Fed. Deposit Ins., Corp. v. Fbop Corp., Case No. 14 CV 4307, Case No. 14 CV 4307.

252 F.Supp.3d 664

FEDERAL DEPOSIT INSURANCE, CORPORATION, as a separate and distinct Receiver of Bank USA, N.A., California National Bank, Citizens National, Bank of Teague, Madisonville State Bank, North, Houston Bank, Pacific National Bank, Park National Bank, and San Diego National Bank, Plaintiff,

v.FBOP CORPORATION; Patrick D. Cavanaugh, of High Ridge Partners, Inc., not individually, but solely as Trustee–Assignee under FBOP Corporation's Trust Agreement and Assignment for the Benefit of Creditors; JPMorgan Chase Bank, N.A., as Agent; BMO Harris Bank, N.A., as successor in interest to M & I Marshall & Ilsley Bank; Ore Hill Hub Fund Ltd.; Canyon Balanced Master Fund, Ltd. ; Canyon GRF Master Fund, L.P. ; Mariner Tricada Credit Strategies Master Fund, Ltd.; PMT Credit Opportunities Fund Ltd. ; Prospect Mountain Fund Limited ; Structured Credit Opportunities Fund II, LP ; and Gordon C. Watson, Defendants.

Pension Benefit Guaranty Corporation, Plaintiff–Intervenor,

v.FBOP Corporation; Patrick D. Cavanaugh of High Ridge Partners, Inc., solely in his capacity as Trustee–Assignee under FBOP Corporation's Trust Agreement and Assignment for the Benefit of Creditors; Federal Deposit Insurance Corporation, as Receiver for Bank USA, N.A., California National Bank, Citizens National Bank of Teague, Madisonville State Bank, North Houston Bank, Pacific National Bank, Park National Bank, and San Diego National Bank; Wells Fargo Bank, N.A.,as escrow agent pursuant to the escrow agreement among the Federal Deposit Insurance Corporation, FBOP Corporation and Wells Fargo Bank, N.A., Defendants.

Case No. 14 CV 4307, Case No. 14 CV 4307.

United States District Court, N.D. Illinois, Eastern Division.

Signed May 12, 2017

David F. Proano, Eric R. Goodman, Adam L. Fletcher, Joseph F. Hutchinson, Baker & Hostetler LLP, Cleveland, OH, Karin Scholz Jenson, Baker & Hostetler LLP, New York, NY, Erin Bolan Hines, Baker Hostetler LLP, Chicago, IL, for Plaintiff.

Edward C. Fitzpatrick, Kate E. Middleton, Faegre Baker Daniels LLP, Alison R. Leff, Sidley Austin LLP, John Clay deMoulpied, William Scott Porterfield, William John Barrett, Barack Ferrazzano Kirschbaum & Nagelberg LLP, Carrie A. Hall, Christopher R. Parker, Michael Best & Friedrich LLP, Thomas P. Cimino, Jr., Douglas Joseph Lipke, William W. Thorsness, III, Vedder Price P.C., Chicago, IL, Adam E. Witkov, Michael Best & Friedrich LLP, Milwaukee, WI, for Defendants.

