Opinion
Todd C. Toral, DLA PIPER LLP (US), Los Angeles, California, John J. Clarke, Jr., DLA PIPER LLP (US), New York, New York, Attorneys for Defendant, Federal Deposit Insurance Corporation, as Receiver of Temecula Valley Bank.
FDIC-RECEIVER'S NOTICE OF MOTION AND MOTION TO WITHDRAW THE REFERENCE, WITH MEMORANDUM OF POINTS AND AUTHORITIES
CHRISTINA A. SNYDER, District Judge.
NOTICE OF MOTION
TO ALL PARTIES AND THEIR COUNSEL OF RECORD:
PLEASE TAKE NOTICE that on _____, 2014, at _____ at the United States District Court for the Central District of California, 3420 Twelfth Street, Riverside, California, or at such later date and time as the Court may order, defendant Federal Deposit Insurance Corporation, as receiver for Temecula Valley Bank (the "FDIC-Receiver"), will and hereby does move for entry of an order withdrawing the reference from the United States Bankruptcy Court for the Central District of California of the adversary proceeding styled Frazer v. F.D.I.C. as Receiver of Temecula Valley Bank, Adv. Proc. No. 6:14-ap-01250-SY.
Withdrawal by this Court of the reference of this action from the bankruptcy court is mandatory under 28 U.S.C. § 157(d) because resolution of the proceeding will require substantial and material consideration of federal laws other than title 11 of the United States Code (the "Bankruptcy Code"). In the alternative, cause is shown for permissive withdrawal of the reference under section 157(d). The grounds for the motion are set forth in the following memorandum of points and authorities, and are supported by the Declaration of Todd C. Toral, Esq., dated October 31, 2014 and the Declaration of Linda K. Shaw dated October 31, 2014, and the exhibits thereto.
Pursuant to Local Bankruptcy Rule 1001-1(b)(3) of the U.S. Bankruptcy Court for the Central District of California, the pre-motion conference requirement in Local Civil Rule 7-3 does not apply to this motion to withdraw the reference because plaintiff has invoked this Court's original bankruptcy jurisdiction under 28 U.S.C. § 1334 in her adversary complaint. See LBR 1001-1(b)(3) ("The Local Bankruptcy Rules apply in the United States District Court for the Central District of California in lieu of the Central District of California Local Rules (Local Civil Rules) when the district court is exercising its original bankruptcy jurisdiction pursuant to 28 U.S.C. § 1334."). Notwithstanding plaintiff's invocation of that jurisdictional provision, as discussed in detail in the accompanying memorandum of points and authorities, the FDIC-Receiver contends that "no court" has subject matter jurisdiction over plaintiffs claims under 12 U.S.C. § 1821(d)(13)(D).
TABLE OF AUTHORITIES
CASES
Addison v. U.S. Dep't of Educ. (In re Addison), 240 B.R. 47 (C.D. Cal. 1999)
Amsave Credit Corp. v. Resolution Tr. Corp., 141 B.R. 578 (Bankr. D.N.J. 1992)
Benson v. JPMorgan Chase Bank, N.A., 673 F.3d 1207 (9th Cir. 2012)
Bloom v. F.D.I.C. (In re First State Bancorp.), 498 B.R. 322 (Bankr. D.N.M. 2013)
BSD Bancorp, Inc. v. F.D.I.C. (In re BSD Bancorp, Inc.), No. 94-1341-IEG, slip op. (S.D. Cal. Feb. 28, 1995)
Cal. HousingSecs., Inc. v. F.D.I.C., No. 99-71084, 12 F.Appx. 519 (9th Cir. June 13, 2001)
Capital Bancshares, Inc. v. F.D.I.C., 957 F.2d 203 (5th Cir. 1992)
Carlyle Fortran Trust v. nVidia Corp. (In re 3DFXInteractive Inc.), No. C 05-00427 JW, 2005 WL 1074407 (N.D. Cal. May 6, 2005)
Colonial BancGroup, Inc. v. F.D.I.C., Civ. A. No. 1:20-mc-3502-MT, slip op. (M.D. Ala. May 10, 2010)
Deutsche Bank Nat'l Tr. Co. v. F.D.I.C., 744 F.3d 1124 (9th Cir. 2014)
Deutsche BankNat'l Trust Co. v. F.D.I.C., 854 F.Supp.2d 756 (C.D. Cal. June 28, 2011), aff'd, 744 F.3d 1124 (9th Cir. 2014)
Douglas v. Wells Fargo Bank, N.A. (In re Douglas), No. 2:11-cv-0348 FCD EFB, 2011 WL 1740607 (E.D. Cal. May 4, 2011)
Eastport Assocs. v. City of Los Angeles (In re Eastport Assocs.), 935 F.2d 1071 (9th Cir. 1991)
F.D.I.C. v. AmFin Fin. Corp., 757 F.3d 530 (6th Cir. 2014)
F.D.I.C. v. Siegel (In re IndyMac Bancorp., Inc.), 554 F.Appx. 668 (9th Cir. Apr. 21, 2014) (per curiam)
F.D.I.C. v. Zucker (In re NetBank, Inc.), 729 F.3d 1344 (11th Cir. 2013)
FirstFedFin. Corp. v. F.D.I.C. (In re FirstFedFin. Corp.), No. CV 12-4914-JFW, slip op. (C.D. Cal. Aug. 7, 2012)
Freeman v. F.D.I.C., 56 F.3d 1394 (D.C. Cir. 1995)
Green v. FDIC (In re Tamalpais Bancorp), 451 B.R. 6 (N.D. Cal. 2011), reversed on reconsideration
Henderson v. Bank of New England, 986 F.2d 319 (9th Cir. 1993)
Holmes v. Grubman, 315 F.Supp.2d (M.D. Ga. 2004)
In re Baldwin-United Corp., 57 B.R. 751 (S.D.Ohio 1985)
In re Castlerock Props., 781 F.2d 159 (9th Cir. 1986)
In re Coe-Truman Techs., Inc., 214 B.R. 183 (N.D. Ill. 1997)
In re Imperial Capital Bancorp, Inc., No. 11-CV-2065, 2012 WL 10710 (S.D. Cal. Jan. 3, 2012)
In re Molina, No. CV 10-0575 SBA, 2010 WL 3516107 (N.D. Cal. Sept. 8, 2010)
In re Nat'l Consumer Mortg., LLC, No. 8:09-01053 TA, 2009 WL 2985243 (C.D. Cal. Sept. 14, 2009)
In re Orion Pictures Corp., 4 F.3d 1095 (2d Cir. 1993)
In re Vicars Ins. Agency, Inc. 196 F.3d 949 (7th Cir. 1996)
Intercontinental Travel Mktg., Inc. v. F.D.I.C., 45 F.3d 1278 (9th Cir. 1994)
Lange v. F.D.I.C. (In re TierOne Corp.), Adv. Proc. No. 11-4018-TLS, 2011 WL 2133702 (Bankr. D. Neb. May 27, 2011)
Liquidating Tr. v. F.D.I.C. (In re First Regional Bancorp), Adv. Proc. No. 2:14-op. 01221-ER (Bankr. C.D. Cal. Oct. 2, 2014)
Lubin v. Cincinnati Ins. Co., 411 B.R. 801 (N.D.Ga. 2009)
McCarthy v. F.D.I.C., 348 F.3d 1075 (9th Cir. 2003)
Nat'l Union Fire Ins. Co. v. F.D.I.C., 28 F.3d 376 (3d Cir. 1994)
Parker N. American Corp. v. R.T.C. (In re Parker N. Amer. Corp), 24 F.3d 1145 (9th Cir. 1994)
Rosa v. R.T.C., 938 F.2d 383 (3d Cir.), cert. denied, 502 U.S. 981 (1991)
Sec. Farms. v. Int'l Bhd. Of Teamsters , Chaueffers, Warehouseman & Helpers, 124 F.3d 999 (9th Cir. 1997)
Sharp v. F.D.I.C. (In re Vineyard Nat'l Bancorp), No. 2:10-ap-01815RN, 2013 WL 1867987 (Bankr. C.D. Cal. May 3, 2013)
Sharp v. FDIC (In re Vineyard Nat'l. Bancorp), No. 2:11-cv-01563-R, slip. op. (C.D. Cal. Apr. 11, 2011)
