Zayler v. United States ( 2006 )

United States Court of Appeals
Fifth Circuit
F I L E D
REVISED OCTOBER 24, 2006
UNITED STATES COURT OF APPEALS October 19, 2006
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
_______________________ Clerk
No. 03-41345
_______________________
IN THE MATTER OF: SUPREME BEEF PROCESSORS, INC.,
Debtor.
-------------------------
STEPHEN ZAYLER, Trustee of the Estate of
Supreme Beef Processors, Inc.,
Appellant,
versus
DEPARTMENT OF AGRICULTURE; UNITED STATES OF AMERICA,
Appellees.
Appeal from the United States District Court
for the Eastern District of Texas
Docket No. 6:02-CV-570
Before JONES, Chief Judge, and JOLLY, HIGGINBOTHAM, DAVIS, SMITH,
WIENER, BARKSDALE, GARZA, DeMOSS, BENAVIDES, STEWART, DENNIS,
CLEMENT, PRADO, and OWEN, Circuit Judges.*
EDITH H. JONES, Chief Judge:**
In this bankruptcy case, the debtor, Supreme Beef
Processors, Inc. (“Supreme Beef”), asserts that it may pursue tort
claims against the United States Department of Agriculture (“USDA”)
*
Judge King is recused and did not participate in the decision.
**
Judge Higginbotham and Judge Owen, writing separately, concur in the
judgment only.
that would be barred by the federal government’s sovereign immunity
outside of bankruptcy. The district court dismissed Supreme Beef’s
claims, but a panel of this court held that permissive
counterclaims against the Government may be used as a setoff
pursuant to § 106(c) of the Bankruptcy Code, 11 U.S.C. § 106(c),
which allegedly effects a waiver of the USDA’s sovereign immunity.
Upon reconsidering the case en banc, we reject the panel’s
interpretation of § 106(c) and AFFIRM the decision of the district
court in its entirety.
I. Background
Supreme Beef was a Texas-based company in the business of
processing, grinding and selling meat products. As a major
domestic wholesale supplier of beef products, the company had
several contracts with the USDA to support the National School
Lunch Program.
The USDA is responsible for ensuring the safety of the
nation’s meat products, 21 U.S.C. § 608, and has delegated its
inspection duties to the Food Safety and Inspection Service
(“FSIS”). As a general matter, the USDA bears the cost of
performing inspection services. It is, however, authorized to seek
reimbursement for overtime work at individual plants, 21 U.S.C.
§ 695 and 7 U.S.C. § 2219(a), and it may collect fees for
certification services. 7 U.S.C. § 1622(h).
2
In 1996, FSIS issued the Pathogen Reduction, Hazard
Analysis and Critical Control Point Systems (“HACCP”) rule,
9 C.F.R. § 417, which requires meat processors to develop and
implement preventive controls to ensure product safety. The FSIS
maintains the power to verify whether plants’ performance plans are
eliminating common pathogens such as E. coli and Salmonella.
Two years later, Supreme Beef implemented its first HACCP
pathogen control plan. Unfortunately, the company failed a series
of tests administered by the FSIS over a period of months.
Still unable to demonstrate adequate HACCP control by
October 1999, Supreme Beef filed a lawsuit on the day that the USDA
had set to suspend inspection activities at its plant. Removal of
USDA inspectors would be a fatal blow to the company, as it is
illegal to sell uninspected beef. 21 U.S.C. § 606. The district
court granted a temporary restraining order and later upheld
Supreme Beef’s contention that because the FSIS testing system was
“not solely – or even substantially” related to the plant’s
sanitary conditions, it fell outside the agency’s regulatory
authority. Supreme Beef Processors, Inc. v. U.S. Dep’t of Agric.,
113 F. Supp. 2d 1048, 1053 (N.D. Tex. 2000), aff’d, 275 F.3d 432
(5th Cir. 2001). The decision was a Pyrrhic victory, however, as
the court refused to compel USDA to perform the National School
Lunch contracts. Having lost its government contracts and many
other customers, Supreme Beef was forced to seek Chapter 11
3
bankruptcy in September 2000. Its case was subsequently converted
to Chapter 7.
Adding insult to the company’s injury, the USDA filed
various proofs of claim totaling $32,753 for pre-petition meat
certification services and overtime inspection work. The trustee
filed an adversary proceeding against the Government in bankruptcy
court seeking damages for USDA’s unauthorized regulatory activity.
The reference was withdrawn, and the case proceeded in federal
district court. The trustee asserted five claims against the USDA
under the Federal Tort Claims Act (“FTCA”), 28 U.S.C. §§ 1346(b),
2671-2680.1 The USDA moved to dismiss Supreme Beef’s claims as
being barred facially by federal sovereign immunity. See FED. R.
CIV. P. 12(b)(1) and 12(b)(6). Citing 11 U.S.C. §§ 106(b) and (c),
Supreme Beef countered that USDA had waived its immunity by filing
bankruptcy proofs of claim. The district court sided with the
USDA, and Supreme Beef appealed. A panel of this court reversed
the trial court’s judgment2 and held that 11 U.S.C. § 106(c) waived
USDA’s sovereign immunity and authorized a setoff of Supreme Beef’s
permissive counterclaims. This court ordered rehearing en banc.
II. Discussion
1
Supreme Beef’s complaint alleged (1) tortious interference with
business relations; (2) tortious interference with existing contracts;
(3) slander; (4) business disparagement; and (5) breach of duty to perform proper
inspection.
2
While its ruling on § 106(c) resulted in a reversal of the district
court’s judgment, the panel upheld the trial court’s conclusion that § 106(b) did
not apply because Supreme Beef’s claims against USDA are not compulsory
counterclaims. See 11 U.S.C. § 106(b) and infra note 6.
4
This court reviews de novo a district court’s dismissal
pursuant to FED. R. CIV. P. 12(b)(1) or 12(b)(6). LeClerc v. Webb,
419 F.3d 405, 413 (5th Cir. 2005). A claim may not be dismissed
unless it appears certain that the plaintiff cannot prove any set
of facts that would entitle him to legal relief. Benton v. United
States, 960 F.2d 19, 21 (5th Cir. 1992).
The issue in this case is whether Supreme Beef stated a
viable claim for tort recovery against the USDA premised solely on
§ 106(c) of the Bankruptcy Code, which provides:
(c) Notwithstanding any assertion of sovereign immunity
by a governmental unit, there shall be offset
against a claim or interest of a governmental unit
any claim against such governmental unit that is
property of the estate.
11 U.S.C. § 106(c).
Our analysis begins with the legal claim that Supreme
Beef may not pursue: an FTCA claim. The Constitution contemplates
that, except as authorized by Congress, the federal government and
its agencies are immune from suit. Hercules, Inc. v. United
States, 516 U.S. 417, 422, 116 S. Ct. 981, 985 (1996). Two
Constitutional provisions support this immunity. The Appropria-
tions Clause states that no money “shall be drawn from the
Treasury, but in Consequence of Appropriations made by Law”.
U.S. CONST. art. I, § 9, cl. 7. Consequently, any “payment of
money from the Treasury must be authorized” by Congress. Office of
Pers. Mgmt. v. Richmond, 496 U.S. 414, 424, 110 S. Ct. 2465, 2472
(1990). Similarly, the Property Clause states that, “[t]he
5
Congress shall have power to dispose of and make all needful rules
and regulations respecting the territory or other property
belonging to the United States.” U.S. CONST. art. IV, § 3, cl. 2.
“Congress has the absolute right to prescribe” the manner in which
its property is transferred. Gibson v. Chouteau, 80 U.S. 92, 99
(1872).
