In Re: Kaiser Grp ( 2005 )

Opinions of the United
2005 Decisions States Court of Appeals
for the Third Circuit
2-25-2005
In Re: Kaiser Grp
Precedential or Non-Precedential: Precedential
Docket No. 04-1634
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 04-1634
__________
IN RE: KAISER GROUP INTERNATIONAL INC.,
Debtor
__________
INTERNATIONAL FINANCE CORPORATION
v.
KAISER GROUP INTERNATIONAL INC.,
Appellant
FRANK J. PERCH, III,
Trustee
___________
On Appeal from the United States District Court
for the District of Delaware
(D.C. No. 03-cv-00038)
District Judge: Honorable Joseph J. Farnan, Jr.
___________
Argued: December 15, 2004
___________
BEFORE: NYGAARD and GARTH, Circuit Judges
and POLLAK * , District Judge.
(Opinion Filed: February 25, 2005)
_________
OPINION
_________
George E. Rahn, Jr., Esq. (Argued)
Saul Ewing
1500 Market Street
Centre Square West, 38th Floor
Philadelphia, PA 19102
Counsel for Appellant
Robert J. Stearn, Jr., Esq.
Richards Layton & Finger
One Rodney Square
P. O. Box 551
*
Honorable Louis H. Pollak, District Judge for the
United States District Court for the Eastern District of
Pennsylvania, sitting by designation.
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Wilmington, DE 19899
Warren E. Zirkle, Esq. (Argued)
McGuire Woods
1750 Tysons Boulevard, Suite 1800
McLean, VA 22102
Counsel for Appellee
GARTH, Circuit Judge.
Appellant, Kaiser Group International (“International”),
appeals from the District Court’s decision granting International
Finance Company’s (“IFC”)1 Motion to Dismiss International’s
Third Amended Complaint for Lack of Subject Matter
Jurisdiction. In doing so, the District Court reversed the
Bankruptcy Court to the extent that the bankruptcy decision
concluded that International’s claims were within the scope of
the waiver of sovereign immunity by IFC pursuant to 11 U.S.C.
§ 106(b).
On appeal, International argues that its claims fall within
1
IFC is an international organization composed of
member states, including the United States and the Czech
Republic. As a public international organization, IFC is entitled
to the privileges, exemptions, and immunities conferred by the
International Organizations Immunities Act, including sovereign
immunity, a subject discussed in text infra.
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the scope of IFC’s waiver of sovereign immunity, thereby
conferring subject matter jurisdiction on the bankruptcy court.
It contends that its claims are both property of the estate and
arise out of the same transaction or occurrence as the Proof of
Claim filed by IFC in International’s bankruptcy proceeding and
that, therefore, the claims asserted by International in the Third
Amended Complaint are viable and should be considered on the
merits. We agree.
Accordingly, we will reverse the judgment of the District
Court, remand to the District Court, and direct that the District
Court remand this case to the Bankruptcy Court so that there
may be a ruling on the merits of International’s Third Amended
Complaint.
I.
The District Court had jurisdiction over this case as an
appeal from the determination of the Bankruptcy Court under 28
U.S.C. § 158(a)(1). We have jurisdiction under 28 U.S.C. §
158(d) and 28 U.S.C. § 1291.
The District Court dismissed the instant action upon
IFC’s Federal Rule of Civil Procedure 12(b)(1) motion for lack
of subject matter jurisdiction predicated on sovereign immunity.
We exercise plenary review over the District Court's dismissal
under Rule 12(b)(1). In re Cybergenics Corp., 226 F.3d 237,
239 (3d Cir. 2000). When reviewing a facial challenge to this
Court’s subject matter jurisdiction, we accept all well-pleaded
allegations in the complaint as true and view them in the light
most favorable to the plaintiff. See Turicentro, S.A. v. Am.
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Airlines Inc., 303 F.3d 293, 300 (3d Cir. 2002).
II.
