In Re: State of Montana Department of Revenue v. Timothy L. Blixseth

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

In re: TIMOTHY L. BLIXSETH, No. 22-60046

Debtor, BAP No. 22-1160

------------------------------

OPINION

STATE OF MONTANA

DEPARTMENT OF REVENUE,

Appellant,

v.

TIMOTHY L. BLIXSETH,

Appellee.

Appeal from the Ninth Circuit

Bankruptcy Appellate Panel

Lafferty III, Taylor, and Gan, Bankruptcy Judges, Presiding

Argued and Submitted January 10, 2024

Pasadena, California

Filed August 14, 2024

2 STATE OF MT DEPT OF REVENUE V. BLIXSETH

Before: Johnnie B. Rawlinson, Michael J. Melloy, * and

Holly A. Thomas, Circuit Judges.

Opinion by Judge Rawlinson

SUMMARY **

Bankruptcy

The panel reversed (1) the Bankruptcy Appellate Panel’s

order dismissing an interlocutory appeal and (2) the

bankruptcy court’s order denying the State of Montana

Department of Revenue’s motion to dismiss an adversary

proceeding brought by Timothy Blixseth under 11 U.S.C.

§ 303(i) for costs and damages arising out of the State’s

involuntary petition filed against Blixseth under 11 U.S.C.

§ 303(b)(1).

The panel held that the BAP and this court had

jurisdiction under the collateral order doctrine to review the

bankruptcy court’s order denying the State’s sovereign

immunity.

The panel held that the bankruptcy court erred in

concluding that the State was not entitled to sovereign

immunity in Blixseth’s adversary proceeding. First, the

State did not voluntarily invoke the jurisdiction of the

*

The Honorable Michael J. Melloy, United States Circuit Judge for the

U.S. Court of Appeals for the Eighth Circuit, sitting by designation.

**

This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

STATE OF MT DEPT OF REVENUE V. BLIXSETH 3

bankruptcy court and waive its sovereign immunity by filing

the involuntary petition under § 303(b)(1).

Second, the State’s counsel did not waive sovereign

immunity because counsel did not make a clear and

unequivocal statement of waiver.

Third, 11 U.S.C. § 106, addressing sovereign immunity

in a § 303(b) proceeding, is an unconstitutional assertion of

Congress’s power and therefore did not support the

bankruptcy court’s ruling. The panel therefore turned to the

analysis set forth in Central Va. Cmty. Coll. v. Katz, 546 U.S.

356 (2006), to determine whether the State was entitled to

sovereign immunity. Katz held that the states agreed in the

plan of the Constitutional Convention of 1787 not to assert

any sovereign immunity defense that they might have had in

bankruptcy proceedings, but this agreement was limited to

proceedings necessary to effectuate the core in rem

jurisdiction of the bankruptcy courts and orders ancillary to

their in rem jurisdiction. The panel agreed with the Third

and Eleventh Circuits that the critical functions delineated in

Katz provide useful guidelines for discerning whether an

adversary proceeding qualifies as a proceeding necessary to

effectuate the in rem jurisdiction of the bankruptcy

courts. Applying these guidelines, the panel concluded that

the adversary proceeding brought by Blixseth was not

necessary to effectuate the jurisdiction of the bankruptcy

court in this case because § 303(i) creates a remedial scheme

that is markedly distinct from the first two critical functions

described in Katz: a bankruptcy court’s exercise of

exclusive jurisdiction over all of the debtor’s property and

the equitable distribution of the property among the debtor’s

creditors. The panel concluded that a proceeding brought

under § 303(i) also does not further the third critical

function: the ultimate discharge that gives the debtor a fresh

4 STATE OF MT DEPT OF REVENUE V. BLIXSETH

start. The panel therefore reversed the bankruptcy court’s

denial of sovereign immunity and remanded with

instructions to dismiss Blixseth’s § 303(i) claim against the

State as barred by sovereign immunity.

COUNSEL

Daniel Solomon (argued), Husch Blackwell LLP,

Washington, D.C.; Lynn H. Butler, Husch Blackwell LLP,

Austin, Texas; Ogonna M. Brown, Lewis Roca Rothberger

Christie LLP, Las Vegas, Nevada; for Appellant.

Nathan A. Schultz (argued), Law Office of Nathan A.