Absent an express waiver of federal immunity by Congress,
the USDA cannot be sued by Supreme Beef. Congress provided, in the
FTCA, an exclusive vehicle for the assertion of tort claims for
damages against the federal government. See 28 U.S.C. §§ 2679(a)-
(b)(1). The FTCA allows a plaintiff to pursue tort actions against
the federal government, and it holds the government liable as if it
were a defendant in state court, subject to strict limitations.
Relevant here are two substantive limitations that constitute a
sine qua non for a plaintiff’s recovery.3 Codified at 28 U.S.C.
§ 2680, these exceptions deprive courts of subject matter
jurisdiction and cannot be waived. Hayes v. United States,
899 F.2d 438, 450-51 (5th Cir. 1990). Claims based upon “a
discretionary function or duty” of a federal agency cannot be
brought against the United States. 28 U.S.C. § 2680(a). Because
3
The FTCA contains two administrative prerequisites to suit that were
arguably also not complied with and could bar Supreme Beef’s suit. These are the
requirements for exhaustion of administrative remedies and a two-year limitation
on filing suit following exhaustion. See 28 U.S.C. §§ 2401(b), 2675(a). The
district court held that § 106(c) obviated the administrative exhaustion
roadblock for Supreme Beef. See, e.g., Ashbrook v. Block, 917 F.2d 918, 923 (6th
Cir. 1990). We need not consider that ruling here, nor has the two-year
limitation been raised.
6
USDA’s implementation of a Salmonella performance standard involved
discretionary acts, the FTCA affords no recovery for claims
predicated on such actions. Additionally, § 2680(h) excludes
recovery for claims against the United States for “libel, slander,
misrepresentation, deceit, or interference with contract rights.”
Id. § 2680(h). Four of the company’s causes of action also ran
afoul of this limitation. The district court correctly held, and
Supreme Beef does not dispute on appeal, that for these reasons, it
could not have asserted FTCA claims against the USDA prior to
filing bankruptcy.4
In lieu of the FTCA, Supreme Beef contends that the
Bankruptcy Code effected an independent waiver of federal sovereign
immunity, allowing its offset of permissive counterclaims against
USDA’s proof of claim. While the determinative provision for
Supreme Beef is 11 U.S.C. § 106(c),5 that provision is part of a
Bankruptcy Code section that deals more completely with questions
4
The FTCA provides the sole basis of recovery for tort claims against
the United States. That Congress chose to incorporate standards for federal
conduct that mirror applicable state standards of liability does not diminish
this exclusivity. In fact, the exclusivity is reinforced by substantive limits
on that incorporation, which are embodied, inter alia, in the discretionary
function and intentional tort exceptions to the FTCA.
5
Supreme Beef continues to contend that its claims are also permitted
under § 106(b), which authorizes recovery of compulsory counterclaims against a
governmental unit that has filed a proof of claim in the bankruptcy case. The
discussion hereinafter of “property of the estate” is as relevant to § 106(b) as
to § 106(c). We also find dispositive, as did the panel, the district court’s
ruling that because USDA’s claims for overtime and certification services covered
entirely different periods of time than the Salmonella HACCP tests at the company
plant, Supreme Beef’s claims based on the latter events do not arise out of the
same transactions or occurrences as those that underlie USDA’s claims. See
Supreme Beef,391 F.3d 629, 633-35 (2004).
7
of sovereign immunity.6 In searching for the best interpretation
of § 106(c), it is a “cardinal rule that a statute is to be read as
a whole,” in order not to render portions of it inconsistent or
devoid of meaning. Wash. State Dep’t of Soc. & Health Servs. v.
Guardianship Estate of Keffeler, 537 U.S. 371, 385 n.7, 123 S. Ct.
1017, 1025 (2003) (internal quotation omitted). Another guiding
principle is that waivers of sovereign immunity should be narrowly
construed in favor of the United States. United States v. Nordic
Vill. Inc., 503 U.S. 30, 34-35, 112 S. Ct. 1011, 1015 (1992).
Bankruptcy Code § 106 currently consists of three
subsections, which provide in pertinent part:
(a) Notwithstanding an assertion of sovereign immunity,
sovereign immunity is abrogated as to a
governmental unit to the extent set forth in this
section with respect to the following:
(1) Sections 105, 106, 107, 108, 303, 346,
362, 363, 364, 365, 366, 502, 503, 505,
506, 510, 522, 523, 524, 525, 542, 543,
544, 545, 546, 547, 548, 549, 550, 551,
552, 553, 722, 724, 726, 728, 744, 749,
764, 901, 922, 926, 928, 929, 944, 1107,
1141, 1142, 1143, 1146, 1201, 1203, 1205,
1206, 1227, 1231, 1301, 1303, 1305, and
1327 of this title. . . .
. . . .
(5) Nothing in this section shall create any
substantive claim for relief or cause of
action not otherwise existing under this
6
The Supreme Court’s recent decision in Cent. Va. Cmty. Coll. v. Katz,
126 S. Ct. 990 (2006), declared that states waived their sovereign immunity in
bankruptcy “in the usual case” under the plan of the Constitutional Convention.
126 S. Ct. at 1000. Regardless what effect Katz has with respect to some aspects
of state or local governmental units’ encounters with bankruptcy, Katz had no
effect on this case involving federal sovereign immunity.
8
title, the Federal Rules of Bankruptcy
Procedure, or nonbankruptcy law.
(b) 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.
(c) Notwithstanding any assertion of sovereign immunity
by a governmental unit, there shall be offset
against a claim or interest of a governmental unit
any claim against such governmental unit that is
property of the estate.
11 U.S.C. § 106 (a)-(c).
When the modern Bankruptcy Code was enacted in 1978,
Congress attempted to create a level playing field between
sovereign entities and other participants in bankruptcy court by
abrogating sovereign immunity. Subsections 106(b) and (c) have
been redesignated, but are substantively unchanged since the Code’s
inception except for the addition of the “notwithstanding” clause
to § 106(c) in 1994. The current structure of the provisions is a
response to Supreme Court decisions that required express
declarations of congressional intent to abrogate sovereign immunity
in order to satisfy to the Eleventh Amendment and federal immunity
law. See, e.g., Hoffman v. Conn. Dep’t of Income Maint., 492 U.S.
96, 101-02, 109 S. Ct. 2818, 2823 (1989); Nordic Vill., supra, 503
U.S. at 34-35, 112 S. Ct. at 1015. Section 106(a)(1) creates
jurisdiction in bankruptcy courts “[n]otwithstanding an assertion
of sovereign immunity” to hear certain types of administrative
9
struggles in which governmental units may become embroiled in a
bankruptcy case. The list of Code sections identifies the types of
proceedings in which governmental units may be sued, e.g.,
preference and fraudulent transfer litigation (§§ 547-48), and
assessment of administrative expenses (§§ 502-03). Not included
among these sections is § 541 of the Code, which defines “property
of the estate”. Section 106 (a)(5) provides that no substantive
cause of action is created against governmental units beyond what
exists in bankruptcy law or in applicable non-bankruptcy law.
Sections 106(a)(3) and (4) regulate the amounts and types of
recovery in bankruptcy proceedings against governmental units.7
For this reason, and insofar as § 106(a)(5) creates no cause of
action apart from applicable non-bankruptcy law, § 106(a) clearly
distinguishes between sovereign immunity from suit and immunity
from liability. See 2 COLLIER ON BANKRUPTCY ¶106.05-.07,(15th ed. rev.
2004).
Sections 106(b) and (c) are consistent with Section
106(a); they vest the bankruptcy courts with jurisdiction to hear
certain claims but do not create substantive non-bankruptcy law
that will govern a claim. These provisions have been described by
the Supreme Court as “plainly waiving” sovereign immunity with
respect to monetary relief in two settings: compulsory counter-
7
Sections 106(a)(3) and (4) provide the bankruptcy court the same
capacity as a district court to award reasonable monetary damages, exclusive of
punitive damages, for costs and fees pursuant to 28 U.S.C. § 2412(d)(2)(A).
