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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. 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).