MEMORANDUM OPINION AND ORDER
THOMAS M. DURKIN, District Judge.
This litigation involves a dispute over $265.3 million in tax refunds currently being held in escrow (the "Escrowed Refunds"). An additional $10.3 million in tax refunds not held in escrow also are at issue (the "Non-Escrowed Refunds"). The Federal Deposit Insurance Corporation ("FDIC") claims entitlement to the tax refunds
The TAA sets forth the applicable rules to which, prior to FBOP's insolvency, FBOP and the Banks agreed for allocating the tax benefits and burdens of the Consolidated Group. It is assumed for purposes of the present motions that the TAA obligated FBOP to distribute the tax savings represented by the tax refunds to the Banks. The issue to be decided is whether the Banks' entitlement to those tax savings is a property right or a contractual right. If the Banks have a property right, then FBOP must turn the tax refunds over to the FDIC.
The FDIC and the FBOP Defendants have presented the ownership issue through cross-motions for partial judgment on the pleadings under Federal Rule of Civil Procedure 12(c). For the reasons that follow, the Court holds that the Banks' right to receive the tax refunds is a property right. Therefore, the FBOP Defendants' motion for partial judgment on the pleadings is denied. Although the Court holds that the Banks have property rights in the tax refunds, the Court cannot tell from the parties' arguments if a disputed issue of fact exists over whether the TAA required FBOP to distribute the entire amount of the Escrowed Refunds to the Banks, and whether the Banks paid the entire amount of the original taxes that led to the Escrowed Refunds. Therefore, the Court will withhold ruling on the FDIC's cross-motion for partial judgment on the pleadings until the parties file a joint report regarding the question of whether the FDIC's Rule 12(c) motion must be converted to a summary judgment motion for purposes of determining the amount of the Escrowed Refunds to which the Banks, given their property rights as set forth herein, are entitled.
STANDARD OF REVIEW
Federal Rule of Civil Procedure 12(c) permits a party to move for judgment on the pleadings after the parties have filed the complaint and answer. See Buchanan-Moore v. Cnty. of Milwaukee, 570 F.3d 824, 827 (7th Cir. 2009). The primary function of a Rule 12(c) motion is to "dispos[e] of cases on the basis of the underlying substantive merits of the parties' claims and defenses as they are revealed in the formal pleadings." Wright & Miller, FEDERAL PRACTICE AND PROCEDURE, § 1367 (3d ed.) (citing Alexander v. City of Chicago, 994 F.2d 333 (7th Cir. 1993)). The parties disagree over whether the applicable standard for their Rule 12(c) motions is the Rule 12(b)(6) standard for motions to dismiss or the Rule 56 standard for motions for summary judgment. Which standard applies "is often a point of confusion in many civil cases." West v. Phillips, 883 F.Supp. 308, 313 n.1 (S.D. Ind. 1994). In United States v. Wood, 925 F.2d 1580, 1581 (7th Cir. 1991) (per curiam), the Seventh Circuit held that a motion for judgment on the pleadings should be analyzed according to the same standard as a motion to dismiss. But in Alexander, the Seventh Circuit held that the Rule 12(b)(6) standard should be applied only where the defendant "use[s] a rule 12(c) motion after the close of the pleadings to raise various rule 12(b) defenses regarding procedural defects." 994 F.2d at 336. Where a party "use[s] rule 12(c) in its customary application to attempt to dispose of the case on the basis of the underlying substantive merits," the court said, "the appropriate standard is that applicable to summary judgment, except that the court may consider only the contents of the pleadings." Id.
The Court need not choose between the motion to dismiss and summary judgment standards here because the outcome of the parties' Rule 12(c) cross-motions does not turn on that selection.
The Amended Complaint, including reasonable inferences therefrom, and matters of which the Court can take judicial notice, show the following facts.
A. THE RISE AND FALL OF FBOP AND THE BANKS
FBOP is a privately held financial holding company headquartered in Illinois. From 1990 through sometime in 2007, FBOP successfully acquired troubled financial institutions at attractive prices, resolved the acquired institutions' problems, and integrated them into the organization. As a result of this strategy, FBOP at one time owned, in addition to its nonbank holdings, six national banks and two state banks operating in California, Illinois, Arizona, and Texas (the Banks).
Beginning in the fourth quarter of 2008, the Banks' (and, as a result, FBOP's) economic fortunes took a turn for the worse. Prior to that time, FBOP had implemented a strategy to cause the Banks to heavily invest in the preferred stock of Fannie Mae and Freddie Mac as well as in securities and corporate bonds of Washington Mutual Bank (WAMU). In the third quarter of 2008, Fannie Mae and Freddie Mac were placed into conservatorship and WAMU failed. As a result, the Banks recognized a combined loss of approximately $838 million on their Fannie Mae and Freddie Mac investments, and wrote down their holdings of WAMU bonds by another $99 million. In addition, FBOP had caused the Banks to focus much of their lending activity in the commercial real estate market, and the value of those loans declined precipitously when the real estate market crashed in the same time period. The net effect of these events was to cause the Banks to become severely undercapitalized. In mid-November 2008, FBOP applied for federal funding under the Troubled Asset Recovery Program ("TARP") in an effort to relieve the Banks' financial stress. While FBOP's application for TARP funds was pending, however, the condition of the Banks declined even further, which led federal regulators
B. THE CORPORATE DEBT OF FBOP AND THE PERSONAL DEBT OF ITS CHAIRMAN
In the months prior to the FDIC's appointment as receiver for the Banks, FBOP began experiencing financial pressure from its creditors In particular, in June 2009, Defendant JPMorgan Chase, N.A. ("JPMorgan"), acting as agent for a number of lenders that had extended unsecured credit to FBOP over the years, declared FBOP in default on that debt and brought suit to recover the outstanding balance of approximately $246 million. Two months later, in August 2009, the Chairman and President of FBOP, Michael E. Kelly, withdrew money from FBOP for personal use by causing FBOP to extend a personal loan to him for approximately $6 million. In return for the loan, Kelly executed an unsecured promissory note (the "Kelly Note") in favor of FBOP, which Kelly signed as the debtor and also on behalf of FBOP in his capacity as President of FBOP. In March 2010 (after the FDIC was appointed receiver for the Banks), Defendant BMO Harris, N.A. ("BMO") brought suit against FBOP, claiming that FBOP owed BMO approximately $44 million as a result of an earlier failed attempt by FBOP to acquire another bank subsidiary that had been indebted to BMO. In addition to the debt FBOP owed to JPMorgan and BMO (its two largest creditors), FBOP also owed collectively approximately $100 million to numerous other creditors.
C. THE $10.3 MILLION IN NON-ESCROWED REFUNDS
Just before JPMorgan filed its lawsuit (and before the FDIC took over the Banks), on or about April 15, 2009, the Consolidated Group made an estimated quarterly tax payment to the IRS in the approximate amount of $10.3 million. This payment was made by FBOP with funds transferred to it by the Banks for the specific purpose of paying the Banks' share of the 2009 quarterly estimated tax payment. As it turned out, the Consolidated Group suffered a $1.12 million consolidated net operating loss in 2009. Thus, in March 2010, the IRS issued a full refund of the $10.3 million estimated tax payment. The refund was made payable to FBOP. By the time FBOP received the $10.3 million tax refund, the Banks had been closed and the FDIC had been appointed receiver. FBOP did not inform the FDIC about the Consolidated Group's tax refund, "[d]espite the fact that FBOP was in discussions with the FDIC regarding ownership of tax refunds." R. 35 (¶ 118). At the time FBOP received the $10.3 million tax refund, both JPMorgan and BMO were pursuing collection actions against it. The FDIC alleges upon information and belief that FBOP transferred some or all of the $10.3 million tax refund to the Trustee or one or more of its creditors.
D. FBOP'S SETTLEMENT OF ITS UNSECURED CREDITORS' CLAIMS
Approximately six months after its receipt of the $10.3 million tax refund from the IRS, FBOP entered into settlement agreements with JPMorgan and BMO. As part of the settlement agreements, FBOP pledged all of its assets as security for the previously unsecured debt owed to those two creditors, including FBOP's rights (if any) to the $10.3 million tax refund it had received plus any other tax refunds FBOP might receive from the IRS on behalf of the Consolidated Group. In addition, Kelly promised to cooperate and assist in any efforts required to preserve the Consolidated Group's tax refunds for the benefit of JPMorgan and BMO to the exclusion of the FDIC. In return for these pledges, JPMorgan and BMO gave FBOP permission to use cash collateral to satisfy $13.7 million in purported deferred compensation claims allegedly owed by FBOP to former officers of the Banks and high level officers of FBOP. Additionally, JPMorgan agreed to acquire the Kelly Note and then forgive the amounts owed by Kelly under that Note. This plan was to be carried out by the Trustee acquiring the Kelly Note from FBOP through the Assignment, and then transferring the Note to JPMorgan, which then was to forgive the debt.
