United States v. Nordic Village, Inc. - Oral Argument

Argument of Richard H. Seamon

Chief Justice Rehnquist: We'll hear argument next in No. 90-1629, United States v. Nordic Village, Inc.--

Mr. Seamon.

Mr. Seamon: Mr. Chief Justice, and may it please the Court:

This case arises under the Bankruptcy Code.

The trustee in bankruptcy appointed for the respondent--

Unknown Speaker: Mr. Seamon, before you get started, don't our rules provide that briefs should have a summary of the argument?

Mr. Seamon: --That's correct.

Unknown Speaker: Is the Solicitor General's office subject to those rules?

Mr. Seamon: Yes, I believe it is.

Unknown Speaker: Where is the summary of argument in your brief?

Mr. Seamon: It is lacking one, and that is an oversight for which I apologize the Court.

Unknown Speaker: Would you say that again?

I didn't hear it.

Mr. Seamon: That was an oversight for which I apologize to the Court.

The... to continue, the trustee in bankruptcy appointed for the respondent in this case, Nordic Village, brought this adversary proceeding and recovered a 20,000 dollar money judgment against the Internal Revenue Service.

The Sixth Circuit upheld the judgement on the ground that the United States had waived sovereign immunity under section 106(c) of the Bankruptcy Code.

Thus, the issue is whether section 106(c) of the code authorizes a bankruptcy trustee to recover money from the Government.

This Court previously addressed the scope of section 106(c) in a case involving an individual State, namely, Hoffman v. Connecticut Department of Income Maintenance.

In Hoffman, the Court concluded that section 106(c) does not authorize monetary relief against the States.

We submit that the same conclusion should apply in cases involving the United States.

The facts of this case are undisputed and may be summarized briefly.

Nordic Village was a restaurant in Lake County, Ohio, that filed a petition for relief under Chapter 11 in March 1984.

After the petition was filed, the IRS filed a proof of claim against the estate seeking payment of overdue employment taxes.

Also, after the petition was filed, an officer of Nordic Village, Josef Lah, drew a check for 26,000 dollars on Nordic Village's corporate bank account which he used to get a 20,000 dollar cashier's check payable to the IRS.

Mr. Lah delivered the 20,000 dollar check to the IRS and had them apply it against his personal taxes.

The trustee for Nordic Village then brought this action seeking to recover the 20,000 dollar payment on the grounds that it was an unauthorized postpetition transfer.

The bankruptcy court agreed, and held that the transfer was voidable, and entered the 20,000 dollar judgment against IRS.

And the District Court for the Northern District of Ohio affirmed.

On appeal to the Sixth Circuit, the Government argued that the 20,000 dollar judgment was barred by sovereign immunity.

The Government relied on the decision in Hoffman.

Hoffman, like this case, involved a voidable payment of taxes.

In Hoffman, as here, the trustee argued that section 106(c) of the code authorized recovery.

Unknown Speaker: May I just get one factual thing straight, Mr. Seamon?

Mr. Seamon: Yes.

Unknown Speaker: I gather you didn't make the sovereign immunity argument in the district court.

And was the reason for raising it in the Sixth Circuit that Hoffman was decided in the interim?

Mr. Seamon: That's correct.

Unknown Speaker: So you in fact learned that there was an available sovereign immunity argument.

Mr. Seamon: I don't think that the Government was aware the availability of the argument before then.

In Hoffman, the Court rejected the argument that recovery of a voidable tax payment was authorized under section 106(c).

In an opinion written by Mr. Justice White, a plurality of the Court concluded that section 106(c) cannot be construed to authorize retroactive monetary relief against the States.

Mr. Justice Scalia concurred in that conclusion on the ground that Congress lacks authority under the bankruptcy clause to subject unconsenting States to retroactive monetary relief.

In this case, the Sixth Circuit declined to follow the plurality's interpretation in Hoffman and adopted instead the views of the dissenting members in Hoffman.

Thus, the court upheld the judgement against the Federal Government, which it recognized could not be entered against a State.

Unknown Speaker: Do you think the requirements for a clear statement are the same in waiving Federal sovereign immunity as they are for finding abrogation of a State Eleventh Amendment immunity?

Mr. Seamon: They are very closely similar and have been described in virtually identical terms.

I would suggest that there is... there may well be some difference between the formulation in the Atascadero case of the clear statement rule and the standard for Federal sovereign immunity cited in a case like Ruckelshaus.

But I don't think that... in any event, I don't think that Congress would have discerned a difference between the two statements, especially at the time it was drafting the code.

And in any event, I think in drafting the statute at issue here, clearly it didn't intend to have a different rule apply to the States as opposed to the United States based on any difference in the standards for waiving the two forms of immunity.

Unknown Speaker: Of course, the incompatibility you describe only exists if you assume that the judgment of the court was based upon the rationale of the plurality opinion.

There's no incompatibility at all if the judgment of the court is thought to have been based on the rationale of the concurrence.

That is to say, it's quite feasible that Congress may... might want to waive its own sovereign immunity, but does not have the power to waive the sovereign immunity of the States.

