Downey Financial Trumps FDIC in $374M Tax Refund Tussle

October 9, 2013 – In The News
Law360

Michael G. Menkowitz, William H. Stassen, Raymond M. Patella and L. John Bird were featured in the Law360 article "Downey Financial Trumps FDIC in $374M Tax Refund Tussle." While the full text can be found in the October 9, 2013, issue of Law360, a synopsis is noted below.

Downey Financial Corp.’s Chapter 7 trustee notched a victory over the Federal Deposit Insurance Corp. Tuesday as a Delaware bankruptcy judge ruled a nearly $374 million tax refund belongs to the failed home lender’s estate.

U.S. Bankruptcy Judge Christopher S. Sontchi determined that under the tax sharing agreement between Downey Financial and subsidiary Downey Savings and Loan Association FA, the refund is an asset of the parent’s bankruptcy estate.

With the decision, the $374 million refund becomes an asset that can be divvied up on a pro rata basis among various creditors of Downey.

In November 2008, the U.S. Office of Thrift Supervision ordered Downey Savings’ operations seized, appointing the FDIC as receiver.

Downey Financial’s Chapter 7 trustee launched an adversary proceeding in October 2010, staking claim to the tax refund as an estate asset.

The FDIC “did not meet its burden in showing that a resulting trust was intended by the parties, nor that the parties’ course of performance indicates a trust or agency relationship,” Judge Sontchi said.

“We think it’s a very well-reasoned opinion,” said William Stassen, a member of the team representing the Chapter 7 trustee. “Judge Sontchi did one of the most thorough jobs of analyzing the issue.”

According to Stassen, the U.S. Department of Justice still needs to sign off on the settlement.

The Chapter 7 trustee is represented by Michael G. Menkowitz, William H. Stassen, Raymond M. Patella and L. John Bird of fox Rothschild.