1 United States Court of Appeals

Fifth Circuit



## FILED

November 16, 2004

Charles R. Fulbruge III

Clerk IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

__________________________

No. 03–41345

__________________________

In The Matter Of : SUPREME BEEF PROCESSORS, INC.

Debtor.

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STEPHEN ZAYLER, Trustee of the Estate of Supreme Beef

Processors, Inc.,

Appellant,

versus

DEPARTMENT OF AGRICULTURE; UNITED STATES OF

AMERICA

Appellees.

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Appeal from the United States District Court

For the Eastern District of Texas

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Before BENAVIDES, STEWART, and CLEMENT, Circuit Judges.

EDITH BROWN CLEMENT, Circuit Judge:

Debtor meat processor brings counterclaim against the Depa rt ment of Agriculture for a

number of alleged torts stemming from that agency’s inspection regime at the debtor’s plant. The

agency argues th at it s so vereign immunity bars those counterclaims; the debtor contends that the2

agency waived that right by filing a claim agai nst the debtor’s estate for unpaid overtime services.

We hold that the debtor does not meet the statutory requirements for a compulsory counterclaim, and

therefore do not reach the merits of their challenge to the agency’s sovereign immunit y. We also hold

that the debtor is en t it led t o bring a permissive counterclaim as an offset to the agency’s claim.

Therefore, we affirm in part and reverse and remand as to the amount, if any, of the offset.

I. FACTS AND PROCEEDINGS

The United States Department of Agriculture (“USDA”) is responsible for ensuring the safety

of the nation’s meat products. See 21 U.S.C. § 608. The Secretary of the USDA (“Secretary”) is

required by statute to inspect the meat supply of the U nit ed States, and to bar the sale of such

products that fail inspection. I d. The Secretary has delegated this responsibility to the Food Safety

and Inspection Service (“FSIS”). USDA pays for the inspection services; however, it is authorized

by statute to seek reimbursement for overtime work that is performed at any particular plant. S ee 21

U.S.C. § 695; 7 U.S.C. § 394. USDA also provides certification services for which it may collect

fees pursuant to 7 U.S.C. § 1622(h).

In 1996, FSIS, after a notice and comment period, adopted regulations known as the

Pathogen Reduction, Hazard Analysis and Critical Control Point Systems (“HACCP”). 61 Fed. Reg.

38,806–38,864 (July 25, 1996) (codified in scattered sections of 9 C.F.R.). In essence, HACCP

requires meat and poultry producers to implement a program for maint aining a low level of pathogens

in their products. In particular, producers must (1) identify, and establish a plan to eliminate, hazards

at their plant; (2) monitor the level of each hazard at their plant; and (3) allow for USDA verification

of their plan performance. FSIS proposed target levels of some common hazards, such as e. coli1 Salmonella was chosen because “it is the most common cause of foodborne illness

associated with meat and poultry products.” 61 Fed. Reg. 38,885 (July 25, 1996). The

salmonella performance standard for raw beef is 7.5 percent.

3 bacteria and, relevant to this case, salmonella. 1 FSIS achieves verificat ion of plan performance

through a series of tests that determines the level of salmonella in a particular plant’s finished meat

products. Those companies that fail FSIS’s verification will have their meat products barred from

the market.

In June 1998, Supreme Beef Processors, Inc. (“Supreme Beef”), a company that processes,

grinds, and sells meat products, implemented an HACCP regime. In November, FSIS began testing

for salmonella at Supreme Beef’s plant in order to verify the efficacy of Supreme Beef’s hazard

reduction plan. After four weeks of testing, FSIS informed Supreme Beef that it would likely fail the

test, and that the company needed to take immediate action to meet the performance standards. In

April 1999, after being notified by Supreme Beef that it had improved its inspection regime, FSIS

initiated a second round of testing at the plant. This, too, Supreme Beef failed, as it did a third round

of testing which began in August 1999.

As a result of Supreme Beef’s continuing inabilit y to meet the salmonella safety benchmark,

FSIS issued a Notice of Intended Enforcement on October 19, 1999, under which it planned t o

suspend inspections at the plant starting on October 25. Without inspectors, Supreme Beef could not

have its products stamped “INSPECTED and PASSED” and consequently could not legally sell its

products in the market. S ee 21 U.S.C. § 621. USDA also canceled its contract with Supreme Beef

for the provision of beef for the National School Lunch Program. In addition to the National School4

Lunch contract, Supreme Beef lost “other actual and potential contracts” with who lesalers after

USDA’s decision to withdraw its inspectors.