There's nothing strange about that.

Mr. Seamon: No, there is nothing strange about that, Your Honor.

And in fact, in certain other statutes, Congress has drawn a distinction between suits against the United States and suits against individual States.

I would cite as an example some of the citizen suit provisions in the environmental statutes like RCRA and CRCLA.

You can bring a citizen's suit against the United States and then against State entities to the extent permitted by the Eleventh Amendment.

The Congress didn't draw the distinction in this case, even though it recognized that there were limitations on its power with regard to the States.

And I would suggest that the fact that it didn't draw a distinction on the face of the statute, but recognized a limit in terms of its power over the States suggests that it wanted to waive Federal sovereign immunity to the same extent it believed it could abrogate State sovereign immunity.

Unknown Speaker: May I just be clear on what you just said?

You're telling us that, in the Clean Water Act and those other citizen suit provisions, Congress has adopted different standards for the waiver of the Federal sovereign immunity, of the waiver of the Eleventh Amendment?

Mr. Seamon: Let me be clearer than I perhaps was.

I'm saying that when Congress is legislating close to the limits of what it thinks that its constitutional authority is, and it intends to allow actions against both kinds of sovereigns, in certain cases it will embody in the statute itself its recognition that maybe some suits against the Federal Government would be permitted, even though the same suit wouldn't permitted against the State.

Unknown Speaker: And the Clean Water Act citizen suit provision, in your view, is an example of such a situation.

Mr. Seamon: I'm citing the Clean Water Act provision as an example of where Congress is drawing a distinction of Congress' recognizing--

Unknown Speaker: It's a different rule for the Federal defendant against a State defendant.

Mr. Seamon: --It's recognizing that there may be a different rule, and perhaps--

Unknown Speaker: Well, I think you said there was a difference and that's an example of the difference.

Mr. Seamon: --If I did, I wasn't being clear enough.

What I meant to say was that it's an example of Congress being sensitive to the possible differences that may evolve in the process of construing such a statute.

Unknown Speaker: Mr. Seamon, the lower courts found, did they not, that the IRS knew or should have known of the transfer's voidability?

Mr. Seamon: It made the latter finding that the IRS should have known that the 20,000 dollar--

Unknown Speaker: On what did they base that finding?

Mr. Seamon: --They based that finding on a notation on the 20,000 dollar check stating that the remitter was Swiss Haus, Inc., which was the doing business name for Nordic Village.

Unknown Speaker: And yet you don't mention that at all in your brief, do you?

Mr. Seamon: We... I don't believe we state that in the brief.

We stated that in the petition.

And--

Unknown Speaker: Well, it seems to me it's critical of the lower court's finding, and I'm a little surprised that you haven't mentioned it in the brief.

Mr. Seamon: --Your Honor, we stated that in our petition to make clear all of the issues that were presented at the lower court.

And we also stated in our petition that we do not at this level dispute the finding below that the transfer was voidable.

The findings by the lower court regarding the notations on the check were part of its holding that the transfer was voidable.

That issue is not before the Court, and that's why we didn't raise it in our brief on the merits.

It is correct that the incompatibility in this case only exists between the result in Hoffman and the result reached by the Sixth Circuit below.

Nonetheless, we believe that the plurality in Hoffman construed section 106(c) correctly.

It does not clearly authorize monetary relief against Governmental units.

And because I'm going to begin by talking about the language of section 106, I would refer the Court to the appendix to our petition at page 57a where section 106 is reprinted.

Section 106(c), which is the provision at issue here, was added late in the legislative process and in some respects, it is not a model of drafting clarity.

Therefore, section 106(c) is best understood in the context of section 106 as a whole.

Sections 106(a) and (b) are the provisions that Congress clearly designed to deal comprehensively with the problem of money claims against governmental units.

That is clear because section 106(a) and (b) use the word claim, which is defined in the code to mean any right to payment.

Thus, section 106(a) and (b) considered together address all money claims that a trustee may have against the Government, whether they arise under a provision of the code or come from a source outside of the code.

While 106(a) and (b) are quite comprehensive in the sense that they address all money claims, they're quite restrictive in setting forth conditions for recovering the money.

106(a) allows affirmative recovery only when the Government has filed a claim against the estate, and the estate has a compulsory counterclaim.

That is a very narrow category of cases that would permit affirmative monetary relief of the sort that was awarded here.

106(b) is slightly broader in scope inasmuch as it reaches permissive counterclaims.

By the same token, it limits the kind of relief available.

Under section 106(b), the trustee can only get an offset of the estate's claim with respect to the Government's claim against the estate.

And as is clear, 106(a) and (b) both apply only when the Government has filed a claim against the estate.

In contrast to 106(a) and (b), section 106(c) contains nothing that is suggestive of monetary relief.

It consists of two subparts, both of which must be satisfied for 106(c) to apply.

Together they allow a court to make a determination of an issue arising under any of over 100 code provisions that contain one of three trigger words that are specified in 106(c)(1).

The plurality in Hoffman construed the language of 106(c) as indicative of declaratory relief rather than monetary relief.

