In re Wash. Mut., Inc.

In re: WASHINGTON MUTUAL, INC., et al., Debtors.

Case No. 08-12229 (MFW)

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

Dated: December 19, 2012

Chapter 11

Jointly Administered

OPINION¹

Before the Court is the Objection of WMI Liquidating Trust (the "Trust"), as successor in interest to Washington Mutual, Inc. ("WMI") and WMI Investment Corp., to the proof of claim filed by the Oregon Department of Revenue ("Oregon"). For the reasons stated herein, the Court will sustain the Objection.

I. BACKGROUND

WMI is a bank holding company that formerly owned Washington Mutual Bank ("WMB"). By the late 1990s, WMB was using real estate investment trusts ("REITs") as a source of funding and capital. In late 1999, each of the REITS became directly-owned subsidiaries of a holding company of WMI and changed their commercial domiciles from the State of Washington to Oregon.

WMB and certain of WMB's subsidiaries (the "WMB Entities") conducted banking-related operations in Oregon during taxable years 1999 through 2005. During this period, WMI and its directand indirect subsidiaries, including the WMB Entities and the REIT Holding Companies (the "Consolidated Tax Group"), filed consolidated returns for federal tax purposes.²

As a result of a downgrade in WMI's and WMB's credit ratings and the global credit crisis, a bank run ensued resulting in more than $16 billion in deposits being withdrawn from WMB in a ten-day period beginning on September 15, 2008. On September 25, 2008, the Office of Thrift Supervision (the "OTS") seized WMB and appointed the Federal Deposit Insurance Corporation (the "FDIC") as the receiver. On the same day, the FDIC sold substantially all of WMB's assets to JPMorgan Chase.

On September 26, 2008, WMI and WMI Investment Corp. (collectively, the "Debtors") filed voluntary petitions under chapter 11 of the Bankruptcy Code. At that time, WMI's assets included its interest in non-banking subsidiaries, more than $4 billion of cash that WMI and its non-banking subsidiaries had on deposit at the WMB Entities immediately prior to the time the FDIC was appointed as receiver, and a claim against the FDIC for, inter alia, its common stock interest in WMB.

In 2008, Oregon conducted an audit of WMI and certain of its subsidiaries. By letter dated November 12, 2008, Oregon asserted that additional corporate excise taxes, penalties, and interest were due by WMI and its subsidiaries for tax years 2002 through 2006 (the "Taxable Period"). On March 17, 2009, WMI and Oregon attended an informal conference at which WMI contested the results of the Oregon audit. On October 8, 2009, Oregon's positions with respect to each of the audit issues was upheld and a notice of assessment was issued (the "Notice of Assessment"). On January 6, 2010, WMI timely filed a written appeal from the Notice of Assessment, which appeal remains pending. (D.I. 9115 at Ex. 23.)³

In the interim, Oregon filed a proof of claim in the Debtors' chapter 11 cases, pursuant to which Oregon sought payment of $29,381,722.91 for corporate excise taxes, interest, and penalties related to the Taxable Period. The Debtors objected to the claim on the basis that Oregon sought payment for excise taxes owed by entities other than the Debtors. (D.I. 3196.) Oregon responded that WMI is jointly and severally liable for the excise tax obligations of the WMB Entities under Oregon law. Thereafter, Oregon filed an amended claim (in the same amount as the original claim). The Debtors objected to theamended claim, asserting that the tax was unconstitutional because WMI lacked a substantial nexus with the State of Oregon. (D.I. 9113.) Alternatively, WMI asserted that if the tax is constitutionally permissible, the amount of the claim should be zero.

In its Seventh Amended Plan of Reorganization (the "Plan"), the Debtors designated a liquidating trust to administer the liquidating trust assets and distribute the proceeds thereof. On February 24, 2012, the Plan was confirmed and the Trust was formed. On September 13, 2012, the Trust, as successor in interest to the Debtors, filed its memorandum of law in support of the Debtors' objection to Oregon's claim.

The matter was fully briefed and the Court heard oral argument on the constitutional issue on September 25, 2012. At the conclusion of the hearing, the Court took the matter under advisement. It is ripe for decision.

II. JURISDICTION

The Court has subject matter jurisdiction over this core matter. 28 U.S.C. §§ 1334(b) & 157(b)(2)(A) & (B).