10
claims to governmental claims (current § 106(b)), and permissive
counterclaims to governmental claims capped by a setoff limitation
(current § 106(c)). Nordic Vill., 503 U.S. at 34, 112 S. Ct. at
1015.8 Importantly, in Nordic Village, the Court added that
Congress’s grant of jurisdiction to entertain such claims is wholly
distinct from the abrogation of all defenses to a claim. Id. at
38, 112 S. Ct. at 1017. Put otherwise, “it cannot be assumed that
a claimant has a cause of action for damages against a government
agency merely because there has been a waiver of sovereign
immunity.” Cicippio-Puleo v. Islamic Republic of Iran, 353 F.3d
1024, 1033 (D.C. Cir. 2004) (citing FDIC v. Meyer, 510 U.S. 471,
483-84, 114 S. Ct. 996 (1994)). In Meyer, the Court stated that
“[t]he first inquiry is whether there has been a waiver of
sovereign immunity. If there has been such a waiver . . . the
second inquiry . . . is whether the source of substantive law upon
which the claimant relies provides an avenue for relief.” Meyer,
510 U.S. at 484, 114 S. Ct. 1004. See also, U.S. Postal Serv. v.
Flamingo Indus. (USA) Ltd., 540 U.S. 736, 744, 124 S. Ct. 1321
(2004)(a federal agency’s amenability to suit “does not result in
liability if the substantive law in question is not intended to
reach the federal entity.”). Sections 106(b) and (c), therefore,
permit the assertion of counterclaims or offsets, but they do not
8
At the time Nordic Village was decided, subsections (b) and (c) were
designated as §§ 106 (a) and (b), respectively.
11
determine the law that substantively governs claims against the
governmental units.
The law that governs counterclaims or offset claims is
applicable state or federal law. This is expressed in both
provisions by the requirement that counterclaims or offsets against
the governmental units be “property of the estate.”9 The
Bankruptcy Code defines “property of the estate” as including “all
legal or equitable interests of the debtor in property as of the
commencement of the case.” 11 U.S.C. § 541(a)(1). The Supreme
Court has emphasized that bankruptcy law is not itself a source of
property rights. It functions to adjust pre-existing property
rights as defined by extrinsic state or federal law. Butner v.
United States, 440 U.S. 48, 54-55, 99 S. Ct. 914, 917-18 (1979);
see also In re Pinetree, Ltd., 876 F.2d 34, 36 (5th Cir. 1989).
Because counterclaims or offset claims against governmental
entities must be “property of the estate,” they are not
freestanding and divorced from the substantive limitations that
would be imposed outside of bankruptcy. The FTCA, as noted, is the
exclusive vehicle for claims that Supreme Beef could have
maintained against USDA outside of bankruptcy. Literal application
of § 106(c) ultimately leads Supreme Beef to a dead end. The
9
As Collier recognizes: “Whether there is a valid and enforceable
claim or obligation in existence to be used as a setoff depends upon the
applicable state or federal substantive law and Sections 541, 1207 and 1306 of
the Bankruptcy Code.” 2 COLLIER ON BANKRUPTCY ¶ 106.07[1] (15th ed. rev. 2004)(the
latter in regard to § 106(b)).
12
company may not offset any permissive counterclaim without an
underlying claim that was “property of the estate” at the date of
bankruptcy.
Supreme Beef takes issue with this interpretation of
§ 106(c) on several grounds. First, it contends that its claims
are “property of the estate” because they “exist” under state law,
notwithstanding the FTCA’s discretionary function and intentional
tort exceptions. That state law defines certain conduct as
tortious, however, simply does not mean that a private person may
sue the U.S. Government solely under the state’s law. The federal
government enjoys complete sovereign immunity except as it has
consented to be sued and consented to submit to liability. Supreme
Beef’s implication that FTCA’s incorporation of state tort law can
be divorced from that statute’s express limits on liability, e.g.,
the discretionary function and intentional tort exceptions,
violates the rule requiring harmonious interpretation of a statute
as a whole.
Supreme Beef also misplaces reliance on this court’s
recent en banc decision interpreting the temporal limits on the
definition of “property of the estate.” Burgess v. Sykes (In re
Burgess), 438 F.3d 493 (5th Cir. 2006). Both the majority and
dissenting opinions in Burgess considered cases in which there was
no dispute that the debtor had obtained a cognizable legal claim
against the federal government, a claim embodied in legislation;
the point of contention solely concerned whether the claim arose
13
before or after bankruptcy. In this case, the question is whether
Supreme Beef has any claim apart from the FTCA.
Supreme Beef next contends that because § 106(c) allows
a trustee to assert permissive counterclaims “notwithstanding any
assertion of sovereign immunity” by a governmental unit, this
effects a waiver of substantive sovereign immunity. We disagree.
The clause is designed to recognize the different procedural
postures in which §§ 106(b) and (c) claims arise. Under § 106(b),
a governmental unit will have filed a proof of claim against the
debtor, e.g., for back taxes, and the unit is then “deemed to have
waived” immunity for any compulsory counterclaim the debtor can
assert that is also “property of the estate.” In the § 106(c)
context, however, it is not necessary that the governmental unit
first file a claim, so no “deemed waiver” is appropriate. But,
where a separate but related governmental entity has filed a claim
(e.g., two different state agencies),10 the debtor’s claim for a
capped offset may be maintained in bankruptcy court “notwith-
standing any assertion of sovereign immunity.” This language
waives immunity from suit, not from liability.
If “notwithstanding any assertion of sovereign immunity”
in § 106(c) means any more than a recognition of the procedural
posture of the waiver, i.e., if it waives immunity from liability,
10
See, e.g., In re Charter Oak Associates, 361 F.3d 760, 770-72 (2d
Cir. 2004), upholding permissive counterclaim against one state agency after
another agency filed proof of claim).
14
then this would render the “property of the estate” language in
§ 106(c) superfluous as regards claims against a governmental unit.
Further, “property of the estate” would have different meanings in
§§ 106(b)and(c), functioning still as a limit on a governmental
unit’s liability in the former provision but not, according to
Supreme Beef’s interpretation, in the latter provision. Finally,
if § 106(c) — uniquely among its companion provisions §§ 106(a) and
(b), and contrary to the FTCA — creates causes of action against
governmental units untethered from existing extrinsic law, it
impermissibly creates “property” of the debtor that the debtor did
not have prebankruptcy. Supreme Beef acknowledges it could not
have sued USDA prebankruptcy under the FTCA. The Bankruptcy Code
does not grant Supreme Beef a superior right against the government
postbankruptcy.
The argument may be made that because § 106(c) involves
capped setoff claims, such claims may not result in a judgment for
money damages against a governmental unit and thus do not implicate
sovereign immunity. This interpretation, however, drains any
meaning from the description of the setoff as “property of the
estate.” It also renders questionable the “notwithstanding”
clause, which would be unnecessary if the fact of a capped offset
dissociates the debtor’s claim from impinging on sovereign
immunity.
Finally, while there appear to be no decisions
interpreting § 106(c) as a freestanding waiver of substantive
15
sovereign immunity, that proposition has been rejected by the Tenth
Circuit. See Franklin Sav. Corp. v. FDIC, 385 F.3d 1279 (10th Cir.
2004). There, the plaintiff attempted to circumvent its inability
to state a timely claim under the FTCA by relying on § 106. The
court rejected the plaintiff’s contention that “Bankruptcy Code
§ 106 constitutes a complete waiver of sovereign immunity separate
and apart from the FTCA’s waiver of immunity, and that this waiver
permits tort claims against the United States which would otherwise
not be permitted under the discretionary function exception of FTCA
§ 2680(a).”11 Id. at 1285. Acknowledging that the FTCA is the
exclusive remedy for tort claims against the United States, the
court held that “Bankruptcy Code § 106 does not provide a substan-
tive or independent basis for asserting a claim against the
government.” Id. at 1286 (quoting § 106(a)(5)). We see no reason
to deviate from the decision and reasoning of Franklin.
