Cascade Roads, Inc., In re

Decision Date22 August 1994
Docket NumberNos. 93-35112,93-35377,s. 93-35112
Citation34 F.3d 756
Parties-5973, 25 Bankr.Ct.Dec. 1717 In re CASCADE ROADS, INC., Debtor. UNITED STATES of America, Plaintiff-Appellant, v. Peter H. ARKISON, Trustee, Defendant-Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

Gary D. Gray, Tax Div., U.S. Dept. of Justice, Washington, DC, for plaintiff-appellant.

Sigurd B. Borgersen, Schwabe, Williamson, Ferguson & Burdell, Seattle, WA, Peter H. Arkison, Law Offices of Peter H. Arkison, Bellingham, WA, for defendant-appellee.

Appeal from the United States District Court for the Western District of Washington.

Before: GOODWIN, D.W. NELSON, and HALL, Circuit Judges.

CYNTHIA HOLCOMB HALL, Circuit Judge:

The United States appeals the district court's decision (1) affirming a bankruptcy court order directing payment of an outstanding Claims Court judgment owed to chapter 7 debtor Cascade Roads, Inc.; (2) upholding a bankruptcy court award of sanctions against the government for willful violation of the automatic stay; and (3) granting attorneys' fees and costs to Cascade for its appeal from the bankruptcy court.

After examining the equitable nature of bankruptcy setoff rights and their interaction with nonbankruptcy statutory provisions, we conclude that the bankruptcy court did not abuse its discretion by ordering the United States to disgorge the Claims Court judgment without deducting Cascade's tax liabilities. We hold, however, that the bankruptcy and district courts relied on inapplicable statutes in sanctioning the government. Accordingly, we affirm in part, reverse in part, and remand.

I.

In 1980, Brazier Forest Products, Inc. hired Cascade Roads, Inc. to construct thirteen miles of logging road pursuant to Brazier's timber contract with the United States Forest Service. In the course of its performance, Cascade encountered a large volume of solid rock and incurred significantly greater excavation costs than anticipated. As a result, upon completion of the project Cascade filed a cost-overrun claim against the Forest Service, alleging that agency officials had misrepresented the amount of excavation work necessary under the contract.

After the Forest Service denied the overrun claim, Cascade and Brazier jointly filed a breach-of-contract action in Claims Court. 1 Shortly thereafter, both Cascade and Brazier filed petitions for reorganization under chapter 11 of the Bankruptcy Code. The bankruptcy court subsequently converted Cascade's case to a chapter 7 liquidation and confirmed Brazier's amended plan of reorganization, which provided for payment to Cascade of any proceeds received in the Claims Court litigation. 2

In 1990, the Forest Service petitioned the Claims Court for the right to deduct debts Brazier owed the United States from any judgment in the pending litigation. Cascade's trustee ("the trustee") subsequently asked the bankruptcy court to hold the Forest Service in contempt for violating the automatic stay in the Cascade bankruptcy case, and the court agreed, concluding that the United States possessed no setoff rights because (1) the government's claim against Brazier lacked mutuality with Cascade's claim (nominally prosecuted by Brazier) against the government and (2) in any event, the government's conduct in stonewalling and withholding documents in the Claims Court litigation precluded it from obtaining the benefits of an equitable bankruptcy setoff. The United States filed a notice of appeal, but subsequently dismissed it.

In mid-1991, Brazier and the Forest Service reached a settlement and the Claims Court entered a judgment against the United States for $185,000 plus interest. The Department of Justice ("DOJ") referred the judgment (which was due directly to Cascade pursuant to Brazier's plan of reorganization) to the General Accounting Office ("GAO") with a letter indicating that a setoff might be available for debts Cascade owed the government. The DOJ subsequently requested that the GAO not pay the judgment until it had ascertained potential setoff rights.

Three months later, the trustee again asked the bankruptcy court to hold the United States in contempt for violating the automatic stay. The government responded by filing a motion for relief from the stay to deduct Cascade's tax liabilities from the Claims Court judgment. The bankruptcy court ultimately issued four relevant orders: (1) an order denying relief from the automatic stay ("Stay Order"); (2) an order denying the government's request for a setoff ("Setoff Order"); (3) an order directing payment of the Claims Court judgment to the bankruptcy estate ("Turnover Order"); and (4) an order awarding attorney's fees as a sanction for willful violation of the automatic stay ("Sanctions Order").

