Inc. v. Fed. Deposit Ins. Corp. (In re Imperial Capital Bancorp, Inc.), 492
Bankr. 25 (S.D. Cal. 2013); Resolution Trust Corp. v. Franklin Sav. Corp. (In re
Franklin Sav. Corp.), 182 Bankr. 859 (D. Kan. 1995); Rodriguez v. Fed. Deposit Ins.
Corp. (In re United W. Bancorp, Inc.), 558 Bankr. 409 (Bankr. D. Colo. 2016);
Waldron v. Fed. Deposit Ins. Corp. (In re Venture Fin. Grp., Inc.), 558 Bankr. 386
(Bankr. W.D. Wash. 2016); Sharp v. Fed. Deposit Ins. Corp. (In re Vineyard Nat’l
Bancorp), 508 Bankr. 437 (Bankr. C.D. Cal. 2014); Team Fin. Inc. v. Fed. Deposit Ins.
Corp. (In re Team Fin., Inc.), 2010 WL 1730681 (Bankr. D. Kan. Apr. 27, 2010).
17
See Fed. Deposit Ins. Corp. v. AmFin Fin. Corp., 757 F.3d 530 (6th Cir. 2014);
Zucker v. FDIC (In re BankUnited Fin. Corp.), 727 F.3d 1100 (11th Cir. 2013); FDIC
v. Zucker (In re NetBank, Inc.), 729 F.3d 1344 (11th Cir. 2013); see also Ghei v. Fed.
Deposit Ins. Corp. (In re First Reg’l Bancorp), 560 Bankr. 772, 785 (C.D. Cal. 2016);
Sosne v. Fed. Deposit Ins. Corp., 2016 WL 775176 (E.D. Mo. Feb. 29, 2016); Lubin v.
Fed. Deposit Ins. Corp., 2011 WL 825751 (N.D. Ga. Mar. 2, 2011); Fed. Deposit Ins.
Corp. v. BSD Bancorp, Inc. (In re BSD Bancorp, Inc.), Case No. 94-1341, Doc. # 2, slip
op. (C.D. Cal. Feb. 28, 1995) (R. 174-1).
18
18
Although the Court is not writing on a blank slate, this case is unique in one
respect. While the FBOP Defendants do not contest that FBOP is insolvent, no
bankruptcy petition has been filed. Instead, FBOP transferred its property to the
Trustee pursuant to the Assignment. An assignment for the benefit of creditors
“passes legal and equitable title to the debtor’s property from the debtor to the
assignee.” In re Computer World Solutions, Inc., 479 Bankr. 483, 486-87 (Bankr. N.D.
Ill. 2012). The “assignee (or trustee) holds property for the benefit of a special group
of beneficiaries, the creditors.” Ill. Bell Tel. Co. v. Wolf Furniture House, Inc., 509
N.E.2d 1289, 1292 (Ill. App. 1987). “A debtor may choose to make an assignment for
the benefit of creditors, which is an out-of-court remedy, rather than to petition for
bankruptcy, because assignments are less costly and completed more quickly.” First
Bank v. Unique Marble & Granite Corp., 938 N.E.2d 1154, 1158 (Ill. App. 2010).
“[T]he assignment is valid without the consent of any of the assignor’s creditors.”
Consol. Pipe & Supply Co. v. Rovanco Corp., 897 F. Supp. 364, 370 (N.D. Ill. 1995).
While an assignment for the benefit of creditors generally is recognized under
Illinois law as a valid alternative to bankruptcy, there is a further wrinkle here.
Prior to FBOP’s execution of the Assignment, it entered into a series of transactions
by which it pledged its assets as security to the Senior Secured Creditors and the
Sub-Debt Holders. The FDIC alleges that FBOP chose the out-of-court remedy of an
assignment for the benefit of creditors to avoid the scrutiny a bankruptcy court would
apply to these pre-assignment security pledges. See In re Computer World Solutions,
Inc., 479 Bankr. at 486 (“the Bankruptcy Code does not provide for bankruptcy court
19
supervision of assignees or their attorneys”). In support of that allegation, the FDIC
cites to the Assignment, which allegedly provides, among other things, that the
Trustee cannot challenge the validity of the pre-assignment security pledges. 19 While
the FDIC alleges claims in this lawsuit to set aside the security interests as
fraudulent conveyances, it argues that if the security interests are not set aside and
the Court finds that FBOP owns the tax refunds, then the Senior Secured Creditors
and the Sub-Debt Holders (who previously were unsecured creditors of FBOP), as
well as FBOP’s Chairman and other high level officers of the Banks and FBOP, all
will be enriched at the expense of the Banks, which will be unable to recover any of
the tax refunds that are owed to them under the TAA.
I.
CHOICE OF LAW
Because the Court has federal question jurisdiction over the FDIC’s
complaint, 20 federal choice of law rules apply. See Berger v. AXA Network LLC, 459
F.3d 804, 809-10 (7th Cir. 2006). “[T]he right to receive a tax refund constitutes an
interest in property.” United States v. Sims (In re Feiler), 218 F.3d 948, 955 (9th Cir.
2000). “Unless some federal interest requires a different result,” the federal choice of
law rule for an issue regarding an interest in property, even when the parties are in
See R. 146 at 18 n.12 (citing ¶ 11 of the Amended Complaint, which alleges that
the Trustee “has failed to, and upon information and belief, lacks the standing to,
challenge the liens granted by FBOP after the Banks failed”). The FDIC also
suggests that the Trustee is an interested party. See id. (alleging that, “upon
information and belief, the Senior Secured Parties are funding the Trustee-Assignee
by consenting to the Trustee-Assignee’s use of cash collateral”).
19
See 12 U.S.C § 1819(b)(2)(A) (“Except as provided in subparagraph (D) [not
applicable here], all suits of a civil nature or in equity to which the [FDIC], in any
capacity, is a party shall be deemed to arise under the laws of the United States.”).
20
20
federal court under federal question jurisdiction, is state law. Butner v. United
States, 440 U.S. 48, 55 (1979). The determination of whether to create a special
federal common law rule depends on the nature and importance of the government
interest at issue and the effect of applying state law. United States v. Kimbell Foods,
Inc., 440 U.S. 715, 728 (1979). The federal government performs a substantial
regulatory/oversight function over banks. Arguably, therefore, this case involves a
situation that might justify a special federal rule of decision. See, e.g., The Official
Comm. of Unsecured Creditors of the Columbia Gas Transmission Corp. v. Columbia
Gas Sys. Inc. (In re Columbia Gas Sys. Inc.), 997 F.2d 1039, 1055-58 (3d Cir. 1993)
(applying federal common law rather than state property law to hold that customers
of owner of natural gas pipeline had property interest in money collected by owner
from upstream suppliers and owed to customers). 21
Nevertheless, “[d]eveloping a federal common law rule is the exception rather
than the rule. Federal law should coincide with the relevant state law unless state
law would undermine the objectives of the federal statutory scheme and there is a
distinct need for nationwide legal standards.” Id. at 1055 (citing Kimbell Foods, Inc.,
440 U.S. at 728). The Court does not need to decide at this time whether a federal
common law rule should be applied because, as will be seen, the Court concludes that
state law properly interpreted and applied does not undermine the federal banking
The court in In re First Central Financial Corp. rejected In re Columbia Gas
Systems, Inc. and the application of federal common law to a claim raising the tax
refund ownership question. But that case did not involve federally regulated banks.
See 269 Bankr at 501 (“The Tax Allocation Agreement at issue pertains exclusively to
state law policies regarding the regulation of its insurance companies, and therefore
. . . New York law, not federal common law, is applicable in this case.”).
21
21
regulatory scheme. Therefore, the Court will apply state law for purposes of the
present motions. The issue may be reconsidered, however, should any future motions
present a conflict between state law and a national interest. The Court also notes
that, while state law is controlling, federal precedent applying that law may and
should be considered, particularly because this case involves property created by
federal law (tax refunds). See In re Innis, 331 Bankr. 784, 786 (Bankr. C.D. Ill. 2005)
(“That a debtor’s rights in a tax refund are determined under state law is not subject
to dispute. However, because a federal tax refund is a creature of federal tax law,
rights created thereunder cannot be ignored.”) (citations omitted).
II.
RULES OF CONTRACT INTERPRETATION
The combining of corporate income and losses to produce a consolidated group
tax liability raises issues about allocating tax benefits and burdens among group
members that are not resolved by federal tax laws. FBOP and the Banks entered into
the TAA to address those unresolved issues. Both parties agree, however, that no
provision of the TAA explicitly deals with the question of who owns the tax refunds.
Because of the absence of an express contractual resolution of the ownership issue,
the FDIC argues that the Court should take into account what the rule would be in
the absence of an agreement on the tax refund ownership question, which both
parties refer to as the “default rule.” The FBOP Defendants, on the other hand, argue
that the default rule should not be considered because the answer to the ownership
question is found by implication from the language of the TAA. The Court agrees
with the FDIC.
22
Even if the Court assumes, as the FBOP Defendants argue, that the TAA
contains language from which FBOP’s ownership of the tax refunds can be implied,
basic principles of contract interpretation teach that the Court must consider the
default rule, particularly where a literal interpretation of the contract language
might “wreak[ ] unintended consequences” on the parties. Wal-Mart Stores, Inc.
Assocs.’ Health & Welfare Plan v. Wells, 213 F.3d 398, 402 (7th Cir. 2000). That was
the holding of the Seventh Circuit in the Wal-Mart case, in which the court examined
the language of an ERISA plan document. The question was whether the plan
document had to be construed according to its “clear” import, which would be
contrary to the default rule and lead to “anomal[ous]” results. Id. at 402. Because
“[t]he plan document[ ] neither advert[ed] to the anomaly [that resulted from a literal
interpretation] nor expressly repudiate[d] [the default rule],” the court concluded as a
matter of “sound application of principles of contract interpretation” that the plan
document did “not alter the background [default rule].” Id. at 402-03 (holding that
“contracts—which for most purposes ERISA plans are—are enacted against a
background of common-sense understandings and legal principles that the parties
may not have bothered to incorporate expressly but that operate as default rules to
govern in the absence of a clear expression of the parties’ intent that they not
govern”).
The “default rule” contract analysis of Wal-Mart was validated by U.S.
Airways, Inc. v. McCutchen, 133 S. Ct. 1537 (2013), in which the United States
23
Supreme Court referred to the default rule as a “gap-filling” principle, and explained
that
[t]he words of a [contract] may speak clearly, but they may
also leave gaps. And so a court must often look outside the
[contract’s] written language to decide what an agreement
means. In undertaking that task, a court properly takes
account of background legal rules—the doctrines that
typically or traditionally have governed a given situation
when no agreement states otherwise.
Id. at 1549 (internal quotation marks and citations omitted). Like the Seventh
Circuit, the Supreme Court emphasized that ignoring default or gap-filling rules in
interpreting contracts “is likely to frustrate the parties’ intent and produce perverse
consequences.” Id.
While McCutchen and Wal-Mart involved ERISA plans and hence applied
federal common law contract interpretation principles, Illinois contract principles 22
are the same:
Generally, the duty owed to a plaintiff is measured by the
terms of the contractual obligation as reflected within the
“four corners” of the contract. Yet, it is presumed that
parties contract with knowledge of the existing law, and
the statutes and laws in existence at the time a contract is
executed are considered part of the contract. The rationale
for this rule is that the parties to the contract would have
expressed that which the law implies had they not
supposed that it was unnecessary to speak of it because the
law provided for it.
The TAA does not contain a choice of law clause. The FBOP Defendants argue that
the Court should apply Illinois law because FBOP and the Trustee are both citizens
of Illinois. See R. 145 at 20. The FDIC does not appear to dispute application of
Illinois law, and therefore the Court will assume that Illinois is the appropriate state
law to apply. See McFarland v. Gen. Am. Life Ins. Co., 149 F.3d 583, 586 (7th Cir.
1998) (where the parties do not dispute that Illinois law applies the court “need not
investigate whether another forum’s law would be more appropriate”).
22
24
Fox v. Heimann, 872 N.E.2d 126, 136 (Ill. App. 2007) (internal quotation marks and
citations omitted); see also Bd. of Regents v. Wilson, 326 N.E.2d 216, 220 (Ill. App.
1975) (“Contracts are presumed to have been entered into in the light of existing
principles of law, (citation omitted) and the existing law is presumed to be a part of
every contract (citation omitted) and contracts should be so understood and
construed unless otherwise clearly indicated by the terms of the agreement.”)
(internal quotation marks and citation omitted); see generally 11 WILLISTON
ON
CONTRACTS § 30:19 (4th ed.) (“[C]ontractual language must be interpreted in light of
existing law, the provisions of which are regarded as implied terms of the contract,
regardless of whether the agreement refers to the governing law. This principle
applies to the common law in effect in the jurisdiction as well as to . . . statutes [and]
. . . regulations, including provisions which affect the validity, construction,
operation, effect, [and] obligations . . . of the contract.”).
An example of an Illinois case applying gap-filling rules, which also involved a
tax issue, is U.S. Trust Co. of N.Y. v. Jones, 111 N.E.2d 144 (Ill. 1953). There, the
Illinois Supreme Court analyzed the question of whether the tax under consideration
should be paid out of the trust corpus or out of distributable income. The language of
the trust document suggested that the tax was to be paid out of the trust corpus. But
the court declined to interpret the trust language literally in light of revenue laws,
which would apply in the absence of that language and would require the taxes to be
paid out of distributable income. Like the Seventh Circuit in Wal-Mart and the
Supreme Court in McCutchin, the Illinois Supreme Court sought “to avoid the
25
unreasonable and impractical” consequences of a literal interpretation of the
language of the document. Id. at 146. Avoiding unintended consequences is as much
a part of contract interpretation as the “four corners” rule, as Judge Learned Hand
explained in words quoted by the Illinois Supreme Court:
The issue involves the baffling question which comes up so
often in the interpretation of all kinds of writings: how far
is it proper to read the words out of their literal meaning in
order to realize their overriding purpose? * * * When we
ask what (was) “intended,” usually there can be no answer,
if what we mean is what any person or group of persons
actually had in mind. Flinch as we may, what we do, and
must do, is to project ourselves, as best we can, into the
position of those who uttered the words, and to impute to
them how they would have dealt with the concrete
occasion.
Id. (quoting United States v. Klinger, 199 F.2d 645, 648 (2d 1952)) (internal quotation
marks omitted).
