By Tom Hals
WILMINGTON, Del. Oct 9 A group of hedge funds
looks set to win an eyewatering return after bankrolling the
winning party in a court fight over a $373.8 million tax refund
in the bankruptcy of Downey Financial Corp.
U.S. Bankruptcy Judge Christopher Sontchi ruled on Tuesday
that the disputed tax return belonged to Downey. The Federal
Deposit Insurance Corp had argued it was entitled to the refund.
For backing the right horse, four hedge funds stood to gain
up to a third of the refund, which the FDIC said in court
documents could amount to a return of 1,000 percent on what they
spent on legal fees.
The four funds are Alden Global Capital, Davidson Kempner
Capital Management, Halcyon Asset Management and Farallon
The tax refund resulted from losses at Downey Savings and
Loan that piled up during the 2008 U.S. housing meltdown, which
exposed the poor quality of the bank's exotic mortgages. Those
losses were claimed against taxes paid for the preceding five
years, during the housing boom, allowing parent company Downey
Financial Corp to file for a tax refund.
That refund set off a legal battle between the FDIC, the
receiver for Downey Savings and Loan, and the trustee overseeing
the Downey Financial Corp, which filed for Chapter 7 in 2008 in
the U.S. Bankruptcy Court in Wilmington, Delaware.
But as the legal battles dragged on, the trustee ran out of
Last year, the four investment funds, which were holders of
some of the parent company's $200 million in bonds, agreed to
pony up a war chest of up to $12 million to carry on the fight.
Halcyon, Davidson Kempner and Farallon declined to comment.
Alden did not immediately return a request for comment.
FDIC spokesman David Barr said the agency does not comment
In his ruling, Sontchi said the FDIC could make a claim for
the amount of the refund against the parent company, although
that claim would be part of the larger pool in the bankruptcy
proceeding. The ruling could be appealed.
Downey Savings and Loan and its 213 branches were seized by
regulators in 2008 and immediately sold to U.S. Bank, a unit of
U.S. Bancorp. The FDIC estimated at the time it expected
Downey's failure would cost the insurance fund $1.6 billion.
The bankruptcy case is In re: Downey Financial Corp, U.S.
Bankruptcy Court for the District of Delaware, No. 08-13042; the
tax refund adversary case is 10-53731.