Sharpe v. F.D.I.C., 126 F.3d 1147, 1154 (9th Cir. 1997)
Siegel v. F.D.I.C. (In re IndyMac Bancorp Inc.), No. 2:12-cv-2967-RGK, 2012 WL 1951474 (C.D. Cal. May 30, 2012), aff'd on other grounds, 554 F.Appx. 668 (9th Cir. Apr. 21, 2014)
Siegel v. F.D.I.C. (In re IndyMac Bancorp, Inc.), No. CV-11-3969-RGK, 2011 WL 2883012 (C.D. Cal. July 15, 2011)
Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594 (2011)
Superior Bank F.S.B. v. Boyd (In re Lewis), 396 F.3d 735 (6th Cir. 2005)
Tri-State Hotels, Inc. v. F.D.I.C., 79 F.3d 707 (8th Cir. 1996)
United States v. Johns-Manville Corp. (In re John-Manville Corp.), 63 B.R. 600 (S.D.N.Y. 1986)
W. Dealer Mgmt., Inc. v. England (In re Bob Richards Chrysler-Plymouth Corp.), 473 F.2d 262 (9th Cir.), cert. denied, 412 U.S. 919 (1973)
Westberg v. F.D.I.C., 741 F.3d 1301 (D.C. Cir. 2014)
Zucker v. F.D.I.C. (In re BankUnited Fin. Corp.), 727 F.3d 1100 (11th Cir. 2013)
STATUTES, REGULATIONS AND RULES
12 U.S.C. § 371c
12 U.S.C. § 371c(a)
12 U.S.C. § 371c-1
12 U.S.C. § 371c-1(a)
12 U.S.C. § 1821(d)(2)(A)
12 U.S.C. § 1821(d)(6)(A)
12 U.S.C. § 1821(d)(13)(D)
12 U.S.C. § 18280)
26 U.S.C. § 1501
26 U.S.C. § 6402(k)
28 U.S.C. § 157
12 C.F.R. § 223.3(o)
12 C.F.R. § 223.14
12 C.F.R. § 223.16(a)
12 C.F.R. § 223.51
12 C.F.R. § 223.52
Treas. Reg. § 1.1502-6(a)
Treas. Reg. § 1.1502-11(a)
Treas. Reg. § 1.1502-13
Treas. Reg. § 1.1502-77(a)
Treas. Reg. § 301.6402-7
Fed. R. Bankr. P. 5011
OTHER AUTHORITIES
Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure, 63 Fed. Reg. 64757 (Nov. 23, 1998)
Restatement (Second) of Contracts, § 203(a) (1981)
Restatement (Third) of Agency, § 8.01 (2006)
Restatement (Third) of Agency, § 8.12, cmt. b (2006)
MEMORANDUM OF POINTS AND AUTHORITIES
Defendant Federal Deposit Insurance Corporation, as receiver of Temecula Valley Bank (the "FDIC-Receiver"), respectfully submits this memorandum of points and authorities in support of its motion, pursuant to 28 U.S.C. § 157(d) and Rule 5011 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"), to withdraw the reference of all aspects of this adversary proceeding from the United States Bankruptcy Court for the Central District of California.
INTRODUCTION
The FDIC-Receiver is the statutory successor in interest to Temecula Valley Bank (the "Bank"), which failed in 2009. In this adversary proceeding, the chapter 7 trustee ("Trustee") for the bankruptcy estate of the failed Bank's holding company, Temecula Valley Bancorp, Inc. ("Bancorp"), is attempting to claim ownership of approximately $34 million in tax refunds that belong to the FDIReceiver as the Bank's successor.
Withdrawal of the reference is necessary because resolution of the Trustee's declaratory judgment claim will require substantial and material application of federal laws other than title 11 of the United States Code (the "Bankruptcy Code"). See 28 U.S.C. § 157(d). Even if the Court concludes that mandatory withdrawal is not applicable, however, cause exists for permissive withdrawal because whatever the outcome might be in this case if the bankruptcy court addresses the merits, this Court ultimately will be required to consider and determine the substantive issues in further de novo proceedings.
The Federal Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), includes a mandatory receivership claims procedure apart from which "no court shall have jurisdiction over... any action seeking a determination of rights with respect to the assets of any depository institution for which the [FDIC] has been appointed receiver...." 12 U.S.C. § 1821(d)(13)(D). An action, such as this one, in which a party seeks a declaratory judgment concerning the failed Bank's interest in tax refunds - as either their owner or a creditor of Bancorp with respect to them - is seeking a "determination of rights with respect to the assets of" the failed Bank that falls squarely within this prohibition. See infra at 7-15. Because neither Bancorp nor the Trustee filed a receivership claim seeking her declaratory relief, they failed to exhaust administrative remedies and "no court shall have jurisdiction" over the current action under section 1821(d)(13)(D). The need for the presiding court to construe and apply FIRREA's jurisdictional bar in the course of these proceedings requires withdrawal of the reference.
In addition, the Trustee's contention that a tax sharing agreement renders the FDIC-Receiver a mere creditor of Bancorp with respect to tax refunds recovered by the affiliated group implicates sections 23A and 23B of the Federal Reserve Act, which strictly limit extensions of credit from a bank to its holding company and requires the holding company to post collateral to the bank for any such borrowing. 12 U.S.C. §§ 371c & 371c-1; see Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure, 63 Fed. Reg. 64757, 64759 (Nov. 23, 1998) (construing sections 23A and 23B in context of tax allocations and settlements).
Because substantial and material consideration of federal laws other than the Bankruptcy Code will be required to resolve this action, mandatory withdrawal of the reference is required. But even if the Court determines that mandatory withdrawal is not required, the Court should still withdraw the reference of this adversary proceeding permissively "for cause shown." The Trustee's state-law claim for a determination of ownership of income tax refunds is a "non-core" proceeding that would be subject to de novo review by this Court if it were to proceed in the bankruptcy court. The principle of judicial economy therefore favors withdrawal of the reference here whether or not it is mandatory.
BACKGROUND
Bancorp was a bank holding company and the Bank is its wholly owned subsidiary. Bancorp "conduct[ed] no business of its own other than owning the common shares of^' the Bank and of several statutory trusts that issued Bancorp's junior subordinated debt. Temecula Valley Bancorp, Inc. Form 10-K dated March 17, 2009, at 5.
