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Third Circuit Affirms Bankruptcy Court’s Decision on Treatment of Tax-Sharing Agreement Funds in Chapter 7 Bankruptcy Case – Glass & Goldberg | Financing, Property & Bankruptcy Law
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Third Circuit Affirms Bankruptcy Court’s Decision on Treatment of Tax-Sharing Agreement Funds in Chapter 7 Bankruptcy Case

Third Circuit Affirms Bankruptcy Court’s Decision on Treatment of Tax-Sharing Agreement Funds in Chapter 7 Bankruptcy CaseOn January 26, 2015, the Third Circuit affirmed a bankruptcy court’s ruling in favor of a bank holding company trustee in a tax refund dispute with the Federal Deposit Insurance Corporation (FDIC).

In its decision in In Re Downey Financial Corporation, the Third Circuit ruled that under California law, a tax-sharing agreement (TSA) between Downey Financial Corp. and its subsidiary, Downey Savings and Loan, F.A., created a debtor-creditor relationship and assigned the $370 million tax refund to Downey Financial Corp.’s Chapter 7 bankruptcy estate.

The Third Circuit panel said that the TSA clearly established a creditor-debtor relationship by meeting three factors:

  1. It created mutually interchangeable payment obligations between both parties;
  2. There were no use restrictions and no escrow or segregation obligations; and
  3. The party responsible for filing taxes — Downey Financial — had full and sole discretion regarding tax matters.

This most recent decision mirrors that of the Ninth Circuit in IndyMac, which found that tax refunds paid to a bank holding company pursuant to a tax-sharing agreement were the property of that holding company’s bankruptcy estate. However, these decisions contrast with other Circuits (Sixth and Eleventh) that have applied different state laws to reach opposite conclusions from similar TSA language.

This ambiguity in the courts’ interpretation of tax-sharing agreements reinforces the need for groups of companies to clarify the treatment of tax refunds in bankruptcy to avoid litigation.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

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