[00:00:02] Speaker 00: I'd like to reserve three minutes for rebuttal. [00:00:04] Speaker 04: All right, thank you. [00:00:05] Speaker 00: May I please the court? [00:00:07] Speaker 00: This court must decide whether the Montana Department of Revenue waived its sovereign immunity to Timothy Blix's adversary proceeding under Section 303 I when it filed an involuntary petition. [00:00:17] Speaker 00: Because the department did not waive its sovereign immunity under the consent by ratification theory through a litigation waiver or under the clear declaration test, this court must reverse the bankruptcy court's order. [00:00:27] Speaker 00: I'll start with the Supreme Court's decision in Katz. [00:00:29] Speaker 00: CATS changed the conversation. [00:00:31] Speaker 00: It held that in bankruptcy, congressional abrogation is not necessary because the states agreed in the plan of the convention to waive their sovereign immunity in certain bankruptcy proceedings. [00:00:42] Speaker 00: What this means is that Section 106A of the Bankruptcy Code is no longer relevant to the sovereign immunity analysis in bankruptcy. [00:00:50] Speaker 00: The district court improperly relied on Section 106A and failed to analyze whether Section 3 of the I proceeding is a type of proceeding that the states agreed to waive their sovereign immunity to. [00:01:02] Speaker 00: Under CATS, the court held that under the Bankruptcy Clause, the states agreed to waive their sovereign immunity in in-rem proceedings or in proceedings that are necessary to effectuate the in-rem jurisdiction of the Bankruptcy Court. [00:01:17] Speaker 04: I'm sorry there any cases in the ninth circuit from from the ninth circuit that have interpreted cats in the way you are urging us to interpret it no your honor this is an issue of first impression I think there was actually a case of the back of the back who might have suggested that [00:01:35] Speaker 00: They should analyze the framework we set out, but both the Third and the Eleventh Circuits analyze CATS based on the three critical functions of bankruptcy, and I urge the Court to adopt that framework. [00:01:48] Speaker 00: CATS didn't identify the range of proceedings in which the states agreed to waive their sovereign immunity, but identified bankruptcy's three critical functions, which are [00:01:57] Speaker 00: the exercise of exclusive jurisdiction over the debtor's property and the debtor, the equitable distribution of that property to the debtor's creditors, and then the ultimate discharge giving the debtor a fresh start. [00:02:10] Speaker 00: What the Third and the Eleventh Circuits held was that [00:02:13] Speaker 00: Courts need to, this is the starting point for the framework of whether the states agreed in the plan of convention to waive their sovereign immunity. [00:02:20] Speaker 00: So a proceeding needs to relate to one or more of these three functions in order for the, to consider that states deem to not assert sovereign immunity in these types of proceedings. [00:02:31] Speaker 04: House, I'm just curious, why did the state maintain this litigation so long after it became apparent that, [00:02:42] Speaker 04: that it was not a viable claim. [00:02:44] Speaker 00: So I think the state had good faith basis to continue to pursue the involuntary petition. [00:02:51] Speaker 00: When this went up to the Ninth Circuit in 2019, the leading bankruptcy treatise and other courts supported their attempt to [00:03:02] Speaker 00: And so that really gets into another theory, the litigation waiver. [00:03:12] Speaker 00: We can pivot there if you'd like. [00:03:15] Speaker 04: I was just curious, because the Ninth Circuit did say that the claim was not a viable one. [00:03:20] Speaker 00: So this court did hold that a bona fide dispute as to amount. [00:03:27] Speaker 00: They could proceed on that basis. [00:03:29] Speaker 00: But there were some avenues which the department could have proceeded on the involuntary petition. [00:03:37] Speaker 00: participant in the courts, they pursued those avenues. [00:03:42] Speaker 00: Turning back to Section 303i, Adversary Proceeding, this type of proceeding does not further any of bankruptcy's three critical functions. [00:03:50] Speaker 00: It doesn't decide or affect interest in deluxe property, it has no effect on the broader distribution of this property to creditors, and it doesn't protect the ultimate discharge. [00:04:01] Speaker 00: And what the framers would have understood when they ratified the bankruptcy clause was crucial to Katz's analysis. [00:04:08] Speaker 00: this type of proceeding, a Section 303-I adversary proceeding