In re Temecula Valley Bancorp, Inc.

523 B.R. 210

In re TEMECULA VALLEY BANCORP, INC.

No. 5:14–cv–02244–CAS.

Bankruptcy No. 6:09–bk–36828 SY.

Adversary No. 6:14–ap–01250 SY.

United States District Court, C.D. California.

Signed Dec. 8, 2014.

Daniel Bussel, Whitman Holt, Los Angeles, CA, for Plaintiffs.

Todd Toral, Los Angeles, CA, John Clarke, Jr., New York, NY, for Defendants.

FDIC–RECEIVER'S MOTION TO WITHDRAW THE BANKRUPTCY REFERENCE (Dkt. No. 9, filed November 5, 2014)

CHRISTINA A. SNYDER, District Judge.

I. INTRODUCTION

On September 24, 2014, Helen R. Frazer, Chapter 7 Trustee of Temecula Valley Bancorp. Inc. (“the Trustee”), filed this adversary proceeding in the U.S. Bankruptcy Court for the Central District of California against defendant Federal Deposit Insurance Corporation (“FDIC”) in its capacity as Receiver of Temecula Valley Bank (the “Bank”). Dkt. No. 2 Ex. C. (“Compl.”). The Trustee seeks a declaration that the bankruptcy estate of Temecula Valley Bancorp, Inc. (“Bancorp”) is entitled to ownership of certain tax refunds currently held in an escrow account. See generally id. On November 5, 2014, the FDIC filed its amended motion to withdraw the bankruptcy reference and have the adversary proceeding heard in this Court. Dkt. No. 9. The Trustee filed an opposition on November 17, 2014. Dkt. No. 12. The FDIC replied on November 24. Dkt. No. 17. On December 8, 2014, the Court held a hearing on the matter. For the reasons that follow, the Court DENIES the motion.

II. BACKGROUND

In 2002, a non-bankruptcy corporate reorganization made Bancorp the parent corporation of the Bank. Compl. ¶ 13. Bancorp was a holding company that “conduct[ed] no business of its own other than owning the common shares of” the Bank and several statutory trusts that issued Bancorp's junior subordinated debt. Temecula Valley Bancorp, Inc. Annual Report at 5 (Form 10–K) (Mar. 17, 2009). On June 3, 2002, Bancorp and the Bank entered into a Tax Sharing Agreement (“TSA”). Compl. ¶ 19; see Toral Decl. Ex. A–1. Pursuant to the TSA, Bancorp filed consolidated tax returns on behalf of Bancorp and the Bank, collectively as the “Bancorp Group.” Compl. ¶ 21. The TSA provides for the Bank to estimate its share of tax liabilities and benefits and, depending on whether that estimated amount is positive or negative, pay or receive that amount to or from Bancorp.Id. ¶¶ 22, 23. Bancorp, in turn, is to remit the Bancorp Group's estimated tax payments to the appropriate taxing authority. Id. ¶ 24.

On July 17, 2009, the California Department of Financial Institutions closed the Bank and placed it under the FDIC's receivership. Id. ¶ 14. The FDIC subsequently established a bar date of October 20, 2009 for the filing of any claims seeking a determination of rights with respect to the Bank's assets. Dkt. No. 1, Memo. Supp. Mot. at 4. Neither Bancorp nor the Trustee ever filed a claim with the receivership. Id. Bancorp filed for bankruptcy under Chapter 7 of the Bankruptcy Code on November 6, 2009. Compl. ¶¶ 6, 15. The Trustee was appointed on the same date. Id. ¶¶ 7, 15.

The adversary proceeding concerns the ownership of tax refunds received as a result of “large taxable losses generated by the Bancorp Group in 2008 and 2009, which could be carried back to reduce the income of the Bancorp Group in other [pre-bankruptcy] tax years.” Id. ¶ 30. The Trustee asserts that, pursuant to the TSA, “the Bank is a creditor of Bancorp to the extent that the Bancorp Group's income tax liability for a given year changes as the result of a loss carryback, an audit, or an amended return” that results in a recomputed tax liability for the Bank smaller than the amount the Bank paid to Bancorp. Id. ¶ 27. According to the Trustee, the TSA “contains no provision creating a trustee-trustor relationship or a principal-agent relationship with respect to any tax refunds, and no grounds exist for implying the existence of any such relationship. Rather, the TSA creates a debtor-creditor relationship with respect to tax refunds received by Bancorp.” Id. ¶ 29. Accordingly, the Trustee asserts that she “is entitled to immediate payment, possession, and ownership” of the tax refunds, and that any rights of the FDIC or Bank with respect to those funds “are properly asserted, if at all, solely in the form of a general unsecured claim against the Bancorp bankruptcy estate.” Id. ¶ 46. The FDIC, on the other hand, has asserted in proofs of claim and otherwise that the tax refunds are the property of the FDIC as the Bank's statutory successor.¹ Memo. Supp. Mot. Withdraw at 3. Pursuant to an April 23, 2010 stipulation between the parties, refunds attributable to the Bancorp Group's filing of consolidated tax returns have been deposited into a specially-created reserve account. Compl. ¶ 31. As of August 31, 2014, the balance in this account totaled just over $34 million.

