Citations
- 252 F. Supp. 3d 664
Full opinion text
MEMORANDUM OPINION AND ORDER
Honorable Thomas M. Durkin, United States District Judge
Introduction
Standard of Review
Background
A. The Rise and Fall of FBOP And The Banks
B. The Corporate Debt of FBOP And The, Personal Debt Of Its ChairMAN
C. The $10.3 Million In Non-Escrowed Refunds
D. FBOP’s Settlement Of Its Unsecured Creditors’ Claims
E. The $265.3 Million In Escrowed Refunds
F. Current Litigation
Discussion
I. Choice of Law
II. Rules of Contract Interpretation
III. The FBOP Defendants’ Rule 12(c) Motion for Judgment As A Matter Of Law On Counts I-II
A. The “Default” Rule Regarding Ownership of Tax Refunds
1. Illinois Law: Tax Refunds Of Joint Filers Belong To The Taxpayer Who Paid The Taxes
2. The Bob Richards Case
3. Federal Common Law Argument
4. United Dominion Argument
5.Unjust Enrichment Argument
B. The Taa
1. Surrounding Circumstances Support The Default Tax Refund Ownership Rule
2. The Taa Does Not Clearly Repudiate The Default Tax Refund Ownership Rule
a. Tax Allocation and Payment Provisions
b. Debtor-Creditor Terminology
c. Absence Of Trust Provisions
d. Principal-Agent Issue
3. The Taa Affirmatively Reflects A Contractual Intent To Maintain The Default Tax Refund Ownership Rule
a. No Less Favorable Principle
b. The 1998 Policy Statement
4. Parol Evidence Issues
IV. The FDIC’s Rule 12(c) Motion For Judgment As A Matter of Law On Counts I-II
V. The FBOP Defendants’ Rule 12(c) Motion On The FDIC’s Alternative Legal and Equitable Claims-Counts III-IV •
VI. The FBOP Defendants’ Rule 12(c) Motion On The FDIC’s Claims To Recover The Non-Escrowed Refunds — Counts
XIX-XXII
VII. The FBOP Defendants’ Rule 12(c) Motion On PBGC’s Intervenor Complaint
Conclusion
Introduction
This litigation involves a dispute over $265.3 million in tax refunds currently being held in escrow (the “Escrowed Refunds”). An additional $10.3 million in tax refunds not held in escrow also are at issue (the “Non-Escrowed 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, which the FDIC alleges earned the income, paid the taxes, and sustained the losses from which the tax refunds are derived. 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) (hereinafter . the “Consolidated Group”). As will be explained in more detail later, FBOP became insolvent and assigned all of its assets, including whatever interest it may have had in the tax refunds, to the Trustee of the FBOP Corporation Trust Agreement and Assignment for the Benefit of Creditors (hereinafter the “Assignment”) for the purpose of applying the property or proceeds thereof to the payment of FBOP’s debts. FBOP and the Trustee (collectively referred to as the “FBOP Defendants”) claim ownership of the tax refunds pursuant to an agreement between FBOP and the Banks concerning the allocation of tax liabilities and benefits among members of the Consolidated Group (hereinafter the “TAA” or the “Agreement”).
The TAA sets forth the applicable rules to which, prior to FBOP’s insolvency, FBOP and the Banks agreed for allocating the tax benefits and burdens of the Consolidated Group. It is assumed for purposes of the present motions that the TAA obligated FBOP to distribute the tax savings represented by the tax refunds to the Banks. The issue to be decided is whether the Banks’ entitlement to those tax savings is a property right or a contractual right. If the Banks have a property right, then FBOP must turn the tax refunds over to the FDIC. If the Banks’ right is contractual, however, then the tax refunds now belong to the Trustee, as the assignee of FBOP, who is charged with distributing them among FBOP’s creditors.
The FDIC and the FBOP Defendants have presented the ownership issue through cross-motions for partial judgment on the pleadings under Federal Rule of Civil Procedure 12(c), For the reasons that follow, the Court holcls that -the Banks’ right to receive the tax refunds is a property right. Therefore, the FBOP Defendants’ motion for partial judgment on the pleadings is denied. Although, the Court holds that the Banks have property rights in the tax refunds, the Court cannot tell from the parties’ arguments if a disputed issue of fact exists over whether the TAA required FBOP to distribute the entire amount of the Escrowed Refunds to the Banks, and whether the Banks paid the entire amount of the original taxes that led to the Escrowed Refunds. Therefore, the Court will withhold ruling' 'on the FDIC’s cross-motion for partial judgment on the pleadings until the parties file a joint report regarding the question of whether the FDIC’s Rule 12(c) motion must be converted to a summiary judgment motion for purposes of determining the amount of the Escrowed Refunds to which the Banks, given their property rights as set forth herein, are entitled.
Standard op Review
Federal Rule of Civil Procedure 12(c) permits a party to move for judgment on the pleadings after the parties have filed the complaint and answer. See Buchanan-Moore v. Cnty. of Milwaukee, 570 F.3d 824, 827 (7th Cir. 2009). 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)). The parties disagree over whether the applicable standard for their Rule 12(c) motions is the Rule 12(b)(6) standard for motions to dismiss or the Rule 56' standard for motions for summary judgment. Which standard applies “is often a point of confusion in many civil cases.” West v. Phillips, 883 F.Supp. 308, 313 n.1 (S.D. Ind. 1994). In United States v. Wood, 925 F.2d 1580, 1581 (7th Cir. 1991) (per curiam), the Seventh Circuit held that a motion for judgment on the pleadings should be analyzed according to the same standard as a motion to dismiss. But in Alexander, the Seventh Circuit held that the Rule 12(b)(6) standard should be applied only where the defendant “use[s] a rule 12(c) motion after the close of the pleadings to raise various rule 12(b) defenses regarding procedural defects.” 994 F.2d at 336. Where a party “use[s] rule 12(c) in its customary application to attempt to dispose of the case on the basis of the underlying substantive merits,” the court said, “the' appropriate standard is that applicable to summary judgment, except that the court may consider only the contents of the pleadings.” Id.
The Court need not choose between the motion to dismiss and summary judgment standards here because the outcome of the parties’ Rule 12(c) cross-motions does not turn on that selection. In either case, the Court must take “all well-pleaded allegations in the plaintiffs’ pleadings to be true, and [ ] view the facts and inferences to be drawn from those allegations in the light most favorable to the plaintiffs.” Id. In addition, applying either standard requires the Court to consider only the content of the competing pleadings, exhibits thereto, matters incorporated by reference in the pleadings, and any facts of which the district court will take judicial notice. 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). In addition, 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.). Thus, if it appears that discovery is necessary to fairly resolve a claim on the merits, then the motion for judgment on the pleadings must be denied. Id.; see also Alexander, 994 F.2d at 336 (‘We will not affirm the granting of the City’s 12(c) motion unless no genuine issues of material fact remain to be resolved”).