On October 25, Supreme Beef moved to temporarily restrain USDA from removing the

inspectors from its plant, contending that the salm onella HACCP was not within FSIS’s statutory

grant of power. The district court issued the TRO, and later determined that the FSIS testing regime

was not sufficiently determinative of the sanitary conditions of the plant, and thus outside of FSIS’s

regulatory prerogative. S ee Supreme Beef Processors, Inc. v. United States Dep’t of Agric.

, 113 F.

Supp. 2d 1048 (N.D. Tex 2000), aff’d

, 275 F.3d 432 (5th Cir. 2001). Supreme Beef also moved the

court to prevent USDA from enforcing the terms of the National School Lunch contract, which the

court denied.

As a consequence of its pecuniary difficulties—Supreme Beef suffered a substantial decrease

in revenue from the lost contracts with USDA and other buyers—the company filed for Chapter 11

Bankruptcy on September 25, 2000 (later converted to Chapter 7). Both USDA and FSIS filed

claims against Supreme Beef’s estate for just over $30,000 for overtime inspection services provided

between April 9 and September 25, 2000. In December 2002, the district court granted Supreme

Beef’s motion to withdraw the case from the bankruptcy court pursuant to 28 U.S.C. § 157(d). On

January 31, 2003, Supreme Beef filed counterclaims under the Federal Tort Claims Act (“FTCA”)

against USDA alleging, among other things, torti ous interference and slander. USDA moved the

court to dismiss the complaint based on Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil

Procedure, arguing that Supreme Beef’s claims were barred by USDA’s sovereign immunity. The

district court granted the motions. Supreme Beef timely appeals to this Court.

II. STANDARD OF REVIEW5

This Court reviews de novo a district court’s dismissal pursuant to Rules 12(b)(1) and

12(b)(6). S ee, e.g., Bombadier Aerospace Employee Welfare Benefits Plan v. Ferrer

, 354 F.3d 348,

351 (5th Cir. 2003). A dismissal on such grounds is proper only if it appears certain, taking all facts

as true and resolving all inferences and doubts in plaint iff’s favor, that plaintif f’s claim would not

entitle him to relief. See Benton v. United States , 960 F.2d 19, 21 (5th Cir. 1992).

III. DISCUSSION

The United States government, including federal agencies such as USDA, is immune from suit

unless that immunit

y is expressly waived by Congress. S ee, e.g.

, Hercules, Inc. v. United States

, 516

U.S. 417, 423–24 (1996); Wilkerson v. United States

, 67 F.3d 112, 118 (5th Cir. 1995). Without

a waiver, this Court does not have jurisdic t io n o ver an action against the United States, and must

dismiss the complaint pursuant to Rule 12(b)(1). F ED

. R. C IV

. P. 12(b)(1).

In its original complaint, Supreme Beef alleged various torts, including slander and libel.

Jurisdiction for those claims was based on the FTCA, which provides the exclusive remedy for tort

actions against the United States. S ee 28 U.S.C. § 2679. If Supreme Beef had met the appropriate

statutory requirements, the FTCA would prov i de jurisdiction over its claims. In its response,

however, USDA argues that the FTCA does not apply b ecause the complaint was filed after the

limitations period expired and before all statutorily-required administrative options were exhausted.

On appeal, Supreme Beef implicit ly concedes these defects of its complaint, but nevertheless asserts

that this Court has jurisdiction because Title 11, Section 106 of the Bankruptcy Co de provides a

separate and independent waiver of US DA’s sovereign immunity. There are two subsections, §§

106(b) and (c), on which Supreme Beef relies. We discuss each in turn.

A. Section 106(b) does not apply to Supreme Beef’s counterclaim2 The other indicators under this analysis—substantially similar issues of facts and a res

judicata relationship between claims—simply do not exist. Supreme Beef’s claims for slander,

tortious interference and business disparagement are not factually related to the inspection

services. To the extent that Supreme Beef claims do rely on inspection services, they are limited

to the salmonella inspections. Of the nearly 800 hours for which USDA seeks reimbursement,

only 2 involve salmonella. Such a tenuous connection cannot establish that Supreme Beef’s

counterclaim is compulsory: there is neither a “substantial” factual overlap between claims, nor

would the judgment of one claim have a res judicata effect on the other.

