# Zayler v. Department of Agriculture (In re Supreme Beef Processors, Inc.)

> Court of Appeals for the Fifth Circuit · October 19, 2006 · 468 F.3d 248

URL: https://www.frixlaw.com/law-library/cases/8410314

## Case

- **Full name:** In the Matter of: SUPREME BEEF PROCESSORS, INC., Debtor. Stephen Zayler, Trustee of the Estate of Supreme Beef Processors, Inc. v. Department of Agriculture United States of America
- **Court:** Court of Appeals for the Fifth Circuit
- **Decided:** October 19, 2006
- **Citations:** 468 F.3d 248
- **Precedential status:** Published
- **Opinion:** Concurring in part by Clement
- **Judges:** Barksdale, Benavides, Clement, Davis, Demoss, Dennis, Garza, Higginbotham, Jolly, Jones, Owen, Prado, Smith, Stewart, Wiener
- **Cited by:** 3 later opinions in the Frix Law Library

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## Opinion text

EDITH BROWN CLEMENT, Circuit Judge,
joined by BENAVIDES, STEWART and PRADO, Circuit Judges,
concurring in part and dissenting in part:
I agree with the majority opinion’s dismissal of Supreme Beefs § 106(b) claims. However, to reach its holding that Supreme Beef cannot use § 106(c) to offset the USDA’s claim for overtime inspection services, the majority opinion ignores the plain language of § 106(c), disregards Congress’s intent to allow offset against governmental claims, and rewrites the definition of property of the estate. Therefore, I respectfully dissent.
Section 106(c) of the bankruptcy code provides that, “[njotwithstanding any assertion of sovereign immunity by a governmental unit, there shall be offset against a claim or interest of a governmental unit any claim against such governmental unit that is property of the estate.” A straightforward reading of § 106(c)’s plain language shows that the only limitation to offset is that the bankrupt’s claim be property of the estate. See 2 Collier on Bankruptcy § 106.02[4] (15th ed.2006). Because § 106(c) contains an explicit waiver of sovereign immunity and because Supreme Beefs offset claim is property of the estate, Supreme Beef has the right to pursue its offset claim.
*265 A. 11 U.S.C. § 106 (c) contains an express waiver of sovereign immunity. 1
For § 106(c) to allow Supreme Beef to offset the USDA’s $32,753 claim for overtime inspection services, there must first be an explicit, unequivocal waiver of sovereign immunity. United States v. Nordic Village, 503 U.S. 30, 33-34 , 112 S.Ct. 1011 , 117 L.Ed.2d 181 (1992) (“Waivers of the Government’s sovereign immunity, to be effective, must be unequivocally expressed.”) (internal quotation omitted). Section 106(c) allows a debtor to offset a governmental claim “[notwithstanding any assertion of sovereign immunity.” Congress’s waiver of sovereign immunity could not be more explicit. The Supreme Court has stated, when discussing the predecessors to §§ 106(b) and (c), 2 that “they plainly waive sovereign immunity with regard to monetary relief in two settings ...one of which involves claims “capped by a set-off limitation.” Nordic Village, 503 U.S. at 34 , 112 S.Ct. 1011 (Scalia, J.). Construing § 106(c) as anything other than an explicit waiver of sovereign immunity ignores the statute’s plain language and Congress’s intent manifested thereby. See Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253-54 , 112 S.Ct. 1146 , 117 L.Ed.2d 391 (1992) (‘We have stated time and again that courts must presume that a legislature says in a statute what it means and means in a statute what it says there.”) (citing United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241-42 , 109 S.Ct. 1026 , 103 L.Ed.2d 290 (1989)).
Indeed, the waiver language in § 106(c) was added by Congress in 1994 — along with other § 106 revisions — to clarify that sovereign immunity was expressly waived. See H.R. Rep. No. 103-835, at 42, reprinted in 1994 U.S.C.C.A.N. 3340, 3350-51. See also Elizabeth Gibson, Congressional Response to Hoffman and Nordic Village: Amended Section 106 and Sovereign Immunity, 69 Am. Bankr.L.J. 311, 337 (1995) (“The insertion of the phrase ‘[n]otwith-standing any assertion of sovereign immunity’ serves merely to make explicit the congressional intent to eliminate sovereign immunity as a defense to setoffs falling within the terms of the provision.”) (alteration in original). The waiver language in § 106(c) is nearly identical