Applying these contract interpretation principles here means that the Court
must consider not only the language of the TAA on which the FBOP Defendants rely,
but also the background or “default” rule on which the FDIC relies and which would
apply in the absence of an agreement to the contrary. The Court also must consider
whether construing the Agreement in contravention of the default rule makes sense
in light of the circumstances surrounding the agreement, and ask how the parties are
likely to have dealt with the ownership question given those circumstances. 23 “When
Illinois courts do not view consideration of the circumstances surrounding the
execution of a contract as changing the terms of the agreement or creating an
ambiguity where none exists. Instead, they consider those circumstances “as a part of
the agreement, reflecting the clear intent of the signators.” Farmers Auto. Ins. Ass’n v.
Kraemer, 857 N.E.2d 691, 694 (Ill. App. 2006) (emphasis added); see also Linn v.
23
26
a contractual interpretation makes no economic sense, that’s an admissible and, in
the limit, a compelling reason for rejecting it . . . . The presumption in commercial
contracts is that the parties were trying to accomplish something rational. Common
sense is as much a part of contract interpretation as is the dictionary or the arsenal
of canons.” Dispatch Automation, Inc. v. Richards, 280 F.3d 1116, 1119 (7th Cir.
2002) (internal quotation marks and citations omitted); see also Baldwin Piano, Inc.
v. Deutsche Wurlitzer GmbH, 392 F.3d 881, 883-84 (7th Cir. 2004) (“Businesses are
not compelled to make sensible bargains, but courts should not demolish the
economic basis of bargains that would be sound if the contract were given a natural
reading.”) (emphasis in original). If after applying these principles, the language of
the TAA is of “such unequivocal clarity as to preclude,” U.S. Trust Co. of N.Y., 111
N.E.2d at 146, application of the default tax refund ownership rule, then the Court
must interpret the TAA according to the contractual language. See McCutchen, 133
S. Ct. at 1549 (when an “express contract term . . . contradicts the background
equitable rule . . . the agreement must govern”); Wal-Mart Stores, Inc. Assocs.’ Health
& Welfare Plan, 213 F.3d at 402 (where the contract contains “a clear expression of
the parties’ intent,” then the default rules do not govern). But if the TAA “leaves
space” for the default tax refund ownership rule “to operate,” by for example “say[ing]
Clark, 128 N.E. 824, 828 (Ill. 1920) (rule barring parol evidence “does not exclude
evidence of the circumstances of the execution of the contract and of facts in
connection with it which may tend to explain its meaning by showing the situation of
the parties and all their relations to one another and the subject-matter of the
contract”); Wells Fargo Funding v. Draper & Kramer Mortg. Corp., 608 F. Supp. 2d
981, 989 (N.D. Ill. 2009) (holding that contracts “are not interpreted in a vacuum,”
but instead are to be interpreted in light of “the circumstances surrounding the
transaction in order to discern the parties’s intent”).
27
nothing specific about that issue,” it does not clearly repudiate the rule. McCutchen,
133 S. Ct. at 1549. In that case, the Court will presume that the parties contracted
with the default rule in mind, which the Court will deem to have been incorporated
into the Agreement as if expressly set forth therein. Fox, 872 N.E.2d at 136; Bd. of
Regents, 326 N.E.2d at 220.
III.
THE FBOP DEFENDANTS’ RULE 12(c) MOTION FOR JUDGMENT AS A
MATTER OF LAW ON COUNTS I-II
A.
THE “DEFAULT” RULE REGARDING OWNERSHIP OF TAX
REFUNDS
1.
ILLINOIS LAW: TAX REFUNDS OF JOINT FILERS
BELONG TO THE TAXPAYER WHO PAID THE TAXES
Under Illinois law, 24 the party who paid the taxes, or, more accurately, bore
the economic burden of the taxes, is the owner of any refunds resulting from those
taxes. See, e.g., Graver, 381 N.E.2d at 1046 (stating that the “majority and better
view of the law” is found in Duden v. United States, 467 F.2d 924, 929 (Ct. Cl. 1972),
where it was held “that wife had no property interest in funds represented by income
tax refund check made payable jointly to husband and wife” because “husband was
the sole producer of income”); In re Lock, 329 Bankr. 856, 859-60 (Bankr. S.D. Ill.
2005) (“The Court is not aware of any Illinois case that contradicts the rule of Graver,
and, accordingly, finds that under Illinois property law, non-earning spouse who
makes no contribution to overpayments resulting in a tax refund is not entitled to the
Illinois law determines the applicable default rule for ownership of tax refunds. See
Section I and footnote 22, supra; see also Graver v. Ill. Dep’t of Pub. Aid, 381 N.E.2d
1044, 1046 (Ill. App. 1978) (“The majority rule of law in our nation is that local law
determines ownership of funds received with respect to income reported on joint
federal income tax returns.”).
24
28
couple’s refund check.”); Lincoln Nat’l Bank v. Cullerton, 310 N.E.2d 845, 848-49 (Ill.
App. 1974) (holding that, because “[t]he tax money actually came from all of the
shareholders,” the shareholders were entitled under state tax statute to seek
refunds). This rule is based on common law property principles that are not unique to
Illinois. See Graver, 381 N.E.2d at 1046 (relying on Duden, 467 F.2d at 929, which
applied Oregon law); In re Lock, 329 Bankr. at 860 n.4 (“Courts applying state law in
other jurisdictions have likewise found that a non-income producing spouse is not
entitled to a property interest in a joint tax refund check.”). 25
Illinois law also provides that the filing of a joint tax return does not divest the
person who paid the taxes of his ownership interest. See In re Lock, 329 Bankr. at
860 (“The mere signing of a joint return by a spouse to obtain the benefit of perceived
tax advantages does not thereby effect a conversion of funds of that spouse into
property of the other. Although joint federal filings are authorized by . . . the Internal
Revenue Code, . . . this provision does not propose, nor does it imply, that any
property rights are altered by a joint income tax filing.”). 26 A similar default rule
regarding the effect of joint filing on property rights applies in the consolidated tax
See also United States v. MacPhail, 149 Fed. App’x 449, 453 (6th Cir. 2005) (“courts
have consistently found that a refund should be disbursed in proportion to the
amount each spouse paid to the taxes owed,” quoting Rev. Rul. 74-611, 1974-2 C.B.
399 (“the wife having paid the entire amount of the tax is entitled to the entire
amount of the overpayment”)); Epstein v. United States, 357 F.2d 928, 937 (Ct. Cl.
1966) (“recovery may be had only if plaintiff can show that he himself had borne the
economic burden of the taxes by paying them out of his own pocket and had not
collected them from members”).
25
See also MacPhail, 149 Fed. App’x at 453 (“‘a joint income tax return does not
create new property interests for the husband or the wife in each other’s income tax
overpayment’” (quoting Rev. Rul. 74-611, 1974-2 C.B. 399)).
26
29
return context. Thus, “a corporation does not lose any [property] interest it had . . .
because of its status in a group of affiliated corporations that file a consolidated tax
return.” The Official Comm. of Unsecured Creditors v. PSS Steamship Co. (In re
Prudential Lines Inc.), 928 F.2d 565, 571 (2d Cir. 1991); see also Wolter Constr. Co. v.
Comm’r of Internal Rev. Serv., 634 F.2d 1029, 1038 (6th Cir. 1980) (“consolidated
return computations are not . . . based on a consolidated accounting . . . as though the
properties of the subsidiaries were owned by the parent”; it “is not the functional
equivalent of a merger”). Instead, “[t]he common parent acts as an agent on behalf of
all the members of the consolidated group for the convenience and protection of [the]
IRS only. The corporations retain their separate identities and the property interests
of the subsidiaries are not absorbed by the common parent.” In re Prudential Lines
Inc., 928 F.2d at 571 (internal quotation marks and citation omitted). Similarly,
under Illinois law, a taxpayer is not divested of his property rights in tax refunds by
virtue of having used an agent to forward his tax payments to the taxing authority.
See, e.g., Lincoln Nat’l Bank, 310 N.E.2d at 849 (holding that “a long-standing
custom, utilized purely for administrative reasons, [which] permitted the banks
themselves to act in behalf of the shareholders as a conduit for payment to the taxing
authorities,” did not eliminate the property interest of the shareholders in recovering
the taxes paid on their behalf); see also 8x8, Inc. v. United States, 125 Fed. Cl. 322,
330 (Feb. 29, 2016) (“The money that 8x8 remitted to the IRS belongs to its
customers, from whom 8x8 collected it for purposes of having them (and not 8x8) pay
the excise tax.”).
30
2.
THE BOB RICHARDS CASE
The FBOP Defendants ignore Illinois law regarding ownership of tax refunds.
Instead, the FBOP Defendants characterize the FDIC’s argument for a “default” rule
as being based on the Ninth Circuit’s decision in Western Dealer Management, Inc. v.
England (In re Bob Richards Chrysler–Plymouth Corp.), 473 F.2d 262 (9th Cir. 1973).
In the Court’s view, however, the FBOP Defendants’ targeting of the Bob Richards
case is a straw man. While Bob Richards is consistent with the FDIC’s position, it
does not actually address the tax refund ownership question. Therefore, attacking
and/or distinguishing the Ninth Circuit’s ruling in that case, as the FBOP
Defendants do, does little to advance the FBOP Defendants’ arguments.
Bob Richards holds that tax refunds of a consolidated tax group should inure
to the benefit of the subsidiary rather than the parent company. In reaching this
conclusion, the Ninth Circuit reasoned as follows:
Normally, where there is an explicit agreement, or where
an agreement can fairly be implied, as a matter of state
corporation law the parties are free to adjust among
themselves the ultimate tax liability. But in the instant
case the parties made no agreement concerning the
ultimate disposition of the tax refund. Absent any differing
agreement we feel that 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. Allowing the parent to keep any refunds arising
solely from a subsidiary’s losses simply because the parent
and subsidiary chose a procedural device to facilitate their
income tax reporting unjustly enriches the parent.
Id. at 264-65.
31
Bob Richards primarily involves a default rule concerning allocation and not
ownership of tax refunds in the consolidated tax filing context. The default allocation
rule applied by the Bob Richards court is that “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. A number of the cases on which the FBOP Defendants rely (see
footnote 17, supra) hold that the rule enunciated in Bob Richards is irrelevant to
resolving the tax refund ownership question where the case involves a tax allocation
agreement. The Court agrees that the default tax allocation rule set forth by the Bob
Richards court does not apply to this case because the TAA expressly states the
allocation rules for determining the extent to which each member of the Consolidated
Group is entitled to enjoy the benefit of consolidated tax refunds. See R. 145 at 44
(TAA, ¶ 9). 27 If that were the issue in this case, however, the FBOP Defendants
would have won the battle but lost the war, because applying the tax allocation rules
in the TAA leads to the same result as applying the Bob Richards allocation rule,
which is that the Banks, not FBOP, are entitled to enjoy the benefit of the tax
refunds. 28
The FBOP Defendants have attached the TAA to their motion for judgment on the
pleadings. The FDIC does not dispute that the Court can consider the TAA in ruling
on the parties’ cross-motions for judgment on the pleadings. See Phillips v.
Prudential Ins. Co. of Am., 714 F.3d 1017, 1019-20 (7th Cir. 2013).
27
28
Section 9 of the TAA states in relevant part as follows:
Any subsequent adjustments for overassessments . . .
resulting from any amendments to, or examinations by the
Internal Revenue Service or any state tax agency, of the
32
Apart from enunciating a default tax allocation rule, Bob Richards impliedly
held that the tax benefit which the subsidiary bank was entitled to enjoy was a
property right. See Bob Richards, 473 F.2d at 265 (“Allowing the parent to keep [the]
refunds . . . unjustly enriches the parent.”). But the Bob Richards court was not
expressly ruling on the property right question because that question was not put at
issue in the case. The default tax refund ownership rule was at issue, however, in
later case law applying the Bob Richards default allocation rule in situations like
Bob Richards where a tax allocation agreement did not exist, Those cases apply the
Bob Richards default allocation rule (i.e., the subsidiary who generated the losses
that led to the consolidated tax refunds is entitled to enjoy the benefit of those
refunds), but then limit the reach of the default allocation rule by further holding
that the subsidiary may only recover refunds up to the amount of taxes actually paid
by it. See, e.g., Jump v. Manchester Life & Cas. Mgmt. Corp., 579 F.2d 449, 454 (8th
Cir. 1978) (limiting the subsidiary’s recovery to the amount required to offset its tax
payments because the court did not see any reason under the applicable state law
(Missouri) “to divert a refund of tax dollars paid by other members of the affiliated
group to reward [the subsidiary] for the fortuitous effect its losses, in combination
tax return filed for the year, to the extent that such
adjustment is attributable to the separate operations of a
member of the affiliated group, shall be . . . credited by
FBOP to the members of the affiliated group . . . Any
additional credits which cannot be directly attributable to
the separate operations of a member of the affiliated group
shall be proportioned to the tax currently payable by each
member of the affiliated group.
R. 145 at 44 (emphasis added).
33
with the earnings of other group members, had on the consolidated tax liability of the
group”). 29
Because the issue of property rights in the tax refunds was not in dispute in
the Bob Richards opinion, that case does not stand for the proposition that the
existence of a tax allocation agreement renders the default tax refund ownership rule
irrelevant. See Stanek v. St. Charles Cmty. Unit Sch. Dist. No. 303, 783 F.3d 634, 640
(7th Cir. 2015) (unexamined assumptions of prior cases do not control the disposition
of a contested issue). The indisputable proposition that a tax allocation agreement
resolves issues of tax allocation does not mean that a tax allocation agreement
necessarily also resolves the issue of whether the subsidiary banks have a property
right in any tax refunds. See, e.g., Sosne, 2016 WL 775176 at *2 (“The TSA includes
provisions addressing distribution of refunds, but the TSA does not address
ownership of the refunds.”); In re Nelco, Ltd., 264 Bankr. at 809 (where court
acknowledges its earlier ruling that the applicable tax allocation agreement “did not
See also Nisselson v. Drew Indus., Inc. (In re White Metal Rolling & Stamping
Corp.), 222 Bankr. 417, 425 (Bankr. S.D.N.Y. 1998) (“The right to the refund is
limited, however, to the amount of tax that the loss corporation paid during the
carryback year. The loss corporation has no right to the excess, and has no rights
against the other affiliated group members who benefit from the carryback.”); In re
First Cent. Fin. Corp., 269 Bankr. at 489 (“the subsidiary is not entitled to share in
consolidated refund[s] in an amount greater than the amount paid by the subsidiary
for its tax liability”); Cohen v. Un-Ltd. Holdings, Inc. (In re Nelco, Ltd.), 264 Bankr.
