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Federal Deposit Insurance Corp. v. FBOP Corp.

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

November 27, 2017

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, et al., Defendants. PENSION BENEFIT GUARANTY CORPORATION, Plaintiff-Intervenor,
v.
FBOP CORPORATION, et al., Defendants.

          MEMORANDUM OPINION AND ORDER

          Honorable Thomas M. Durkin United States District Judge

         This litigation involves a dispute over more than $265.3 million in tax refunds currently being held in escrow (“the Escrowed Tax Refunds”). The Federal Deposit Insurance Corporation (“FDIC”) claims entitlement to the tax refunds by virtue of its appointment as the separate receiver for each of eight failed banks (“the Banks”). 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). FBOP assigned whatever interest it had in the Escrowed Tax Refunds to the Trustee of the FBOP Corporation Trust Agreement and Assignment for the Benefit of Creditors (the “Trustee”). FBOP and the Trustee (collectively the “FBOP Defendants”) claim ownership of the Escrowed Tax Refunds pursuant to an agreement between FBOP and the Banks concerning the allocation of tax liabilities. The Court refers to its Memorandum Opinion and Order entered May 12, 2017 for further background concerning the dispute between the FDIC and the FBOP Defendants over ownership of the Escrowed Tax Refunds, and this Court's resolution of the FDIC's and the FBOP Defendants' cross-motions for judgment on the pleadings as to that dispute. See R. 205 (Fed. Deposit Ins. Corp. v. FBOP Corp., 252 F.Supp.3d 664 (N.D. Ill. 2017)).

         Presently before the Court are the claims of the Pension Benefit Guaranty Corporation (“PBGC”) against the FBOP Defendants set forth in PBGC's Intervention Complaint (R. 51). The FBOP Defendants have filed a Rule 12(c) motion for judgment on the pleadings in their favor on PBGC's intervention claims. See R. 225. For the reasons that follow, the Court denies the FBOP Defendants' Rule 12(c) motion.

         STANDARD OF REVIEW

         Federal Rule of Civil Procedure 12(c) permits a party to move for judgment on the pleadings. Buchanan-Moore v. Cnty. of Milwaukee, 570 F.3d 824, 827 (7th Cir. 2009). The pleadings “consist of the complaint, the answer, and any written instruments attached as exhibits.” Housing Auth. Risk Retention Group, Inc. v. Chi. Hous. Auth., 378 F.3d 596, 600 (7th Cir. 2004). 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)). “A motion for judgment on the pleadings under Rule 12(c) of the Federal Rules of Civil Procedure is governed by the same standards as a motion to dismiss for failure to state a claim under Rule 12(b)(6).” BBL, Inc. v. City of Angola, 809 F.3d 317, 325 (7th Cir. 2015). The court must take all well-pleaded allegations in the plaintiff's pleadings to be true, and view the facts and inferences to be drawn from those allegations in the light most favorable to the plaintiff. In addition, the court must consider only the content of the competing pleadings, exhibits thereto, matters incorporated by reference in the pleadings, and any facts of which a district court can take judicial notice. See Wright & Miller, Federal Practice supra, § 1367. The court cannot consider matters outside these areas without converting the motion into one for summary judgment. See Fed. R. Civ. P. 12(d); Omega Healthcare Investors, Inc. v. Res-Care, Inc., 475 F.3d 853, 856 n.3 (7th Cir. 2007). A Rule 12(c) motion is appropriate only when “it is clear that the merits of the controversy can be fairly and fully decided in this summary manner.” Wright & Miller, Federal Practice and Procedure, § 1369 (3d ed.). If it appears that discovery is necessary to fairly resolve a claim on the merits, then the motion for judgment on the pleadings should be denied. Id.