Approximately three months after entering into the settlement agreements with JPMorgan and BMO (hereinafter the "Senior Secured Creditors"), FBOP also entered into settlement agreements with its other unsecured creditors, giving those creditors security interests in FBOP's assets that were subordinate to the security interests FBOP had granted to the Senior Secured Creditors. The settlement agreements between FBOP and these other creditors (collectively the "Sub-Debt Holders") further provided that the subordinate liens promised in the agreements would be released if the Senior Secured Creditors' liens were avoided as fraudulent transfers. Like FBOP's settlement agreements with the Senior Secured Creditors, the settlement agreements with the Sub-Debt Holders required FBOP to use commercially reasonable efforts to minimize the value of any payments made to the FDIC on account of the Banks' claimed interest in the tax refunds.
Not long after all of these settlement agreements were executed, FBOP entered into the Assignment, pursuant to which FBOP assigned its assets and property to the Trustee and granted the Trustee the power and duty, among other things, to sue or be sued, and prosecute or defend any claims existing against or in favor of FBOP. Included in the transfer of property under the Assignment is any property interest FBOP has in the tax refunds.
E. THE $265.3 MILLION IN ESCROWED REFUNDS
In November 2009, Congress enacted the Worker, Homeownership, and Business Assurance Act ("WHBAA"), which extended the number of years businesses were allowed to carry back net operating losses incurred in 2008 and 2009. Id. (¶ 122). The Consolidated Group had a 2009 NOL of $1,120,632,424, of which $1,027,845,581 was attributable to the Banks' operating losses and $92,786,843 was attributable to losses incurred by FBOP and its non-bank subsidiaries. R. 35 (¶¶ 108-110). Thus, shortly after the FDIC was appointed as receiver for the Banks in October 2009, it began negotiations with FBOP over the filing of amended tax returns for the Consolidated Group to take advantage of the new carry-back rules.
These negotiations took place over the course of the next two years and culminated with FBOP's filing, with the knowledge and consent of the FDIC, of a 2009 consolidated federal tax return and amended consolidated federal tax returns for tax years 2004 through 2008. These consolidated tax filings were made on September 11, 2011, around the same time as FBOP and the FDIC negotiated and entered into the Escrow Agreement (dated September 30, 2011). The Escrow Agreement acknowledged that the Consolidated Group expected to receive tax refunds as a result of the September 11, 2011 tax filings, as well as possible future tax filings yet to be made. The Escrow Agreement further acknowledged that the FDIC and FBOP disagreed over who owned those anticipated tax refunds. Therefore, the tax refunds were placed into an escrow account until the parties reached agreement or until ownership of the funds was determined by an "order or judgment of a federal court of competent jurisdiction in the Northern District of Illinois . . . which is no longer subject to appeal and for which no appeal is pending." R. 145 at 62 (¶ 1.1(x)).
The Consolidated Group's amended tax returns resulted in tax refunds in the total amount of $265,366,909.
F. CURRENT LITIGATION
Discovery on the FDIC's Amended Complaint has been stayed while the FDIC and the FBOP Defendants seek a ruling from the Court on the tax refund ownership question. The parties'
As shown by the above, the FBOP Defendants' Rule 12(c) motion seeks to deliver a fatal blow to virtually all of the FDIC's claims in the Amended Complaint, with Count VIII being the only claim left standing.
The FBOP Defendants ask the Court to adopt the position taken by a number of courts which have held that the parent company is the owner of the tax refunds of a consolidated tax group and the individual group members' rights to the tax refunds under a tax allocation agreement is contractual in nature. The courts adopting this view all address the tax refund issue in the context of the parent corporation's bankruptcy, and conclude that the tax refunds are property of the bankrupt estate within the meaning of 11 U.S.C. § 541(a), such that the subsidiary's recovery of its contractual share of the tax refunds stands on the same footing as the recovery of any other unsecured creditor of the parent company.
Although the Court is not writing on a blank slate, this case is unique in one respect. While the FBOP Defendants do not contest that FBOP is insolvent, no bankruptcy petition has been filed. Instead, FBOP transferred its property to the Trustee pursuant to the Assignment. An assignment for the benefit of creditors "passes legal and equitable title to the debtor's property from the debtor to the assignee." In re Computer World Solutions, Inc., 479 Bankr. 483, 486-87 (Bankr. N.D. Ill. 2012). The "assignee (or trustee) holds property for the benefit of a special group of beneficiaries, the creditors." Ill. Bell Tel. Co. v. Wolf Furniture House, Inc., 509 N.E.2d 1289, 1292 (Ill. App. 1987). "A debtor may choose to make an assignment for the benefit of creditors, which is an out-of-court remedy, rather than to petition for bankruptcy, because assignments are less costly and completed more quickly." First Bank v. Unique Marble & Granite Corp., 938 N.E.2d 1154, 1158 (Ill. App. 2010). "[T]he assignment is valid without the consent of any of the assignor's creditors." Consol. Pipe & Supply Co. v. Rovanco Corp., 897 F.Supp. 364, 370 (N.D. Ill. 1995).
While an assignment for the benefit of creditors generally is recognized under Illinois law as a valid alternative to bankruptcy, there is a further wrinkle here. Prior to FBOP's execution of the Assignment, it entered into a series of transactions by which it pledged its assets as security to the Senior Secured Creditors and the Sub-Debt Holders. The FDIC alleges that FBOP chose the out-of-court remedy of an assignment for the benefit of creditors to avoid the scrutiny a bankruptcy court would apply to these pre-assignment security pledges. In re Computer World Solutions, Inc., 479 Bankr. at 486 ("the Bankruptcy Code does not provide for bankruptcy court supervision of assignees or their attorneys"). In support of that allegation, the FDIC cites to the Assignment, which allegedly provides, among other things, that the Trustee cannot challenge the validity of the pre-assignment security pledges.
I. CHOICE OF LAW
Because the Court has federal question jurisdiction over the FDIC's complaint,
Nevertheless, "[d]eveloping a federal common law rule is the exception rather than the rule. Federal law should coincide with the relevant state law unless state law would undermine the objectives of the federal statutory scheme and there is a distinct need for nationwide legal standards." Id. at 1055 (citing Kimbell Foods, Inc., 440 U.S. at 728). The Court does not need to decide at this time whether a federal common law rule should be applied because, as will be seen, the Court concludes that state law properly interpreted and applied does not undermine the federal banking regulatory scheme. Therefore, the Court will apply state law for purposes of the present motions. The issue may be reconsidered, however, should any future motions present a conflict between state law and a national interest. The Court also notes that, while state law is controlling, federal precedent applying that law may and should be considered, particularly because this case involves property created by federal law (tax refunds). See In re Innis, 331 Bankr. 784, 786 (Bankr. C.D. Ill. 2005) ("That a debtor's rights in a tax refund are determined under state law is not subject to dispute. However, because a federal tax refund is a creature of federal tax law, rights created thereunder cannot be ignored.") (citations omitted).
II. RULES OF CONTRACT INTERPRETATION
The combining of corporate income and losses to produce a consolidated group tax liability raises issues about allocating tax benefits and burdens among group members that are not resolved by federal tax laws. FBOP and the Banks entered into the TAA to address those unresolved issues. Both parties agree, however, that no provision of the TAA explicitly deals with the question of who owns the tax refunds. Because of the absence of an express contractual resolution of the ownership issue, the FDIC argues that the Court should take into account what the rule would be in the absence of an agreement on the tax refund ownership question, which both parties refer to as the "default rule." The FBOP Defendants, on the other hand, argue that the default rule should not be considered because the answer to the ownership question is found by implication from the language of the TAA. The Court agrees with the FDIC.
Even if the Court assumes, as the FBOP Defendants argue, that the TAA contains language from which FBOP's ownership of the tax refunds can be implied, basic principles of contract interpretation teach that the Court must consider the default rule, particularly where a literal interpretation of the contract language might "wreak unintended consequences" on the parties. Wal-Mart Stores, Inc. Assocs.' Health & Welfare Plan v. Wells, 213 F.3d 398, 402 (7th Cir. 2000). That was the holding of the Seventh Circuit in the Wal-Mart case, in which the court examined the language of an ERISA plan document. The question was whether the plan document had to be construed according to its "clear" import, which would be contrary to the default rule and lead to "anomal[ous]" results. Id. at 402. Because "[t]he plan document neither advert[ed] to the anomaly [that resulted from a literal interpretation] nor expressly repudiate[d] [the default rule]," the court concluded as a matter of "sound application of principles of contract interpretation" that the plan document did "not alter the background [default rule]." Id. at 402-03 (holding that "contracts—which for most purposes ERISA plans are—are enacted against a background of common-sense understandings and legal principles that the parties may not have bothered to incorporate expressly but that operate as default rules to govern in the absence of a clear expression of the parties' intent that they not govern").