for damages, wouldn't be invented for 200 years. [00:04:16] Speaker 00: So it is hardly a core proceeding in the administration of a bankruptcy estate. [00:04:22] Speaker 00: And so the bankruptcy court should have analyzed whether, under Katz, the department and states in general agreed to not assert sovereign immunity in this type of proceeding. [00:04:34] Speaker 04: So Counsel, are you asking us to vacate [00:04:37] Speaker 04: the decision and remanded for the bankruptcy court to apply CATS? [00:04:43] Speaker 00: No, I'm asking this court to find that the states did not agree to waive their sovereign immunity. [00:04:49] Speaker 04: Well, I thought you said that the court didn't conduct the CATS analysis. [00:04:54] Speaker 00: Well, it did mention CATS. [00:04:56] Speaker 00: And at one point, there was an offhand remark, which was not connected to the mention of CATS. [00:05:03] Speaker 00: that this proceeding was ancillary to the bankruptcy court's interim jurisdiction. [00:05:08] Speaker 04: Would it be fruitful for us to remand this case for the bankruptcy court to do this analysis in the first instance? [00:05:16] Speaker 00: I believe that this court should decide that on its own. [00:05:18] Speaker 00: I think the 11th and the 3rd circuits both conducted the CATS analysis without remanding to the lower court to decide the issue. [00:05:25] Speaker 00: And I believe that this court could rightfully conduct the analysis itself and decide whether the states agreed to waive their sovereign immunity in this type of proceeding. [00:05:34] Speaker 04: So in the third circuit case and the other case, the bankruptcy court had not done this analysis either? [00:05:41] Speaker 00: I don't recall whether the lower court conducted the analysis. [00:05:48] Speaker 04: We generally like to review a decision from a court [00:05:54] Speaker 04: court below before we [00:05:56] Speaker 04: weighed into, especially issues of first impression. [00:06:00] Speaker 04: And so that's why I thought it might be fruitful for the bankruptcy court, which has expertise in this area, to weigh in on this point before we decide it. [00:06:12] Speaker 00: Well, it's a de novo review, and I think- I understand that. [00:06:15] Speaker 04: I understand this de novo review, but we don't have anything to review. [00:06:20] Speaker 04: That's the point. [00:06:21] Speaker 04: That's fair. [00:06:22] Speaker 04: And bankruptcy is such a specialized area. [00:06:25] Speaker 04: that oftentimes it's helpful if we have the analysis of the bankruptcy court or the BAP before we decide, especially an issue of first impression. [00:06:37] Speaker 04: That's fair. [00:06:38] Speaker 00: Luckily Judge Malloy understands, serves as a bankruptcy judge. [00:06:42] Speaker 00: It's been a long time. [00:06:43] Speaker 00: So you have the benefit of his expertise. [00:06:45] Speaker 01: That's 30 years ago. [00:06:48] Speaker 01: The laws changed a lot. [00:06:51] Speaker 00: I'd like to turn to the second theory, which is litigation waiver. [00:06:55] Speaker 00: The key question here is whether the filing of the involuntary petition, which was a partial waiver of sovereign immunity, extends to a Section 303i adversary proceeding. [00:07:05] Speaker 00: So no matter the forum, when the state invokes the federal jurisdiction, it waives sovereign immunity to compulsory counterclaims. [00:07:14] Speaker 00: This is true in bankruptcy when a state invokes the bankruptcy court's aid, and it's true in federal court when a state files a complaint. [00:07:23] Speaker 00: Both the Seventh and the Federal Circuit held that when a state files a complaint, they have never been in court before, that it waives sovereign immunity as to compulsory counterclaims. [00:07:32] Speaker 04: And the Ninth Circuit, we don't have a case in the Ninth Circuit that says that, do we? [00:07:38] Speaker 00: No, Your Honor. [00:07:38] Speaker 00: In the bankruptcy analysis in Ray Pegasus and Ray Lazar, they held in the context of bankruptcy, a state waives its sovereign immunity to compulsory counterclaims. [00:07:48] Speaker 00: But again, that would be an issue of first impression in this court, whether when a state files a complaint, they waive sovereign immunity as to compulsory counterclaims. [00:07:58] Speaker 00: And in this court, the compulsory counterclaim test, this court applies the logical relationship test, which is whether the second filing arises out of the same set of operative facts. [00:08:11] Speaker 00: And this analysis is easy. [00:08:14] Speaker 00: Mr. Blixoth concedes that Section 303-I claim is not a compulsory counterclaim