         BACKGROUND

         The following facts, construed in the light most favorable to PBGC, are from the pleadings and exhibits thereto in the present case, as well as court documents in two related cases-FBOP Corp. v. Pension Benefit Guaranty Corp., Case No. 11-cv-2782 (N.D. Ill.), filed Apr. 26, 2011, and Pension Benefit Guaranty Corp. v. FBOP Corp., Case No. 11-cv-2788 (N.D. Ill.), filed Apr. 27, 2011-of which this Court takes judicial notice.[1]

         A. Statutory Background

         PBGC is a wholly owned United States government corporation, which administers the pension insurance program established by Title IV of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). See 29 U.S.C. §§ 1301-1461. When an underfunded pension plan terminates without sufficient assets to pay all promised benefits, PBGC generally becomes the plan's trustee and pays statutorily guaranteed pension benefits to plan participants and beneficiaries. See 29 U.S.C. §§ 1302(a)(2), 1321, 1322, 1344. When PBGC determines that its possible long-run loss “may reasonably be expected to increase unreasonably” if the plan is not terminated, or if the plan will not be able to pay benefits when due, PBGC is statutorily authorized to initiate termination of a pension plan. See 29 U.S.C. § 1342. If PBGC decides to terminate a plan under § 1342 and the plan administrator disagrees with that decision, ERISA authorizes PBGC to apply for a judicial decree that the plan must be terminated. See 29 U.S.C. § 1342(c). If the court enters such a decree, it also sets a termination date, see 29 U.S.C. § 1348(a)(4), and appoints PBGC as statutory trustee under §§ 1342 and 1348. After a plan is terminated, PBGC makes a final assessment of liability. See 29 C.F.R. §§ 4003.1(b)(9), 4068.3. This determination of liability is generally appealable to the agency's Appeal Board, 29 C.F.R. § 4003.1(a), but when PBGC believes that its “ability to assert or obtain payment of liability is in jeopardy, ” it may issue a demand immediately upon making its liability determination, without providing for appeal rights, 29 C.F.R. § 4068.3(c).

         PBGC, as a federal agency, also has a right to offset debts owed to it by plan sponsors or controlled group members[2] against amounts that any other federal agency, including the IRS, owe to the plan sponsors or controlled group members.[3]PBGC's setoff rights are established by regulations, which provide a mandatory period to allow the plan sponsor or controlled group member a period of time in which to contest the offset. See 29 C.F.R § 4903.

         B. FBOP's Demise and The Pension Plan

         FBOP was the contributing sponsor and plan administrator of the FBOP Corporation Pension Plan (“the Plan”), a defined-benefit pension plan under ERISA. The Plan provides pension benefits to approximately 2, 589 current or former FBOP employees and their beneficiaries, the large majority of which were employees of the Banks. In October 2009, banking regulatory authorities closed the Banks and appointed the FDIC as their respective receivers, at which time FBOP employees associated with the Banks were terminated. The Banks constituted the majority of FBOP's assets, and, after their seizure, FBOP began the process of liquidating its remaining assets.

         After the FDIC assumed control over the Banks, PBGC determined that the Plan would be unable to pay benefits when due and that PBGC's long-run loss with respect to the Plan could reasonably be expected to increase unreasonably unless the Plan was terminated. Around the same time, FBOP informed PBGC that it anticipated receiving an estimated $200 million federal tax refund in June 2011. As a result, on April 21, 2011, PBGC issued a Notice of Determination (“Notice”) that the Plan should be terminated under 29 U.S.C. § 1342(a) and (c). That same day, PBGC sent FBOP the Notice along with a letter demanding payment by April 26, 2011 of the Plan's “unfunded benefit liabilities, ”[4] then estimated at $56, 650, 211 (the “Demand Letter”). Further, by letter dated April 26, 2011, PBGC sent notice to FBOP of the agency's intention by June 25, 2011 to set off the amount of the unfunded benefit liabilities against FBOP's anticipated $200 million income tax refund (“the Setoff Notice”). PBGC explained that it issued the Demand Letter and Setoff Notice before the Plan was terminated because it believed time was of the essence, based on FBOP's indication that it expected to receive the $200 million tax refund in a matter of months.

