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

468 F.3d 248

Opinions

EDITH H. JONES, Chief Judge:

Footnotes

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In this bankruptcy case, the debtor, Supreme Beef Processors, Inc. (“Supreme Beef’), asserts that it may pursue tort claims against the United States Department of Agriculture (“USDA”) that would be barred by the federal government’s sovereign immunity outside of bankruptcy. The district court dismissed Supreme Beefs claims, but a panel of this court held that permissive counterclaims against the Government may be used as a setoff pursuant to § 106(c) of the Bankruptcy Code, 11 U.S.C. § 106(c), which allegedly effects a waiver of the USDA’s sovereign immunity. Upon reconsidering the case en banc, we reject the panel’s interpretation of § 106(c) and AFFIRM the decision of the district court in its entirety.

I. Background

Supreme Beef was a Texas-based company in the business of processing, grinding and selling meat products. As a major domestic wholesale supplier of beef products, the company had several contracts with the USDA to support the National School Lunch Program.

The USDA is responsible for ensuring the safety of the nation’s meat products, 21 U.S.C. § 608, and has delegated its inspection duties to the Food Safety and Inspection Service (“FSIS”). As a general matter, the USDA bears the cost of performing inspection services. It is, however, authorized to seek reimbursement for overtime work at individual plants, 21 U.S.C. § 695 and 7 U.S.C. § 2219(a), and it may collect fees for certification services. 7 U.S.C. § 1622(h).

In 1996, FSIS issued the Pathogen Reduction, Hazard Analysis and Critical Control Point Systems (“HACCP”) rule, 9 C.F.R. § 417, which requires meat processors to develop and implement preventive controls to ensure product safety. The FSIS maintains the power to verify whether plants’ performance plans are eliminating common pathogens such as E. coli and Salmonella.

Two years later, Supreme Beef implemented its first HACCP pathogen control plan. Unfortunately, the company failed a series of tests administered by the FSIS over a period of months.

Still unable to demonstrate adequate HACCP control by October 1999, Supreme Beef filed a lawsuit on the day that the USDA had set to suspend inspection activities at its plant. Removal of USDA inspectors would be a fatal blow to the company, as it is illegal to sell uninspected beef. 21 U.S.C. § 606. The district court granted a temporary restraining order and later upheld Supreme Beefs contention that because the FSIS testing system was “not solely — or even substantially” related to the plant’s sanitary conditions, it fell outside the agency’s regulatory authority. Supreme Beef Processors, Inc. v. U.S. Dep’t of Agric., 113 F.Supp.2d 1048, 1053 (N.D.Tex.2000), aff'd, 275 F.3d 432 (5th Cir.2001). The decision was a Pyrrhic victory, however, as the court refused to compel USDA to perform the National School Lunch contracts. Having lost its government contracts and many other customers, Supreme Beef was forced to seek Chapter 11 bankruptcy in September 2000. Its case was subsequently converted to Chapter 7.

Adding insult to the company’s injury, the USDA filed various proofs of claim totaling $32,753 for pre-petition meat certification services and overtime inspection work. The trustee filed an adversary proceeding against the Government in bankruptcy court seeking damages for USDA’s unauthorized regulatory activity. The reference was withdrawn, and the case proceeded in federal district court. The trustee asserted five claims against the USDA under the Federal Tort Claims Act (“FTCA”), 28 U.S.C. §§ 1346(b), 2671-2680.¹ The USDA moved to dismiss Supreme Beefs claims as being barred facially by federal sovereign immunity. See Fed.R.Civ.P. 12(b)(1) and 12(b)(6). Citing 11 U.S.C. §§ 106(b) and (c), Supreme Beef countered that USDA had waived its immunity by filing bankruptcy proofs of claim. The district court sided with the USDA, and Supreme Beef appealed. A panel of this court reversed the trial court’s judgment² and held that 11 U.S.C. § 106(c) waived USDA’s sovereign immunity and authorized a setoff of Supreme Beefs permissive counterclaims. This court ordered rehearing en banc.