On July 17, 2009, the Bank was closed by its chartering authority, the California Department of Financial Institutions, and the FDIC-Receiver was appointed the Bank's receiver. Compl., ¶ 14. As a result, by operation of law, the FDIC-Receiver succeeded immediately to "all rights, titles, powers, and privileges" of the failed Bank "and of any stockholder, member, accountholder, depositor, officer, or director of" the Bank "with respect to the institution and the assets of the institution." 12 U.S.C. § 1821(d)(2)(A)(i). The FDIC-Receiver therefore became the owner of all of the Bank's assets, including, inter alia, its books and records and its federal and state tax refunds and any claims thereto.
On November 6, 2009, Bancorp filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code and the Trustee was appointed as trustee of Bancorp's bankruptcy estate. See Compl., ¶ 15. While reserving all jurisdictional arguments, which cannot be waived, on June 30, 2010, the FDIC-Receiver timely filed a protective proof of claim in the Bancorp bankruptcy case, which it has amended thereafter [Claim Nos. 11-1, 11-2]. See Declaration of Todd C. Toral, Esq., dated October 31, 2014, ("Toral Decl."), Exhs. A & B. While the Trustee mentions the proof of claim, as amended, in her complaint, the Trustee does not object to any part of the proof of claim in this adversary proceeding.
Among other things, the proof of claim states that federal and state tax refunds that have been, or might in the future be, recovered from taxing authorities based on filings by or on behalf of the consolidated group of taxpayers that includes the Bank are the property of the FDIC-Receiver, as the Bank's statutory successor, and are not property of the Bancorp estate. The proof of claim further asserted, in the alternative, that to the extent any such tax refunds are found by a court to be property of the Bancorp bankruptcy estate, the FDIC-Receiver will have an unsecured claim in this bankruptcy case in the full amount of any such refunds.
At the time of the Bank's failure, the FDIC-Receiver established a claims bar date of October 20, 2009 for the filing of claims against the receivership, including any claim seeking a determination of rights with respect to assets of the failed Bank. See 12 U.S.C. § 1821(d)(13)(D). Neither Bancorp nor the Trustee ever filed a claim with the receivership. See Declaration of Linda K. Shaw dated October 31, 2014, ¶ 2 ("Shaw Decl.").
On September 24, 2014, the Trustee filed her complaint in this adversary proceeding. Toral Decl., Exh. C. In the complaint, the Trustee asserts that an alleged tax sharing agreement dated as of June 3, 2002 between Bancorp and the Bank effected the transfer of ownership of the Bank's federal and state tax refunds to Bancorp. The Trustee alleges that approximately $34 million in federal and state tax refunds have been recovered from taxing authorities and are being held in an escrow account pending the resolution of the parties' disputes. Compl., ¶¶ 34-40.
On April 18, 2013, the Trustee and the FDIC-Receiver entered into a tolling agreement with respect to any action, proceeding or contested matter with respect to their disputes concerning tax refunds. See Compl., ¶ 41. On August 5, 2013, United States Bankruptcy Judge Deborah J. Saltzman entered an order authorizing and approving the tolling agreement [Bankr. Doc. No. 99]. By its terms, the "Tolling Period" provided for in the tolling agreement expired when the Ninth Circuit issued its mandate in F.D.I.C. v. Siegel (In re IndyMac Bancorp. Inc.), following its unpublished disposition of that appeal. See 554 F.Appx. 668 (9th Cir. 2014).
According to the Trustee, the Bank is merely a creditor of Bancorp with respect to any tax refunds Bancorp receives from taxing authorities on behalf of the affiliated group for which Bancorp is designated by law, as the common parent, to act as agent. See Compl., ¶¶ 27, 29; see generally Treas. Reg. § 1.1502-77(a) (common parent "is the sole agent (agent for the group)" for all members of affiliated group in interactions with the Internal Revenue Service). The Trustee requests a declaratory judgment that the Trustee, "as the successor to Bancorp, is entitled to immediate payment, possession, and ownership of all the Tax Refunds, " and that "any legal rights of the [FDIC-Receiver] or the Bank with respect the Tax Refunds or the [tax sharing agreement] are properly asserted, if at all, solely in the form of a general unsecured claim against the Bancorp bankruptcy estate...." Compl., ¶ 46.
By stipulated order, the FDIC-Receiver's response to the complaint must be served and filed on or before November 3, 2014 [Doc. No. 7].
ARGUMENT
THIS COURT SHOULD WITHDRAW THE REFERENCE OF THE ADVERSARY PROCEEDING PURSUANT TO 28 U.S.C. § 157(d)
Withdrawal of the reference of matters pending before the bankruptcy courts is governed by 28 U.S.C. § 157(d), which provides that:
The district court may withdraw, in whole, or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown. The district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce.
28 U.S.C. § 157(d) (emphasis added). The provision authorizes two types of withdrawal: "the first sentence allows permissive withdrawal, while the second sentence requires mandatory withdrawal in certain situations." In re Nat'l Consumer Mortg., LLC, 8:09-01053 TA, 2009 WL 2985243, at *2 (C.D. Cal. Sept. 14, 2009) (citing In re Coe-Truman Techs., Inc., 214 B.R. 183, 185 (N.D. Ill. 1997)).
In this instance, the reference should be withdrawn under both provisions. Resolution of the adversary proceeding will require substantial and material consideration of complex federal law - other than the Bankruptcy Code - that Congress expressly directed should be resolved in federal district courts. Withdrawal of the reference is, therefore, mandatory. Even if this were not the case, permissive withdrawal is warranted because the adversary complaint raises "non-core" issues that are more properly resolved by an Article III judge in federal district court than by an Article I bankruptcy judge, this action is in its earliest stages, and withdrawal of the reference will promote the efficient use of judicial resources, cause no delay and minimize costs to the parties.
I. THIS MOTION IS TIMELY.
"A motion to withdraw [the reference] is timely if it was made as promptly as possible in light of the developments in the bankruptcy proceeding.'" Sec. Farms. v. Int'l Bhd. of Teamsters, Chauffeurs, Warehouseman & Helpers, 124 F.3d 999, 1007 n.3 (9th Cir. 1997) (quoting In re Baldwin-United Corp., 57 B.R. 751, 754 (S.D. Ohio 1985)). In this action, the FDIC-Receiver has filed its motion even before filing its response to the Trustee's complaint. There have been no substantive proceedings in this matter, and no discovery has been exchanged among the parties. The Trustee can claim no prejudice as a result of withdrawal of the reference here.