The United States filed notices of appeal from all four orders but, for unspecified reasons, subsequently dismissed the appeals of the Stay and Setoff Orders. The district court eventually affirmed the bankruptcy court in all regards, United States v. Cascade Roads, Inc. (In re Cascade Roads, Inc.), No. C92-303C, 1992 WL 544948 (W.D.Wash. Nov. 23, 1992), and granted Cascade's request for fees as a sanction for the government's appeal ("Appeal Sanctions Order"), id., 1993 WL 461297 (W.D.Wash. Feb. 5, 1993).

The United States appealed both orders to this Court and we consolidated the cases. The GAO subsequently paid the Claims Court judgment to Cascade, prompting the trustee to file a motion to dismiss as moot the government's appeal of the Turnover Order. The trustee also moved to limit the government's appeal of the bankruptcy court's denial of setoff, on the ground that the United States had not appealed the Setoff Order.

For the reasons set forth below, we deny Cascade's motions to dismiss and limit the appeal, affirm the Turnover Order, and reverse the Sanctions and Appeal Sanctions Orders.

II.

The bankruptcy court's Turnover Order provided that "the United States shall immediately issue a check in satisfaction of the judgment against it in the United States Claim[s] Court ... in the amount of $185,000.00 plus interest, ... made payable to and delivered to Peter H. Arkison, Trustee in Bankruptcy for Cascade Roads, Inc." The United States argues that the Turnover Order is invalid because it contravenes 31 U.S.C. Sec. 3728(a), which requires "[t]he Comptroller General [to] withhold paying that part of a judgment against the United States Government presented to the Comptroller General that is equal to a debt the plaintiff owes the Government."

A.

We first consider the trustee's argument that this appeal is moot because the United States paid the Claims Court judgment to Cascade's bankruptcy estate after losing on appeal in the district court.

"[I]f an event occurs while a case is pending on appeal that makes it impossible for the court to grant any effectual relief whatever to a prevailing party, the appeal [is moot and] must be dismissed.... [However, w]hile a court may not be able to return the parties to the status quo ante ... [, an appeal is not moot if the] court can fashion some form of meaningful relief...." Church of Scientology v. United States, --- U.S. ----, ---- - ----, 113 S.Ct. 447, 449-50, 121 L.Ed.2d 313 (1992) (quotation omitted) (holding that compliance with an order requiring production of documents does not render moot an appeal of that order). The trustee contends this appeal is moot because "[t]his court cannot give the government any additional relief even if it determines that the bankruptcy court erred in entering the [Turnover] Order.... It cannot undo what is already done." We disagree.

The short answer to the trustee's argument is that, should the United States prevail, we can fashion effective relief merely by ordering the trustee to repay the judgment. State of Ohio v. Madeline Marie Nursing Homes, 694 F.2d 449 (6th Cir.1982), is directly on point. In that case, the bankruptcy court ordered the State of Ohio to pay to the debtor certain funds allegedly due under a Medicaid program. The state complied with the order and then sought appellate review. The Sixth Circuit held that the state's appeal was not moot:

The State of Ohio was and is entitled to a legal determination that the act of the bankruptcy judge in ordering payment of the money was unlawful.... That issue may have consequences in the further administration of the estate and in Ohio's ultimate right to obtain, if it can, a disgorgement of the monies so paid....

... [W]e are unable to say that the impact of the bankruptcy court orders if allowed to remain unchallenged (which would be the effect of a dismissal of the appeal for mootness) would not have some important bearing upon the parties. We do not know at this point how Ohio may, in a practical way, get its money back, nor are we asked to decide the relative priorities that Ohio might enjoy in pursuing such an effort. It is enough for us to hold here that the turnover orders were unlawful....

Id. at 463-64 (emphasis added).

Several Ninth Circuit cases reach similar results. In Salomon v. Logan (In re International Environmental Dynamics, Inc.), 718 F.2d 322 (9th Cir.1983), for example, we held that the appeal of a bankruptcy court order approving payment of interim fees to creditors' counsel was not moot even though the bankruptcy estate had paid the fees long before appellate review: "Because [the attorney] is a party to this appeal, this court could fashion effective relief by remanding with instructions to the bankruptcy court to order the return of erroneously disbursed funds. Nor would it be inequitable to hear the merits of [the trustee]'s appeal ... [because the attorney] has known [for more than a year] that [the trustee] contests the bankruptcy court's order that he be paid...." Id. at 326 (citation omitted).

Similarly, in Spirtos v. Moreno (In re Spirtos), 992 F.2d 1004 (9th Cir.1993), we followed...

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