Schultz PC, Traverse City, Michigan; Brett A. Axelrod, Fox

Rothschild LLP, Las Vegas, Nevada; for Appellee.

STATE OF MT DEPT OF REVENUE V. BLIXSETH 5

OPINION

RAWLINSON, Circuit Judge:

The State of Montana Department of Revenue (State)

brings an interlocutory appeal of the bankruptcy court’s

decision denying the State’s motion to dismiss an action

brought by Timothy Blixseth under 11 U.S.C. § 303(i) 1 for

costs and damages arising out of the State’s involuntary

petition filed against Blixseth under 11 U.S.C. § 303(b)(1). 2

We have jurisdiction under 28 U.S.C. §§ 158(d)(1). We

review decisions of the Bankruptcy Appellate Panel (BAP)

and questions of sovereign immunity de novo. See Leslie v.

Mihranian (In re Mihranian), 937 F.3d 1214, 1216 (9th Cir.

BAP 2019); see also Miller v. Wright, 705 F.3d 919, 923 (9th

Cir. 2013), as amended (sovereign immunity). Because we

1

11 U.S.C. § 303(i) provides that:

If the court dismisses a petition under this section other

than on consent of all petitioners and the debtor, and if

the debtor does not waive the right to judgment under

this subsection, the court may grant judgment--

(1) against the petitioners and in favor of the debtor

for-- (A) costs; or (B) a reasonable attorney’s fee; or

(2) against any petitioner that filed the petition in bad

faith, for-- (A) any damages proximately caused by

such filing; or (B) punitive damages.

2

11 U.S.C. § 303(b) provides that:

An involuntary case against a person is commenced by

the filing with the bankruptcy court of a petition under

chapter 7 or 11 of this title-- (1) by three or more

entities, each of which is either a holder of a claim

against such person that is not contingent as to liability

or the subject of a bona fide dispute as to liability or

amount . . .

6 STATE OF MT DEPT OF REVENUE V. BLIXSETH

conclude that sovereign immunity shields the State from

Blixseth’s action, we reverse the BAP decision denying

sovereign immunity to the State.

I. Background

Following an audit of Blixseth and his business entities,

the State of Montana Department of Revenue, Idaho State

Tax Commission, and California Franchise Tax Board filed

an involuntary bankruptcy petition against Blixseth for

unpaid taxes. See Montana Dept. of Revenue v. Blixseth, 942

F.3d 1179, 1181-82 (9th Cir. 2019). The Yellowstone Club

Liquidating Trust subsequently joined the action. See id. at

1182. After the Idaho State Tax Commission and California

Franchise Tax Board settled with Blixseth, they withdrew as

petitioning creditors. See id. The bankruptcy court then

granted summary judgment in favor of Blixseth, finding that

because the State’s claim was the subject of a bona fide

dispute as to the amount of liability, the State lacked

standing to pursue the claim in bankruptcy court, and the

petition could not be sustained based on the existence of only

one remaining petitioning creditor (the Yellowstone

Liquidating Trust). See id. at 1182-83.

The State appealed the bankruptcy court’s decision to the

district court, which affirmed. See id. at 1183. On appeal to

this court, we also affirmed, agreeing that the State lacked

standing as a petitioning creditor because its claim was

subject to a bona fide dispute. See id. at 1187. On remand,

the bankruptcy court dismissed the involuntary petition for

want of prosecution.

During the pendency of the involuntary petition, the

bankruptcy court held a hearing during which the parties

discussed sovereign immunity. The following colloquy

STATE OF MT DEPT OF REVENUE V. BLIXSETH 7

between the bankruptcy court and MDOR’s counsel

occurred:

COURT: [A]s a preliminary matter. I saw in

both the settlements with respect to

the Idaho Taxation Department

and The California Franchise Tax

Board something that piqued my

interest. I take it that all the

petitioning creditors, even though

they are sovereigns, they’re

waiving their sovereign immunity

with respect to any liability they

might have for this action, is that

correct?

COUNSEL: To the extent that is consistent with

the United States Supreme Court’s

rulings over the last couple of

years—

COURT: No, No. I don’t want it consistent.

I want explicit on the record that by

coming into this court you are

exposing yourself to anything this

Court might have to remedy [sic]

anything that the Bankruptcy

Court says needs to be remedied.