II. RESOLUTION OF THIS ACTION WILL REQUIRE SUBSTANTIAL AND MATERIAL CONSIDERATION OF FEDERAL LAW OTHER THAN TITLE 11.
The decision to order mandatory withdrawal of the reference under 28 U.S.C. § 157(d) involves a consideration of "whether the case requires substantial and material consideration of non-bankruptcy federal law.'" In re Molina, No. CV 10-0575 SBA, 2010 WL 3516107, at *3 (N.D. Cal. Sept. 8, 2010) (quoting Sec. Farms., 124 F.3d at 1008). Withdrawal is mandatory "when complicated, interpretive issues are involved, " In re Imperial Capital Bancorp, Inc., No. 11-CV-2065, 2012 WL 10710, at *2 (S.D. Cal. Jan. 3, 2012) (citing Holmes v. Grubman, 315 F.Supp.2d 1376, 1379 (M.D. Ga. 2004)), or when there are "issues requiring significant interpretation of federal laws that Congress would have intended to have decided by a district judge rather than a bankruptcy judge." Carlyle Fortran Trust v. nVidia Corp. (In re 3DFX Interactive Inc.), No. C 05-00427 JW, 2005 WL 1074407, at *3 (N.D. Cal. May 6, 2005) (citing In re Vicars Ins. Agency, Inc. 96 F.3d 949, 953 n.5 (7th Cir. 1996) and United States v. Johns-Manville Corp. (In re John-Manville Corp.), 63 B.R. 600, 602 (S.D.N.Y. 1986)). Each one of these factors applies in this case.
"Although the Ninth Circuit has not squarely addressed mandatory withdrawal, it has followed other circuits, stating, in dictum, that mandatory withdrawal hinges on the presence of substantial and material questions of federal law.'" Douglas v. Wells Fargo Bank, N.A. (In re Douglas), No. 2:11-cv-0348 FCD EFB, 2011 WL 1740607, at *2 (E.D. Cal. May 4, 2011) (citing Sec. Farms, 124 F.3d at 1008 n.4).
A. The Complaint Raises Complex Issues Under Federal Law Other Than the Bankruptcy Code.
1. The Trustee's Claim for Declaratory Relief Is Prohibited By 12 U.S.C. § 1821(d)(13)(D).
Resolution of the Trustee's request for a declaratory judgment that the FDIC-Receiver is merely a general unsecured creditor of the Bancorp estate, rather than the owner of the $34 million in federal and state tax refunds at issue, will require substantial and material consideration of the receivership claims provisions of FIRREA and the related "jurisdictional bar" in 12 U.S.C. § 1821(d)(13)(D).
As one court observed in recommending mandatory withdrawal of a similar adversary proceeding, "the existence of FIRREA's jurisdictional bar would seem to preclude this court's involvement in the adversary proceeding. Mandatory withdrawal of the adversary proceeding is necessary because the resolution of the trustee's claims regarding the tax refunds will necessitate the interpretation of nonbankruptcy law for which the district court is better equipped." Lange v. F.D.I.C. (In re TierOne Corp.), Adv. Proc. No. 11-4018-TLS, 2011 WL 2133702, at *4 (Bankr. D. Neb. May 27, 2011); see also Colonial BancGroup, Inc. v. F.D.I.C., Civ. A. No. 1:20-mc-3502-MT, slip op. (M.D. Ala. May 10, 2010) (ordering withdrawal of the reference of debtor's adversary proceeding for declaratory judgment as to ownership of tax refunds and of debtor's objection to FDIC's bankruptcy proof of claim) (attached as Toral Decl., Exh. D); see also Imperial Capital Bancorp, 2012 WL 10710, at *2-3 (withdrawing the reference of objection to proof of claim filed by FDIC as receiver for failed bank that implicated provision in Federal Deposit Insurance Act); Lubin v. Cincinnati Ins. Co., 411 B.R. 801, 804 (N.D.Ga. 2009) (adversary proceeding asserting claims against directors and officers of failed bank and holding company was likely to require substantial and material consideration of FIRREA requiring mandatory withdrawal).
The order withdrawing the reference in Colonial BancGroup was entered with the debtor's consent, but only after an initial hearing during which United States District Judge Myron H. Thompson informed the debtor that the court's "preliminary research indicates that the F.D.I.C. does have some compelling arguments" in favor of withdrawal of the reference and reiterated that the debtor should not "waste our time requiring further response" if the debtor concluded that the FDIC's arguments were correct. See Colonial BancGroup, Inc. v. F.D.I.C., Transcript of Hearing on April 7, 2010, at 10 (attached as Toral Decl., Exh. E).
In Siegel v. F.D.I.C. (In re IndyMac Bancorp, Inc.), No. CV-11-3969-RGK, 2011 WL 2883012, at *6 (C.D. Cal. July 15, 2011), Judge Klausner declined to order mandatory withdrawal of the reference of an adversary proceeding against the FDIC as receiver for a failed thrift in which another bankrupt holding company asserted ownership of tax refunds. The Siegel court did not address the statutory prohibition of 12 U.S.C. § 1821(d)(13)(D) or explain why resolution of the proceeding would not require substantial and material consideration of that statute. In FirstFed Fin. Corp. v. F.D.I.C. (In re FirstFed Fin. Corp.), No. CV 12-4914-JFW, slip op. (C.D. Cal. Aug. 7, 2012) (Toral Decl., Exh. F), Green v. FDIC (In re Tamalpais Bancorp), 451 B.R. 6, 9-10 (N.D. Cal. 2011), reversed on reconsideration on other grounds (unpublished), and Sharp v. FDIC (In re Vineyard Nat'l. Bancorp), No. 2:11-cv-01563-R, slip. op. at 2-3 (C.D. Cal. Apr. 11, 2011), the courts declined mandatory withdrawal of similar proceedings because they had not been persuaded that application of FIRrEA would be complex. In reaching that conclusion, however, those courts did not discuss the issues raised by Ninth Circuit decisions applying FIRREA's jurisdictional bar that are discussed in the text below.
When it is appointed the receiver of a failed depository institution, the FDIC succeeds by operation of law to "all rights, titles, powers, and privileges of the insured depository institution, and of any stockholder, member, accountholder, depositor, officer, or director of such institution with respect to the institution and the assets of the institution." 12 U.S.C. § 1821(d)(2)(A).
"To enable the FDIC to move quickly and without undue interruption to preserve and consolidate the assets of the failed institution, Congress enacted a broad limit on the power of courts to interfere with the FDIC's efforts...." Deutsche Bank Nat'l Tr. Co. v. F.D.I.C., 744 F.3d 1124, 1128 (9th Cir. 2014) (quoting Sharpe v. F.D.I.C., 126 F.3d 1147, 1154 (9th Cir. 1997)). To that end, FIRREA's exclusive receivership claims process allows the FDIC, as receiver, to perform its statutory function to determine claims without resort to litigation. Intercontinental Travel Mktg., Inc. v. F.D.I.C., 45 F.3d 1278, 1285 (9th Cir. 1994); see Benson v. JPMorgan Chase Bank, N.A., 673 F.3d 1207, 1211 (9th Cir. 2012). As a result, submission to this receivership claims process is required for specified district courts to obtain jurisdiction over any claim or action falling within the scope of the jurisdictional bar. 12 U.S.C. § 1821(d)(6)(A).
