Graham, In re

• Citation: 981 F.2d 1135
• Decision Date: 09 December 1992
• Docket Number: No. 89-1371,89-1371
• Parties: -364, 61 USLW 2378, 93-1 USTC P 50,255, 28 Collier Bankr.Cas.2d 78, 24 Fed.R.Serv.3d 681, 23 Bankr.Ct.Dec. 1303, Bankr. L. Rep. P 75,078 In re Samuel Derek GRAHAM and Suzanne Genett Graham, Debtors. Samuel Derek GRAHAM and Suzanne Genett Graham, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

Page 1135

981 F.2d 1135

71 A.F.T.R.2d 93-364, 61 USLW 2378,

93-1 USTC P 50,255,

28 Collier Bankr.Cas.2d 78, 24 Fed.R.Serv.3d 681,

23 Bankr.Ct.Dec. 1303, Bankr. L. Rep. P 75,078

In re Samuel Derek GRAHAM and Suzanne Genett Graham, Debtors.

Samuel Derek GRAHAM and Suzanne Genett Graham, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.

No. 89-1371.

United States Court of Appeals,

Tenth Circuit.

Dec. 9, 1992.

Joel A. Rabinovitz, Attorney, Tax Div., Dept. of Justice, Washington, DC (Shirley D. Peterson, Asst. Atty. Gen., Dept. of Justice, Washington, DC; Gary R. Allen, Charles E. Brookhart, James H. Love, and David M. Moore, Attorneys, Tax Div., Dept. of Justice, Washington, DC; and Michael J. Norton, U.S. Atty., Denver, CO, of counsel, on the briefs), for defendant-appellant.

Ralph A. Cantafio of McGill Professional Law Corp., Steamboat Springs, CO, for plaintiffs-appellees.

Before SEYMOUR, BARRETT, and ANDERSON, Circuit Judges.

SEYMOUR, Circuit Judge.

In order to punish the Internal Revenue Service for the "extraordinarily inept and confusing way [it] handled" this litigation, rec., vol. III, at 8, and to compensate the debtors who were its adversaries, the Bankruptcy Court for the District of Colorado imposed two awards of attorney's fees against the government. It also granted a tax refund to the debtors. Because the judicially-created tradition of sovereign immunity protects the federal government from such awards, United States v. Nordic Village, Inc., --- U.S. ----, ---- - ----, 112 S.Ct. 1011, 1017-20, 117 L.Ed.2d 181 (1992) (Stevens, J., dissenting), we must reverse.

I.

Beginning in April 1983, Suzanne and Samuel Graham (Grahams) owned 45% of Glow Electric, Inc., and Samuel's parents owned the remaining 55%. Suzanne served as secretary-treasurer, and Samuel as vice-president. In February 1987, the Internal Revenue Service alleged that the Grahams were responsible for Glow's failure to pay taxes withheld from Glow employees, and made assessments against the Grahams totalling $46,848.43.

The United States Bankruptcy Court for the District of Colorado acquired jurisdiction over the matter when the Grahams filed for bankruptcy under Chapter 7 of the Bankruptcy Code on June 8, 1987. Soon afterwards, the Grahams filed a complaint asking the court to determine their tax liability for all of 1985 and the first two quarters of 1986.

The resulting litigation unfortunately produced a long history of procedural missteps, neglect, and mismanagement, leading to "seventeen months of confusing, relatively useless and wasted time and expenses for both Plaintiffs and Defendant." Rec., supp. vol. I, at 28. The government twice moved for relief from the automatic stay in order to adjudicate the tax liability of the Grahams and Samuel's parents. The first time, the government neglected to serve the bankruptcy trustee. The second time, it filed the motion improperly. The government then abandoned its motion to lift the stay but did not file a responsive pleading to the Grahams' initial complaint. The Grahams moved for an entry of default on April 11, 1988, and the court entered default one week later. On April 19, the government filed both a motion for leave to answer out of time and an answer. When the government then skipped the hearing on that motion, the bankruptcy court denied the motion and entered default judgment in favor of the Grahams. Following more motions by both parties, the court vacated the default judgment, and it granted $3,788.82 in attorney's fees to the Grahams. Rec., vol. I, doc. 34.

On November 3, 1988, the government filed a proof of claim against the Grahams in the amount of $86,280.18 for the last quarter of 1986. As the parties proceeded to prepare for a trial on the merits, a dispute emerged regarding the government's unwillingness to produce certain documents. On March 3, 1989, the court ordered the government to produce the administrative file relating to Glow Electric. When the case was finally called for trial on March 7, however, the government informed the court that the file in question had been destroyed sometime after April 1987. ¹ After a one-week trial, the court held that the Grahams were not responsible for the tax liability. In addition, it assessed $233.90 in attorney's fees against the United States for its failure to produce Glow's administrative file, and held that the Grahams were entitled to a $1,567.32 tax refund. ²

The government appealed to the district court both the merits of the bankruptcy court's decision and the several fee assessments. The district court affirmed, and the government now presses its arguments that the bankruptcy court lacked jurisdiction to order a refund in the absence of a refund claim filed by the Grahams, and that no waiver of sovereign immunity supported the award of fees against the government.

