Opinion ID: 4777078
Heading Depth: 2
Heading Rank: 3

Heading: The United States’ waiver extinguished

Text: ICSP’s ability to be subrogated to the setoff rights. As a subrogee, ICSP can assume no more rights than those that belonged to its subrogor. See California, 507 U.S. at 756. Thus, ICSP “‘cannot acquire by subrogation’” the setoff rights that the United States has waived. Id. (citation omitted); see also Chateaugay II, 94 F.3d at 776. ICSP raises two arguments to the contrary, but neither is persuasive. First, ICSP argues that the reservation of rights in the Settlement 25 Order limited the effect of the United States’ waiver here. Second, ICSP argues that the Second Circuit’s reasoning in Chateaugay II supports ICSP’s claim to the setoff rights.
Again, the relevant provision of the Settlement Order provides: . . . nothing in this Order or the Stipulation shall waive, estop, or otherwise limit the rights of any party claiming an interest in the Tax Refund, including but not limited to, the estate, the Insurance Company of the State of Pennsylvania, BMO Harris Bank N.A., or any other party claiming an interest in the Tax Refund, and the parties reserve any and all rights and arguments they had regarding the ownership of, or their interest in [the] Tax Refund prior to the entry of this Order. A277. ICSP argues that it was subrogated to the United States’ setoff rights to the extent that ICSP had made payments, that the above-quoted language reserved those rights, and that absolutely “nothing” the United States did in the Settlement Stipulation (i.e., the waiver) could alter those rights. Appellant’s Br. 31. However, the Settlement Order does not define the nature of the rights that ICSP reserved. Rather, ICSP reserved “any and all rights and arguments,” if any, “regarding the 26 ownership of, or [its] interest in [the] Tax Refund prior to the entry of this Order.” A277. As discussed above, prior to the entry of the Settlement Order, ICSP had not made payment in full to the United States. Thus, at the time that ICSP reserved its subrogation rights, those rights were subordinate to the United States’ ability to use the setoff rights to settle its remaining and superior claim. The Settlement Order did not transform or redefine the nature of ICSP’s subordinate rights. Again, those subordinate rights were extinguished once the United States waived them, which ICSP consented to rather than pressing its objection. ICSP argues that this interpretation of the Settlement Order renders it “meaningless” or worthless for ICSP. Appellant’s Br. 35. Yet BMO would have at least an equally strong argument that the Settlement Order and Settlement Stipulation would be worthless for the Trustee (and BMO) if we were to determine that the United States’ waiver did not extinguish ICSP’s rights. As BMO argues, “the Settlement Stipulation was built around the setoff release,” and the “Trustee would not have released the estates’ REA claims against the United States, or agreed to the allowance of the DOD Claim, in the absence of the setoff release.” Appellee’s Br. 25. In point of fact, the Settlement Order was not worthless for ICSP, as ICSP obtained at least two clear benefits. First, ICSP effectively preserved its subrogation arguments (including the argument that ICSP had made payment in full). BMO has not attempted to preclude ICSP from arguing its ownership of the Tax Refund on the basis of waiver or estoppel. Second, the Settlement Order ensured that the United States would relinquish the $5.5 million Tax Refund into 27 escrow (rather than attempting to set off the Tax Refund against the United States’ own losses acknowledged in the Settlement Stipulation). This at least guaranteed that ICSP would get a bite at the $5.5 million apple.
ICSP argues that a ruling against its claim to the Tax Refund is inconsistent with Chateaugay II. See 94 F.3d at 773– 80. Of course, that authority from the Second Circuit is not binding on this Court. It is also distinguishable in several key ways. The procedural history of Chateaugay II was tangled. A mining company (LTV Steel, the debtor) had obtained surety bonds from Aetna (the surety) in favor of the United States Department of Labor (DOL, the obligee) for certain black lung benefits owed to the company’s employees. Id. at 773–74. When the debtor filed for Chapter 11 bankruptcy and stopped paying the black lung benefits, the surety paid out the full $5.5 million owed under its bond. Id. at 774. The DOL then paid the remainder of the benefits due. Id. In an earlier proceeding, the debtor and the DOL had reached a settlement wherein the debtor agreed to pay back a portion of the black lung benefits that the DOL had been forced to cover. The surety pressed an objection that the DOL settlement risked extinguishing the surety’s right to be repaid as a subrogee to the DOL. Id. The Second Circuit explained that it had affirmed the DOL settlement “but expressly noted 28 that the settlement could have no adverse effect on [the surety’s] rights or claims.” Id. Chateaugay II stemmed from the IRS’s proposed settlement with the debtor regarding certain tax payments. That settlement indicated that the federal government owed a tax refund to the debtor; the IRS planned to set off the refund against certain excise taxes that were owed by the debtor. Id. at 775. Apparently, that tax refund was not mentioned in the earlier DOL settlement, as the surety first learned of the tax refund when it received the application to approve the IRS settlement. Id. The surety sought to prohibit the IRS from using the refund and/or to obtain adequate protection for its interest in the refund as a subrogee to the DOL. Id. The Second Circuit held, among other things, that the DOL had been “paid in full” and that the surety had an interest in the tax refund because it was subrogated to the DOL’s setoff rights. Id. at 780, 782. In summary, the surety in Chateaugay II: (i) had made payment in full; (ii) pressed an objection to a settlement that apparently had no mention, let alone an express waiver, of the government-obligee’s right to set off a tax refund; and (iii) obtained a court order that the settlement could “have no adverse effect” on the surety’s subrogation rights. In contrast, here, ICSP: (i) had not made payment in full; (ii) dropped its objection to a settlement that had an express waiver of the government-obligee’s setoff rights, including the right to set off the Tax Refund; and (iii) obtained a court order reserving only the undefined “rights and 29 arguments” that ICSP had, if any, to set off the Tax Refund prior to the entry of the Settlement Order. Again, because ICSP had not made payment in full, the subrogation rights that ICSP held at the time of the Settlement Order were subordinate to the United States’ rights. Thus, the United States was entitled to, and did, waive its setoff rights to settle its own remaining and superior claim. That waiver extinguished ICSP’s derivative subrogation rights to set off the Tax Refund.