Gordon Sel-Way Inc. v. U.S.A.

• Citation: 270 F.3d 280
• Decision Date: 08 December 2000
• Docket Number: No. 99-2203,99-2203
• Parties: (6th Cir. 2001) In re: Gordon Sel-Way, Inc., Debtor. Gordon Sel-Way, Inc., Appellant, v. United States of America, Appellee. Argued:
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

Page 280

270 F.3d 280 (6th Cir. 2001)

In re: Gordon Sel-Way, Inc., Debtor.

Gordon Sel-Way, Inc., Appellant, v. United States of America, Appellee.

No. 99-2203

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Argued: December 8, 2000

Decided and Filed: October 26, 2001

Appeal from the United States District Court for the Eastern District of Michigan at Ann Arbor. No. 98-60512

[Copyrighted Material Omitted] Kevin M. Ball, Stuart J. Snider, Robert A. Peurach, FITZGERALD & DAKMAK, Detroit, Michigan, for Appellant.

Joel L. McElvain, Bruce R. Ellisen, Thomas P. Cole, UNITED STATES DEPARTMENT OF JUSTICE, TAX DIVISION, APPELLATE SECTION, Washington, D.C., for Appellee.

Before: JONES, BOGGS, and SILER, Circuit Judges.

OPINION

NATHANIEL R. JONES, Circuit Judge.

On December 22, 1993, Chapter 11 debtor, Gordon Sel-Way, Inc. ("Sel-Way") filed a claim for a federal tax refund in bankruptcy court. While the government acknowledged that Sel-Way was entitled to a refund, it refused to pay on the grounds that Sel-Way owed it money for past tax penalties. The bankruptcy court held that the government was not entitled to set off the tax refund against Sel-Way's prior debts because the government's claims arose prior to Sel-Way's filing of the bankruptcy petition and Sel-Way's refund claim arose post-petition. The government appealed this decision to the United States District Court for the Eastern District of Michigan, where it argued that the bankruptcy court did not have jurisdiction over this case, and that it was entitled to a setoff. The district court held that the bankruptcy court had jurisdiction and that the government was entitled to a setoff. For the reasons stated below, we AFFIRM the district court's decision.

I. Facts

On July 1, 1988, Sel-Way, which was in the excavation business, filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. The appellant's plan of liquidation and reorganization was confirmed by the bankruptcy court on July 15, 1991. The Plan provided for the liquidation of all of Sel-Way's assets, after which it would not continue doing business. The Plan did not provide for a discharge of Sel-Way's debt.

Sel-Way's pre-petition debts included unpaid unemployment tax ("FUTA") penalties owed to the IRS. Under the Plan the government's tax penalty claims were treated as class 5 general unsecured claims. As such, these claims were to be paid off after the full payment of the expenses of administration, priority union fringe benefit fund claims, and secured and priority tax claims.

On March 31, 1992, Sel-Way paid its Michigan unemployment taxes for 1987 and 1989, and thereby became entitled to FUTA refunds. On August 17, 1994 the bankruptcy court found that Sel-Way was entitled to FUTA tax refunds for the years 1987 and 1989, in the amounts of $54,538.28 and $35,699,87, respectively ($90,238.15 in total). In the meantime, Sel-Way also filed an adversary complaint against the IRS to subordinate the government's class 5 unsecured tax penalty claims mentioned above. Citing the Sixth Circuit's decision in United States v. Noland (In re First Truck Lines), 48 F.3d 210 (6th Cir. 1995), the bankruptcy court granted the motion. The government appealed this decision to the district court. While this appeal was pending, Sel-Way liquidated all of its assets (except for the FUTA tax refund) and disbursed the liquidation in a manner consistent with the confirmed plan as amended by the bankruptcy court's order allowing Sel-Way to subordinate the government's tax penalty claims.

On May 13, 1996, the Supreme Court issued its opinion in United States v. Noland, 517 U.S. 535 (1996), overruling the Sixth Circuit's disposition. Based on the Supreme Court's opinion, the district court remanded this case to the bankruptcy court for further review. After considering Noland, the bankruptcy court reversed its prior order granting subordination of the government's claims and restored those claims to the status of general unsecured claims. Thus, the government once again became entitled to a pro-rata share of the monies that were distributed to all unsecured claims. However, by this point Sel-Way had already disbursed all of the liquidated assets in reliance on the bankruptcy court's initial decision to subordinate certain government claims. Consequently, the IRS tax penalty claims that had been temporarily subordinated were not paid. Also left unpaid were administrative expenses in the form of attorney's and accountant's fees totaling approximately $80,000 which were entitled to first priority of distribution under the Plan.