In May 2013, the parties entered into a tolling agreement staying litigation of the instant dispute until the Ninth Circuit issued a mandate in the case of FDIC v. Siegel ( In re IndyMac Bancorp, Inc.), No. 12–56218. Compl. ¶ 41. That mandate issued on July 9, 2014. Id. The Trustee commenced the adversary proceeding on September 24, 2014.

III. LEGAL STANDARD

Withdrawal of the reference of an adversary proceeding from bankruptcy court is governed by 28 U.S.C. § 157(d), which provides:

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). This statute “contains two distinct provisions: the first sentence allows permissive withdrawal, while the second sentence requires mandatory withdrawal in certain situations.”In re Coe–Truman Techs., Inc., 214 B.R. 183, 185 (N.D.Ill.1997). Under either provision, the “burden of persuasion is on the party seeking withdrawal.” FTC v. First Alliance Mortgage Co. (In re First Alliance Mortgage Co.), 282 B.R. 894, 902 (C.D.Cal.2001).

Withdrawal is mandatory if “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) ; Sec. Farms v. Int'l Bhd. of Teamsters, Chauffers, Warehousemen & Helpers, 124 F.3d 999, 1008 (9th Cir.1997). The Ninth Circuit has suggested that mandatory withdrawal hinges “on the presence of substantial and material questions of federal law.” See id. at 1008 n. 4 (“By contrast, permissive withdrawal does not hinge on the presence of substantial and material questions of federal law.”).² The mandatory withdrawal provision should be construed narrowly so as to avoid creating an “ ‘escape hatch’ by which bankruptcy matters could easily be removed to the district court.” In re Vicars Ins. Agency, Inc., 96 F.3d 949, 952 (7th Cir.1996). Thus, the consideration of non-bankruptcy federal law must entail more than “routine application” to warrant mandatory withdrawal. In re Ionosphere Clubs, Inc., 922 F.2d 984, 995 (2d Cir.1990) ; see also Hawaiian Airlines, Inc. v. Mesa Air Grp., Inc., 355 B.R. 214, 222 (D.Haw.2006) (“Cases involving significant interpretation require mandatory withdrawal, while those involving simple application do not.”) (citing City of New York v. Exxon Corp., 932 F.2d 1020, 1026 (2nd Cir.1991) ).

Withdrawal is permissive “for cause shown.” 28 U.S.C. § 157(d) ; Sec. Farms, 124 F.3d at 1008. To determine whether cause for permissive withdrawal exists, a district court “should first evaluate whether the claim is core or non-core, since it is upon this issue that questions of efficiency and uniformity will turn.” In re Orion Pictures Corp.,

4 F.3d 1095, 1101 (2d Cir.1993). Next, the “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 at 1101 ). “It is within a district court's discretion to grant or deny a motion for permissive withdrawal of reference; that decision will not be disturbed unless the court abuses its discretion.” In re EPD Inv. Co. LLC, No. cv–13–05536 SJO, 2013 WL 5352953, at *2 (C.D.Cal. Sept. 24, 2013) (citing In re Cinematronics, Inc., 916 F.2d 1444, 1451 (9th Cir.1990) ).

IV. ANALYSIS

A. Mandatory Withdrawal

The FDIC argues that adjudication of the adversary proceeding will require substantial and material consideration of non-bankruptcy federal law. But as explained below, the FDIC merely raises federal defenses that a clear majority of courts have found inapplicable or inconsequential, and insufficient to mandate withdrawal.

1. 12 U.S.C. § 1821(d)(13)(D)

a. Background

First, the FDIC contends that resolution of the adversary proceeding will require interpretation of the receivership claims provisions and a related jurisdictional bar contained in the Federal Deposit Insurance Act, as amended by the Financial Institutions, Reform, Recovery and Enforcement Act of 1989 (“FIRREA”). The statute provides in relevant part:

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 [FDIC] has been appointed receiver, including assets which the [FDIC] may acquire from itself as such receiver; or

(ii) any claim relating to any act or omission of such institution or the [FDIC] as receiver.

12 U.S.C. § 1821(d)(13)(D)(i)-(ii). “The phrase ‘except as otherwise provided in this subsection’ refers to a provision that allows jurisdiction after the...