790, 810 (Bankr. E.D. Va. 1999) (“The case law is clear that a member of a
consolidated group can participate in a tax refund only to the extent of tax payments
made by that member.”); Fed. Deposit Ins. Corp. v. Brandt (In re Fla. Park Banks,
Inc.), 110 Bankr. 986, 989 (Bankr. M.D. Fla. 1990) (“[B]ecause both Park Bank and
the Debtor have losses in 1985, each member should be entitled to recover only taxes
it had previously paid. Again, Park Bank would be entitled to the entire refund since
only Park Bank paid the refunded taxes.”).
29
34
address the allocation of tax refunds”). As the court observed in In re Bancorp, slip op
at 10 (R. 174-1 at 11), “[p]arties to a contract do not override a gap-filling rule simply
by reaching explicit agreement on some other matter.” The cases on which the FBOP
Defendants rely for the proposition that the default rule is irrelevant because of the
existence of a tax sharing agreement are essentially circular: they reason that the
default rule does not apply because the tax sharing agreement resolves the
ownership question, when the very purpose for considering the default rule is to
decide whether the tax sharing agreement resolves the ownership question.
Accordingly, the Court rejects the FBOP Defendants’ argument based on these cases
that the parties’ explicit agreement in the TAA concerning how to allocate tax
refunds negates the need to interpret the TAA on the ownership question using gapfilling rules like the Illinois tax refund ownership rule.
3.
FEDERAL COMMON LAW ARGUMENT
The FBOP Defendants also argue that the default rule should be ignored
because Bob Richards applies federal common law, and the Supreme Court has held
that “there is no free-ranging federal common law to provide gap-filing rules in favor
of the FDIC-R.” R. 166 at 9 n.5. As already noted, however, Illinois’ default tax
refund ownership rule does not depend on the Bob Richards case. Instead, it is based
on state law property principles. In any event, the Court does not agree that the Bob
Richards case is an example of the inappropriate application of federal common law.
The Supreme Court has defined federal common law as “the judicial ‘creation’ of a
special federal rule of decision” that “‘displace[s] state law.’” Atherton v. Fed. Deposit
Ins. Corp., 519 U.S. 213, 218 (1997) (citation omitted); see also O’Melveny & Myers v.
35
Fed. Deposit Ins. Corp., 512 U.S. 79, 87 (1994) (creation of federal common law rule
“alter[ ]s” otherwise applicable law). The FBOP Defendants do not cite any state law
they contend the Bob Richards court displaced or altered. While the Bob Richards
court did not specifically cite a source of law, its holding is based on the general
equitable principle of preventing unjust enrichment. See 473 F.2d at 264-65; see also
8x8, Inc., 125 Fed. Cl. at 327 (purpose of provision in tax code providing that a tax
collector may not secure a refund of taxes it collected from taxpayers and remitted to
the IRS on their behalf where it has neither repaid the taxpayers nor obtained the
taxpayers’ consent, was to “preclude what would otherwise result in unjust
enrichment”). The FBOP Defendants may disagree with the Bob Richards court’s
application of unjust enrichment principles to the consolidated tax filing context, but
it has not shown that, by applying those principles, the court was creating federal
common law to displace state law.
4.
UNITED DOMINION ARGUMENT
The FBOP Defendants also argue that Bob Richards, and by extension, the
default rule, is contrary to the Supreme Court’s decision in United Dominion
Industries, Inc. v. United States, 532 U.S. 822 (2001). United Dominion involved a
particular type of carry-back loss called a product liability loss (“PLL”), which, under
the Internal Revenue Code (“IRC”), is calculated by taking the total of a taxpayer’s
product liability expenses (“PLEs”) up to the amount of its NOL, which means that “a
taxpayer with a positive annual income, and thus no NOL, may have PLEs but can
have no PLL.” Id. at 825. The question in United Dominion was whether a
36
consolidated group’s PLL could be calculated by aggregating PLLs separately
determined company-by-company, or whether it instead must be calculated on a
consolidated, single-entity basis. The Supreme Court rejected the aggregate-ofseparate PLLs approach on the theory that the IRC and applicable Treasury
regulations define net operating losses exclusively as consolidated net operating
losses. Given this statutory definition, the Court observed, it was “fair to say, as
United Dominion says, that the concept of separate NOL ‘simply does not exist.’” Id.
at 830 (quoting Brief for Petitioner).
The FBOP Defendants rely on this quoted sentence to argue that the FDIC’s
position in this case based on the default rule relies on the erroneous premise that
the tax refunds stem from the Banks’ separate NOLs when in fact separate NOLs do
not exist. United Dominion, however, addressed how to calculate the tax liability
owed by a consolidated group to the IRS, while this case concerns the entirely
different issue of ownership rights in tax refunds as between members of a
consolidated tax group. Moreover, United Dominion in any event “does not stand for
the blanket proposition that [all deductions are] determined at the consolidated
return level.” Brunswick Corp. v. United States, 2008 WL 5387086, at *8 (N.D. Ill.
Dec. 22, 2008). Instead, it stands for the much narrower proposition “that courts
considering whether to look at the consolidated return level or the subsidiary level
should look to the applicable IRC provisions and regulations.” Id. In this case, there
37
are no applicable IRC provisions and regulations. 30 The rules for allocating tax
liability among members of the Consolidated Group are found in the TAA. And the
TAA, unlike the IRC, does recognize separate NOLs. In short, the Supreme Court’s
decision in United Dominion has no bearing on this case.
In addition to the above, the question of separate versus consolidated NOLs is
beside the point, because the issue here is not whether the Banks have a property
interest in their NOLs. See The Asher Candy Co. v. MAFCO Holdings, Inc., (In re
Marvel Entm’t Grp., Inc.), 273 Bankr. 58, 85 (D. Del. 2002) (cited by the FBOP
Defendants) (citing United Dominion for the proposition that, “[i]n the context of the
consolidated tax filing group, the hypothetical stand-alone NOLs that were
calculated for the purposes of the Tax Sharing Agreement were not property of the
debtor because they were a legal fiction”). While the Banks’ NOLs may have led to
the refunds, and also factor into the computation under the TAA for allocating the
refunds, the issue here is whether the Banks had a property interest in the tax
refunds themselves, not the items that gave rise to those refunds or determined their
allocation among members of the Group. As the bankruptcy court stated in In re
Indymac Bancorp, Inc., 2012 WL 1037481 (Bankr. C.D. Cal. Mar. 29, 2012), a debate
about whether the NOLs themselves represent a property interest is “a sideshow and
not material to resolution of this dispute.” Id. at 22; see also In re Feiler, 218 F.3d at
956 (“Whether the NOLs themselves are considered property is something of a red
See Capital Bancshares, Inc. v. Fed. Deposit Ins. Corp., 957 F.2d 203, 206 (5th Cir.
1992) (the Code “is silent as to whether ‘a tax saving must or should inure to the
benefit of the parent company or of the company which has sustained the loss that
makes possible the tax saving’”) (quoting Bob Richards, 473 F.2d at 264).
30
38
herring[ ] . . . [because] the property [the debtors] gave up was the tax refund—the
NOLs are simply an accounting method for figuring their entitlement to the refund
under the present tax code.”).
5.
UNJUST ENRICHMENT ARGUMENT
The FBOP Defendants’ final argument against the Court’s consideration of a
default rule regarding tax refund ownership is that unjust enrichment is not present
here because FBOP seeks to use the tax refunds to pay its creditors rather than keep
the money for itself. But both the Banks and FBOP are insolvent and have creditors.
Moreover, if the FDIC’s allegations regarding FBOP’s transfer of security interests to
the Senior Secured Creditors and Sub-Debt Holders turn out to be true, then this
argument seems somewhat disingenuous. The FDIC alleges that FBOP used the tax
refunds to structure a settlement with these other creditors that not only gave a
preference to those creditors at the expense of the Banks, but also personally
enriched FBOP’s Chairman and high level Bank and FBOP officers to the detriment
of the Banks. None of the cases on which the FBOP Defendants rely involved
allegations of pre-bankruptcy shenanigans similar to those alleged here. 31
In any event, even if the pre-Assignment transactions between FBOP and the
Senior Secured Creditors and Sub-Debt Holders are not taken into account, FBOP’s
The FBOP Defendants argue that the FDIC’s allegations seek to portray
“legitimate efforts between FBOP and its lenders to settle a $250 million lawsuit over
commercial loans” as “a conspiracy to cheat the FDIC-R.” R. 156 at 12. Regardless of
whether the FDIC’s characterization of the transactions at issue is accurate, it is
based on reasonable inferences from the facts alleged in the complaint. And, as
previously noted, the Court must accept the well-pled facts and all reasonable
inferences therefrom as true for purposes of ruling on a motion for judgment on the
pleadings. See Alexander, 994 F.2d at 336.
31
39
use of the tax refunds to satisfy its other creditors is irrelevant. If FBOP is not the
owner of the tax refunds, then it will be unjustly enriched by retaining those funds,
regardless of FBOP’s intention of making the funds available for distribution to its
other creditors. 32 An argument similar to the FBOP Defendants’ unjust enrichment
argument here was made by the parent bank holding company in Capital
Bancshares. In that case, the parent company argued it would not be unjustly
enriched if the court allowed it to keep tax refunds generated by its subsidiary
because it had been forced by “the Bank’s unsatisfactory primary capital position . . .
to borrow substantial amounts of money from third party lenders for the benefit of
the Bank.” 957 F.2d at 208. The parent company claimed that “equitable
considerations” thus weighed in its favor in that it had “assigned a portion of the tax
refund claims to the third party lenders” whose loans had “benefitted the Bank, and
ultimately the FDIC.” Id. The court was “not moved by the equities” cited by the
parent company, stating that there was no evidence the Bank’s board of directors had
agreed to the parent company’s pledging of the Bank’s property to the third party
lenders. Id. Furthermore, the court said, “[e]ven if there had been no loans from third
party lenders and had the Bank failed sooner, the Bank could still have generated
the same refund had it filed separately with the IRS.” Id.
See, e.g., In re Nelco, Ltd., 264 Bankr. at 810 (“To allow a member of a consolidated
group to receive a tax refund when the member did not contribute to the tax payment
would result in the unjust enrichment of that member.”); In re White Metal Rolling &
Stamping Corp., 222 Bankr. at 424 (“principles of unjust enrichment dictate that a
loss corporation is entitled to receive the refund generated by the application of its
NOL carryback to reduce the amount of income tax that it paid during the carryback
year”).
32
40
The FBOP Defendants’ unjust enrichment argument is similarly unpersuasive.
Moreover, the cases cited by the FBOP Defendants are not to the contrary. Instead,
those courts reject equitable arguments raised by the subsidiary only after first
holding that the subsidiary did not have a property interest in the tax refunds. As a
result, they merely stand for the truism that, when an unsecured creditor receives
less than the full amount of a debt the insolvent corporation had promised to pay it,
that “is not injustice, it is bankruptcy.” In re First Cent. Fin. Corp., 377 F.3d at 217.
That same argument has no force whatsoever if the tax refunds are found to be
property of the subsidiary. See Pearlman v. Reliance Ins. Co., 371 U.S. 132, 135-36
(1962) (“The Bankruptcy Act simply does not authorize a trustee to distribute other
people’s property among a bankrupt’s creditors.”).
B.
THE TAA
Turning to the TAA, the Court begins its analysis, as dictated by Illinois
contract interpretation principles, with the presumption that the TAA incorporates
the default tax refund ownership rule pursuant to which the Banks are the owners of
the tax refunds to the extent that they bore the economic burden of the taxes on
which the refunds are based. In construing whether the TAA overrides this
presumption, the Court will consider not only the language of the TAA but the
circumstances surrounding the parties’ execution of that Agreement and a common
sense understanding of the parties’ likely intent.
41
1.
SURROUNDING CIRCUMSTANCES SUPPORT
DEFAULT TAX REFUND OWNERSHIP RULE
THE
The circumstances surrounding the execution of the TAA include the
economics of consolidated tax filing and the reasons why, in light of those economics,
the parties would enter into the TAA. Consolidated tax filing is beneficial to an
affiliated group of companies because it permits a company with income to offset that
income with the losses of an affiliated company without income. Typically, as here,
members of a consolidated tax group will enter into a tax allocation agreement to
establish the terms on which a company with net income will compensate an
affiliated company with net operating losses for the use of those losses to reduce the
tax liability of the income-producing company. Consequently, although an incomeproducing member’s tax liability may be less under the consolidated filing as a result
of its ability to use the off-setting losses of another member of the group, the incomeproducing member does not experience any net benefit from filing a consolidated tax
return because it has to pay the loss member for use of the loss. On the other hand,
the loss member with no positive net income is better off having filed as part of a
consolidated tax group because it receives compensation from the income-producing
group member through the tax sharing agreement for losses otherwise of no use to it.
The FDIC argues that typically banks that are part of a consolidated tax group
are income-producing members, while the parent bank holding company and its nonbanking subsidiaries are loss members. From a group perspective, therefore,
consolidated tax filing in the banking context facilitates transfers of money from the
banks to the parent and the parent’s non-banking subsidiaries through tax allocation
42
agreements that require the banks to compensate the parent and the non-banking
subsidiaries for use of those entities’ net operating losses. See R. 153 at 10. What
actually happened here in the last year in which the Banks were operating before the
FDIC took over is the reverse of the typical situation; that is, the Banks had net
operating losses of their own, which they were entitled under the law to use to
generate tax refunds by filing amended tax returns for past years in which they had
net income and paid taxes. Given the economics of what was expected when the
Banks entered into the TAA, however, it makes little sense for the Banks to have
agreed in the TAA to give up their property rights in tax refunds to which they
otherwise would have been entitled had they not entered into the TAA. Because the
Banks did not receive a net benefit from the consolidated tax filing, they had no
incentive to give up their property rights. See Wells Fargo Funding, 608 F. Supp. 2d
at 989 (“Why would DKMC’s payment of the settlement amount—which only covered
fifteen loans—absolve the guarantors of their obligations under their Guaranty
Agreements of other loans not being settled? Such largesse on Wells Fargo’s part
would make no commercial sense—at least none that the defendants can point to[.]”).
To construe the TAA as transferring the Banks’ property interest in tax refunds to
FBOP, the Court essentially would have to hold that the Banks entered into an
agreement that not only provided them with no benefits but also made them worse
off when the unexpected later happened and they experienced net operating losses,
which, had they filed separately, would have led to tax refunds directly payable to
them. See Lubin, 2011 WL 825751, at *6 (citing to “[t]he economic reality of the
43
arrangement between Bancshares and the Bank” in ruling against the parent
company on the tax refund ownership question).