Once the subordination issue was resolved in favor of the IRS, the bankruptcy court proceeded to address Sel-Way's claim for its FUTA tax refund and the government's claim that it should be able to setoff this refund against the amount of money that it would have received had it been given a pro-rata share of the monies distributed to all other unsecured claims. On September 11, 1998, the bankruptcy court found that the government's claim arose prior to Sel-Way's petition for bankruptcy and that Sel-Way's FUTA tax refund claims arose in 1994 after the petition. The bankruptcy court concluded that the since the government's claim arose pre-petition it could not be set off against Sel-Way's post-petition claim.

The government appealed this decision to the United States District Court for the Eastern District of Michigan. On appeal, the government asserted that the bankruptcy court lacked jurisdiction over this case. Specifically, it argued that Sel-Way's refund claim was barred by the doctrine of sovereign immunity and that the bankruptcy court lacked subject matter jurisdiction over this post-petition matter. In addition, the government argued that the bankruptcy court erred by refusing to grant it a setoff.

On August 31, 1999, the district court held that the bankruptcy court properly exercised jurisdiction over Sel-Way's claim. However, it reversed the bankruptcy court's decision regarding setoff. The court found that upon confirmation of the appellant's plan of liquidation and reorganization, the government's pre-petition claim was converted to a post-petition claim. The court reasoned that since Sel-Way's FUTA tax refund claim also arose post-petition, the parties' claims could be set off against one another. Sel-Way now appeals the district court's decision to this Court.

II. Jurisdiction of the Bankruptcy Court

On appeal, the government argues that the district court erred when it held that the bankruptcy court had jurisdiction over this case. Since the jurisdictional issue is necessarily antecedent to any determination of the merits, we will address it first. In doing so, we review the district court's jurisdictional determinations de novo. Michigan Employment Sec. Comm'n v. Wolverine Radio Co. (In re Wolverine Radio Co.), 930 F.2d 1132, 1138 (6th Cir. 1991).

A. Sovereign Immunity

The terms under which the United States waives sovereign immunity against suit in bankruptcy court are specified in 11 U.S.C. § 106 (a), (b), and (c).¹

1. Section 106(a)

Section 106(a) waives the government's sovereign immunity with respect to proceedings listed in certain provisions of the bankruptcy code. One of these provisions is 11 U.S.C. § 505, which relates to the determination of tax liabilities. Section 505(b) states:

A trustee may request a determination of any unpaid liability of the estate for any tax incurred during the administration of the case by submitting a tax return for such tax and a request for such a determination to the governmental unit charged with responsibility for collection or determination of such tax.

11 U.S.C. 505(b). As noted above, the district court found that since Sel-Way properly brought its refund claim under this section, the government had waived sovereign immunity.

On appeal, the government emphasizes that the language of section 505 states that a "trustee" acting on behalf of the estate may obtain a tax refund in bankruptcy court. The government concludes that since Sel-Way is not a trustee acting on behalf of the estate, Sel-Way did not establish jurisdiction in the bankruptcy court under § 505. We are not entirely persuaded by this argument.

First, the government's argument that section 505(b) is restricted to trustees seems inconsistent with the broad language of §505(a), which allows the bankruptcy court to determine

the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.

11 U.S.C. § 505(a). In addition, the legislative history indicates that § 505 was not intended to restrict the bankruptcy court jurisdiction to claims of trustees over property of the estate. Rather, it "authorizes the bankruptcy court to rule on the merits of any tax claim involving an unpaid tax, fine, or penalty relating to a tax, or any addition to a tax, of the debtor or the estate." 124 Cong. Rec. H 11110 (daily ed. Sept. 28, 1978) (remarks of Rep. Edwards introducing the House amendments) (emphasis added), reprinted in 1978 U.S.C.C.A.N. 5787, 6436, 6490.

Moreover, at least one circuit has held that § 505 is not restricted solely to claims brought by trustees. See IRS v. Luongo(In re Constance Luongo), 259 F.3d 323,328-29 (5th Cir. 2001). Similarly, several other courts have rejected attempts to restrict the use of other bankruptcy provisions to trustees. For example, in Fleet Bank of Massachusetts, N.A. v. Tierney, Kalis & Lucas (In re Patriot Illinois Corp.), 181 B.R. 56, 59 (Bankr. C.D. Ill. 1994) and Winston & Strawn v. Kelly (In re Churchfileld Mgmt. & Inv. Corp.), 122 B.R. 76, 79-80 (Bankr. N.D. Ill. 1990), bankruptcy courts allowed successors-in-interest and assignees to bring actions under §§544, 547 even though...