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Civil Resource Manual 193. Sovereign Immunity -- 11 U.S.C. § 106(b)

193.

Sovereign Immunity -- 11 U.S.C. § 106(b)

[Note: The Bankruptcy Reform Act of 1994 recodified as subsection 106(b) what previously was subsection 106(a). Thus, different references to this subsection may appear in cases depending upon when they were decided.]

1. Elements
2. Rationale
3. Scope
4. The Governmental Unit Must File A Proof Of Claim
5. The Claim Against The Governmental Unit Must Be Property Of The Estate
6. Claims Must Arise From The "Same Occurrence Or Transaction.
7. Trustee cannot assert tax refund claim as compulsory counterclaim to IRS proof of claim after proof of claim has been denied



 1.   Elements.    This subsection waives sovereign immunity where --        a.    The estate has a claim against a governmental unit and the             governmental unit files a claim against the estate;        b.    The claim against the governmental unit is property of the  estate;             and        c.    The claims of each arise out of the same transaction or             occurrence.         2. Rationale.  It would be unfair for a governmental unit to receive a distribution from  the estate without subjecting itself to compulsory counterclaims which the  estate possesses.  S. Rep. No. 989, 95th Cong., 2d Sess. 29, reprinted  in 1978 U.S.C.C.A.N. 5787, 5815-16; accord W. Va. Dep't of  Fin. & Admin. v. Hassett (In re O.P.M. Leasing Servs.), 21 B.R. 993,  1001 (Bankr. S.D.N.Y. 1982).         3. Scope.    Section 106(b) applies to monetary relief against a governmental unit.   (Code defines "claim" as "right to payment." § 101(5))  Thus, §  106(b) does not waive sovereign immunity for declaratory or injunctive  relief.         4. The Governmental Unit Must File A Proof Of Claim.  Previously the waiver of sovereign immunity for compulsory counterclaims  [now § 106(b)] did not, on its face, require the filing of a proof of  claim.  However, the legislative history of the Bankruptcy Reform Act of  1994 is clear:  "Section 106(b) is clarified by allowing a compulsory  counterclaim to be asserted against a governmental unit only where such unit   has actually filed a proof of claim in the bankruptcy case.  This has the  effect of overruling contrary case law, such  as [Town and Country  and In re Gribben]."  140 Cong. Rec. H10766 (daily ed. Oct. 4, 1994).    See May v. Mo. Dep't of Revenue (In re May), 251 B.R. 714  (B.A.P. 8th Cir. 2000) (mere filing of answer not an express waiver of  sovereign immunity, even if the answer fails to raise sovereign immunity as  a defense), aff'd, 2001 WL 238077 (8th Cir. Mar. 12, 2001) (No. 00-  3102).         5. The Claim Against The Governmental Unit Must Be Property Of The  Estate.  IRS v. Germaine (In re Germaine), 152 B.R. 619 (B.A.P. 9th Cir.  1992); Johnston v. Commodity Credit Corp. (In re Johnston), 151 B.R.  367 (Bankr. N.D. Miss. 1992) (claim for damages based upon alleged improper  postconfirmation setoff not property of the estate, and thus no § 106  waiver applies, because estate ceases to exist upon confirmation of plan);  Farmers State Bank v. Norris (In re Norris), 90 B.R. 424, 426-27  (Bankr. D. Neb. 1988) (no waiver for action by bank alleging conversion of  its cash collateral by debtor's postpetition transfers to IRS because claim  against the governmental unit not property of the estate); Fireman's Fund   Ins. Co. v. United States (In re Boston Shipyard Corp.), 76 B.R. 4, 7  (Bankr. D. Mass. 1987) (by filing proof of claim, U.S. did not waive  sovereign immunity for suit against it by performance bond surety).         6. Claims Must Arise From The "Same Occurrence Or Transaction."  The analysis used to determine whether two claims arise out of the same  "transaction or occurrence" is the same as that needed to determine whether  a claim is a compulsory counterclaim under Fed. R. Civ. P. 13(a).  S. Rep.  