State of Mont. Dep't of Revenue v. Blixseth (In re Blixseth)

112 F.4th 837

IN RE: Timothy L. BLIXSETH, Debtor,

State of Montana Department of Revenue, Appellant, v. Timothy L. Blixseth, Appellee.

No. 22-60046

United States Court of Appeals, Ninth Circuit

Argued and Submitted January 10, 2024 Pasadena, California

Filed August 14, 2024

Appeal from the Ninth Circuit Bankruptcy Appellate Panel, Lafferty III, Taylor, and Gan, Bankruptcy Judges, Presiding, BAP No. 22-1160

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.

Before: Johnnie B. Rawlinson, Michael J. Melloy,^* and Holly A. Thomas, Circuit Judges.

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 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 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.

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 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, 69 S.Ct. 1221, 93 L.Ed. 1528 (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, 69 S.Ct. 1221. 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 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, 113 S.Ct. 684, 121 L.Ed.2d 605 (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, 67 S.Ct. 467, 91 L.Ed. 504 (1947) (citation omitted) (emphasis added). "When the State becomes the actor and files a claim against the [res] it waives any immunity which it otherwise might have had respecting the adjudication of the claim." Id. at 574, 67 S.Ct. 467 (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...