United States District Court, C.D. California
IN RE: TEMECULA VALLEY BANCORP, INC Bankruptcy No. 6:09-bk-36828 SY Adversary No. 6:14-ap-01250 SY
Daniel Bussel, Whitman Holt, Attorneys Present for Plaintiffs.
Todd Toral, John Clarke, Jr., Attorneys Present for Defendants.
CIVIL MINUTES - GENERAL
CHRISTINA A. SNYDER, District Judge.
Proceedings: FDIC-RECEIVER'S MOTION TO WITHDRAW THE BANKRUPTCY REFERENCE (Dkt. No. 9, filed November 5,
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.
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. 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."). 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 (7 th 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 ...