Background
The Amended Complaint, including reasonable inferences therefrom, and matters of which the Court can take judicial notice, show the following facts.
A. The Rise And Fall Of FBOP And The Banks
FBOP is a privately held financial holding company headquartered in Illinois. From 1990 through sometime in 2007, FBOP successfully acquired troubled financial institutions at attractive prices, resolved the acquired institutions’ problems, and integrated them into the organization. As a result of this strategy, FBOP at one time owned, in addition to its nonbank holdings, six national banks and two state banks operating in California, Illinois, Arizona, and Texas (the Banks).
Beginning in the fourth quarter of 2008, the Banks’ (and, as a result, FBOP’s) economic fortunes took a turn for the worse. Prior to that time, FBOP had implemented a strategy to cause the Banks to heavily invest in the preferred stock of Fannie Mae and Freddie Mac as well as in securities and corporate bonds of Washington Mutual Bank (WAMU). In the third quarter of 2008, Fannie Mae and Freddie Mac were placed into conservatorship and WAMU failed. As a result, the Banks recognized a combined loss of approximately $838 million on their Fannie Mae and Freddie Mac investments, and wrote down their holdings of WAMU bonds by another $99 million. In addition, FBOP had caused the Banks to focus much of their lending activity in the commercial real estate market, and the value of those loans declined precipitously when the real estate market crashed in the same time period. The net effect of these events was to cause the Banks to become severely undercapital-ized. In mid-November 2008, FBOP applied for federal funding under the Troubled Asset Recovery Program (“TARP”) in an effort to relieve the Banks’ financial stress. While FBOP’s application for TARP funds was pending, however, the condition of the Banks declined even further, which led federal regulators to determine in the Fall of 2009 that the Banks were no longer able to meet regulatory approval standards. The Banks were placed into receivership, with the FDIC being appointed the separate and independent receiver for each on October 30, 2009.
B. The Corporate Debt of FBOP And The Personal Debt Of Its ChairMAN
In the months prior to the FDIC’s appointment as receiver for the Banks, FBOP began experiencing financial pressure from its creditors In particular, in June 2009, Defendant JPMorgan Chase, N.A. (“JPMorgan”), acting as agent for a number of lenders that had extended unsecured credit to FBOP over the years, declared FBOP in default on that debt and brought suit to recover the outstanding balance of approximately $246 million. Two months later, in August 2009, the Chairman and President of FBOP, Michael E. Kelly, withdrew money from FBOP for personal use by causing FBOP to extend a personal loan to him for approximately $6 million. In return for the loan, Kelly executed an unsecured promissory note (the “Kelly Note”) in favor of FBOP, which Kelly signed as the debtor and also on behalf of FBOP in his capacity as President of FBOP. In March 2010 (after the FDIC was appointed receiver for the Banks), Defendant BMO Harris, N.A. (“BMO”) brought suit against FBOP, claiming that FBOP owed BMO approximately $44 million as a result of an earlier failed attempt by FBOP to acquire another bank subsidiary that had been indebted to BMO. In addition to the debt FBOP owed to JPMorgan and BMO (its two largest creditors), FBOP also owed collectively approximately $100 million to numerous other creditors. Like FBOP’s debt to JPMor-gan and BMO, FBOP’s debt to these other creditors also was unsecured.
C. The $10.3 Million In Non-Escrowed Refunds
Just before JPMorgan filed its lawsuit (and before the FDIC took over the Banks), on or about April 15, 2009, the Consolidated Group made an estimated quarterly tax payment to the IRS in the approximate amount of $10.3 million. This payment was made by FBOP with funds transferred to it by the Banks for the specific purpose of paying the Banks’ share of the 2009 quarterly estimated tax payment. As it turned out, the Consolidated Group suffered a $1.12 million consolidated net operating loss in 2009. Thus, in March 2010, the IRS issued a full refund of the $10.3 million estimated tax payment. The refund was made payable to FBOP. By the time FBOP received the $10.3 million tax refund, the Banks had been closed and the FDIC had been appointed receiver. FBOP did not inform the FDIC about the Consolidated Group’s tax refund, “[d]e-spite the fact that FBOP was in discussions with the FDIC[] regarding ownership of tax refunds.” R. 35 (¶ 118). At the time FBOP received the $10,3 million tax refund, both JPMorgan and BMO were pursuing collection actions against it. The FDIC alleges upon information and belief that FBOP transferred some or all of the $10.3 million tax .refund to the Trustee or one or more of its creditors.
D. FBOP’s Settlement Op Its Unsecured Creditors’ Claims
Approximately six months after its receipt of the $10.3 million tax refund from the IRS, FBOP entered into settlement agreements with JPMorgan and BMO. As part of the settlement agreements, FBOP pledged all of its assets as security for the previously unsecured debt owed to those two creditors, including FBOP’s rights (if any) to the $10.3 million tax refund it had received plus any other tax refunds FBOP might receive from the IRS on behalf of the Consolidated Group. In addition, Kelly promised to cooperate and assist in any efforts required to preserve the Consolidated' Group’s tax refunds for the benefit of JPMorgan and BMO to the exclusion of the FDIC. In return for these pledges, JPMorgan and BMO gave FBOP permission to use cash collateral to satisfy $13.7 million in purported deferred compensation claims allegedly owed, by FBOP ,to former officers of the Banks and high level officers of FBOP. Additionally, JPMorgan. agreed to acquire the Kelly Note and then forgive the amounts owed by Kelly under that Note. This plan was to be carried out by-the Trustee acquiring the Kelly Note from FBOP through the Assignment, and then transferring' the Note to JPMorgan, which then was to forgive the debt.
Approximately three months after entering into the settlement agreements with JPMorgan and BMO (hereinafter the “Senior Secured Creditors”), FBOP also entered into settlement agreements with its other unsecured creditors, giving those creditors security interests in FBOP’s assets that were subordinate to the security interests FBOP had granted to the Senior Secured Creditors. The settlement agreements between FBOP ánd these other creditors (collectively the “Sub-Debt Holders”) further provided that the subordinate liens promised in'the agreements would be released if the Senior Secured Creditors’ liens were avoided as fraudulent transfers. Like FBOP’s settlement agreements with the Senior Secured Creditors, the settlement agreements with the Sub-Debt Holders required FBOP to use commercially reasonable efforts to minimize the value of any payments ipade to the FDIC on account of the Banks’ claimed interest in the tax refunds.
