Every dollar counts, and for debtors that are party to tax-sharing agreements (“TSAs”), significant dollars may be at stake. As the Sixth and Ninth Circuit Courts of Appeals have demonstrated, when dealing with tax refunds and TSAs, it is not always clear that a debtor’s estate is entitled to every dollar.
In re IndyMac Bancorp Inc.
In FDIC v. Siegel (In re IndyMac Bancorp Inc.),[1] the Ninth Circuit Court of Appeals affirmed the decision of a district court, holding that certain tax refunds were property of IndyMac Bancorp Inc.’s bankruptcy estate. IndyMac Bancorp Inc. was the holding company for IndyMac Bank F.S.B. (the “bank”), which was under a Federal Deposit Insurance Corp. (FDIC) receivership.[2] IndyMac and the bank were party to a TSA,[3] and after IndyMac entered bankruptcy, a dispute arose over the extent to which a tax refund was property of IndyMac’s bankruptcy estate.[4] The U.S. District Court for the Central District of California adopted the report and recommendation of the U.S. Bankruptcy Court for the Central District of California and declared that more than $55 million in tax refunds were property of IndyMac’s bankruptcy estate.[5] The FDIC, as receiver for the bank, appealed.[6]
On appeal, the Ninth Circuit noted § 541’s definition of “property of the estate” and set forth the general proposition that property interests are created and defined by state law.[7] The Ninth Circuit further noted its precedent establishing that the parties are free to adjust among themselves their ultimate tax liability, as a matter of state corporation law, and where the parties have made no agreement concerning ultimate disposition of a tax refund, the parent holds the tax refunds in trust for the subsidiary.[8] In this case, however, the Ninth Circuit noted that the parties had entered into a TSA that “clearly adjust[ed] the parties’ ultimate tax liability” and thus, it was required to follow California state law in determining whether the tax refunds were property of Bancorp’s estate.[9]
To determine whether the tax refunds were property of IndyMac’s bankruptcy estate, the Ninth Circuit considered whether the TSA created either an agency or trust relationship between the bank and IndyMac.[10] Turning to whether the TSA created an agency relationship, the Ninth Circuit concluded that it did not because the bank did not exercise any control over IndyMac’s activities under the TSA.[11] Instead, the Ninth Circuit noted that the TSA gave IndyMac sole discretion in determining the means and manner of preparing and filing tax returns, resolving tax disputes and paying refunds.[12] While acknowledging that the TSA appointed IndyMac as “agent and attorney-in-fact,” the Ninth Circuit held that such appointment did not give the bank any control and could not be reconciled with the plenary discretion granted to IndyMac under the TSA.[13]
Having concluded that no agency relationship was created, the Ninth Circuit turned to consider whether a trust relationship was created instead.[14] Here, the Ninth Circuit first noted the absence of language creating a trust relationship — an explicit indication of a debtor/creditor relationship.[15] The Ninth Circuit further noted that IndyMac was not prohibited from using the taxes that were paid or tax refunds as its own or commingling funds paid to it by the bank or received from taxation authorities.[16] Moreover, the bank bore no risk of loss under the TSA.[17]
Based on these factors, the Ninth Circuit similarly held that no agency or trust relationship had been created.[18] The Ninth Circuit concluded that the district and bankruptcy courts had correctly concluded that a debtor/creditor relationship existed between IndyMac and the bank, and the tax refunds were property of IndyMac’s bankruptcy estate rather than assets of the bank.[19]
FDIC v. AmFin Financial Corp.