III. Conclusion
The foregoing holistic interpretation of § 106 means that
Supreme Beef has no claim for offset against the federal government
unless nonbankruptcy law gave it a claim that was “property of the
estate” as of the date of bankruptcy. Any such claim, however, was
coterminous with, and doomed under, the FTCA. The construction of
11
Franklin distinguished the decisions in Anderson v. FDIC, 918 F.2d
1139 (4th Cir. 1990), and Ashbrook v. Block, 917 F.2d 918 (6th Cir. 1990), which
held that FTCA’s procedural exhaustion requirement does not apply in a § 106
setting. Franklin’s distinction between disallowing presentment of a claim in
the first instance and disallowing an untimely filed claim sufficiently treats
this intercircuit discrepancy. Franklin, 385 F.3d at 1290-91.
16
§ 106(c) that Supreme Beef advocates would allow it to assert a
prebankruptcy claim against USDA that it could not assert outside
of bankruptcy. This result flies against the fundamental principle
that bankruptcy law is intended to divide up a debtor’s assets
according to the property rights prescribed by applicable
nonbankruptcy law. Butner, supra, 440 U.S. at 54-55, 99 S. Ct. at
917-18.
For the foregoing reasons, the judgment of the district
court is AFFIRMED.
17
PATRICK E. HIGGINBOTHAM, Circuit Judge, concurring:
This is not an easy case, and I offer no words to make it so.
Rather, in my view, the best footing for resolution lies with its
clouding uncertainty — as I will explain. At its heart the dispute
is whether the FTCA selectively incorporates state tort law,
extinguishing the unincorporated husk, or whether the FTCA merely
waives sovereign immunity, leaving a remedy under certain
conditions. To my eye, resolving that question largely decides the
case. This is true because any claim brought under 106(c) must
have been “property of the estate”; that is, the claim must have
existed pre-petition. There is the traditional view, sovereign
immunity destroys the remedy, not the cause of action.1 There is
the response that the revival of previously barred state tort
claims would create “property of the estate” that never existed
outside of bankruptcy.
While this response arguably is question begging, it is not
demonstrably wrong. Indeed, its main hurdle is the text of section
106(c) itself, which provides for an offset against the government
“notwithstanding any assertion of sovereign immunity.” The
argument must explain what (other than a clear waiver of immunity)
these words could possibly mean. The proffered solution is more
clever than grounded and mirrors our approach in Meyers ex rel.
1
See, e.g., Pennhurst, 465 U.S. at 112 (noting that the “doctrine of
sovereign immunity and the requirement that a plaintiff state a cause of action”
should not be “confused.”).
Benzing v. Texas, which held that the State of Texas waived only
its immunity from suit, not its immunity from liability, when it
removed a case from state to federal court.2 Likewise, the
argument continues, the clear waiver expressed in section 106(c) is
a waiver only of “forum immunity,” not of substantive immunity.
This solution has conceptual difficulties. As Meyers ex rel.
Benzing recognized, other circuits have held that “the federal
government's sovereign immunity, unlike that of the states, is a
defense to liability but not an immunity from suit.”3 The two
Constitutional Clauses in which the argument locates federal
sovereign immunity, the Appropriations Clause and the Property
Clause, support only immunity from liability.
Another, perhaps the best possible source of the federal
government’s immunity from suit in its own courts is Article III’s
grant to Congress of the power to control our jurisdiction. Early
references to federal sovereign immunity agree with this reading,
locating immunity in the silence of the Judiciary Act, not the text
of the Constitution.4
2
410 F.3d 236 (5th Cir. 2005).
3
Only the Ninth Circuit has squarely held this. The Seventh Circuit’s
holding is more nuanced than Meyers suggests. In certain sue and be sued cases,
the Supreme Court has suggested that federal immunity is an immunity from suit.
See, e.g., F.D.I.C. v. Meyer, 510 U.S. 471, 483 (1994).
4
Cohens v. Virginia, 19 U.S. (6 Wheat.) 264, 411-12 (1821) (“The
universally received opinion is, that no suit can be commenced or prosecuted
against the United States; that the judiciary act does not authorize such
suits.”).
19
Whatever the answer to this contested question, neither the
Supreme Court nor the Bankruptcy Code “clearly distinguishes
between [federal] sovereign immunity from suit and immunity from
liability.” Nor does Collier on Bankruptcy support this
proposition, as the opinion suggests.5 So if we are to rest
decision on this useful conceptual dichotomy, we should name its
source.
Even assuming away this conceptual problem and accepting two-
part immunity as law, we are yet at sea. If Congress merely wanted
to provide jurisdiction over FTCA claims to the Bankruptcy courts
(waive forum immunity), it chose a most subtle means to make that
simple purpose manifest. All other provisions waiving only forum
immunity clearly sound in venue and jurisdiction.6 And the reality
that if Congress intended this result, it likely would have amended
28 U.S.C. 1334 (the bankruptcy jurisdictional statute), not the
substantive provisions of 11 U.S.C. 106, is troubling. Add to the
mix another reality: legislative history is no friend to the
argument that section 106 anticipates only that the same result
5
If anything, Colliers supports the dissent, noting in section
106.06[3], “to the extent that judgment is entered under 106(b), the limitations
on punitive damages of 106(a) do not apply.” This suggests that punitive damages
might be available under 106(b), a suggestion which rejects the incorporation of
the FTCA into 106(b) and (c).
6
See, e.g., 28 U.S.C. § 1346 (“the district courts . . . shall have
exclusive jurisdiction of civil actions on claims against the United States . .
. .”); 28 U.S.C.A. § 1605(a) (“A foreign state shall not be immune from the
jurisdiction of courts of the United States or of the States.”).
20
prevail within Bankruptcy as would have prevailed outside of
Bankruptcy. The Senate Report notes:
Section 106 provides for a limited waiver of
sovereign immunity in Bankruptcy cases. . . . The policy
followed here is designed to achieve approximately the
same result that would prevail outside of bankruptcy. .
. . There is, however, a limited change from the result
that would prevail in the absence of bankruptcy; the
change is two-fold and is within Congress’ power vis-a-
vis both the federal government and the states. First,
the 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 . . . . Second, the estate may offset against
the allowed claim of a governmental unit, up to the
amount of the governmental unit’s claim, any claim that
the debtor, and thus the estate, has against the
governmental unit.
This Senate report suggests that Bankruptcy does indeed provide a
cause of action for recoupment or offset that would not have been
otherwise available.
So it is that the dissent’s argument that the waiver in
section 106 is unequivocal has purchase, but only until that waiver
21
is viewed within the statutory matrix. For although, in the
interest of fairness, section 106 plainly exposes the government to
suit when it files a claim in Bankruptcy, it is another thing to
say that section 106 upsets the FTCA’s detailed statutory
provisions which expressly carve out a withholding of sovereignty.
It would be surprising if Congress intended to silently outflank
such an important remedial statute, exposing government officials
to suit for their every exercise of discretion. Immunity for the
exercise of discretion has been viewed as essential to the
administration of government policy: a view that sustains the
judicially crafted federal common law of immunity for its employees
— from qualified to absolute.
Compare this impression of the statutory matrix to the Court’s
evolving section 1983 doctrine. In Sea Clammers, the Court held
that the “comprehensive enforcement mechanisms” found in relevant
environmental statutes implied a Congressional intent to preclude
a remedy under the more general provisions of section 1983.7 Such
might be the case here. Congress might have intended that the
waiver in section 106 apply only generically, to claims not covered
by some other and relatively explicit statutory scheme. Or, as the
7
Middlesex County Sewerage Authority v. National Sea Clammers
Association, 453 U.S. 1, 20-21 (1981).