Section 1821(d)(13)(D) provides:
Analyzing the statute, courts have recognized that the jurisdictional bar provision in section 1821(d)(13)(D) works with FIRREA's claims procedures to impose a "statutory exhaustion requirement" that is "explicitly jurisdictional." Rosa v. R.T.C., 938 F.2d 383, 395 (3d Cir.), cert. denied, 502 U.S. 981 (1991); Freeman v. F.D.I.C., 56 F.3d 1394, 1400 (D.C. Cir. 1995). The Ninth Circuit has held repeatedly that FIRREA "bars judicial review of any non-exhausted claim, monetary or nonmonetary, which is susceptible of resolution through the claims procedure." Henderson v. Bank of New England, 986 F.2d 319, 321 (9th Cir. 1993); see Benson, 673 F.3d at 1211; McCarthy v. F.D.I.C., 348 F.3d 1075, 1081 (9th Cir. 2003); Intercontinental Travel Mktg., 45 F.3d at 1282.
In the complaint here, the Trustee seeks a declaratory judgment that the Trustee, as the successor to Bancorp, "is entitled to immediate payment, possession, and ownership of all" of the roughly $34 million in federal and state tax refunds at issue and that "any legal rights of the [FDIC-Receiver] or the Bank with respect to the Tax Refunds... are properly asserted, if at all, solely in the form of a general unsecured claim against the Bancorp bankruptcy estate...." Compl., ¶ 46. On its face, this is unquestionably an "action seeking a judicial determination of rights with respect to the assets of [a] depository institution for which the Corporation has been appointed receiver." 12 U.S.C. § 1821(d)(13)(D)(i).
As the Third Circuit has observed, "[n]o reasonable argument can be offered that the plain meaning of the any action seeking a determination of rights' language of § 1821(d)(13)(D) does not include complaints requesting declaratory relief." Nat'l Union Fire Ins. Co. v. F.D.I.C., 28 F.3d 376, 385 (3d Cir. 1994). Other courts agree. See Westberg v. F.D.I.C., 741 F.3d 1301, 1305 (D.C. Cir. 2014) ("declaratory relief against the FDIC is obtainable through the administrative process" and subject to FIRREA exhaustion requirement) (citing Freeman v. F.D.I.C., 56 F.3d 1394, 1400, 1404 (D.C. Cir. 1995)); Tri-State Hotels, Inc. v. F.D.I.C., 79 F.3d 707, 714-15 (8th Cir. 1996) ("Tri-State's request for declaratory relief likewise does not render the exhaustion requirements inapplicable.").
Federal law provides only one avenue for a party to obtain such relief against the FDIC-Receiver: it must file a timely receivership claim with the FDIC-Receiver and, if such a claim is disallowed, it must then file an action within 60 days in one of two designated federal district courts to obtain a de novo judicial determination of that disallowed claim. See 12 U.S.C. § 1821(d)(6)(A).
If anything, that conclusion is even more clear in this case given the declaratory relief sought in the Trustee's complaint. See Compl., ¶ 46. Nor must the FDIC-Receiver first establish its ownership of the disputed tax refunds for FIRREA's exhaustion requirement to apply. See Bloom v. F.D.I.C. (In re First State Bancorp.), 498 B.R. 322, 330 (Bankr. D.N.M. 2013) (rejecting trustee argument that bankruptcy court must first resolve avoidance action before determining whether an asset of receivership is at issue as to which FIRREA exhaustion would apply); Amsave Credit Corp. v. Resolution Tr. Corp., 141 B.R. 578, 583 (Bankr. D.N.J. 1992) (bankruptcy court "finds no merit in AmSave's argument that the RTC must first prove in this court its ownership interest in the 34 loans before the provisions of FIRREA are invoked"); but see Zucker v. F.D.I.C. (In re BankUnited Fin. Corp.), 727 F.3d 1100, 1104 n.5 (11th Cir. 2013); Sharp v. F.D.I.C. (In re Vineyard Nat'l Bancorp), No. 2:10-ap-01815RN, 2013 WL 1867987 (Bankr. C.D. Cal. May 3, 2013). Imposing such a threshold requirement on the applicability of the jurisdictional bar would not only contradict the plain language of section 1821(d)(13)(D)(i), it would eviscerate it. See McCarthy, 348 F.3d at 1077 ("[T]he text of § 1821(d)(13)(D) plainly states that any claim or action that asserts a right to assets of a failed institution is subject to exhaustion. There is no limitation to creditors, or exclusion of debtors, and that is controlling.") (emphasis in original).
In any event, there can be no reasonable dispute that there are assets of Temecula Valley Bank at stake in this action. Either the FDIC-Receiver is the owner of the tax refunds at issue, as the FDIC-Receiver maintains, or it is, instead, the holder of a general unsecured claim against the Bancorp bankruptcy estate, as the Trustee argues. See Compl., ¶ 46. In either instance, an asset of the Bank receivership is at issue; the only question is whether that action takes the form of the tax refunds themselves or a chose-in-action against the Bancorp estate that is based on them. See First State Bancorp., 498 B.R. at 330 ("A disputed claim, unless so frivolous that it is worthless, is an asset regardless of whether the claim ultimately is allowed. A claim may have substantial value before the claim is litigated, even if the claim ultimately is denied.") (emphasis added).
Bancorp and the Trustee had the opportunity to pursue her declaratory relief through the mandatory receivership claims process procedure, but they waived that opportunity when they chose not to file a claim against the Bank receivership. See Shaw Decl., ¶ 2. The Trustee's attempt to obtain declaratory relief outside of the receivership claims process now is prohibited by federal law. See McCarthy, 348 F.3d at 1081.
While the language of section 1821(d)(13)(D) is clear and determinative, its application here will not be rote. Instead, it will require a detailed review and application of Supreme Court and Ninth Circuit authority. As one example of the complexity that such issues can raise, in 2011 Judge Feess reversed his own prior ruling in a case construing other aspects of FIRREA's claims provisions and sua sponte certified the revised decision for immediate interlocutory appeal to the Ninth Circuit, where the revised order ultimately was affirmed. See Deutsche Bank Nat'l Trust Co. v. F.D.I.C., 854 F.Supp.2d 756, 769 (C.D. Cal. June 28, 2011), aff'd, 744 F.3d 1124 (9th Cir. 2014)
The FDIC-Receiver anticipates that the Trustee will argue that FIRREA does not preclude its declaratory judgment action in bankruptcy court because of the Ninth Circuit's decision in Parker N. American Corp. v. R.T.C. (In re Parker N. Amer. Corp), 24 F.3d 1145 (9th Cir. 1994). But Parker is inapplicable, and the continuing vitality of that opinion is doubtful given more recent decisions of the Ninth Circuit and the United States Supreme Court. These are issues that the presiding court in this action will be required to address in order to resolve the Trustee's declaratory judgment claim.
In Parker, the Ninth Circuit permitted a chapter 11 debtor to assert a preference action in bankruptcy court against the Resolution Trust Corporation, as receiver for a failed thrift, in response to a proof of claim that had been filed by the thrift before it failed. Reasoning that the bankruptcy court had "expertise in determining preference actions, which involve legal matters unique to the [Bankruptcy] Code, " the Ninth Circuit concluded that the jurisdictional bar did not apply in those particular circumstances. Parker, 24 F.3d at 1153-54.