II. Discussion

This court reviews de novo a district court’s dismissal pursuant to Fed.R.Civ.P. 12(b)(1) or 12(b)(6). LeClerc v. Webb, 419 F.3d 405, 413 (5th Cir.2005). A claim may not be dismissed unless it appears certain that the plaintiff cannot prove any set of facts that would entitle him to legal relief. Benton v. United States, 960 F.2d 19, 21 (5th Cir.1992).

The issue in this case is whether Supreme Beef stated a viable claim for tort recovery against the USDA premised solely on § 106(c) of the Bankruptcy Code, which provides:

(c) Notwithstanding 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.

11 U.S.C. § 106(c).

Our analysis begins with the legal claim that Supreme Beef may not pursue: an FTCA claim. The Constitution contemplates that, except as authorized by Congress, the federal government and its agencies are immune from suit. Hercules, Inc. v. United States, 516 U.S. 417, 422, 116 S.Ct. 981, 985, 134 L.Ed.2d 47 (1996). Two Constitutional provisions support this immunity. The Appropriations Clause states that no money “shall be drawn from the Treasury, but in Consequence of Appropriations made by Law”. U.S. CONST. art. I, § 9, cl. 7. Consequently, any “payment of money from the Treasury must be authorized” by Congress. Office of Pers. Mgmt. v. Richmond, 496 U.S. 414, 424, 110 S.Ct. 2465, 2472, 110 L.Ed.2d 387 (1990). Similarly, the Property Clause states that, “[t]he Congress shall have power to dispose of and make all needful rules and regulations respecting the territory or other property belonging to the United States.” U.S. CONST. art. IV, § 3, cl. 2. “Congress has the absolute right to prescribe” the manner in which its property is transferred. Gibson v. Chouteau, 13 Wall. 92, 80 U.S. 92, 99, 20 L.Ed. 534 (1872).

Absent an express waiver of federal immunity by Congress, the USDA cannot be sued by Supreme Beef. Congress provided, in the FTCA, an exclusive vehicle for the assertion of tort claims for damages against the federal government. See 28 U.S.C. §§ 2679(a)-(b)(l). The FTCA allows a plaintiff to pursue tort actions against the federal government, and it holds the government liable as if it were a defendant in state court, subject to strict limitations. Relevant here are two substantive limitations that constitute a sine qua non for a plaintiffs recovery.³ Codified at 28 U.S.C. § 2680, these exceptions deprive courts of subject matter jurisdiction and cannot be waived. Hayes v. United States, 899 F.2d 438, 450-51 (5th Cir.1990). Claims based upon “a discretionary function or duty” of a federal agency cannot be brought against the United States. 28 U.S.C. § 2680(a). Because USDA’s implementation of a Salmonella performance standard involved discretionary acts, the FTCA affords no recovery for claims predicated on such actions. Additionally, § 2680(h) excludes recovery for claims against the United States for “libel, slander, misrepresentation, deceit, or interference with contract rights.” Id. § 2680(h). Four of the company’s causes of action also ran afoul of this limitation. The district court correctly held, and Supreme Beef does not dispute on appeal, that for these reasons, it could not have asserted FTCA claims against the USDA prior to filing bankruptcy.⁴

In lieu of the FTCA, Supreme Beef contends that the Bankruptcy Code effected an independent waiver of federal sovereign immunity, allowing its offset of permissive counterclaims against USDA’s proof of claim. While the determinative provision for Supreme Beef is 11 U.S.C. § 106(c),⁵ that provision is part of a Bankruptcy Code section that deals more completely with questions of sovereign immunity.⁶ In searching for the best interpretation of § 106(c), it is a “cardinal rule that a statute is to be read as a whole,” in order not to render portions of it inconsistent or devoid of meaning. Wash. State Dep’t of Soc. & Health Servs., v. Guardianship Estate of Keffeler, 537 U.S. 371, 385 n. 7, 123 S.Ct. 1017, 1025, 154 L.Ed.2d 972 (2003) (internal quotation omitted). Another guiding principle is that waivers of sovereign immunity should be narrowly construed in favor of the United States. United States v. Nordic Vill. Inc., 503 U.S. 30, 34-35, 112 S.Ct. 1011, 1015, 117 L.Ed.2d 181 (1992).