to an involuntary petition. [00:08:21] Speaker 00: The facts underlying the department's claim was that Mr. Blixoth had a tax deficiency, [00:08:27] Speaker 00: and the facts underlying the the section 33 I claim is that the department engaged in a conspiracy to to ruin Mr books it's personally and financially and engaged in bad faith conduct. [00:08:39] Speaker 00: During during the litigation also a claim that arises or matures during litigation cannot be a compulsory counterclaim. [00:08:46] Speaker 00: to the original claim, and in this respect, a Section 303i claim is just like a malicious prosecution claim, which is its common law equivalent. [00:08:54] Speaker 00: This court held that a Section 303i preempts all state law claims for damages, and a malicious prosecution claim cannot arise until the proceeding ends, and so too with the Section 303i claim. [00:09:09] Speaker 00: it inherently a predicate element is that the original, the original involuntary petition was dismissed. [00:09:16] Speaker 01: And so. [00:09:18] Speaker 01: Wouldn't it be, it wouldn't be much of a leap though from Lazar and Pegasus to say that a compulsory, you waived sovereign immunity as to a compulsory counterclaim. [00:09:30] Speaker 00: I mean, those cases held that when a state invokes the bankruptcy court's aid to file a proof of claim, it's to a compulsory counterclaim. [00:09:35] Speaker 00: And on the other end, we have a claim. [00:09:36] Speaker 01: Yeah, but I mean, essentially, that's what you're doing. [00:09:41] Speaker 01: When you started the involuntary bankruptcy, you basically are invoking the aid of the bankruptcy court to collect the tax, right? [00:09:48] Speaker 01: Right. [00:09:48] Speaker 01: I mean, that's what I say. [00:09:50] Speaker 01: It's not much of a leap. [00:09:51] Speaker 00: Oh, it's not much of a leap? [00:09:52] Speaker 00: Yes. [00:09:53] Speaker 00: Oh, I thought you said it is a leap. [00:09:54] Speaker 00: But you're saying that- I agree. [00:09:55] Speaker 00: I agree. [00:09:56] Speaker 00: I agree. [00:09:56] Speaker 00: It's not much of a leap. [00:09:57] Speaker 04: But you're saying that the claim that was filed by Blixet does not come within that definition of a compulsory counterclaim. [00:10:05] Speaker 00: That's correct. [00:10:06] Speaker 00: And Blixet conceded that. [00:10:07] Speaker 00: He said it is in no way a compulsory counterclaim. [00:10:11] Speaker 00: And so along the entire spectrum of states invoking federal court jurisdiction, whether it's just a proof of claim in terms of bankruptcy when they didn't file a petition but they were brought into the case as a debtor, [00:10:24] Speaker 00: were all the way to filing a full-blown complaint in federal court. [00:10:28] Speaker 00: I mean, we have three circuits which suggest that the range of claims necessary for a complete determination is compulsory counterclaims. [00:10:37] Speaker 00: And so I think it's easy to slot an involuntary petition on that spectrum and find that an involuntary petition only waives sovereign immunity as to compulsory counterclaims. [00:10:47] Speaker 03: So when counsel said to the bankruptcy court, [00:10:51] Speaker 03: that he believed it was correct that the state was waiving sovereign immunity. [00:10:55] Speaker 03: Was he referring only to these compulsory counterclaims, or what was the reference to? [00:11:01] Speaker 00: I was about to transition there, Your Honor. [00:11:03] Speaker 00: So I think just to jump ahead. [00:11:06] Speaker 00: Sure question. [00:11:07] Speaker 00: I think those statements are consistent with waiver as to only compulsory counterclaims. [00:11:12] Speaker 00: Mr. Butler stated that the department voluntarily submitted itself to the jurisdiction of the court and the voluntary submission is a partial waiver as to compulsory counterclaims. [00:11:26] Speaker 00: Just to back up a little bit, [00:11:29] Speaker 00: The bankruptcy court improperly relied on Mr. Butler's statements when it was analyzing sovereign immunity. [00:11:36] Speaker 00: It conflated two tests, the litigation waiver test and the clear declaration test. [00:11:42] Speaker 00: It held that the [00:11:44] Speaker 00: Department voluntarily waived its sovereign immunity as to compose It was a clear and unequivocal unequivocal waiver of its sovereign immunity and that mr. Butler statements further reflected this clear and unequivocal waiver that language clear and unequivocal waiver is unique to the clear declaration test which requires a statutory enactment for waiver and the Montana legislator has never waived sovereign immunity in federal court and