to the waiver language in § 106(a), which Congress unmistakably modified to overturn the effects of the Hoffman and Nordic Village decisions. See H.R. Rep. No. 103-835, at 42, reprinted in 1994 U.S.C.C.A.N. 3340, 3350-51; Cent. Va. Comm. College v. Katz, 546 U.S. 356, n. 2 , 126 S.Ct. 990 , 995 n. 2, 163 L.Ed.2d 945 (2006) (noting that Congress modified what is now 11 U.S.C. § 106 (a) to clarify that it waives the federal government’s sovereign immunity). Therefore, any implication that § 106(c) does not explicitly waive sovereign immunity 3 not only creates a result incompatible *266 with Congress’s intention, but also creates inconsistency between §§ 106(a) and (c), with nearly identical language leading to waiver in (a) but not in (c).
B. Supreme Beefs claim is property of the estate.
Since § 106(c) contains an express waiver of sovereign immunity, this court must turn to the only remaining offset requirement in § 106(c). As the majority correctly notes, for Supreme Beef to offset the USDA’s claim, its claim must be property of the estate as required in § 106(c). See Maj. Op. at 255-56. Property of the estate is defined as “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541 . In analyzing whether Supreme Beefs claim against the USDA meets this definition, this court’s recent decision in Burgess v. Sikes (In re Burgess), 438 F.3d 493 (5th Cir.2006) (en banc), is instructive. 4 Burgess was a farmer who suffered a crop loss prior to filing for bankruptcy. Id. at 495 . After Burgess filed his bankruptcy petition and after he was discharged from bankruptcy, Congress enacted legislation that entitled him to a relief payment. Id. The trustee argued that the payment was property of the estate, while Burgess argued for sole possession. See id.
In resolving the dispute, the court first rejected the trustee’s argument that crop loss together with potential relief legislation constituted property of the estate. Id. at 503 . It held that, because Burgess had “only a mere hope that crop-disaster-relief legislation would be enacted” when he filed his bankruptcy petition, Burgess “had no interest, contingent or otherwise, in the disaster-relief payment when he filed” that petition. Id. The court next considered the trustee’s argument that the crop loss itself was property of the estate and concluded that Burgess had no legal prepetition claim because “[h]is crops were damaged by nature” rather than “at the hands of an individual or entity giving rise to a legal claim for reimbursement.” Id. at 505-06 .
From the Burgess court’s analysis emerges a two-step property-of-the-estate inquiry. First, there must be a prepetition loss. Second, the claimant must have a prepetition right to recover that loss. 5 Supreme Beefs claim satisfies both steps. The loss here is the injury caused by the USDA inspectors, and Supreme Beef has a right to recover the loss pursuant to substantive Texas state law, assuming it proves the necessary facts after any remand. See, e.g., Burch v. Coca-Cola Co., 119 F.3d 305, 323-24 (5th Cir.1997) (analyzing defamation claims under Texas law). Since Supreme Beefs claim satisfies these *267 two steps, Supreme Beefs claim is property of the estate, and Supreme Beef has met the lone requirement to pursue an offset claim under § 106(c).
The majority opinion focuses on the fact that the FTCA’s discretionary function exception, along with other FTCA provisions, would stand as a sovereign immunity bar to Supreme Beefs recovery outside of bankruptcy. In the majority opinion’s view, because sovereign immunity would bar Supreme Beefs claim if brought through the FTCA outside of bankruptcy, its claim is not property of the estate. 6 This analysis improperly fails to distinguish between a right and a remedy and construes property of the estate in a manner that is inconsistent with Fifth Circuit and Supreme Court precedent.
