It’s not often that the United States government, as a plaintiff, uses its sovereign immunity as a sword against lawsuit defendants, in this case the bankruptcy trustees of the Eastern District of Michigan.
More typically, the government raises sovereign immunity as a shield after being sued for transgressions, real and imagined.
And, if the government wields sovereign immunity as a sword, the thrust, as the 6th U.S. Circuit Court of Appeals explains in United States v. Carroll, et al., must be against the correct parties.
Our story: In 2008, the clearance rate for Eastern District Chapter 13 bankruptcy cases was among the lowest in the country — 79th out of 90 judicial districts.
Some of the Eastern District bankruptcy judges devised a plan to improve the situation. When a debtor was due a tax refund, the bankruptcy court would order the IRS to send the refund directly to the trustee overseeing the debtor’s case. That way, the trustees could directly disburse funds to Chapter 13 creditors while eliminating the debtor, who might find other uses for the money, as a middleman.
At first, the IRS went along with this, even though redirecting the refunds to the trustees required the IRS to hand-process the affected tax returns. But the number of affected returns grew from an initial 400 to almost 5,000. And, because Chapter 13 reorganizations typically last three to five years, the refund-redirect orders were creating a significant headache for the IRS.
So, the IRS asked the United States to sue the trustees, claiming that the redirect orders violated the government’s sovereign immunity.
The government’s argument was that the bankruptcy code abrogates sovereign immunity “to the extent set forth” in 11 U.S.C. § 106. Section 106 requires that debts owed to the bankruptcy estate must be paid to the trustee. But, according to the government, this language does not clearly waive sovereign immunity with respect to the refund-redirect orders.
The federal district court thought this was a pretty good argument. The court enjoined the trustees from enforcing existing redirect orders and issued a writ of mandamus to prohibit the bankruptcy court from issuing redirect orders in future Chapter 13 cases.
The trustees appealed to the Sixth Circuit. Judge Jeffrey S. Sutton set the stage:
Even though both sets of parties would prefer that we resolve this lawsuit on the merits, we lack the jurisdiction to do so. The government sued the wrong parties, depriving it of standing to bring this lawsuit.
Of the three “irreducible constitutional minimum[s]” of standing — injury in fact, causation and redressability, Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992) — the government satisfies just one of them. Given the administrative burden to the United States of complying with the bankruptcy court’s orders, to say nothing of the alleged violation of sovereign immunity underlying them, the government has suffered the requisite injury.
But, Sutton said, causation and “redressability” are much more problematic.
The government sued a group of bankruptcy trustees, but the harm it suffered — administrative costs associated with processing tax refunds — flows not from the trustees’ actions but from the bankruptcy court’s orders.
When an entity does not like a court order, the answer is not to sue the lawyer or party who recommended the order; it is to appeal the order or, if utterly necessary, to sue the court. Bankruptcy trustees do not control bankruptcy courts.
Redressability, too, is a problem. The question is whether the requested relief would fix the problem at hand … . Even if the trustees have a role in enforcing these orders, that does not mean a judgment against the trustees will eliminate the problem. Trustees are not the only parties to Chapter 13 bankruptcies. Other parties, including the debtor and creditors, have an interest in ensuring that tax refunds make their way to the trustees.
Nothing prevents these entities from asking the bankruptcy court to issue the same order. …
This lawsuit was apparently born of three good intentions: (1) a need to resolve the government’s sovereign-immunity defense to the redirection orders; (2) a timing exigency in view of the growing administrative burden of the orders; and (3) a desire not to sue federal judges — thank you — unless absolutely necessary.
Yet the government’s unusual vehicle for handling these concerns was not the only one available. The government could have filed a direct appeal from the entry of a redirection order in one (or more) of the cases in which the IRS is a party.
Good intentions, yes; good trial strategy, no
The Michigan Lawyer 