so mr. Butler statements can't be used under the clear declaration test and [00:12:11] Speaker 00: to fine waiver. [00:12:13] Speaker 00: And as for whether it supports the litigation waiver, this court held in rape Pegasus that later actions don't expand the scope of the state's initial act, which is filing involuntary retition. [00:12:27] Speaker 00: Just like in the Seventh Circuit in the Phoenix International case, the court didn't hold that the state of Wisconsin waived its sovereign immunity to more than compulsory counterclaims by litigating the case. [00:12:39] Speaker 00: So later actions or statements don't expand the scope of the state's initial waiver under the litigation waiver test. [00:12:46] Speaker 00: And that's essentially what the bankruptcy court held. [00:12:48] Speaker 00: It's my rebuttal time. [00:12:50] Speaker 00: I'll just finish this point and I'll stop. [00:12:53] Speaker 00: Mr. Blix also argues that Mr. Butler's statements bolster the conclusion that the state of Montana waived the sovereign immunity by filing the involuntary petition. [00:13:05] Speaker 00: And so he also tries to fit his statements within the litigation waiver test. [00:13:09] Speaker 00: But under the litigation waiver, later actions don't expand the scope of the state's initial waiver, which focuses on the act that the state takes to invoke the bankruptcy court jurisdiction. [00:13:20] Speaker 04: All right. [00:13:21] Speaker ?: Thank you, counsel. [00:13:37] Speaker 02: Good morning. [00:13:39] Speaker 02: May it please the court, Nathan Schultz, on behalf of the appellee, Timothy Blixit. [00:13:43] Speaker 02: I'm having some deja vu this morning, and it's not just because my Michigan Wolverines won a Rose Bowl game and a national championship for the first time since I was a senior. [00:13:54] Speaker 02: It's more so because four and a half years ago, I was before the court in Seattle arguing that [00:14:00] Speaker 02: it should affirm the dismissal of the involuntary petition for a very simple reason. [00:14:05] Speaker 02: And that is that the law doesn't permit Montana to split up a disputed tax liability into separate components to manufacture an undisputed claim for purposes of filing an involuntary petition. [00:14:18] Speaker 02: Today I'm here in Pasadena, not far from the Rose Bowl, arguing to this court again [00:14:24] Speaker 02: for a very simple reason, that it should reject the frivolous appeal that we have here today, which is that- Well, counsel, I wouldn't say this is frivolous. [00:14:32] Speaker 04: This is a very challenging case. [00:14:35] Speaker 04: And it's an issue of first impression. [00:14:37] Speaker 04: The CATS analysis is in play. [00:14:42] Speaker 04: So I wouldn't say it's frivolous. [00:14:44] Speaker 04: I think that we need some help from the parties in analyzing whether or not [00:14:52] Speaker 04: Catz precludes the deprivation of sovereign immunity. [00:14:58] Speaker 02: Well, that's a great place to start, Your Honor, because Catz is not required for this Court to decide in favor of Mr. Blisseth today at all. [00:15:06] Speaker 02: And I'll explain why. [00:15:07] Speaker 02: Catz is a bankruptcy clause analysis. [00:15:10] Speaker 02: It drives the question of whether the states consented and waived sovereign immunity [00:15:15] Speaker 02: for bankruptcy matters under the bankruptcy clause. [00:15:18] Speaker 02: Now, we talked about why we think that is also the case here, but that's not the primary thrust of why we should prevail today. [00:15:25] Speaker 02: The primary thrust is one essential fact and one controlling principle of law that don't have anything to do with CATS, and the essential fact is Montana authorized that filing of the petition, and the controlling legal principle is litigation waiver, which is a separate [00:15:41] Speaker 02: aspect sovereign immunity waiver it doesn't require the bankruptcy clause at all it it it requires just looking at did the sovereign invoked jurisdiction and this is Clark v. Barnard 1883 case that's the case we're here to talk about today primarily happy to get into cats issues but I want to make sure it's clear that the court understands why we don't think you need to reach cats it tell us why the litigation waiver encompasses [00:16:09] Speaker 04: So opposing counsel says that the litigation waiver only encompasses compulsory counterclaims and that your client conceded that this was not a compulsory counterclaim. [00:16:22] Speaker 02: The second thing is true. [00:16:23] Speaker 02: We agree this isn't a compulsory counterclaim. [00:16:25] Speaker 02: The first thing is