Bankruptcy Code § 106 currently consists of three subsections, which provide in pertinent part:

(a)Notwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to the following:

(1) Sections 105, 106, 107, 108, 303, 346, 362, 363, 364, 365, 366, 502, 503, 505, 506, 510, 522, 523, 524, 525, 542, 543, 544, 545, 546, 547, 548, 549, 550, 551, 552, 553, 722, 724, 726, 728, 744, 749, 764, 901, 922, 926, 928, 929, 944, 1107, 1141, 1142, 1143, 1146, 1201, 1203, 1205, 1206, 1227, 1231, 1301, 1303, 1305, and 1327 of this title

(5) Nothing in this section shall create any substantive claim for relief or cause of action not otherwise existing under this title, the Federal Rules of Bankruptcy Procedure, or nonbankruptcy law.

(b) A governmental unit that has filed a proof of claim in the case is deemed to have waived sovereign immunity with respect to a claim against such governmental unit that is property of the estate and that arose out of the same transaction or occurrence out of which the claim of such governmental unit arose.

(c) Notwithstanding 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.

11 U.S.C. § 106(a)-(c).

When the modern Bankruptcy Code was enacted in 1978, Congress attempted to create a level playing field between sovereign entities and other participants in bankruptcy court by abrogating sovereign immunity. Subsections 106(b) and (c) have been redesignated, but are substantively unchanged since the Code’s incep tion except for the addition of the “notwithstanding” clause to § 106(c) in 1994. The current structure of the provisions is a response to Supreme Court decisions that required express declarations of congressional intent to abrogate sovereign immunity in order to satisfy to the Eleventh Amendment and federal immunity law. See, e.g., Hoffman v. Conn. Dep’t of Income Maint., 492 U.S. 96, 101-02, 109 S.Ct. 2818, 2823, 106 L.Ed.2d 76 (1989); Nordic Vill., supra, 503 U.S. at 34-35, 112 S.Ct. at 1015. Section 106(a)(1) creates jurisdiction in bankruptcy courts “[n]ot-withstanding an assertion of sovereign immunity” to hear certain types of administrative struggles in which governmental units may become embroiled in a bankruptcy case. The list of Code sections identifies the types of proceedings in which governmental units may be sued, e.g., preference and fraudulent transfer litigation (§§ 547 — 48), and assessment of administrative expenses (§§ 502-03). Not included among these sections is § 541 of the Code, which defines “property of the estate”. Section 106(a)(5) provides that no substantive cause of action is created against governmental units beyond what exists in bankruptcy law or in applicable non-bankruptcy law. Sections 106(a)(3) and (4) regulate the amounts and types of recovery in bankruptcy proceedings against governmental units.⁷ For this reason, and insofar as § 106(a)(5) creates no cause of action apart from applicable non-bankruptcy law, § 106(a) clearly distinguishes between sovereign immunity from suit and immunity from liability. See 2 Collier on Bankruptcy ¶ 106.05-07,(15th ed. rev.2004).