II. Refund Claim

The law regarding claims for tax refunds is unusually clear, and does not appear to admit any exceptions: "No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax ... until a claim for refund or credit has been duly filed with the Secretary...." 26 U.S.C. § 7422(a) (emphasis added). More specifically, the bankruptcy court may not determine

any right of the estate to a tax refund, before the earlier of--(i) 120 days after the trustee properly requests such refund from the governmental unit from which such refund is claimed; or (ii) a determination by such governmental unit of such request.

11 U.S.C. § 505(a)(2)(B). Thus, the government does not waive sovereign immunity in a suit for a tax refund until presented with an administrative claim which it has either denied or ignored. The administrative claim itself must be filed within the later of two years after the tax was paid or three years after the return was filed. 26 U.S.C. § 6511(a).

These rules are nonwaivable jurisdictional requirements. See United States v. Dalm, 494 U.S. 596, 608, 110 S.Ct. 1361, 1368, 108 L.Ed.2d 548 (1990); Goulding v. United States, 929 F.2d 329, 331-32 (7th Cir.1991); Gustin v. United States, 876 F.2d 485, 488 (5th Cir.1989). While the Grahams argue correctly that section 106 of the Bankruptcy Code provides a waiver of sovereign immunity for refund claims under some circumstances, any such general governmental waiver of the right not to be sued does not waive other jurisdictional requirements. The Grahams do not contend that they have filed the requisite administrative claim for a refund. Absent such a filing, the bankruptcy court erred in awarding them a tax refund. Simply put, no claim, no refund.

III. Attorney's Fees

As with the refund claim, sovereign immunity is the potential obstacle to an award of attorney's fees against the government. See Adamson v. Bowen, 855 F.2d 668, 670 (10th Cir.1988) ("[u]nless the United States has waived its sovereign immunity, the government is immune from actions for attorney's fees"). The bankruptcy court, the district court, and even the government lawyer for this appeal agree that the IRS's conduct fell short of reasonable expectations. In a standard bankruptcy or tax case, the court would not lack avenues to impose a monetary sanction against a party for frivolous, contemptuous, or vexatious practices. As we discuss below, however, a provision authorizing sanctions does not automatically waive sovereign immunity, and thus does not apply, without more, to fee awards against the government. The Grahams must point to some explicit statutory waiver that will support the bankruptcy court's award. See United States v. Mitchell, 463 U.S. 206, 212, 103 S.Ct. 2961, 2965, 77 L.Ed.2d 580 (1983) (federal government immune from suit unless it expressly consents).

A.

The obvious waiver is located at 26 U.S.C. § 7430, providing that a party who substantially prevails on the merits in a tax case may be entitled to attorney's fees. ³ Under any traditional definition of "prevailing party," the Grahams' award would probably be upheld. Section 7430(c)(4), however, defines the party against whom fees may be awarded as one whose litigating position was substantially unjustified. ⁴ In this circuit, the relevant "position" is "the stance taken by the United States in litigation," specifically, "the arguments relied upon by the government in litigation." United States v. Balanced Fin. Management, Inc., 769 F.2d 1440, 1450-51 & n. 12 (10th Cir.1985); United States v. 2,116 Boxes of Boned Beef, 726 F.2d 1481, 1487 (10th Cir.), cert. denied, 469 U.S. 825, 105 S.Ct. 105, 83 L.Ed.2d 49 (1984). In order to be "substantially unjustified," the litigation must have been initiated unreasonably, without a reasonable basis in law or in fact. Balanced Fin. Management, 769 F.2d at 1450-51. Under this definition, not every losing party will have been substantially unjustified in its litigating position ab initio. Indeed, the Grahams do not contend that the IRS was substantially unjustified in seeking to determine the tax liability against them. Moreover, the government attorney's failure to appear at a contempt hearing does not render the underlying litigating position unreasonable for the purpose of a section 7430 award. See id. at 1450-51. Regardless of the government's inexcusably bad conduct during this litigation, section 7430 does not support an award of attorney's fees here.

The government contends that section 7430 is the sole waiver of sovereign immunity in cases to which it applies. Relying on a statement in the legislative history to this effect, the government essentially proposes that it be shielded from any kind of reprimand for its activities in the course of otherwise justified adversary proceedings. Furthermore, the government contends that sanctions can be awarded only in cases in which it not only loses on the merits, but also had no business initiating the litigation. Whether section 7430 is or is not the sole waiver of sovereign immunity for grants of...