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In re United Western Bancorp, Inc.

United States District Court, D. Colorado

July 10, 2017

SIMON E. RODRIGUEZ, in his capacity as Trustee for the bankruptcy estate of United Western Bancorp, Inc., Plaintiff-Appellee. No. FEDERAL DEPOSIT INSURANCE CORPORATION, in its capacity as receiver for United Western Bank, Defendant-Appellant,

         Appeal from Bankruptcy Adversary Proceeding No. 14-01191-TBM



         The Federal Deposit Insurance Corporation (“FDIC”), acting as receiver for the defunct United Western Bank (“Bank”), appeals the Bankruptcy Court's determination that a tax refund generated on account of the Bank's losses should remain a part of the bankruptcy estate of the Bank's parent company, United Western Bancorp, Inc. (“Holding Company”). See In re United W. Bancorp, Inc., 558 B.R. 409 (Bankr. D. Colo. 2016) (“UWBI”). For the reasons explained below, the Court finds that the relevant contract between the Bank and the Holding Company is ambiguous regarding whether the Holding Company may keep the tax refund in the present circumstances. That contract further requires that any ambiguity be construed in favor of the Bank. Accordingly, the tax refund is not part of the Holding Company's bankruptcy estate and must be remitted to the Bank. The judgment of the Bankruptcy Court is reversed.[1]


         In reviewing a bankruptcy court's decision, the district court normally functions as an appellate court, reviewing the bankruptcy court's legal conclusions de novo and its factual findings for clear error. 28 U.S.C. § 158(a); In re Warren, 512 F.3d 1241, 1248 (10th Cir. 2008). The Bankruptcy Court's judgment rested on a contract interpretation made as a matter of law, so this Court's review is de novo. In re Universal Serv. Fund Tel. Billing Practice Litig., 619 F.3d 1188, 1203 (10th Cir. 2010).


         A. The Holding Company and the Bank

         The Holding Company owned thirteen subsidiaries. (App. 41, 45-46.) One of those subsidiaries was the Bank, which the Holding Company wholly owned, and which was the Holding Company's principal asset. UWBI, 558 B.R. at 416. The Bank operated eight branches and a loan servicing office in Colorado. Id.

         B. The Tax Allocation Agreement (TAA)

         The Internal Revenue Code permits an “affiliated group” of corporations (those with a common parent and a chain of sufficient stock ownership) to file a “consolidated [tax] return” that aggregates the gains and losses of all of them as if one corporation. See 26 U.S.C. §§ 1501-04. To facilitate such consolidated filing, eligible affiliated groups often enter into a written agreement amongst themselves known as a tax sharing agreement or a tax allocation agreement. Here, the Holding Company and its subsidiaries entered into a Tax Allocation Agreement” (“TAA”).[3]

         The TAA is dated January 1, 2008, and was signed by representatives of the Holding Company and its thirteen subsidiaries, including the Bank. (App. 41, 45-46.) It refers to all of the subsidiaries combined as “the Group, ” and also sometimes as “the Affiliates.” (App. 41.) The TAA's recitals announce its purpose as follows: “to establish a method for (i) allocating the consolidated tax liability of the Group among its members, (ii) reimbursing [the Holding Company] for the payment of such tax liability, and (iii) compensating each member of the Group for the use of its losses by any other member of the Group.” (Id.)

         To accomplish this purpose, the TAA first proclaims the following “General Rule” for federal tax filings:

Except as specifically set forth herein to the contrary, each Affiliate shall pay [the Holding Company] an amount equal to the federal income tax liability such Affiliate would have incurred were it to file a separate return (or, if appropriate, a consolidated return with its subsidiary affiliates). If [the Bank] incurs a net operating loss or excess tax credits, the [Bank] is entitled to a refund [from the Holding Company] equal to the amount that it would have been entitled to receive had it not joined in the filing of a consolidated return with [the Holding Company]. Similar treatment is optional at [the Holding Company's] discretion for [other] Affiliates. Any refund shall generally not exceed the amount claimed or received as a refund resulting from a carryback claim filed by [the Holding Company]. However, this shall not prevent [the Holding Company] from the ability to make a refund over the amount received or claimed as a refund or carryback, if in its sole discretion it believes such payment is in its best interest.

(TAA § A.1.) Having proclaimed this general rule, the TAA then goes on to re-proclaim its purpose, although with a different focus than that evident in the recitals: “In essence, this Agreement requires that each [Affiliate] be treated as a separate taxpayer with [the Holding Company] merely being an intermediary between an Affiliate and the Internal Revenue Service (‘IRS').” (Id. § A.2.)