The "default rule" contract analysis of Wal-Mart was validated by U.S. Airways, Inc. v. McCutchen, 133 S.Ct. 1537 (2013), in which the United States Supreme Court referred to the default rule as a "gap-filling" principle, and explained that
Id. at 1549 (internal quotation marks and citations omitted). Like the Seventh Circuit, the Supreme Court emphasized that ignoring default or gap-filling rules in interpreting contracts "is likely to frustrate the parties' intent and produce perverse consequences." Id.
While McCutchen and Wal-Mart involved ERISA plans and hence applied federal common law contract interpretation principles, Illinois contract principles
Fox v. Heimann, 872 N.E.2d 126, 136 (Ill. App. 2007) (internal quotation marks and citations omitted); see also Bd. of Regents v. Wilson, 326 N.E.2d 216, 220 (Ill. App. 1975) ("Contracts are presumed to have been entered into in the light of existing principles of law, (citation omitted) and the existing law is presumed to be a part of every contract (citation omitted) and contracts should be so understood and construed unless otherwise clearly indicated by the terms of the agreement.") (internal quotation marks and citation omitted); see generally 11 WILLISTON ON CONTRACTS § 30:19 (4th ed.) ("[C]ontractual language must be interpreted in light of existing law, the provisions of which are regarded as implied terms of the contract, regardless of whether the agreement refers to the governing law. This principle applies to the common law in effect in the jurisdiction as well as to . . . statutes [and]. . . regulations, including provisions which affect the validity, construction, operation, effect, [and] obligations . . . of the contract.").
An example of an Illinois case applying gap-filling rules, which also involved a tax issue, is U.S. Trust Co. of N.Y. v. Jones, 111 N.E.2d 144 (Ill. 1953). There, the Illinois Supreme Court analyzed the question of whether the tax under consideration should be paid out of the trust corpus or out of distributable income. The language of the trust document suggested that the tax was to be paid out of the trust corpus. But the court declined to interpret the trust language literally in light of revenue laws, which would apply in the absence of that language and would require the taxes to be paid out of distributable income. Like the Seventh Circuit in Wal-Mart and the Supreme Court in McCutchin, the Illinois Supreme Court sought "to avoid the unreasonable and impractical" consequences of a literal interpretation of the language of the document. Id. at 146. Avoiding unintended consequences is as much a part of contract interpretation as the "four corners" rule, as Judge Learned Hand explained in words quoted by the Illinois Supreme Court:
Id. (quoting United States v. Klinger, 199 F.2d 645, 648 (2d 1952)) (internal quotation marks omitted).
Applying these contract interpretation principles here means that the Court must consider not only the language of the TAA on which the FBOP Defendants rely, but also the background or "default" rule on which the FDIC relies and which would apply in the absence of an agreement to the contrary. The Court also must consider whether construing the Agreement in contravention of the default rule makes sense in light of the circumstances surrounding the agreement, and ask how the parties are likely to have dealt with the ownership question given those circumstances.
III. THE FBOP DEFENDANTS' RULE 12(c) MOTION FOR JUDGMENT AS A MATTER OF LAW ON COUNTS I-II
A. THE "DEFAULT" RULE REGARDING OWNERSHIP OF TAX REFUNDS
1. ILLINOIS LAW: TAX REFUNDS OF JOINT FILERS BELONG TO THE TAXPAYER WHO PAID THE TAXES
Under Illinois law,
Illinois law also provides that the filing of a joint tax return does not divest the person who paid the taxes of his ownership interest. See In re Lock, 329 Bankr. at 860 ("The mere signing of a joint return by a spouse to obtain the benefit of perceived tax advantages does not thereby effect a conversion of funds of that spouse into property of the other. Although joint federal filings are authorized by . . . the Internal Revenue Code, . . . this provision does not propose, nor does it imply, that any property rights are altered by a joint income tax filing.").
BOB RICHARDS CASE
The FBOP Defendants ignore Illinois law regarding ownership of tax refunds. Instead, the FBOP Defendants characterize the FDIC's argument for a "default" rule as being based on the Ninth Circuit's decision in Western Dealer Management, Inc. v. England (In re Bob Richards Chrysler-Plymouth Corp.), 473 F.2d 262 (9th Cir. 1973). In the Court's view, however, the FBOP Defendants' targeting of the Bob Richards case is a straw man. While Bob Richards is consistent with the FDIC's position, it does not actually address the tax refund ownership question. Therefore, attacking and/or distinguishing the Ninth Circuit's ruling in that case, as the FBOP Defendants do, does little to advance the FBOP Defendants' arguments.
Bob Richards holds that tax refunds of a consolidated tax group should inure to the benefit of the subsidiary rather than the parent company. In reaching this conclusion, the Ninth Circuit reasoned as follows:
Id. at 264-65.
Bob Richards primarily involves a default rule concerning allocation and not ownership of tax refunds in the consolidated tax filing context. The default allocation rule applied by the Bob Richards court is that "a tax refund resulting solely from offsetting the losses of one member of a consolidated filing group against the income of that same member in a prior or subsequent year should inure to the benefit of that member." Id. at 265. A number of the cases on which the FBOP Defendants rely (see footnote 17, supra) hold that the rule enunciated in Bob Richards is irrelevant to resolving the tax refund ownership question where the case involves a tax allocation agreement. The Court agrees that the default tax allocation rule set forth by the Bob Richards court does not apply to this case because the TAA expressly states the allocation rules for determining the extent to which each member of the Consolidated Group is entitled to enjoy the benefit of consolidated tax refunds. See R. 145 at 44 (TAA, ¶ 9).
Apart from enunciating a default tax allocation rule, Bob Richards impliedly held that the tax benefit which the subsidiary bank was entitled to enjoy was a property right. See Bob Richards, 473 F.2d at 265 ("Allowing the parent to keep [the] refunds . . . unjustly enriches the parent."). But the Bob Richards court was not expressly ruling on the property right question because that question was not put at issue in the case. The default tax refund ownership rule was at issue, however, in later case law applying the Bob Richards default allocation rule in situations like Bob Richards where a tax allocation agreement did not exist, Those cases apply the Bob Richards default allocation rule (i.e., the subsidiary who generated the losses that led to the consolidated tax refunds is entitled to enjoy the benefit of those refunds), but then limit the reach of the default allocation rule by further holding that the subsidiary may only recover refunds up to the amount of taxes actually paid by it. See, e.g., Jump v. Manchester Life & Cas. Mgmt. Corp., 579 F.2d 449, 454 (8th Cir. 1978) (limiting the subsidiary's recovery to the amount required to offset its tax payments because the court did not see any reason under the applicable state law (Missouri) "to divert a refund of tax dollars paid by other members of the affiliated group to reward [the subsidiary] for the fortuitous effect its losses, in combination with the earnings of other group members, had on the consolidated tax liability of the group").
Because the issue of property rights in the tax refunds was not in dispute in the Bob Richards opinion, that case does not stand for the proposition that the existence of a tax allocation agreement renders the default tax refund ownership rule irrelevant. See Stanek v. St. Charles Cmty. Unit Sch. Dist. No. 303, 783 F.3d 634, 640 (7th Cir. 2015) (unexamined assumptions of prior cases do not control the disposition of a contested issue). The indisputable proposition that a tax allocation agreement resolves issues of tax allocation does not mean that a tax allocation agreement necessarily also resolves the issue of whether the subsidiary banks have a property right in any tax refunds. See, e.g., Sosne, 2016 WL 775176 at *2 ("The TSA includes provisions addressing distribution of refunds, but the TSA does not address ownership of the refunds."); In re Nelco, Ltd., 264 Bankr. at 809 (where court acknowledges its earlier ruling that the applicable tax allocation agreement "did not address the allocation of tax refunds"). As the court observed in In re Bancorp, slip op at 10 (R. 174-1 at 11), "[p]arties to a contract do not override a gap-filling rule simply by reaching explicit agreement on some other matter." The cases on which the FBOP Defendants rely for the proposition that the default rule is irrelevant because of the existence of a tax sharing agreement are essentially circular: they reason that the default rule does not apply because the tax sharing agreement resolves the ownership question, when the very purpose for considering the default rule is to decide whether the tax sharing agreement resolves the ownership question. Accordingly, the Court rejects the FBOP Defendants' argument based on these cases that the parties' explicit agreement in the TAA concerning how to allocate tax refunds negates the need to interpret the TAA on the ownership question using gap-filling rules like the Illinois tax refund ownership rule.