22
majority urges, Congress might have intended that the waiver
provide only a forum.8 Nor is that the end of deep water.
There is force in the argument that,9 because all offsets are
capped at zero recovery for the government, immunity from liability
does not attach. No affirmative judgment against the public fisc
can issue under section 106(c). It’s true, of course, that
practically speaking a penny saved by the debtor is a penny earned.
But if practical effect were the standard, then injunctions would
also implicate the public fisc.
But this zero-recovery argument ultimately fails. It does not
apply to section 106(b), and would create an odd statutory scheme
under which a defendant could bring any state tort claim as an
offset under section 106(c), but could bring only FTCA actions in
recoupment under 106(b). That scheme would sorely tax the text of
106(b) and (c), and, as I have already pointed out, frustrates the
larger congressional scheme.
This said, all the writings collectively make plain that
ambiguity remains in the waiver of immunity. A Congressional
waiver of immunity must be unequivocal.10 By the clear-statement
rule, resort to legislative history, which we turn to with textual
8
See Chrome Plate, Inc. v. District Director of Internal Revenue, 442
F. Supp. 1023 (a pre-waiver case that forced a bankruptcy trustee to bring his
valid Tucker Act counterclaim in the Court of Claims).
9
Recall that Congress has waived sovereign immunity from actions in
federal courts (not state courts) seeking relief other that money damages. 5
U.S.C. § 702.
10
Lane v. Pena, 518 U.S. 187 (1996).
23
ambiguity, is foreclosed, even if it offered answers, which it does
not. And it is the clear statement rule that closes this case.
While the argument of the dissent is strong, the clear statement
rule demands that it do more. The majority, concurring, and
dissenting opinions search for definitive readings of the statutory
matrix and in the effort offer creative solutions that, while not
fully successful, expose ambiguity. Other courts, in their search
for concinnity, have done the same.11 And ambiguity is resolved in
favor of the sovereign. Either way, and with all respect, the
writings overstate their case, and move with more certainty than is
warranted. Rather than creatively stretching for non-existent
certainty, I would accept the uncertainty, apply the clear
statement rule, and reach the same conclusion as the majority. To
my eyes, my colleagues move beyond interstitial interpretation of
this statutory array to the making of policy choices that ought be
left to Congress.
11
See, e.g., Ashbrook v. Block, 917 F.2d 918, 924 (6th Cir. 1990)
(holding that section 106 repealed by implication only the FTCA's exhaustion
requirement); In re TPI Intern. Airways, Inc., 141 B.R. 512, 518
(Bkrtcy.S.D.Ga.,1992) (holding that section 106 repeals all FTCA protections
except for the discretionary function exception); Anderson v. Federal Deposit
Ins. Corp., 918 F.2d 1139, 1144 (4th Cir. 1990) (concluding that section 106
repealed all FTCA protections).
24
DENNIS, Circuit Judge, concurring:
I join the majority opinion and write separately only
to assign additional reasons for concluding that the
state-law tort claims that Supreme Beef attempts to bring
in this case are not “property of the estate” that can be
asserted as a setoff under section 106(c) of the
Bankruptcy Code. In my view, the resolution of this
question, which turns on the proper characterization of
the Federal Tort Claims Act (the “FTCA”), is critical to
the result in this case. Because the FTCA is something
more than a mere limited waiver of the federal
government’s sovereign immunity, I agree with the
majority that the waiver of sovereign immunity contained
in section 106(c) does not permit a debtor to assert in
bankruptcy state-law tort claims that would otherwise be
barred by the “substantive” exceptions to the FTCA. See
28 U.S.C. § 2680.
Liability may be imposed upon the United States only
if two requirements are met: (1) there must be a waiver
of sovereign immunity; and (2) there must be a source of
25
substantive law that provides a claim for relief. See
FDIC v. Meyer, 510 U.S. 471, 483-84 (1994). The FTCA
fulfills both of those requirements, as it waives the
federal government’s immunity from suit and provides that
the United States shall be liable for the torts of its
employees under certain circumstances. See 28 U.S.C. §§
1346(b)(1), 2674; Richards v. United States, 369 U.S. 1,
6 (1962) (“The Tort Claims Act was designed primarily to
remove the sovereign immunity of the United States from
suits in tort and, with certain specific exceptions, to
render the Government liable in tort as a private
individual would be under like circumstances.”). For the
most part, the FTCA pegs the scope of governmental tort
liability to the content of applicable state law, but
Congress undoubtedly possesses the authority to displace
state law and place federal limits and conditions on the
federal government’s tort liability, see Richards, 369
U.S. at 7, 14, and it has exercised that authority at
various places in the FTCA. For example, the FTCA
establishes a federal statute of limitations that applies
irrespective of the relevant state limitations period, see
26
28 U.S.C. § 2401(b); it sets limitations on the remedies
available against the United States, see id. § 2674; it
provides that it is the exclusive remedy for tort recovery
against the United States, see id. § 2679(b)(1); and, most
importantly for this case, it categorically excludes
liability for many types of claims, including claims based
on a discretionary governmental function, claims arising
in a foreign country, and claims “arising out of assault,
battery, false imprisonment, false arrest, malicious
prosecution, abuse of process, libel, slander,
misrepresentation, deceit, or interference with contract
rights.” Id. § 2680. Moreover, in developing the
jurisprudence under the FTCA, the federal courts have used
a mixture of federal, state and hybrid concepts. See
Devlin v. United States, 352 F.3d 525, 532-34 (2d Cir.
2003) (discussing “hybrid,” “purely federal” and “purely
state-law-derived” approaches to defining different FTCA
statutory terms).
While the rules of decision in suits brought under the
FTCA are derived principally from the law of the states,
a substantial number of purely federal and hybrid precepts
27
are also integral to the body of law known as the FTCA.
Consequently, the FTCA claim for relief, which is subject
to all of the above-described federal principles,
limitations and more, is not exclusively a state-law claim
in any realistic sense. Similarly, where a party is
prevented from recovering from the United States by, for
example, the FTCA’s discretionary function exception, he
does not possess a state-law cause of action that is
simply barred by the United States’ sovereign immunity;
rather, his claim is barred, or effectively preempted, by
a substantive limitation imposed by federal law. Thus,
although section 106(c) of the Bankruptcy Code contains a
waiver of sovereign immunity, that section cannot be read
to dispense with the substantive principles and
limitations that the FTCA imposes on the liability of the
United States. To hold otherwise would require us to
construe section 106(c) as not only waiving sovereign
immunity, but also altering the essential nature of tort
claims against the United States and significantly
expanding the substantive liability of the federal
government for tort claims asserted in a bankruptcy
28
proceeding. Congress presumably has the authority to
enact such sweeping substantive changes, but the current
section 106, which speaks only in terms of sovereign
immunity and expressly disclaims the creation of any
“substantive claim for relief or cause of action,” 11
U.S.C. § 106(a)(5), does not do so. Accordingly, I join
the majority’s opinion.
29
PRISCILLA R. OWEN, Circuit Judge, concurring:
I join the majority’s judgment. In my view, section 106(c)1
does not unambiguously abrogate the federal government’s
sovereign immunity retained by the Federal Tort Claims Act.2
Section 106(c) provides: “Notwithstanding any assertion of
sovereign immunity by a governmental unit, there shall be offset
against a claim or interest of a governmental unit any claim
against such governmental unit that is property of the estate.”3
The “[n]otwithstanding” phrase can plausibly be read as merely
providing a forum in bankruptcy courts for claims against the
federal government that would have been cognizable in another
venue. This construction would not override the express
reservation of sovereign immunity in the Federal Tort Claims Act
for a lengthy list of particular claims.4 Nor would it subject
the federal government to liability under state common law or
myriad state and federal statutes as a “person” or entity without
sovereign immunity. But a plausible argument can also be
mounted, as the dissent has done, that the phrase
1
11 U.S.C. § 106(c) (2004).
2
28 U.S.C. § 2680 (1994 & Supp. 2006).
3
11 U.S.C. § 106(c) (2004).
4
28 U.S.C. § 2680 (1994 & Supp. 2006).
30
“[n]otwithstanding any assertion of sovereign immunity” means
that all sovereign immunity is swept aside in its entirety, and
therefore all state and federal causes of action that would be
viable against a private entity are viable against the federal
government.