That is clear, in our view, not only on the face of the statute, section 106(c) itself, but also when 106(c) is contrasted with (a) and (b), whereas (a) and (b) refer broadly to claims, and clearly indicate that Congress was thinking of monetary relief.

106(c) refers to the courts making determinations of an issue, which is much narrower language than the language of claim used in 106(a) and (b).

Unknown Speaker: Well now you make a distinction between the power of the trustee to void a transfer and the power to sue for recovery of money.

Is that right?

Mr. Seamon: Yes.

Because the code itself distinguishes those two concepts by treating... voiding, having a separate set of voidance provisions from the recovery provision.

Unknown Speaker: And the transfer section is section 549?

Mr. Seamon: Yes, regarding postpetition transfers like this one.

Unknown Speaker: And do you think that a transfer could be voided by the court against the Federal Government if none of the trigger words appear in 549?

Mr. Seamon: No, I don't think that's so.

I think that in this case, the significant provision is section 550, and the fact that section 550 contains a trigger word allows suits to void transfers.

Unknown Speaker: And you think 550 applies even though none of the trigger words are in 549?

Mr. Seamon: That's correct.

550 embraces a variety of provisions that regard a voidance of different kinds of transfers.

Postpetition transfers like what we're talking about here, as well as fraudulent conveyances and preferential transfers, we would say that you look to section 550.

And that... and under section 106(c), 550 is brought in by virtue of (c)(1).

But you must also look to (c)(2) to determine what sort of relief is authorized; (c)(2) in effect specifies the consequences of applying (c)(1).

(c)(2) says that when a provision has been triggered, the Court in that circumstance can render a determination of the issue that has arisen under the trigger provision.

And that language regarding determination of an issue, especially when compared to 106(a) and (b), clearly seemed to limit relief beyond that contemplated in 106(a) and (b).

Unknown Speaker: May I ask you, Mr. Seamon, under your theory they can't recover the money.

Supposing the transfer had been, say the Government had seized an automobile just before the... could the debtor's estate get that back?

Mr. Seamon: I think I would need to know more facts, but I believe that yes, because that would be the situation, essentially in Whiting Pools, where there was seizure and restraint of tangible property.

In that case it was immediately before the petition was filed.

That is exactly what 106(c) was designed to do.

Unknown Speaker: What if they seized a suitcase full of money?

Mr. Seamon: Then I do not think that--

Unknown Speaker: They get the suitcase, but not the money?

Mr. Seamon: --Cases start to get hard when you talk about identifiable funds.

I think in general it is the same kind of problem that arises in the Eleventh Amendment context.

You have Edelman v. Jordan on the one hand, and ex parte Young on the other.

And in individual cases you need to look at the trustee's claim and say, what is he or she really seeking?

Is it in effect retroactive monetary relief?

In general, though, I would say that there will be very few claims that would entail the handing over of money that will be permitted under section 106(c).

The clearest example would be some sort of specie remedy where you have rare coins and those were seized in a Whiting Pools kind of situation.

Unknown Speaker: Mr. Seamon, may I ask you a question which may well be answered in Hoffman, I just don't remember.

Does the language, any assertion of sovereign immunity, in (c) have a breadth sufficient to reach monetary recovery?

Mr. Seamon: The Court did address that phrase in Hoffman, and if I'm recalling it correctly, said that that indicates that 106(c) is in fact a waiver of sovereign immunity, but doesn't answer the question of the extent to which sovereign immunity has been waived.

Unknown Speaker: It's just insufficiently specific.

Mr. Seamon: That's correct.

It suspends the defense of... the defense of sovereign immunity with respect to whatever relief is authorized under section 106(c), but you still need to look at the language following that phrase to determine exactly what is authorized.

And the other indication, besides contrasting (c) with (a) and (b), that reinforces the narrow scope of the relief authorized under section 106(c) is that (c) does contain the provision subpart (c)(2).

We think that it is improper as the Sixth Circuit suggested here, to look at the provisions that have been triggered to determine what kind of relief is authorized.

Rather you have to go on to (c)(2) and determine it by reference to that provision.

If, as the Sixth Circuit was suggesting here, and as the trustee argues, you simply look to whatever relief is authorized in the trigger provision, then subpart (c)(2) become superfluous.

It then becomes merely a restatement of subpart (c)(1).

Unknown Speaker: Is there any explanation, Mr. Seamon, you think (c) was... 106(c) was added after (a) and (b) were already in place in the congressional--

Mr. Seamon: Yes.

Unknown Speaker: --why this was added?

Mr. Seamon: Yes, to refer to the legislative history, it indicates that 106(c) was added primarily to resolve a conflict among the circuits, and that conflict had to do with the availability of declaratory relief rather than monetary relief.

The floor managers of the legislation referred to a case called Gwilliam which was out of the Ninth Circuit, and the Gwilliam case held that a bankruptcy court could determine whether a tax debt was dischargeable, whether or not the IRS had filed a claim against the estate.