3. FEDERAL COMMON LAW ARGUMENT
The FBOP Defendants also argue that the default rule should be ignored because Bob Richards applies federal common law, and the Supreme Court has held that "there is no free-ranging federal common law to provide gap-filing rules in favor of the FDIC-R." R. 166 at 9 n.5. As already noted, however, Illinois' default tax refund ownership rule does not depend on the Bob Richards case. Instead, it is based on state law property principles. In any event, the Court does not agree that the Bob Richards case is an example of the inappropriate application of federal common law. The Supreme Court has defined federal common law as "the judicial `creation' of a special federal rule of decision" that "`displace[s] state law.'" Atherton v. Fed. Deposit Ins. Corp., 519 U.S. 213, 218 (1997) (citation omitted); see also O'Melveny & Myers v. Fed. Deposit Ins. Corp., 512 U.S. 79, 87 (1994) (creation of federal common law rule "alters" otherwise applicable law). The FBOP Defendants do not cite any state law they contend the Bob Richards court displaced or altered. While the Bob Richards court did not specifically cite a source of law, its holding is based on the general equitable principle of preventing unjust enrichment. See 473 F.2d at 264-65; see also 8 × 8, Inc., 125 Fed. Cl. at 327 (purpose of provision in tax code providing that a tax collector may not secure a refund of taxes it collected from taxpayers and remitted to the IRS on their behalf where it has neither repaid the taxpayers nor obtained the taxpayers' consent, was to "preclude what would otherwise result in unjust enrichment"). The FBOP Defendants may disagree with the Bob Richards court's application of unjust enrichment principles to the consolidated tax filing context, but it has not shown that, by applying those principles, the court was creating federal common law to displace state law.
UNITED DOMINION ARGUMENT
The FBOP Defendants also argue that Bob Richards, and by extension, the default rule, is contrary to the Supreme Court's decision in United Dominion Industries, Inc. v. United States, 532 U.S. 822 (2001). United Dominion involved a particular type of carry-back loss called a product liability loss ("PLL"), which, under the Internal Revenue Code ("IRC"), is calculated by taking the total of a taxpayer's product liability expenses ("PLEs") up to the amount of its NOL, which means that "a taxpayer with a positive annual income, and thus no NOL, may have PLEs but can have no PLL." Id. at 825. The question in United Dominion was whether a consolidated group's PLL could be calculated by aggregating PLLs separately determined company-by-company, or whether it instead must be calculated on a consolidated, single-entity basis. The Supreme Court rejected the aggregate-of-separate PLLs approach on the theory that the IRC and applicable Treasury regulations define net operating losses exclusively as consolidated net operating losses. Given this statutory definition, the Court observed, it was "fair to say, as United Dominion says, that the concept of separate NOL `simply does not exist.'" Id. at 830 (quoting Brief for Petitioner).
The FBOP Defendants rely on this quoted sentence to argue that the FDIC's position in this case based on the default rule relies on the erroneous premise that the tax refunds stem from the Banks' separate NOLs when in fact separate NOLs do not exist. United Dominion, however, addressed how to calculate the tax liability owed by a consolidated group to the IRS, while this case concerns the entirely different issue of ownership rights in tax refunds as between members of a consolidated tax group. Moreover, United Dominion in any event "does not stand for the blanket proposition that [all deductions are] determined at the consolidated return level." Brunswick Corp. v. United States, 2008 WL 5387086, at *8 (N.D. Ill. Dec. 22, 2008). Instead, it stands for the much narrower proposition "that courts considering whether to look at the consolidated return level or the subsidiary level should look to the applicable IRC provisions and regulations." Id. In this case, there are no applicable IRC provisions and regulations.
In addition to the above, the question of separate versus consolidated NOLs is beside the point, because the issue here is not whether the Banks have a property interest in their NOLs. See The Asher Candy Co. v. MAFCO Holdings, Inc., (In re Marvel Entm't Grp., Inc.), 273 Bankr. 58, 85 (D. Del. 2002) (cited by the FBOP Defendants) (citing United Dominion for the proposition that, "[i]n the context of the consolidated tax filing group, the hypothetical stand-alone NOLs that were calculated for the purposes of the Tax Sharing Agreement were not property of the debtor because they were a legal fiction"). While the Banks' NOLs may have led to the refunds, and also factor into the computation under the TAA for allocating the refunds, the issue here is whether the Banks had a property interest in the tax refunds themselves, not the items that gave rise to those refunds or determined their allocation among members of the Group. As the bankruptcy court stated in In re Indymac Bancorp, Inc., 2012 WL 1037481 (Bankr. C.D. Cal. Mar. 29, 2012), a debate about whether the NOLs themselves represent a property interest is "a sideshow and not material to resolution of this dispute." Id. at 22; see also In re Feiler, 218 F.3d at 956 ("Whether the NOLs themselves are considered property is something of a red herring . . . [because] the property [the debtors] gave up was the tax refund—the NOLs are simply an accounting method for figuring their entitlement to the refund under the present tax code.").
5. UNJUST ENRICHMENT ARGUMENT
The FBOP Defendants' final argument against the Court's consideration of a default rule regarding tax refund ownership is that unjust enrichment is not present here because FBOP seeks to use the tax refunds to pay its creditors rather than keep the money for itself. But both the Banks and FBOP are insolvent and have creditors. Moreover, if the FDIC's allegations regarding FBOP's transfer of security interests to the Senior Secured Creditors and Sub-Debt Holders turn out to be true, then this argument seems somewhat disingenuous. The FDIC alleges that FBOP used the tax refunds to structure a settlement with these other creditors that not only gave a preference to those creditors at the expense of the Banks, but also personally enriched FBOP's Chairman and high level Bank and FBOP officers to the detriment of the Banks. None of the cases on which the FBOP Defendants rely involved allegations of pre-bankruptcy shenanigans similar to those alleged here.
In any event, even if the pre-Assignment transactions between FBOP and the Senior Secured Creditors and Sub-Debt Holders are not taken into account, FBOP's use of the tax refunds to satisfy its other creditors is irrelevant. If FBOP is not the owner of the tax refunds, then it will be unjustly enriched by retaining those funds, regardless of FBOP's intention of making the funds available for distribution to its other creditors.
The FBOP Defendants' unjust enrichment argument is similarly unpersuasive. Moreover, the cases cited by the FBOP Defendants are not to the contrary. Instead, those courts reject equitable arguments raised by the subsidiary only after first holding that the subsidiary did not have a property interest in the tax refunds. As a result, they merely stand for the truism that, when an unsecured creditor receives less than the full amount of a debt the insolvent corporation had promised to pay it, that "is not injustice, it is bankruptcy." In re First Cent. Fin. Corp., 377 F.3d at 217. That same argument has no force whatsoever if the tax refunds are found to be property of the subsidiary. See Pearlman v. Reliance Ins. Co., 371 U.S. 132, 135-36 (1962) ("The Bankruptcy Act simply does not authorize a trustee to distribute other people's property among a bankrupt's creditors.").
B. THE TAA
Turning to the TAA, the Court begins its analysis, as dictated by Illinois contract interpretation principles, with the presumption that the TAA incorporates the default tax refund ownership rule pursuant to which the Banks are the owners of the tax refunds to the extent that they bore the economic burden of the taxes on which the refunds are based. In construing whether the TAA overrides this presumption, the Court will consider not only the language of the TAA but the circumstances surrounding the parties' execution of that Agreement and a common sense understanding of the parties' likely intent.
1. SURROUNDING CIRCUMSTANCES SUPPORT THE DEFAULT TAX REFUND OWNERSHIP RULE
The circumstances surrounding the execution of the TAA include the economics of consolidated tax filing and the reasons why, in light of those economics, the parties would enter into the TAA. Consolidated tax filing is beneficial to an affiliated group of companies because it permits a company with income to offset that income with the losses of an affiliated company without income. Typically, as here, members of a consolidated tax group will enter into a tax allocation agreement to establish the terms on which a company with net income will compensate an affiliated company with net operating losses for the use of those losses to reduce the tax liability of the income-producing company. Consequently, although an income-producing member's tax liability may be less under the consolidated filing as a result of its ability to use the off-setting losses of another member of the group, the income-producing member does not experience any net benefit from filing a consolidated tax return because it has to pay the loss member for use of the loss. On the other hand, the loss member with no positive net income is better off having filed as part of a consolidated tax group because it receives compensation from the income-producing group member through the tax sharing agreement for losses otherwise of no use to it.