The FTCA provides both a limited waiver of sovereign immunity and federal court jurisdiction for tort claims brought by individuals against the United States. See 28 U.S.C. §§ 1346 (b), 2674. FTCA’s focus is on the remedy; what the FTCA does not do is provide the substantive law from which the right to recover arises. The state law does that. Both the text of the FTCA and the Supreme Court’s analysis of that text reveal that the FTCA is merely a procedural vehicle through which state law claims are brought. See 28 U.S.C. § 1346 (b)(1) (noting that the federal government can be sued in federal court “for injury or loss of property ... under circumstances where the United States, if a private person, would be liable to the claimant in accordance with the law of the place where the act or omission occurred”) (internal quotation omitted and emphasis added). See also Meyer, 510 U.S. at 477-78, 114 S.Ct. 996 (noting that the Supreme Court “ha[s] consistently held ... [that the reference to] ‘law of the place’ means law of the State — the source of substantive liability under the FTCA”) (emphasis added); United States v. Brown, 348 U.S. 110, 112 , 75 S.Ct. 141 , 99 L.Ed. 139 (1954) (“[T]he effect of the Tort Claims Act is to waive immunity from recognized causes of action.”) (internal quotation omitted and emphasis added). Supreme Beefs claims against the USDA include claims for, among other things, slander and libel. These causes of action are creatures of Texas state law, which provides a right for Supreme Beef to recover. This right to recover from the USDA, under Burgess, is property of the estate irrespective of whether the FTCA provides a procedural remedy for that right.
The majority’s holding that the mere presence of a sovereign immunity bar in the FTCA prevents the existence of property of the estate cannot be reconciled with this court’s en banc opinion in Burgess. As stated there, “sovereign immunity is not a bar to the existence of a pre-petition cause of action for bankruptcy purposes.” Burgess, 438 F.3d at 504 (emphasis added). Put otherwise, the presence of a sovereign immunity bar, here the FTCA’s discretionary function and other exceptions, does not mean that no right to recover exists. The Burgess court drew this distinction citing to Supreme Court precedent. See 438 F.3d at 503 -05 (citing Williams v. Heard, 140 U.S. 529 , 11 S.Ct. 885 , 35 L.Ed. 550 (1891), and Milnor v. Metz, 41 U.S. 221 , 16 Pet. 221 , 10 L.Ed. 943 (1842), and emphasizing that *268 both decisions distinguish between the existence of a right and the ability to enforce that right). This distinction should not be conflated. 7
The majority’s holding effectively requires two express sovereign immunity waivers for a bankrupt to offset a governmental claim: one express waiver in the bankruptcy code and one in the FTCA. The Supreme Court requires one. See Nordic Village, 503 U.S. at 33-34 , 112 S.Ct. 1011 . It is incongruous to add an additional prerequisite considering that Congress did not include this requirement in § 106(c) (or in the definition of property of the estate) and considering that sovereign immunity is less of a concern — not more, as the majority’s holding implies — in bankruptcy situations. Cf. Katz, 126 S.Ct. at 995 .
Moreover, where the claim against the government is only for offset, as Supreme Beefs is, sovereign immunity concerns are even further diminished because Supreme Beef cannot affirmatively recover from government coffers. Congress implicitly recognized this lessened concern; § 106(c) contains fewer limitations on the waiver than do §§ 106(a) and (b). In § 106(a), Congress limited the sovereign immunity waiver to situations covered by enumerated sections of the bankruptcy code and in § 106(b) limited waiver to situations in which the claim against the government is property of the estate and arises out of the same “transaction or occurrence” as the government’s claim. Section 106(c) does have its own limitation, but it is a less restrictive one than §§ 106(a) or (b): “[T]here shall be offset ... [for] any claim that is property of the estate.” 8 It is not unreasonable to think that Congress provided a limitation in § 106(c) that is less restrictive than those in §§ 106(a) or (b) because a bankrupt claiming offset cannot affirmatively recover from the government.
C. Conclusion
Since Congress explicitly waived sovereign immunity and Supreme Beefs claim is property of the estate, I would hold that Supreme Beef can pursue its claim for offset against the USDA’s $32,753 claim for overtime inspection services. I respectfully dissent from the majority’s holding that Supreme Beef cannot offset the government’s claim under § 106(c).