There was contrary precedent in the Fifth Circuit, and so 106(c) essentially codifies the holding in Gwilliam so that even when a governmental unit has not filed a claim against the estate and brought itself within (a) and (b), it is still subject to declarations by the court, the bankruptcy court, that have to do with the Government's rights in the property of the estate.

So to the extent that Gwilliam is codified, Congress... the legislative history suggests... also intended to allow binding determinations on matters in addition to tax debts.

Thus, under the rationale of the way that section 106(c) operates is that the Government is bound by discharges in bankruptcy.

If you look through the code, all of the discharge provisions in the various chapters contain a trigger word.

And to the extent that a Government debt has been brought into the estate and is part of a reorganization plan or an order of relief or whatever, that is discharged, and the Government is bound by that discharge order.

Thus, section 106(c), even though it does not authorize monetary relief, nonetheless serves a very important function.

It gives the court a broad array of declaratory types of powers.

And it also, in certain circumstances, allows incidental injunctive relief of the sort that was upheld in Whiting Pools.

I mentioned Whiting Pools a moment ago.

To discuss it a little further, it involved tangible property that had been seized prior to bankruptcy filing.

The seizure was effected by the IRS, and before the seized tangible property was sold, the trustee sought turnover of the property to the estate.

In effect, the Court was determining in that case, and rather than employ self-help remedies of the type that would be authorized under the tax code, the Government had to resort to the Bankruptcy Code for relief, just like other creditors.

The important distinction between Whiting Pools and this case is that it involved tangible property rather than a claim for monetary relief.

Unknown Speaker: Mr. Seamon, do you have any idea how it occurred to anybody to draft (c)(1) that way?

I mean, instead of just mentioning the sections, pick out a couple of words?

Why would that occur to anybody to do something like that?

It's almost like a game.

Mr. Seamon: It's part of... it stems from the fact that 106(c) was added after all of the rest of the code had been drafted.

Unknown Speaker: No, but I mean why wouldn't you just name the sections instead of, you know, saying a provision that contains these, what you called trigger words.

Mr. Seamon: It may well be--

Unknown Speaker: I've never seen a provision like that.

Mr. Seamon: --Nor have I.

And it may well be that it is a product of haste or that in fact there are a fairly lengthy list of provisions that include one of these three trigger words.

I think there are something like 111 in the code.

When you look at what provisions are triggered, there doesn't seem to be any rigorous logic between what was included and what was excluded.

And again, I would suggest that there was... to the extent that it was logical, there was a broader kind of logic going on that Congress started with the Gwilliam case that concerned declaratory relief in the tax area, and thought it would be a good idea to generalize that holding so that declaratory relief was available in other areas where the Government had not filed a claim against the estate, and thereby brought itself under (a) and (b).

You had this conflict in the circuits out there that it wanted to resolve.

And while it was at it, it considered what sorts of kind of major actors in the code would cover declaratory relief of the sort that it had in mind.

I think the only other thing that one can say about what the choice of the trigger words was is that the selection of governmental unit as a trigger word is significant in as much as it suggests that where Congress used the term governmental unit elsewhere in the code, it wasn't thinking about waiving sovereign immunity.

It had to go back after the fact and add it as a trigger word.

That is important inasmuch as, you know, likewise in the trigger provisions that address monetary recovery, there too, Congress was not thinking about sovereign immunity.

And that is another reason why it is inappropriate to look to the trigger provisions to determine what kind of relief is authorized.

The third of the three trigger words, entity, I would suggest brings in some very important provisions that Congress would rationally have wanted to subject the Government to, such as the substance of the automatic stay provision, as well as a code provision which authorized the trustee to void the fixing of certain statutory liens that attach after a bankruptcy petition has been filed.

That provision only contains the trigger word entity and I think it is a situation where Congress chose entity with the idea of having particular provisions apply.

In any event, it is hard to figure out the logic of the way section 106(c) is drafted.

What you can say about it with confidence is that it does not clearly speak to the issue of monetary recovery.

And inasmuch as it is a waiver of sovereign immunity, Congress had to speak clearly, as it did in (a) and (b), if it intended to subject governmental entities to monetary relief under that provision.

Because it is not clear, it cannot be construed in the manner that the Sixth Circuit adopted.

And if there are no further questions, I'd like to reserve the balance of my time.

Unknown Speaker: Very well, Mr. Seamon.

Mr. Sicherman, we'll hear from you.

Argument of Marvin A. Sicherman

Mr. Sicherman: Mr. Chief Justice, may it please the Court:

The appellant and appellee in this case have one serious difference.

The appellant believes its sovereign immunity exists in all instances under all conditions.

The appellee suggests that sovereign immunity doesn't exist under all circumstances and in all conditions.

Section 106 of the Bankruptcy Code clearly deals with the topic of a waiver of sovereign immunity, but neither section 106 of the Bankruptcy Code nor any other provision of bankruptcy law creates sovereign immunity where it does not already exist.

Sovereign immunity does not exist to deprive a court of its in rem jurisdiction over that which is in the actual physical custody and control of the court.

I'm not speaking about property of the estate in the intellectual control of the court, I'm talking about dollars.

