Court Opinion

ID: 9846740
Source: CourtListenerOpinion
Date Created: 2023-09-24 03:47:26.376793+00
Date Added: 2024-06-11T09:19:47.010701
License: Public Domain

COLLOTON, Circuit Judge,
concurring in the judgment in part and dissenting in part.
These appeals raise complex questions concerning the application of 11 U.S.C. § 1222(a)(2)(A). My analysis of the three principal issues differs in some respects from the majority opinion.
I.
The first principal issue is whether § 1222(a)(2)(A) applies to transactions occurring after the filing of a bankruptcy petition. There are plausible arguments on both sides of this question, but with one exception, I agree with the majority’s rationale and its conclusion that the statute does apply to the post-petition sale of farm assets used in the debtor’s farming operation.
The exception is the issue of sovereign immunity. Where a waiver of sovereign immunity is required, it must be “unequivocally expressed.” United States v. Nordic Village, Inc., 503 U.S. 30, 34, 112 S.Ct. 1011, 117 L.Ed.2d 181 (1992) (internal quotation omitted). The government’s consent to be sued must be “construed strictly in favor of the sovereign,” and not “enlarged ... beyond what the language requires.” Id. (internal quotations omitted). Where there are two plausible readings of a statute, one of which imposes monetary liability on the government and another which does not, then there is no “unambiguous” waiver of sovereign immunity, and a court should adopt the reading that favors the sovereign. Id. at 37, 112 S.Ct. 1011.
If a waiver of sovereign immunity is required for confirmation of the Chapter 12 plans in these cases, then I doubt that the majority’s rationale is sufficient to establish a clear waiver. Section 1222(a)(2)(A) itself (which is not among the sections as to which Congress expressly waived sovereign immunity in 11 U.S.C. *720§ 106), and the waiver of sovereign immunity with respect to administrative expenses under 11 U.S.C. § 503(b) (which is said to waive immunity under § 1222(a)(2)(A) through a three-step process involving references to 11 U.S.C. § 507, ante, at 708), are not the sort of unequivocal expressions that are demanded by Supreme Court precedent. Section 1222(a)(2)(A) is at least plausibly “susceptible of another construction,” Nordic Village, 503 U.S. at 36, 112 S.Ct. 1011, namely, that it applies only to pre-petition claims, and the statutes lack the necessary clarity to effect a valid waiver of sovereign immunity.5
As I read the Supreme Court’s most recent discussion of sovereign immunity in the bankruptcy context, however, no waiver of immunity is required for confirmation of the Chapter 12 plans in these cases. “Bankruptcy jurisdiction, as understood today and at the time of the framing, is principally in rem jurisdiction.” Cent. Va. Cmty. Coll. v. Katz, 546 U.S. 356, 369, 126 S.Ct. 990, 163 L.Ed.2d 945 (2006). The bankruptcy court’s jurisdiction typically “is premised on the debtor and his estate, and not on the creditors.” Tenn. Student Assistance Corp. v. Hood, 541 U.S. 440, 447, 124 S.Ct. 1905, 158 L.Ed.2d 764 (2004). The court’s in rem jurisdiction “permits it to determine all claims that anyone, whether named in the action or not, has to the property or thing in question.” Id. at 448, 124 S.Ct. 1905. On this understanding, the Supreme Court held neither a bankruptcy court’s discharge of a student loan debt, id. at 450, 124 S.Ct. 1905, nor a proceeding to avoid alleged preferential transfers by a debtor to a state agency, Katz, 546 U.S. at 371-72, 126 S.Ct. 990, implicated a State’s sovereign immunity under the Eleventh Amendment. The confirmation of a Chapter 12 plan, with its attendant decisions about the priority status of various claims in bankruptcy, similarly proceeds under the bankruptcy court’s in rem jurisdiction over the bankruptcy estate.