As we indicated above, because the present appeal is
before us on the District Court’s order granting IFC’s 12(b)(1)
motion to dismiss, we must accept the allegations of the Third
Amended Complaint as true and view them in the light most
favorable to International. Consequently, the following factual
summary is drawn from the facts as alleged in the Third
Amended Complaint.
A.
On July 18, 1994, Kaiser Engineers (“Engineers”)3 , a
debtor subsidiary of International, entered into a Letter of Intent
with Nova Hut, a Czech steel manufacturer (“Nova Hut”),
pursuant to which International agreed to provide certain
advisory services to Nova Hut in connection with the
construction of a continuous caster and reversing rolling mill,
also known as a “minimill,” to be located in the Czech
Republic. Nova Hut agreed to pay a fee of $1.5 million for
those services. In order to assist Nova Hut funding the project,
International eventually agreed to defer $510,000 of that fee.
According to International, that fee was never paid.
On November 8, 1996, International, Kaiser Netherlands,
3
Engineers is joined with International as a debtor in
International’s bankruptcy proceedings.
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B.V. (“Netherlands”), a wholly-owned, non-debtor subsidiary
of International, and Nova Hut, entered into a Memorandum of
Understanding for the construction of the minimill which set the
total purchase price for Phase 1 of the project at $168.5 million.
On June 27, 1997, Netherlands and Nova Hut entered
into a contract for construction of Phase 1 of the minimill (the
“Construction Agreement”) pursuant to which Netherlands
agreed to design and supply Nova Hut’s existing steel mill with
a “fully constructed, operational Phase 1 of the mini-mill for flat
rolled products.” It is undisputed that International was not a
party to the Construction Agreement. In order to finance its
obligations under the Construction Agreement, Nova Hut
obtained a secured loan from IFC in the amount of $125
million.
To secure Netherlands’ timely and proper design,
manufacture, and construction of the mini-mill, the
Construction Agreement required Netherlands to submit a
performance letter of credit in the amount of $11.1 million (the
“Letter of Credit”). The Construction Agreement provided that
Nova Hut could draw down against the Letter of Credit if
Netherlands breached the contract or failed to renew the Letter
of Credit as required. First Union Bank issued the Letter of
Credit on July 8, 1997 (as amended on September 15, 1998).
It is also undisputed that Netherlands, not International,
is listed as the “customer” on the Letter of Credit. At the same
time, according to the Third Amended Complaint, First Union
Bank required International to post collateral as security for the
Letter of Credit. To meet this requirement, International
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deposited $11.1 million in cash with First Union Bank.
To further ensure Netherlands’ performance under the
Construction Agreement, International executed a written
“Guaranty of the Performance of Kaiser Netherlands” pursuant
to the agreement between Nova Hut and Netherlands (the
“Performance Guaranty”). This Performance Guaranty
provided that if Netherlands failed to prove that the mini-mill
passed the requisite performance tests, and if Netherlands was
unable to correct that deficiency or pay Nova Hut what it owed,
then Nova Hut would have the right to seek liquidated damages
from International.
On November 7, 1997, Nova Hut granted IFC a security
interest in the Construction Agreement and Performance
Guaranty. Nova Hut conditionally assigned its rights under the
Construction Contract, but not its obligations, to IFC.
Netherlands and International acknowledged and consented to
this conditional assignment.
Thereafter, Netherlands commenced construction of the
minimill. The Construction Agreement required Netherlands to
pass a four week integrated production performance test (the
“Performance Test”) in connection with the minimill
construction. The four week performance test was run from
October 16, 2000 through November 13, 2000. After
completing the test, Nova Hut informed Netherlands that it had
failed to prove that the mini-mill performed as required by the
Construction Agreement. Thus, Nova Hut notified Netherlands
that it was in default. International, however, claims that
Netherlands passed that test and met all of its other contractual
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obligations under the Construction Agreement.
