Downey Financial Gets $370M Refund In FDIC Fight: 3rd Circ.

January 26, 2015 – In The News

Michael G. Menkowitz and William H. Stassen were mentioned in the Law360 article, “Downey Financial Gets $370M Refund In FDIC Fight: 3rd Circ.” Full text can be found in the January 26, 2015, issue, but a synopsis is below.

A Third Circuit panel upheld a decision in favor of Downey Financial Corp.'s Chapter 7 trustee in a $370 million tax refund dispute with the Federal Deposit Insurance Corp., finding that a tax sharing agreement with Downey’s subsidiaries ensured that the funds are part of its bankruptcy estate.

According to the panel’s analysis of the opinion from U.S. Bankruptcy Judge Christopher S. Sontchi, Downey’s TSA with Downey Savings and Loan Association FA and other subsidiaries created a contractual debtor-creditor relationship that “unambiguously” made the tax refund an asset to the parent company’s Chapter 7 estate.

The panel concluded that the FDIC and Downey Savings’ trust argument was “inconsistent with the express terms of the TSA.”

With the decision, the refund becomes an asset that can be divided on a pro rata basis between Downey Financial's various creditors, one being Wilmington Trust.

The panel’s conclusion stated that the TSA clearly established a creditor-debtor relationship, because it met the three factors:

  1. It created fungible payment obligations among the parties;
  2. There were no escrow or segregation obligations, or use restrictions; and
  3. The tax filer was given sole discretion regarding tax matters.

The Chapter 7 trustee is represented by Michael G. Menkowitz and William H. Stassen of Fox Rothschild LLP.

Attorneys, Peter C. Buckley and Maura L. Burke also contributed to the victory.