Not long after all of these settlement agreements were executed, FBOP entered into the Assignment, pursuant to which FBOP assigned its assets and property to the Trustee and granted the Trustee the power and duty, among other things, to sue or .be sued, and prosecute or defend any claims existing against or in favor of FBOP. Included in the transfer of property under the Assignment is any property interest FBOP ‘ has .in the tax refunds.
E. The $265.3 Million In Escrowed ■Refunds
In November 2009, Congress enacted the Worker, Homeownership, and Business Assurance Act (“WHBAA”),' which extended the number of years businesses were allowed to‘ carry back net operating losses incurred in 2008 and 2009. Id. (¶ 122). The Consolidated Group had a 2009 NOL of $1,120,632,424, of which $1,027,845,581 was attributable to the Banks’ operating losses and $92,786,843 was attributable to losses incurred by FBOP and its non-bank subsidiaries. R. 35 (¶¶ 108-110). Thus, shortly after the FDIC was appointed as receiver for the Banks in October 2009, it began negotiations with FBOP over the filing of amended tax returns for the Consolidated Group to take advantage of the new carry-back- rules.
These negotiations took place over the course of the next two years and culminated with FBOP’s filing, with the knowledge and consent of the FDIC, of a 2009 consolidated federal tax return and amended consolidated' federal tax returns for tax years 2004 through 2008. These consolidated tax filings were made on September 11, 2011, around the same time as FBOP and the FDIC negotiated and entered into the Escrow Agreement (dated September 30, 2011). The Escrow Agreement acknowledged that the Consolidated Group expected to receive tax refunds as a result of the September 11, 2011 tax filings, as well as possible future tax filings yet to be made. The Eserow Agreement further acknowledged that the FDIC and FBOP disagreed over who owned those anticipated tax refunds. Therefore, the tax refunds vyere placed into an escrow account until the parties reached agreement or until ownership of the funds was determined by an “order or judgment of a federal court of competent jurisdiction in the Northern District of Illinois .,. which is no longer subject to appeal and for which no appeal is pending.” R. 145 at 62 (¶ l.l(x)).
The Consolidated Group’s amended tax returns resulted in tax refunds in the total amount of $265,366,909, The FDIC alleges that the entire amount of the tax refunds generated by the Consolidated Group’s 2009 NOL is attributable to the Banks. R. 35 (¶¶ 125-126). FBOP received the $265.3 million-in tax refunds from the IRS in December 2013 and January 2014, and placed them ih escrow pursuant to the terms of the Escrow Agreement. The FDIC arid FBOP could not agree on ownership of the Escrowed Refunds, and this lawsuit was filed. - -
F. Current Litigation
Discovery on- the FDIC’s Amended Complaint has been stayed while the FDIC and the FBOP Defendants seek a ruling from the Court on the tax refund ownership question. The parties’ Rule 12(c) cross-motions seek judgment on the pleadings as to the following counts:
• Count I, in which the FDÍC seeks a declaratory judgment that the Es-crowed Refunds are the property of the FDIC “as a matter of law,” and Count II, in which the FDIC seeks a declaratory judgment that the Es-crowed Refunds aye the property of the FDIC “under the Tax Allocation Agreement.” R. 35 at 61-62. The Court interprets both the FDIC’s and the FBOP Defendants’ motions as seeking judgment on the pleadings as to these Counts.
• Counts III through VII, ⅛ which the FDIC assumes that the TAA accords ownership rights in the Escrowed Refunds to FBOP, and then seeks alternative equitable and legal relief with regard to those Funds. The FBOP Defendants, but not the FDIC, have moved for judgment on the pleadings as to these counts based on their assertion that their ownership rights to the Escrowed Refunds foreclose not only the declaratory relief sought in Counts I and II but also the FDIC’s alternative claims in Counts III through VIL
• Counts XIX through XXII, in which the FDIC seeks to recover the Non-Escrowed Refunds under various legal and equitable theories. Once again, the FDIC does not seek judgment on the pleadings on these counts, see R. 166 at 6 n.2, while the FBOP Defendants do. The FBOP Defendants argue that the Court should enter judgment against the FDIC on its claims to recover the Non-Escrowed Refunds because, just like the Escrowed Refunds, the FBOP Defendants, not the Banks, are the owners of those refunds.
As shown by the above, the FBOP Defendants’ Rule 12(c) motion seeks to deliver a fatal blow to virtually all of the FDIC’s claims in the Amended Complaint, with Count VIII being the only claim left standing. The FDIC, on the other hand, has brought a targeted motion for judgment on the pleadings, which, if successful, would render moot not only the FDIC’s alternative claims based on a ruling that FBOP is the owner of the tax refunds, but also the FDIC’s claims not currently before the Court against the Senior Secured Creditors and the Sub-Debt Holders to declare those parties’ security interests in the tax refunds void under theories of fraudulent conveyance.
Discussion
The FBOP Defendants ask the Court to adopt the position taken by a number of courts which hqve held that the parent company is the owner of the tax refunds of a consolidated tax group and the individual group members’ rights to the tax refunds under a tax allocation agreement is contractual in nature. The courts adopting this view all address the tax refund issue in the context of the parent corporation’s bankruptcy, and conclude that the tax refunds are property of the bankrupt estate within the meaning of 11 U.S.C. § 541(a), such that the subsidiary’s recovery of its contractual share of the tax refunds stands on the same footing as the recovery of any other unsecured creditor of the parent company. But not every court agrees. The FDIC asks the Court to adopt the position of a competing line of cases, which hold on similar facts either that the subsidiary banks have a property right in the tax refunds or that the issue cannot be decided as a matter of law because the tax allocation agreement on which the question turns is ambiguous. Included in this group are the only published, and hence prece-dential, appellate decisions on the issue.