In January 2001, a dispute arose over the Letter of
Credit, which was set to expire on March 7, 2001. International
agreed to extend the Letter of Credit in return for Nova Hut’s
and IFC’s representations that they would not draw on the
Letter of Credit if it was extended until July 31, 2001. Despite
these representations, on February 16, 2001, Nova Hut drew
down on the $11.1 million Letter of Credit and terminated the
Construction Agreement (allegedly at the direction of IFC).
That draw down, which International alleges was improper and
in breach of the Construction Agreement and the additional
agreements that it had with Nova Hut and IFC, forms the basis
of the present litigation.
B.
On June 9, 2000, International and certain subsidiaries
filed a petition under Chapter 11 of the Bankruptcy Code. On
August 14, 2000, IFC filed a Proof of Claim in the bankruptcy
case seeking recovery from International based on an
assignment IFC had received from Nova Hut. It alleged claims
in connection with the Performance Guaranty, the Letter of
Credit and the Construction Agreement and sought damages in
excess of $46 million. IFC further alleged that it was entitled to
recover the $46 million from International because it had the
“right to step into the shoes of Nova Hut and enforce the terms
and provisions of the [Construction Contract] and the
[Performance] Guaranty” pursuant to the Assignment.
At the same time, IFC stated that it was filing the Proof
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of Claim under the compulsion of the bar date and that the filing
was not a consent by IFC to the jurisdiction of the court with
respect to the subject matter of those claims.
On April 9, 2001, after Nova Hut drew down on the
Letter of Credit, International filed an amended objection to
Nova Hut’s and IFC’s proofs of claim and filed claims against
IFC and Nova Hut. 4 In response, on June 12, 2001, IFC filed a
motion for leave to withdraw its proof of claim.
In an order dated January 9, 2002, the Bankruptcy Court
granted IFC’s motion, but only on the conditions that the
Bankruptcy Court would retain jurisdiction over International’s
claims and that IFC was barred from asserting other claims
against the debtors.
On October 21, 2002, International filed its Third
Amended Complaint.
C.
The Third Amended Complaint alleges that at the time
Nova Hut drew on the Letter of Credit, Netherlands had passed
the Performance Test, had met all of the requirements for final
4
International subsequently filed its Second Amended
Complaint on December 17, 2001. IFC moved to dismiss the
Second Amended Complaint on June 14, 2002. The Bankruptcy
Court denied that motion on October 18, 2002. IFC did not
appeal that decision.
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acceptance of the minimill project, and was in compliance with
the requirements of the Construction Amendment. Thus, the
Third Amended Complaint alleges that the draw down on the
Letter of Credit was wrongful and resulted in International
sustaining damages of over $11.1 million in loss of collateral.
International further charges that Nova Hut improperly drew
down on the Letter of Credit at the direction of IFC.
As against IFC, International asserted both contract and
equitable claims. These claims can be summarized as follows:
• First, Nova Hut and IFC are liable for breach of
warranty for allegedly false representations and
warranties made by Nova Hut at the direction of
IFC in connection with the draw on the Letter of
Credit.
• Second, Nova Hut and IFC are liable for breach
of contract in connection with agreements they
had with International concerning the Letter of
Credit whereby International agreed to establish
the Letter of Credit on behalf of Netherlands and
Nova Hut agreed not to draw on the Letter of
Credit if International extended the Letter of
Credit prior to its expiration.
• Third, as an alternative to its breach of contract
claims, Nova Hut and IFC are liable to
International under a theory of unjust enrichment
for (1) improperly drawing on the Letter of
Credit, (2) failing to pay $510,000 in deferred
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payments allegedly owed to Engineers for
financial and engineering services it provided
pursuant to the Letter of Intent, and (3) failing to
pay $5.25 million allegedly owed to International
for engineering and construction goods and
services it provided pursuant to the Memorandum
of Understanding.