6 Supreme Beef argues that § 106(b) provides a separate and independent waiver of USDA’s

sovereign immunity. Section 106(b) states:

A governmental unit that has filed a proof of claim in the case is deemed to have waived

sovereign immunit

y with respect to a cl aim against such governmental unit that is

property of the estate and that a rose out of the sam e transacti on or occurrence out of

which the claim of such governmental unit arose.

11 U.S.C. § 106(b). Therefore, under § 106(b) Supreme Beef’s counterclaim must (1) arise out of

the same transaction or occurrence of USDA’s claim, and (2) be property of the estate.

Section 106(b) employs the same “transaction or occurrence” language that is found in Rule

13(a) of the Federal Rules of Civil Procedure for joinder of compulsory counterclaims. We use the

same analysis here as we would in those cases to determine whether Supreme Beef’s counterclaim

is compulsory under § 106(b):

(1) whether the issues of fact and law raised by the claim and counterclaim largely are the

same; (2) whether res judicata would bar a subsequent suit on defendant’s claim absent

the compulsory counter claim rule; (3) whether substantially the same evidence will

support or re fut e plaintiff’s claim as well as defendant's counterclaim; and (4) whether

there is any logical relationship between the claim and the counterclaim.

Tank Insulation Int’l v. Insultherm, Inc.

, 104 F.3d 83, 85–86 (5th Cir. 1997). “If a ny of these four

questions results in an affirmative answer, then the counterclaim is compulsory.” Id.

Supreme Beef argues that there is a logical relationship between its co unterclaims and

USDA’s original claim. 2 A logical relationship exists when either “‘the same operative facts serve3 FSIS’s claim was for $13,906.06, and USDA filed a claim for $18,847.04.

7 as the basis of both claims,’” or “‘the aggrega t e core of facts upon which the claim rests activates

addit io nal right s, otherwise dormant, in the defendants.’” M ontgomery Elevator Co. v. Building

Eng’g Serv. Co. , 730 F.2d 377, 380 (5th Cir. 1984) (quoting Plant v. Blazer Fin. Servs., Inc.

, 598

F.2d 1357, 1361 (5th Cir. 1979)). USDA and FSIS filed claims, totaling just over $30,000, 3 for

inspection and certification services provided at Supreme Beef’s plant between April and September

2000. To the extent that they relate to the inspections as such, Supreme Beef’s counterclaims involve

the three (failed) tests of Supreme Bee f’s plant. That testing occurred between June 1998 and

N o vember 1999. In contrast, only two of the hours for which USDA filed claims involved such

testing; indeed, the overtime and certification services were performed over a different time period.

Given these disparate factual predicates, the two claims simply do not bear a logical relationship to

one another.

Supreme Beef places its principal reliance on In re Lile

, 96 B.R. 81 (S.D. Tex. 1989). In that

case, the debtor filed bankruptcy petitions on behalf of himself and his corporate restaurant. Id. at

82. After the IRS attempted to seize the restaurant’s property on account of Lile’s delinquent taxes,

Lile counterclaimed against the IRS, arguing that the attempted levy violated the bankruptcy court’s

automatic stay order. Id. In determining that the IRS had waived its sovereign immunity, the Lile

court held that the two claims—violatio n o f t he aut omatic stay, and the levy of the property for

unpaid taxes—arose from the same transaction or occurrence because “[t]he [corporate] tax

indebtedness began the chain of events which culminated in the attempted levy by the IRS which is

the source of the claim against Lile.” Id.8

Here, Supreme Beef argues that the salmonella testing triggered a “chain of events” that lead

to both the withdrawal of USDA’s inspectors and Supreme Beef’s subsequent bankruptcy. It is true

that, without a relationship between USDA and Supreme Beef, USDA’s claims, and likely Supreme

Beef’s claims, would not have arisen. However, we find nothing in L ile to support Supreme Beef’s

contention that the two claims bear a logical relationship to e ach o t her. The “chain of events”

language on which Supreme Beef relies is part of the court’s unremarkable holding that one cannot

separate the underlying debt (the unpaid taxes) from the enforcemen t act ion (the levy ), when

discussing whether the levy and the counterclaim arose from the same transaction or occurrence.