Hood and Katz involved state sovereign immunity under the Eleventh Amendment, but the Supreme Court’s treatment of in rem jurisdiction and federal sovereign immunity suggests no different result with respect to the interests of the United States in a bankruptcy proceeding. The Court has looked to admiralty law when considering the relationship between in rem jurisdiction and sovereign immunity in bankruptcy. See Hood, 541 U.S. at 441, 124 S.Ct. 1905 (“Although bankruptcy and admiralty are specialized areas of the law, there is no reason why the exercise of federal courts’ in rem bankruptcy jurisdiction is more threatening to state sovereignty than the exercise of their in rem admiralty jurisdiction.”). When discussing in rem jurisdiction over admiralty actions, the Court has acknowledged no distinction between the immunity of federal and state sovereigns. See California v. Deep Sea Research, Inc., 523 U.S. 491, 506-07, 118 *721S.Ct. 1464, 140 L.Ed.2d 626 (“In considering whether the Eleventh Amendment applies where the State asserts a claim in admiralty to a res not in its possession, this Court’s decisions in cases involving the sovereign immunity of the Federal Government in in rem admiralty actions provide guidance, for this Court has recognized a correlation between sovereign immunity principles applicable to States and the Federal Government.”); Tindal v. Wesley, 167 U.S. 204, 213, 17 S.Ct. 770, 42 L.Ed. 137 (1897) (“[I]t cannot be doubted that the question whether a particular suit is one against the state, within the meaning of the constitution, must depend upon the same principles that determine whether a particular suit is one against the United States.”). Striking a theme similar to Hood and Katz, the Court held that an in rem proceeding in admiralty to enforce a lien against the United States does not offend sovereign immunity as long as the government’s actual possession of property is not invaded under process of the court. See The Davis, 10 Wall. 15, 77 U.S. 15, 19-21, 19 L.Ed. 875 (1869).
Based on these authorities, I conclude that the bankruptcy court’s exercise of in rem jurisdiction to approve a Chapter 12 plan is not an affront to the sovereign immunity of the United States. Therefore, sovereign immunity does not preclude the application of § 1222(a)(2)(A) to post-petition transactions. Because I agree with the court that § 1222(a)(2)(A) does apply to post-petition sales of farm assets used in the debtor’s farming operation, I concur in the judgment in the Schilke case.
II.
The second principal issue is whether § 1222(a)(2)(A) applies to the sale of slaughter hogs by the Knudsens in 2004. The statute provides that a Chapter 12 plan need not provide for full payment of a claim that “arises as a result of the sale ... of any farm asset used in the debtor’s farming operation.” The bankruptcy court concluded that the government’s claim for taxes due as a result of the sale of the Knudsen’s slaughter hogs did not fit within this exception, see In re Knudsen, 356 B.R. 480, 485-86 (Bankr.N.D.Iowa 2006), and I would affirm this conclusion.
The statute defines “farming operation” to include the “raising of crops, poultry, or livestock.” 11 U.S.C. § 101(21). As of 2004, the Knudsens were involved in this sort of farming operation. They raised livestock and sold them for slaughter. The slaughter hogs, therefore, were assets produced by the farming operation, not assets used in the livestock-raising operation. That the slaughter hogs were sold to produce income (or, at a later date, to facilitate a reorganization of the farming operation) does not mean that they were “used in” the farming operation. The statute refers to claims arising as a result of the sale of an asset that was already used in the farming operation. The sale itself cannot be the use. With respect, the majority’s analysis, adopted largely from a treatise on bankruptcy practice, overlooks this textual requirement. See ante, at 714 (concluding that “the Knudsens ‘used’ the slaughter hogs in their farming operation by selling them in order to reorganize their farming operation” and by usell[ing] the hogs as their main source of income”) (emphasis added); C. Richard McQueen & Jack F. Williams, Tax Aspects of Bankruptcy Law and Practice § 14:9 (3d ed. 2009) (“In this case, the debtors intended to use the sale of the slaughter hogs ... in the debtors’ farm operations as contemplated in their business plan and as ultimately embodied in their Chapter 12 plan.”) (emphasis added).
Beyond this textual problem with the majority’s conclusion, I see no flaw in the bankruptcy court consideration of § 1222(a)(2)(A) in pari materia with the *722capital gains provision of 26 U.S.C. § 1231(b), which indicates that beneficial capital-gain tax treatment is limited to breeding livestock. The Knudsens and the majority acknowledge, even highlight, that a principal purpose of § 1222(a)(2)(A) was to address the treatment of a debtor’s capital gains taxes. In that context, the analysis of § 1222(a)(2)(A) is better informed by the closely related provision of the Internal Revenue Code than by a provision of the bankruptcy code, 11U.S.C. § 363, that operates in a different context and has no relation to tax claims (or any other claims of governmental units) arising from the sale of assets.
It is common ground that the breeding sows and farm equipment sold by the Knudsens in 2004 qualify for preferential treatment under § 1222(a)(2)(A). I would affirm the bankruptcy court’s conclusion, however, that § 1222(a)(2)(A) does not apply to the sale of the Knudsens’ slaughter hogs in 2004.
III.
The third principal issue is whether the “proration method” or the “marginal method” should be used to allocate the Knudsens’ tax liability for 2004. I would affirm the bankruptcy court’s decision to apply the proration method.