• Fourth, as an alternative to its breach of contract
and unjust enrichment claims, Nova Hut and IFC
are liable to International under a theory of
quantum meruit.
• Fifth, in the event a contract existed between
Nova Hut and International or Engineers, IFC is
liable for tortious interference with contract.
• Sixth, in the event no enforceable contract
existed, IFC is liable for tortious interference with
business relations and prospective economic
advantage.
In response, IFC filed a motion to dismiss the Third
Amended Complaint for lack of subject matter jurisdiction,
claiming sovereign immunity under § 106 of the Bankruptcy
Code. IFC argued that it was immune under the International
Organizations Immunity Act; that IFC could not waive its
immunity under § 106(b) because it was not a governmental
unit or a sovereign; and that even if it could waive its immunity,
it had not done so by filing the Proof of Claim.
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The Bankruptcy Court ruled that IFC is a governmental
unit under § 106(b) and that its filing of the Proof of Claim was
an express waiver of its immunity. Consequently, in an order
dated December 9, 2002, the Bankruptcy Court denied IFC’s
motion to dismiss.
On appeal to the District Court of Delaware, in addition
to the arguments it raised before the Bankruptcy Court, IFC
asserted for the first time that even if it had waived its immunity,
the claims set forth in the Third Amended Complaint were
outside the scope of its waiver pursuant to § 106(b). In an order
dated September 30, 2003, the District Court affirmed the
Bankruptcy Court’s decision that IFC constituted a
“governmental unit” for purposes of § 106(b) of the Bankruptcy
Code and that IFC had expressly waived its immunity by filing
the Proof of Claim in International’s bankruptcy proceeding.
The District Court, after reviewing supplemental briefs which it
had ordered, reversed the Bankruptcy Court’s decision and held
that International’s claims were outside the scope of IFC’s
waiver of sovereign immunity under 11 U.S.C. § 106(b), and
thus IFC prevailed.
With respect to International’s breach of contract claims
in connection with the Letter of Credit, the District Court found
that those claims were not “property of the estate.” Specifically,
it held that because neither a letter of credit nor its proceeds are
“property of the estate” under bankruptcy law, any recourse
International might have, would be limited to the underlying
Construction Agreement. Such a cause of action could not be
“property of the estate” because International was not a party to
that contract.
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As for International’s equitable claims, the District Court
found that even assuming they were “property of the estate,”
they were not within the scope of IFC’s waiver, because they
did not arise from the same transaction or occurrence as IFC’s
Proof of Claim. It so held because International’s claims were
predicated on events that occurred subsequent to International’s
filing of its objections to the Proof of Claim and thus had not
“matured” within the period of time prescribed by Fed. R. Civ.
P. 13(a). The District Court concluded, therefore, that those
claims did not meet the compulsory counterclaim test under
Fed. R. Civ. P. 13(a) and were therefore outside the scope of
IFC’s waiver.
By order dated February 23, 2004, the District Court
dismissed International’s Third Amended Complaint with
prejudice for lack of subject matter jurisdiction. This timely
appeal followed.
III.
As an initial matter, International asserts that IFC has
waived the issues of: (1) whether its claims were “property of
the estate” and (2) whether the claims arose out of the same
transaction or occurrence, and therefore, cannot raise these
issues on appeal. International relies on the general rule that
when a party fails to raise an issue in the bankruptcy court, the
issue is waived and may not be considered by the district court
on appeal. See Buncher Co. v. Official Comm . of Unsecured
Creditors of Genfarm LP IV, 229 F.3d 245, 253 (3d Cir. 2000).
Although the general rule of Buncher is correct, International
fails to note the exception for subject matter jurisdiction, which
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is applicable to this case.
It is well-settled law that subject matter jurisdiction can
be challenged at any point before final judgment, even if
challenged for the first time on appeal. See Grupo Dataflux v.
Atlas Global Group, L.P., 124 S. Ct. 1920, 1924 (2004). We
have consistently held that the defense of lack of subject matter
jurisdiction may be raised at any time. See, e.g., Brown v.