The Supreme Court has repeatedly held that “[w]aivers of the
Government’s sovereign immunity, to be effective, must be
unequivocally expressed,”5 and “the Government’s consent to be
sued must be construed strictly in favor of the sovereign.”6 The
Supreme Court has held that sections 106(b) and 106(c), when they
were, respectively, sections 106(a) and 106(b),7 “meet this
‘unequivocal expression’ requirement with respect to monetary
liability.”8 The Court said in this regard,
Addressing “claim[s],” which the Code defines as
“right[s] to payment,” § 101(4)(A), they plainly waive
sovereign immunity with regard to monetary relief in
two settings: compulsory counterclaims to governmental
claims, § 106(a); and permissive counterclaims to
governmental claims capped by a setoff limitation,
§ 106(b). Next to these models of clarity stands
5
United States v. Nordic Village, Inc., 503 U.S. 30, 33 (1992)
(quoting Irwin v. Dep’t of Veterans Affairs, 498 U.S. 89, 95 (1990) (quoting
United States v. Mitchell, 445 U.S. 535, 538 (1980), and United States v. King,
395 U.S. 1, 4 (1969))) (internal quotation marks omitted).
6
Id. at 34 (quoting Ruckelshaus v. Sierra Club, 463 U.S. 680, 685
(1983)) (internal quotation marks and citation omitted).
7
11 U.S.C. § 106(a), (b) (1978) (amended 1994).
8
Nordic Village, 503 U.S. at 34.
31
[former] subsection (c).9 Though it, too, waives
sovereign immunity, it fails to establish unambiguously
that the waiver extends to monetary claims. It is
susceptible of at least two interpretations that do not
authorize monetary relief.10
I submit that while former sections 106(a) and 106(b), now
sections 106(b) and 106(c), clearly waive sovereign immunity with
respect to monetary liability, they do not unequivocally abrogate
sovereign immunity to the extent that they breathe life into
causes of action against the federal government that would not
otherwise exist. The Supreme Court was not presented with this
question in Nordic Village, and its statement that the language
in sections 106(b) and 106(c) are an “‘unequivocal expression’
. . . with respect to monetary liability” cannot be stretched to
encompass the issue before us today.
Even when Congress has used waiver language that “should be
given a liberal—that is to say, expansive—construction,” such as
9
At the time of the Nordic decision, 11 U.S.C. § 106(c) (1978)
provided:
(c) Except as provided in subsections (a) and (b) of
this section and notwithstanding any assertion of
sovereign immunity–
(1) a provision of this title that contains
‘creditor’, ‘entity’, or ‘governmental
unit’ applies to governmental units; and
(2) a determination by the court of an
issue arising under such a provision
binds governmental units.
10
Nordic Village, 503 U.S. at 34.
32
a sue-and-be-sued provision,11 “the interpretation of the waiver
statute was just the initial step in a two-part inquiry.”12 In
United States Postal Service v. Flamingo Industries (USA) Ltd.,13
the Supreme Court discussed the analysis employed in an earlier
case, FDIC v. Meyer:14 “[E]ven though sovereign immunity had been
waived, there was the further, separate question whether the
agency was subject to the substantive liability recognized in
Bivens.”15 In Flamingo Industries, the question was whether the
Postal Service could be liable under the Sherman Act based on the
sue-and-be-sued provision in the Postal Reorganization Act of
1970.16 The Supreme Court explained, “We ask first whether there
is a waiver of sovereign immunity for actions against the Postal
Service. If there is, we ask the second question, which is
whether the substantive prohibitions of the Sherman Act apply to
an independent establishment of the Executive Branch of the
11
United States Postal Serv. v. Flamingo Indus. (USA) Ltd., 540 U.S.
736, 741 (2004).
12
Id. at 743.
13
Id.
14
510 U.S. 471 (1994).
15
Flamingo Indus., 540 U.S. at 743 (referring to a so-called “Bivens
action” based on Bivens v. Six Unknown Agents of Fed. Bureau of Narcotics, 403
U.S. 388 (1971)).
16
Id. at 743-44 (construing 39 U.S.C. § 401 (1980)).
33
United States.”17 The Supreme Court criticized the court of
appeals because the court of appeals “found that the Postal
Service’s immunity from suit [was] waived to the extent provided
by the statutory sue-and-be-sued clause” and, in doing so,
“conflated the two steps[, which] resulted in an erroneous
conclusion.”18 The Supreme Court explained that the substantive
law on which a claim is based must be consulted to determine if
it was intended to reach the federal entity:
While Congress waived the immunity of the Postal
Service, Congress did not strip it of its governmental
status. The distinction is important. An absence of
immunity does not result in liability if the
substantive law in question is not intended to reach
the federal entity. So we proceed to Meyer’s second
step to determine if the substantive antitrust
liability defined by the statute extends to the Postal
Service. Under Meyer’s second step, we must look to
the statute.19
The “[n]otwithstanding any assertion of sovereign immunity
by a governmental unit” phrase in section 106(c) does not clearly
strip the federal government of its governmental status as
distinguished from immunity. It would seem that Congress would
more plainly state its intention to override the Federal Tort
Claims Act’s retention of sovereign immunity from the claims
17
Id. at 743.
18
Id. at 743-44.
19
Id. at 744.
34
enumerated in 28 U.S.C. § 2680, including those based on the
exercise or performance of a discretionary function or duty, or
arising out of interference with contract rights, if that were
Congress’ intent. The “[n]otwithstanding” phrase is an
improbable vehicle for such a sea change in the government’s
liability. For example, the Federal Tort Claims Act expressly
retains sovereign immunity from liability for punitive damages.20
If Congress intended to strip the federal government of its
governmental status in bankruptcy court, then punitive damages
would be available under sections 106(b) and 106(c) of the
Bankruptcy Code since section 106(a) expressly provides that
punitive damages may not be awarded,21 but no similar provision is
included in either section 106(b) or 106(c).
We cannot resort to legislative history to discern the intent
of Congress when there is ambiguity regarding waiver of sovereign
immunity. As the Supreme Court has said, “legislative history
has no bearing on the ambiguity point. . . . [T]he ‘unequivocal
20
28 U.S.C. § 2674 (1994) (“The United States shall be liable,
respecting the provisions of this title relating to tort claims, in the same
manner and to the same extent as a private individual under like circumstances,
but shall not be liable for interest prior to judgment or for punitive
damages.”).
21
11 U.S.C. § 106(a)(3) (2004) (“The court may issue against a
governmental unit an order, process, or judgment under such [enumerated sections
of the Bankruptcy Code] or the Federal Rules of Bankruptcy Procedure, including
an order or judgment awarding a money recovery, but not including an award of
punitive damages.”).
35
expression’ of elimination of sovereign immunity that we insist
upon is an expression in the statutory text. If clarity does not
exist there, it cannot be supplied by a committee report.”22
Focusing on whether a claim against the government “is
property of the estate” is not helpful in determining whether
section 106(c) permits assertion of the claims at issue in the
case before us.23 Even assuming that a pre-petition claim that is
barred by sovereign immunity is not property of the debtor’s
estate, if section 106(c) abrogates sovereign immunity, sovereign
immunity is not a bar to the pre-petition claim; therefore, the
claim is property of the estate. Whether Supreme Beef Processors
prevails ultimately turns on the meaning of the
“[n]otwithstanding” phrase in section 106(c). Because that
phrase is ambiguous, it does not waive the federal government’s
immunity from the claims enumerated in 28 U.S.C. § 2680.
