Rodriguez v. FDIC, 589 U.S. _____ (2020) and the separation of powers.

Rodriguez v. FDIC, 589 U.S. _____ (2020), arose out of a dispute over who was entitled to an Internal Revenue Service refund but otherwise has no bearing on this Motion before this Court. In Rodriguez, United Western Bank was placed in receivership for which the FDIC was the receiver.  The parent of United Western, United Western Bancorp, ended up in bankruptcy and Rodriguez was that entity’s trustee.  The IRS issued a $4 million tax refund and the receiver and the trustee litigated to the Tenth Circuit Court of Appeals the issue of which of them was entitled to the refund and, when the Tenth Circuit held that the refund belonged to the FDIC, the bankruptcy trustee sought review in the Supreme Court.

The Internal Revenue Code allows an affiliated group of corporations to file a consolidated tax return, for which lots of regulations exist on the filing of the return and payment of the taxes, but for which little is stated regarding distribution of refunds – other than that the IRS will pay a refund to the group’s designated agent and then has no further liability to the members of the consolidated group.  Federal law says little on how the members distribute the refund among themselves, as a result of which, some groups use “tax allocation agreements.”   Normally, a federal court would turn to state law to resolve a dispute over distribution of a refund, but some federal courts have crafted their own federal common law under a rule set forth in In re Bob Richards Chrysler-Plymouth Corp., (9th Cir. 1973).  The Bob Richards rule stated that in the absence of an agreement, the refund belongs to the group member responsible for the losses that led to the refund.  Some jurisdictions have evolved Bob Richards as a general rule to be followed unless the tax allocation agreement unambiguously specifies a different result.  In Rodriguez, the Tenth Circuit Court of Appeals applied this expanded rule to the tax allocation agreement between the parties and analyzed whether the agreement unambiguously deviated from the Bob Richards rule.  The result was that the Tenth Circuit held that the refund belonged to the FDIC.

The Supreme Court limited its review to whether unique federal interest exists to utilize federal common law rulemaking.  The Court began its analysis with a visit to the Constitution, which vests the federal government’s “legislative Powers” in Congress and reserves most other regulatory authority to the State. See Art. I, §1; Amdt. 10. The Court then cited long-standing precedent for the premise that there is no federal general common law. Erie R. Co. v. Tompkins, 304 U.S. 64, 78 (1938). There are limited areas in which federal courts craft a rule of decision, such as admiralty and certain controversies between States.  But, before doing so, the law has been that federal common law rulemaking must be necessary to protect uniquely federal interests.

The Court reasoned that no unique federal interest existed in the determination of ownership of the consolidated group refund, once the refund was made and the IRS eliminated any claim of the members of the group against the federal government.  Beginning with Bob Richards, none of the lower courts or even the parties in the case articulated what the unique federal interest is.  Even the FDIC conceded that federal courts should not put a “thumb on …. the scale” of who is entitled to the refund.  The Supreme Court agreed, reasoning that corporations are creatures of state law and state law is well equipped to handle disputes regarding property rights, even if those property rights are in the context of a bankruptcy and tax dispute.  Citing Butner v. United States, 440 U.S. 48, 54 (1978) for the proposition that “Congress has generally left the determination of property rights in the assets of a bankrupt’s estate to state law[,]” the Court concluded that the same applies to the Internal Revenue Code, which generally “creates no property rights.”  U.S. v. National Bank of Commerce, 472 U.S. 713, 722 (1985), (quoting U.S. v. Bess, 357 U.S. 51, 55 (1958)). The Court refrained from deciding who gets the refund and limited its holding to “Bob Richards made the mistake of moving too quickly past the important threshold questions at the heart of our separation of powers.”  The Court remanded to the Tenth Circuit to decide who gets the refund, with instruction to do with without reference to Bob Richards.

Follow the link below for the offical case document.