.The majority opinion introduces the issue of whether § 106(c) contains an express waiver of sovereign immunity, see Maj. Op. at 252, and later holds that § 106(c) does not effect "a waiver of substantive sovereign immunity.'' Maj. Op. at 256, 257. Presumably, "substantive sovereign immunity” — a term new to Fifth Circuit jurisprudence — refers to the sovereign immunity bar contained in the FTCA, rather than to the sovereign immunity waiver contained in § 106(c). It appears that the majority opinion never specifically addresses whether § 106(c) contains an express waiver of sovereign immunity, which is the first step required in a waiver-of-sovereign-immunity analysis. See United States v. Nordic Village, 503 U.S. 30, 33 , 112 S.Ct. 1011 , 117 L.Ed.2d 181 (1992). See also FDIC v. Meyer, 510 U.S. 471, 484 , 114 S.Ct. 996 , 127 L.Ed.2d 308 (1994).
. Before Congress amended § 106 in 1994, what is now §§ 106(b) and (c) were codified at§§ 106(a) and (b).
. The majority opinion implies as much when it states that "[t]he ['notwithstanding any assertion of sovereign immunity'] clause is designed to recognize the different procedural *266 postures in which §§ 106(b) and (c) claims arise.” See Maj. Op. at 256.
. The majority opinion states that Burgess is inapposite because, unlike in Burgess, the question here is "whether Supreme Beef has any claim apart from the FTCA.” Maj. Op. at 255-56. However, since § 106(c) contains an express waiver of sovereign immunity, resolution of Supreme Beefs appeal necessarily turns on whether its claim is property of the estate, which is the sole requirement to setoff in § 106(c). It is proper to consider this circuit's latest treatment of the property-of-the-estate definition. When discussing whether Supreme Beef's claim is property of the estate, the majority opinion does little more than quote the definition of property of the estate from the bankruptcy code and state that offset claims "are not freestanding and divorced from the substantive limitations that would be imposed outside of bankruptcy.” See Maj. Op. at 255-56.
. The Eleventh Circuit has recently followed Burgess in resolving a crop-loss property-of-the-estate dispute. See Bracewell v. Kelley (In re Bracewell), 454 F.3d 1234, 1237-40 (11th Cir.2006).
. To the extent that the majority’s position is drawn from § 106(a)(5)'s general statement regarding creation of substantive rights, that section must be read harmoniously with the more specific § 106(c). See Gozlon-Peretz v. United States, 498 U.S. 395, 407 , 111 S.Ct. 840 , 112 L.Ed.2d 919 (1991) (“A specific provision controls over one of more general application.”). See also Carmona v. Andrews, 357 F.3d 535 , 538 n. 4 (5th Cir.2004) (same). So long as Supreme Beef meets the lone requirement specifically listed in § 106(c), it is entitled to offset the USDA’s claim.
. Because sovereign immunity, under Burgess, is inapposite to the property-of-the-estate inquiry and because § 106(c) contains an unequivocal waiver of sovereign immunity, a recent Tenth Circuit panel’s opinion cited by the majority opinion is unpersuasive. See Maj. Op. at 255-56 (citing Franklin Savings Corp. v. United States (In re Franklin Savings Corp.), 385 F.3d 1279, 1287-89 (10th Cir.2004) (holding that § 106 does not operate to waive the procedural requirements of the FTCA)). Adopting the Tenth Circuit approach also would create incoherence with Fifth Circuit precedent, specifically W. Tex. Mktg. Corp. v. United States (In re W. Tex. Mktg. Corp.), 54 F.3d 1194 (5th Cir.1995). In Kellogg, a panel of this court held that the waiver of sovereign immunity in § 106(a) operates to waive sovereign immunity with respect to administrative filing requirements in the Internal Revenue Code. See id. at 1198-99 n. 10. Endorsing the Franklin analysis would create confusion as to which prerequisites in non-bankruptcy law are waived by an explicit sovereign immunity waiver. The better approach is to look to the plain language of the bankruptcy code's sovereign immunity waiver for its limitations.
. The Supreme Court has recognized the textual limitations to sovereign immunity waivers in § 106. See Hoffman v. Conn. Dep't of Income Maint., 492 U.S. 96, 101-02 , 109 S.Ct. 2818 , 106 L.Ed.2d 76 (1989) (noting that the predecessors to §§ 106(b) and (c) “carefully limit! ]the waiver of sovereign immunity”).

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/8410314. Public record. Not legal advice.