In addition to economics, the FDIC points out that the Federal Reserve Act
requires that an extension of credit from a banking institution to its non-banking
parent company must be secured by collateral at the time of the transaction. And
another provision of the Act requires that extensions of credit from a bank to its
parent company must be made on terms that would be provided in comparable
transactions, which would include provisions at the inception for the payment of
interest at an appropriate rate. See 12 U.S.C. § 371c-1. “[A]n interpretation which
renders a contract lawful is preferred over one which renders it unlawful.” 11
WILLISTON
ON
CONTRACTS § 32:11. But the Court does not need to decide whether
banking laws in fact would be violated if the TAA is interpreted as transferring the
Banks’ ownership rights in the tax refunds to FBOP, because it at least arguable that
the banking laws would be. See In re NetBank, Inc., 729 F.3d at 1351 n.8 (stating
that the absence of provisions for interest and collateral was significant to deciding
whether ownership of refunds was transferred to parent company by tax allocation
agreement given that, “under 12 U.S.C. § 371c, banks are restricted in their ability to
engage in certain transaction with affiliates—including issuing a loan or extension of
credit without ensuring sufficient collateral protections”); In re BSD Bancorp., slip
op. at 11-12 (stating that, “[f]or a debtor-creditor relationship to arise between
Bancorp [the parent] and Bank, then, there would presumably have to be some
44
further agreement through which Bancorp supplied collateral meeting the
requirements of § 371c(c)(l)”). 33
In fact, the Federal Reserve has suggested that it might conclude an unlawful
extension of credit resulted from a situation where a bank is not immediately paid
the tax refunds received by the parent company to which the subsidiary was entitled
under a tax allocation agreement. See Interagency Policy Statement on Income Tax
Allocation in a Holding Company Structure, 63 Fed. Reg. 64757-01 at 64758, 1998
WL 804364(F.R.) (“1998 Policy Statement”) (“If a refund is not made to the
institution within [a reasonable] period, the institution’s primary federal regulator
may consider the receivable as either an extension of credit or a dividend from the
subsidiary to the parent.”). 34 The Federal Reserve cautions that “[a]ny practice that
See also Lincoln Savs. & Loan Ass’n v. Wall, 743 F. Supp. 901, 908-11 (D.D.C.
1990) (holding that agreement requiring a thrift to make large payments to its
parent, ostensibly for the purpose of paying the consolidated group’s tax liability,
runs afoul of the then-existing regulatory restrictions on a thrift’s lending to its
parent). In In re IndyMac Bankcorp, Inc., the Ninth Circuit rejected the FDIC’s
argument that a tax sharing agreement among members of a consolidated group that
included banks fell within the ambit of 12 U.S.C. § 371c-1. But the court’s only
analysis of the issue was the statement that “[a] run-of-the-mill contract claim is not
a ‘covered transaction’ under the federal banking laws cited by the FDIC.” 554 Fed.
App’x at 670. While the IndyMac court acknowledged that “covered transactions”
include “extensions of credit,” 12 U.S.C. § 371c(b)(7)(A), it gave no indication that it
considered the broadly worded definition of that term contained in the Treasury
Regulations. See 12 C.F.R. § 223.3(o)(1) and (6) (“‘Extension of credit’ to an affiliate
means the making or renewal of a loan, the granting of a line of credit, or the
extending of credit in any manner whatsoever, including on an intraday basis, to an
affiliate. An extension of credit to an affiliate includes, without limitation: (1) An
advance to an affiliate by means of an overdraft, cash item, or otherwise . . . and
(6) any other similar transaction a result of which an affiliate becomes obligated to
pay money (or its equivalent).”) (emphasis added).
33
The 1998 Policy Statement “reiterates and clarifies the position the [Federal
Reserve Board of Governors] will take as [it] carries out [its] supervisory
34
45
is not consistent with [its] polic[ies] may be viewed as an unsafe and unsound
practice,” id., which could prompt either informal or formal corrective action. This
means that if the Banks agreed to transfer their property rights in the tax refunds to
FBOP, they did so knowing that federal regulatory authorities might consider the
agreement to violate banking laws. As the FDIC argues, it does not make sense to
say that a “bank would brazenly disregard regulatory guidance . . . and intentionally
transfer all of its rights to future tax refunds to its parent in exchange for an
unsecured debt obligation.” R. 146 at 36.
The FBOP Defendants argue that it cannot be correct that interpreting the
TAA as transferring the Banks’ ownership rights to FBOP defies common sense
because numerous courts have construed similar tax allocation agreements as
providing that the banks in those cases did just that. All of those cases, however,
address the issue in the bankruptcy context where the court was applying the
definition of property under 11 U.S.C. § 541(a). While the definition of property is the
same both inside and outside the bankruptcy context, several of the courts in
question appeared to justify their interpretation of the agreements in question by the
fact that bankruptcy laws were involved. 35 In addition, those courts have found an
responsibilities for institutions regarding the allocation and payment of income taxes
by institutions that are members of a group filing a consolidated return.” 63 Fed.
Reg. 64757-01 at 64757, 1998 WL 804364.
See, e.g., In re United W. Bancorp, Inc., 558 Bankr. at 434 (distinguishing In re
BankUnited Financial Corp., which found that the tax allocation agreement did not
divest the subsidiary of its ownership interest, on the basis that the Eleventh Circuit
in that case “made no mention of the Bankruptcy Code at all”); id. at 436 (finding the
Sixth Circuit’s opinion in AmFin Financial Corp.—which reversed the bankruptcy
court’s ruling in favor of the parent company on the ground that the tax allocation
35
46
“unambiguous” intent to create a debtor-creditor relationship only by ignoring the
default tax refund ownership rule. Under Illinois law, as previously discussed, the
default tax refund ownership rule is the background principle against which the
parties contracted and is presumed to be part of the agreement. Rather than consider
the default tax refund ownership rule, the courts in question appear to apply a
different default rule—one that holds that accounting and allocation rules such as
those set out in corporate tax sharing agreements create or give rise to a debtorcreditor “legal construct.” 36 But a debtor-creditor relationship can only be “created by
consent.” In re BankUnited Fin. Corp., 727 F.3d at 1108. And given the Banks’
ownership interest in the tax refunds under Illinois law, it is hardly sensible to say
that the Banks consented to give up their ownership rights in favor of a contractual
debt. “When there is a choice among plausible interpretations, it is best to choose a
reading that makes commercial sense, rather than a reading that makes the deal
one-sided.” Baldwin Piano, Inc., 392 F.3d at 883; see also Sutter Ins. Co. v. Applied
agreement was ambiguous on the ownership question—“not especially persuasive”
because the Sixth Circuit “did not directly address the central bankruptcy issues,”
noting that § 541 was “not even mentioned” by that court); see also In re Team Fin.,
Inc., 2013 WL 492854, at *5 (holding that it was irrelevant that “interpreting the tax
allocation as according ownership interest in parent company would amount to an
unsafe and unsound banking practice and a sanctioned affiliate transaction,” because
“what ultimately matters in this proceeding is whether the agreement confers a
substantial ownership interest on [the parent] that its creditors are entitled to have
preserved as estate property”) (emphasis added).
See, e.g., In re Indymac Bancorp, Inc., 2012 WL 1037481, at *14 (holding that
“right to receive fungible ‘payments’ using a formula calculated as if the Bank were a
separate tax filer” is “meaningfully different from the right to receive specific refunds
upon receipt,” and is considered under the law to “evidence[ ] a debtor-creditor
relationship,” and concluding “that none of [the FDIC’s arguments] succeeds in
defeating the basic legal construct that results under the TSA”) (emphasis added).
36
47
Sys., Inc., 393 F.3d 722, 726 (7th Cir. 2004) (“‘[W]here a contract is susceptible to one
of two constructions, one of which makes it fair, customary, and such as prudent men
would naturally execute, while the other makes it inequitable, unusual, or such as
reasonable men would not be likely to enter into, the interpretation which makes a
rational and probable agreement must be preferred.’”) (quoting NutraSweet Co. v.
Am. Nat’l Bank & Trust Co. of Chi., 635 N.E.2d 440, 445 (Ill. App. 1994)). Thus, even
if the debtor-creditor construct applied here—which is arguable37—the applicable
contract interpretation principles point to the default tax refund ownership rule over
the debtor-creditor construct because there is no reason to conclude that the Banks
would have agreed to give up their ownership interest in the tax refunds.
In Illinois, “a debtor-creditor relationship is created when a party (the creditor)
voluntarily transfers his property to another (the debtor).” Bill Marek’s The
Competitive Edge, Inc. v. Mickelson Group, Inc., 806 N.E.2d 280, 287 (Ill. App. 2004)
(citing Katz v. Belmont Nat’l Bank of Chi., 491 N.E.2d 1157 (Ill. 1986); In re Thebus,
483 N.E.2d 1258 (Ill. 1985); and Gen. Motors Corp. v. Douglass, 565 N.E.2d 93 (Ill.
App. 1990)). If the funds in question were received from a third party, no debt is
created. See Bill Marek’s The Competitive Edge, Inc., 806 N.E.2d at 287 (“[T]here was
no creditor-debtor relationship between plaintiff and defendant. Plaintiff never
voluntarily transferred funds to defendant. Rather, defendant mistakenly received
plaintiff’s funds from a third party.”); Roderick Dev. Inv. Co. v. Cmty. Bank of
Edgewater, 668 N.E.2d 1129, 1135 (Ill. App. 1996) (holding that the relationship
between the parties was not one of debtor-creditor “because the plaintiff never
voluntarily transferred funds to the Bank”; instead, the Bank received the funds to
which the plaintiff claimed entitlement from a third party). While the issue has not
been addressed by the parties, it seems to the Court that the Illinois debtor-creditor
default rule is inapplicable here because FBOP did not receive the tax refunds from
the Banks; it received them from a third party, the IRS.
37
48
2.
THE TAA DOES NOT CLEARLY REPUDIATE THE
DEFAULT TAX REFUND OWNERSHIP RULE
The FBOP Defendants cite to a number of provisions of the TAA which they
argue demonstrate an intent to create a debtor-creditor relationship. The Court will
consider each of these.
a.
TAX ALLOCATION
PROVISIONS
AND
PAYMENT
The FBOP Defendants rely on provisions of the TAA intended to address the
allocation of tax benefits and the payment of tax liability, arguing that an implied
debtor-creditor relationship can be inferred from those provisions. The relevant
contractual provisions include §§ 1, 2, and 4-7. Section 1 provides that each Group
member is to calculate the amount of taxes it would have incurred had it filed a
separate tax return. Section 2 provides that each Group member is to adjust its
separate tax liability based on a set of rules set out in §§ 4-7, which govern the
circumstances under which a Group member is or is not entitled to be compensated
for a tax benefit attributable to that member’s operations. For the most part, these
rules benefit the member who is identified with the income or losses that led to the
tax savings. The separate adjusted tax liabilities of each Group member are then
totaled. If the Consolidated Group’s actual tax liability is less than the aggregate
separate tax liabilities (a consolidated tax savings), then § 2(b) provides that the tax
savings is allocated among the Group members taking into account the rules set forth
in §§ 4-7. If the consolidated tax savings cannot be specifically identified and
attributed to a particular member of the Group, then § 2(b) provides that the tax
savings is allocated among the Group members in proportion to the tax currently
49
payable by each member as calculated on a separate return basis. If the Group’s
consolidated tax liability is greater than the aggregate separate basis tax liability of
the Group’s members (a consolidated tax loss), then § 2(a) provides that the excess
liability is attributed to FBOP. 38 Section 9 provides that the allocation of tax benefits
and liabilities provided for in the preceding sections of the Agreement is to be
effected through credits between and among members of the Group made on
intercompany accounts. Section 10 provides that Group members are to make their
payments of their share of the Consolidated Group’s tax liability to FBOP, and FBOP
is then responsible for forwarding a single Consolidated Group tax payment to the
IRS.
Nothing in these allocation and payment provisions suggests that the parties
had the tax refund ownership issue in mind. Only two of these provisions even
mention refunds. The first is § 9, which, as noted in the discussion about the Bob
Richards case, deals with the allocation of tax refunds among members of the
Consolidated Group. The Court does not perceive anything about the allocation rules
in § 9 that would mandate the conclusion that the Banks gave up their property right
to receive the tax refunds.
The second provision that refers to refunds is § 3. The FBOP Defendants argue
that § 3 “squarely distinguishes between actual tax refunds paid to FBOP by a taxing
A loss scenario is unlikely to occur because the very reason for filing a consolidated
return is that it almost always will result in tax savings, not additional tax liability.
The FDIC asserts that an excess consolidated tax liability, which FBOP would have
been required to pay under § 2(a), in fact “never happened,” and that the tax refunds
at issue here “are not attributable to any taxes paid by FBOP.” R. 146 at 29. The
FBOP Defendants do not appear to contest that assertion.
38
50
authority and FBOP’s independent contractual obligations to reimburse Subsidiaries
for refunds that would have been due and owing based upon the Subsidiaries’ standalone tax attributes.” R. 145 at 7. But no such distinction is drawn in that provision.
Instead, § 3 states that:
Amounts determined to be payable separately as federal
and state income taxes by the Subsidiary having taxable
income under Section 1, and subject to any adjustment
under Section 2 or the application of Section 7b, shall upon
notice to the Subsidiary be payable [to] FBOP. Amounts
determined to be refunded separately as federal and state
income taxes to the Subsidiary under Section 1, and subject
to any adjustment under Section 2, shall be paid [by] FBOP
no later than the date it would receive the refund from the
applicable federal or state taxing authority.
R. 145 at 42 (¶ 3).
According to the FBOP Defendants, § 3 provides that if a Bank overpaid its
estimated taxes to FBOP, then FBOP had a contractual obligation to refund the
overpayment to that Bank no later than the date on which the Bank would have
expected to receive a refund from the IRS had it filed on a stand-alone basis.
Assuming that is a correct interpretation of § 3, 39 the requirement that FBOP refund
The actual language of § 3 reverses the “to” and “by” that appear in brackets in the
language quoted above; that is, the first sentence actually reads “by FBOP” and the
second sentence actually reads “to FBOP.” As both parties agree, § 3 does not make
much sense if interpreted as written with the bracketed words reversed. The FBOP
Defendants argue that the inverted prepositions are a typographical error. The FDIC
responds that the TAA has used the phrase “to FBOP” in both the first and second
sentences of § 3 in multiple versions applicable over the course of ten years, and that,
in late 2007, the phrase “to FBOP” was changed to “by FBOP,” but only in the first
sentence. R. 146 at 29 n.61. According to the FDIC, “[i]t is not clear why this change
was made.” Id. It seems more than likely, however, that prior to 2007 the TAA
contained a single typographical error in that the second “to FBOP” should have read
“by FBOP.” Then, in 2007, an attempt to correct that error was made, but the
39
51
an overpayment of estimated taxes paid by one of the Banks to FBOP does not say
anything about actual tax refunds from the IRS. Instead, § 3 refers to (1) payments
by the Banks to FBOP, which are to be “refunded” by FBOP (not the IRS), and,
(2) hypothetical refunds from the IRS that could have been anticipated had the Banks
filed taxes on a separate basis. Several of the opinions on which the FBOP
Defendants rely find similar provisions “particularly telling” as to the creation of a
debtor-creditor relationship because “the amount due from [the parent company] to
the [subsidiary banks] under the [provision in question] may be significantly
different from the amount of any refunds received and may even be due when no
refunds are paid to [the parent].” In re Indymac Bancorp, Inc., 2012 WL 1037481, at
*15. The Court does not agree with this assessment because § 3, just like the rest of
the TAA, “speaks only to the allocation of liability in the event of an adjustment,” and
“says nothing about the ownership of [tax] refund[s].” AmFin Fin. Corp., 757 F.3d at
534.
