United States District Court, N.D. Illinois, Eastern Division
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,
FBOP CORPORATION, et al., Defendants.
MEMORANDUM OPINION AND ORDER
JAMES F. HOLDERMAN, District Judge.
On June 10, 2014, the Federal Deposit Insurance Corporation ("FDIC-R"), as a separate and distinct receiver for eight failed banks, filed a complaint against the banks' former parent company, defendant FBOP Corporation ("FBOP"), as well as FBOP's Trustee-Assignee and a number of FBOP's creditors to determine the ownership of a multi-million dollar tax refund currently residing in escrow. (Dkt. No. 1.) On August 12, 2014, the FDIC-R filed an amended complaint ("Amended Complaint") (Dkt. No. 35 ("Am. Compl.")) seeking, among other relief, a judgment avoiding security interests that FBOP granted to two of its creditors, defendants JPMorgan Chase Bank, N.A. ("JPMC") and BMO Harris Bank N.A. ("BMO"), because the security interests were actual or constructive fraudulent transfers under Illinois and federal law. The FDIC-R's Amended Complaint also asks the court to impose a constructive trust on any portion of the tax refund FBOP has already provided to its creditors, including JPMC and BMO. JPMC and BMO have moved to dismiss (Dkt. Nos. 36, 40) the fraud claims against them (Counts IX through XIV) and the FDIC-R's "claim" for a constructive trust (Count XXIV) pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons stated below, JPMC's and BMO's motions (Dkt. Nos. 36, 40) are granted in part and denied in part.
This lawsuit concerns the ownership of $275.6 million in tax refunds generated by eight different banks,  all of which failed after the Banks' holding company, FBOP, implemented a strategy in 2007 causing the Banks to invest in the housing market. The Banks bought preferred stock issued by Fannie Mae and Freddie Mac (collectively, the "Government Sponsored Enterprises" or "GSEs"), bonds issued by Washington Mutual Bank ("WaMu"), and other securities backed by commercial real estate loans. (Am. Compl. ¶ 142.) The timing of FBOP's bet on the housing market could not have been worse-a housing crisis would soon grip the nation-and FBOP's belief that the GSEs' stock was guaranteed by the federal government proved to be incorrect. ( Id. ) On July 30, 2008, Congress passed the Housing and Economic Recovery Act of 2008, establishing the Federal Housing Finance Agency ("FHFA") as the regulator of the GSEs and empowering FHFA to serve as conservator to the GSEs when necessary to preserve their financial health. See Pub. L. No. 110-289, 122 Stat. 2653 (2008). On September 6, 2008, following the GSEs' unsuccessful efforts to raise much needed capital in the private markets, FHFA placed the GSEs into conservatorship and suspended dividend payments on common and preferred shares. The GSEs' share prices fell to nearly zero.
The Banks, along with the GSEs' other stockholders, suffered massive losses. By the end of September 2008, the Banks had recognized a combined investment loss of approximately $838 million on their GSE preferred stock, written down the value of their WaMu-issued bonds by at least $99 million, and suffered additional losses on their other commercial real estate investments. (Am. Compl. ¶¶ 147-48.) On October 30, 2009, as a result of the 2008 investment losses and the recession that followed, the Banks' chartering authorities-the Office of the Comptroller of Currency ("OCC") and the Texas Department of Banking ("TDB")-closed the Banks and appointed the FDIC-R as receiver for the Banks. ( Id. ¶ 1, 40-44.)
FBOP remained in existence as a legal entity, albeit as a bank holding company without subsidiary banks. During the two years following the Banks' failure, FBOP received approximately $275.6 million in tax refunds (the "Tax Refunds") attributable to taxes paid by the Banks during the 2004-2009 tax years. (Am. Compl. ¶¶ 124-31.) FBOP did not return the Tax Refunds to the Banks or to the FDIC-R. Instead, at the urging of its creditors and in exchange for financial benefits to FBOP insiders, FBOP asserted ownership over the Tax Refunds and pledged its asserted rights to its various creditors to the detriment of the original taxpayers: the Banks. ( Id. ¶¶ 345, 346, 358, 385, 388.) The FDIC-R objected to FBOP's actions and demanded that FBOP transfer the Banks' Tax Refunds to the FDIC-R. FBOP refused, and the ownership of the Tax Refunds is now the subject of this lawsuit.
