WASHINGTON An appeals court in California has ruled the Federal Deposit Insurance Corp. must wait in line with everyone else for a share of tax refunds awarded to IndyMac Bank's parent company.
The decision, issued late Monday by three judges on the Ninth Circuit Court of Appeals, upholds a lower court ruling and an earlier bankruptcy judge's opinion that the roughly $55 million in tax benefits belongs to the estate of IndyMac Bancorp. The company filed for bankruptcy in 2008 just after its $30 billion thrift was seized in the costliest failure of the mortgage meltdown.
IndyMac's bankruptcy trustee "is gratified the Ninth Circuit has affirmed the ruling and looks forward to finality in this matter so that appropriate distribution to creditors can be made," said Andrew Sandler, chairman and executive partner of BuckleySandler LLP. (The firm represented the trustee along with Klee, Tuchin, Bogdanoff & Stern LLP.)
The FDIC had claimed rights to the entire pot, essentially arguing that the refunds stemmed from losses attributable to the bank. Typically, a parent firm, which files tax returns on behalf of the entire consolidated company, grants a portion of tax-related benefits to its bank subsidiaries as dictated by a previously drafted "tax-sharing agreement."
Lawyers for the FDIC said in a 2011 court filing before the bankruptcy judge that it was "undisputed" that all of the tax refunds stemmed from the "financial history of the failed bank and its subsidiaries and would have been paid to the bank had the bank group filed separate income tax returns." They argued that IndyMac's parent "did nothing other than file consolidated tax returns on behalf of a group of affiliated corporations for which it serves as the parent holding company."
But the appeals court judges agreed with the earlier decisions that the TSA drafted between IndyMac and its parent when both were operating allows the parent company, which in this case is the bankruptcy trustee, to control the money. The FDIC, however, can still file a claim as an unsecured creditor in the bankruptcy for rights to a portion of the refund. (An agency spokesman declined to comment on the appeals court decision.)
In its ruling, the judges said the TSA gave the parent clear power to set parameters for "preparing and filing tax returns, resolving tax disputes, and paying refunds."
"The district and bankruptcy courts were correct to conclude that tax refunds are property of Bancorp's estate," the appeals court decision said.
The failure of IndyMac, which the FDIC temporarily ran as conservator before selling its operations to a new ownership group in 2009, was estimated to cost the FDIC over $13 billion.