Sections 106(b) and (c) are consistent with Section 106(a); they vest the bankruptcy courts with jurisdiction to hear certain claims but do not create substantive non-bankruptcy law that will govern a claim. These provisions have been described by the Supreme Court as “plainly waiving” sovereign immunity with respect to monetary relief in two settings: compulsory counterclaims to governmental claims (current § 106(b)), and permissive counterclaims to governmental claims capped by a setoff limitation (current § 106(c)). Nordic Vill., 503 U.S. at 34, 112 S.Ct. at 1015.⁸ Importantly, in Nordic Village, the Court added that Congress’s grant of jurisdiction to entertain such claims is wholly distinct from the abrogation of all defenses to a claim. Id. at 38, 112 S.Ct. at 1017. Put otherwise, “it cannot be assumed that a claimant has a cause of action for damages against a government agency merely because there has been a waiver of sovereign immunity.” Cicippio-Puleo v. Islamic Republic of Iran, 353 F.3d 1024, 1033 (D.C.Cir.2004) (citing FDIC v. Meyer, 510 U.S. 471, 483-84, 114 S.Ct. 996, 127 L.Ed.2d 308 (1994)). In Meyer, the Court stated that “[t]he first inquiry is whether there has been a waiver of sovereign immunity. If there has been such a waiver ... the second inquiry ... is whether the source of substantive law upon which the claimant relies provides an avenue for relief.” Meyer, 510 U.S. at 484, 114 S.Ct. 1004. See also, U.S. Postal Serv. v. Flamingo Indus. (USA) Ltd., 540 U.S. 736, 744, 124 S.Ct. 1321, 158 L.Ed.2d 19 (2004)(a federal agency’s amenability to suit “does not result in liability if the substantive law in question is not intended to reach the federal entity.”). Sections 106(b) and (c), therefore, permit the assertion of counterclaims or offsets, but they do not determine the law that substantively governs claims against the governmental units.

The law that governs counterclaims or offset claims is applicable state or federal law. This is expressed in both provisions by the requirement that counterclaims or offsets against the governmental units be “property of the estate.”⁹ The Bankruptcy Code defines “property of the estate” as including “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). The Supreme Court has emphasized that bankruptcy law is not itself a source of property rights. It functions to adjust pre-existing property rights as defined by extrinsic state or federal law. Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, 917-18, 59 L.Ed.2d 136 (1979); see also In re Pinetree, Ltd., 876 F.2d 34, 36 (5th Cir.1989). Because counterclaims or offset claims against governmental entities must be “property of the estate,” they are not freestanding and divorced from the substantive limitations that would be imposed outside of bankruptcy. The FTCA, as noted, is the exclusive vehicle for claims that Supreme Beef could have maintained against USDA outside of bankruptcy. Literal application of § 106(c) ultimately leads Supreme Beef to a dead end. The company may not offset any permissive counterclaim without an underlying claim that was “property of the estate” at the date of bankruptcy.

Supreme Beef takes issue with this interpretation of § 106(c) on several grounds. First, it contends that its claims are “property of the estate” because they “exist” under state law, notwithstanding the FTCA’s discretionary function and intentional tort exceptions. That state law defines certain conduct as tortious, however, simply does not mean that a private person may sue the U.S. Government solely under the state’s law. The federal government enjoys complete sovereign immunity except as it has consented to be sued and consented to submit to liability. Supreme Beefs implication that FTCA’s incorporation of state tort law can be divorced from that statute’s express limits on liability, e.g., the discretionary function and intentional tort exceptions, violates the rule requiring harmonious interpretation of a statute as a whole.

Supreme Beef also misplaces reliance on this court’s recent en banc decision interpreting the temporal limits on the definition of “property of the estate.” Burgess v. Sikes (In re Burgess), 438 F.3d 493 (5th Cir.2006). Both the majority and dissenting opinions in Burgess considered cases in which there was no dispute that the debtor had obtained a cognizable legal claim against the federal government, a claim embodied in legislation; the point of contention solely concerned whether the claim arose before or after bankruptcy. In this case, the question is whether Supreme Beef has any claim apart from the FTCA.

