By Patrick Fitzgerald
A federal appeals court has reversed a lower court decision
involving the rights to a dead bank's tax refunds, giving the
Federal Deposit Insurance Corp. a victory in its legal battles with
investors picking over the remnants of the hundreds of failed banks
left in the wake of the financial crisis.
A three-judge panel of the U.S. 11th Circuit Court of Appeals
said a bankruptcy judge erred in declaring that some $50 million in
tax refunds were the property of the bankruptcy estate of
BankUnited Financial Corp., the corporate parent of Florida's
BankUnited. The FDIC, which took over BankUnited four years ago as
the bank's receiver, said it owned the tax refunds.
The court based its 16-page decision on a tax-sharing agreement,
or TSA, that called for the holding company to file the
consolidated company's income tax return but for the bank to pay
all of the taxes due.
The court could "find no words in the TSA from which it could
reasonably be inferred that the parties agreed that the holding
company would retain the tax refunds as a company asset and, in
lieu of forwarding them to the bank, would be indebted to the bank
in the amount of the refunds," said Judge Gerald Tjoflat in his
ruling Thursday.
That appellate court ruling reverses a bankruptcy court decision
that found a tax-sharing agreement between the holding company and
the bank created a debtor-creditor relationship, rather than that
of a principal-agent. The panel ordered the bankruptcy court to
reverse its decision and direct the holding company to forward the
funds to the FDIC.
A lawyer for BankUnited couldn't be reached for comment.
The BankUnited decision could ultimately mean billions of
dollars going to the FDIC instead of to creditors of bank holding
companies.
The creditors of bank holding companies, who are often hedge
funds and other investors looking to profit on distressed debt,
have been sparring with the FDIC in courtrooms across the country
for several years.
Those fights, in addition to BankUnited, involve creditors of
such bank-holding companies as Imperial Capital Bancorp Inc.,
Colonial Bancgroup Inc. and IndyMac Bancorp Inc. At stake are
billions of dollars in tax refunds and other assets left behind in
the wreckage of hundreds of failed banks closed by regulators in
recent years.
In each of the above-mentioned cases, lower courts have ruled in
favor of holding company creditors. That's why the 11th Circuit
decision could be a game changer.
Indeed, lawyers for the FDIC have already filed notice of the
11th Circuit's decision in its fight with Colonial over more than
$600 million in tax refunds and other assets left behind when the
FDIC seized Colonial Bank and transferred its deposits to BB&T
Corp. The FDIC points out that "unlike the various decisions of
bankruptcy courts and district courts in other jurisdictions...the
Eleventh Circuit decision in Bank United is controlling," requiring
summary judgment in its favor.
However, Colonial's lawyers, in papers filed Tuesday, said the
11th Circuit ruling confirms that it owns the tax refunds because
under Colonial's tax sharing agreement the holding company, not
Colonial Bank, pays all the taxes.
The number of bank failures surged in 2007 when the nation's
housing industry went into free fall and financial markets seized
up. Those failures have cost the FDIC, the federal agency that
manages the receiverships of failed banking institutions, tens of
billions of dollars.
When a faltering bank is seized, the FDIC transfers a failed
bank's deposits to a stronger company and it remains as a receiver
for what is left.
That puts the agency in the cross hairs of creditors of the
bank-holding company, a separate entity, who often see the tax
refunds as their best chance to wring a recovery out of what they
are owed.
The FDIC's lawyers maintain that hedge funds and other
speculative investors are using the bankruptcy cases of the
bank-holding companies to launch litigation and profit by suing the
regulator.
The FDIC took charge of IndyMac in 2008 and Colonial, Imperial
and BankUnited the following year
The restructured BankUnited Inc.'s (BKU) banking operations were
sold to a group of big private-equity firms led by banker John
Kanas. The FDIC agreed to reimburse the new bank's owners--who
included Carlyle Group LP, WL Ross & Co. and Blackstone Group
LP--for up to $10.5 billion for losses on bad loans. The private
equity have made more than $1 billion in profits from BankUnited,
according to an analysis conducted by investment bank Sandler
O'Neill + Partners LP.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection. Go to
http://dbr.dowjones.com)
--Robin Sidel contributed to this article.
-Write to Patrick Fitzgerald at patrick.fitzgerald@wsj.com
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