III. DISCUSSION

A. Oregon Corporate Excise Tax

Oregon argues that, pursuant to Oregon law, WMI is liablefor the Oregon excise tax owed by its subsidiaries. Oregon asserts that WMI, as the parent holding company of its unitary business, filed consolidated corporate tax returns on behalf of itself and its operating subsidiaries for the Taxable Period. The Oregon tax laws provide in relevant part:

(1) Generally, the consolidated return shall be filed by and in the name of the common parent corporation. If the common parent is not a member of the affiliated group filing the consolidated Oregon return or is not subject to Oregon taxation, the return shall be filed in the name of a member of the affiliated group doing business in Oregon as defined under ORS 317.010(4). If more than one member is doing business in Oregon, the name of the member having the greatest presence in Oregon shall be used.

Or. Admin. R. 150-317.710(5)(a)-(A) (2012).

Oregon argues that if WMI was not subject to taxation by Oregon, the return should not have been filed in its name and WMI should not have been included in the consolidated tax group. Oregon asserts, therefore, that by filing the return in its name, WMI admitted that it was doing business in Oregon and was liable for the excise tax. Oregon seeks to impose joint and several liability upon WMI because it was included in the consolidated state tax return.

The corporation's tax liability shall be joint and several with any other corporation that is included in a consolidated state return with the corporation under subsection (5) of this section.

Or. Rev. Stat. § 317.710(2) (2012).

The Trust responds that the mere inclusion of WMI in theconsolidated tax return is not a concession or admission of its tax liability. See, e.g., Estee Lauder Serv., Inc. v. Dep't of Revenue, 16 Or. Tax 279, 284 (Or. T.C. 2000) (holding that members of an affiliated group are not treated as a single taxpayer for the purpose of determining whether any member is subject to tax); State ex rel. Dep't of Revenue v. Penn Indep. Corp., 15 Or. Tax 68, 74 (Or. T.C. 1999) (holding that the inclusion of income by a nontaxable member of a unitary group does not subject that income to taxation of the group). In fact, the Trust notes that WMI was required to be included in the Oregon tax return because it was part of the consolidated group for federal tax purposes. Or. Rev. Stat. § 317.710(2) (2012) ("If [a] corporation is a member of an affiliated group of corporations making a consolidated federal return, it shall file a return and determine its Oregon taxable income as provided in ORS 317.715.").

The Trust further contends that if WMI is liable under Oregon tax law, that tax is unconstitutional.

B. Constitutionality of Tax

A state's power to tax a particular taxpayer is limited by both the Due Process and Commerce Clauses of the United States Constitution. Quill Corp. v. North Dakota, 504 U.S. 298, 305 (1992); Mobile Oil Corp. v. Comm'r of Taxes of Vt., 445 U.S. 425, 449 (1980); Nat'l Bellas Hess, Inc. v. Dep't of Revenue, 386 U.S.753, 756 (1967), overruled in part on other grounds, Quill, 504 U.S. at 308.

The Trust argues that the tax is unconstitutional because it (i) is incompatible with the Due Process Clause and (ii) violates the Commerce Clause.

1. Due Process

Due process requires (1) "some minimum connection, between a state and the person, property or transaction it seeks to tax," and (2) that "income attributed to the State for tax purposes must be rationally related to values connected with the taxing State." Quill, 504 U.S. at 306. Due process is not satisfied unless, in addition to finding "minimum contacts," the court determines that the income a state seeks to tax relates to a benefit received from the state. Id. at 308. The initial inquiry regarding due process, therefore, is "whether a defendant had minimum contacts with the jurisdiction such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice." Quill, 504 U.S. at 307 (citing Int'l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945)).

a. Minimum contacts

The Trust contends that WMI did not purposefully avail itself of the benefits of Oregon because WMI's primary business offices were located in Seattle, Washington, and it did not operate any offices or own any other property in Oregon.Further, the Trust argues that WMI conducted no business activity within or directed towards Oregon and received no sales or other operating revenue of any kind from Oregon sources. The Trust asserts that WMI was merely a holding company and that WMB did not represent WMI, nor act on WMI's behalf, in its business dealings within Oregon. See, e.g., Applied Biosystems, Inc. v. Cruachem, Ltd., 772 F. Supp. 1458, 1471-72 (D. Del. 1991) (holding that the ownership of a Delaware subsidiary in the taxing state, standing alone, does not qualify as a continuous and systematic contact to meet the due process requirements of minimum contacts); Afros S.p.A. v. Krauss-Maffei Corp., 624 F. Supp. 464, 468 (D. Del. 1985) (holding that the continuous incorporation of a subsidiary in the taxing state and the filing of annual franchise tax returns are insufficient minimum contacts of the holding company).

Oregon argues that WMI, through its banking subsidiaries, was doing business in Oregon. Oregon asserts that WMI directly controlled its banking subsidiaries (the WMB Entities) all of which were indisputably doing...