Although the Court is not writing on a blank slate, this case is unique in one respect. While the FBOP Defendants do not contest that FBOP is insolvent, no bankruptcy petition has been filed. Instead, FBOP transferred its property to the Trustee pursuant to the Assignment. An assignment for the benefit of creditors “passes legal and equitable title to the debtor’s property from the debtor to the assignee.” In re Computer World Solutions, Inc., 479 B.R. 483, 486-87 (Bankr. N.D. Ill. 2012). The “assignee (or trustee) holds property for the benefit of a special group of beneficiaries, the creditors.” Ill. Bell Tel. Co. v. Wolf Furniture House, Inc., 157 Ill.App.3d 190, 109 Ill.Dec. 277, 509 N.E.2d 1289, 1292 (1987). “A debtor may choose to make an assignment for the benefit of creditors, which is an out-of-court remedy, rather than to petition for bankruptcy, because assignments are less costly and completed more quickly.” First Bank v. Unique Marble & Granite Corp., 406 Ill.App.3d 701, 345 Ill.Dec. 233, 938 N.E.2d 1154, 1158 (2010). “[T]he assignment is valid without the consent of any of the assignor’s creditors.” Consol. Pipe & Supply Co. v. Rovanco Corp., 897 F.Supp. 364, 370 (N.D. Ill. 1995).
While an assignment for the benefit of creditors generally is recognized under Illinois law as a valid alternative to bankruptcy, there is a further wrinkle here. Prior to FBOP’s execution of the Assignment, it entered into a series of transactions by which it pledged its assets as security to the Senior Secured Creditors and the Sub-Debt Holders. The FDIC alleges that FBOP chose the out-of-court remedy of an assignment for the benefit of creditors to avoid the scrutiny a bankruptcy court would apply to these pre-assignment security pledges. See In re Computer World Solutions, Inc., 479 B.R. at 486 (“the Bankruptcy Code does not provide for bankruptcy court supervision of assignees or their attorneys”). In support of that allegation, the FDIC cites to the Assignment, which allegedly provides, among other things, that the Trustee cannot challenge the validity of the pre-assignment security pledges. While the FDIC alleges claims in this lawsuit to set aside the security interests as fraudulent conveyances, it argues that if the security interests are not set aside and the Court finds that FBOP owns the tax refunds, then the Senior Secured Creditors and the Sub-Debt Holders (who previously were unsecured creditors of FBOP), as well as FBOP’s Chairman and other high level officers of the Banks and FBOP, all will be enriched at the expense of the Banks, which will be unable to recover any of the tax refunds that are owed to them under the TAA.
I. Choice of Law
Because the Court has federal question jurisdiction over the FDIC’s complaint, federal choice of law rules apply. See Berger v. AXA Network LLC, 459 F.3d 804, 809-10 (7th Cir. 2006)) “[T]he right to receive a tax refund constitutes an interest in property.” United States v. Sims (In re Feiler), 218 F.3d 948, 955 (9th Cir. 2000). “Unless some federal interest requires a different result,” the federal choice of law rule for an issue regarding an interest in property, even when the parties are in federal court under federal question jurisdiction, is state law. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). The determination of whether to create a special federal common law rule depends on the nature and importance of the government interest at issue and the effect of applying state law. United States v. Kimbell Foods, Inc., 440 U.S. 715, 728, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979). The federal government performs a substantial regulatory/oversight function over banks. Arguably, therefore, this case involves a situation that might justify a special federal rule of decision. See, e.g., The Official Comm. of Unsecured Creditors of the Columbia Gas Transmission Corp. v. Columbia Gas Sys. Inc. (In re Columbia Gas Sys. Inc.), 997 F.2d 1039, 1055-58 (3d Cir. 1993) (applying federal common law rather than state property law to hold that customers of owner of natural gas pipeline had property interest in money collected by owner from upstream suppliers and owed to customers).
Nevertheless, “[developing a federal common law rule is the exception rather than the rule. Federal law should coincide with the relevant state law unless state law would undermine the objectives of the federal statutory scheme and there is a distinct need for nationwide legal standards.” Id. at 1055 (citing Kimbell Foods, Inc., 440 U.S. at 728, 99 S.Ct. 1448). The Court does not need to decide at this time whether a federal common law rule should be applied because, as will be seen, the Court concludes that state law properly-interpreted and applied does not undermine the federal banking regulatory-scheme. Therefore, the. Court will apply state law for purposes of the present motions. The issue may be reconsidered, however, should any future motions present a conflict between state law and a national interest. The Court also notes that, while state law is controlling, federal precedent applying that law may and should be considered, particularly because this case involves property created by federal law (tax refunds). See In re Innis, 331 B.R. 784, 786 (Bankr. C.D. Ill. 2005) (“That a debt- or’s rights in a tax refund are determined under state law is not subject to dispute. However, because a federal tax refund is a creature of federal tax law, rights created thereunder cannot be ignored.”) (citations' omitted).
II. Rules op Contract Interpretation
The combining of corporate income and losses to produce a consolidated group tax liability raises issues about allocating tax benefits and burdens among group members' that are not resolved- by federal tax laws. FBOP and the Banks entered into the TAA to address those unresolved issues. Both parties agree, however, that no provision of the - TAA explicitly deals with the question- of who owns the tax refunds. Because, of the absence of an express contractual resolution of the ownership issue, the FDIC argues that the Court should take into account what the rule would be in the absence of an agreement on the tax refund ownership question, which both parties refer to as the “default rule.” The FBOP Defendants, on the other hand, argue that the default rule should not be considered because the answer to the ownership question is found by implication from the language of the TAA. The Court agrees with the FDIC. ■
Even if the Court assumes, ag the FBOP Defendants argue, that the TAA contains language from which FBOP’s' ownership of the tax refunds can be implied, basic principles of contract interpretation teach that the Court must consider the default rule, particularly where a literal interpretation of the contract language might “wreak[] unintended consequences” on the parties. Wal-Mart Stores, Inc. Assocs.’ Health & Welfare Plan v. Wells, 213 F.3d 398, 402 (7th Cir. 2000). That was the holding of the Seventh Circuit in the Wal-Mart case, in which the court examined the language of an ERISA plan document. The question was whether the plan document had to be construed According to its “clear” import, which would be contrary to the default rule and lead to “anomalous]” results. Id. at 402. Because “[t]he' plan document[] neither advert[ed] to the anomaly [that resulted from a literal interpretation] nor expressly repudiated] [the default rule],” the court concluded as a matter of “sound application of principles of contract interpretation” that the plan document did ’“not alter the background [default rule].” Id. at 402-03 (holding that “contracts — which for most purposes ERISA plans are — are enacted against a background of commonsense understandings and legal principles that the parties may not have bothered to incorporate expressly but that operate as default rules to govern in the absence of a clear expressio'n of the parties’ intent that they not govern”).