The relationship between the concept embodied in § 3 and actual tax refunds is
explained in the 1998 Policy Statement, which, as previously noted, sets forth the
position of the Federal Reserve Board of Governors regarding the allocation and
payment of income taxes by banks that are members of a consolidated tax group. It is
correction was erroneously applied to the first sentence of § 3, resulting in the
current version which now contains two errors instead of only one. The parties
disagree over whether the Court can rewrite § 3 to reflect what is likely the parties’
intent. That question need not be resolved, however, because even if the Court ruled
in favor of the FBOP Defendants by holding that it can rewrite § 3 to reflect what the
parties likely meant to say, the Court still would not conclude that § 3 supports the
FBOP Defendants’ debtor-creditor argument.
52
obvious from a comparison of the text of the Policy Statement and the text of the TAA
that § 3 of the TAA is patterned after the Policy Statement. Therefore, it is helpful to
consider the full text of the relevant portion of the Policy Statement:
Tax Refunds From the Parent Company
An institution incurring a loss for tax purposes should
record a current income tax benefit and receive a refund
from its parent in an amount no less than the amount the
institution would have been entitled to receive as a
separate entity. The refund should be made to the
institution within a reasonable period following the date
the institution would have filed its own return, regardless
of whether the consolidated group is receiving a refund. If a
refund is not made to the institution within this period, the
institutions’ primary federal regulator may consider the
receivable as either an extension of credit to or a dividend
from the subsidiary to the parent. A parent company may
reimburse an institution more than the refund amount it is
due on a separate entity basis. Provided the institution will
not later be required to repay this excess amount to the
parent, the additional funds received should be reported as
a capital contribution.
If the institution, as a separate entity, would not be
entitled to a current refund because it has no carryback
benefits available on a separate entity basis, its holding
company may still be able to utilize the institution’s tax
loss to reduce the consolidated group’s current tax liability.
In this situation, the holding company may reimburse the
institution for the use of the tax loss. If the reimbursement
will be made on a timely basis, the institution should
reflect the tax benefit of the loss in the current portion of
its applicable income taxes in the period the loss is
incurred. Otherwise, the institution should not recognize
the tax benefit in the current portion of its applicable
income taxes in the loss year. Rather, the tax loss
represents a loss carryforward, the benefit of which is
recognized as a differed tax asset, net of any valuation
allowance.
Regardless of the treatment of an institution’s tax loss for
regulatory reporting and supervisory purposes, a parent
company that receives a tax refund from a taxing authority
obtains these funds as agent for the consolidated group on
53
behalf of the group members. [footnote citing to 26 C.F.R.
1.1502-77(a)] Accordingly, an organization’s tax allocation
agreement or other corporate policies should not purport to
characterize refunds attributable to a subsidiary depository
institution that the parent receives from a taxing authority
as the property of the parent.
63 Fed. Reg. at 64758-64759, 1998 WL 804364 (emphasis added).
The Policy Statement’s explanation refers to the contractual duty on the part
of the parent company to make retroactive adjustments to the amount of a bank’s
share of the consolidated group’s tax liability regardless of whether a tax refund is
actually received by the consolidated group (the requirement embodied in § 3), while
at the same time also admonishing that tax allocation agreements should not purport
to characterize actual tax refunds “receive[d] from a taxing authority,” which are
attributable to the operations of the subsidiary, as the property of the parent. Thus,
the Federal Reserve Board does not perceive any inconsistency between provisions
like § 3 and a bank’s ownership interest in tax refunds. Nor does this Court. Under
Illinois law, the Banks do not have an ownership interest in the funds they
forwarded to FBOP for purposes of making their tax payments. 40 Section 3, however,
gives the Banks a contractual right to an adjustment for those estimated tax
payments. That contractual right to an adjustment exists even if no tax refunds are
ever paid by the government. But the Banks are not seeking the return of estimated
See Gen. Motors Corp., 565 N.E.2d at 100 (“a relation of debtor and creditor was
created . . . when [General Motors] voluntarily . . . transferred money to [the
defendant]”); Kerwin v. Balhatchett 147 Ill. App. 561, 565 (1909) (holding that, when
the plaintiff gave the defendant money to pay certain debts of the plaintiff and to
account to her for the balance, the relationship of debtor and creditor was created
and trover for the conversion of the funds would not lie).
40
54
tax payments for which no actual tax refunds were paid by the government. They are
seeking actual tax refunds paid by the IRS to FBOP. And the existence of a
contractual right where no tax refunds are paid does not negate an intent by the
Banks to retain their ownership interest in actual tax refunds paid by the IRS.
Section 3 neither speaks to that issue, nor reasonably suggests a contractual intent
to override the default tax refund ownership rule by which the Banks would have
retained their ownership interest. 41
That the concept of ownership interests in tax refunds can co-exist legally with
contractual provisions like § 3 related to settling intracorporate tax obligations is
confirmed by a simple analogy to tax withholding in the employor-employee context.
In In re Thebus, 483 N.E.2d 1258, the Illinois Supreme Court held that an employer
who failed to remit to the government money withheld from its employees’ paychecks
for payment of taxes was not liable for conversion because “the employees have no
interest in the money the respondent withheld from their wages, so there has been no
conversion of employees’ funds.” Id. at 1261 (“[T]he general rule is that conversion
will not lie for money represented by a general debt or obligation. It must be shown
that the money claimed, or its equivalent, at all times belonged to the plaintiff and
that the defendant converted it to his own use.”). The Thebus court cited to U.S.
Fidelity & Guaranty Co. v. United States, 201 F.2d 118 (10th Cir. 1952), for the
proposition that the employee had no interest in the withheld tax payment money.
See id. at 120 (“when an employer withholds the tax from an employee’s wage and
pays him the balance the employee has been paid in full, he has received his full
wage”). In reaching this conclusion, the Tenth Circuit noted, however, that the
employee has a right to tax refunds arising out of the tax payments that were to be
made with the withheld funds, even if the employer failed to pay the withheld funds
to the government. Id. at 119-20 (the employee is entitled to receive “a credit or
refund from the government based on this payment of taxes on his behalf by the
employer”). Just as an employee retains his property right to tax refunds even
though he lost his ownership interest in funds withheld by his employer for purposes
of making the tax payments that gave rise to the tax refunds, so too can the Banks
retain their ownership interest in tax refunds, even though they had only a
contractual interest in a refund of the estimated tax payments they made to FBOP.
The only difference here is the addition of a contractual right to the funds paid to
FBOP for tax purposes, which is not present in the employee-employer context with
regard to the taxes withheld from the employee’s paycheck. The adding of a contract
41
55
b.
DEBTOR-CREDITOR TERMINOLOGY
The Court also does not think the so-called “debtor/creditor” terminology used
in the TAA, see, e.g., In re Downey Fin. Corp., 593 Fed. App’x at 127; In re United W.
Bancorp, Inc., 558 Bankr. at 425; In re Indymac Bancorp, Inc., 2012 WL 1037481, at
*13, overrides the default tax refund ownership rule. Because the TAA is primarily a
contract about allocating tax liabilities and benefits, accounting for those liabilities
and benefits among Group members not surprisingly required the parties to use
words such as “credit” or “reimburse.” As the FDIC notes, the allocation provisions in
the TAA that use the debtor-creditor language in question “say nothing about tax
refunds actually received from the IRS that are attributable solely to taxes paid by
the Banks in previous years and losses suffered by the Banks in the current year.”
R. 174 at 10; see Lubin, 2011 WL 825751, at *5 (concluding that debtor-creditor
language of tax agreement “does not override the presumptive principal-agent
relationship”).
“Moreover, because words derive their meaning from the context in which they
are used, a contract must be construed as a whole, viewing each part in light of the
others.” Gallagher v. Lenart, 874 N.E.2d 43, 58 (Ill. 2007). Thus, the “letter” of a
written instrument must be “controlled by its spirit and purpose, bearing in mind
that the terms employed are servants and not masters of an intent.” U.S. Trust Co. of
N.Y., 111 N.E.2d at 147. This means that “courts are sometimes required to restrict
the meaning of words,” and “[p]articular expressions will not control where the whole
right as to A (tax payments), however, does not negate the original property right as
to B (tax refunds).
56
tenor or purpose of the instrument forbids a literal interpretation of the specific
words.” Id. at 147-48; see also 11 WILLISTON
ON
CONTRACTS § 31:7 (4th ed.) (“few
courts [ ] will give the words of a contract their literal meaning if it appears from the
surrounding circumstances that a literal construction or interpretation will defeat or
frustrate the intentions of the parties”). Thus, the Court agrees with the Sixth
Circuit when it said that “straining to imbue the commonplace terms ‘payment’ and
‘reimbursement’ with specialized and unambiguous meaning falls flat.” AmFin Fin.
Corp., 757 F.3d at 535; see also In re BankUnited Fin. Corp., 727 F.3d at 1108
(rejecting argument that similar language showed intent to create a debtor-creditor
relationship in light of absence of provisions that would provide “some means of
protection for the creditor that would help guarantee the debtor’s obligation, such as
a fixed interest rate, a fixed maturity date, or the ability to accelerate payment upon
default”).
c.
ABSENCE OF TRUST PROVISIONS
For similar reasons, the Court also rejects the FBOP Defendants’ argument
that the absence of language in the TAA creating an express trust in favor of the
Banks over the refunds (such as provisions restricting FBOP’s use of the tax refunds,
requiring that the funds be placed in an escrow upon their receipt, or obligating
FBOP to maintain them in a segregated account, see, e.g., In re Downey Fin. Corp.,
593 Fed. App’x at 127; In re United W. Bancorp, Inc., 558 Bankr. at 427; In re
IndyMac Bancorp, Inc., 554 Fed. App’x at 670; In re Team Fin. Inc., 2010 WL
1730681 at *5), shows a clear intent to create a debtor-creditor relationship. The
57
FDIC is not arguing that an express trust was created by the TAA. Instead, the
FDIC’s argument is that the Banks did not intend, by entering into the Agreement,
to transfer their property rights in tax refunds, and consequently that a resulting
trust should be applied over the tax refunds. See AmFin Fin. Corp., 757 F.3d at 537
(“the FDIC never argued that the TSA created an express trust; rather, the FDIC
urges the court to find an implied resulting trust”) (emphasis in original). As the
Eleventh Circuit stated, “the absence of language requiring a trust or escrow [does
not have] much persuasive value. That factor is offset entirely by the similar absence
of any language indicative of a debtor-creditor relationship—e.g., provisions for
interest and collateral.” In re NetBank, Inc., 729 F.3d at 1352. Moreover, under
Illinois law, money “need not be held in a segregated account” for it to be subject to a
conversion claim, so long as it is “sufficiently identifiable” such as “where a specific
amount is transferred to the recipient from an outside source.” Gates v. Towery, 435
F. Supp. 2d 794, 801 (N.D. Ill. 2006). Thus, the Banks’ failure to insist on a provision
in the TAA that would have required the segregation or escrowing of tax refunds does
not necessarily mean that the Banks intended to give up their property interests in
those funds.
In addition, contrary to the FBOP Defendants’ suggestion, the TAA specifically
provides that FBOP was not free to do whatever it wanted with the tax refunds.
Section 9 requires FBOP to distribute tax refunds to the Banks according to the
58
allocation rules set out in that paragraph. 42 Thus, the Court “find[s] no words in the
[TAA] from which it could reasonably be inferred that the parties agreed that the
[parent] Company would retain the tax refunds as a company asset and, in lieu of
forwarding them to the Bank[s], would be indebted to the Bank[s] in the amount of
the refunds.” In re BankUnited Fin. Corp., 727 F.3d at 1108. As the Eleventh Circuit
found in the BankUnited case, the Court finds that the absence of language requiring
FBOP to turn tax refunds over to the Banks does not negate FBOP’s duty to do so
when the Agreement provides that FBOP was to distribute tax refunds among
members of the Consolidated Group according to the amount due each member after
application of the pertinent allocation rules. 43 The distributive obligation imposed on
Although the FBOP Defendants repeatedly state that FBOP was free to forgo
receipt of an actual refund and instead receive a future tax credit in its place, they
fail to cite any provision of the TAA that gives FBOP such decision-making authority,
and the Court’s own review has not found any. In cases on which the FBOP
Defendants rely for this argument, the tax allocation agreement at issue contained
specific language to that effect. See, e.g., In re Downey Fin. Corp., 593 Fed. App’x at
127 n.5 (where tax allocation agreement provided that parent company had “the
right, ‘in its sole discretion,’ . . . (iii) to file, prosecute, compromise or settle any claim
for refund; and (iv) to determine whether any refunds to which the consolidated
group may be entitled shall be paid by way of refund or credited against the tax
liability of the consolidated group.”) (emphasis in original). No comparable language
can be found in the TAA. And even if the TAA gave FBOP this authority, it is not
particularly relevant here because this case does not involve a situation where FBOP
elected not to receive the tax refunds. See, e.g., In re NetBank, Inc., 729 F.3d at 1351
(“We need not decide what NetBank’s obligation to reimburse the Bank would be if
NetBank elected not to receive a refund because those are not the facts in front of
us.”).
42
The FBOP Defendants argue that In re BankUnited Financial Corp. is
distinguishable because the tax sharing agreement at issue there appointed one of
the banks as the principal operating entity for the consolidated group and required
that bank to pay the parent company the total tax liability of the subsidiaries. The
other subsidiaries would then reimburse the principal bank for their share of the tax
liability. The agreement also provided that the principal bank would pay the other
43
59
FBOP by § 9 necessarily implies that FBOP did not have the right to keep the tax
refunds. Perhaps the Banks should have ensured that provisions were included in
the TAA that expressly stated what was implied. But the Court cannot infer solely
from the absence of such provisions that the Banks intended to give up their
ownership interest in tax refunds. 44
d.