After Parker was issued, other appellate courts criticized the decision for ignoring the plain language of 12 U.S.C. § 1821(d)(13)(D). See, e.g., Superior Bank F.S.B. v. Boyd (In re Lewis), 398 F.3d 735, 742 (6th Cir. 2005) ("We are troubled by the argument that the language in a statute has a different meaning when it is read in the context of a bankruptcy case than it has in the context of any other case.... The fact that the claim is associated with a bankruptcy proceeding does not suddenly render the language ambiguous."); Tri-State Hotels, 79 F.3d at 714 n.11 (rejecting Parker interpretation of the meaning of "claim" in 12 U.S.C. § 1821(d)(13)(D) as inconsistent with language of the statute); Freeman, 56 F.3d at 1401 (expressing doubt that Parker construction of 12 U.S.C. § 1821(d)(13)(D) "quite squares with the statutory text").
Recognizing that criticism, the Ninth Circuit in McCarthy limited the Parker holding to its specific facts and in the process expressly rejected Parker's central rationale: that the FIRREA jurisdictional bar applied only to creditors, and not to debtors, of a failed bank or thrift. The Ninth Circuit in McCarthy joined the other Circuits of the U.S. Court of Appeals in holding that debtors of a failed bank are subject to FIRREA's mandatory claims process to the same extent as creditors of the failed institution. See McCarthy, 348 F.3d at 1077 ("the text of § 1821(d)(13)(D) plainly states that any claim or action that asserts a right to assets of a failed institution is subject to exhaustion. There is no limitation to creditors, or exclusion of debtors, and that is controlling") (emphasis in original). This holding overruled the central basis for the Ninth Circuit's earlier holding in Parker. See 24 F.3d at 1152 ("We agree with the courts that hold that FIRREA applies only to claims of creditors of the RTC and not to challenges incident to the [RTC]'s claims against its debtors'") (emphasis in original).
After McCarthy, any continuing vitality of Parker is limited to those instances within the Ninth Circuit when a bankruptcy law counterclaim asserts a cause of action - such as a preference claim - in which "the bankruptcy courts, not the [FDIC], have specific competence." McCarthy, 348 F.3d at 1078. In this action, the Trustee's declaratory judgment claim does not raise such a bankruptcy-specific claim. To the contrary, it is predicated entirely on a contract argument that arises under state non-bankruptcy law. See Siegel v. F.D.I.C. (In re IndyMac Bancorp, Inc.), No. CV-11-3969-RGK, 2011 WL 2883012, at *6 (C.D. Cal. July 15, 2011).
In In re Vineyard Nat'l Bancorp, the bankruptcy court misread the McCarthy court's rejection of this important part of the Parker reasoning in an action involving a similar tax refund dispute. In denying the FDIC's motion to dismiss, the Vineyard court read Parker to hold that FIRREA's exhaustion requirement was inapplicable to holders of "an obligation owing to" the failed institution, Vineyard, 2013 WL 1867987, at *5 (citing Parker, 24 F.3d at 1153), and mistakenly cited McCarthy as holding that the distinction between debtors and creditors of a receivership still applied "to bankruptcy cases." Vineyard, 2013 WL 1867987, at *5 n.6. To the contrary, however, McCarthy rejected that reading of section 1821(d)(13)(D) in all cases and strictly limited Parker to its facts - a defensive preference claim that was "not susceptible of resolution through FIRREA's claims procedure." See McCarthy, 348 F.3d at 1078.
Casting even further doubt on Parker, the Supreme Court has now rejected a second premise of Parker's holding, specifically, that a creditor could alter the application of FIRREA's jurisdictional bar and confer jurisdiction in the bankruptcy court merely by filing a proof of claim. See Parker, 24 F.3d at 1155 (FIRREA claims process does not apply to actions filed in bankruptcy court "at least where the RTC has filed a proof of claim that exceeds the amount sought to be recovered by the debtor."). In Stern v. Marshall, the Supreme Court held that a party could not by its actions expand the permissible subject matter jurisdiction of the bankruptcy court by filing an adversary proceeding against the debtor in bankruptcy court. The bankruptcy court therefore had no jurisdiction to determine a state law counterclaim against that plaintiff if it was a "non-core" proceeding that would not be resolved in the bankruptcy claims resolution process. See Stern v. Marshall, ___ U.S. ____, 131 S.Ct. 2594, 2616 (2011).
In an unpublished order entered before Stern was issued, the district court in Tamalpais reversed its prior order withdrawing the reference on reconsideration because it had not been aware that the FDIC as receiver had filed a protective proof of claim in the debtor's bankruptcy case. See Order Vacating Order of Withdrawal, Green v. F.D.I.C., No. 3:11-cv-00076-JSW (N.D. Cal. Apr. 19, 2011) (attached as Toral Decl., Exh. G). The Tamalpais court's reasoning that the action at issue was a "core" proceeding because it was a counterclaim to the FDIC's proof of claim - did not anticipate the Stern holding that bankruptcy courts lacked constitutional authority over such matters. See Siegel, 2011 WL 2883012, at *6-7.
Here, the jurisdictional ouster is even clearer: Except as permitted under FIRREA's claims resolution process, "no court shall have jurisdiction over" actions seeking a determination of rights in assets such as the Trustee's declaratory judgment action here. A defense of lack of subject matter jurisdiction cannot be waived and, in any event, the FDIC-Receiver expressly preserved that defense in its proof of claim. Moreover, the Trustee has not objected to that proof of claim in this action but instead has asserted a standalone declaratory judgment claim for a ruling under state law.
These complex issues are not presented for determination now, but they will have to be addressed by the presiding court to resolve the Trustee's claim for declaratory relief against the FDIC-Receiver. Under these circumstances, section 157(d) mandates withdrawal of the reference for adjudication before an Article III court.
2. The Trustee's Claim That a Tax Sharing Agreement Creates an Unsecured Debtor-Creditor Relationship Violates the Federal Reserve Act.
The premise of the Trustee's tax ownership argument is that an alleged tax sharing agreement between Bancorp and the Bank had the effect of transferring the Bank's property interest in tax refunds to its holding company by creating a debtor-creditor relationship under which the parent owns refunds it receives for the group and merely owes a payment to the Bank as an unsecured creditor. See Compl., ¶¶ 21-29. This argument is wrong for many reasons, including that it would require a court to construe the tax sharing agreement in a way that violates fundamental federal banking laws.
Under the Internal Revenue Code of 1986, as amended, affiliated groups of corporations may elect to file a consolidated federal income tax return. 26 U.S.C. § 1501. Making such an election provides certain advantages to the group, including that losses suffered by one member can be used to offset income earned by another member resulting in a reduction of the group's consolidated tax liability. See Treas. Reg. §§ 1.1502-11(a), 1.1502-13.
Each member of the affiliated group remains severally liable for the full amount of the consolidated tax liability. Treas. Reg. § 1.1502-6(a).
If a group elects to file a consolidated return, only one return may be filed on behalf of all of the affiliated corporations. The regulations designate the common parent corporation to act as "sole agent" for the members of the group with respect to "all matters" relating to the tax liability for that consolidated return year, which includes the receipt of refunds owed to any member of the group. See Treas. Reg. § 1.1502-77(a)(2)(v). This does not mean the parent corporation has a property interest in any tax refunds that may be paid to it for the members of the group. To the contrary, as the Ninth Circuit has recognized:
If the group includes a failed depository institution, the FDIC as receiver is empowered to file a consolidated return as co-agent for the group. See 26 U.S.C. § 6402(k); Treas. Reg. § 301.6402-7.
