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9th Circuit rules against FDIC in IndyMac tax refund dispute

4/24/14 REUTERS LEGAL 10:00:01

April 24, 2014

9th Circuit rules against FDIC in IndyMac tax refund dispute

Tom Hals

(Reuters) - A federal appeals court has ruled that a $55 million tax refund belonged to the bankrupt parent company of the failed IndyMac bank and not the Federal Deposit Insurance Corp.

The Monday ruling by the U.S. Appeals Court for the 9th Circuit is the latest in a string of rulings regarding disputes over tax refunds involving failed banks that have often gone against the FDIC.

The three judge-panel affirmed a lower court ruling that the tax refund would go to benefit creditors of IndyMac Bancorp, which filed for bankruptcy in 2008 after U.S. authorities seized its lending subsidiary.

The FDIC sought sole ownership of the refund as receiver of IndyMac's bank unit, but as a result of the ruling the agency will have to share it as an unsecured creditor of the parent company.

IndyMac was the third-largest bank failure in U.S. history when it was seized in 2008 with $32 billion in assets. The FDIC said at that time it expected the bank's failure to cost its insurance fund nearly $9 billion.

About 500 U.S. banks have failed since the housing market began to collapse in 2007. Many suffered large losses soon after very profitable years, and as a result generated large tax refunds that became a prime asset.

The FDIC in its role as receiver for a failed bank has often found itself battling against the parent company's bankruptcy estate, which receives a tax refund on behalf of the banking group.

The FDIC has argued that the bank subsidiary suffered the financial losses that generated the refund, therefore the money belonged to the deposit insurer.

However, banking groups often have tax-sharing agreements that spell out how taxes and refunds are divided between the bank and its parent company.

Monday's ruling affirmed that determining ownership of a refund should follow guidance laid down in a 1973 9th Circuit case known as Bob Richards.

The Bob Richards case said that the issue turns on whether a tax-sharing agreement establishes the parent company as an agent that holds the refund in trust for the banking subsidiary. The FDIC argued it did, and therefore the refund should pass to it as a receiver for the banking subsidiary.

The three-judge appeals panel sided with Alfred Siegel, the bankruptcy trustee for the parent company, who argued the tax- sharing agreement did not spell out such a relationship.

"Therefore, the district and bankruptcy courts were correct to conclude that tax refunds are property of Bancorp's estate," the court said.

Damian Schaible, a restructuring partner at Davis Polk & Wardwell, said regulators with the U.S. Federal Reserve, Office of the Comptroller of the Currency and FDIC have proposed that banking groups revisit their tax-sharing agreements to clarify that refunds generated by bank losses belong to those bank subsidiaries.

"The regulators are now stepping in to issue guidance to banks that would require them to make their tax-sharing agreements crystal clear in creating a trust-agency relationship," he said.

If the proposal is adopted, he said rulings like Monday's would become less significant over time.

The FDIC declined to comment and Siegel did not immediately respond to a request for comment.

The case is Federal Deposit Insurance Corp as Receiver of IndyMac Bank FSB v Alfred Siegel, U.S. Court of Appeals for the 9th Circuit, No. 12-56218' The case was decided by Ferdinand Fernandez, Randy Smith and Mary Murguia.

For the FDIC: Michelle Ognibene

For Siegel: Whitman Holt of Klee, Tuchin, Bogdanoff & Stern

---- Index References ----

Company: INDYMAC BANCORP INC; FEDERAL DEPOSIT INSURANCE CORP; INDYMAC FEDERAL BANK FSB

News Subject: (Business Management (1BU42); Tax Law (1TA64); Legal (1LE33); Judicial Cases & Rulings (1JU36); Bankruptcies (1BA08); Taxation (1TA10); Corporate Events (1CR05))

Industry: (Financial Services (1FI37); Banking (1BA20); Accounting, Consulting & Legal Services (1AC73))

Language: EN

Other Indexing: (Danny Moloshok; Mary Murguia; Whitman Holt; Bob Richards; Michelle Ognibene; Randolph Smith; Ferdinand Fernandez; Alfred Siegel; Damian Schaible)

Keywords: bankruptcy; banking (MCC:f); (N2:US); (N2:AMERS); (N2:USA); (MCCL:OEC)

Word Count: 630