The FDIC argues that typically banks that are part of a consolidated tax group are income-producing members, while the parent bank holding company and its non-banking subsidiaries are loss members. From a group perspective, therefore, consolidated tax filing in the banking context facilitates transfers of money from the banks to the parent and the parent's non-banking subsidiaries through tax allocation agreements that require the banks to compensate the parent and the non-banking subsidiaries for use of those entities' net operating losses. See R. 153 at 10. What actually happened here in the last year in which the Banks were operating before the FDIC took over is the reverse of the typical situation; that is, the Banks had net operating losses of their own, which they were entitled under the law to use to generate tax refunds by filing amended tax returns for past years in which they had net income and paid taxes. Given the economics of what was expected when the Banks entered into the TAA, however, it makes little sense for the Banks to have agreed in the TAA to give up their property rights in tax refunds to which they otherwise would have been entitled had they not entered into the TAA. Because the Banks did not receive a net benefit from the consolidated tax filing, they had no incentive to give up their property rights. See Wells Fargo Funding, 608 F. Supp. 2d at 989 ("Why would DKMC's payment of the settlement amount—which only covered fifteen loans—absolve the guarantors of their obligations under their Guaranty Agreements of other loans not being settled? Such largesse on Wells Fargo's part would make no commercial sense—at least none that the defendants can point to[.]"). To construe the TAA as transferring the Banks' property interest in tax refunds to FBOP, the Court essentially would have to hold that the Banks entered into an agreement that not only provided them with no benefits but also made them worse off when the unexpected later happened and they experienced net operating losses, which, had they filed separately, would have led to tax refunds directly payable to them. See Lubin, 2011 WL 825751, at *6 (citing to "[t]he economic reality of the arrangement between Bancshares and the Bank" in ruling against the parent company on the tax refund ownership question).
In addition to economics, the FDIC points out that the Federal Reserve Act requires that an extension of credit from a banking institution to its non-banking parent company must be secured by collateral at the time of the transaction. And another provision of the Act requires that extensions of credit from a bank to its parent company must be made on terms that would be provided in comparable transactions, which would include provisions at the inception for the payment of interest at an appropriate rate. See 12 U.S.C. § 371c-1. "[A]n interpretation which renders a contract lawful is preferred over one which renders it unlawful." 11 WILLISTON ON CONTRACTS § 32:11. But the Court does not need to decide whether banking laws in fact would be violated if the TAA is interpreted as transferring the Banks' ownership rights in the tax refunds to FBOP, because it at least arguable that the banking laws would be. See In re NetBank, Inc., 729 F.3d at 1351 n.8 (stating that the absence of provisions for interest and collateral was significant to deciding whether ownership of refunds was transferred to parent company by tax allocation agreement given that, "under 12 U.S.C. § 371c, banks are restricted in their ability to engage in certain transaction with affiliates—including issuing a loan or extension of credit without ensuring sufficient collateral protections"); In re BSD Bancorp., slip op. at 11-12 (stating that, "[f]or a debtor-creditor relationship to arise between Bancorp [the parent] and Bank, then, there would presumably have to be some further agreement through which Bancorp supplied collateral meeting the requirements of § 371c(c)(1)").
In fact, the Federal Reserve has suggested that it might conclude an unlawful extension of credit resulted from a situation where a bank is not immediately paid the tax refunds received by the parent company to which the subsidiary was entitled under a tax allocation agreement. See Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure, 63 Fed. Reg. 64757-01 at 64758, 1998 WL 804364(F.R.) ("1998 Policy Statement") ("If a refund is not made to the institution within [a reasonable] period, the institution's primary federal regulator may consider the receivable as either an extension of credit or a dividend from the subsidiary to the parent.").
The FBOP Defendants argue that it cannot be correct that interpreting the TAA as transferring the Banks' ownership rights to FBOP defies common sense because numerous courts have construed similar tax allocation agreements as providing that the banks in those cases did just that. All of those cases, however, address the issue in the bankruptcy context where the court was applying the definition of property under 11 U.S.C. § 541(a). While the definition of property is the same both inside and outside the bankruptcy context, several of the courts in question appeared to justify their interpretation of the agreements in question by the fact that bankruptcy laws were involved.
2. THE TAA DOES NOT CLEARLY REPUDIATE THE DEFAULT TAX REFUND OWNERSHIP RULE
The FBOP Defendants cite to a number of provisions of the TAA which they argue demonstrate an intent to create a debtor-creditor relationship. The Court will consider each of these.
a. TAX ALLOCATION AND PAYMENT PROVISIONS
The FBOP Defendants rely on provisions of the TAA intended to address the allocation of tax benefits and the payment of tax liability, arguing that an implied debtor-creditor relationship can be inferred from those provisions. The relevant contractual provisions include §§ 1, 2, and 4-7. Section 1 provides that each Group member is to calculate the amount of taxes it would have incurred had it filed a separate tax return. Section 2 provides that each Group member is to adjust its separate tax liability based on a set of rules set out in §§ 4-7, which govern the circumstances under which a Group member is or is not entitled to be compensated for a tax benefit attributable to that member's operations. For the most part, these rules benefit the member who is identified with the income or losses that led to the tax savings. The separate adjusted tax liabilities of each Group member are then totaled. If the Consolidated Group's actual tax liability is less than the aggregate separate tax liabilities (a consolidated tax savings), then § 2(b) provides that the tax savings is allocated among the Group members taking into account the rules set forth in §§ 4-7. If the consolidated tax savings cannot be specifically identified and attributed to a particular member of the Group, then § 2(b) provides that the tax savings is allocated among the Group members in proportion to the tax currently payable by each member as calculated on a separate return basis. If the Group's consolidated tax liability is greater than the aggregate separate basis tax liability of the Group's members (a consolidated tax loss), then § 2(a) provides that the excess liability is attributed to FBOP.
Nothing in these allocation and payment provisions suggests that the parties had the tax refund ownership issue in mind. Only two of these provisions even mention refunds. The first is § 9, which, as noted in the discussion about the Bob Richards case, deals with the allocation of tax refunds among members of the Consolidated Group. The Court does not perceive anything about the allocation rules in § 9 that would mandate the conclusion that the Banks gave up their property right to receive the tax refunds.
The second provision that refers to refunds is § 3. The FBOP Defendants argue that § 3 "squarely distinguishes between actual tax refunds paid to FBOP by a taxing authority and FBOP's independent contractual obligations to reimburse Subsidiaries for refunds that would have been due and owing based upon the Subsidiaries' stand-alone tax attributes." R. 145 at 7. But no such distinction is drawn in that provision. Instead, § 3 states that:
R. 145 at 42 (¶ 3).
According to the FBOP Defendants, § 3 provides that if a Bank overpaid its estimated taxes to FBOP, then FBOP had a contractual obligation to refund the overpayment to that Bank no later than the date on which the Bank would have expected to receive a refund from the IRS had it filed on a stand-alone basis. Assuming that is a correct interpretation of § 3,
The relationship between the concept embodied in § 3 and actual tax refunds is explained in the 1998 Policy Statement, which, as previously noted, sets forth the position of the Federal Reserve Board of Governors regarding the allocation and payment of income taxes by banks that are members of a consolidated tax group. It is obvious from a comparison of the text of the Policy Statement and the text of the TAA that § 3 of the TAA is patterned after the Policy Statement. Therefore, it is helpful to consider the full text of the relevant portion of the Policy Statement:
63 Fed. Reg. at 64758-64759, 1998 WL 804364 (emphasis added).
The Policy Statement's explanation refers to the contractual duty on the part of the parent company to make retroactive adjustments to the amount of a bank's share of the consolidated group's tax liability regardless of whether a tax refund is actually received by the consolidated group (the requirement embodied in § 3), while at the same time also admonishing that tax allocation agreements should not purport to characterize actual tax refunds "receive[d] from a taxing authority," which are attributable to the operations of the subsidiary, as the property of the parent. Thus, the Federal Reserve Board does not perceive any inconsistency between provisions like § 3 and a bank's ownership interest in tax refunds. Nor does this Court. Under Illinois law, the Banks do not have an ownership interest in the funds they forwarded to FBOP for purposes of making their tax payments.
b. DEBTOR-CREDITOR TERMINOLOGY
The Court also does not think the so-called "debtor/creditor" terminology used in the TAA, see, e.g., In re Downey Fin. Corp., 593 Fed. App'x at 127; In re United W. Bancorp, Inc., 558 Bankr. at 425; In re Indymac Bancorp, Inc., 2012 WL 1037481, at *13, overrides the default tax refund ownership rule. Because the TAA is primarily a contract about allocating tax liabilities and benefits, accounting for those liabilities and benefits among Group members not surprisingly required the parties to use words such as "credit" or "reimburse." As the FDIC notes, the allocation provisions in the TAA that use the debtor-creditor language in question "say nothing about tax refunds actually received from the IRS that are attributable solely to taxes paid by the Banks in previous years and losses suffered by the Banks in the current year." R. 174 at 10; see Lubin, 2011 WL 825751, at *5 (concluding that debtor-creditor language of tax agreement "does not override the presumptive principal-agent relationship").