The only reason the tax refunds are not being paid directly to the subsidiary is because income tax regulations require that the parent act as the sole agent, when duly authorized by the subsidiary, to handle all matters relating to the tax return... But these regulations are basically procedural in purpose and were adopted solely for the convenience and protection of the federal government.
W. Dealer Mgmt., Inc. v. England (In re Bob Richards Chrysler-Plymouth Corp.), 473 F.2d 262, 265 (9th Cir.), cert. denied, 412 U.S. 919 (1973); see also Capital Bancshares, Inc. v. F.D.I.C., 957 F.2d 203, 208 (5th Cir. 1992).
"An agent has a fiduciary duty to act loyally for the principal's benefit in all matters connected with the agency relationship, " Restatement (Third) of Agency, § 8.01 (2006), and "not to acquire a material benefit from a third party in connection with transactions conducted or other actions taken on behalf of the principal, " id., § 8.02. "If the agent receives property for the principal, the agent's duty is to use due care to safeguard it pending delivery to the principal." Restatement (Third) of Agency, § 8.12, cmt. b).
Consistent with these fundamental principles of state law, the Ninth Circuit has recognized that allowing a parent corporation "to keep any refunds arising solely from a subsidiary's losses simply because the parent and subsidiary chose a procedural device to facilitate their income tax reporting unjustly enriches the parent." Bob Richards, 473 F.2d at 265; see also Capital Bancshares, 957 F.2d at 208 (same).
As a result, when corporations file joint income tax returns as a consolidated group, tax refunds arising from net operating loss carrybacks inure to the benefit of the entity that earned the income giving rise to the previous tax liability and incurred the loss giving rise to the refund. The common parent does not obtain an ownership interest in such refunds but merely receives them as agent. As such, the parent-agent is bound to turn the refund amounts over to their rightful owner(s) in accordance with the parent's duties as agent and fiduciary. See, e.g., Cal. Housing Sees., Inc. v. F.D.I.C., No. 99-71084, 12 F.Appx. 519, 520 (9th Cir. June 13, 2001) (per curiam) (unpublished disposition applying Bob Richards); Capital Bancshares., 957 F.2d at 210; Bob Richards, 473 F.2d at 265.
The principle of agency law followed by the Ninth Circuit in Bob Richards and regularly followed by courts thereafter acknowledges that the members of a consolidated tax group can enter into a "differing agreement" that alters the common law rule. Bob Richards, 473 F.2d at 264. The Ninth Circuit, in an unpublished disposition that cannot be cited as precedent, recently broke from the other Circuits of the United States Court of Appeals in holding that a tax sharing agreement between a failed bank and its bankrupt holding company amounted to such a differing agreement. F.D.I.C. v. Siegel (In re IndyMac Bancorp., Inc.), 554 F.Appx. 668 (9th Cir. Apr. 21, 2014) (per curiam); compare F.D.I.C. v. AmFin Fin. Corp., 757 F.3d 530, 535 (6th Cir. 2014) (tax sharing agreement did not unambiguously create debtor-creditor relationship); F.D.I.C. v. Zucker (In re NetBank, Inc.), 729 F.3d 1344, 1350-51 (11th Cir. 2013) (tax sharing agreement supported agency relationship required under federal policy statement rather than debtor-creditor relationship); BankUnited, 727 F.3d at 1108 ("Although the TSA does not contain a provision expressly requiring the Holding Company to forward the tax refunds to the Bank on receipt, it is obvious to us that this is what the parties intended.").
IndyMac is the entire basis for the Trustee's argument here. But in the case of Bancorp and other bank holding companies, such a contractual alteration of the common law rule is not permissible as a matter of federal banking law, specifically, sections 23A and 23B of the Federal Reserve Act and the Interagency Policy Statement on Income Tax Allocation In A Holding Company Structure, 63 Fed. Reg. 64757 (Nov. 23, 1998) (the "Policy Statement"), which expresses federal bank regulators' joint interpretation of those statutes.
A recent decision in this district by U.S. Bankruptcy Judge Ernest M. Robles makes it clear that even in this Circuit the non-precedential IndyMac opinion does not require a finding of a debtor-creditor relationship between a common parent and its subsidiary based on the mere existence of a document that addresses procedures for tax allocation and settlements. See Liquidating Tr. v. F.D.I.C. (In re First Regional Bancorp), slip op. at 15, Adv. Proc. No. 2:14-op. 01221-ER (Bankr. C.D. Cal. Oct. 2, 2014) (Toral Decl., Exh. H).
Sections 23A and 23B of the Federal Reserve Act are among the most fundamental federal restrictions on the activities of banks and their "affiliates, " including holding companies. See 12 U.S.C. §§ 371c, 371c-1. Under section 23A, any extension of credit, in whatever form, that is made from a bank to its holding company must be secured by collateral from the holding company equal to at least 100%, and as much as 130%, of the amount of the extension of credit. 12 U.S.C. § 371c(a); 12 C.F.R. § 223.14. Under section 23B, any transaction between an insured bank and its "affiliates" must be on terms and conditions, such as the rate of interest and credit standards, that the bank would require in a transaction with an unrelated third party. 12 U.S.C. § 371c-1(a); 12 C.F.R. §§ 223.51, 223.52.
Sections 23A and 23B apply by their literal terms to "member banks" and their subsidiaries, i.e. banks that are members of the Federal Reserve system. Those provisions apply to state non-member banks, such as the Bank here, under 12 U.S.C. § 1828(j).
If the tax sharing agreement here were interpreted to result in an extension of credit from the Bank to its holding company, as the Trustee asserts, the agreement would violate these laws. As the Board of Governors of the Federal Reserve System explained in its implementing regulations, sections 23A and 23B require a bank to "treat any of its transactions with any person as a transaction with an affiliate to the extent that the proceeds of the transaction are used for the benefit of, or transferred to, an affiliate, such as the bank's holding company." 12 C.F.R. § 223.16(a) (emphasis added). In this instance, there are no provisions in the alleged agreement for the holding company's posting of collateral to secure such the "loan" to the holding company that would result under the Trustee's argument, or other terms to ensure that such an extension of credit would be on arms-length terms.
If the Trustee's argument were correct, the extension of credit that resulted when a Bank refund was received by its parent and agent would result in an immediate and serious violation of these federal banking laws. See, e.g., NetBank, 729 F.3d at 1351 n.8 (absence from tax sharing agreement of provisions for interest and collateral raised concerns under section 23A with debtor-creditor argument), BSD Bancorp, Inc. v. F.D.I.C. (In re BSD Bancorp, Inc.), No. 94-1341-IEG, slip op. at 10-11 (S.D. Cal. Feb. 28, 1995) (Toral Decl., Exh. I) (refusing to construe provisions of tax allocation agreement to give rise to a debtor-creditor relationship where there were no provisions for the posting of collateral by holding company and therefore the extension of credit would violate section 23A of the Federal Reserve Act); but see Siegel v. F.D.I.C. (In re IndyMac Bancorp Inc.), No. 2:12-cv-2967-RGK, 2012 WL 1951474, at *4 (C.D. Cal. May 30, 2012) (distinguishing BSD Bancorp), aff'd on other grounds, 554 F.Appx. 668 (9th Cir. Apr. 21, 2014).