         C. The Termination and Declaratory Judgment Actions

         On April 25, 2011, FBOP informed PBGC that it was unwilling to agree to terminate the Plan. PBGC responded that, if FBOP did not agree by the April 26 deadline, PBGC would seek a district court decree terminating the Plan pursuant to 29 U.S.C. § 1342(c)(1). The next day, FBOP filed an action in this district seeking a declaratory judgment that PBGC incorrectly calculated that the Plan assets were not sufficient to pay benefits and incorrectly determined that FBOP had abandoned the Plan, and further seeking a court order to protect FBOP from PBGC's involuntary termination of the Plan. See FBOP Corp. v. Pension Benefit Guar. Corp., Case No. 11-cv-2782, Dkt. #1 (N.D. Ill.) (hereinafter the “Declaratory Judgment Action”). The following day, on April 27, 2011, PBGC filed an action in this district under 29 U.S.C. § 1342(c) and 1348(a) seeking an order: (1) terminating the Plan; (2) appointing PBGC as statutory trustee of the Plan; and (3) establishing April 21, 2011, as the Plan's termination date. See Pension Benefit Guar. Corp. v. FBOP Corp., Case No. 11-cv-2788, Dkt. #1 (N.D. Ill.) (hereinafter the “Termination Action”). While PBGC's complaint provided an estimate of FBOP's unfunded benefit liabilities, it did not seek a judgment regarding either the amount of those liabilities or PBGC's right to offset those liabilities under federal law.[5]

         The Declaratory Judgment Action and the Termination Action were consolidated before Judge Gettleman. Shortly thereafter, FBOP's counsel informed PBGC that its tax return was being audited and receipt of the $200 million tax refund was not expected for a year or more. Accordingly, PBGC issued a letter to FBOP withdrawing without prejudice both the Setoff Notice and the demand for liability contained in the Demand Letter.

         On May 18, 2011, FBOP filed an amended complaint in the Declaratory Judgment Action seeking a declaration that the Plan should not be terminated, injunctive relief barring PBGC from making false statements regarding FBOP and the Plan and requiring PBGC to issue a written retraction of its “prior false statements, ” a declaration that PBGC was not owed any unfunded benefit liabilities, and injunctive relief barring PBGC from referring the purported debt for a tax refund offset. See Declaratory Judgment Action, Dkt. # 14.

         On May 20, 2011, PBGC filed an amended complaint in the Termination Action, and, on June 10, 2011, FBOP filed a counterclaim to PBGC's amended complaint in which it asserted nearly identical claims to those asserted in its amended complaint in the Declaratory Judgment Action. See Termination Action, Dkt. ## 23, 28.

         On June 21, 2011, PBGC filed a motion to dismiss FBOP's claims in the Declaratory Judgment Action and FBOP's overlapping counterclaims in the Termination Action. See Termination Action, Dkt. # 30; Declaratory Judgment Action, Dkt. ## 20, 26. The district court granted that motion to dismiss on or about October 5, 2011. See Termination Action, Dkt. # 51; Declaratory Judgment Action, Dkt. # 46. The court held that FBOP's claims/counterclaims seeking to declare that the Plan should not be terminated served no useful purpose and would result in piecemeal and duplicative litigation because that claim would be resolved by the Termination Action. The court further held that FBOP's remaining claims against PBGC related to unfunded benefit liabilities and PBGC's Setoff Notice were not properly before the court because, upon learning that FBOP's tax refund was delayed pending resolution of the audit of FBOP's tax returns (which according to FBOP could take a year or more), PBGC had revoked its unfunded benefit liabilities demand and setoff request. In essence, PBGC had conceded that, at the time of the Termination Action, it was not entitled to setoff, and, as a result, its complaint in the Termination Action did not seek setoff or a certain amount of the unfunded benefit liabilities, the final determination of which had not yet occurred. Accordingly, the court held, FBOP was not “adversely affected by any action of [PBGC]” on which it could bring suit seeking a declaration regarding the unfunded benefit liabilities or to enjoin a potential future setoff.