Philadelphia Hous. Auth., 350 F.3d 338, 347 (3d Cir. 2003)
(citing Sansom Comm. v. Lynn, 735 F.2d 1535, 1538 (3d Cir.
1984) (defense that district court lacked subject matter
jurisdiction to enforce consent decree may be raised for the first
time on appeal)).
Specifically, we have stated that Courts of Appeals must
consider whether sovereign immunity was waived under 11
U.S.C. § 106(b) even though “neither presented or considered
below” because “a waiver of sovereign immunity is a
prerequisite for jurisdiction.” In re Univ. Med. Ctr., 973 F.2d
1065, 1085 (3d Cir. 1992) (citation omitted). We therefore
reject International’s “waiver” argument.
IV.
11 U.S.C. § 106 sets forth the conditions under which an
entity will be deemed to have waived its sovereign immunity in
the bankruptcy courts. Section 106(b) provides that:
A governmental unit that has filed a proof of
claim in the case is deemed to have waived
sovereign immunity with respect to a claim
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against such governmental unit that is property of
the estate and that arose out of the same
transaction or occurrence out of which the claim
of such governmental unit arose.
Id. Thus, by its terms, § 106(b) limits the scope of a waiver
predicated on the filing of a proof of claim to those adversarial
claims that are both “property of the estate” and “arise out of the
same transaction or occurrence” as the claims set forth in the
proof of claim.
A.
As we observed earlier, the District Court found that
International’s breach of contract claims concerning the Letter
of Credit were not “property of the estate.” It based this
conclusion on the “well-established” rule of bankruptcy law that
“a letter of credit and the proceeds therefrom are not property of
the debtor’s estate.” Matter of Compton Corp., 831 F.2d 586,
589 (5th Cir. 1987) (citations omitted); see also In re Hechinger
Inv. Co. of Del., Inc., 282 B.R. 149, 161 (D. Del. 2002).
Instead, a debtor seeking to remedy an improper draw on a letter
of credit is limited to a cause of action on the underlying
contract. See In re Graham Square, Inc., 126 F.3d 823, 827 (6th
Cir. 1997). Because the District Court found that International
was not a party to the Construction Agreement upon which the
Letter of Credit was based, it found that International’s claim for
$11.1 million predicated on Nova Hut’s improper draw down
was not “property of the [International] estate” and could not be
recovered by International.
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On appeal, International argues that the general “well-
established” rule of letter of credit jurisprudence relied upon by
the District Court is not applicable in this case. In the typical
case, a debtor either seeks to enjoin 5 a bank’s distribution of the
proceeds of a letter of credit or to recover the bank’s distribution
as a voidable preference or unauthorized postpetition transfer. 6
See, e.g., In re Hechinger Inv. Co. of Del., Inc., No. 99-2261
(Bankr. D. Del. 2001). Such challenges to the distribution of
proceeds of a letter of credit are barred in the routine letter of
credit case. See In re Graham Square, Inc., 126 F.3d at 827.
This rule is predicated on the “independence principle” which
seeks to preserve the viability of letters of credit, whose purpose
is to allow the beneficiary to draw on the money before
obtaining a judgment. See In re Sabratek Corp., 257 B.R. 732,
738 (Bankr. D. Del. 2000).
Here, however, International is not seeking to enjoin First
Union Bank’s distribution of the Letter of Credit proceeds, nor
is it alleging that there was a preferential payment to Nova Hut.
Rather, International seeks damages against Nova Hut and IFC
for the resultant loss of the collateral that International posted
and subsequently lost as a result of Nova Hut’s allegedly
improper draw down on the Letter of Credit. As International
argues explicitly in its opening brief, “[i]t is this $11.1 million
in collateral, which was posted by Kaiser International, a
5
See 11 U.S.C. § 362, which provides for an automatic
stay upon the filing of a bankruptcy petition.