COUNSEL: I believe that’s a correct

summation of the law, that the

courts—the three state agencies

have voluntarily submitted

themselves to the jurisdiction of

this court.

8 STATE OF MT DEPT OF REVENUE V. BLIXSETH

COURT: All right. And I will tell you, I

don’t—I have no idea if we will get

there, although I saw that—I saw

obviously there was a waiver with

respect to . . . the Franchise Tax

Board—I know from the debtor,

but I also saw a request from the

Debtor for 303(i) damages, and I

just want to clear up front that it is

my view at this point that, as you

have stated, by commencing an

action in this court, not only have

they submitted to the jurisdiction

of this Court, but they have waived

whatever sovereign immunity they

might have with respect to

damages, fines, or penalties that

might accrue because of actions

taken in this Court.

COUNSEL: I believe that’s correct, Your

Honor.

Blixseth subsequently brought an adversary proceeding

against the State under § 303(i) seeking attorneys’ fees and

costs, proximate and punitive damages, and sanctions

against counsel. The State moved to dismiss, asserting

sovereign immunity. The bankruptcy court concluded that

the State was not immune from liability. First, the

bankruptcy court found that the State “voluntarily invoked

the jurisdiction of [the bankruptcy] court by filing the

[i]nvoluntary [p]etition.” Next, the bankruptcy court

concluded that the State’s counsel “clear[ly] and

unequivocal[ly] waive[d] [the State’s] sovereign immunity

STATE OF MT DEPT OF REVENUE V. BLIXSETH 9

under the Eleventh Amendment regarding any future Section

303(i) claims.” Finally, the bankruptcy court found that an

action under § 303(i) “is ancillary to the bankruptcy court’s

in rem jurisdiction” and that, “[t]o accept [the State’s]

argument would be to impermissibly read Section 106(a)(1)

out of the [Bankruptcy] Code.”

The State appealed the bankruptcy court’s decision to the

BAP, which dismissed the appeal on the ground that the

collateral order doctrine did not apply.

II. Jurisdiction

Citing Cohen v. Beneficial Industrial Loan Corp., 337

U.S. 541, 546 (1949), the BAP summarily concluded that the

collateral order doctrine did not apply because the

bankruptcy court’s decision did not fit into “the small class

which finally determine[s] claims of right separable from,

and collateral to, rights asserted in the action, too important

to be denied review and too independent of the cause itself

to require that appellate consideration be deferred until the

whole case is adjudicated.”

Normally, appeals under 28 U.S.C. § 158(d) are from

“final decisions, judgments, orders, and decrees” of a district

court or of the BAP. However, a case that is still ongoing

may be appealed if the case finally determines a claim or

claims collateral to claims asserted in the underlying action

and the collateral claims are “too important to be denied

review and too independent of the cause itself to require that

appellate consideration be deferred until the whole case is

adjudicated.” Cohen, 337 U.S. at 546. This doctrine is

commonly referred to as the “collateral order doctrine.” See

Security Pac. Bank Wash. v. Steinberg (In re Westwood

Shake & Shingle, Inc.), 971 F.2d 387, 390 (9th Cir. 1992)

(applying the collateral order doctrine to appeals brought

10 STATE OF MT DEPT OF REVENUE V. BLIXSETH

under 28 U.S.C. § 158(d)). “To come within the small class

[described in] Cohen, the order [being appealed] must

[1] conclusively determine the disputed question, [2] resolve

an important issue completely separate from the merits of the

action, and [3] be effectively unreviewable on appeal from a

final judgment.” Puerto Rico Aqueduct and Sewer Auth. v.

Metcalf & Eddy, Inc., 506 U.S. 139, 144 (1993) (citation,

alteration, and internal quotation marks omitted).

Both the United States Supreme Court and this court

have applied Cohen and concluded that denials of sovereign

immunity are immediately appealable under the collateral

order doctrine. See id.; see also Childs v. San Diego Family

Hous. LLC, 22 F.4th 1092, 1095-96 & n.2 (9th Cir. 2022)

(same). Consequently, the BAP ruling that the State’s

appeal did not fit within the collateral order doctrine was

erroneous.