Supreme Beef next contends that because § 106(c) allows a trustee to assert permissive counterclaims “notwithstanding any assertion of sovereign immunity” by a governmental unit, this effects a waiver of substantive sovereign immunity. We disagree. The clause is designed to recognize the different procedural postures in which §§ 106(b) and (c) claims arise. Under § 106(b), a governmental unit will have filed a proof of claim against the debtor, e.g., for back taxes, and the unit is then “deemed to have waived” immunity for any compulsory counterclaim the debtor can assert that is also “property of the estate.” In the § 106(e) context, however, it is not necessary that the governmental unit first file a claim, so no “deemed waiver” is appropriate. But, where a separate but related governmental entity has filed a claim {e.g., two different state agencies),¹⁰ the debtor’s claim for a capped offset may be maintained in bankruptcy court “notwithstanding any assertion of sovereign immunity.” This language waives immunity from suit, not from liability.

If “notwithstanding any assertion of sovereign immunity” in § 106(c) means any more than a recognition of the procedural posture of the waiver, i.e., if it waives immunity from liability, then this would render the “property of the estate” language in § 106(c) superfluous as regards claims against a governmental unit. Further, “property of the estate” would have different meanings in §§ 106(b)and(c), functioning still as a limit on a governmental unit’s liability in the former provision but not, according to Supreme Beefs interpretation, in the latter provision. Finally, if § 106(c) — uniquely among its companion provisions §§ 106(a) and (b), and contrary to the FTCA — creates causes of action against governmental units untethered from existing extrinsic law, it imper-missibly creates “property” of the debtor that the debtor did not have prebankrupt-cy. Supreme Beef acknowledges it could not have sued USDA prebankruptcy under the FTCA. The Bankruptcy Code does not grant Supreme Beef a superior right against the government postbankruptcy.

The argument may be made that because § 106(c) involves capped setoff claims, such claims may not result in a judgment for money damages against a governmental unit and thus do not implicate sovereign immunity. This interpretation, however, drains any meaning from the description of the setoff as “property of the estate.” It also renders questionable the “notwithstanding” clause, which would be unnecessary if the fact of a capped offset dissociates the debtor’s claim from impinging on sovereign immunity.

Finally, while there appear to be no decisions interpreting § 106(c) as a freestanding waiver of substantive sovereign immunity, that proposition has been rejected by the Tenth Circuit. See Franklin Sav. Corp. v. FDIC, 385 F.3d 1279 (10th Cir.2004). There, the plaintiff attempted to circumvent its inability to state a timely claim under the FTCA by relying on § 106. The court rejected the plaintiffs contention that “Bankruptcy Code § 106 constitutes a complete waiver of sovereign immunity separate and apart from the FTCA’s waiver of immunity, and that this waiver permits tort claims against the United States which would otherwise not be permitted under the discretionary function exception of FTCA § 2680(a).”¹¹ Id. at 1285. Acknowledging that the FTCA is the exclusive remedy for tort claims against the United States, the court held that “Bankruptcy Code § 106 does not provide a substantive or independent basis for asserting a claim against the government.” Id. at 1286 (quoting § 106(a)(5)). We see no reason to deviate from the decision and reasoning of Franklin.

III. Conclusion

The foregoing holistic interpretation of § 106 means that Supreme Beef has no claim for offset against the federal government unless nonbankruptcy law gave it a claim that was “property of the estate” as of the date of bankruptcy. Any such claim, however, was coterminous with, and doomed under, the FTCA. The construction of § 106(c) that Supreme Beef advocates would allow it to assert a prebankruptcy claim against USDA that it could not assert outside of bankruptcy. This result flies against the fundamental principle that bankruptcy law is intended to divide up a debtor’s assets according to the property rights prescribed by applicable nonbankruptcy law. Butner, supra, 440 U.S. at 54-55, 99 S.Ct. at 917-18.

For the foregoing reasons, the judgment of the district court is AFFIRMED.

Judge Higginbotham and Judge Owen, writing separately, concur in the judgment only.