No. 95-989, 95th Cong., 2d Sess. 29-30, reprinted in 1978  U.S.C.C.A.N. 5787, 5815-16; see Ga. Dep't of Revenue v. Burke (In  re Burke), 146 F.3d 1313, 1318 n.10 (11th Cir. 1998) (claim for  violation of discharge injunction arose out of same transaction or  occurrence as State's proof of claim), cert. denied, 527 U.S. 1043  (1999); Wyo. Dep't of Transp. v. Straight (In re Straight), 143 F.3d  1387, 1390 (10th Cir.) (debtor's claim against one state agency arose out of   same transaction as claim of another state agency), cert. denied, 525   U.S. 982 (1998); 995 Fifth Ave. Assocs., L.P. v. N.Y. Dep't of Taxation &   Fin. (In re 995 Fifth Ave. Assocs., L.P.), 963 F.2d 503 (2d Cir. 1992)  (State, by filing administrative expense claim for additional gains tax on  transfer of property in chapter 11 case, waived its Eleventh Amendment  immunity with respect to debtor's attempt to recover previously paid gains  tax); Brown v. United States (In re Rebel Coal Co.), 944 F.2d 320  (6th Cir. 1991) (preference claim for return of funds garnished to pay Mine  Safety Act fines was not a compulsory counterclaim to the government's claim   for uncollected fines; though claims are related, factual and legal issues  raised by each are too dissimilar to satisfy compulsory counterclaim rule);  IRS v. Germaine (In re Germaine), 152 B.R. 619 (B.A.P. 9th Cir. 1992)   (damages based on violation of § 524's post-discharge injunction barred   because it did not arise from same occurrence or transaction as IRS claim  for discharged taxes); Sacred Heart Hosp. of Norristown v. Pa. Dep't of  Pub. Welfare (In re Sacred Heart Hosp. of Norristown), 204 B.R. 132  (E.D. Pa. 1997) (debtor's claim for unreimbursed unemployment compensation  benefits was not part of same transaction or occurrence as State's claim for   employment and sales taxes), aff'd, 133 F.3d 237 (3d Cir. 1998);  In re Weaver, 248 B.R. 106 (Bankr. N.D. Ohio 2000) (insufficient  nexus for proof of tax claim and motion to avoid tax lien to be "logically  related" under 6th Circuit's compulsory counterclaim rule); White v.  Shalala (In re Pace Enters. of Columbia, Inc.), 171 B.R. 444 (Bankr.  D.D.C. 1994) (no waiver of sovereign immunity for unpaid invoices under an  HHS contract provided by the IRS having filed a claim for unpaid withholding   taxes, because there exists no "logical relationship" between the claim and  the counterclaim); Davis v. United States Postal Serv. (In re Leeth  Constr. Co.), 170 B.R. 684 (Bankr. D. Ariz. 1994) (FDIC's filing of  claim did not waive sovereign immunity for USPS contract breach claim);  Rocchio & Sons, Inc. v. R.I. Dep't of Transp. (In re Rocchio and Sons,  Inc.), 165 B.R. 86 (Bankr. D.R.I. 1994) (claims of state taxing  authority did not arise out of same transaction as debtor's contract claims  against state transportation department); Unicare Homes, Inc. v. Four  Seasons Care Ctrs. (In re Four Seasons Care Ctrs.), 119 B.R. 681 (Bankr.   D. Minn. 1990) (filing of claim by state department of taxation does not  allow counterclaim for Medicare funds withheld for recoupment purposes by  state department of health because § 106(a) allows only counterclaims  arising from the same transaction or occurrence as governmental unit's  claim); Pullman Constr. Indus. v. United States (In re Pullman Constr.  Indus.), 142 B.R. 280 (Bankr. N.D. Ill. 1992) (preference claim to  recover prepetition taxes was compulsory counterclaim to government's claim  to recover unpaid taxes, and thus sovereign immunity waived), aff'd,  153 B.R. 539 (N.D. Ill. 1993), appeal dismissed, 23 F.3d 1166 (7th  Cir. 1994); Graham v. United States (In re Malmart Mortgage Co.), 109   B.R. 1 (Bankr. D. Mass. 1989) (same); Ellenberg v. DeKalb County (In re  Maytag Sales and Serv.), 23 B.R. 384 (Bankr. N.D. Ga. 1982) (same).   But see United States v. Academy Answering Servs. (In re Acad.  Answering Servs.), 100 B.R. 327 (N.D. Ohio 1989).  For tax issues,  see Pinkstaff v. United States (In re Pinkstaff), 974 F.2d 113   (9th Cir. 1992) (IRS claim for back taxes and debtor's claim under §  362(h) for alleged violation of the automatic stay (by IRS) in collecting  those taxes both arise from same aggregate core of facts, the debtor's  failure to pay taxes; therefore, waiver under § 106(a) exists);  United States v. Fingers (In re Fingers), 170 B.R. 419 (S.D. Cal.  1994); accord In re Boldman, 157 B.R. 412 (C.D. Ill. 1993);  United States v. Bulson (In re Bulson), 117 B.R. 537 (B.A.P. 9th Cir.   1990), aff'd, 974 F.2d 1341 (9th Cir. 1992); In re Lile, 96  B.R. 81 (Bankr. S.D. Tex. 1989).         7. Trustee cannot assert tax refund claim as compulsory counterclaim to IRS proof of claim after proof of claim has been denied.               United States v. Neary (In re Armstrong), 206 F.3d 465, 473 (5th Cir.   2000).
Updated February 19, 2015