PRINCIPAL-AGENT ISSUE
The FBOP Defendants also make a number of arguments based on the TAA
and agency law, none of which the Court finds persuasive. To begin with, the Court
rejects the FBOP Defendants’ reliance on the absence of language in the TAA
creating a principal-agent relationship between FBOP and the Banks. See, e.g., In re
subsidiaries any tax refund to which they were entitled. The Eleventh Circuit held
that, although there was no requirement in the agreement that the parent company
pay the tax refunds to the principal bank, such a requirement was implicit in the fact
that the principal bank had a contractual obligation to distribute those refunds to the
other subsidiaries. That the agreement in In re BankUnited Financial Corp. used one
of the group members as an intermediary for collection and distribution does not
change the ultimate and relevant fact that the agreement required the tax refunds to
be distributed among the entities that paid the taxes. Similarly, § 9 of the TAA does
the same here. That distribution requirement was the reason the Eleventh Circuit
inferred an obligation by the parent to pay the refunds to the principal bank, not the
fact that the entity with the contractual duty to make the distribution was the
principal bank rather than the parent company itself.
See RESTATEMENT (SECOND) OF CONTRACTS § 204 & cmt. b, (stating that if the
parties “fail to foresee the situation which later arises,” or “fail to manifest” their
intentions “because the situation seems to be unimportant or unlikely, or because
discussion of it might be unpleasant or might produce delay or impasse,” the court
may supply a term “which is reasonable in the circumstances.”); see also Alliance for
Water Efficiency v. Fryer, 2014 WL 5423272, at *6 (N.D. Ill. Oct. 22, 2014) (“‘[A]
contract includes, not only the promises set forth in express words, but, in addition,
all such implied provisions as are indispensable to effectuate the intention of the
parties and as arise from the language of the contract and the circumstances under
which it was made.’” (quoting Sacramento Navigation Co. v. Salz, 273 U.S. 326, 329
(1927)).
44
60
Downey Fin. Corp., 593 Fed. App’x at 126. The FDIC does not argue that the Banks’
property interest arises from an agency relationship established by the TAA; its
argument is that the Banks’ property interest arises from the default tax refund
ownership rule. Moreover, any argument that the TAA affirmatively gives FBOP the
right to control all tax matters, see, e.g., In re IndyMac Bancorp, Inc., 554 Fed. App’x
at 670, is not only irrelevant but also factually untrue. 45
The FBOP Defendants also argue that a transfer in ownership rights to tax
refunds can be inferred from the fact that the “actual refunds from the IRS were paid
to and in the name of FBOP.” R. 145 at 12. But it is beyond dispute that the reason
the IRS paid the refunds to and in the name of FBOP was because of the procedural
requirements of 26 C.F.R. § 1.1502-77, which make the parent company the agent of
the subsidiary group members for purposes of dealing with the IRS. And every court
The provisions on which the FBOP Defendants rely to show that FBOP had
complete control over all tax matters of the Consolidated Group relate primarily to
the administrative process by which tax payments are collected and then remitted to
the IRS. FBOP has no discretion regarding which member of the Group ultimately
gets to enjoy the benefit of tax attributes or has to pay the tax liabilities, or whether
any Group member must be compensated or paid a refund, and if so, how much.
Those matters are resolved by the rules set forth in the Agreement. Further, several
provisions give the Banks substantial substantive control. See R. 145 at 45 (¶ 15)
(stating that “[t]he allocation of taxes and tax benefits provided for in this Agreement
shall be reviewed by the Subsidiary’s Auditors in connection with their annual
audit,” and that, “[s]ubject to any subsequent adjustments provided for in Section 9
above, [the Auditors’] approval shall be final and conclusive as respecting the rights
and obligations of each of the members of the affiliated group in the allocation of
taxes and/or tax benefits.”); id. at 46 (¶ 17) (giving the Banks’ Chief Financial
Officers the “discretion” to authorize cash payments for tax benefits in lieu of credits
and to apply credits against any outstanding loans owed to FBOP). FBOP’s right to
amend the TAA unilaterally also is limited and applies only to matters that either
are outside of both parties’ control or do not affect the Banks’ substantive rights. See,
e.g., R. 145 at 47 (Adoption Agreement, ¶ 3).
45
61
that has considered the issue has adopted the view of the Bob Richards court that
those procedural requirements do not establish a transfer of ownership interests in
the tax refunds to the parent company. 46
Further, to make clear that FBOP received tax refunds from the IRS only in
its capacity as agent for the Banks pursuant to 26 C.F.R. § 1.1502-77, the TAA refers
to that regulation in § 11, which provides:
It is understood and acknowledged that in accordance with
the consolidated federal and state income tax regulations
consented to, FBOP is the sole agent for the affiliated
group respecting the payment of federal and state income
taxes and the claiming of refunds.
R.145 at 45 (emphasis added). The FBOP Defendants argue that this provision does
not establish a general agency relationship between the Banks and FBOP because it
merely incorporates the limited procedural agency rule of the federal regulation. But
the FBOP Defendants miss the point of the FDIC’s argument based on § 11. The
FDIC does not claim that the Banks’ ownership interest in the tax refunds arises out
of an agency relationship created by either 26 C.F.R. § 1.1502-77 or § 11 of the TAA.
Instead, the FDIC is saying that § 11 confirms the applicability of the default, gapfilling tax refund ownership rule. See In re NetBank, Inc., 729 F.3d at 1351 (resolving
ambiguity in similar agency language of tax allocation agreement by reference to
circumstances surrounding execution of the agreement and other provisions in the
See Bob Richards, 473 F.2d at 265 (“The only reason for the tax refunds not being
paid directly to the subsidiary is because income tax regulations require that the
parent act as the sole agent, when duly authorized by the subsidiary, to handle all
matters relating to the tax return. . . . But these regulations are basically procedural
in purpose and were adopted solely for the convenience and protection of the federal
government.”).
46
62
agreement); 47 see also Lubin, 2011 WL 825751, at *6 (“the language of the Tax
Agreement is clear that an agency relationship was intended, particularly when
Bancshares ‘receives a tax refund from a taxing authority’”).
Finally, the FBOP Defendants also suggest that by virtue of the TAA, FBOP
assumed the Banks’ tax liability vis a vis the IRS. See R. 145 at 12, 24 (“FBOP
remained liable to the IRS for the entirety of the Consolidated Group tax liability,
without regard to whether FBOP had, in fact, received estimated tax payments from
its Subsidiaries.”). But FBOP remained liable for the entire amount of the taxes owed
by the Consolidated Group because the applicable statutory and regulatory
provisions made FBOP liable, just as they make all members of the Group liable for
the entire tax liability of the Group. This statutory liability is not relevant to the
contractual issue of whether the parties intended to transfer the Banks’ ownership
interests in the tax refunds to FBOP.
3.
THE
TAA
AFFIRMATIVELY
REFLECTS
A
CONTRACTUAL INTENT TO MAINTAIN THE DEFAULT
TAX REFUND OWNERSHIP RULE
The FDIC argues that the FBOP Defendants not only rely on sections of the
TAA that address only the allocation of tax liability and benefits, but they also ignore
explicit provisions in the TAA that affirmatively demonstrate that the parties did not
intend to override the default tax refund ownership rule. The Court agrees.
The FBOP Defendants argue that the language appointing the parent as the agent
of the banks in NetBank is “meaningfully distinct or simply absent from the TAA,”
R. 145 at 23 n.17, while failing to explain in what way that is so. In any event, the
Eleventh Circuit’s ruling, as noted, did not turn on this language, which the court
found to be ambiguous.
47
63
a.
NO LESS FAVORABLE PRINCIPLE
To begin with, the parties state in the TAA that it is their intent “that in no
event will [the Banks] be required to contribute a share of the consolidated tax
liability for the year in an amount in excess of that which [they] would have incurred
for that particular year on the basis of separate federal and state income tax
returns.” R. 145 at 41 (Sixth Whereas clause). Indeed, the idea that the Banks would
not pay any more taxes under the TAA than if they had filed separately is “at the
core,” In re NetBank, Inc., 729 F.3d at 1350, of the TAA. If the Banks are denied their
appropriate share of the tax refunds, they will have paid more in taxes than had they
filed separately, thereby defeating the “paramount purpose,” In re BankUnited Fin.
Corp., 727 F.3d at 1108, of that Agreement.
Further, the TAA states “that any permanent benefit accruing to the affiliated
group by reason of the filing of a consolidated return shall be enjoyed by the member
to which the benefit is attributed or otherwise shared in proportion to the respective
amounts of tax liability incurred on the basis of separate returns for the year, . . .
regardless of the possibility that the benefit . . . may not have been enjoyed under
separate federal and state income tax returns.” Id. (Sixth Whereas clause). This
stated intent specifically applies to the recovery of taxes paid in prior years.” Id.
(Fourth Whereas clause) (emphasis added). The “permanent benefit” of net operating
losses—which would have led to the “recovery of taxes paid in prior years” if the
subsidiary that suffered the loss had filed taxes separately—would not be enjoyed by
the member to which the benefit is attributed (the Banks) if that member is held to
have only a contractual right in the tax refunds and the party owing the member that
64
contractual right (FBOP) is unable or unwilling to fulfill its contractual obligation.
See In re First Reg’l Bancorp, 560 Bankr. at 785 (“An implied tax-sharing agreement
that would require the Bank to relinquish its rights to the Refund that is attributable
to the Bank’s own losses directly conflicts with Debtor’s obligation to ‘do nothing to
benefit itself financially at the expense of the financial condition of’ the Bank.”); In re
BSD Bancorp., slip op. at 16 (same). 48 The FBOP Defendants argue that interpreting
the Agreement as creating a debtor-creditor relationship is not inconsistent with
these provisions because the Banks’ rights under the tax allocation agreement are
the same—those rights are just contractual in nature rather than a property interest.
But that argument ignores the function of the court in interpreting a contract, which
is to give effect to the parties’ intent. Thus, the question is not whether it is possible
to reconcile these provisions with a debtor-creditor relationship but whether a debtorcreditor relationship was likely intended in light of those provisions. The Court can
think of no reason why that would be the case.
b.
THE 1998 POLICY STATEMENT
The TAA does not just contain basic principles that are fundamentally
inconsistent with an intent to give up property rights in favor of a contractual right.
The TAA also contains language that affirmatively indicates an intent not to give up
property rights in tax refunds. The language in question is found in the Fifth
Whereas clause, where the parties state their intention of accounting for the separate
The FBOP Defendants try to distinguish In re First Reg’l Bancorp and In re BSD
Bancorp by arguing that they did not involve tax allocation agreements. But the
portion of those opinions on which the FDIC relies involve the courts assuming that a
tax allocation agreement did in fact exist.
48
65
tax liabilities and benefits of each group “consistent with . . . the Policy Statements of
the Board of Governors of the Federal Reserve regarding the allocation of taxes
between members of an affiliated group.” R. 145 at 41 (Fifth Whereas Clause). The
Policy Statements of the Board of Governors of the Federal Reserve include the 1998
Policy Statement. 49 And, as previously noted (where the language is quoted in full),
The Court rejects the FBOP Defendants’ argument that “the TAA’s general
mention” of policy statements of the Board of Governors of the Federal Reserve “is
not a clear and specific reference to the 1998 Policy Statement.” R. 156 at 30. The
1998 Policy Statement clearly falls within the Fifth Whereas clause’s reference to
“Policy Statements of the Board of Governors of the Federal Reserve regarding the
allocation of taxes between members of an affiliated group.” See 1998 Policy
Statement, 63 Fed. Reg. 64757-01 at 64758, 1998 WL 804364 (“The Federal Deposit
Insurance Corporation, the Board of Governors of the Federal Reserve System, the
Office of the Comptroller of the Currency, and the Office of Thrift Supervision (‘the
Agencies’) are issuing this policy statement to provide guidance to banking
organizations and savings associations regarding the allocation and payment of taxes
among a holding company and its subsidiaries.”) (emphasis added). The FBOP
Defendants rely for their argument on the Indymac bankruptcy court opinion, but
the relevant language in the tax allocation agreement there did not include any
reference to “Policy Statements” of the Federal Reserve. See In re Indymac Bancorp,
Inc., 2012 WL 1037481, at *36 (provision in question referred to “penalties for
violating the rules of the OTS or the FDIC”). The FBOP Defendants also point out
that the Fifth Whereas clause appeared in previous versions of the TAA before the
1998 Policy Statement was even issued. They argue that the language in the 1998
Policy Statement referencing property rights in tax refunds did not appear in the
versions of the Policy Statement that were in effect when the previous versions of the
TAA were entered into, and therefore that the reference in the current TAA to Policy
Statements cannot be read to include the 1998 Policy Statement. That argument,
however, falters on the principle that contractual intent does not refer to the parties’
actual subjective intent. See Empro Mfg. Co. v. Ball-Co Mfg., Inc., 870 F.2d 423, 425
(7th Cir. 1989) (“‘intent’ in contract law is objective rather than subjective”).
Understood this way, the parties’ objective intent as stated in the Fifth Whereas
clause was to adhere to the policies for tax allocation agreements propounded by the
Board of Governors of the Federal Reserve. This intent did not change in any of the
iterations of the TAA, even if the Policy Statements of the Board of Governors of the
Federal Reserve did. The fact that FBOP may not have had a subjective
understanding or awareness of the contents of the 1998 Policy Statement is
irrelevant. By signing the TAA with the Fifth Whereas clause in it, FBOP expressed
49
66
the 1998 Policy Statement expressly states that tax allocation agreements between
banks and their parent bank holding companies “should not purport to characterize
refunds attributable to a subsidiary depository institution that the parent receives
from a taxing authority as the property of the parent.” 63 Fed. Reg. at 64759, 1998
WL 804364.
The Eleventh Circuit considered similar contract language, 50 and held that the
parties to that tax allocation agreement did not intend by entering into the
agreement to divest the banks of their ownership interest in tax refunds. In re
NetBank, Inc., 729 F.3d at 1351. The FBOP Defendants argue that In re NetBank is
inapposite because the provision in the tax allocation agreement at issue in that case
expressing an intent to comply with the 1998 Policy Statement appeared in the
contract itself, rather than in a preliminary “Whereas” clause. According to the
FBOP Defendants, statements contained in preliminary recitals in a contract do not
create enforceable contractual obligations unless there is language in the contract
specifically incorporating the recitals into the agreement. But the Eleventh Circuit’s
analysis of the 1998 Policy Statement did not turn on the conclusion that compliance
with it was a contractual obligation of the parties to the tax allocation agreement.
Rather, the Eleventh Circuit relied on the provision as an indicator of the parties’
contractual intent regarding the ownership issue. See id. at 1350 & n.7 (holding that
a contractual intent to follow the Policy Statements of the Board of Governors of the
Federal Reserve Board, and that objective manifestation of intent is what controls.