not. [00:16:27] Speaker 02: Compulsory counterclaim analysis, especially in bankruptcy, arises from a very different set of facts. [00:16:33] Speaker 02: What usually happens when you reach that analysis in bankruptcy is that a state [00:16:38] Speaker 02: is forced to confront a decision whether it should file a proof of claim or not. [00:16:42] Speaker 02: Bankruptcy jurisdiction's already been invoked. [00:16:44] Speaker 02: There's a bankruptcy case out there, and as Judge Malloy knows, you set a bar date in a bankruptcy case that says if creditors want to participate in recovery from the bankruptcy case, you have to file a claim, and that's a proof of claim. [00:16:56] Speaker 02: That happens only after jurisdiction's already there. [00:16:59] Speaker 02: So a proof of claim is a responsive act. [00:17:01] Speaker 02: It's not an offensive act. [00:17:03] Speaker 02: It's a responsive act. [00:17:04] Speaker 02: And so the state has to decide, do we want to submit ourselves to bankruptcy court jurisdiction, upside, collect maybe some money from the bankruptcy case, downside, some amount of sovereign immunity waiver? [00:17:16] Speaker 02: That's very different here. [00:17:18] Speaker 02: They weren't forced to confront that decision. [00:17:21] Speaker 02: They initiated this. [00:17:22] Speaker 02: They invoked the jurisdiction. [00:17:24] Speaker 04: And the issue still is in invoking the jurisdiction, did that weigh sovereign immunity for claims that were not compulsory counterclaims? [00:17:34] Speaker 02: Exactly. [00:17:34] Speaker 02: That's exactly the issue. [00:17:36] Speaker 02: And there is no textual jurisdictional case law policy or conduct, whether you think that's relevant or not, support for the idea that Section 303 I claims, which is what Mr. Blixit is asserting, [00:17:50] Speaker 02: don't fall within the complete determination of the case, because that's what we're talking about here. [00:17:54] Speaker 02: I agree, Your Honor. [00:17:54] Speaker 02: Complete determination of the case. [00:17:55] Speaker 04: But that's a different issue than whether or not it's a compulsory counterpoint. [00:17:59] Speaker 04: It is. [00:17:59] Speaker 02: And I don't think compulsory counterclaim is relevant, because that is applied in situations where it's not clear whether what's being brought by the party asserting that sovereign immunity has been waived, my client here, it's not clear whether what they're trying to assert should fall within a complete termination of the case. [00:18:19] Speaker 04: In a case that says that, that in the instance of a litigation waiver, the compulsory counterclaim analysis is not [00:18:29] Speaker 04: What case is that? [00:18:33] Speaker 04: We're trying to grapple with these issues, and so it's helpful to us if you can give us some legal guidance rather than just theories. [00:18:43] Speaker 04: So that's why I always ask, what case are you relying upon to support this argument? [00:18:48] Speaker 02: We don't need a case, Your Honor, because there's a statute. [00:18:50] Speaker 04: We need a case. [00:18:51] Speaker 02: No, Your Honor, there's a statute. [00:18:54] Speaker 02: And so we don't even have to get to a case. [00:18:56] Speaker 01: But you're mixing apples and oranges. [00:18:59] Speaker 01: Because, yes, there's a statute, 303. [00:19:01] Speaker 01: That's the bankruptcy clause argument. [00:19:05] Speaker 01: And then there's the litigation waiver, which is separate from 303. [00:19:08] Speaker 01: The way I look at it, you're trying to say 303 is a litigation waiver? [00:19:15] Speaker 02: Yes, by filing the petition and commencing the case, there's a litigation waiver. [00:19:19] Speaker 02: And the question is, what's the scope of that litigation waiver? [00:19:22] Speaker 02: The answer is it has to include 303-I claims. [00:19:25] Speaker 02: And here's why. [00:19:26] Speaker 02: One, it's in the same statute. [00:19:28] Speaker 02: So it's not like Montana didn't know that 303-I was in play. [00:19:33] Speaker 02: They had capable bankruptcy counsel. [00:19:35] Speaker 02: They knew. [00:19:36] Speaker 02: It says right in the statute, if you file an involuntary case and it doesn't stick, you're subject to these claims coming back. [00:19:42] Speaker 02: So textually, we already know. [00:19:44] Speaker 02: That's part of the same thing. [00:19:45] Speaker 02: Second, I'll give you a case, Your Honor. [00:19:47] Speaker 04: There is a case. [00:19:48] Speaker 04: But that's in the instance where there is not sovereign immunity in play. [00:19:53] Speaker 04: That's the wrinkle here, is that generally we don't have