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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).