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

Heading: Relevance of Chateaugay II

Text: 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.