a litigant who has sovereign immunity. [00:20:02] Speaker 04: That's the wrinkle here that you're asking. [00:20:04] Speaker 04: I think you're asking us to ignore the fact that sovereign immunity is in play here. [00:20:11] Speaker 02: I don't think I'm asking the court to ignore the fact that sovereign immunity is in play. [00:20:15] Speaker 02: It's a fundamental question. [00:20:16] Speaker 02: And again, I'll go back to some analogies, and I'll give you a case that I think fully supports our position. [00:20:20] Speaker 02: So again, the reason you need the compulsory counterclaim analysis is for the distinguishing basis that counsel raised. [00:20:28] Speaker 02: Compulsory counterclaims aren't part of the original [00:20:30] Speaker 02: uh... case not case but but but claims that were asserted to start the the the litigation that's in question that they're they're separate going back another way three or three i claims are embedded in the fact that involuntary cases fired filed in the first place and i think that that the rule levin uh... and other sanctioning power the court uh... requirements uh... are are are good analogies here if councils interpretation is correct [00:20:59] Speaker 02: a state could initiate litigation, commit sectionable conduct under Rule 11, and say, I didn't waive for Rule 11. [00:21:07] Speaker 04: And Rule 11 is not what we have here. [00:21:10] Speaker 02: But it's very close, Your Honor, because that involuntary case was filed improperly. [00:21:15] Speaker 02: That's what this court held. [00:21:17] Speaker 02: And this court said this was exactly the type of conduct that 303B, which is the provision that talks about eligible creditors, it was designed to prevent that. [00:21:26] Speaker 02: And just to be clear, [00:21:28] Speaker 02: This was a $200,000 audit issue that they tried to leverage for a $56 million claim. [00:21:34] Speaker 02: So this wasn't a close question at the end of the day. [00:21:37] Speaker 02: And I'll give Your Honor a case to look at, which is the Sunbelt Developers case, which is 608 F3rd 463. [00:21:46] Speaker 02: It's not in the sovereign immunity context. [00:21:48] Speaker 02: Is it in your brief? [00:21:50] Speaker 02: It's been cited by the parties. [00:21:52] Speaker 02: Yeah. [00:21:53] Speaker 02: And that case talks about, [00:21:56] Speaker 02: 303 I-2 damages, which are claims for punitive and consequential damages that result from the filing of an involuntary petition that was improper. [00:22:07] Speaker 02: And there's also 303 I-1, which says you can get attorney's fees. [00:22:11] Speaker 02: And what Sunbelt looked at was, can you get attorney's fees under 303 I-1 for prosecuting 303 I-2 damage claims [00:22:23] Speaker 02: involuntary petitioner that failed. [00:22:26] Speaker 04: And what it says is... Was it a government entity? [00:22:29] Speaker 02: Again, Your Honor, it's not a sovereign immunity case, but it's important because it says those I-2 damages, which don't happen until after the case is over, right? [00:22:38] Speaker 02: After the case has been dismissed. [00:22:40] Speaker 02: It's not over, but the petition's been dismissed. [00:22:42] Speaker 02: Those are part of the same case, and that's why you can include them within your attorney's fee damages. [00:22:48] Speaker 02: There is no way to separate, and I'll give you a jurisdictional example. [00:22:53] Speaker 02: Mr. Blix that didn't independently invoke the bankruptcy court's jurisdiction to seek this relief, the bankruptcy court retained it. [00:23:00] Speaker 02: when it dismissed the involuntary petition for the third and final time. [00:23:05] Speaker 02: And notably, this is, I think, the only opportunity I know of where Montana didn't take an appeal from that decision. [00:23:12] Speaker 02: If they thought that the court had no jurisdiction over 303 I claims, they knew they were going to be brought. [00:23:19] Speaker 02: They knew that was going to happen in 2011 when Judge Markell said, not just are you waiving sovereign immunity kind of generally, Judge Markell specifically said, [00:23:27] Speaker 02: As to 303i damages, this kind of stuff. [00:23:30] Speaker 04: Well, that's different. [00:23:32] Speaker 04: The lawyer can't waive sovereignty. [00:23:34] Speaker 04: Right. [00:23:35] Speaker 02: But it shows that they understood the issue and that it was out there. [00:23:39] Speaker 02: And so they knew. [00:23:40] Speaker 04: That colloquy was kind of not clear. [00:23:43] Speaker 04: I mean, the judge was of the view that there was a waiver. [00:23:47] Speaker 04: The attorney did not unequivocally say