1

. Supreme Beefs complaint alleged (1) tor-tious interference with business relations; (2) tortious interference with existing contracts; (3) slander; (4) business disparagement; and (5) breach of duty to perform proper inspection.

2

. While its ruling on § 106(c) resulted in a reversal of the district court’s judgment, the panel upheld the trial court's conclusion that § 106(b) did not apply because Supreme Beef’s claims against USDA are not compul-soiy counterclaims. See 11 U.S.C. § 106(b) and infra note 6.

3

.The FTCA contains two administrative prerequisites to suit that were arguably also not complied with and could bar Supreme Beefs suit. These are the requirements for exhaustion of administrative remedies and a two-year limitation on filing suit following exhaustion. See 28 U.S.C. §§ 2401(b), 2675(a). The district court held that § 106(c) obviated the administrative exhaustion roadblock for Supreme Beef. See, e.g., Ashbrook v. Block, 917 F.2d 918, 923 (6th Cir.1990). We need not consider that ruling here, nor has the two-year limitation been raised.

4

. The FTCA provides the sole basis of recovery for tort claims against the United States. That Congress chose to incorporate standards for federal conduct that mirror applicable state standards of liability does not diminish this exclusivity. In fact, the exclusivity is reinforced by substantive limits on that incorporation, which are embodied, inter alia, in the discretionary function and intentional tort exceptions to the FTCA.

5

. Supreme Beef continues to contend that its claims are also permitted under § 106(b), which authorizes recovery of compulsory counterclaims against a governmental unit that has filed a proof of claim in the bankruptcy case. The discussion hereinafter of "property of the estate” is as relevant to § 106(b) as to § 106(c). We also find disposi-tive, as did the panel, the district court's ruling that because USDA's claims for overtime and certification services covered entirely different periods of time than the Salmonella HACCP tests at the company plant, Supreme Beef's claims based on the latter events do not arise out of the same transactions or occurrences as those that underlie USDA's claims. See In re Supreme Beef, 391 F.3d 629, 633-35 (2004).

6

. The Supreme Court's recent decision in Cent. Va. Cmty. Coll. v. Katz, - U.S. -, 126 S.Ct. 990, 163 L.Ed.2d 945 (2006), declared that states waived their sovereign immunity in bankruptcy "in the usual case” under the plan of the Constitutional Convention. 126 S.Ct. at 1000. Regardless what effect Katz has with respect to some aspects of state or local governmental units’ encounters with bankruptcy, Katz had no effect on this case involving federal sovereign immunity.

7

. Sections 106(a)(3) and (4) provide the bankruptcy court the same capacity as a district court to award reasonable monetary damages, exclusive of punitive damages, for costs and fees pursuant to 28 U.S.C. § 2412(d)(2)(A).

8

. At the time Nordic Village was decided, subsections (b) and (c) were designated as §§ 106(a) and (b), respectively.

9

. As Collier recognizes: "Whether there is a valid and enforceable claim or obligation in existence to be used as a setoff depends upon the applicable state or federal substantive law and Sections 541, 1207 and 1306 of the Bankruptcy Code.” 2 Collier on Bankruptcy ¶ 106.07[1] (15th ed. rev.2004)(the latter in regard to § 106(b)).

10

. See, e.g., In re Charter Oak Associates, 361 F.3d 760, 770-72 (2d Cir.2004), (upholding permissive counterclaim against one state agency after another agency filed proof of claim).

11

. Franklin distinguished the decisions in Anderson v. FDIC, 918 F.2d 1139 (4th Cir.1990), and Ashbrook v. Block, 917 F.2d 918 (6th Cir.1990), which held that FTCA’s procedural exhaustion requirement does not apply in a § 106 setting. Franklin’s distinction between disallowing presentment of a claim in the first instance and disallowing an untimely filed claim sufficiently treats this intercircuit discrepancy. Franklin, 385 F.3d at 1290-91.