For these reasons, I would affirm the district court’s
judgment.
22
United States v. Nordic Village, Inc., 503 U.S. 30, 37 (1992).
23
11 U.S.C. § 106(c) (2004).
36
EDITH BROWN CLEMENT, Circuit Judge, joined by BENAVIDES, STEWART, and
PRADO, Circuit Judges, concurring in part and dissenting in part:
I agree with the majority opinion’s dismissal of Supreme Beef’s § 106(b) claims.
However, to reach its holding that Supreme Beef cannot use § 106(c) to offset the USDA’s
claim for overtime inspection services, the majority opinion ignores the plain language of §
106(c), disregards Congress’s intent to allow offset against governmental claims, and rewrites
the definition of property of the estate. Therefore, I respectfully dissent.
Section 106(c) of the bankruptcy code provides that, “[n]otwithstanding any assertion
of sovereign immunity by a governmental unit, there shall be offset against a claim or interest
of a governmental unit any claim against such governmental unit that is property of the
estate.” A straightforward reading of § 106(c)’s plain language shows that the only limitation
to offset is that the bankrupt’s claim be property of the estate. See 2 COLLIER ON
BANKRUPTCY § 106.02[4] (15th ed. 2006). Because § 106(c) contains an explicit waiver of
sovereign immunity and because Supreme Beef’s offset claim is property of the estate,
Supreme Beef has the right to pursue its offset claim.
A. 11 U.S.C. § 106(c) contains an express waiver of sovereign immunity.24
24
The majority opinion introduces the issue of whether § 106(c)
contains an express waiver of sovereign immunity, see Maj. Op. at 7, and later
holds that § 106(c) does not effect “a waiver of substantive sovereign immunity.”
Maj. Op. at 13, 15. Presumably, “substantive sovereign immunity”—a term new to
Fifth Circuit jurisprudence—refers to the sovereign immunity bar contained in the
FTCA, rather than to the sovereign immunity waiver contained in § 106(c). It
appears that the majority opinion never specifically addresses whether § 106(c)
contains an express waiver of sovereign immunity, which is the first step
required in a waiver-of-sovereign-immunity analysis. See United States v. Nordic
37
For § 106(c) to allow Supreme Beef to offset the USDA’s $32,753 claim for overtime
inspection services, there must first be an explicit, unequivocal waiver of sovereign immunity.
United States v. Nordic Village, 503 U.S. 30, 33–34 (1992) (“Waivers of the Government’s
sovereign immunity, to be effective, must be unequivocally expressed.”) (internal quotation
omitted). Section 106(c) allows a debtor to offset a governmental claim “[n]otwithstanding
any assertion of sovereign immunity.” Congress’s waiver of sovereign immunity could not
be more explicit. The Supreme Court has stated, when discussing the predecessors to §§
106(b) and (c),25 that “they plainly waive sovereign immunity with regard to monetary relief
in two settings . . . ,” one of which involves claims “capped by a setoff limitation.” Nordic
Village, 503 U.S. at 34 (Scalia, J.). Construing § 106(c) as anything other than an explicit
waiver of sovereign immunity ignores the statute’s plain language and Congress’s intent
manifested thereby. See Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253–54 (1992) (“We
have stated time and again that courts must presume that a legislature says in a statute what
it means and means in a statute what it says there.”) (citing United States v. Ron Pair Enters.,
Inc., 489 U.S. 235, 241–42 (1989)).
Indeed, the waiver language in § 106(c) was added by Congress in 1994—along with
other § 106 revisions—to clarify that sovereign immunity was expressly waived. See H.R.
REP. NO. 103–835, at 42, reprinted in 1994 U.S.C.C.A.N. 3340, 3350–51. See also Elizabeth
Village, 503 U.S. 30, 33 (1992). See also FDIC v. Meyer, 510 U.S. 471, 484
(1994).
25
Before Congress amended § 106 in 1994, what is now §§ 106(b) and (c)
were codified at §§ 106(a) and (b).
38
Gibson, Congressional Response to Hoffman and Nordic Village: Amended Section 106 and
Sovereign Immunity, 69 AM. BANKR. L.J. 311, 337 (1995) (“The insertion of the phrase
‘[n]otwithstanding any assertion of sovereign immunity’ serves merely to make explicit the
congressional intent to eliminate sovereign immunity as a defense to setoffs falling within the
terms of the provision.”) (alteration in original). The waiver language in § 106(c) is nearly
identical to the waiver language in § 106(a), which Congress unmistakably modified to
overturn the effects of the Hoffman and Nordic Village decisions. See H.R. REP. NO. 103–835,
at 42, reprinted in 1994 U.S.C.C.A.N. 3340, 3350–51; Cent. Va. Comm. College v. Katz, 546
U.S. –, 126 S. Ct. 990, 995 n. 2 (2006) (noting that Congress modified what is now 11 U.S.C.
§ 106(a) to clarify that it waives the federal government’s sovereign immunity). Therefore,
any implication that § 106(c) does not explicitly waive sovereign immunity26 not only creates
a result incompatible with Congress’s intention, but also creates inconsistency between §§
106(a) and (c), with nearly identical language leading to waiver in (a) but not in (c).
B. Supreme Beef’s claim is property of the estate.
Since § 106(c) contains an express waiver of sovereign immunity, this court must turn
to the only remaining offset requirement in § 106(c). As the majority correctly notes, for
Supreme Beef to offset the USDA’s claim, its claim must be property of the estate as required
in § 106(c). See Maj. Op. at 11–12. Property of the estate is defined as “all legal or equitable
26
The majority opinion implies as much when it states that “[t]he
[‘notwithstanding any assertion of sovereign immunity’] clause is designed to
recognize the different procedural postures in which §§ 106(b) and (c) claims
arise.” See Maj. Op. at 13.
39
interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541. In
analyzing whether Supreme Beef’s claim against the USDA meets this definition, this court’s
recent decision in Burgess v. Sikes (In re Burgess), 438 F.3d 493 (5th Cir. 2006) (en banc),
is instructive.27 Burgess was a farmer who suffered a crop loss prior to filing for bankruptcy.
Id. at 495. After Burgess filed his bankruptcy petition and after he was discharged from
bankruptcy, Congress enacted legislation that entitled him to a relief payment. Id. The trustee
argued that the payment was property of the estate, while Burgess argued for sole possession.
See id.
In resolving the dispute, the court first rejected the trustee’s argument that crop loss
together with potential relief legislation constituted property of the estate. Id. at 503. It held
that, because Burgess had “only a mere hope that crop-disaster-relief legislation would be
enacted” when he filed his bankruptcy petition, Burgess “had no interest, contingent or
otherwise, in the disaster-relief payment when he filed” that petition. Id. The court next
considered the trustee’s argument that the crop loss itself was property of the estate and
concluded that Burgess had no legal prepetition claim because “[h]is crops were damaged by
27
The majority opinion states that Burgess is inapposite because,
unlike in Burgess, the question here is “whether Supreme Beef has any claim apart
from the FTCA.” Maj. Op. at 12–13. However, since § 106(c) contains an express
waiver of sovereign immunity, resolution of Supreme Beef’s appeal necessarily
turns on whether its claim is property of the estate, which is the sole
requirement to setoff in § 106(c). It is proper to consider this circuit’s
latest treatment of the property-of-the-estate definition. When discussing
whether Supreme Beef’s claim is property of the estate, the majority opinion does
little more than quote the definition of property of the estate from the
bankruptcy code and state that offset claims “are not freestanding and divorced
from the substantive limitations that would be imposed outside of bankruptcy.”