Unknown Speaker: This was not a case that was approached to court below, was it?

Mr. Sicherman: To please the Court, this has been argued in this case from the original complaint.

The Sixth Circuit--

Unknown Speaker: Well, you haven't answered my question.

Mr. Sicherman: --The answer is no, the Sixth Circuit decided the case on a sovereign immunity issue.

Unknown Speaker: Well, it decided the case based on its construction of the statute.

Mr. Sicherman: That is correct.

Unknown Speaker: And that it didn't decide the case based on the argument you are now making.

Mr. Sicherman: It didn't reach that argument.

Unknown Speaker: Well, all right, but it didn't use that.

And it seems... I think what you're arguing would argue for a much broader relief than the Sixth Circuit gave you.

Mr. Sicherman: It would.

And we did.

Unknown Speaker: You didn't cross appeal.

Mr. Sicherman: No, we did not.

But I don't believe, Your Honor, that if this money was in the court's custody, that the Sixth Circuit erred.

I believe the Sixth Circuit posture that sovereign immunity did not prevent the lower court from awarding relief was a recognition that the money was in the court's custody, that where it was removed from the custody of the court improperly, the improper postpetition transfer by Mr. Lah, that what was happening was a restoration to the bankruptcy court of a possession of that which was in the court's possession.

This is not a, shall we say, reduction of the money in the Federal till, because it was a restoration.

I'm the first to acknowledge in saying restoration is different from a judgment to pay is a play on words.

But the fact remains that the money was being restored to that place where it belonged.

Unknown Speaker: What do you think is the closest case from this Court that supports your position, Mr. Sicherman?

Mr. Sicherman: If it please the Court, we had the Far East Lines.

We go all the way back to, I think it's Bull v. United States.

Unknown Speaker: You're saying that is the closest case that supports your--

Mr. Sicherman: That is the closest I can come.

There's Bull, and there's another case of that same vintage, Your Honor, United States v. State Bank.

Now they dealt with the concept of restoration.

They did not deal with pure in rem.

The in rem position, the closest we come is a Ninth Circuit decision in Far East... Pacific Far East Lines.

And there are other cases, such as Matter of Retail Stores Delivery--

Unknown Speaker: --Yes, I'd asked you about cases from this Court.

Bull v. United States is a case--

Mr. Sicherman: --It's the closest I can come, Your Honor.

Unknown Speaker: --And it's from this Court?

Mr. Sicherman: Yes.

And State Bank.

Unknown Speaker: State Bank is a case from this Court?

Mr. Sicherman: Yes, Your Honor.

Cites to State Bank are 96 U.S. 30.

Bull, Your Honor, is 295 U.S. 247.

They're as close as anything we have found.

Your Honor, the Government position is that sovereign immunity is of such significance that the sovereign is not bound, or should not be bound by determinations of courts.

The Ninth Circuit in Pacific Far East Lines clearly stated that the sovereign immunity of the United States did not prevent a bankruptcy court from compelling the return of property which was part of the bankruptcy estate.

The Ninth Circuit went on to say that sovereign immunity protects the property which belongs to the Government independent of the bankruptcy process, but where the property has been transferred from the bankruptcy estate, the bankruptcy court retains jurisdiction.

Unknown Speaker: The property.

You mean they have the right to get back the same bills that went--

Mr. Sicherman: No, Your Honor, money... if it were my pen, my pen might be identifiable, although this cheap Papermate pen I'm sure there are many of.

Where it's dollars, they're a fungible commodity.

Fortuitously, in the case at bar in the lower court, as Justice Stevens notes... I'm sorry, I believe it was Justice Blackmun pointed out, the money was clearly traceable in the concept of a fixed number of dollars.

Mr. Lah purchased, with funds of the debtor in possession that he no right to do, an official check or money order from the Ameritrust Company in Cleveland.

That Ameritrust official check indicated the remitter as Nordic Village, Inc, or Swiss Haus.

I think it said Swiss Haus, as I reflect upon it.

Mr. Lah took that check down the street... and in the City of Cleveland the Internal Revenue to the Ameritrust main office is about 5 blocks... went into Internal Revenue and had... gave the check to an Internal Revenue collector and asked that the money be applied to his personal tax obligations.

The record below is silent as to who drew what I believe was two or three lines through the name of the remitter.

The court below found, and the Government has not appealed or made an issue, that the Government was on sufficient notice of the impropriety of the transfer of these funds, that they were coming out of a bankruptcy estate.

Unknown Speaker: --Would it make any difference whether the Government was on notice or not if you're relying on the theory of, what do you say, restoration to the estate as something that belongs to it?

Mr. Sicherman: It said... I would say, Your Honor, if we rely on the theory of restoration, and the Government had knowledge.

We certainly have a stronger entitlement to restoration than if the Government were an unwitting party who had been duped.

Our brief--

Unknown Speaker: Well, you'd have a stronger equitable claim, but it wouldn't be any stronger as far as the doctrine of sovereign immunity is concerned.

I mean, you're either just taking back what's yours or you're taking something that belongs to the United States.