"Moreover, because words derive their meaning from the context in which they are used, a contract must be construed as a whole, viewing each part in light of the others." Gallagher v. Lenart, 874 N.E.2d 43, 58 (Ill. 2007). Thus, the "letter" of a written instrument must be "controlled by its spirit and purpose, bearing in mind that the terms employed are servants and not masters of an intent." U.S. Trust Co. of N.Y., 111 N.E.2d at 147. This means that "courts are sometimes required to restrict the meaning of words," and "[p]articular expressions will not control where the whole tenor or purpose of the instrument forbids a literal interpretation of the specific words." Id. at 147-48; see also 11 WILLISTON ON CONTRACTS § 31:7 (4th ed.) ("few courts  will give the words of a contract their literal meaning if it appears from the surrounding circumstances that a literal construction or interpretation will defeat or frustrate the intentions of the parties"). Thus, the Court agrees with the Sixth Circuit when it said that "straining to imbue the commonplace terms `payment' and `reimbursement' with specialized and unambiguous meaning falls flat." AmFin Fin. Corp., 757 F.3d at 535; see also In re BankUnited Fin. Corp., 727 F.3d at 1108 (rejecting argument that similar language showed intent to create a debtor-creditor relationship in light of absence of provisions that would provide "some means of protection for the creditor that would help guarantee the debtor's obligation, such as a fixed interest rate, a fixed maturity date, or the ability to accelerate payment upon default").
c. ABSENCE OF TRUST PROVISIONS
For similar reasons, the Court also rejects the FBOP Defendants' argument that the absence of language in the TAA creating an express trust in favor of the Banks over the refunds (such as provisions restricting FBOP's use of the tax refunds, requiring that the funds be placed in an escrow upon their receipt, or obligating FBOP to maintain them in a segregated account, see, e.g., In re Downey Fin. Corp., 593 Fed. App'x at 127; In re United W. Bancorp, Inc., 558 Bankr. at 427; In re IndyMac Bancorp, Inc., 554 Fed. App'x at 670; In re Team Fin. Inc., 2010 WL 1730681 at *5), shows a clear intent to create a debtor-creditor relationship. The FDIC is not arguing that an express trust was created by the TAA. Instead, the FDIC's argument is that the Banks did not intend, by entering into the Agreement, to transfer their property rights in tax refunds, and consequently that a resulting trust should be applied over the tax refunds. See AmFin Fin. Corp., 757 F.3d at 537 ("the FDIC never argued that the TSA created an express trust; rather, the FDIC urges the court to find an implied resulting trust") (emphasis in original). As the Eleventh Circuit stated, "the absence of language requiring a trust or escrow [does not have] much persuasive value. That factor is offset entirely by the similar absence of any language indicative of a debtor-creditor relationship—e.g., provisions for interest and collateral." In re NetBank, Inc., 729 F.3d at 1352. Moreover, under Illinois law, money "need not be held in a segregated account" for it to be subject to a conversion claim, so long as it is "sufficiently identifiable" such as "where a specific amount is transferred to the recipient from an outside source." Gates v. Towery, 435 F.Supp.2d 794, 801 (N.D. Ill. 2006). Thus, the Banks' failure to insist on a provision in the TAA that would have required the segregation or escrowing of tax refunds does not necessarily mean that the Banks intended to give up their property interests in those funds.
In addition, contrary to the FBOP Defendants' suggestion, the TAA specifically provides that FBOP was not free to do whatever it wanted with the tax refunds. Section 9 requires FBOP to distribute tax refunds to the Banks according to the allocation rules set out in that paragraph.
d. PRINCIPAL-AGENT ISSUE
The FBOP Defendants also make a number of arguments based on the TAA and agency law, none of which the Court finds persuasive. To begin with, the Court rejects the FBOP Defendants' reliance on the absence of language in the TAA creating a principal-agent relationship between FBOP and the Banks. See, e.g., In re Downey Fin. Corp., 593 Fed. App'x at 126. The FDIC does not argue that the Banks' property interest arises from an agency relationship established by the TAA; its argument is that the Banks' property interest arises from the default tax refund ownership rule. Moreover, any argument that the TAA affirmatively gives FBOP the right to control all tax matters, see, e.g., In re IndyMac Bancorp, Inc., 554 Fed. App'x at 670, is not only irrelevant but also factually untrue.
The FBOP Defendants also argue that a transfer in ownership rights to tax refunds can be inferred from the fact that the "actual refunds from the IRS were paid to and in the name of FBOP." R. 145 at 12. But it is beyond dispute that the reason the IRS paid the refunds to and in the name of FBOP was because of the procedural requirements of 26 C.F.R. § 1.1502-77, which make the parent company the agent of the subsidiary group members for purposes of dealing with the IRS. And every court that has considered the issue has adopted the view of the Bob Richards court that those procedural requirements do not establish a transfer of ownership interests in the tax refunds to the parent company.
Further, to make clear that FBOP received tax refunds from the IRS only in its capacity as agent for the Banks pursuant to 26 C.F.R. § 1.1502-77, the TAA refers to that regulation in § 11, which provides:
R.145 at 45 (emphasis added). The FBOP Defendants argue that this provision does not establish a general agency relationship between the Banks and FBOP because it merely incorporates the limited procedural agency rule of the federal regulation. But the FBOP Defendants miss the point of the FDIC's argument based on § 11. The FDIC does not claim that the Banks' ownership interest in the tax refunds arises out of an agency relationship created by either 26 C.F.R. § 1.1502-77 or § 11 of the TAA. Instead, the FDIC is saying that § 11 confirms the applicability of the default, gap-filling tax refund ownership rule. See In re NetBank, Inc., 729 F.3d at 1351 (resolving ambiguity in similar agency language of tax allocation agreement by reference to circumstances surrounding execution of the agreement and other provisions in the agreement);
Finally, the FBOP Defendants also suggest that by virtue of the TAA, FBOP assumed the Banks' tax liability vis a vis the IRS. See R. 145 at 12, 24 ("FBOP remained liable to the IRS for the entirety of the Consolidated Group tax liability, without regard to whether FBOP had, in fact, received estimated tax payments from its Subsidiaries."). But FBOP remained liable for the entire amount of the taxes owed by the Consolidated Group because the applicable statutory and regulatory provisions made FBOP liable, just as they make all members of the Group liable for the entire tax liability of the Group. This statutory liability is not relevant to the contractual issue of whether the parties intended to transfer the Banks' ownership interests in the tax refunds to FBOP.
3. THE TAA AFFIRMATIVELY REFLECTS A CONTRACTUAL INTENT TO MAINTAIN THE DEFAULT TAX REFUND OWNERSHIP RULE
The FDIC argues that the FBOP Defendants not only rely on sections of the TAA that address only the allocation of tax liability and benefits, but they also ignore explicit provisions in the TAA that affirmatively demonstrate that the parties did not intend to override the default tax refund ownership rule. The Court agrees.
a. NO LESS FAVORABLE PRINCIPLE
To begin with, the parties state in the TAA that it is their intent "that in no event will [the Banks] be required to contribute a share of the consolidated tax liability for the year in an amount in excess of that which [they] would have incurred for that particular year on the basis of separate federal and state income tax returns." R. 145 at 41 (Sixth Whereas clause). Indeed, the idea that the Banks would not pay any more taxes under the TAA than if they had filed separately is "at the core," In re NetBank, Inc., 729 F.3d at 1350, of the TAA. If the Banks are denied their appropriate share of the tax refunds, they will have paid more in taxes than had they filed separately, thereby defeating the "paramount purpose," In re BankUnited Fin. Corp., 727 F.3d at 1108, of that Agreement.
Further, the TAA states "that any permanent benefit accruing to the affiliated group by reason of the filing of a consolidated return shall be enjoyed by the member to which the benefit is attributed or otherwise shared in proportion to the respective amounts of tax liability incurred on the basis of separate returns for the year, . . . regardless of the possibility that the benefit . . . may not have been enjoyed under separate federal and state income tax returns." Id. (Sixth Whereas clause). This stated intent specifically applies to the recovery of taxes paid in prior years." Id. (Fourth Whereas clause) (emphasis added). The "permanent benefit" of net operating losses—which would have led to the "recovery of taxes paid in prior years" if the subsidiary that suffered the loss had filed taxes separately—would not be enjoyed by the member to which the benefit is attributed (the Banks) if that member is held to have only a contractual right in the tax refunds and the party owing the member that contractual right (FBOP) is unable or unwilling to fulfill its contractual obligation. See In re First Reg'l Bancorp, 560 Bankr. at 785 ("An implied tax-sharing agreement that would require the Bank to relinquish its rights to the Refund that is attributable to the Bank's own losses directly conflicts with Debtor's obligation to `do nothing to benefit itself financially at the expense of the financial condition of' the Bank."); In re BSD Bancorp., slip op. at 16 (same).
b. THE 1998 POLICY STATEMENT
The TAA does not just contain basic principles that are fundamentally inconsistent with an intent to give up property rights in favor of a contractual right. The TAA also contains language that affirmatively indicates an intent not to give up property rights in tax refunds. The language in question is found in the Fifth Whereas clause, where the parties state their intention of accounting for the separate tax liabilities and benefits of each group "consistent with . . . the Policy Statements of the Board of Governors of the Federal Reserve regarding the allocation of taxes between members of an affiliated group." R. 145 at 41 (Fifth Whereas Clause). The Policy Statements of the Board of Governors of the Federal Reserve include the 1998 Policy Statement.