that. [00:23:51] Speaker 04: So I'm not sure that that [00:23:53] Speaker 04: get you where you want to be. [00:23:54] Speaker 02: And my only point, I'm not trying to rely on that as a standalone basis for the court to decide the case today, but the question is, you know, did Montana understand that the court was going to be asserting jurisdiction over 303i claims? [00:24:08] Speaker 02: It could have taken an appeal from that third dismissal order, Your Honor. [00:24:11] Speaker 04: But the issue, we look at jurisdiction independently. [00:24:16] Speaker 04: And we have to determine whether there was jurisdiction or not, regardless of what the bankruptcy court said, regardless of what the attorney said. [00:24:26] Speaker 04: So what they must have understood doesn't help us in terms of as a legal matter whether or not sovereign immunity was waived. [00:24:36] Speaker 02: right and and so i think you know it's it's important also to consider mister blix couldn't bring these claims anywhere else so if the court says as montana's arguing a sovereign can file [00:24:51] Speaker 02: at nuclear action that's what involuntary bankruptcy is it is a very strong extreme remedy and states already have taxing authorities really broad remedies right but they're saying if you're gonna take this very serious action that there are consequences to that and if the court says well montana can use that mechanism the benefit the sweet you know from the bitter in the sweet quote that that we cited [00:25:17] Speaker 02: But you're going to deny the ability and let them preserve sovereign immunity for someone to come back and assert damages later. [00:25:23] Speaker 04: But that's what sovereign immunity is for, to protect states from having to pay damages from the coffers of the public fisc. [00:25:32] Speaker 02: Not when they take offensive action. [00:25:35] Speaker 02: That's the big difference here. [00:25:36] Speaker 02: The only premise for Mr. Blixest's claims here is the fact that they took inappropriate offensive action against him and failed. [00:25:45] Speaker 02: That's the only premise for a 303I claim. [00:25:47] Speaker 02: You can't get there without it. [00:25:48] Speaker 01: But isn't one of the case law analogizes 303 actions to malicious prosecution? [00:25:56] Speaker 01: He could have, Montana could have done basically the same thing by suing him and making the same allegations in state or federal court. [00:26:04] Speaker 01: And a malicious prosecution claim is a tort claim. [00:26:07] Speaker 01: Isn't that really what you're doing here is bringing a tort claim for which arguably Montana is immune? [00:26:15] Speaker 02: Well, first of all, [00:26:17] Speaker 02: Tort claims and malicious prosecution claim is preempted by 303i. [00:26:21] Speaker 02: All the case law agrees with that. [00:26:22] Speaker 02: But there's analogous to it, though. [00:26:25] Speaker 02: He couldn't bring that. [00:26:26] Speaker 02: And second, I don't recall a case cited that says a malicious prosecution claim is precluded by sovereign immunity because it's not a compulsory counterclaim. [00:26:39] Speaker 02: they're trying, I think Montana's trying to string together two different concepts to get the court to conclude that there's no way to get from here to there. [00:26:47] Speaker 02: It doesn't matter whether it's a compulsory counterclaim because it's an embedded remedial part of the essential underlying action. [00:26:55] Speaker 02: It was already included there. [00:26:56] Speaker 02: And again, Montana, I take Judge Maloney's point, I agree with it. [00:27:01] Speaker 02: Montana could have done a lot of other things here. [00:27:04] Speaker 02: They were the ones that chose to try to avail themselves of the benefit of 303B, involuntary bankruptcy. [00:27:13] Speaker 02: How could the court possibly conclude that in doing so, [00:27:17] Speaker 02: they can preserve the ability to defend themselves against a remedy that's not just out there in tort land, right, depending on common law or state or federal statute or something else. [00:27:28] Speaker 02: It's embedded right in the statute that they used to try to assert this. [00:27:34] Speaker 01: But doesn't that get us back to the original issue, which is [00:27:39] Speaker 01: Was this, was 303 I authorized under the bankruptcy clause? [00:27:44] Speaker 01: Because Congress, I mean the Supreme Court now seem to tell us, unless the bankruptcy clause authorizes it, you can't do it. [00:27:51] Speaker 02: I don't think it does, again, because the bankruptcy clause analysis, every other case, I haven't seen a single case where the bankruptcy