Opinion
Nos. 83 B 4804 and
August 10, 1994
Opinion
This adversary proceeding is now before the court on a postjudgment motion of the United States, asserting sovereign immunity. The Chapter 7 trustee commenced this adversary proceeding in order to recover preferential tax payments made by the debtor to the United States. The court thereafter granted the trustee's motion for summary judgment. In response, the United States has asked the court to reconsider the granting of that judgment on the ground that the United States did not waive its sovereign immunity in this adversary proceeding. For the reasons stated below, the United States did waive its sovereign immunity and, accordingly, its motion is denied.
Jurisdiction
This court has jurisdiction over this motion pursuant to 28 U.S.C. § 1334(a) and (b); 28 U.S.C. § 157(a) and (b); and Rule 2.33 of the General Rules of the United States District Court for the Northern District of Illinois. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(F).
Findings of Fact
The relevant facts are undisputed. The debtor filed its petition for relief under Chapter 7 of the Bankruptcy Code in April, 1983. The United States filed several proofs of claim against the estate for prepetition tax liabilities owed by the debtor. The Chapter 7 trustee then commenced this adversary proceeding in order to recover four tax payments made by the debtor to the United States on the ground that such payments were preferences. In January, 1991, the trustee moved for summary judgment. That motion was granted in September, 1992, and judgment was entered in favor of the trustee in the approximate amount of $101,000. In October, 1992, the United States asked this court to reconsider the granting of that judgment on the ground that the United States did not waive its sovereign immunity. The trustee opposed that motion, and the parties submitted briefs in support of their positions. One of the principal authorities relied on by the trustee, In re Pullman Constr. Indus., Inc., 142 B.R. 280 (Bankr.N.D.Ill. 1992) (hereinafter "Pullman I"), was then on appeal to the district court. Pullman I was affirmed by the district court in 1993, United States v. Pullman Constr. Indus., Inc., 153 B.R 539 (N.D.Ill. 1993) (hereinafter "Pullman II"), and earlier this year a subsequent appeal was dismissed, Pullman Constr. Indus., Inc. v. United States, 23 F.2d 1166 (7th Cir. 1994).
Conclusions of Law
Because this court has determined to follow the reasoning set forth inPullman I and II, the applicable law can be briefly summed.
Sovereign immunity and section 106 of the Bankruptcy Code. The United States enjoys sovereign immunity from suit unless it unequivocally expresses a waiver of such immunity. See United States v. Nordic Village, 112 S.Ct. 1011, 1014-15 (1992). Section 106 of the Bankruptcy Code unequivocally provides for the waiver of sovereign immunity by the United States to claims arising under the Bankruptcy Code, but limits that waiver to: (1) compulsory counterclaims to governmental claims, 11 U.S.C. § 106(a); (2) permissive counterclaims to governmental claims capped by a setoff limitation, 11 U.S.C. § 106(b); and (3) claims giving rise to declaratory or injunctive relief against the government, 11 U.S.C. § 106(c). Nordic Village, 112 S.Ct. at 1015-16.
In this case, the trustee seeks monetary relief against the United States for four preferential tax payments made by the debtor. Section 106(c) of the Bankruptcy Code provides no assistance to the trustee in light of the Supreme Court's decision in United States v. Nordic Village, 112 S.Ct. 1011, 1014-17 (1992). Similarly, section 106(b) of the Bankruptcy Code offers limited assistance to the trustee since the amount of the monetary relief requested by the trustee greatly exceeds the amount of funds in the estate available for distribution on account of the allowed tax claims of the United States. Thus, section 106(a) is the statutory provision relevant here.
Section 106(a) provides that "[the United States] is deemed to have waived sovereign immunity with respect to any claim against [it] that is property of the estate and that arose out of the same transaction or occurrence out of which [its] claim arose." 11 U.S.C. § 106(a). Neither the United States nor the trustee dispute that the preference claims here are property of the estate or that the United States has filed against the estate proofs of claim for prepetition tax claims owed by the debtor. Instead, they contest whether the trustee's preference claims "[arise] out of the same transaction or occurrence" as the United States' prepetition tax claims.