And if it's your theory of restoration it really doesn't... as far as sovereign immunity is concerned, it doesn't matter whether the Government knew about it or not, right?

Mr. Sicherman: --The court below, trial court and the district court, felt it important to determine that the Government knew, because under section 550 of the Bankruptcy Code there are provisions where there's a third-party transferee... let me rephrase that, Your Honor.

Where the trustee is seeking to recover money from the initial transferee, good-faith/bad-faith knowledge are unimportant.

Where the trustee is seeking recovery from one other than the initial transferee, whether called immediate or intermediate transferee, a question of good faith or knowledge becomes important.

In this case in the court below, they first found that the Government was in fact the initial transferee.

On the appellant's request in the district court for a modification of the judgment, then District Court Judge, now Chief District Court Judge Lambrose concluded that either they were the immediate initial... I'm sorry, either they were the initial transferee, or if they were the mediate or intermediate transferee, they were on knowledge and had notice.

So it's both pieces together, Your Honor.

Unknown Speaker: Mr. Sicherman, don't you think that your reliance on Bull against United States may be somewhat limited by our later decision in the Dalm case?

Mr. Sicherman: Yes, Your Honor.

Unknown Speaker: Which said that really Bull just applied to equitable recoupment in tax cases.

Mr. Sicherman: Yes, Your Honor, that is a serious problem.

The Court asked what the closest case I could find is or had, that's as close as I can get.

Unknown Speaker: What you're saying is it may not be very close, but it's the best you can do?

Mr. Sicherman: I hate to use the expression standing in these chambers, but it's kind of like horseshoes, Your Honor, that's as close as I can get on that point.

We have... going directly to the issue of sovereign immunity and the question of waiver/nonwaiver.

The plurality and the dissent... plurality and dissenting opinions of this Court in the Hoffman case appear to agree that 106(c) of the Bankruptcy Code was a waiver of sovereign immunity with respect to the Federal Government in that the Federal Government, according to the plurality opinion, would be bound by a determination of issues by bankruptcy courts even where the Federal Government did not appear and subject itself.

Which, of course, puts us back to the problem of what is a determination of an issue in 106(c).

And to deal with that, you really have to start by reading... and I think in part I answer Justice Scalia's question about the strange structure of the language of 106(c).

If the Court will indulge me, I have been a bankruptcy practitioner for 31 years.

I have lived through the trauma of the 10 years of legislation that started with the Ford Foundation grant.

So if on occasion I slip off into what I know, please just check me and say, hey, you're off base.

106(c) was created in part to cure different arguments.

If we go back, the Bankruptcy Commission, whose report was beginning of the serious legislation that gave rise to the 1978 Bankruptcy Code, perceived a bankruptcy law where the jurisdiction of the bankruptcy court would be all-encompassing, or as we called it, pervasive... any matters arising in, arising out of, et cetera, which this Court found constitutionally infirm in Marathon as an improper grant.

There was also tied with that a concept of being able to void multiple different pieces of litigation in nonbankruptcy forms.

When you come back to reading section 106(c)(1), if you start in a vacuum, which is a peculiar way to interpret a statute, but will help if you indulge me in my explaining what I believe is meant... if you read a provision in this title that contains creditor entity or governmental unit... applies to governmental units, which is 106(c)(1), read in a vacuum, unless intended to mean that any provision that says creditor or entity includes governmental unit, 106(c)(1) has no meaning.

If you are going to read all of the words of the statute, then it must anywhere the word creditor or entity appears it is intended to include the governmental unit.

If you will go on to 106(c)(2), if you come to the conclusion that a determination means any judgment or decision on any issue binds a governmental unit, then you can take 106(c) and you can say that anywhere creditor, entity, or governmental unit appears, a decision of the bankruptcy court would bind the governmental unit.

When we get back to Hoffman, this Court is troubled by... if 106(c) says what I'm suggesting it was intended to mean, what is the role of 106(a) and 106(b)?

The answer lies partly in the fact that when you read 106(a) you find the word claim appearing twice.

A governmental unit is deemed to have waived sovereign immunity with respect to any claim against such governmental unit... that was the first claim word... that is property of the estate and that arose out of the same transaction or occurrence out of which such governmental units claim arose.

The word claim is used in 106(a) as two different concepts.

You have a proof... you have the definition of claim in the Bankruptcy Code.

Section 101.5 defines claim as a right to payment.

You also have the writing, called a proof of claim, which is dealt with in Bankruptcy Code section 501, and in rules 3001(a).

And I should add as a side comment, the filing of a proof of claim needs to be perceived as equivalent to the filing of a short form of complaint for money only in a nonbankruptcy court.

Now we deal with what 106(a) means.

If the Government files this proof of claim, the piece of paper, because that's where their claim arose, in the bankruptcy court they have agreed to be subjected to any counterclaim or cross claim that arose out of the same transaction... the typical compulsory counterclaim provision of the Federal Rules of Civil Procedure.

So that if the Government files a proof of claim arising out of a defense contract that has nothing to do with the word creditor, entity, governmental unit... it has filed a proof of claim because the debtor hasn't finished performing on a defense contract.