Further, this Court has implicit ly rejected this “chain of events” notion when common facts and legal

issues are not present. See Birmingham Fire Ins. Co. of Pa. v. Winegardner & Hammons, Inc.

, 714

F.2d 548, 551 (5th Cir. 1983) (holding that a suit against one insurance company was not compulsory

as related to a suit against another insurance company because, even though they were the result of

the same event

—a hurricane strike—they were two different parties with two different policies).

We hold that Supreme Beef’s counterclaim does not meet the statutory requirements as set

forth in § 106(b) because it does not arise from the same transaction or occurrence as USDA’s claim.

By so holding, we need not reach the quest io n o f whet her § 106(b) is a separate and independent

waiver of the substantive and procedural requirements of the FTCA.

B. Section 106(c) provides a setoff for Supreme Beef’s permissive counterclaim

Although § 106(b) does not provide relief, Supreme Beef argues that § 106(c) is a separate

and independent waiver of USDA’s sovereign immunity. Section 106(c) states:

Notwithstanding any assertion of sovereign immunit y 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.9

11 U.S.C. § 106(c). In contrast with subsection (b), the plain text of subsection (c) does not require

the counterclaim to arise from the same “transaction or occurrence” as the original claim. All that

is required is that the claim “be property of the estate.”

USDA makes two related arguments for why Supreme Beef’s setoff should be barred. First,

it argues that whether claims are pro perty of the estate turns on substantive law, in this case the

FTCA. Second, it argues that the language of § 106(a)(5)—“[n]othing in this section shall create any

substantive claim for relief or cause of action not otherwise existing under this title . . . or

nonbankruptcy law”—precludes any holding that “creates” a claim for the debtor. Taken together,

USDA contends that if Supreme Beef’s claim did not exist outside of bankruptcy because it does not

meet the FTCA’s substantive require ment s, t hen it cannot be brought as a counterclaim under §

106(c).

We reject USDA’s argument. First, assuming, a rguendo

, that the underlying substantive law

is the touchstone for a § 106(c) analysis, the FTCA’s substantive re quirements are not the onl y

avenues for relief. Indeed, this Court has held that the federal government waives its immunity even

to some recoupments that are not specifically authorized by statute. S ee Frederick v. United States

,

386 F.2d 481, 488 (5th Cir. 1967) (holdin g t hat sovereign immunity may be waived as to a

recoupment, noting that “the waiver can be by statutory consent to be sued or by the institution of

the particular action ”) (emphasis added); see also First Nat. Bank v. Genina Marine Serv., Inc.

, 136

F.3d 391, 395 n.8 (5th Cir. 1998) (“A recoupment claim within the scope of Frederick need not also

fall with in ano t her statutory waiver of sovereign immunity) (citing F rederick

, 386 F.2d at 488);

United States v. Johnson

, 853 F .2d 619, 621 (8th Cir. 1988) (holding that when the government10

waives sovereign immunit y as to matters in recoupment, “it does so even as to t ho se claims that

ordinarily are barred by the FTCA”).

Second, and more important, accepting USDA’s argument as it relates to sovereign immunit y

would render the plain language of § 106(c) meaning less. Determining whether a claim exists by

looking to the statutory law that abrogates sovereign immunit y is simply another way of saying that

the setoff hinges on the existence of sovereign immunit y. But § 106(c) plainly states that a party will

be allowed a set o ff “notwithstanding any assertion of sovereign immunity.” Similarly, reading §

106(a)(5) as precluding causes of action that are barred, outside of bankruptc y, by soverei gn

immunit y would also be in direct confli ct wit h the plain language of § 106(c). Because canons of

statutory construction dictate that a court should “not rend er as meaningless the language of the

statute,” we reject USDA’s interpretation of § 106(c). T hompson v. Goetzmann

, 337 F.3d 489, 497

n.19 (5th Cir. 2003).

IV. CONCLUSION

We AFFIRM the district court’s ruling in regards to § 106(b). Because Supreme Beef is

entitled to bring an offset against USDA for its claims under § 106(c), we REVERSE and REMAND

to the district court to determine the amount, if any, of the offset.