6
See 11 U.S.C. §§ 547 and 549.
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Debtor, that was property of the estate.” Kaiser Br. at 23 n.2.
Several courts , including the Fifth, Ninth and Eleventh
Circuits, have held that the collateral posted to secure a Letter
of Credit is property of the estate. In Matter of Compton, the
Fifth Circuit held expressly: “Overall, the letter of credit itself
and the payments thereunder may not be property of [the]
debtor, but the collateral pledged as a security interest for the
letter of credit is.” 831 F.2d at 590-91; see also In re Mayan
Networks Corp., 306 B.R. 295, 299 (9th Cir. B.A.P. 2004); In re
Air Conditioning, Inc., 845 F.2d 293, 296 (11th Cir. 1988); In re
Metro Comms., Inc., 115 B.R. 849, 854 (W.D. Pa. 1990). Thus,
as the Ninth Circuit Bankruptcy Appellate Panel noted in In re
Mayan Networks, where the claim centers around the collateral
pledged to the bank and not the distribution of the proceeds
themselves, “the fact that letters of credit themselves are not
property of the estate is a red herring.” 306 B.R. at 299.
The logic and reasoning of the Fifth Circuit in Matter of
Compton is compelling and has direct application here.
Applying the “collateral” analysis of Compton, therefore, we
hold that the District Court erred in disposing of International’s
claims concerning the Letter of Credit and holding that they
were not “property of the estate.” Taking as true the Third
Amended Complaint’s allegation that International, not
Netherlands, posted the collateral to secure the Letter of Credit,
it is evident that International’s claim predicated on posting its
own $11.1 million collateral constitutes “property of the estate”
for purposes of § 106(b).
Indeed, the Third Amended Complaint’s further alleges
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that International had independent agreements with Nova Hut
and IFC whereby International (1) agreed to post the collateral
for the Letter of Credit and (2) agreed to extend the Letter of
Credit in exchange for Nova Hut’s representation that it would
not draw down on the Letter of Credit. Thus, International has
alleged causes of action predicated on its own – not
Netherlands’ – agreements that it had with Nova Hut.
International’s claims are therefore “property of the estate” and
assets to which its creditors in bankruptcy can look. As such,
they are within the scope of IFC’s sovereign immunity waiver
under § 106(b) and should not have been dismissed.7
B.
The District Court also dismissed the Third Amended
Complaint’s claims, advanced by International, because it found
that they did not satisfy the “same transaction or occurrence”
requirement of § 106(b). We do not agree.
The legislative history of § 106(b) and the case law
interpreting that provision make clear that courts should look
“to the standards employed in identifying compulsory
counterclaims under Federal Rule of Civil Procedure 13(a) for
guidance in discerning the applicability of section 106(a)’s
waiver of immunity.” In re Univ. Med. Center, 973 F.2d at
7
A claim deemed to be “outside the scope of IFC’s
sovereign immunity waiver under § 106(b)” as the District Court
held, could not be entertained, as IFC would be protected by
immunity.
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1086. As set forth in In re University Medical Center, “[t]he
operative question in determining whether a claim is a
compulsory counterclaim is whether it bears a ‘logical
relationship’ to the opposing party’s claim.” Id. (citation
omitted).
The District Court never reached the issue of whether
International’s claims bore a logical relationship to IFC’s
claims. Instead, it relied on the fact that International’s claims,
as set forth in the Third Amended Complaint, matured after it
filed objections to IFC’s Proof of Claim. Based on that finding,
the District Court concluded that the claims were not
compulsory counterclaims as defined in Federal Rule of Civil
Procedure 13(a) and so fell outside the scope of IFC’s § 106(b)
waiver. The District Court admitted that the Rule 13(a)
“maturity” requirement had never been discussed in the
bankruptcy context. However, it added that requirement,
finding it to be appropriate in light of the “overriding policy that
waivers of sovereign immunity should be narrowly construed.”