I. Pre-Failure Tax Arrangement between FBOP and the Banks
On October 31, 2007, FBOP and the Banks entered into an agreement to allocate consolidated federal and state income tax liabilities (the "2007 Tax Allocation Agreement"). (Am. Compl. ¶ 238.) The purpose of the 2007 Tax Allocation Agreement was to allow FBOP and the Banks to continue filing taxes as a consolidated group, as they had done since 2004, with FBOP acting as the Banks' agent for filing tax returns, paying taxes, and seeking refunds. ( Id. ¶ 59, 60, 239, 241.) Since 2004, each Bank had paid its own tax liability by transferring funds to FBOP. FBOP then transferred the Banks' tax payments to the IRS. ( Id. ¶ 65.) FBOP likewise transferred any tax refunds attributable to Banks' earnings back to the Banks upon receiving the refunds from the IRS. FBOP and the Banks envisioned the same arrangement under the 2007 Tax Allocation Agreement and, until the Banks failed in 2009, all of the parties acted as though the Banks' tax refunds belonged to the Banks, not FBOP. ( Id. ¶¶ 242-43, 378.)
The same understanding applied to deferred tax assets, which are assets derived from a financial institution's ability to generate tax deductions through operating losses. When banks are profitable and earn income, they pay income taxes. ( Id. ¶ 132.) When they are unprofitable, they generate net operating losses ("NOLs"). ( Id. ) Banks can "carry back" NOLs to offset income earned (and taxes paid) in the previous two tax years and receive an overpayment refund from the IRS for those two tax years. In some circumstances, such as the 2008 financial crisis, NOLs are so large that they exceed income earned in the previous two years. In those cases, banks can "carry forward" the remaining NOLs to offset income earned in future tax years. But because the utility of "carry forward" NOLs depends in part on future income, banks may only recognize a percentage of "carry forward" NOLs in their Tier 1 capital ratios. ( Id. ¶¶ 133-34, 156-57.) The Tier 1 capital ratio compares shareholder equity to risk-adjusted assets and is often used by regulators to measure an institution's financial strength.
Consistent with FBOP's and the Banks' larger tax scheme, the Banks treated deferred tax assets-when such assets existed-as their own. (Am. Compl. ¶ 139.) FBOP apparently understood the same, because in coordinating the Banks' policies for calculating their individual capital ratios, FBOP treated the Banks' deferred tax assets as property of the Banks. ( Id. ¶ 136.) The understanding persisted even after the Banks suffered massive GSE-related losses and the prospect of sizable deferred tax assets became apparent. Throughout 2008 and 2009, as FBOP sought special treatment for the Banks' deferred tax assets as a means of keeping the Banks capitalized and staving off seizure, FBOP repeatedly told the OCC that the Banks' deferred tax assets, including the right to claim tax refunds, belonged to the Banks-not FBOP. ( Id. ¶¶ 163, 166-68.) FBOP made the same representation when it applied for TARP funds in 2008. ( Id. ¶¶ 169-71.) And in each quarterly "call report, " a type of financial health report banks must submit to regulators under 12 U.S.C. § 1817(a)(3), each Bank-under the direction of FBOP-claimed ownership of its respective deferred tax assets through October 2009. ( Id. ¶¶ 172-233.)
II. The Banks' Failure and the Aftermath
In June 2009, eight months after FHFA placed the GSEs into conservatorship, FBOP and the Banks remained open but were struggling to meet the demands of creditors and regulators. On June 19, 2009, one of those creditors, JPMC, filed a collection action against FBOP seeking payment of an overdue loan. (Am. Compl. ¶¶ 325, 334); see also JPMorgan Chase Bank, N.A. v. FBOP Corp., No. 09 C 3720 (N.D. Ill.). JPMC acted as the agent for a syndicated lending group that made revolving loans to FBOP under a longstanding credit agreement. ( Id. ) FBOP failed to make a payment by the due date, causing JPMC to accelerate the payment terms and effectively call in the entire $247.6 million loan. (Am. Compl. ¶¶ 182, 326.)
FBOP's financial woes extended to its owner as well. On September 30, 2009, Michael Kelly ("Kelly"), FBOP's President and sole shareholder, caused FBOP to lend him $6.5 million at an interest rate of 3.25% per year. ( Id. ¶¶ 335-36.)
Around the same time, in the fall of 2009, FBOP was attempting to convince the Banks' regulators, the OCC and TDB, to refrain from seizing the Banks until President Obama signed the Workers, Homeowners, and Business Assistance Act of 2009 ("WHBAA"). The WHBAA eventually extended the two-year limitation on "carry back" NOLs to five years for banks and other institutions whose losses stemmed from the GSEs' failures. If FBOP's Banks had survived long enough to take advantage of the WHBAA's extended "carry back" allowance, FBOP contends that its NOLs would have provided an additional $200 million to support the Banks' capital ratios and potentially avoid seizure. (Am. Compl. ¶¶ 122, 128.) But the OCC and TDB ultimately refused FBOP's request to wait. The regulators seized the Banks on October 30, 2009-one week before President ...