         The details of actual cash flow to and from the Holding Company and the Affiliates are addressed later in the TAA, and here the TAA starts to become somewhat convoluted. As best the Court can discern, each Affiliate was required to pay to the Holding Company the Affiliate's “hypothetical estimated income tax liability” on a quarterly basis at around the same time that the Holding Company was required to make estimated quarterly payments to the IRS. (Id. §§ F.1, F.2.) However, “[p]ayments [from the Holding Company] to an Affiliate for net operating losses or similar items shall not to be made under this [quarterly] provision, but rather on an annual basis pursuant to Section A.” (Id. § F.3.)

         While the cross-referenced “Section A” certainly discusses refunds from the Holding Company for an Affiliate's net operating losses, it actually says nothing about the timing of those refunds, e.g., on an annual basis or otherwise. Rather, that seems to come from Section E. That section first instructs Affiliates that they must make “[p]reliminary tax settlement payments . . . on or before March 15 following the end of the appropriate taxable year.” (Id. § E.1.) The Court presumes this refers to any amounts over those already paid on a quarterly estimated basis during the previous year. In any event, the various parties' obligations are trued-up towards the end of each year: “Final tax settlement payments or refunds are due on or before November 15.” (Id. § E.2.) This appears to be the “annual basis” referred to for refunds based on quarterly net losses.

         The TAA actually contains three distinct refund provisions. One such provision is that just discussed, i.e., the “[f]inal tax settlement . . . refund[]” that is “due on or before November 15” of each year, with reference to the previous taxable year. This refers to a payment from the Holding Company to the Affiliate, likely from monies received from other Affiliates that owed taxes. The second refund provision is simply an accelerated process to obtain the same payment: “an Affiliate with a taxable loss for the year may recover [from the Holding Company] estimated taxes paid for that year before final settlement if an ‘expedited refund' claim is filed with [the Holding Company] by February 15 following the end of the tax year.” (Id. § E.1.)

         The third refund provision is of the most interest here, as it refers to refunds received by the Holding Company from the IRS, not any sort of refund of amounts paid by the Affiliates to the Holding Company. It establishes a 10-business-day deadline for distributing such refunds:

In the event of any adjustment to the tax returns of the Group as filed (by reason of an amended return, claim for refund, or an audit by a taxing authority), the liability of the parties to this Agreement shall be re-determined to give effect to any such adjustment as if it had been made as part of the original computation of tax liability, and payments between the appropriate parties shall be made within 10 business days after any such payments are made [to the IRS] or refunds are received [from the IRS], or, in the case of contested proceedings, within 10 business days after a final determination of the contest.

(Id. § H.1.)[4] In other words, although an Affiliate with net losses may make a claim on the Holding Company for a refund of estimated tax payments, it appears the Holding Company has a self-executing duty to distribute to the Affiliates any actual refund received from the IRS.

         Three other provisions of the TAA are notable. First, it “shall be governed by and construed in accordance with the laws of the State of Colorado and the applicable laws of the United States of America.” (Id. § H.6.) Second, through the TAA,

[e]ach Affiliate hereby appoints [the Holding Company] as its agent . . . for the purpose of filing such consolidated Federal Income tax returns for the [Group] as [the Holding Company] may elect to file and making any election, application or taking any action in connection therewith on behalf of the Affiliates. Each such Affiliate hereby consents to the filing of any such returns and the making of any such elections and applications.

(Id. § G.1.) Third, the TAA contains yet another statement of its purpose (i.e., in addition to those statements found in its recitals and in § A.2), followed by an “ambiguity favors the Bank” clause: “The intent of this Agreement is to provide an equitable allocation of the tax liability of the Group among [the Holding Company] and the Affiliates. Any ambiguity in the interpretation hereof shall be resolved, with a view to effectuating such intent, in favor of any insured depository institution.” (Id. § H.4.)

         C. The Origin of This Dispute

         In January 2011, the Office of Thrift Supervision closed the Bank and appointed the FDIC as its receiver. UWBI, 558 B.R. at 416. Thus, the FDIC assumed the role of marshaling the Bank's assets as best as possible to pay the Bank's obligations.