         Over the next eight months, the parties engaged in discovery on PBGC's claim for termination of the Plan. Discovery was followed by efforts to settle the Termination Action, which efforts culminated in the Settlement Agreement executed on or about August 21, 2012. Following execution of the Settlement Agreement, PBGC filed a Stipulation of Dismissal with prejudice of the Termination Action. See Termination Action, Dkt. # 164. Shortly thereafter, a status hearing was held in the Declaratory Judgment Action, and that case was then dismissed for want of prosecution. See Declaratory Judgment Action, Dkt. # 54.

         D. The Settlement Agreement

         The Settlement Agreement (“Agreement”) purports “to resolve the [Termination Action, a/k/a the] Lawsuit[, ] and all other controversies between [the parties]” (Final Whereas clause) “relating to the Title IV Liabilities” (¶ 3.2), which are defined as “all liabilities under Title IV of ERISA with respect to the Pension Plan” (Article I). See R. 226-1 at 3, 4, & 7. PBGC agreed to dismiss the Termination Action with prejudice and release FBOP from any claims against it relating to the Title IV Liabilities. Id. at 4 (¶ 2.1). In return, FBOP[6] agreed to the termination of the Plan with a termination date of April 21, 2011 and the appointment of PBGC as statutory trustee of the Plan. Id. at 5 (¶ 2.1(a)). In addition, FBOP agreed “not to formally or informally oppose or object in any way to” the following:

• “any referral by PBGC of an offset of the Title IV Liabilities in an aggregate amount of $30 million (the ‘Settlement Claim Amount) to the Financial Management Service, the Internal Revenue Service, the Treasury Offset Program or any other branch of the Department of Treasury that is involved in the offset process pursuant to 26 U.S.C. §6402 and the regulations thereunder, 31 U.S.C. §3720A and the regulations thereunder, or other applicable federal law (a ‘Referral)” (id., ¶ 2.1(b));
• “the Notice of Past-Due, Legally Enforceable Debt, a copy of which is attached as Exhibit B (the ‘Notice Letter), or to any relief sought thereby by PBGC with respect to the Settlement Claim Amount, or to any notice consistent with the terms of this Settlement Agreement and Exhibit B from the Financial Management Service, the Internal Revenue Service, the Treasury Offset Program or any other branch of the Department of Treasury that is involved in the offset process, including refraining from asserting or submitting evidence that the Settlement Claim Amount is not past-due or legally enforceable” (id., ¶ 2.1(c)); or
• “payment of the Settlement Claim Amount, or any portion thereof, by the Financial Management Service, the Internal Revenue Service, the Treasury Offset Program or any other branch of the Department of Treasury that is involved in the offset process to PBGC on account of the Referral” (id., ¶ 2.1(d)).

         E. BFS's “Computer Glitch”

         Following execution of the Agreement and pursuant to the terms thereof, PBGC sent FBOP a notice, inter alia, that (1) FBOP had a past-due, legally enforceable debt which it owed to PBGC in the amount of $30 million, and (2) that PBGC intended to refer the debt to the Financial Management Service, an entity within the Treasury Department responsible for tax refund offsets. See R. 226-1 at 21 (Ex. B. to Settlement Agreement). PBGC sent a similar notice to the FDIC. See R. 51 at 6 (¶ 17). On or about October 12, 2012, PBGC referred its offset claim of $30 million to the Financial Management Service, which has since been renamed the Bureau of the Fiscal Service (“BFS”). Id. (¶ 18). PBGC also recorded its offset claim of $30 million in the Treasury Offset Program (“TOP”), a centralized offset program administered by the BFS to collect delinquent debts owed to federal agencies. Id.; https://www.fiscal.treasury.gov/fsservices/gov/debtColl/dms/top/ debttop.htm.

         PBGC alleges in the Intervention Complaint that the above steps were sufficient to effectuate its $30 million offset claim against the tax refunds the IRS was expected to pay to FBOP. R. 51 at 6 (¶ 19). Yet, on December 12, 2012 and January 2, 2103, PBGC received payments through the TOP on account of its offset claim of only $8, 780 and $175 ...


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