While the District Court correctly noted a significant
policy concern in rendering its decision, it ignored the equally,
if not more, compelling consideration that the Bankruptcy Code
is intended to be both remedial and quasi-equitable.
Furthermore, in imposing Rule 13(a)’s maturity requirement on
International’s claims, the District Court failed to accord proper
weight to both the language of § 106(b) itself and the
authoritative case law interpreting that provision. In our view,
the analogy to compulsory counterclaims begins and ends with
the phrase “same transaction or occurrence.” Because we hold
that there is no “maturity” component in § 106(b) and because
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we conclude that International’s claims arose from the “same
transaction or occurrence” as IFC’s claims, we will reverse the
District Court as to that element of § 106(b) as well.
As we set forth above, 11 U.S.C. § 106(b) provides:
A governmental unit that has filed a proof of
claim in the case is deemed to have waived
sovereign immunity with respect to a claim
against such governmental unit that is property of
the estate and that arose out of the same
transaction or occurrence out of which the claim
of such governmental unit arose.
Id. (italics added).
On the other hand, Fed. R. Civ. P. 13(a) reads:
A pleading shall state as a counterclaim any claim
which at the time of serving the pleading the
pleader has against any opposing party, if it arises
out of the transaction or occurrence that is the
subject matter of the opposing party’s claim and
does not require for its adjudication the presence
of third parties of whom the court cannot acquire
jurisdiction.
Id. (italics added).
A comparison of the two provisions reveals that there is
no basis in the statutory language for requiring “maturity” of
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claims in the context of § 106(b). “Maturity” as an element of
Federal Rule of Civil Procedure 13(a) compulsory
counterclaims is expressly set forth in the rule itself: “A
pleading shall state as a counterclaim any claim which at the
time of serving the pleading the pleader has against any
opposing party.” Fed. R. Civ. P. 13(a) (emphasis added). The
bankruptcy statute, 11 U.S.C. § 106(b), has no comparable
language and cannot be construed to incorporate the separate
and distinct element of “maturity.” “Maturity” is just not an
element or modifier of Rule 13(a)’s “same transaction or
occurrence” requirement.
The plain language of § 106(b), however, speaks only of
“same transaction or occurrence.” The concept of “maturity” is
simply absent from § 106(b). “Maturity” is best understood in
the context of Rule 13(a) as an entirely separate element of the
compulsory counterclaim analysis of Rule 13(a) and one that
has no place in the operation of § 106(b).
Furthermore, the notes to § 106 do not support the
wholesale importation of Rule 13(a)’s compulsory counterclaim
elements into § 106(b) claims. The relevant legislative history
of § 106(b) states:
[T]he filing of a proof of claim against the estate
by a governmental unit is a waiver by that
governmental unit of sovereign immunity with
respect to compulsory counterclaims, as defined
in the Federal Rules of Civil Procedure . . . that
is, counterclaims arising out of the same
transaction or occurrence.
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11 U.S.C. § 106 (italics added). In our view, the addition of the
italicized phrase necessarily acts as a qualifier on the
relationship between § 106(b) waivers and compulsory
counterclaims. To read it otherwise, and invoke a total
parallelism between § 106(b) and Rule 13(a) claims as the
District Court chose to do, renders the final phrase of that
legislative history meaningless.
In reaching its holding, the District Court relied on a
single bankruptcy court case, In re Pullman Const. Indus., Inc.,
142 B.R. 280, 282-83 (Bankr. N.D. Ill. 1992), which held a
counterclaim must exist at the time of the pleading for purposes
of § 106(b). That case, of course, is in no way binding
precedent on this Court. Furthermore, its reasoning is seriously
suspect in light of later Seventh Circuit precedent. In re
Pullman relied on the Seventh Circuit’s decision in Burlington
N. R.R. v. Strong, 907 F.2d 707 (7th Cir. 1990) – a Rule 13(a)
case. However, in In re Price, 42 F.3d 1068 (7th Cir. 1994), an
opinion filed four years after Burlington, the Seventh Circuit
noted that reliance on Burlington in the bankruptcy context was
misplaced. Id. at 1073 n.4.