III. Discussion

A. Ground One - Voluntary Invocation of

Jurisdiction

The bankruptcy court ruled that the State “voluntarily

invoked the jurisdiction” of the bankruptcy court and waived

its sovereign immunity by filing the involuntary petition,

summarily concluding that “the logical relationship test [for

compulsory counterclaims], to the extent applicable, is

easily satisfied.”

“It is traditional bankruptcy law that he who invokes the

aid of the bankruptcy court by offering a proof of claim and

demanding its allowance must abide by the consequences of

that procedure. . . .” Gardner v. New Jersey, 329 U.S. 565,

573 (1947) (citation omitted) (emphasis added). “When the

State becomes the actor and files a claim against the [res] it

STATE OF MT DEPT OF REVENUE V. BLIXSETH 11

waives any immunity which it otherwise might have had

respecting the adjudication of the claim.” Id. at 574

(citations omitted) (emphasis added). “[W]hen a state or an

‘arm of the state’ files a proof of claim in a bankruptcy

proceeding, the state waives its Eleventh Amendment

immunity with regard to the bankruptcy estate’s claims that

arise from the same transaction or occurrence as the state’s

claim. . . .” Lazar v. California (In re Lazar), 237 F.3d 967,

978 (9th Cir. 2001) (emphasis added).

The State never filed a proof of claim, so any litigation

waiver must be predicated upon the existence of a claim

arising out of the adversary proceeding brought by the State.

See id. “To determine whether a claim against the state

arises out of the ‘same transaction or occurrence’ as the

state’s proof of claim,” thereby overcoming sovereign

immunity, “we apply the ‘logical relationship’ test for

compulsory counterclaims.” Montana v. Goldin (In re

Pegasus Gold Corp.), 394 F.3d 1189, 1195-96 (9th Cir.

2005) (internal quotation marks omitted). Under that test,

[a] logical relationship exists when the

counterclaim arises from the same aggregate

set of operative facts as the initial claim, in

that the same operative facts serve as the

basis of both claims or the aggregate core of

facts upon which the claim rests activates

additional legal rights otherwise dormant in

the defendant.

Id. (citation omitted).

We are not persuaded, however, that a § 303(i) claim is

the equivalent of a compulsory counterclaim when an

involuntary petition is filed under § 303(b) because, much

12 STATE OF MT DEPT OF REVENUE V. BLIXSETH

like a common law malicious prosecution claim, a claim

filed under § 303(i) cannot arise out of the same factual

predicate that supports a § 303(b) claim. See Hydranautics

v. FilmTec Corp., 70 F.3d 533, 537 (9th Cir. 1995) (“[A]

malicious prosecution claim cannot be asserted as a

counterclaim to the original suit which furnishes its

predicate. . . .”) (citation omitted). A § 303(i) claim arises

from the fact of the filing of an involuntary petition under

§ 303(b), and therefore cannot satisfy the logical relationship

test as a matter of law. See 11 U.S.C. § 303(i) (conditioning

award of costs, fees, and damages on “the court dismiss[ing]

a petition under this section other than on consent of all

petitioners and the debtor”). Such an action is not a

permissible “counterclaim to the original [involuntary

petition] which furnishes its predicate.” Hydranautics, 70

F.3d at 537.

Nor are we inclined to conclude that sanctions imposed

under Rule 11 are a more apt analogy. Indeed, we have held

that Ҥ 303(i) is a fee-shifting provision rather than a

sanctions statute” and we have “contrast[ed]” § 303(i) with

Rule 11. Orange Blossom Ltd. P’ship v. S. Cal. Subelt Devs.,

Inc. (In re S. Cal. Sunbelt Devs., Inc.), 608 F.3d 456, 462

(9th Cir. 2010). Specifically, we observed that “[l]ike other

fee shifting provisions, and in contrast to Rule 11, eligibility

for fees [under § 303(i)] turns on the merits of the litigation

as a whole, rather than on whether a specific filing is well

founded.” Id. (internal quotation marks omitted).

Blixseth’s allegations fail the logical relationship test in

any event because Blixseth’s claim does not arise from the

same “aggregate set of operative facts” as the State’s

involuntary petition. In re Pegasus Gold Corp., 394 F.3d at

1195-96. The States’s involuntary petition alleged a debt of

unpaid taxes from an improper tax deduction. In contrast,

STATE OF MT DEPT OF REVENUE V. BLIXSETH 13

Blixseth sought relief based on the consequences of having

to defend against the petition, rather than claims arising from

the factual predicate of his alleged tax deficiency. See id.