The "logical relationship" test. To determine if claims arise from the same transaction for purposes of section 106(a), most courts have adopted the definition of compulsory counterclaim found in Fed.R.Civ.P. 13(a). In re McLean Indus., Inc., 162 B.R. 410, 417 S.D.N.Y. 1993); Pullman II, 153 B.R at 541 (collecting cases). In the context of Fed.R.Civ.P. 13(a), the Seventh Circuit employs the "logical relationship" test to decide if two sets of claims arise out of the same transaction. See Burlington Northern R. Co. v. Strong, 907 F.2d 707, 710-12 (7th Cir. 1990); Pullman II, 153 B.R at 541-42. That test is not a rigid formula. See Burlington Northern, 907 F.2d at 710-12. Instead, it liberally interprets the phrase "transaction or occurrence" to "comprehend a series of many occurrences, depending not so much upon the immediateness of their connection as upon their logical relationship."Burlington Northern, 907 F.2d at 711; Pullman II, 153 B.R at 542. To determine whether claims are logically related, the totality of the claims must be considered, including: (1) the nature of the claims, (2) the legal basis for recovery, (3) the law involved, and (4) factual background of the respective claims. Burlington Northern, 907 F.2d at 711-12; Pullman II, 153 B.R at 542; Pullman I, 142 B.R at 283.
Application of the "logical relationship" test. The parties differ about the conclusion to be drawn from considering the totality of the claims here. The United States maintains that the trustee's claims for the recovery of preferential tax payments are not logically related to the United States' tax claims since there is not a substantial identity of factual and legal issues between the two sets of claims. The trustee disagrees, contending that a logical relationship exists because the antecedent debts giving rise to the preference claims are the unpaid portion of the taxes serving as the basis for the United States' claims against the estate. The trustee's position is the better application of the "logical relationship" test.
The United States seeks payment of taxes that the debtor failed to pay. The debtor seeks to recover preferential payments made to the United States on account of those taxes. Both claims involve common factual and legal issues regarding the same antecedent debts: the debtor's failure to pay federal taxes. Hence, the claims are logically related, though hardly completely overlapping, and the United States, by filing its tax claims, waived its sovereign immunity to the trustee's claims for the recovery of preferential tax payments.
Several other courts have previously applied the "logical relationship" test to the facts relevant here. In each case, they found the existence of a logical relationship between the antecedent debts giving rise to the preference claims and the taxes serving as the basis of the governmental entity's tax claims. Pullman II, 153 B.R at 541-43; Pullman I, 142 B.R. at 283-84; In re Malmart Mortgage Co., Inc., 109 B.R. 1, 3 (Bankr.D.Mass. 1989); In re Maytag Sales and Service, Inc., 23 B.R. 384, 389 (Bankr.N.D.Ga. 1982).
Courts have also applied the "logical relationship" test in a context analogous to the one here: damage claims against the United States for violations of the automatic stay. In those cases, courts found that a logical relationship existed between the section 362(h) claims against the United States and the tax claims filed by the United States and, therefore, concluded that the United States waived its sovereign immunity to section 362(h) damage claims by filing its tax claims against the debtor's estate. See Pullman II, 153 B.R. at 542-43 (collecting cases);Pullman I, 142 B.R at 284-85 (same).
The Rebel Coal test. The Sixth Circuit is the only court of appeals to reach a conclusion contrary to the one here. In re Rebel Coal Co., 944 F.2d 320 (6th Cir. 1991). In so doing, however, that court applied a four-part test which the Seventh Circuit has not adopted. Rebel Coal, 944 F.2d at 322-23. The "logical relationship" test binds this court, and the case law invoking that test has consistently reached the holding stated in this opinion. See Pullman II, 153 B.R. at 543, for a fuller discussion of the Rebel Coal approach.
Conclusion
For the reasons set forth above, the court finds that the United States did waive its sovereign immunity to the trustee's claims for the recovery of preferential tax payments by filing its prepetition tax claims. The pending motion is, therefore, denied. An order will be entered in conformity with this opinion.