See In re NetBank, Inc., 729 F.3d at 1350 (“[T]he TSA itself expressly provides:
‘This Agreement is intended to allocate the tax liability in accordance with the [Policy
Statement].’”).
50
67
“the cardinal rule of contract interpretation” (under Georgia law, in that case) “is to
ascertain the intention of the parties,” and the contract provision referencing the
Policy Statement was “a clear expression . . . that the intent of the parties was to
comply with the Policy Statement”).
Similarly, here, the Court must “give effect to all the relevant contractual
language to resolve the question of the parties’ intent,” and “[t]his includes the
contract recitals.” Hagene v. Derek Polling Constr., 902 N.E.2d 1269, 1274 (Ill. App.
2009). “The contract recitals create a context through which the operational portion
of the contract can be better understood, because they indicate the relevant
circumstances to its execution.” Id. (internal quotation marks and citations omitted).
The Court looks to the recitals “not as a statement of obligation in itself but as an aid
to construing an obligation elsewhere in the contract.” Cress v. Recreation Servs.,
Inc., 795 N.E.2d 817, 838 (Ill. App. 2003). Indeed, “[i]t would be illogical to ignore the
recitals that are included on the same page as the body of the [contract] and are so
indicative of the surrounding circumstances relevant to its execution.” First Bank &
Tr. Co. of Ill. v. Vill. of Orland Hills, 787 N.E.2d 300, 3011 (Ill. App. 2003).
The FBOP Defendants also argue that In re NetBank is distinguishable
because it incorporated the actual language from the 1998 Policy Statement in the
agreement itself. See R. 145 at 23 n.17. But that is inaccurate. The language of the
1998 Policy Statement about not characterizing tax refunds attributable to a
subsidiary bank as the property of the parent corporation was not included directly
in the NetBank agreement. Instead, the NetBank agreement incorporated other parts
68
of the 1998 Policy Statement. And what the FBOP Defendants do not acknowledge is
that most if not all of those same items from the 1998 Policy Statement that were
incorporated into the NetBank agreement also are incorporated in the TAA. 51
Ultimately unable to distinguish In re NetBank, the FBOP Defendants simply call
that case an “outlier in tax refund jurisprudence.” R. 166 at 20. The Court disagrees.
The only other appellate decisions to address the tax refund ownership issue are the
Third, Ninth, and Sixth Circuits. The Sixth Circuit cited favorably to the Eleventh
Circuit’s decision in NetBank. See AmFin Fin. Corp., 757 F.3d at 534-35. Moreover,
while the Third and Ninth Circuits ruled in favor of the FBOP Defendants’ position,
those decisions are both unpublished, non-precedential opinions, while the three
appellate decisions finding in favor of the FDIC’s position are not.
The FBOP Defendants also repeat a number of arguments addressed by the
Indymac bankruptcy court for discounting the 1998 Policy Statement. For instance,
the Indymac bankruptcy court agreed with the argument that the 1998 Policy
Statement is actually consistent with interpreting a tax allocation agreement as
transferring the subsidiary bank’s ownership rights to the parent company. See 2012
WL 1037481, at *40 n.28. According to the Indymac bankruptcy court, the Policy
The provisions that were incorporated in the NetBank agreement, 729 F.3d at
1348, which are also found in the TAA, include the requirements that (1) tax
remittances from the banks to the parent company should not exceed the amount
that each bank would have paid in taxes had it filed separately (TAA, § 1)); (2) tax
payments from the banks to the parent company should not be made significantly
before the banks would have been obligated to pay the taxing authority had it filed as
separate entity (TAA, § 10); and (3) should the banks incur a tax loss, they should
receive a refund from the parent company in an amount no less than the amount the
banks would have received as a separate entity, regardless of whether the
consolidated group as a whole was receiving a refund (TAA, § 4).
51
69
Statement encourages tax allocation agreements, and, as a result, the “single,
precatory sentence” in that Statement admonishing that such agreements not
purport to characterize tax refunds as the property of the parent “must be
interpreted in the context of the Policy Statement as a whole and its general
purpose.” Id. The court said that, “[s]o interpreted, the only logical meaning of this
provision is that the agencies might consider it an unsafe or unsound practice for a
parent to keep all of a group’s refunds free and clear without a corresponding
reimbursement obligation to the subsidiary.” Id. This Court does not find the
IndyMac bankruptcy court’s reasoning persuasive. An interpretation of the tax
allocation agreement in which the parent owned the tax refunds with only a
corresponding reimbursement obligation to the subsidiary that is contractual in
nature is most certainly inconsistent with the 1998 Policy Statement’s admonition
against characterizing tax refunds as property of the parent. The two positions
cannot be reconciled by the simple expedient of “interpreting” the language of the
1998 Policy Statement to mean something other than what it plainly says.
Nor does the Court agree with the Indymac bankruptcy court’s related
conclusion that accepting the plain meaning of the 1998 Policy Statement “ignores
and nullifies those provisions in the Policy Statement, among others, describing the
parent’s obligation to ‘reimburse’ the subsidiary and to do so even if the parent never
receives refunds,” id., as the Court already has explained in its discussion of § 3 of
the TAA. Moreover, contrary to the Indymac bankruptcy court’s suggestion, the fact
that the language of the Policy Statement was not changed even after several courts
70
interpreted tax allocation agreements as transferring ownership rights in tax refunds
to the parent company, is not persuasive evidence of the meaning of the Policy
Statement. See id. (“the Court finds this silence in the face of established law to be as
instructive as any words used in the Policy Statement”). The language of the Policy
Statement is not ambiguous; it clearly and unambiguously states that tax allocation
agreements should not give parent bank holding companies ownership rights in tax
refunds that would otherwise belong to its subsidiary banks. The Court does not need
to look to a purported subsequent failure to alter the language of the Policy
Statement to construe the sentence in the Policy Statement about not characterizing
tax refunds as property of the parent company according to its plain import. 52
4.
PAROL EVIDENCE ISSUES
Although neither party has requested that the Court convert the present
motions for judgment on the pleadings into motions for summary judgment, both
parties have either submitted or discussed extrinsic evidence concerning the meaning
The FBOP Defendants also argue (1) that the 1998 Policy Statement is parol
evidence, which cannot be considered to contradict the “unambiguous language” of
the tax allocation agreement, and (2) that the 1998 Policy Statement is “nonbinding.” These arguments were accepted by the IndyMac bankruptcy court, see 2012
WL 1037481 at *39, but are inapplicable here, because the TAA states that the
parties intended to comply with the 1998 Policy Statement, unlike the tax allocation
agreement in the Indymac case, which did not refer to the Policy Statement at all.
Therefore, the 1998 Policy Statement is not inadmissible parol evidence in this case
and its non-binding nature is irrelevant to the contract interpretation question.
Moreover, the Court agrees in any event with the Eleventh Circuit, which stated that
even if the 1998 Policy Statement were not specifically referenced in the tax
allocation agreement, it should still be considered as part of the circumstances
surrounding the parties’ execution of the agreement. See In re NetBank, Inc., 729
F.3d at 1350 (“When considering the background against which the TSA was entered
into, we consider particularly the [1998 Policy Statement].”).
52
71
of the TAA. The extrinsic evidence referred to by the FDIC includes emails, financial
reports prepared by FBOP, and Call Reports 53 filed by the Banks. With respect to the
latter two categories, the FDIC alleges that:
Each of the Banks filed quarterly . . . [Call Reports] with the
Federal Financial Institutions Examination Council[ 54] covering the
period from September 2008 through September 2009. [R. 35 (¶ 172).] In
the Call Reports, the Banks represented to their regulators, including
the OCC, that the Banks’ deferred tax assets were the Banks’ property
and included such assets as part of their capital. [Id. (¶ 176)].
On October 14, 2008, FBOP applied for TARP funds . . ., which
TARP Application was executed by FBOP’s Chairman, Michael E. Kelly
. . . . In the course of submitting the TARP application, FBOP
represented to the OCC that the Banks’ deferred tax assets, including
the right to claim tax refunds, were the Banks’ property and were
included as such in determining the Banks’ capital ratios[, and] . . . that
the Banks’ deferred tax assets, including the right to claim tax refunds,
were not FBOP’s property. [Id. (¶¶ 169-171)].
In November 2008, Mr. Daniel Mandarino, the Vice President of
FBOP, sent the OCC portions of the Banks’ records to support the
Banks’ inclusion of deferred tax asset “carry forwards” in their
regulatory capital ratios. FBOP knew the content of the records
Mr. Mandarino sent to the OCC. Those records reflected that the Banks
owned the tax refunds and did not reflect that the Banks’ deferred tax
assets were in the nature of a receivable FBOP owed to the Banks. [Id.
(¶ 167)].
In November 2008, Mr. Dunning, the Chief Financial Officer of
FBOP, sent the OCC portions of the Banks’ records describing the
deferred tax assets included in the Banks’ capital as of September 30,
2008. FBOP knew the content of the records Mr. Dunning sent to the
OCC. The Banks’ records reflected that the Banks owned the tax
See R. 35 (¶ 173) (“A bank, in its Call Reports, represents its financial condition,
capital ratios, income, and certain risk factors to its regulators. Banks are required to
file Call Reports under 12 U.S.C. § 1817(a)(3).”).
53
See R. 35 (¶ 174) (“The Federal Financial Institutions Examination Council
includes, among others, the FDIC, the Board of Governors of the Federal Reserve,
and the OCC.”).
54
72
refunds. The Banks’ records did not reflect that the Banks’ deferred tax
assets were in the nature of a receivable owed by FBOP to the Banks.
[Id. (¶ 168)].
On November 5, 2008, based upon, among other things, the
representations made by FBOP, the OCC sent FBOP a letter (the “OCC
Waiver”), in which the OCC permitted the Banks it regulated to include
in their capital ratios all deferred tax assets that they could reasonably
expect to use to offset future taxable income in the ensuing four years,
even if those deferred tax assets exceeded ten percent (10%) of their Tier
1 capital. The OCC scheduled the OCC Waiver to expire at the earlier of
the second quarter of 2009 or FBOP’s receipt of TARP funds. [Id.
(¶ 164)].
But for the Banks’ inclusion of their deferred tax assets in their
capital and the OCC Waiver, California Bank, FBOP’s largest
subsidiary Bank, would have been deemed critically undercapitalized as
early as September 30, 2008. [Id. (¶ 234)].
Under Illinois law, the parties’ course of performance is admissible to help to
resolve contractual ambiguities. See Kinesoft Dev. Corp. v. Softbank Holdings Inc.,
139 F. Supp. 2d 869, 890-91 (N.D. Ill. 2001) (citing Barney v. Unity Paving, Inc., 639
N.E.2d 592, 595-96 (Ill. App. 1994) (“It is a firmly established principle of contract
interpretation that courts should give great weight to the parties’ interpretation of
the contract because the parties are in the best position to know what was intended
by the language employed.”); Chi. & N.W. Ry. Co. v. Peoria & Pekin Union Ry. Co.,
360 N.E.2d 404, 407 (Ill. App. 1977) (in case of ambiguity, court relied on parties’
course of performance as evidence of their “settled construction”); and N.Y. Cent. Dev.
Corp. v. Byczynski, 238 N.E.2d 414, 416 (Ill. App. 1968) (in addition to parol evidence,
courts can admit evidence of parties’ acts or course of performance to interpret what
parties intended as to essential matters on which the contract is silent)). Thus, the
FDIC’s course of performance evidence referenced in the Amended Complaint is
73
highly relevant and would be admissible to determine the meaning of the TAA if the
Court were to find an ambiguity exists on the tax refund ownership question.
The FBOP Defendants also refer to extrinsic evidence in arguing that their
interpretation of the TAA is correct. The extrinsic evidence to which they refer is the
responses to written questions from Congress submitted by the then-current Director
of the FDIC’s Receivership Division, Mitchell Glassman. According to the FBOP
Defendants, Congress was concerned with whether the government’s seizure of the
Banks could have been avoided by the enactment of the WHBAA, which became law
one week after federal regulators placed the Banks into receivership. Mr. Glassman
was asked whether certain deferred tax assets and their resulting refunds could have
added to the regulatory capital of the Banks, thereby avoiding the government
seizure. Mr. Glassman responded that “Park National’s [one of the Banks] deferred
tax asset . . . should have been disallowed from regulatory capital,” because “[a]ny tax
benefit available to carry back to previous years was a receivable from FBOP [and]
. . . FBOP did not have the capacity to refund taxes up-streamed . . . in previous
years,” such that the Park National’s “ability to recognize a tax benefit in the near
future was doubtful.” R. 145 at 34.
The Glassman testimony is not as compelling as the FDIC’s course of
performance evidence. To begin with, the Court rejects the FBOP Defendants’
argument that the Glassman testimony is subject to judicial notice for the truth of
the matters asserted. The Court may only take judicial notice of the indisputable fact
that the testimony was given and says what it says. See Indep. Trust Corp. v. Stewart
74
Info. Servs. Corp., 665 F.3d 930, 943 (7th Cir. 2012). The Court cannot take judicial
notice of the testimony for substantive purposes because the meaning and import of
the testimony are in dispute. See Fed. R. Evid. 201(b)(2) (for a court to take judicial
notice of a fact, the fact must not be “subject to reasonable dispute because it . . . can
be accurately and readily determined from sources whose accuracy cannot reasonably
be questioned”); see also Indep. Trust Corp., 665 F.3d at 943 (holding that the district
court properly did not rely on judicially noticed documents “as proof of disputed
facts”).
In addition, even if the Court considered the Glassman testimony, and even if
the Court also fully credited the FBOP Defendants’ explanation of the meaning of
that testimony despite credible arguments made by the FDIC to the contrary,
Mr. Glassman is not a party to the TAA. His testimony was in relation to the decision
of the Banks’ regulators to close the Banks, not to the meaning of the TAA or the
Banks’ and FBOP’s intent regarding ownership of tax refunds. The Court therefore
sees only minimal relevance to his testimony to the issues in this case. Finally, even
if the Glassman testimony could be imputed to the FDIC (a proposition that the
FBOP Defendants have not established), at most the testimony would go to the
credibility of the FDIC in taking a contrary factual and/or legal position in this
matter from the position Mr. Glassman supposedly took before Congress. While that
might be marginally helpful to the FBOP Defendants, the Court doubts it would be of
sufficient persuasive value to overcome the course of performance evidence to which
the FDIC alludes.