B. Ground Two - Counsel’s Waiver of Sovereign

Immunity

“Generally, [a court] will find a waiver [of sovereign

immunity] . . . if the State makes a clear declaration that it

intends to submit itself to [the court’s] jurisdiction.” College

Sav. Bank v. Fla. Prepaid Postsecondary Educ. Expense Bd.,

527 U.S. 666, 675-76 (1999) (citations and internal

quotation marks omitted). A “state’s consent to suit,”

however, “must be unequivocally expressed.” Id. at 676

(citation and internal quotation marks omitted). “[T]he

‘unequivocal expression’ of elimination of sovereign

immunity that [the Supreme Court] insist[s] upon is an

expression in statutory text. . . .” United States v. Nordic

Vill., Inc., 503 U.S. 30, 37 (1992) (citation omitted). Thus,

MDOR’s counsel could not and did not effect an

“unequivocal” waiver of MDOR’s sovereign immunity

through his statements to the court. Id.

C. Ground Three - Ancillary Bankruptcy

Jurisdiction (Katz Analysis)

“The text of Article I, § 8, cl. 4, of the Constitution . . .

provides that Congress shall have the power to establish

uniform Laws on the subject of Bankruptcies throughout the

United States. . . .” Central Va. Cmty. Coll. v. Katz, 546 U.S.

356, 370 (2006) (internal quotation marks omitted).

Pertinent to this appeal, Congress has established that:

An involuntary case against a person is

commenced by the filing with the bankruptcy

court of a petition under chapter 7 or 11 of

14 STATE OF MT DEPT OF REVENUE V. BLIXSETH

this title . . . by three or more entities, each of

which is either a holder of a claim against

such person that is not contingent as to

liability or the subject of a bona fide dispute

as to liability or amount . . .

11 U.S.C. § 303(b)(1).

If the court dismisses a petition under this

section other than on consent of all

petitioners and the debtor, and if the debtor

does not waive the right to judgment under

this section, the court may grant judgment--

(1) against the petitioners and in favor of the

debtor for-- (A) costs; or (B) a reasonable

attorney’s fee; or (2) against any petitioner

that filed the petition in bad faith, for--

(A) any damages proximately caused by such

filing; or (B) punitive damages.

11 U.S.C. § 303(i)(1)-(2). 3

“Notwithstanding an assertion of sovereign immunity,

sovereign immunity is abrogated as to a governmental unit

to the extent set forth within this section with respect to . . .

[Section] 303 . . .” 11 U.S.C. § 106(a)(1).

In Mitchell v. California Franchise Tax Board (In re

Mitchell), 209 F.3d 1111, 1120 (9th Cir. 2000), abrogation

on other grounds recognized in Pistor v. Garcia, 791 F.3d

1104, 1111 (9th Cir. 2015), we held that § 106(a) is “an

3

This is the provision Blixseth used to support the claims in his adversary

proceeding against the State.

STATE OF MT DEPT OF REVENUE V. BLIXSETH 15

unconstitutional assertion of Congress’s power.” 4 Thus, the

bankruptcy court improperly relied on § 106(a) as a basis for

ruling that the State waived its sovereign immunity. See id.

Because § 106(a) does not support the bankruptcy court’s

ruling, we turn to the analysis set forth in Katz to determine

whether the State is entitled to sovereign immunity.

In Katz, the Supreme Court held that Virginia institutions

of higher education were “amenable” to “proceedings to

recover preferential transfers.” 546 U.S. at 379. To reach

this conclusion, the Court observed that “states agreed in the

plan of the [Constitutional Convention of 1787] not to assert

any sovereign immunity defense they might have had in

proceedings brought pursuant to Laws on the subject of

Bankruptcies.” Id. at 377 (citation and internal quotation

marks omitted). However, as the Supreme Court further

explained, “[t]he scope of this consent was limited.” Id. at

378. “In ratifying the Bankruptcy Clause, the States

acquiesced in a subordination of whatever sovereign

immunity they might otherwise have asserted in proceedings

necessary to effectuate the in rem jurisdiction of the

bankruptcy court.” Id. (footnote reference omitted). This

subordination also encompassed orders “ancillary to the

bankruptcy courts’ in rem jurisdiction.” Id. at 373.