The “default rule” contract analysis of Wal-Mart was validated by U.S. Airways, Inc. v. McCutchen, 569 U.S. 88, 133 S.Ct. 1537, 185 L.Ed.2d 654 (2013), in which the United States Supreme Court referred to the default rule as a “gap-filling” principle, and explained that
[t]he words of a [contract] may speak clearly, but they may also leave gaps. And so a court must often look outside the [contract’s] written language to decide what an agreement means. In undertaking that task, a court properly takes account of background legal rules — the doctrines that typically or traditionally have governed a given situation when no agreement states otherwise. .
Id. at 1549 (internal quotation marks and citations omitted). Like the Seventh Circuit, the Supreme Court emphasized that ignoring default or gap-filling rules in interpreting contracts “is likely to frustrate the parties’ intent and produce perverse consequences.” Id.
While McCutchen and Wal-Mart involved ERISA plans and hence applied federal common law contract interpretation principles, Illinois contract principles are the same:
Generally, the duty owed to a plaintiff is measured by the terms of the contractual obligation as reflected within the “four corners” of the contract. Yet, it is presumed that parties contract with knowledge of the existing law, and the statutes and laws in existence at the time a contract is executed are considered part of the contract. The rationale for this rule is that the parties to the contract would have expressed that which the law implies had they not supposed that it was unnecessary to speak of it because the law provided for it.
Fox v. Heimann, 375 Ill.App.3d 35, 313 Ill.Dec. 366, 872 N.E.2d 126, 136 (2007) (internal quotation marks and citations omitted); see also Bd. of Regents v. Wilson, 27 Ill.App.3d 26, 326 N.E.2d 216, 220 (1975) (“Contracts are presumed to have been entered into in the light of existing principles of law, (citation omitted) and the existing law is presumed to be a part of every contract (citation omitted) and contracts should be so understood and construed unless otherwise clearly indicated by the terms of the agreement.”) (internal quotation marks and citation omitted); see generally 11 Williston on Contracts § 30:19 (4th ed.) (“[Contractual language must be interpreted in light of existing law, the provisions of which are regarded as implied terms of the contract, regardless of whether the agreement refers to the governing law. This principle applies to the common law in effect in the jurisdiction as well as to ... statutes [and] ... regulations, including provisions which affect the validity, construction; operation, effect, [and] obligations ... of the contract.”).
An example of an Illinois case applying gap-filling rules, which also involved a tax issue, is U.S. Trust Co. of N.Y. v. Jones, 414 Ill. 265, 111 N.E.2d 144 (1953). There, the Illinois Supreme Court analyzed the question of whether the tax under consideration should be paid out of the trust corpus or out of distributable income. The language of the trust document suggested that the tax was to be paid out of the trust corpus. But the court declined to interpret the trust language literally in light of revenue laws, which would apply in the absence of that language and would require the taxes to be paid out of distributable income. Like the Seventh Circuit in Wal- Mart and the Supreme Court in McCutch-in, the Illinois Supreme Court sought “to avoid the unreasonable and impractical” consequences of a literal interpretation of the language of the document. Id. at 146. Avoiding unintended consequences is as much a part of contract interpretation as the “four corners” rule, as Judge Learned Hand explained in words quoted by the Illinois Supreme Court:
The issue involves the baffling question which comes up so often in the interpretation of all kinds of writings: how far is it proper to read the words out of their literal meaning in order to realize their overriding purpose? * * * When we ask what (was) “intended,” usually there can be no answer, if what we mean is what any person or group of persons actually had in mind. Flinch as we may, what we do, and must do, is to project ourselves, as best we can, into the position of those who uttered the words, and to impute to them how they would have dealt with the concrete occasion.
Id. (quoting United States v. Klinger, 199 F.2d 645, 648 (2d Cir. 1952)) (internal quotation marks omitted).
Applying these contract interpretation principles here means that the Court must consider not only the language of the TAA on which the FBOP Defendants rely, but also the background or “default” rule on which the FDIC relies and which would apply in the absence of an agreement to the contrary. The Court also must consider whether construing the Agreement in contravention of the default rule makes sense in light of the circumstances surrounding the agreement, and ask how the parties are likely to have dealt with the ownership question given those circumstances. “When a contractual interpretation makes no economic sense, that’s an admissible and, in the limit, a compelling reason for rejecting it.... The presumption in commercial contracts is that the parties were trying to accomplish something rational. Common sense is as much a part of contract interpretation as is the dictionary or the arsenal of canons.” Dispatch Automation, Inc. v. Richards, 280 F.3d 1116, 1119 (7th Cir. 2002) (internal quotation marks and citations omitted); see also Baldwin Piano, Inc. v. Deutsche Wurlitzer GmbH, 392 F.3d 881, 883-84 (7th Cir. 2004) (“Businesses are not compelled to make sensible bargains, but courts should not demolish the economic basis of bargains that would be sound if the contract were given a natural reading.”) (emphasis in original). If after applying these principles, the language of the TAA is of “such unequivocal clarity as to preclude,” U.S. Trust Co. of N.Y., 111 N.E.2d at 146, application of the default tax refund ownership rule, then the Court must interpret the TAA according to the contractual language. See McCutchen, 133 S.Ct. at 1549 (when an “express contract term ... contradicts the background equitable rule ... the agreement must govern”); Wal-Mart Stores, Inc. Assocs.’ Health & Welfare Plan, 213 F.3d at 402 (where the contract contains “a clear expression of the parties’ intent,” then the default rules do not govern). But if the TAA “leaves space” for the default tax refund ownership rule “to operate,” by for example “say[ing] nothing specific about that issue,” it does not clearly repudiate the rule. McCutchen, 133 S.Ct. at 1549. In that case, the Court will presume that' the parties contracted with the default rule in mind, which the Court will deem to have been incorporated into the Agreement as if expressly set forth therein. Fox, 313 Ill.Dec. 366, 872 N.E.2d at 136; Bd. of Regents, 326 N.E.2d at 220.