75
Nevertheless, even assuming that the Glassman testimony would be otherwise
admissible to determine the meaning of the TAA, the Court has determined that any
ambiguity in the TAA can be resolved within the four corners of that document by
reference to established rules of contract interpretation. See USG Corp. v. Sterling
Plumbing Grp., Inc., 617 N.E.2d 69, 71 (Ill. App. 1993) (“An ambiguity is not created
by the mere fact that, as here, the parties do not agree upon an interpretation.”).
Accordingly, the Court declines to consider either side’s extrinsic evidence. If the
Court were to hold otherwise, it would have to convert the present motions for
judgment on the pleadings into motions for summary judgment, and allow the parties
an opportunity for further discovery if needed. This is the approach that was taken in
AmFin Financial Corp., where the Sixth Circuit remanded for consideration of
extrinsic evidence to resolve the ambiguity created by the tax sharing agreement.
The tax allocation agreement in that case, however, did not refer to the 1998 Policy
Statement. Moreover, the Sixth Circuit rejected consideration of a default tax refund
ownership rule because it believed that rule derived solely from the Bob Richards
case, which it held did not apply because it was based on federal common law. 757
F.3d at 536. As discussed earlier, this Court does not agree with that view of the Bob
Richards case and the applicable default rule. 55 This Court finds that the TAA must
This Court instead agrees with the concurring opinion in AmFin Financial Corp.,
which expressed the opinion that the Bob Richards decision could not be read “as
requiring an ‘either-or’ choice between federal and state law.” 757 F.3d at 538. The
concurring opinion stated that the correct protocol was “[f]irst look to the tax-sharing
agreement (TSA) to settle the refund issue. But if the TSA is ambiguous, then
determine whether an agreement between the parties can be implied under state
law. And if that inquiry also proves inconclusive, then the loss belongs to the entity
55
76
be construed in light of the Illinois default tax refund ownership rule. The TAA does
not clearly override that default rule, which therefore fills in the gaps in that
Agreement to provide the applicable ownership rule that the parties intended but
failed to express.
IV.
THE FDIC’S RULE 12(c) MOTION FOR JUDGMENT AS A MATTER OF
LAW ON COUNTS I-II
The FDIC’s cross motion for judgment on the pleadings seeks an order
declaring it the owner of the entire amount of the Escrowed Refunds. While the
Court has interpreted the TAA as according ownership rights in the tax refunds to
the Banks as a matter of law, it cannot tell from the parties’ briefs whether it can
rule on the current record that the FDIC is entitled to recover the entire amount of
the Escrowed Refunds.
To decide how much of the Escrowed Refunds the FDIC may recover, it is
necessary to determine, first, what portion of the Escrowed Refunds represent
refunds owed to the Banks under the allocation rules in § 9 of the TAA; and second,
whether any portion of that amount is in excess of the funds transferred by the
Banks to FBOP as their share of the Consolidated Group’s tax payments for the
years in question. While the FDIC alleges that the Banks are entitled to the entire
amount of the tax refunds and that the entire amount of the taxes paid by the
Consolidated Group was paid by the Banks, 56 the FBOP Defendants deny these
that generated the tax refund because federal tax law does not change the ownership
of the refund.” Id. at 539-40. This Court’s opinion follows a similar path.
56
See R. 35 (¶¶ 2, 21, 28, 129, 429, 459, 479, 562).
77
allegations in their answers. 57 The FBOP Defendants state in their brief that they
admit “for purposes of this motion only” that the tax refunds “were paid by the IRS on
account of (i) a Consolidated Group NOL for the 2009 tax year and (ii) the return of
overpayments made to the IRS by FBOP for the 2008 and 2009 tax years.” R.145 at
17 n.12 (emphasis added). They further state that they reserve their rights “to
dispute this contention based upon, among other things, the amended tax returns
filed by FBOP in 2011 claiming refunds arising from a worthless stock deduction
based upon FBOP’s investment in the FBOP Banks. (See Compl. ¶ 128.).” Id. 58
The parties’ abbreviated statements regarding the amount of the tax refunds
to which the FDIC would be entitled if the Court were to rule in its favor on the tax
refund ownership question are insufficient for the Court to make a final ruling on
that issue. The Court therefore directs the parties to meet and confer on any
outstanding factual issues regarding the FDIC’s cross-motion for judgment on the
pleadings. The parties shall file a joint status report explaining their respective
See R. 44 (¶¶ 2, 21, 28, 129, 429, 459, 479, 562); R. 45 (¶¶ 2, 21, 28, 129, 429, 459,
479, 562).
57
The FBOP Defendants argue that “the Escrowed Refunds are not solely
attributable to the losses of the FBOP Banks,” R. 166 at 23 n.17, but do not make any
argument contradicting the FDIC’s assertion that the Banks paid the entire amount
of the taxes. The Court infers that the FBOP Defendants do not in fact dispute the
latter point; however, the Court will allow the FBOP Defendants to either confirm or
deny whether the Court’s inference is correct. If it is, then the only relevant question
is not, as the FBOP Defendants contend, whether any part of the Escrowed Refunds
are solely attributable to the losses of the FBOP Banks, but rather whether any
portion of the tax refunds would not be payable to the Banks under the allocation
rules set forth in § 9 of the TAA. The Court assumes that the FBOP Defendants’
contention regarding a portion of the 2009 being attributable to the losses of FBOP,
as opposed to the Banks, would if true affect the allocation under § 9, but will leave it
to the parties to explain further.
58
78
positions, detailing the exact factual issues, if any, that remain in dispute, taking a
position as to whether the FDIC’s Rule 12(c) motion must be converted into a motion
for summary judgment, and proposing a joint plan for resolving disputed fact issues,
including discovery if needed with proposed deadlines. If the parties cannot reach
agreement on a joint plan, then each side should set forth their respective position
with areas of disagreement indicated.
V.
THE FBOP DEFENDANTS’ RULE 12(c) MOTION ON THE FDIC’S
ALTERNATIVE LEGAL AND EQUITABLE CLAIMS—COUNTS III-VII
The FBOP Defendants argue that judgment in their favor on the FDIC’s
alternative claims in Counts III through VII is appropriate because those claims are
also barred by FBOP’s ownership rights in the tax refunds under the TAA. The Court
has found that FBOP does not have ownership rights in the tax refunds to the extent
that the Banks have a right to those refunds under § 9 of the TAA and the Banks
paid the taxes out of which those refunds arise. Therefore, the FBOP Defendants’
motion for judgment on the FDIC’s alternative counts must be denied. But even if the
Court had found in favor of the FBOP Defendants on the ownership issue, the FBOP
Defendants would not be entitled to judgment as a matter of law on the FDIC’s
alternative claims as the Court does not believe a finding that the TAA transferred
the Banks’ ownership interest in tax refunds to FBOP necessarily precludes those
alternative claims.
Even the cases on which the FBOP Defendants rely recognize that a tax
allocation “agreement will control the members’ rights in the absence of overreaching
or breach of fiduciary duty.” In re First Cent. Fin. Corp., 269 Bankr. at 490 (emphasis
79
added) (citing In re White Metal Rolling & Stamping Corp., 222 Bankr. at 423, and In
re Franklin Sav. Corp., 159 Bankr. at 29). The cases on which the FBOP Defendants
rely holding that there was no evidence of overreaching or breach of fiduciary duty do
so based on a full summary judgment record. The FBOP Defendants attempt to fit
this case within that framework by arguing that none of the FDIC’s allegations relate
to overreaching or breach of fiduciary in relation to the creation of the tax agreement.
But their argument is based on language in In re Franklin Savings Corp., which
referred to not only the creation of the tax agreement but its implementation as well.
See 159 Bankr. at 31 (holding that “question whether the parent acted ‘unfairly,’
‘overreachingly,’ or ‘unconscionably’ in the creation or implementation of the tax
agreements or in its other dealings with the bank [is] one of fact”). And the FDIC has
alleged a number of facts regarding overreaching and breach of fiduciary duty on
FBOP’s part with respect to the implementation of the TAA.
For
instance,
the
FDIC
has
alleged
that
FBOP
made
material
misrepresentations concerning the ownership of tax refunds of the Consolidated
Group in regulatory correspondence and stand-alone call reports filed by the Banks,
in FBOP’s application for TARP funds, and in FBOP’s requests for relief from
regulatory capital limitations. The FDIC also alleges that FBOP reported (or caused
the Banks to report) “deferred tax assets,” including tax refunds, as property of the
Banks. It was only after the Banks were placed into receivership did FBOP claim
that it, and not the Banks, owned the tax refunds. While the FBOP Defendants
80
contend that their current position is consistent with FBOP’s pre-receivership
position on the ownership question, the FDIC clearly alleges otherwise:
A key part of the Banks’ survival strategy was based on the
Banks’ inclusion of deferred tax assets in their regulatory
capital. Banking regulations limit a bank’s ability to
include in capital deferred tax assets that are not based on
carryback refunds but are dependent on future income.
Because of this, FBOP and the Banks applied for a waiver
from the OCC. In so doing, and in the course of filing its
TARP Application, FBOP represented that the Banks’
anticipated carryback refunds belonged to the Banks. The
OCC relied upon FBOP’s representations and issued the
requested waiver. The Banks also submitted Call Reports
to their federal regulators in which they recorded deferred
tax assets on their balance sheets that included the full
value of their anticipated carryback refunds in their Tier 1
capital. The Banks were required to disclose intercompany
debts in their Call Reports. The Banks never reported any
tax-related “receivables” due from FBOP. FBOP never
reported any tax-related “payables” due to the Banks in its
own regulatory filings. Given FBOP’s financial condition,
any “receivable” owed by FBOP had to be disclosed and
discounted. An impaired debt that the Banks could not
reasonably expect to collect from FBOP could not have been
lawfully included in the Banks’ regulatory capital.
R. 146 at 16 (FDIC Brief In Opposition to FBOP Motion) (citing Amended Complaint
throughout and 12 C.F.R. § 325.5(g)(2)(ii)). According to the FDIC, the Banks could
not record deferred tax assets on their balance sheets that included the full value of
their carryback refunds unless they believed they had the exclusive right to such
refunds. Thus, the FDIC contends, if the FBOP Defendants’ current argument is
accepted (i.e., that the tax assets recorded on the Banks’ balance sheets actually
reflected a severely impaired intercompany debt rather than the Banks’ exclusive
right to carryback refunds), that would mean FBOP intentionally overstated the
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Banks’ capital position to federal regulators. And, if it did, then it is plausible to
argue FBOP engaged in misconduct related to the implementation of the TAA.
In addition, the FDIC’s allegations regarding FBOP’s settlement agreements
with the Senior Secured Creditors and Sub-Debt¶ Holders 59 separate this case from
the cases cited by the FBOP Defendants where the courts addressed alternative
theories similar to those pled by the FDIC here. The FDIC has alleged facts which, if
true, shows that “the reasonable expectations of the parties as to how the agreements
would operate has been altered since the agreements were executed.” In re Franklin
Sav. Corp., 159 Bankr. 32-33. While the FBOP Defendants assert that many of the
complaint’s allegations “are nothing more than conclusions concocted by the FDIC-R
to fit the yarn it attempts to spin,” that argument is obviously not appropriate at this
stage of the proceedings. The FDIC is entitled to have its day in court on those issues.
The Court also rejects the FBOP Defendants’ argument that the FDIC’s
alternative claims are barred by the parol evidence rule. These claims do not involve
questions of contract interpretation, and accordingly the parol evidence rule is not
applicable. Thus, even if the Court were to agree with the FBOP Defendants’
interpretation of the TAA, the FDIC would be entitled to proceed on its alternative
See R. 146 at 8 (citing to R. 35 (Complaint), ¶¶ 9, 341-76 & 417) (alleging that
FBOP’s primary assets were its equity interests in the Banks; that once the Banks
failed, FBOP’s creditors—including, JPMC and BMO—faced the high likelihood of a
fractional recovery on the debts owed to them by FBOP; and that, given this reality,
FBOP and its unsecured creditors developed a two-part strategy: first, FBOP would
claim ownership of the tax refunds, and, second, in order to divert the full value of
the tax refunds to its unsecured creditors, FBOP would grant liens on all of its
assets, including future tax refunds, in favor of those creditors, and then liquidate its
assets through an assignment for the benefit of creditors).
59
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claims against the FBOP Defendants, in addition to its fraudulent transfer claims
against the Senior Secured Creditors and Sub-Debt Holders.
Finally, the FBOP Defendants argue that Count VII must be dismissed
because a constructive trust is a remedy, and not a claim, and therefore cannot stand
as a separate cause of action. R. 145 at 38. The FDIC is not asserting entitlement to a
constructive trust as a separate claim for relief but merely as an equitable remedy.
Count VII seeks a declaratory judgment that the FDIC is entitled to that remedy.
The FBOP Defendants’ argument is without merit.
VI.
THE FBOP DEFENDANTS’ RULE 12(c) MOTION ON THE FDIC’S CLAIMS
TO RECOVER THE NON-ESCROWED REFUNDS--COUNTS XIX-XXII
The FBOP Defendants argue they are entitled to judgment declaring FBOP
the owner of the $10.3 million Non-Escrowed Refunds for the same reasons they are
entitled to judgment declaring FBOP the owner of the $265.3 million Escrowed
Refunds. Because the Court has found that the FDIC in its capacity of separate
receiver for each of the Banks is the owner of the tax refunds, the Court rejects the
FBOP Defendants’ arguments regarding ownership of the $10.3 million NonEscrowed Refunds as well.
VII.
THE FBOP DEFENDANTS’
INTERVENOR COMPLAINT
RULE
12(C)
MOTION
ON
PBGC’S
In addition to the Rule 12(c) cross-motions at issue herein, a third Rule 12(c)
motion also is pending before the Court, in which the FBOP Defendants seek
judgment on the pleadings on claims brought against them by the IntervenorPlaintiff, Pension Benefit Guaranty Corporation (“PBGC”). The Court finds that, as a
result of the Court’s ruling on the tax refund ownership issue, the PBGC’s Intervenor
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Complaint against the FBOP Defendants is moot. Accordingly, the FBOP
Defendants’ Rule 12(c) motion seeking judgment on the PBGC’s claims also is moot.
CONCLUSION
For the foregoing reasons:
(1)
The FBOP Defendants’ motion for partial judgment on the pleadings as
to Counts I-II, III-VII, and XIX-XXII of the FDIC’s complaint, R. 139, is denied;
(2)
The FDIC’s motion for partial judgment on the pleadings on Counts I
and II, R. 150, is entered and continued; and
(3)
The FBOP Defendants’ motion for judgment on the pleadings as to
PBGC’s Intervenor Complaint, R. 162, is denied without prejudice as moot.
ENTERED:
___
Dated: May 12, 2017
84
Honorable Thomas M. Durkin
United States District Judge
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