The Eleventh Circuit considered similar contract language,
Similarly, here, the Court must "give effect to all the relevant contractual language to resolve the question of the parties' intent," and "[t]his includes the contract recitals." Hagene v. Derek Polling Constr., 902 N.E.2d 1269, 1274 (Ill. App. 2009). "The contract recitals create a context through which the operational portion of the contract can be better understood, because they indicate the relevant circumstances to its execution." Id. (internal quotation marks and citations omitted). The Court looks to the recitals "not as a statement of obligation in itself but as an aid to construing an obligation elsewhere in the contract." Cress v. Recreation Servs., Inc., 795 N.E.2d 817, 838 (Ill. App. 2003). Indeed, "[i]t would be illogical to ignore the recitals that are included on the same page as the body of the [contract] and are so indicative of the surrounding circumstances relevant to its execution." First Bank & Tr. Co. of Ill. v. Vill. of Orland Hills, 787 N.E.2d 300, 3011 (Ill. App. 2003).
The FBOP Defendants also argue that In re NetBank is distinguishable because it incorporated the actual language from the 1998 Policy Statement in the agreement itself. See R. 145 at 23 n.17. But that is inaccurate. The language of the 1998 Policy Statement about not characterizing tax refunds attributable to a subsidiary bank as the property of the parent corporation was not included directly in the NetBank agreement. Instead, the NetBank agreement incorporated other parts of the 1998 Policy Statement. And what the FBOP Defendants do not acknowledge is that most if not all of those same items from the 1998 Policy Statement that were incorporated into the NetBank agreement also are incorporated in the TAA.
The FBOP Defendants also repeat a number of arguments addressed by the Indymac bankruptcy court for discounting the 1998 Policy Statement. For instance, the Indymac bankruptcy court agreed with the argument that the 1998 Policy Statement is actually consistent with interpreting a tax allocation agreement as transferring the subsidiary bank's ownership rights to the parent company. See 2012 WL 1037481, at *40 n.28. According to the Indymac bankruptcy court, the Policy Statement encourages tax allocation agreements, and, as a result, the "single, precatory sentence" in that Statement admonishing that such agreements not purport to characterize tax refunds as the property of the parent "must be interpreted in the context of the Policy Statement as a whole and its general purpose." Id. The court said that, "[s]o interpreted, the only logical meaning of this provision is that the agencies might consider it an unsafe or unsound practice for a parent to keep all of a group's refunds free and clear without a corresponding reimbursement obligation to the subsidiary." Id. This Court does not find the IndyMac bankruptcy court's reasoning persuasive. An interpretation of the tax allocation agreement in which the parent owned the tax refunds with only a corresponding reimbursement obligation to the subsidiary that is contractual in nature is most certainly inconsistent with the 1998 Policy Statement's admonition against characterizing tax refunds as property of the parent. The two positions cannot be reconciled by the simple expedient of "interpreting" the language of the 1998 Policy Statement to mean something other than what it plainly says.
Nor does the Court agree with the Indymac bankruptcy court's related conclusion that accepting the plain meaning of the 1998 Policy Statement "ignores and nullifies those provisions in the Policy Statement, among others, describing the parent's obligation to `reimburse' the subsidiary and to do so even if the parent never receives refunds," id., as the Court already has explained in its discussion of § 3 of the TAA. Moreover, contrary to the Indymac bankruptcy court's suggestion, the fact that the language of the Policy Statement was not changed even after several courts interpreted tax allocation agreements as transferring ownership rights in tax refunds to the parent company, is not persuasive evidence of the meaning of the Policy Statement. See id. ("the Court finds this silence in the face of established law to be as instructive as any words used in the Policy Statement"). The language of the Policy Statement is not ambiguous; it clearly and unambiguously states that tax allocation agreements should not give parent bank holding companies ownership rights in tax refunds that would otherwise belong to its subsidiary banks. The Court does not need to look to a purported subsequent failure to alter the language of the Policy Statement to construe the sentence in the Policy Statement about not characterizing tax refunds as property of the parent company according to its plain import.
4. PAROL EVIDENCE ISSUES
Although neither party has requested that the Court convert the present motions for judgment on the pleadings into motions for summary judgment, both parties have either submitted or discussed extrinsic evidence concerning the meaning of the TAA. The extrinsic evidence referred to by the FDIC includes emails, financial reports prepared by FBOP, and Call Reports
Under Illinois law, the parties' course of performance is admissible to help to resolve contractual ambiguities. See Kinesoft Dev. Corp. v. Softbank Holdings Inc., 139 F.Supp.2d 869, 890-91 (N.D. Ill. 2001) (citing Barney v. Unity Paving, Inc., 639 N.E.2d 592, 595-96 (Ill. App. 1994) ("It is a firmly established principle of contract interpretation that courts should give great weight to the parties' interpretation of the contract because the parties are in the best position to know what was intended by the language employed."); Chi. & N.W. Ry. Co. v. Peoria & Pekin Union Ry. Co., 360 N.E.2d 404, 407 (Ill. App. 1977) (in case of ambiguity, court relied on parties' course of performance as evidence of their "settled construction"); and N.Y. Cent. Dev. Corp. v. Byczynski, 238 N.E.2d 414, 416 (Ill. App. 1968) (in addition to parol evidence, courts can admit evidence of parties' acts or course of performance to interpret what parties intended as to essential matters on which the contract is silent)). Thus, the FDIC's course of performance evidence referenced in the Amended Complaint is highly relevant and would be admissible to determine the meaning of the TAA if the Court were to find an ambiguity exists on the tax refund ownership question.
The FBOP Defendants also refer to extrinsic evidence in arguing that their interpretation of the TAA is correct. The extrinsic evidence to which they refer is the responses to written questions from Congress submitted by the then-current Director of the FDIC's Receivership Division, Mitchell Glassman. According to the FBOP Defendants, Congress was concerned with whether the government's seizure of the Banks could have been avoided by the enactment of the WHBAA, which became law one week after federal regulators placed the Banks into receivership. Mr. Glassman was asked whether certain deferred tax assets and their resulting refunds could have added to the regulatory capital of the Banks, thereby avoiding the government seizure. Mr. Glassman responded that "Park National's [one of the Banks] deferred tax asset . . . should have been disallowed from regulatory capital," because "[a]ny tax benefit available to carry back to previous years was a receivable from FBOP [and]. . . FBOP did not have the capacity to refund taxes up-streamed . . . in previous years," such that the Park National's "ability to recognize a tax benefit in the near future was doubtful." R. 145 at 34.
The Glassman testimony is not as compelling as the FDIC's course of performance evidence. To begin with, the Court rejects the FBOP Defendants' argument that the Glassman testimony is subject to judicial notice for the truth of the matters asserted. The Court may only take judicial notice of the indisputable fact that the testimony was given and says what it says. See Indep. Trust Corp. v. Stewart Info. Servs. Corp., 665 F.3d 930, 943 (7th Cir. 2012). The Court cannot take judicial notice of the testimony for substantive purposes because the meaning and import of the testimony are in dispute. See Fed. R. Evid. 201(b)(2) (for a court to take judicial notice of a fact, the fact must not be "subject to reasonable dispute because it . . . can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned"); see also Indep. Trust Corp., 665 F.3d at 943 (holding that the district court properly did not rely on judicially noticed documents "as proof of disputed facts").
In addition, even if the Court considered the Glassman testimony, and even if the Court also fully credited the FBOP Defendants' explanation of the meaning of that testimony despite credible arguments made by the FDIC to the contrary, Mr. Glassman is not a party to the TAA. His testimony was in relation to the decision of the Banks' regulators to close the Banks, not to the meaning of the TAA or the Banks' and FBOP's intent regarding ownership of tax refunds. The Court therefore sees only minimal relevance to his testimony to the issues in this case. Finally, even if the Glassman testimony could be imputed to the FDIC (a proposition that the FBOP Defendants have not established), at most the testimony would go to the credibility of the FDIC in taking a contrary factual and/or legal position in this matter from the position Mr. Glassman supposedly took before Congress. While that might be marginally helpful to the FBOP Defendants, the Court doubts it would be of sufficient persuasive value to overcome the course of performance evidence to which the FDIC alludes.