III. The FBOP Defendants’ Rule 12(c) Motion For Judgment As A Matter of Law On Counts I-II
A. The “Default” Rule Regarding Ownership Of Tax Refunds
l. Illinois Law: Tax Refunds of Joint Filers Belong To The Taxpayer Who Paid The Taxes
Under Illinois law, the party who paid the taxes, or, more accurately, bore the economic burden of the taxes, is. the owner of any refunds resulting from those taxes. See, e.g., Graver, 21 Ill.Dec. 597, 381 N.E.2d at 1046 (stating that the “majority and better view of the law” is found in Duden v. United States, 467 F.2d 924, 929 (Ct. Cl. 1972), where it was held “that wife had ho property interest in funds represented by income tax refund check made payable jointly to husband and wife” because “husband was the sole producer of income”); In re Lock, 329 B.R. 856, 859-60 (Bankr. S.D. Ill. 2005) (“The Court is not aware'of any Illinois case that contradicts the rule of Graver, and, accordingly, finds that under Illinois property law, non-earning spouse who makes no contribution to overpayments resulting in a tax refund ⅛ not entitled to the couple’s refund check.”); Lincoln Nat’l Bank v. Cullerton, 18 Ill.App.3d 953, 310 N.E.2d 845, 848-49 (1974) (holding that,- because “[t]he tax money actually came from all of the shareholders,” the shareholders were entitled under state- tax statute to seek refunds). This rule is based on common law property principles that are not unique to Illinois. See Graver, 21 Ill.Dec. 597, 381 N.E.2d at 1046 (relying on Duden, 467 F.2d at 929, which applied Oregon law); In re Lock, 329 B.R. at 860 n.4 (“Courts applying state law in other jurisdictions have likewise found that a non-income producing spouse is not entitled to a property interest in a joint tax refund, check.”).
Illinois law also provides that the filing of a joint tax return does not divest the person who paid the taxes of.his ownership interest. See In re Lock, 329 B.R. at 860 (“The mere signing of a joint return by a spouse to obtain the,benefit of perceived tax advantages does not thereby effect a conversion of funds of that spouse into property of the other. Although joint federal filings are authorized by ... the Internal Revenue Code, ,.. this provision does not propose, nor does it imply, that any property rights are altered by a joint income tax filing.”). A similar default rule regarding the effect of joint-filing on property rights applies in the consolidated tax return context. Thus, “a corporation does not lose any [property] interest it had ... because of its status in a group of affiliated corporations that file a consolidated tax return.” The Official Comm. of Unsecured Creditors v. PSS Steamship Co. (In re Prudential Lines Inc.), 928 F.2d 565, 571 (2d Cir. 1991); see also Wolter Constr. Co. v. Comm’r of Internal Rev. Serv., 634 F.2d 1029, 1038 (6th Cir. 1980) (“consolidated return computations are not ... based on a consolidated accounting ... as though the properties of the subsidiaries were owned by the parent”; it “is not the functional equivalent of a merger”). Instead, “[t]he common parent acts as an agent on behalf of all the members of the consolidated group for the convenience and protection of [the] IRS only. The corporations retain their separate identities and the property interests of the subsidiaries are not absorbed by the common parent.” In re Prudential Lines Inc., 928 F.2d at 571 (internal quotation marks and citation omitted). Similarly, under Illinois law, a taxpayer is not divested of his property rights in tax refunds by virtue of having used an agent to forward his tax payments to the taxing authority. See, e.g., Lincoln Nat’l Bank, 310 N.E.2d at 849 (holding that “a long-standing custom, utilized purely for administrative reasons, [which] permitted the banks themselves to act in behalf of the shareholders as a conduit for payment 'to the taxing authorities,” did not eliminate the property interest' of the shareholders in recovering the taxes paid on their behalf); see also 8x8, Inc. v. United States, 125 Fed.Cl. 322, 330 (2016) (“The money that 8x8 remitted to the IRS belongs to its customers, from whom 8x8 collected it for purposes of having them (and not 8x8) pay the excise tax.”).
2. The Bob Richards Case
The FBOP Defendants ignore Illinois law regarding ownership of tax refunds. Instead, the FBOP Defendants characterize the FDIC’s argument for a “default” rule as being based on the Ninth Circuit’s decision in Western Dealer Management, Inc. v. England (In re Bob Richards Chrysler-Plymouth Corp.), 473 F.2d 262 (9th Cir. 1973). In the Court’s view, however, the FBOP Defendants’ targeting of the Bob Richards case is a straw man. While Bob Richards is consistent with the FDIC’s position, it does not actually address the tax refund ownership • question. Therefore, attacking and/or distinguishing the Ninth Circuit’s ruling in that case, as the FBOP Defendants do, does little to advance the FBOP Defendants’ arguments.
. Bob Richards holds that tax refunds of a consolidated .tax group should inure to the benefit of the subsidiary . rather than the parent company. In reaching this conclusion, the Ninth Circuit reasoned as follows:
Normally,..where there is an explicit agreement, or where an agreement can fairly be implied, as a matter of state corporation law the parties are free to adjust among themselves the ultimate tax liability. But in the instant case the parties made no agreement concerning the ultimate 'disposition of the tax refund. Absent any differing agreement we feel that a tax refund resulting solely from offsetting the losses of one member of a consolidated filing group against the income of that same member in a prior or subsequent year should inure to the benefit of that member. Allowing the parent to keep any refunds arising solely from a subsidiary’s losses simply because the parent and subsidiary chose a procedural device to facilitate their income tax reporting unjustly enriches the parent.
Bob Richards primarily involves a default rule concerning allocation and not ownership of tax refunds in the consolidated tax filing context. The default allocation rule applied by the Bob Richards court is that “a tax refund resulting solely from offsetting the losses of one member of a consolidated filing group against the income of that same member in a prior or subsequent year should inure to the benefit of that member.” Id. at 265. A number of the cases on which the FBOP Defendants rely (see footnote 17, supra) hold that the rule enunciated in Bob Richards is irrelevant to resolving the tax refund ownership question where the case involves a tax allocation agreement. The Court agrees that the default tax allocation rule set forth by the Bob Richards court does not apply to this case because the TAA expressly states 'the allocation rules for determining the extent to which each member of the Consolidated Group is entitled to enjoy the benefit of consolidated tax refunds. See R. 145 at 44 (TAA, ¶ 9). If that were the issue in this case, however, the FBOP Defendants would have won the battle but lost the war, because applying the tax allocation rules in the TAA leads to the same result as applying the Bob Richards allocation rule, which is that the Banks, not FBOP, are entitled to enjoy the benefit of the tax refunds.
