A group of hedge funds looks set to win a large return after bankrolling the winning party in a court fight over a $373.8 million tax refund in the bankruptcy of Downey Financial Corp, according to a newswire report yesterday. U.S. Bankruptcy Judge Christopher Sontchi ruled on Tuesday that the disputed tax return belonged to Downey. The Federal Deposit Insurance Corp. had argued that it was entitled to the refund. For backing the right horse, four hedge funds — Alden Global Capital, Davidson Kempner Capital Management, Halcyon Asset Management and Farallon Capital Management — stood to gain up to a third of the refund, which the FDIC said in court documents could amount to a return of 1,000 percent on what they spent on legal fees. The tax refund resulted from losses at Downey Savings and Loan that piled up during the 2008 U.S. housing meltdown, which exposed the poor quality of the bank's exotic mortgages. In his ruling, Sontchi said the FDIC could make a claim for the amount of the refund against the parent company, although that claim would be part of the larger pool in the bankruptcy proceeding. The bankruptcy case is In re Downey Financial Corp., U.S. Bankruptcy Court for the District of Delaware, No. 08-13042; the tax refund adversary case is 10-53731.