See Maj. Op. at 11–12.
40
nature” rather than “at the hands of an individual or entity giving rise to a legal claim for
reimbursement.” Id. at 505–06.
From the Burgess court’s analysis emerges a two-step property-of-the-estate inquiry.
First, there must be a prepetition loss. Second, the claimant must have a prepetition right to
recover that loss.28 Supreme Beef’s claim satisfies both steps. The loss here is the injury
caused by the USDA inspectors, and Supreme Beef has a right to recover the loss pursuant
to substantive Texas state law, assuming it proves the necessary facts after any remand. See,
e.g., Burch v. Coca-Cola Co., 119 F.3d 305, 323–24 (5th Cir. 1997) (analyzing defamation
claims under Texas law). Since Supreme Beef’s claim satisfies these two steps, Supreme
Beef’s claim is property of the estate, and Supreme Beef has met the lone requirement to
pursue an offset claim under § 106(c).
The majority opinion focuses on the fact that the FTCA’s discretionary function
exception, along with other FTCA provisions, would stand as a sovereign immunity bar to
Supreme Beef’s recovery outside of bankruptcy. In the majority opinion’s view, because
sovereign immunity would bar Supreme Beef’s claim if brought through the FTCA outside
of bankruptcy, its claim is not property of the estate.29 This analysis improperly fails to
28
The Eleventh Circuit has recently followed Burgess in resolving a
crop-loss property-of-the-estate dispute. See Bracewell v. Kelley (In re
Bracewell), 454 F.3d 1234, 1237–40 (11th Cir. 2006).
29
To the extent that the majority’s position is drawn from §
106(a)(5)’s general statement regarding creation of substantive rights, that
section must be read harmoniously with the more specific § 106(c). See Gozlon-
Peretz v. United States, 498 U.S. 395, 407 (1991) (“A specific provision controls
over one of more general application.”). See also Carmona v. Andrews, 357 F.3d
535, 538 n.4 (5th Cir. 2004) (same). So long as Supreme Beef meets the lone
requirement specifically listed in § 106(c), it is entitled to offset the USDA’s
41
distinguish between a right and a remedy and construes property of the estate in a manner that
is inconsistent with Fifth Circuit and Supreme Court precedent.
The FTCA provides both a limited waiver of sovereign immunity and federal court
jurisdiction for tort claims brought by individuals against the United States. See 28 U.S.C. §§
1346(b), 2674. FTCA’s focus is on the remedy; what the FTCA does not do is provide the
substantive law from which the right to recover arises. The state law does that. Both the text
of the FTCA and the Supreme Court’s analysis of that text reveal that the FTCA is merely a
procedural vehicle through which state law claims are brought. See 28 U.S.C. § 1346(b)(1)
(noting that the federal government can be sued in federal court “for injury or loss of property
. . . under circumstances where the United States, if a private person, would be liable to the
claimant in accordance with the law of the place where the act or omission occurred”)
(internal quotation omitted and emphasis added). See also Meyer, 510 U.S. at 477–78 (noting
that the Supreme Court “ha[s] consistently held . . . [that the reference to] ‘law of the place’
means law of the State—the source of substantive liability under the FTCA”) (emphasis
added); United States v. Brown, 348 U.S. 110, 112 (1954) (“[T]he effect of the Tort Claims
Act is to waive immunity from recognized causes of action.”) (internal quotation omitted and
emphasis added). Supreme Beef’s claims against the USDA include claims for, among other
things, slander and libel. These causes of action are creatures of Texas state law, which
provides a right for Supreme Beef to recover. This right to recover from the USDA, under
claim.
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Burgess, is property of the estate irrespective of whether the FTCA provides a procedural
remedy for that right.
The majority’s holding that the mere presence of a sovereign immunity bar in the
FTCA prevents the existence of property of the estate cannot be reconciled with this court’s
en banc opinion in Burgess. As stated there, “sovereign immunity is not a bar to the existence
of a prepetition cause of action for bankruptcy purposes.” Burgess, 438 F.3d at 504 (emphasis
added). Put otherwise, the presence of a sovereign immunity bar, here the FTCA’s
discretionary function and other exceptions, does not mean that no right to recover exists. The
Burgess court drew this distinction citing to Supreme Court precedent. See 438 F.3d at
503–05 (citing Williams v. Heard, 140 U.S. 529 (1891), and Milnor v. Metz, 41 U.S. 221
(1842), and emphasizing that both decisions distinguish between the existence of a right and
the ability to enforce that right)). This distinction should not be conflated.30
The majority’s holding effectively requires two express sovereign immunity waivers
for a bankrupt to offset a governmental claim: one express waiver in the bankruptcy code and
30
Because sovereign immunity, under Burgess, is inapposite to the
property-of-the-estate inquiry and because § 106(c) contains an unequivocal
waiver of sovereign immunity, a recent Tenth Circuit panel’s opinion cited by the
majority opinion is unpersuasive. See Maj. Op. at 15 (citing Franklin Savings
Corp. v. United States (In re Franklin Savings Corp.), 385 F.3d 1279, 1287–89
(10th Cir. 2004) (holding that § 106 does not operate to waive the procedural
requirements of the FTCA)). Adopting the Tenth Circuit approach also would create
incoherence with Fifth Circuit precedent, specifically W. Tex. Mktg. Corp. v.
Kellogg (In re W. Tex. Mktg. Corp.), 54 F.3d 1194 (5th Cir. 1995). In Kellogg,
a panel of this court held that the waiver of sovereign immunity in § 106(a)
operates to waive sovereign immunity with respect to administrative filing
requirements in the Internal Revenue Code. See id. at 1198–99 n.10. Endorsing the
Franklin analysis would create confusion as to which prerequisites in non-
bankruptcy law are waived by an explicit sovereign immunity waiver. The better
approach is to look to the plain language of the bankruptcy code’s sovereign
immunity waiver for its limitations.
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one in the FTCA. The Supreme Court requires one. See Nordic Village, 503 U.S. at 33–34.
It is incongruous to add an additional prerequisite considering that Congress did not include
this requirement in § 106(c) (or in the definition of property of the estate) and considering that
sovereign immunity is less of a concern—not more, as the majority’s holding implies—in
bankruptcy situations. Cf. Katz, 126 S. Ct. at 995.
Moreover, where the claim against the government is only for offset, as Supreme
Beef’s is, sovereign immunity concerns are even further diminished because Supreme Beef
cannot affirmatively recover from government coffers. Congress implicitly recognized this
lessened concern; § 106(c) contains fewer limitations on the waiver than do §§ 106(a) and (b).
In § 106(a), Congress limited the sovereign immunity waiver to situations covered by
enumerated sections of the bankruptcy code and in § 106(b) limited waiver to situations in
which the claim against the government is property of the estate and arises out of the same
“transaction or occurrence” as the government’s claim. Section 106(c) does have its own
limitation, but it is a less restrictive one than §§ 106(a) or (b): “[T]here shall be offset . . .
[for] any claim that is property of the estate.”31 It is not unreasonable to think that Congress
provided a limitation in § 106(c) that is less restrictive than those in §§ 106(a) or (b) because
a bankrupt claiming offset cannot affirmatively recover from the government.
C. Conclusion
31
The Supreme Court has recognized the textual limitations to sovereign
immunity waivers in § 106. See Hoffman v. Conn. Dep’t of Income Maint., 492 U.S.
96, 101–02 (1989) (noting that the predecessors to §§ 106(b) and (c) “carefully
limit[]the waiver of sovereign immunity”).
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Since Congress explicitly waived sovereign immunity and Supreme Beef’s claim is
property of the estate, I would hold that Supreme Beef can pursue its claim for offset against
the USDA’s $32,753 claim for overtime inspection services. I respectfully dissent from the
majority’s holding that Supreme Beef cannot offset the government’s claim under § 106(c).
45