Opinion ID: 3029751
Heading Depth: 3
Heading Rank: 1

Heading: Logical Relationship

Text: [10] We first confronted the extent of a state’s waiver in In re Lazar, 237 F.3d 967 (9th Cir. 2001). In that case, we followed a number of sister circuits to hold that by filing a proof of claim, “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.” Id. at 978 (emphasis added). To determine whether a claim against the state arises out of the “same transaction or occurIN RE: PEGASUS GOLD CORP. 397 rence” as the state’s proof of claim, we applied the “logical relationship” test for compulsory counterclaims: A logical relationship exists when the counterclaim arises from the same aggregate set of operative facts as the initial claim, in that the same operative facts serve as the basis of both claims or the aggregate core of facts upon which the claim rests activates additional legal rights otherwise dormant in the defendant. Id. at 979 (quoting In re Pinkstaff, 974 F.2d 113, 115 (9th Cir. 1992)). Applying this test, we concluded in Lazar that the bankruptcy estate’s action for reimbursement from a California fund for petroleum cleanup undertaken by the debtor was logically related to the state’s proof of claim for unpaid underground storage tank fees (which would have been contributed to the cleanup fund). We noted that “both concern the Fund and both arise out of activities associated with the same bankruptcy case.” Id. at 980. [11] Here, however, the basis for the State’s claims was the insufficiency of the Debtors’ reclamation bonds and various environmental obligations of the Debtors. Those claims do not arise from the same aggregate set of operative facts as the Appellees’ claims for a post-confirmation breach of contract. See Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375, 380 (1994) (facts underlying original dispute and those involving breach of a settlement agreement unrelated); see also In re Creative Goldsmiths, 119 F.3d 1140, 1149 (4th Cir. 1997) (action to avoid payment of corporate income taxes does not arise out of same transaction or occurrence as state’s proof of claim for sales and withholding taxes simply because both involve taxes). While the State’s proofs of claim (seeking environmental compliance) and the settlement agreement (creating an entity 398 IN RE: PEGASUS GOLD CORP. to effect compliance) obviously involve the same general subject matter, the timing of events here provides a critical distinction from cases like Lazar, because the Debtors could not have asserted any type of counterclaim against the State at the time it filed its proofs of claims. The “logical relationship” test adopted in Lazar was based on Federal Rule of Civil Procedure 13(a) involving compulsory counterclaims, and, of course, it would be hard to conclude that the Debtors in this case had a compulsory bankruptcy counterclaim regarding a company yet to be formed or an agreement yet to be made. The rationale underlying proof of claim waiver of immunity also presupposes that the state will be able to determine ex ante whether it will be opening itself up to a counterclaim by electing to participate in the bankruptcy estate. See Arecibo Cmty. Health Care, Inc. v. Commonwealth of Puerto Rico, 270 F.3d 17, 29 (1st Cir. 2001) (“As with any case of a knowing and intelligent waiver of rights, the state has the option . . . of determining whether the potential benefit from waiving its immunity will exceed the potential liability.”); see also In re Straight, 143 F.3d 1387, 1392 (10th Cir. 1998) (holding that state waives sovereign immunity against compulsory counterclaims arising from the same transaction or occurrence as the state’s proof of claim); In re Creative Goldsmiths, 119 F.3d at 1148 (same). The Appellees contend that although this circuit adopted the Rule 13(a) test in Lazar, we extended its application beyond compulsory counterclaims in In re Harleston, 331 F.3d 699 (9th Cir. 2003). In Harleston, a California agency filed a proof of claim in the bankruptcy proceeding but failed to prosecute it. Id. at 701. Two years after the discharge order was entered in the bankruptcy case, the state commenced collection efforts against Harleston, who promptly filed a complaint in bankruptcy court, seeking declaratory relief that the debt had been discharged. Id. at 703. We determined that the state’s original waiver extended to the later action, noting: “As the adversary proceeding seeks to clarify the scope of the IN RE: PEGASUS GOLD CORP. 399 bankruptcy proceeding, the proceedings are logically related. The same set of operative facts underlies both.” Id. at 703. Harleston does not alter the result in this case. There, the debtor sought only declaratory relief regarding the effect of the original proof of claim, not damages or other affirmative relief. Moreover, it was the sort of action the state could have reasonably anticipated as a consequence of its original bankruptcy court filing. The facts underlying the current action against the State, however, are not “the same aggregate set of operative facts” that gave rise to the State’s proofs of claims in the first place. Lazar, 237 F.3d at 979. Although involving the same general subject matter — reclamation at the mine sites — the relationship between the claims in the current action and the State’s original claim against the Debtors is significantly more tenuous than the relationships presented in Lazar or Harleston. We recognize that courts should generally interpret Rule 13 broadly “to analyze whether the essential facts of the various claims are so logically connected that considerations of judicial economy and fairness dictate that all the issues be resolved in one lawsuit,”3 but those considerations are not present here; there has already been one proceeding, in which the Debtors had no possible counterclaims against the State, and now there is a subsequent proceeding, involving newly arisen claims against the State.