The bankruptcy court adopted the pro-ration method, observing that it (1) “recognizes all income, deductions, exemptions, and credits in arriving at a tax and allocates according to the percentage of each type of income,” and (2) “divides the actual tax without regard to which sales produced the last dollar of income.” Knudsen, 356 B.R. at 487. The district court agreed with these points, and acknowledged that “as a matter of tax policy, and from a tax perspective, the ‘proration method’ is appealing,” In re Knudsen, 389 B.R. 643, 667 (N.D.Iowa 2008), but then reasoned that § 1222(a)(2)(A) applies to government claims other than tax claims, and adopted the marginal method because “ambiguous provisions must be resolved in favor of the debtor” in bankruptcy. Id. at 668.
The majority notes that the IRS does not always apply the proportional method, and that it sometimes applies the marginal method. But in explaining why it adopts the marginal method in this situation, the court reverts to the district court’s view that the Bankruptcy Code must be “liberally construed” in favor of the debtor. Ante, at 718. This proposition is traced to Justice Douglas’s opinion in Wright v. Union Central Life Insurance Co., 311 U.S. 273, 61 S.Ct. 196, 85 L.Ed. 184 (1940), which observed that “the [Bankruptcy] Act must be liberally construed to give the debtor the full measure of the relief afforded by Congress, lest its benefits be frittered away by narrow formalistic interpretations which disregard the spirit and the letter of the Act.” Id. at 279, 61 S.Ct. 196 (internal citation omitted).
The bankruptcy court’s adoption of the proration method did not involve a “formalistic interpretation” of the Bankruptcy Code, but rather an effort to strike an appropriate balance between the competing interests in bankruptcy on a matter about which the Code is silent. The more general proposition that ambiguous bankruptcy provisions must always be construed in favor of the debtor — if it ever held sway with the Supreme Court — -is outmoded in light of the modern Bankruptcy Code and the Court’s discussion in Florida Department of Revenue v. Piccadilly Cafeterias, Inc., — U.S. -, 128 S.Ct. 2326, 171 L.Ed.2d 203 (2008). There, the Court rejected the Eleventh Circuit’s declaration that the Bankruptcy Code is a “remedial statute” that should be construed “liberally” in favor of debtors. Id. at 2338. The Court explained that “the Bankruptcy Code — and Chapter 11 in particular — is not a remedial statute in that *723sense.” Id. (emphasis added). Chapter 11, for example, “strikes a balance between a debtor’s interest in reorganizing and restructuring its debts and the creditors’ interest in maximizing the value of the bankruptcy estate.” Id. at 2339. This court has concluded that Congress did not intend to depart from the “general purposes of bankruptcy law when creating an expeditious avenue for farm reorganizations” in Chapter 12. Rowley v. Yarnall, 22 F.3d 190, 193 (8th Cir.1994).
The bankruptcy court’s adoption of the proration method best strikes a balance between the farm debtor’s interest in reorganizing his debts and the government’s interest in satisfying tax obligations. The marginal method, by contrast, is a one-sided approach that tilts in favor of the debtor by disproportionately reducing the amount of tax unrelated to the sale of farm assets that is entitled to priority treatment. That the proration method makes sense as a matter of tax policy, moreover, is hardly insignificant. The Knudsens and the majority stress that § 1222(a)(2)(A) was adopted primarily to address the treatment of capital gains taxes owed by farmers in the process of reorganization, and it is sensible to adopt an allocation method that accommodates the competing interests involved in resolving the debtors’ tax liability.
For these reasons, I concur in the judgment in No. 08-3627, United States v. Schilke, affirming the decision of the bankruptcy court. I dissent from the judgment in No. 08-2820, Knudsen v. Internal Revenue Service, and would affirm the decision of the bankruptcy court in that case as well.

. Also problematic is tire majority’s statement, based on dicta in a footnote in Rose v. U.S. Department of Education (In re Rose), 187 F.3d 926, 930 n. 7 (8th Cir.1999), that the government’s belated assertion of sovereign immunity is a "factor” that may be "relevant to tire issue of waiver.” Ante, at 707. Sovereign immunity is a jurisdictional issue that may be raised at any time, Jones v. United States, 255 F.3d 507, 511 (8th Cir.2001); United States v. Johnson, 853 F.2d 619, 622 n. 7 (8th Cir.1988), and negligence by an attorney for the government cannot accomplish a waiver, because "[n]o officer by his action can confer jurisdiction.” United States v. Shaw, 309 U.S. 495, 501, 60 S.Ct. 659, 84 L.Ed. 888 (1940). When deciding question of sovereign immunity, we consider whether the government has given "specific statutory consent,” id. at 500, 60 S.Ct. 659, and the answer does not change from case to case depending on whether counsel for the government timely asserted the point.