Instead of examining all of Rule 13(a) requirements, the
Seventh Circuit, as well as all of the other circuits that have
analyzed § 106(b), including the Third Circuit, have focused on
whether the claims of the governmental unit and the estate arise
out of the “same transaction or occurrence.” To define that
phrase, and that phrase only, the courts have turned to Rule
13(a) and have focused solely on a “logical relationship”: “The
operative question in determining whether a claim is a
compulsory counterclaim is whether it bears a ‘logical
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relationship’ to the opposing party’s claim.” In re Univ. Med.
Center, 973 F.2d at 1086 (citation omitted). Applying the logic
and reasoning of the foregoing cases to this appeal, we now
expressly hold that there is no “claim maturity” requirement
grafted onto the “same transaction or occurrence” test of §
106(b).
Turning to the “same transaction or occurrence” test, we
are instructed that the logical relationship standard should be
construed liberally. See In re Price, 42 F.3d at 1073. Thus, to
determine whether a logical relationship exists under § 106(b),
we must examine whether the claim “arises from the same
aggregate set of operative facts as the initial claim, in that the
same operative facts serve as the basis of both claims or the
aggregate core of facts upon which the claim rests activates
additional legal rights otherwise dormant in the defendant.” In
re Pinkstaff, 974 F.2d 113, 115 (9th Cir. 1992). Furthermore,
it is not necessary that the parties’ claims arise at the same
moment. See In re Gordon Sel-Way, Inc., 270 F.3d 280, 287
(6th Cir. 2001). Rather, the “transaction may comprehend a
series of many occurrences, depending not so much upon the
immediateness of their connection as upon their logical
relationship.” Id. (citation and internal quotation omitted).
On appeal, IFC cites to In re William Ross, Inc., 199
B.R. 551 (W.D. Pa. 1996) and In re Sacred Heart Hospital, 204
B.R. 132 (E.D. Pa. 1997), both of which are non-binding and
inapposite. Those lower court cases, involved claims by debtors
that were asserted against different government agencies than
the agency that filed the proof of claim. See In re William Ross,
199 B.R. at 554-55; In re Sacred Heart Hosp., 204 B.R. at 141.
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Here, however, International asserted its claims against IFC –
the same entity that filed the Proof of Claim. Thus, IFC’s
attempt to demonstrate that there is no logical relationship
between its claims and those of International, is unpersuasive.
Instead, applying the flexible logical relationship
standard enunciated above, we hold that International’s claims
satisfy the “same transaction or occurrence” test. Both IFC’s
Proof of Claim and International’s counterclaims arise out of
the construction of the Nova Hut minimill. That fact alone –
that all of the claims and counterclaims arise out of that one
complex transaction – is sufficient to demonstrate a logical
relationship between the claims.8
VI.
The District Court properly addressed, for the first time
on appeal, the scope of IFC’s waiver of sovereign immunity
under § 106(b) of the Bankruptcy Code. However, the District
Court’s holding that International’s claims were neither
“property of the estate” nor part of the “same transaction or
occurrence” as IFC’s Proof of Claim was in error.
8
A liberal application of the logical relationship test is
particularly appropriate given the fact that the present case is
proceeding in bankruptcy. Thus, if the allegations of
International’s Third Amended Complaint are proven, see pages
9-10 supra, it is the creditors of the bankrupt estate that stand to
gain from the additional assets that will inure to the estate.
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Accordingly, we will reverse the District Court’s order
of February 24, 2004, and remand to the District Court with the
direction that the case be remanded to the Bankruptcy Court so
that the Bankruptcy Court may rule on International’s Third
Amended Complaint, and for further proceedings consistent
with this opinion.
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