The Supreme Court May Duck a Case Involving Federal Common Law vs. State Law

To resolve a split of circuits, the Supreme Court granted certiorari in Rodriguez v. Federal Deposit Insurance Corp., 18-1269 (Sup. Ct.), to decide whether state law or federal common law decides who owns a tax refund when a parent holding company files a tax return but a subsidiary generated the losses giving rise to the refund.

The case was an opportunity for the justices to lay down rules prescribing limits on the ability of federal courts to create federal common law in derogation of state law. As it turned out at oral argument on December 3, the Court may never reach the question for which the justices granted certiorari.

Why duck an important question? Because, neither side defended federal common law known as the Bob Richards rule. Instead, the case boils down to a question of whether the Tenth Circuit correctly applied state law, and the Supreme Court is not in the business of ruling on disputes about the application of state law.

As Justice Ruth Bader Ginsburg said a few minutes into oral argument, the question of the validity of federal common law “has vanished from the case.” She and several other justices suggested that the Court may end up dismissing the certiorari petition as having been improvidently granted.

The Facts

The holding company for a bank ended up in chapter 7 with a trustee. The bank subsidiary was taken over by the Federal Deposit Insurance Corp, as receiver. The bank subsidiary’s losses resulted in a $4 million tax refund payable to the parent under a pre-bankruptcy tax allocation agreement, or TAA, between the parent and the bank subsidiary.

The refund arrived after the holding company’s bankruptcy, thus raising the question of whether the holding company owned the refund, leaving the FDIC with nothing more than an unsecured claim.

The bankruptcy court in Colorado granted summary judgment in favor of the holding company’s trustee. Finding that the TAA did not create a trust or agency under Colorado law, the bankruptcy court believed the parent and subsidiary had a debtor/creditor relationship under the TAA, meaning that the parent was the owner of the tax refund. In the opinion of the bankruptcy court, the FDIC only had an unsecured claim for the refund.

On appeal, the district court concluded that the Tenth Circuit had previously adopted the Bob Richards rule, first enunciated by the Ninth Circuit in In re Bob Richards Chrysler-Plymouth Corp., 473 F.2d 262 (9th Cir. 1973). Bob Richards adopted a presumption — evidently a creation of federal common law — that the subsidiary with the losses is presumptively entitled to the refund absent a TAA that clearly gives the refund to the parent.

The district court, however, went on to analyze the TAA and found provisions supporting a ruling in favor of the holding company and other provisions where the bank subsidiary would come out on top. The district court ended up by relying on tie-breaking language in the TAA that resolves ambiguity in favor of the bank subsidiary. The district court therefore reversed and awarded the refund to the FDIC.

 The Tenth Circuit affirmed the district court, first saying that the appeals court had adopted Bob Richards in handing down Barnes v. Harris, 783 F.3d 1185 (10th Cir. 2015).

Unlike Barnes and Bob Richards, Tenth Circuit said that the case on appeal had a written agreement, namely, the TAA. Construing the TAA, the appeals court ruled that the tie-breaking provision had the effect of creating an agency relationship. The holding company was only an agent for the bank, thus giving ownership of the refund to the FDIC.

Upholding the district court, the Tenth Circuit created ambiguity about the basis for its ruling by saying at the end of the opinion that the result did not differ from the rule in Barnes and Bob Richards.

The holding company’s trustee filed a petition for certiorari in April. The Court granted the petition at the end of June to answer the one question presented: Does federal common law (Bob Richards) or state law determine the ownership of a tax refund?

On the question presented, the circuits are split 3/4. The Fifth, Ninth and Tenth Circuits follow Bob Richards, while the Second, Third, Sixth and Eleventh Circuits reject Bob Richards and employ state law to decide who owns a refund and whether the TAA creates an unsecured debtor/creditor relationship.

Oral Argument

Speaking first, the attorney for the holding company’s trustee correctly stated that the FDIC abandoned any defense of Bob Richards. The first among the justices to speak, Justice Ginsburg observed that the Tenth Circuit decided the case based on state law, not Bob Richards.

Given that the case below was decided on state law and the FDIC was not defending Bob Richards, Justice Ginsburg said that the question presented “has vanished from the case.” Likewise, Justice Stephen G. Breyer said that the question of federal common law “seems to have evaporated.”

Justice Sonia Sotomayor was on the same page, observing that the case had become a question of whether the lower courts correctly applied state law. With no one defending Bob Richards, she said, “we need adversarial testing before we reach questions that are implicated by the issues before us.”

Similarly, Justice Ginsburg said, “we usually don’t decide an abstract” question when there is a lack of “adversarial confrontation.” Justice Elena Kagan said there was a “good probability” that the Court would have appointed an amicus had the justices known no one would defend Bob Richards.

Arguing for the FDIC, the U.S. Solicitor General said the Court would be issuing an “advisory opinion” were it to rule on Bob Richards.

It is not clear that the Court will dismiss the petition as improvidently granted, or DIG in the parlance of Court observers. Several justices seemed primed to strike down Bob Richards. Justice Brett M. Kavanaugh said the federal common law was “patently indefensible.” Similarly, Justice Neil M. Gorsuch said the outcome should be determined by state law, without “any thumb on the scale by federal common law.”

The Solicitor General agreed, saying that Bob Richards is not “a correct rule of federal common law.”

Justice Gorsuch appeared inclined to reach the merits. He said, “it would be of material benefit” if courts around the country knew that Bob Richards is not good law. However, Justice Gorsuch recently demonstrated a disinclination to rule on theoretical issues.

Last term in Mission Product Holdings Inc. v. Tempnology LLC, 587 U.S. ___, 203 L. Ed. 2d 876 (May 20, 2019), he dissented and said the petition should have been dismissed for having been improvidently granted. In his view, the case was moot because effective relief could not be granted in the event of reversal.

Procedurally, the Court has several options. The justices could ‘DIG’ the petition, which event the decision below will stand, and the circuit split will theoretically endure. Or, the Court could overrule Bob Richards and remand for the Tenth Circuit to review the case without reliance on Bob Richards.

Naturally, the FDIC would wish for the Court to affirm. In that instance, the Court would be ruling that the Tenth Circuit properly applied state law.

Or, without passing on Bob Richards, the Court could remand for the Tenth Circuit to clarify whether it was relying on federal common law.

Mitchell P. Reich, a senior associate with Hogan Lovells US LLP in Washington, D.C., argued for the trustee. It was his first argument in the Supreme Court. Reich was a clerk for Justice Kagan. Assistant to the Solicitor General Michael R. Huston argued for the FDIC.