The debtor says, but I have done more work than you have paid for, Mr. Government, you owe me money.

That would be the 106(a) counterclaim arising out of.

Interesting, if we read 106(a) and don't recognize that the word claim is being used in two different senses, we come to the conclusion that maybe the Government doesn't have to file a proof of claim for a 106(a) waiver of sovereign immunity, which is contrary to every case I've read... which is why I focus on the dual meaning of claim in 106(a).

There is a third meaning of claim that we need to keep sight of.

And that is a claim is a cause of action, as we learned when I was in law school.

So each time we see the word claim in 106, we have to think in terms of which meaning is it being used as.

When you get to 106(b), the offset provision, you have again the word claim appearing twice.

Now, one of the problems with the word... with the structure of 106(b) is it deals with an allowed claim.

There shall be offset against an allowed claim or interest.

Under the provisions of Chapters 9 and 11, and 106 is as significant and applicable in Chapters 9 and Chapter 11 as it is in Chapter 7... if the creditor is scheduled by the debtor for the correct amount and is not scheduled as being disputed, unliquidated, then in that event under bankruptcy rule 3003(b)(1), and section 502 of the Bankruptcy Code, that creditor's claim is deemed filed, and if not objected to, will be allowed.

If we now look at 106(b), if that creditor has a deemed allowed, deemed filed claim in a Chapter 9 or 11, and it would be more frequently an 11 than a 9... there are very few 9's... and if we did not have 106(b), and if we look at 502(d) of the Bankruptcy Code, a creditor who received a preference, or voidable transfer who does not restore it, their claim shall be disallowed.

So if the bankruptcy court determined that a governmental agency or unit got a preference, the total claim could be disallowed.

If the preference were 5 dollars, and the governmental unit's proof of claim were 50 million dollars, the failure to return the 5 dollars would be a basis of disallowance of the 50 dollar million claim.

Unknown Speaker: Mr. Sicherman, I think the basic argument you're up against here, as you probably realize, is that since (a) and (b) specify quite limited bases in which sovereign immunity is waived, how can you read (c) in its much broader language to constitute an across the board waiver?

Do the sections you've just been referring to that would govern the operation of (a) and (b), do they contain key words or trigger words such as are contained in (c)(1)?

Mr. Sicherman: Some do and some don't, Your Honor.

It is the totality of bankruptcy law.

I am aware of the fact that why (c) is in there--

Unknown Speaker: But you've got to make us aware of it.

Mr. Sicherman: --I'm trying.

I suggested a few moments ago, Your Honor, I have lived with bankruptcy law and may jump a little fast.

And I implore the Court to slow me down when I go too fast.

Unknown Speaker: Well, it's not necessarily a question of going too fast, but you only have half an hour.

[Laughter]

And I presume you're still getting to the reason.

Mr. Sicherman: I am getting right at it.

Unknown Speaker: Okay.

You've got about 8 minutes left.

Mr. Sicherman: What I'm suggesting, simply put, is the correct reading would be to recognize that 106(c) is a waiver of sovereign immunity wherever the trigger words appear.

In addition thereto, that where the governmental unit filed a proof of claim, and the debtor has a counterclaim that is unrelated to the trigger words, that's what 106(a) is.

Where the governmental unit has a proof of claim, whether filed or deemed filed, and there is a settle off or disallowance, that 106(b) will override 502(d), and therefore the Government will only have a settle off and not a total disallowance.

Taken collectively, it means (c) was the intent... which goes right back to where we were with the Bankruptcy Commission... of the broad waiver.

Additionally, since it is the Federal Government whom we are claiming has waived sovereign immunity, and Congress has passed the Bankruptcy Code, that waiver does not have to meet the Atascadero standard.

It is a simple waiver.

It is here.

In substance, the waiver by Congress in 106(c) is a sufficient waiver of the Federal Government's sovereign immunity, if there is sovereign immunity under the facts of this case, which unfortunately takes us back to the topic of, this was property in the custody of the court and has been removed.

Unknown Speaker: Mr. Sicherman, can you tell me something?

What puzzles me about 106(c) is the first phrase of it.

Can you explain to me, you know, it says, except as provided in subsections (a) and (b).

Now what the rest of (c) does, no matter how you interpret the rest of (c), what the rest of (c) does is broadly or narrowly, it waives sovereign immunity.

Right?

I mean, that's the only thing we're arguing about, whether it does it in some limited way as to issues or does it broadly.

Mr. Sicherman: Except as provided--

Unknown Speaker: What is the... how could (a) and (b) possibly be an exception to what is done in (c)?

Mr. Sicherman: --My hypothetical of a Government contract claim, Defense Department contract, had nothing to do with any section of the code where the word creditor, entity, or governmental unit applied.

Unknown Speaker: All right.

Mr. Sicherman: The Government says, this defense contractor didn't finish work on these torpedoes.

Unknown Speaker: Right.

Mr. Sicherman: Therefore, we had to send the torpedoes to somebody else to do.