Nevertheless, even assuming that the Glassman testimony would be otherwise admissible to determine the meaning of the TAA, the Court has determined that any ambiguity in the TAA can be resolved within the four corners of that document by reference to established rules of contract interpretation. See USG Corp. v. Sterling Plumbing Grp., Inc., 617 N.E.2d 69, 71 (Ill. App. 1993) ("An ambiguity is not created by the mere fact that, as here, the parties do not agree upon an interpretation."). Accordingly, the Court declines to consider either side's extrinsic evidence. If the Court were to hold otherwise, it would have to convert the present motions for judgment on the pleadings into motions for summary judgment, and allow the parties an opportunity for further discovery if needed. This is the approach that was taken in AmFin Financial Corp., where the Sixth Circuit remanded for consideration of extrinsic evidence to resolve the ambiguity created by the tax sharing agreement. The tax allocation agreement in that case, however, did not refer to the 1998 Policy Statement. Moreover, the Sixth Circuit rejected consideration of a default tax refund ownership rule because it believed that rule derived solely from the Bob Richards case, which it held did not apply because it was based on federal common law. 757 F.3d at 536. As discussed earlier, this Court does not agree with that view of the Bob Richards case and the applicable default rule.
IV. THE FDIC'S RULE 12(c) MOTION FOR JUDGMENT AS A MATTER OF LAW ON COUNTS I-II
The FDIC's cross motion for judgment on the pleadings seeks an order declaring it the owner of the entire amount of the Escrowed Refunds. While the Court has interpreted the TAA as according ownership rights in the tax refunds to the Banks as a matter of law, it cannot tell from the parties' briefs whether it can rule on the current record that the FDIC is entitled to recover the entire amount of the Escrowed Refunds.
To decide how much of the Escrowed Refunds the FDIC may recover, it is necessary to determine, first, what portion of the Escrowed Refunds represent refunds owed to the Banks under the allocation rules in § 9 of the TAA; and second, whether any portion of that amount is in excess of the funds transferred by the Banks to FBOP as their share of the Consolidated Group's tax payments for the years in question. While the FDIC alleges that the Banks are entitled to the entire amount of the tax refunds and that the entire amount of the taxes paid by the Consolidated Group was paid by the Banks,
The parties' abbreviated statements regarding the amount of the tax refunds to which the FDIC would be entitled if the Court were to rule in its favor on the tax refund ownership question are insufficient for the Court to make a final ruling on that issue. The Court therefore directs the parties to meet and confer on any outstanding factual issues regarding the FDIC's cross-motion for judgment on the pleadings. The parties shall file a joint status report explaining their respective positions, detailing the exact factual issues, if any, that remain in dispute, taking a position as to whether the FDIC's Rule 12(c) motion must be converted into a motion for summary judgment, and proposing a joint plan for resolving disputed fact issues, including discovery if needed with proposed deadlines. If the parties cannot reach agreement on a joint plan, then each side should set forth their respective position with areas of disagreement indicated.
V. THE FBOP DEFENDANTS' RULE 12(c) MOTION ON THE FDIC'S ALTERNATIVE LEGAL AND EQUITABLE CLAIMS—COUNTS III-VII
The FBOP Defendants argue that judgment in their favor on the FDIC's alternative claims in Counts III through VII is appropriate because those claims are also barred by FBOP's ownership rights in the tax refunds under the TAA. The Court has found that FBOP does not have ownership rights in the tax refunds to the extent that the Banks have a right to those refunds under § 9 of the TAA and the Banks paid the taxes out of which those refunds arise. Therefore, the FBOP Defendants' motion for judgment on the FDIC's alternative counts must be denied. But even if the Court had found in favor of the FBOP Defendants on the ownership issue, the FBOP Defendants would not be entitled to judgment as a matter of law on the FDIC's alternative claims as the Court does not believe a finding that the TAA transferred the Banks' ownership interest in tax refunds to FBOP necessarily precludes those alternative claims.
Even the cases on which the FBOP Defendants rely recognize that a tax allocation "agreement will control the members' rights in the absence of overreaching or breach of fiduciary duty." In re First Cent. Fin. Corp., 269 Bankr. at 490 (emphasis added) (citing In re White Metal Rolling & Stamping Corp., 222 Bankr. at 423, and In re Franklin Sav. Corp., 159 Bankr. at 29). The cases on which the FBOP Defendants rely holding that there was no evidence of overreaching or breach of fiduciary duty do so based on a full summary judgment record. The FBOP Defendants attempt to fit this case within that framework by arguing that none of the FDIC's allegations relate to overreaching or breach of fiduciary in relation to the creation of the tax agreement. But their argument is based on language in In re Franklin Savings Corp., which referred to not only the creation of the tax agreement but its implementation as well. See 159 Bankr. at 31 (holding that "question whether the parent acted `unfairly,' `overreachingly,' or `unconscionably' in the creation or implementation of the tax agreements or in its other dealings with the bank [is] one of fact"). And the FDIC has alleged a number of facts regarding overreaching and breach of fiduciary duty on FBOP's part with respect to the implementation of the TAA.
For instance, the FDIC has alleged that FBOP made material misrepresentations concerning the ownership of tax refunds of the Consolidated Group in regulatory correspondence and stand-alone call reports filed by the Banks, in FBOP's application for TARP funds, and in FBOP's requests for relief from regulatory capital limitations. The FDIC also alleges that FBOP reported (or caused the Banks to report) "deferred tax assets," including tax refunds, as property of the Banks. It was only after the Banks were placed into receivership did FBOP claim that it, and not the Banks, owned the tax refunds. While the FBOP Defendants contend that their current position is consistent with FBOP's pre-receivership position on the ownership question, the FDIC clearly alleges otherwise:
R. 146 at 16 (FDIC Brief In Opposition to FBOP Motion) (citing Amended Complaint throughout and 12 C.F.R. § 325.5(g)(2)(ii)). According to the FDIC, the Banks could not record deferred tax assets on their balance sheets that included the full value of their carryback refunds unless they believed they had the exclusive right to such refunds. Thus, the FDIC contends, if the FBOP Defendants' current argument is accepted (i.e., that the tax assets recorded on the Banks' balance sheets actually reflected a severely impaired intercompany debt rather than the Banks' exclusive right to carryback refunds), that would mean FBOP intentionally overstated the Banks' capital position to federal regulators. And, if it did, then it is plausible to argue FBOP engaged in misconduct related to the implementation of the TAA.
In addition, the FDIC's allegations regarding FBOP's settlement agreements with the Senior Secured Creditors and Sub-Debt¶ Holders
The Court also rejects the FBOP Defendants' argument that the FDIC's alternative claims are barred by the parol evidence rule. These claims do not involve questions of contract interpretation, and accordingly the parol evidence rule is not applicable. Thus, even if the Court were to agree with the FBOP Defendants' interpretation of the TAA, the FDIC would be entitled to proceed on its alternative claims against the FBOP Defendants, in addition to its fraudulent transfer claims against the Senior Secured Creditors and Sub-Debt Holders.
Finally, the FBOP Defendants argue that Count VII must be dismissed because a constructive trust is a remedy, and not a claim, and therefore cannot stand as a separate cause of action. R. 145 at 38. The FDIC is not asserting entitlement to a constructive trust as a separate claim for relief but merely as an equitable remedy. Count VII seeks a declaratory judgment that the FDIC is entitled to that remedy. The FBOP Defendants' argument is without merit.
VI. THE FBOP DEFENDANTS' RULE 12(c) MOTION ON THE FDIC'S CLAIMS TO RECOVER THE NON-ESCROWED REFUNDS—COUNTS XIX-XXII
The FBOP Defendants argue they are entitled to judgment declaring FBOP the owner of the $10.3 million Non-Escrowed Refunds for the same reasons they are entitled to judgment declaring FBOP the owner of the $265.3 million Escrowed Refunds. Because the Court has found that the FDIC in its capacity of separate receiver for each of the Banks is the owner of the tax refunds, the Court rejects the FBOP Defendants' arguments regarding ownership of the $10.3 million Non-Escrowed Refunds as well.
VII. THE FBOP DEFENDANTS' RULE 12(C) MOTION ON PBGC'S INTERVENOR COMPLAINT
In addition to the Rule 12(c) cross-motions at issue herein, a third Rule 12(c) motion also is pending before the Court, in which the FBOP Defendants seek judgment on the pleadings on claims brought against them by the Intervenor-Plaintiff, Pension Benefit Guaranty Corporation ("PBGC"). The Court finds that, as a result of the Court's ruling on the tax refund ownership issue, the PBGC's Intervenor Complaint against the FBOP Defendants is moot. Accordingly, the FBOP Defendants' Rule 12(c) motion seeking judgment on the PBGC's claims also is moot.
For the foregoing reasons:
(1) The FBOP Defendants' motion for partial judgment on the pleadings as to Counts I-II, III-VII, and XIX-XXII of the FDIC's complaint, R. 139, is denied;
(2) The FDIC's motion for partial judgment on the pleadings on Counts I and II, R. 150, is entered and continued; and
(3) The FBOP Defendants' motion for judgment on the pleadings as to PBGC's Intervenor Complaint, R. 162, is denied without prejudice as moot.
R. 145 at 44 (emphasis added).