Apart from enunciating a default tax allocation rule, Bob Richards impliedly held that the tax benefit which the subsidiary bank was entitled to enjoy was a property right. See Bob Richards, 473 F.2d at 265 (“Allowing the parent to keep [the] refunds ... unjustly enriches the parent.”). But the Bob Richards court was not expressly ruling on the property right question because that question was not put at issue in the case. The default tax refund ownership rule was at issue, however, in later case law applying the Bob Richards default allocation rule in situations like Bob Richards where a tax allocation agreement did not exist, Those cases apply the Bob Richards default allocation rule (i.e., the subsidiary who generated the losses that led to the consolidated tax refunds is entitled to enjoy the benefit of those refunds), but then limit the reach of the default allocation rule by further holding that the subsidiary may only recover refunds up to the amount of taxes actually paid by it. See, e.g., Jump v. Manchester Life & Cas. Mgmt. Corp., 579 F.2d 449, 454 (8th Cir. 1978) (limiting the subsidiary’s recovery to the amount required to offset its tax payments because the court did not see any reason under the applicable state law (Missouri) “to divert a refund of tax dollars paid by other members of the affiliated group to reward [the subsidiary] for the fortuitous effect its losses, in combination with the earnings of other group members, had on the consolidated tax liability of the group”).
Because the issue of property rights in the tax refunds was not in dispute in the Bob Richards opinion, that case does not stand for the proposition that the existence of a tax allocation agreement renders the default tax refund ownership rule irrelevant. See Stanek v. St. Charles Cmty. Unit Sch. Dist. No. 303, 783 F.3d 634, 640 (7th Cir. 2015) (unexamined assumptions of pri- or cases do not control the disposition of a contested issue). The indisputable proposition that a tax allocation agreement resolves issues of tax allocation does not mean that a tax allocation agreement necessarily also resolves the issue of whether the subsidiary banks have a property right in any tax refunds. See, e.g., Sosne, 2016 WL 775176 at *2 (“The TSA includes provisions addressing distribution of refunds, but the TSA does not address ownership of the refunds.”); In re Nelco, Ltd., 264 B.R. at 809 (where court acknowledges its earlier ruling that the applicable tax allocation agreement “did not address the allocation of tax refunds”). As the court observed in In re Bancorp, slip op at 10 (R. 174-1 at 11), “[pjarties to a contract do not override a gap-filling rule simply by reaching explicit agreement on some other matter.” The cases on which the FBOP Defendants rely for the proposition that the default rule is irrelevant because of the existence of a tax sharing agreement are essentially circular: they reason that the default rule does not apply because the tax sharing agreement resolves the ownership question, when the very purpose for considering the default rule is to decide whether the tax sharing agreement resolves the ownership question. Accordingly, the Court rejects the FBOP Defendants’ argument based on these cases that the parties’ explicit agreement in the TAA concerning how to allocate tax refunds negates the need to interpret the TAA on the ownership question using gap-filling rules like the Illinois tax refund ownership rule. 3. Federal Common Law Argument
The FBOP Defendants also argue that the default rule should be ignored because Bob Richards applies federal common law, and the Supreme Court has held that “there is no free-ranging federal common law to provide gap-filing rules in favor of the FDIC-R.” R. 166 at 9 n.5. As already noted, however, Illinois’ default tax refund ownership rule does not depend on the Bob Richards case. Instead, it is based on state law property principles. In any event, the Court does not agree that the Bob Richards case is an example of the inappropriate application of federal common law. The Supreme Court has defined federal common law as “the judicial ‘creation’ of .a special federal rule of decision” that “ ‘dis-plácete] state law.’ ” Atherton v. Fed. Deposit Ins. Corp., 519 U.S. 213, 218, 117 S.Ct. 666, 136 L.Ed.2d 656 (1997) (citation omitted); see also O’Melveny & Myers v. Fed. Deposit Ins. Corp., 512 U.S. 79, 87, 114 S.Ct. 2048, 129 L.E.2d 67 (1994) (creation of federal common law rule “alter[ ]s” otherwise applicable law). The FBOP De-fendánts do hot cite any state law they contend the Bob Richards court displaced or altered. While the Bob Richards court did'not specifically cite a source of law, its holding is based on the general equitable principle of preventing unjust enrichment. See 473 F.2d at 264-65; see also 8x8, Inc., 125 Fed.Cl. at 327 (purpose of provision in tax code providing that a tax collector may not secure a refund of taxes it collected from taxpayers and remitted to the IRS on their behalf where it has neither repaid the taxpayers nor obtained the taxpayers’ consent, was to “preclude what would otherwise result in unjust enrichment”). The .FBOP Defendants may disagree with the Bob Richards court’s application of unjust enrichment principles to the consolidated tax filing context, but it has not shown that, by applying those principles, the court was creating federal common law' to displace state law.
4. United Dominion Argument
The FBOP Defendants also argue that Bob Richards, and by extension, the default rule, is contrary to the Supreme Court’s decision in United Dominion Industries, Inc. v. United States, 532 U.S. 822, 121 S.Ct. 1934, 150 L.Ed.2d 45 (2001). United Dominion involved a particular type of carry-back loss called a product liability loss (“PLL”), _ which, under the Internal Revenue Code (“IRC”), is calculated by taking the total of a taxpayer’s product liability-expenses (“PLEs”) up to the amount of its NOL, which means that “a taxpayer with a positive annual income, and thus no NOL, may have PLEs but can have no PLL.” Id. at 825, 121 S.Ct. 1934. The question in United Dominion was whether a consolidated group’s PLL could be calculated by aggregating PLLs separately determined company-by-company, or whether it instead must be calculated on a consolidated, single-entity basis. The Supreme Court rejected the aggregate-of-separate PLLs approach on the theory that the IRC and applicable Treasury regulations define net operating losses exclusively as consolidated net operating losses. Given this statutory definition, the Court observed, it was “fair to say, as United Dominion says, that the concept of separate NOL ‘simply does not exist.’ ” Id. at 830, 121 S.Ct. 1934 (quoting Brief for Petitioner).
The FBOP Defendants rely on this quoted sentence to argue that the FDIC’s position in this case based on the default rule relies on the erroneous premise that the tax refunds stem from the Banks’ separate NOLs when in fact' separate NOLs do not exist. United Dominion, however, addressed how to calculate the tax liability owed by a consolidated group to the IRS, while this case concerns the entirely different issue of ownership rights in tax refunds as between members of a consolidated tax group. Moreover, United Dominion in any event “does not stand for the blanket proposition that [all -deductions are] determined at the consolidated return level.” Brunswick Corp. v. United States, 2008 WL 5387086, at *8 (N.D. Ill. Dec. 22, 2008). Instead, it stands for the much narrower proposition “that courts considering whether to look at the consolidated return level or the subsidiary level should look to the applicable IRC provisions and regulations.” Id, In this case, there are no applicable IRC provisions and- regulations. The rules for allocating tax liability among members of the Consolidated Group are found in the TAA, And the TAA, unlike the IRC, does recognize separate NOLs. In short, the Supreme Court’s decision in United Dominion has no bearing on this case.
