The Supreme Court unanimously struck down a judge-made rule that tipped the scales in favor of subsidiaries in disputes with their parent companies’ bankruptcy estates over a tax refund.
The Tuesday opinion focused on a single issue: whether a federal common law rule known as “the Bob Richards rule,” is valid. That judge-made rule created a presumption that entities responsible for losses get the resulting tax refund, unless there was a clear agreement to the contrary.
The court, in an opinion authored by Justice Neil Gorsuch, invalidated the rule and vacated a 2019 decision from the U.S. Court of Appeals for the Tenth Circuit.
“The cases in which federal courts may engage in common lawmaking are few and far between,” Gorsuch said. “This is one of the cases that lie between.”
The case involved a $4 million tax refund awarded to United Western Bancorp Inc., which filed a consolidated tax return for its subsidiaries, including United Western Bank. While all agreed that the refund was owed to the subsidiary under a pre-existing agreement, they disagreed about what should happen after the parent company declared bankruptcy while still holding the refund—should it go straight to the subsidiary or did it belong in the parent’s bankruptcy estate, which would leave the subsidiary as one of multiple creditors vying for resources in the estate?
The justices chose not to decide who should get the tax refund without the Bob Richards rule tipping the scales, emphasizing that their core concern was clarifying the care federal courts should take when they consider making common law. Instead, they sent the case back down to the appeals court for further proceedings.
“We’re happy that it’s going to be decided under the correct rules of law and not on the basis of this presumption,” said Mitchell P. Reich, an attorney for Simon E. Rodriguez, trustee of United Western Bancorp Inc.'s bankruptcy estate. Reich is a senior associate at Hogan Lovells in Washington.
For more on oral arguments in the case, listen to this episode of Talking Tax.
Federal Common Law
The Bob Richards rule was established in the U.S. Court of Appeals for the Ninth Circuit’s 1973 In re Bob Richards Chrysler-Plymouth Corp. ruling.
The court’s opinion emphasized the small role that federal common law should play under the Constitution, arguing that such judicial lawmaking must be necessary for protecting uniquely federal interests.
“Nothing like that exists here,” Gorsuch said.
While the court thought the federal government may have an interest in how it receives taxes or delivers refunds, it questioned why there would be a unique interest in how members of a corporate group distribute a refund after it has been delivered.
The Solicitor General’s office, which represented United Western Bank’s receiver, the Federal Deposit Insurance Corporation, didn’t immediately return a request for comment.
The case is Rodriguez v. Fed. Deposit Ins. Corp., U.S., No. 18–1269, 2/25/20.
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