In contrast, in FDIC v. AmFin Financial Corp.,[20] the Sixth Circuit Court of Appeals reversed the decision of the U.S. District Court for the Northern District of Ohio, which had held that a tax refund was property of AmFin Financial Corp.’s bankruptcy estate. Like in Siegel, AmFin Financial Corp. was a holding company for AmTrust Bank, which was under an FDIC receivership.[21] Prior to AmFin’s bankruptcy case, AmFin and AmTrust had entered into a TSA for the purpose of allocating tax liability.[22] After AmFin entered bankruptcy, it filed a consolidated tax return and took the position that any refund would be property of its estate.[23] In response, the FDIC filed a complaint seeking a declaratory judgment that AmTrust owned a substantial portion of the refund because it was attributable to AmTrust’s operating losses.[24] Reasoning that the TSA’s use of terms such as “reimbursement” and “payment” definitively established a debtor-creditor relationship, the district court held that the refund was property of AmFin’s bankruptcy estate.[25] The FDIC appealed.[26]
On appeal, the Sixth Circuit first addressed the district court’s conclusion that the TSA was integrated and unambiguous.[27] Analyzing the TSA’s language, the Sixth Circuit noted that the TSA’s stated purpose was to “specify the manner in which [the Affiliated Group] will share the Consolidated Tax Liability … and the manner in which certain Tax Attributes … are to be treated among the members of the Affiliated Group.”[28]
While noting that the TSA contained provisions addressing that purpose, the Sixth Circuit found that it important that none of the TSA’s provisions addressed ownership of tax refunds issued by the Internal Revenue Service.[29] As a result, the Sixth Circuit rejected the notion that the language of the TSA supported AmFin’s right to the tax refund.[30] The Sixth Circuit rejected the district court’s reliance on IndyMac, stating that the cases were distinct because the IndyMac TSA, unlike the AmFin TSA, (1) expressly stated the circumstances under which the parent corporation would disburse funds and (2) granted the parent corporation sole discretion as to whether refunds would be distributed at all.[31] Instead, the Sixth Circuit pointed to In re BankUnited Financial Corp.[32] in which the Eleventh Circuit rejected terminology-based reasoning that was employed by the district court in this case.[33] Like the Eleventh Circuit, the Sixth Circuit reasoned that the TSA said nothing about ownership of tax refunds received by AmFin and included no protections for AmTrust, as one would expect if the parties intended a debtor/creditor relationship.[34] As a result, the Sixth Circuit concluded that nothing in the TSA evidences an intent to create a debtor/creditor relationship and allocate the refund to AmFin.[35] As a result, and after rejecting application of federal common law, the Sixth Circuit reversed and remanded the district court’s decision, stating that the district court would be required to consider extrinsic evidence to determine whether the parties intended the recipient of the property to also hold the beneficial interest, and an agency relationship was created by the TSA.[36]
Conclusion
These decisions demonstrate how small changes in the language and provisions of a TSA can significantly change the assets that are available to a bankruptcy estate. While banking regulations have been issued affecting TSAs between entities subject to banking regulations —they now require a clear acknowledgement that an agency relationship exists and prohibit language evincing a contrary intent — it is still imperative to pay particular attention to the language used to address subjects such as the discretion of the parent corporation and who holds the beneficial interest in any tax refunds, when drafting or reviewing TSAs. As demonstrated by the Sixth and Ninth Circuits, the failure to do so could have significant monetary implications.
[1] FDIC v. Siegel (In re IndyMac Bancorp Inc.), 554 Fed. App’x 668 (9th Cir. 2014).
[2] Id. at 669.
[3] Id. at 670.
[4] Id. at 669.
[5] Id. at 668.
[6] Id.
[7] Id. at 669.
[8] Id. at 669-70.
[9] Id. at 670.
[10] Id.
[11] Id.
[12] Id.
[13] Id.
[14] Id.
[15] Id.
[16] Id.
[17] Id.
[18] Id.
[19] Id.
[20] FDIC v. AmFin Fin. Corp., 757 F.3d 530 (6th Cir. 2014).
[21] Id. at 532.
[22] Id.
[23] Id.
[24] Id.
[25] Id. at 532-33.
[26] Id. at 533.
[27] Id. at 533-34.
[28] Id. at 533 (alterations in opinion).
[29] Id. at 534.
[30] Id.
[31] Id.
[32] In re BankUnited Fin. Corp., 727 F.3d 1100 (11th Cir. 2013).
[33] FDIC v. AmFin Fin. Corp at 534-35.
[34] Id. at 535.
[35] Id.
[36] Id. at 535-37.