         Later in 2011, apparently, the Holding Company filed its consolidated 2010 tax return on behalf of the Affiliates, including the Bank. In fact, the Bank was particularly important to this tax return. Whereas the Bank had generated taxable income in 2008 (on which the Holding Company paid taxes), the Bank generated an even larger taxable loss in 2010. Id. at 417.[5] The Internal Revenue Code permits corporations to “carryback” net operating losses for up to two taxable years. See 26 U.S.C. § 172. Thus, the Holding Company was permitted to carryback the Bank's 2010 losses to offset the taxes paid in 2008. It therefore claimed a refund on its 2010 tax return of about $4.8 million. UWBI, 558 B.R. at 417. There is no dispute that, to whatever extent a refund was due, it was entirely the result of revenue generated by the Bank in 2008 and losses incurred by the Bank in 2010-or in other words, neither the Holding Company itself nor any Affiliate generated any gains or losses relevant to the requested refund.

         While that refund claim was still pending, the Holding Company found itself insolvent-because the Bank was its only real source of operating income-and so the Holding Company filed for Chapter 11 reorganization in March 2012. (App. 17.) About a year later, the Bankruptcy Court converted the proceeding to a Chapter 7 liquidation. (Id.) Thus, the Trustee was appointed to perform essentially the same role for the Holding Company that the FDIC was performing for the Bank: to realize as much value as possible from the Holding Company's assets so that creditors could receive at least some compensation.

         D. The Adversary Proceeding

         “After learning of the anticipated Tax Refund, the Trustee (acting on behalf of the [Holding Company's bankruptcy] estate) filed [an] adversary proceeding against the FDIC (acting as receiver of the Bank)” to settle the question of whether the refund would belong to the Holding Company (the Trustee's position) or the Bank (the FDIC's position). UWBI, 558 B.R. at 412. The parties agreed “that the underlying facts [were] undisputed and the contest [could] be decided as a matter of law.” Id. They accordingly filed cross-motions for summary judgment.

         The crux of the dispute was whether the anticipated refund would be considered property of the Holding Company's bankruptcy estate. If so, the Bank could make “a general unsecured claim against [the Holding Company's] bankruptcy estate for some or all of the Tax Refund, which should share pari passu with other general unsecured claims against [the estate].” UWBI, 558 B.R. at 415. On the other hand, the Bankruptcy Code recognizes that a debtor might possess “only legal title and not an equitable interest” in certain property. 11 U.S.C. § 541(d). If this is the case, the property in question “becomes property of the estate . . . only to the extent of the debtor's legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold.” Id. Naturally, the Trustee argued that the Holding Company would possess both legal title and the equitable interest in the anticipated refund, while the FDIC argued that the Holding Company would lack at least an equitable interest, if not legal title as well.

         While the parties' cross-motions were pending, the IRS issued the refund in the adjusted amount of approximately $4.1 million (“Tax Refund” or “Refund”). It deposited that sum into the Bankruptcy Court's registry pending resolution of the adversary proceeding. UWBI, 558 B.R. at 412, 417 n.21.

         E. The Bankruptcy Court's Decision

         On September 16, 2016, the Bankruptcy Court resolved the parties' cross-motions in a lengthy, thorough, and thoughtful opinion. Various portions of the Bankruptcy Court's analysis will be examined in detail below. For present purposes, it is enough to state that the Bankruptcy Court held:

• the Holding Company “has at least bare legal title to the Tax Refund, ” Id. at 423 (emphasis in original), a matter that the FDIC does not challenge on appeal and therefore will not be discussed further; • the TAA is unambiguous, Id. at 424 & n.26; and
• the TAA's unambiguous terms establish that the relationship between the Holding Company and the Bank was that of debtor and creditor, not that of agent and principal or trustee and beneficiary, meaning that the Holding Company possesses an equitable interest in the Refund in addition to legal title, Id.. at 424-36.

Thus, the Bankruptcy Court concluded, the Refund was a part of the Holding Company's bankruptcy estate and the Bank could only seek it through a general unsecured claim. Id. at 436-38.

         The Bankruptcy Court entered final judgment based on this order, and the FDIC timely appealed. (App. 406.) This Court has jurisdiction to hear the appeal under 28 U.S.C. § 158(a)(1).

         III. ANALYSIS

         A. Preliminary Observation

         There is an air of unreality about this litigation. Under normal circumstances, it would never have been brought. If the directors of a wholly-owned subsidiary elected to sue the parent company for a refund wrongly withheld under a tax allocation agreement, it is inconceivable that the parent would do anything other than replace the subsidiary's directors with those who would cause the subsidiary to withdraw the lawsuit. Only in situations where an independent fiduciary takes control of the parent or the subsidiary- or where separate fiduciaries take over both, as in this case-is such a lawsuit likely to exist. Not surprisingly, then, every case cited by either ...

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