MEMORANDUM OPINION AND ORDER

Honorable Thomas M. Durkin, United States District Judge

INTRODUCTION

STANDARD OF REVIEW

BACKGROUND

A. THE RISE AND FALL OF FBOP AND THE BANKS

B. THE CORPORATE DEBT OF FBOP AND THE PERSONAL DEBT OF ITS CHAIRMAN

C. THE $10.3 MILLION IN NON–ESCROWED REFUNDS

D. FBOP'S SETTLEMENT OF ITS UNSECURED CREDITORS' CLAIMS

E. THE $265.3 MILLION IN ESCROWED REFUNDS

F. CURRENT LITIGATION

DISCUSSION

I. CHOICE OF LAW

II. RULES OF CONTRACT INTERPRETATION

III. THE FBOP DEFENDANTS' RULE 12(C) MOTION FOR JUDGMENT AS A MATTER OF LAW ON COUNTS I–II

A. THE "DEFAULT" RULE REGARDING OWNERSHIP OF TAX REFUNDS

1. ILLINOIS LAW: TAX REFUNDS OF JOINT FILERS BELONG TO THE TAXPAYER WHO PAID THE TAXES

2. THE BOB RICHARDSCASE

3. FEDERAL COMMON LAW ARGUMENT

4. UNITED DOMINIONARGUMENT

5. UNJUST ENRICHMENT ARGUMENT

B. THE TAA

1. SURROUNDING CIRCUMSTANCES SUPPORT THE DEFAULT TAX REFUND OWNERSHIP RULE

2. THE TAA DOES NOT CLEARLY REPUDIATE THE DEFAULT TAX REFUND OWNERSHIP RULE

a. TAX ALLOCATION AND PAYMENT PROVISIONS

b. DEBTOR–CREDITOR TERMINOLOGY

c. ABSENCE OF TRUST PROVISIONS

d. PRINCIPAL–AGENT ISSUE

3. THE TAA AFFIRMATIVELY REFLECTS A CONTRACTUAL INTENT TO MAINTAIN THE DEFAULT TAX REFUND OWNERSHIP RULE

a. NO LESS FAVORABLE PRINCIPLE

b. THE 1998 POLICY STATEMENT

4. PAROL EVIDENCE ISSUES

IV. THE FDIC'S RULE 12(C) MOTION FOR JUDGMENT AS A MATTER OF LAW ON COUNTS I–II I

V. THE FBOP DEFENDANTS' RULE 12(C) MOTION ON THE FDIC'S ALTERNATIVE LEGAL AND EQUITABLE CLAIMS—COUNTS III–IV

VI. THE FBOP DEFENDANTS' RULE 12(C) MOTION ON THE FDIC'S CLAIMS TO RECOVER THE NON–ESCROWED REFUNDS—COUNTS XIX–XXII

VII. THE FBOP DEFENDANTS' RULE 12(C) MOTION ON PBGC'S INTERVENOR COMPLAINT

CONCLUSION

INTRODUCTION

This litigation involves a dispute over $265.3 million in tax refunds currently being held in escrow (the "Escrowed Refunds"). An additional $10.3 million in tax refunds not held in escrow also are at issue (the "Non–Escrowed Refunds"). The Federal Deposit Insurance Corporation ("FDIC") claims entitlement to the tax refunds¹ by virtue of its appointment as the separate receiver² for each of eight failed banks,³ which the FDIC alleges earned the income, paid the taxes, and sustained the losses from which the tax refunds are derived. Defendant FBOP Corporation ("FBOP") is the parent company of the Banks, and received the refunds from the Internal Revenue Service ("IRS") as the appointed agent for a consolidated tax group consisting of itself and its subsidiary corporations (the Banks and approximately 80 non-banking subsidiaries) (hereinafter the "Consolidated Group").⁴ As will be explained in more detail later, FBOP became insolvent and assigned all of its assets, including whatever interest it may have had in the tax refunds, to the Trustee of the FBOP Corporation Trust Agreement and Assignment for the Benefit of Creditors (hereinafter the "Assignment") for the purpose of applying the property or proceeds thereof to the payment of FBOP's debts. FBOP and the Trustee (collectively referred to as the "FBOP Defendants") claim ownership of the tax refunds pursuant to an agreement between FBOP and the Banks concerning the allocation of tax liabilities and benefits among members of the Consolidated Group (hereinafter the "TAA" or the "Agreement").

The TAA sets forth the applicable rules to which, prior to FBOP's insolvency, FBOP and the Banks agreed for allocating the tax benefits and burdens of the Consolidated Group. It is assumed for purposes of the present motions that the TAA obligated FBOP to distribute the tax savings represented by the tax refunds to the Banks. The issue to be decided is whether the Banks' entitlement to those tax savings is a property right or a contractual right. If the Banks have a property right, then FBOP must turn the tax refunds over to the FDIC.⁵ If the Banks' right is contractual, however, then the tax refunds now belong to the Trustee, as the assignee of FBOP, who is charged with distributing them among FBOP's creditors.⁶

The FDIC and the FBOP Defendants have presented the ownership issue through cross-motions for partial judgment on the pleadings under Federal Rule of Civil Procedure 12(c). For the reasons that follow, the Court holds that the Banks' right to receive the tax refunds is a property right. Therefore, the FBOP Defendants' motion for partial judgment on the pleadings is denied. Although the Court holds that the Banks have property rights in the tax refunds, the Court cannot tell from the parties' arguments if a disputed issue of fact exists over whether the TAA required FBOP to distribute the entire amount of the Escrowed Refunds to the Banks, and whether the Banks paid the entire amount of the original taxes that led to the Escrowed Refunds. Therefore, the Court will withhold ruling on the FDIC's cross-motion for partial judgment on the pleadings until the parties file a joint report regarding the question of whether the FDIC's Rule 12(c) motion must be converted to a summary judgment motion for purposes of determining the amount of the Escrowed Refunds to which the Banks, given their property rights as set forth herein, are entitled.

STANDARD OF REVIEW

Federal Rule of Civil Procedure 12(c) permits a party to move for judgment on the pleadings after the parties have filed the complaint and answer. See Buchanan–Moore v. Cnty. of Milwaukee, 570 F.3d 824, 827 (7th Cir. 2009). The primary function of a Rule 12(c) motion is to "dispos[e] of cases on the basis of the underlying substantive merits of the parties' claims and defenses as they are revealed in the formal pleadings." Wright & Miller, FEDERAL PRACTICE AND PROCEDURE , § 1367 (3d ed.) (citing Alexander v. City of Chicago, 994 F.2d 333 (7th Cir. 1993) ). The parties disagree over whether the applicable standard for their Rule 12(c) motions is the Rule 12(b)(6) standard for motions to dismiss or the Rule 56 standard for motions for summary judgment. Which standard applies "is often a point of confusion in many civil cases." West v. Phillips, 883 F.Supp. 308, 313 n.1 (S.D. Ind. 1994). In United States v. Wood, 925 F.2d 1580, 1581 (7th Cir. 1991) (per curiam), the Seventh Circuit held that a motion for judgment on the pleadings should be analyzed according to the same standard as a motion to dismiss. But in Alexander, the Seventh Circuit held that the Rule 12(b)(6) standard should be applied only where the defendant "use[s] a rule 12(c) motion after the close of the pleadings to raise various rule 12(b) defenses regarding procedural defects." 994 F.2d at 336. Where a party "use[s] rule 12(c) in its customary application to attempt to dispose of the case on the basis of the underlying substantive merits," the court said, "the appropriate standard is that applicable to summary judgment, except that the court may consider only the contents of the pleadings." Id.

The Court need not choose between the motion to dismiss and summary judgment standards here because the outcome of the parties' Rule 12(c) cross-motions does not turn on that selection.⁷ In either case, the Court must take "all well-pleaded allegations in the plaintiffs' pleadings to be true, and [ ] view the facts and inferences to be drawn from those allegations in the light most favorable to the plaintiffs." Id. In addition, applying either standard requires the Court to consider only the content of the competing pleadings, exhibits thereto, matters incorporated by reference in the pleadings, and any facts of which the district court will take judicial notice. Wright & Miller, FEDERAL PRACTICE supra,...