Supreme Court justices spent much of a Dec. 3 argument questioning the validity of a court rule that favors corporate subsidiaries in fights with a parent company over the status of a tax refund during bankruptcy proceedings.
The federal common law rule known as the Bob Richards rule—developed by judges—presumes that such refunds are owned by subsidiaries unless there was a clear agreement to the contrary, according to the U.S. Court of Appeals for the Tenth Circuit decision being challenged in the case.
While some members of the court were skeptical of the Bob Richards rule, there was some disagreement over whether the court should address it at all.
“We took this to decide the Bob Richards rule, whether it’s a thing,” Justice Neil Gorsuch said during arguments. “Why shouldn’t we put a period at the end of saying, both sides agree this is not a thing, go back and do it properly?”
The case arose after United Western Bancorp Inc. (UWBI) filed a consolidated tax return for its subsidiaries, including United Western Bank. The IRS issued UWBI a $4 million tax refund arising from United Western Bank’s losses. The dispute over the refund began after UWBI entered bankruptcy.
The case could have a large economic impact—corporate tax refunds can run into the hundreds of millions of dollars, the petitioner said. The outcome could resolve a split in lower appeals courts over whether some form of the Bob Richards rule plays into deciding these disputes.
Addressing Bob Richards Rule
Justice Ruth Bader Ginsburg expressed some concern about addressing the rule when the government’s lawyer—for whom the rule is beneficial—wasn’t actively defending it.
“We have had no adversarial confrontation on this issue,” she said, adding that justices don’t usually consider a question that is separated from the case. But she later noted that the government brought up the Bob Richards case in support of its position in its brief.
Justice Sonya Sotomayor also wondered whether the justices should address the rule given the lack of briefing from the subsidiary’s receiver on the issue and the possibility of deciding the case by looking at the contract and applying state law.
“So we don’t need to reach Bob Richards, is what I keep saying,” she said.
Gorsuch suggested the justices should address disagreement in lower courts over the rule.
“That’s why we took cert in this case after all,” he said, referring to the court’s decision to hear the case.
Justices also explored what else they would need to do if they addressed the validity of the Bob Richards rule.
Justice Brett Kavanaughasked whether it would be enough for the justices to say the rule isn’t good and send the fight back to a lower court.
What Is the Status?
While the parties agree that the refund was ultimately owed to the subsidiary under a pre-existing agreement, they disagree about the refund’s status before any transfer, at the time of their bankruptcies.
Simon E. Rodriguez, the trustee for the parent company’s bankruptcy estate, requested the high court review. He has argued that the Bob Richards rule is implicated in the dispute and should be struck down. The Federal Deposit Insurance Corp., the receiver for the subsidiary, has argued the rule is irrelevant because it only applies when there isn’t an agreement between the parent and subsidiary over which should ultimately get the refund.
Michael Huston, an assistant to the Solicitor General in the Justice Department representing the FDIC, compared the case to his co-workers appointing him as their agent to pick up sandwiches for them from the deli.
“When I’m on my way back to the office, if I suddenly declare bankruptcy, everyone understands that the sandwiches and the change are the property of my coworkers,” he said.
Mitchell P. Reich, a senior associate at Hogan Lovells in Washington and lawyer for Rodriguez, advocated for a model in which subsidiaries and a parent establish a trust relationship to get to the result the government wants here—where a trustee acts for the benefit of a beneficiary.
Reich suggested that creating an agency relationship is harder, requiring the subsidiary to have sufficient control over the parent.
The Rodriguez case had a long road to the nation’s highest court.
Initially, the U.S. Bankruptcy Court for the District of Colorado (Denver) in 2016 held that the Bob Richards rule didn’t apply because there was an agreement about what should ultimately happen to the tax refund, and further held that the agreement’s language, interpreted under Colorado law, clearly favored UWBI. The decision meant the bank would have to vie for its refund as one of the parent company’s multiple creditors.
But the U.S. District Court for the District of Colorado in 2017 questioned this reading of the Bob Richards rule, while ruling in favor of the subsidiary bank.
On appeal, the U.S. Court of Appeals for the Tenth Circuit held that the rule favored the subsidiary when there was no clear agreement to the contrary. Finding no such clarity in the agreement, the Tenth Circuit said the subsidiary owned the refund and so didn’t need to compete with creditors.
Kavanaugh suggested that the justices might think of sending the case back to a lower court to sort out the question of state law.
“So, if it is purely a question of state law and there’s been disagreement here and there’s disagreement between the bankruptcy court, which is expert in these matters, and the district court and the Tenth Circuit, shouldn’t we remand for the state law question to be sorted out?” Kavanaugh said.
The case is Rodriguez v. Fed. Deposit Ins. Corp., U.S., No. 18-1269, argued 12/3/19.