We had a cost overrun as a result of that.

We have a claim.

The Chapter 11 debtor or the Chapter 7 trustees... Chapter 7 debtor's trustee says we did more work than we had to, you guys caused all the delay, Defense Department, you owe us for the cost overruns.

In fact, you're the guys who ended up pushing us into bankruptcy with your Mickey Mouse games that we couldn't finish your project.

So we've got damages for our bankruptcy case having to be filed because of you.

106(a) says even though you don't have the preference, the trigger words, et cetera, you have a waiver of sovereign immunity if they file that proof of claim.

Unknown Speaker: I understand that, but that would not be an exception from (c) at all, it would be in addition to (c).

I mean, isn't there a difference between in addition to and except for?

Mr. Sicherman: Your Honor, there is a difference.

Your statement that it would have been prudent to have said in addition to those provided instead of except for.

If you... and I'll watch my red light quickly... if you take time to read the Bankruptcy Code versus the Bankruptcy Act, you will find the writing style has changed.

Speculation is, on the eve of passing the act under pressure, IRS people were drafted to help on the drafting.

And that explains why there are certain similarities in some of the language and the drafting of the Bankruptcy Code to the tax code.

And it is difficult reading.

But I suggest that the except means in addition to that which is provided.

So that under (a) and (b) you have jurisdiction without trigger words, and under (c) you have the trigger words.

Unknown Speaker: Well, Mr. Sicherman, I would say that the tax code can frequently be difficult, but my experience with the Bankruptcy Code is that it's frequently garbled, which I regard as quite different than being difficult.

[Laughter]

Mr. Sicherman: To please the Court, that is one topic that I cannot defend.

I have said that from 1977 onward.

It is garbled.

It is difficult to read.

It is not straightforward.

And fortunately I don't have to defend the draftsmen on that topic in this Court today.

If there are no other questions, my time is about up, I will rest.

Unknown Speaker: Thank you, Mr. Sicherman.

Mr. Seamon, you have 4 minutes remaining.

Rebuttal of Richard H. Seamon

Mr. Seamon: I have three points to make, and I can make them briefly.

First, in terms of respondent's arguments on the facts, they're simply beside the point.

If sovereign immunity has not been waived, then the merits are irrelevant and that was one of the reasons that we did not raise the question about the voidability of the transfer.

Second, with respect to the in rem theory of jurisdiction that the respondent is asserting here, whatever its merits, it simply doesn't apply.

We're talking about money, and there may be close cases where money is arguably erased, but this is not one of them.

The money is--

Unknown Speaker: Are we free to accept his argument here?

Even if we thought it was pretty good?

Mr. Seamon: --Even if you thought that, I think that inasmuch as it wasn't raised below, I doubt that the Court should entertain it at this point.

Unknown Speaker: The question to whether we should, would it change the judgment below if we accepted his argument?

Mr. Seamon: The judgment below, in my mind, can't be defended as an exercise of in rem jurisdictions.

Unknown Speaker: No, but that's not my question.

Mr. Seamon: I'm sorry.

Unknown Speaker: The judgment below requires the Government to turn over the money that was wrongfully transferred to it, right?

And if we accepted his first argument, you have exactly the same judgment.

Mr. Seamon: It would seem like for it to be an in rem order, it would have to order the Government to turn over the very same dollars that were taken out--

Unknown Speaker: No, if you accepted his argument that the in rem theory he advances requires the Government to repay the same amount of money that would be paid under the... then it would be permissible, wouldn't it?

Wouldn't it be the same... couldn't we affirm the judgment's already been entered if we agreed with his argument?

I'm not saying we should or would.

Mr. Seamon: --Yes, I believe that is correct.

Again, my point would be on the merits of the argument.

I just don't think it works, certainly, here.

And in any event, I don't think that as we discuss in our reply brief, there is no in rem exception to the waiver of sovereign immunity.

In the U.S. Code there are examples of instances in which Congress has felt it necessary to waive sovereign immunity with respect to certain exercises of in rem jurisdiction.

So the two are simply inconsistent.

Unknown Speaker: Mr. Seamon, I know you have very little time left, and I don't want you to give me what the answer is, but is there an answer?

It would just give me great comfort to know that some rational person thinks there is one, to why (c) says except as provided in subsections (a) and (b).

Mr. Seamon: There is an answer.

It does not make the except as phrase perfectly grammatical.

It means that money relief against Governmental units is not available except as provided in subsections (a) and (b).

Now, while that is not grammatically... the point was not grammatically made, the reason that I say that is what it means is that this same construction is used elsewhere in the code.

I would refer the Court to page 57a of our appendix.

We reprint section 549 on that page.

And 549(a) of the code begins in the same way.

It is the provision regarding postpetition transfers.

And 549(a) sets forth a general rule for voiding postpetition transfers.

It begins by saying, except as provided in subsections (b) or (c).

(b) or (c) create exceptions to a general rule, and I would say that the same wording does the same thing in subsection 106(c).

Thank you.

Chief Justice Rehnquist: Thank you, Mr. Seamon.

The case is submitted.