The Court thus considered whether 11 U.S.C. § 550, the

section under which the universities’ sought “to avoid and

4

Hunsaker v. United States, 902 F.3d 963 (9th Cir. 2018), does not

negate our reasoning in In re Mitchell. Hunsaker concerned federal

sovereign immunity rather than State sovereign immunity under the

Eleventh Amendment. See id. at 967-68 (discussing the recovery of

emotional distress damages against the federal government under a

federal statute). For the same reason, the bankruptcy court’s reliance on

Zazzali v. United States (In re DBSI, Inc.), 869 F.3d 1004, 1011 (9th Cir.

2017), was misplaced.

16 STATE OF MT DEPT OF REVENUE V. BLIXSETH

recover alleged preferential transfers” to the universities, id.

at 360, was within the scope of the States’ consent given

during the Constitutional Convention. In concluding that

proceedings brought under § 550 were within the scope of

the States’ consent given during the Convention, the Court

reasoned that “those who crafted the Bankruptcy Clause

would have understood it to give Congress the power to

authorize courts to avoid preferential transfers and to recover

the transferred property.” Id. at 372. The Court described

the recovery of preferential transfers under § 550 as “a core

aspect of the administration of bankrupt estates since at least

the 18th century.” Id.

Proceedings are at the “core” of a bankruptcy court’s

jurisdiction (i.e., within its in rem jurisdiction) to which the

States acquiesced insofar as they further the three “[c]ritical

features of every bankruptcy proceeding” as set forth in

Katz: “[1] the exercise of exclusive jurisdiction over all of

the debtor’s property, [2] the equitable distribution of that

property among the debtor’s creditors, and [3] the ultimate

discharge that gives the debtor a ‘fresh start’ by releasing

him, or her, or it from further liability for old debts.” Id. at

363-64 (citation omitted); see also id. at 362 (“Bankruptcy

jurisdiction, at its core, is in rem. . . .”) (citation omitted).

In Venoco LLC v. California (In re Venoco LLC), 998

F.3d 94, 99 (3d Cir. 2021), the Third Circuit “appl[ied] Katz

to a bankruptcy adversary proceeding brought by a

liquidating trustee for the debtors’ assets.” The trustee

sought “compensation from the State of California and its

Lands Commission for the alleged taking of a refinery that

belonged to debtors.” Id. The adversary proceeding was

“primarily a claim for inverse condemnation, a cause of

action against a governmental defendant to recover the value

of property which has been taken in fact by the governmental

STATE OF MT DEPT OF REVENUE V. BLIXSETH 17

defendant.” Id. at 100 (citation and internal quotation marks

omitted).

In reaching its holding that the governmental defendants

could not assert sovereign immunity, the Third Circuit

concluded that the adversary proceeding furthered the first

and second critical functions articulated in Katz. See id. at

106. The court explained that the adversary proceeding

“further[ed] the Bankruptcy Court’s exercise of jurisdiction

over property of the Debtors and their estates,” namely the

refinery owned by the debtors. Id. The adversary

proceeding also furthered the second critical function of

“facilitating equitable distribution of the estate’s assets.”

The Third Circuit observed that if the governmental

defendants could assert sovereign immunity they would be

able to recover from the Trust as creditors of the estate, while

at the same time “preventing any judicial scrutiny over

whether they [could] use the [refinery] without payment.”

Id. In addition, the governmental defendants “would

improve their status vis-à-vis other creditors solely owing to

their status as a state that can invoke sovereign immunity,

just the kind of result Katz wanted to avoid.” Id. (citation

omitted).

In State of Florida Dept. of Revenue v. Diaz (In re Diaz),

647 F.3d 1073, 1079 (11th Cir. 2011), the Eleventh Circuit

held that sovereign immunity shielded the Florida

Department of Revenue and the Virginia Department of

Social Services from the debtor’s motion for contempt and

sanctions for violation of the automatic bankruptcy stay and

related discharge injunction.