In addition to the above, the question of separate versus consolidated NOLs is beside the point, because the issue here is not whether the Banks have a property interest in their NOLs. See The Asher Candy Co. v. MAFCO Holdings, Inc., (In re Marvel Entm’t Grp., Inc.), 273 B.R. 58, 85 (D. Del. 2002) (cited by the FBOP Defendants) (citing United Dominion for the proposition that, “[i]n the context of the consolidated tax filing group, the hypothetical stand-alone NOLs that were calculated for the purposes of the Tax Sharing Agreement were not property of the debt- or because they were a légal fiction”). While the Banks’ NOLs may have led to the refunds, and also factor into the computation under the TAA for allocating the refunds, the issue here is whether the Banks had a property interest in the tax refunds themselves, not the items that gave rise to those refunds or determined their allocation among members of the Group. As the bankruptcy court stated in In re Indymac Bancorp, Inc., 2012 WL 1037481 (Bankr. C.D. Cal. Mar. 29, 2012), a debate about whether the NOLs themselves represent a property interest is “a sideshow and not material to resolution of this dispute” Id. at 22; see also In re Feiler, 218 F.3d at 956 (“Whether the NOLs themselves are considered property is something of a red herring[]- ... [because] the property [the debtors] gave up was the tax refund — the NOLs are simply an accounting method for figuring their entitlement to the refund under the present tax code.”).
5. Unjust Enrichment Argument
The FBOP Defendants’ final argument against the Court’s consideration of a default rule regarding tax refund ownership is that unjust enrichment is not present here because FBOP seeks to use the tax refunds to pay its creditors rather than keep the money for itself. But both the Banks and FBOP are insolvent and have creditors. Moreover, if the FDIC’s allegations regarding FBOP’s transfer of security interests to the Senior Secured Creditors and Sub-Debt Holders turn out to be true, then this argument seems somewhat disingenuous. The FDIC alleges that FBOP used the tax refunds to structure a settlement with these other creditors that not only gave a preference to those creditors at- the expense of the Banks, but also personally enriched FBOP’s Chairman ánd high level Bank and FBOP officers tó the detriment o'f the Banks. None of the cases on which the FBOP Defendants rely involved allegations of pre-bankruptcy shenanigans similar to those alleged here.
In any event, even if the pre-Assignment transactions between FBOP and the Senior Secured Creditors and Sub-Debt Holders are not taken into account, FBOP’s use of the tax refunds to satisfy its other creditors is irrelevant. If FBOP is not the owner of the tax refunds, then it will be unjustly enriched by retaining those funds, regardless of FBOP’s intention of making the funds available for distribution to its other creditors. An argument similar to the FBOP Defendants’ unjust enrichment argument here was made by the parent bank holding company in Capital Banc-shares. In that case, the parent company argued it would not be unjustly enriched if the court allowed it to keep tax refunds generated by its subsidiary because it had been forced by “the Bank’s unsatisfactory primary capital position ... to borrow substantial amounts of money from third party lenders for the benefit of the Bank.” 957 F.2d at 208. The parent company claimed that “equitable considerations” thus weighed in its favor in that it had “assigned a portion of the tax refund claims to the third party lenders” whose loans had “benefitted the Bank, and ultimately the FDIC.” Id. The court was “not moved by the equities” cited by the parent company, stating that there was no evidence the Bank’s board of directors had agreed to the parent company’s pledging of the Bank’s property to the third party lenders. Id. Furthermore, the court said, “[e]ven if there had been no loans from third party lenders and had the Bank failed sooner, the Bank could still have generated the same refund had it filed separately with the IRS.” Id.
The FBOP Defendants’ unjust enrichment argument is similarly unpersuasive. Moreover, the cases cited by the FBOP Defendants are not to the contrary. Instead,- those courts reject equitable arguments raised by the subsidiary only after first holding that the subsidiary did not have a property interest in the tax refunds. As a result, they merely stand for the truism that, when an unsecured creditor receives less than the full amount of a debt the insolvent corporation had promised to pay it, that “is not injustice, it is bankruptcy.” In re First Cent. Fin. Corp., 377 F.3d at 217. That same argument has no force whatsoever if the tax refunds are found to be property of the subsidiary. See Pearlman v. Reliance Ins. Co., 371 U.S. 132, 135-36, 83 S.Ct. 232, 9 L.Ed.2d 190 (1962) (“The Bankruptcy Act simply does not authorize a trustee to distribute other people’s property among a bankrupt’s creditors.”).
B. The Taa
Turning to the TAA, the Court begins its analysis, as dictated by Illinois contract interpretation principles, with the presumption that the TAA incorporates the default tax refund ownership rule pursuant to which the Banks are the owners of the tax refunds to the extent that they bore the economic burden of the taxes on which the refunds are based. In construing whether the TAA overrides this presumption, the Court will consider not only the language of the TAA but the circumstances surrounding the parties’ execution of that Agreement and a common sense understanding of the parties’ likely intent.
1. Surrounding Circumstances Support The Default Tax Refund Ownership Rule
The circumstances surrounding the execution of the TAA include the economics of consolidated tax filing and the reasons why, in light of those economics, the parties would enter into the TAA. Consolidated tax filing is beneficial to an affiliated group of companies because it permits a company with income to offset that income with the losses of an affiliated company without income. Typically, as here, members of a consolidated tax group will enter into a tax allocation agreement to establish the terms on which a company with net income will compensate an affiliated company with net operating losses for the use of those losses to reduce the tax liability of the income-producing company. Consequently, although an income-producing member’s tax liability may be less under the consolidated filing as a result of its ability to use the off-setting losses of another member of the group, the income-producing member does not experience any net benefit from filing a consolidated tax return because it has to pay the loss member for use of the loss. On the other hand, the loss member with no positive net income is better off having filed as part of a consolidated tax group because it receives compensation from the income-producing group member through the tax sharing agreement for losses otherwise of no use to it.
The FDIC argues that typically banks that are part of a consolidated tax group are income-producing members, while the parent bank holding company and its non-banking subsidiaries are loss members. From a group perspective, therefore, consolidated tax filing in the banking context facilitates transfers of money from the banks to the parent and the parent’s non-banking subsidiaries through tax allocation agreements that require the banks to compensate the parent and the non-banking subsidiaries for use of those entities’ net operating losses. See R. 153 at 10. What actually happened here in the last year in which the Banks were operating before the FDIC took over is the reverse of the typi