A $4 million tax refund belongs to a subsidiary after the Tenth Circuit took another look at the dispute following the demise of the “Bob Richards rule.”
The U.S. Supreme Court unanimously ruled in February to strike down the “Bob Richards rule,” which created a presumption that entities that are responsible for losses that give rise to tax refunds should get those tax refunds, unless there was a clear agreement to the contrary. The high court sent the case back to the U.S. Court of Appeals for the Tenth Circuit, ordering it to decide the case again without applying the Bob Richards rule.
On Tuesday, the Tenth Circuit followed those orders, examining the parties’ contract to determine whether, when the parent company declared bankruptcy while in possession of the tax refund, the parent company was a debtor to or agent of its subsidiary. If a debtor, the refund would go into the parent’s bankruptcy estate and the subsidiary would be one of multiple creditors. If an agent, the subsidiary would get the refund.
A three-judge panel for the Tenth Circuit found that the contract was ambiguous on that point, but that a portion of the contract required the court to construe ambiguities in favor of the subsidiary and its receiver, the Federal Deposit Insurance Corporation (FDIC), which meant in this case that the parent company was the subsidiary’s agent.
“Because the Agreement creates an agency relationship between UWBI and the Bank, we conclude that the tax refund at issue belongs to the Bank, and that the FDIC, as receiver for the Bank, was entitled to summary judgment in its favor,” wrote Judge Mary Beck Briscoe.
The dispute arose after United Western Bancorp Inc. (UWBI) filed a consolidated tax return for its subsidiaries, including United Western Bank. The IRS issued a tax refund to the parent of more than $4 million arising from the subsidiary bank’s losses.
While the parties agreed that the refund would have been owed ultimately to the subsidiary under a pre-existing agreement, after the parent company declared bankruptcy without having yet handed over the refund, they disagreed about whether the refund belonged with the parent company’s bankruptcy estate or with the FDIC, which was the receiver for the subsidiary bank.
Briscoe’s opinion was joined by Judges Stephanie K. Seymour and Jerome A. Holmes.
Mitchell Reich, Neal Katyal, and Thomas Schmidt of Hogan Lovells, and Mark Haynes of Ireland Stapleton Pryor & Pascoe PC, who represented the trustee of the parent company’s bankruptcy estate, didn’t immediately return a request for comment.
The FDIC declined to comment on litigation.
The case is Rodriguez v. Fed. Deposit Ins. Corp., 10th Cir., No. 17-1281, 5/26/20.