The Eleventh Circuit acknowledged that “[t]he

automatic stay is a fundamental procedural mechanism in

bankruptcy that allows the court to carry out” the first and

18 STATE OF MT DEPT OF REVENUE V. BLIXSETH

second critical functions identified in Katz, and was

therefore necessary to effectuate the in rem functions of the

bankruptcy court. Id. at 1085. However, the debtor did not

file the contempt motion until four years after “the

bankruptcy court had distributed the estate according to the

Chapter 13 plan and entered a discharge order, which

replaced the automatic stay with the discharge injunction.”

Id. at 1086. Because the contempt motion at that point no

longer furthered the purpose of the bankruptcy stay, the

Eleventh Circuit determined that the contempt motion “was

filed too late to be considered essential to any in rem

functions of the bankruptcy court.” Id. The Eleventh Circuit

concluded that “[t]he nexus between the [contempt] motion

and the bankruptcy court’s in rem jurisdiction [was] thus too

remote to satisfy Katz’s ‘necessary to effectuate [the in rem

jurisdiction of the bankruptcy court] standard.’” Id.

We agree with the Third and Eleventh Circuits that the

critical functions delineated in Katz provide useful

guidelines for discerning whether an adversary proceeding

qualifies as a “proceeding[] necessary to effectuate the in

rem jurisdiction of the bankruptcy courts.” Id. (quoting

Katz, 546 U.S. at 378). Applying these guidelines, we

conclude that the adversary proceeding brought by Blixseth

under § 303(i) was not “necessary to effectuate the

jurisdiction of the bankruptcy court[]” in this case. Id.

Section 303(i) creates a “remedial scheme” that

“addresses . . . costs and attorneys’ fees for dismissed

involuntary petitions [and] compensatory and punitive

damages for involuntary petitions filed in bad faith.” Miles

v. Okun (In re Miles), 430 F.3d 1083, 1090 (9th Cir. 2005).

This remedial function is markedly distinct from the first two

critical functions described in Katz: a bankruptcy court’s

exercise of exclusive jurisdiction over all of the debtor’s

STATE OF MT DEPT OF REVENUE V. BLIXSETH 19

property and the equitable distribution of that property

among debtor’s creditors. See Katz, 546 U.S. at 363-64.

Section 303(i) is also substantially different than § 550,

the statute at issue in Katz, which “authorize[s] [bankruptcy]

courts to avoid preferential transfers and to recover

transferred property” that is part of the res of the bankruptcy

estate. Id. at 372. As the Supreme Court explained, the

authority “to avoid preferential transfers and to recover

transferred property” of the estate “has been a core aspect of

the administration of bankrupt estates since at least the 18th

century.” Id. (citations omitted). In contrast, an adversary

proceeding brought under § 303(i) does not concern property

in the res of the bankruptcy estate, but rather compensation

for having been the subject of an unsuccessful involuntary

petition that could have created a res but never did.

Neither does an adversary proceeding brought under

§ 303(i) further the third critical function, “the ultimate

discharge that gives the debtor a fresh start by releasing him

. . . from further liability for old debts.” Katz, 546 U.S. at

364 (citation and internal quotation marks omitted).

Blixseth does not seek a “fresh start” with regard to “old

debts,” but reimbursement of his costs incurred for

undergoing bankruptcy proceedings. Id.

Denying sovereign immunity in this context could have

the effect of subjecting a state to litigation merely because

the state filed an involuntary bankruptcy petition. See Katz,

546 U.S. at 362-63 (“The . . . Bankruptcy Clause . . . was

intended . . . to authorize limited subordination of state

sovereign immunity in the bankruptcy arena.”) (emphasis

added). For these reasons, we conclude that the State’s

assertion of sovereign immunity under the Eleventh

Amendment was properly invoked.

20 STATE OF MT DEPT OF REVENUE V. BLIXSETH

IV. Conclusion

We have jurisdiction over this appeal under the collateral

order doctrine. We are not persuaded that any of the grounds

relied upon by the bankruptcy court to deny sovereign

immunity to the State survive the Katz analysis. Rather, we

conclude that under the reasoning and analysis in Katz, the

State properly invoked sovereign immunity for Blixseth’s

claim brought under § 303(i).

We therefore reverse the BAP’s order finding that the

collateral order doctrine does not apply. We also reverse the

bankruptcy court’s denial of sovereign immunity, and

remand with instructions to dismiss Blixseth’s § 303(i)

claim against the State as barred by sovereign immunity.

REVERSED AND REMANDED with instructions.