An "extension of credit" is any transaction in which a person "becomes obligated (directly or indirectly, or by any means whatsoever) to pay money or its equivalent to the bank." 12 C.F.R. § 223.3(o) (emphasis added).
The Policy Statement further supports that conclusion. In the Policy Statement, all of the federal bank regulatory agencies jointly articulated how sections 23A and 23B would be construed in the context of intercompany tax settlements and allocations between an insured depository institution and its holding company. Consistent with sections 23A and 23B, the regulators stated that tax sharing arrangements among the members of a bank's or thrift's consolidated tax group "should result in no less favorable treatment to the [insured depository] institution than if it had filed its income tax return as a separate entity." Id. at 64757. The Policy Statement further provided that "a parent company that receives a tax refund from a taxing authority obtains these funds as agent for the consolidated group on behalf of the group members." Id. at 64759 (emphasis added). As a result, a tax sharing agreement for a bank holding company group "should not purport to characterize refunds attributable to a subsidiary depository institution that the parent receives from a taxing authority as the property of the parent. '" Id. (emphasis added).
The Trustee's bankruptcy argument assumes that Bancorp's and the Bank's own officers consciously caused the holding company and its Bank subsidiary to enter into a tax allocation agreement that directly violated federal banking laws and bank regulators' expressed interpretation of those laws. This demonstrates the fallacy of the Trustee's debtor-creditor argument. See Restatement (Second) of Contracts, § 203(a) (1981) (interpretation that "gives a reasonable, lawful, and effective meaning to all the terms is preferred").
To resolve the Trustee's declaratory judgment claim, a presiding court will be required to consider the effect of these fundamental provisions of federal banking law on the Trustee's unfounded debtor-creditor argument based on the alleged tax sharing agreement here.
B. Federal Law Requires Many of These Issues to Be Litigated in District Court.
As previously noted, withdrawal of the reference is mandatory when a matter raises "issues requiring significant interpretation of federal laws that Congress would have intended to have decided by a district judge rather than a bankruptcy judge." Carlyle Fortran Trust, 2005 WL 1074407, at *3. There is no better evidence of congressional intent than the language of federal statutes. Section 1821(d)(6)(A) of title 12 specifies that any action for a de novo judicial determination of a disallowed receivership claim must be brought in one of two specific federal district courts: (1) the United States District Court for the District of Columbia; or (2) the United States District Court for the district in which a failed depository institution had its principal place of business. Section 1821(d)(6)(A) does not provide for any action to be filed in bankruptcy court.
III. IN THE ALTERNATIVE, THE COURT SHOULD WITHDRAW THE REFERENCE OF THE ADVERSARY PROCEEDING "FOR CAUSE SHOWN."
Quite apart from the compelling grounds for mandatory withdrawal of the reference set forth above, "cause" exists to withdraw the reference of the adversary proceeding from the bankruptcy court. The determination to order "permissive" withdrawal of the reference under 28 U.S.C. § 157(d) is subject to this Court's discretion. See Addison v. U.S. Dep't of Educ. (In re Addison), 240 B.R. 47, 49 (C.D. Cal. 1999).
"In determining whether cause exists, a district court should consider the efficient use of judicial resources, delay and costs to the parties, uniformity of bankruptcy administration, the prevention of forum shopping, and other related factors." Sec. Farms, 124 F.3d at 1008 (citing In re Orion Pictures Corp., 4 F.3d 1095, 1101 (2d Cir. 1993)).
Because of their constitutional limitations as Article I courts, bankruptcy courts are not permitted to enter final judgment in "non-core" proceedings within the meaning of 28 U.S.C. § 157. Any findings entered by the bankruptcy court in "non-core" proceedings are subject to de novo review by the district court. See 28 U.S.C. § 157(c)(1). Consequently, as an initial step in the permissive withdrawal analysis courts generally evaluate whether the matter at issue is a "core" or "non-core" proceeding. See In re Nat'l Consumer Mortg., LLC, No. 8:09-01053 TA, 2009 WL 2985243, at *2 (C.D. Cal. Sept. 14, 2009). As the Ninth Circuit has explained, "[a]ctions that do not depend on bankruptcy laws for their existence and that could proceed in another court are considered non-core.'" Sec. Farms, 124 F.3d at 1008 (citing In re Castlerock Props., 781 F.2d 159, 162 (9th Cir. 1986)); see 28 U.S.C. § 157(b)(2) (listing matters that are considered "core" proceedings).
The Trustee's declaratory judgment claim here is not dependent on bankruptcy law. As Judge Klausner recognized in a similar case, it is, in reality, no more than a "non-core" state law contract action. See Siegel v. F.D.I.C. (In re IndyMac Bancorp, Inc.), No. CV-11-3969-RGK, 2011 WL 2883012, at *6 (C.D. Cal. July 15, 2011); Lange v. F.D.I.C. (In re TierOne Corp.), 2011 WL 2133702, at *4; see also Eastport Assocs. v. City of Los Angeles (In re Eastport Assocs.), 935 F.2d 1071, 1077 (9th Cir. 1991) (action for declaratory judgment could have been brought in state court and was not a core proceeding).
The recent Supreme Court decision in Stern v. Marshall makes clear that bankruptcy courts do not have the constitutional authority to adjudicate state law claims, such as the Trustee's declaratory judgment claims here, when they cannot be resolved through the bankruptcy claims resolution process. In this case, the bankruptcy claims process is not implicated. As a result, the claim must be viewed as a "non-core" proceeding notwithstanding the general designation in 28 U.S.C. ¶ 157(b)(2)(C) of debtor counterclaims as "core" proceedings. Stern v. Marshall, 131 S.Ct. at 2620; see Siegel, 2011 WL 2883012, at *6 (applying Stern in holding that counterclaim seeking determination of ownership of tax refunds was "non-core").
Permissive withdrawal of "non-core" proceedings eliminates unnecessary costs because the alternative for such matters is to proceed in the bankruptcy court subject to de novo review by the district court. Sec. Farms, 124 F.3d at 1009. Further, this is not a case where the bankruptcy court has particular familiarity with the relevant issues and facts. There have been no substantive proceedings in this action and only limited related disputes in Bancorp's chapter 7 case. The currently presiding bankruptcy judge, the Honorable Scott H. Yun, was assigned the underlying bankruptcy case on July 21st of this year. He is the third bankruptcy judge to have been assigned to the case since it was filed in 2009.
There is no invested knowledge base in the bankruptcy court that would be lost if this action were to be withdrawn to this Court. Judicial resources and efficiency strongly favor withdrawal of the reference here.
CONCLUSION
For the foregoing reasons, the FDIC-Receiver respectfully requests that this Court withdraw the reference from the bankruptcy court of the Trustee's adversary proceeding filed against the FDIC-Receiver and that the Court grant the FDIC-Receiver such other and further relief as it may deem just and proper.
(D) Limitation on judicial review
Except as otherwise provided in this subsection, no court shall have jurisdiction over
(i) any claim or action for payment from, or any action seeking a determination of rights with respect to, the assets of any depository institution for which the Corporation has been appointed receiver, including assets which the Corporation may acquire from itself as such receiver; or
(ii) any claim relating to any act or omission of such institution or the Corporation as receiver.