Downey Financial wins OK of FDIC deal resolving $1 billion in claims

By Kali Hays

New York, March 13 – Downey Financial Corp. Chapter 7 trustee Matthew A. Cantor obtained court approval of a partial settlement with the Federal Deposit Insurance Corp., as receiver for Downey Saving and Loan Association, FA, eliminating more than $1 billion of tax claims filed against Downey’s estate, according to a March 12 order from the U.S. Bankruptcy Court for the District of Delaware.

As previously reported, the settlement is designed to resolve all disputes other than disputes over the ownership of tax refunds and the dollar amount of the FDIC’s claims under a tax sharing agreement if tax refunds are property of Downey’s Chapter 7 estate.

Cantor said that Downey’s rights related to the residual equity of Downey Saving’s receivership are also preserved and that the settlement “greatly streamlines the remaining litigation and eliminates more than $1 billion of asserted claims against the Chapter 7 estate,” the motion said.

Under the settlement, Cantor, the indenture trustee and the FDIC will withdraw numerous claims.

Specifically, the Downey estate will withdraw more than $80 million of preferential and fraudulent transfer claims against the Downey Saving receivership and several other miscellaneous claims raised against the receiver.

In exchange, the FDIC will withdraw a $1.4 billion priority capital maintenance claim against the Chapter 7 estate, as well as a $20.7 million intercompany claim, a more than $13 million deposit funds claim, more than $4.4 million of fraudulent conveyance claims and numerous other miscellaneous claims.

In addition, Cantor said the U.S. Court of Appeals for the Third Circuit affirmed a bankruptcy court judgment related to ownership of the tax refunds in question on Jan. 26.

As previously reported, the Downey bankruptcy estate's potential entitlement to more than $373 million in federal tax refunds is one of the largest potential assets of the estate.

Newport Beach, Calif.-based Downey Financial filed for bankruptcy on Nov. 26, 2008. Its Chapter 7 case number is 08-13041.

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