clause analysis is applied to an offensive action by a state. [00:28:04] Speaker 02: It's always responsive to the fact that there's already a bankruptcy case there, not that they initiated a case or even filed an adversary proceeding in the bankruptcy case necessarily. [00:28:16] Speaker 02: But even under the bankruptcy clause, how could it be that [00:28:21] Speaker 02: the framers intended to protect debtors from going to debtor's prison, give them a fresh start, have valid uniform exercise of bankruptcy court jurisdiction and the discharge injunction, and then say a state can improperly try to throw somebody into bankruptcy and impose all those penalties on them and burdens, but then protect themselves. [00:28:41] Speaker 04: Is the action under 303i part of giving a debtor a fresh start, or is it the debtor taking action against a creditor? [00:28:51] Speaker 02: It's a fresh start because the only reason Mr. Balick said needed any kind of fresh start here is because of what Montana did. [00:28:58] Speaker 02: They put him into bankruptcy for more than a decade. [00:29:01] Speaker 02: He couldn't conduct business. [00:29:03] Speaker 02: He was under the cloud of a bankruptcy case, which vastly affects a person's ability to live their life and conduct their business affairs. [00:29:11] Speaker 02: And that's why Congress put in 303i in the first place, because it's such an extreme remedy. [00:29:17] Speaker 02: They wanted to make sure that there was a remedy for debtors if it was done improperly. [00:29:23] Speaker 02: And if the court allows Montana to shield itself from this, I think it clearly calls into question the bankruptcy courts, the legitimacy of the bankruptcy court's jurisdiction in the first instance, which is an in-rem jurisdiction. [00:29:36] Speaker 02: Because now states and government actors can use this without any fear of any consequences. [00:29:42] Speaker 02: And they already have more powers than other creditors. [00:29:44] Speaker 02: So you're, number one, disadvantaging other creditors who can't do the same thing. [00:29:48] Speaker 02: And two, you're really giving the states, instead of sovereign immunity, this would be sovereign impunity. [00:29:54] Speaker 02: It lets them exercise this extremely consequential and prejudicial remedy without any risk of [00:30:01] Speaker 02: you know, remedial effort on the part of the debtor. [00:30:05] Speaker 02: And, you know, that can't be what the framers intended, and it's also just not consistent with the way that the complete determination of the case analysis works. [00:30:13] Speaker 02: There's no situation like this that's in the case law. [00:30:16] Speaker 02: I think, Your Honor, it's because if I hadn't seen this with my own two eyes, I wouldn't have been able to believe the state would take this position, that they can try to avail themselves of bankruptcy court jurisdiction [00:30:27] Speaker 02: but then not answers for the consequences of that. [00:30:30] Speaker 02: It just doesn't fit the bitter with the sweet analysis. [00:30:32] Speaker 04: That's what sovereign immunity is all about, that the state is immune from money damages for actions that are brought against the state. [00:30:42] Speaker 04: It happens all the time that people sue the state for money damages and sovereign immunity precludes a recovery. [00:30:49] Speaker 02: not based on the state exercising and invoking a court's jurisdiction. [00:30:54] Speaker 02: That's the difference here. [00:30:55] Speaker 02: These aren't monetary damages based on extrajudicial, extra litigation circumstances, and that's why the compulsory counterclaim analysis is so clear. [00:31:02] Speaker 04: Well, that's, to me, that's why Katz's analysis is important, because what was the sovereign immunity waiver in the bankruptcy realm? [00:31:14] Speaker 04: I think that's part of the equation as well. [00:31:16] Speaker 04: That's the difficulty I'm having. [00:31:17] Speaker 04: And this is a very difficult and challenging case because of all of the different moving parts that are in there. [00:31:26] Speaker 04: I'm not sure I agree with you that we can totally disregard CATS. [00:31:30] Speaker 02: I'd encourage Your Honor to take a close look. [00:31:32] Speaker 02: And I trust the court will, because again, CATS, if you look at it in the cases, Nordic Village, a lot of those Supreme Court sovereign immunity cases, they concern [00:31:44] Speaker 02: the debtor attempting to get a recovery from a state that is not responsive to something that the state did invoke in jurisdiction. [00:31:51] Speaker 02: Again, the state's just trying to collect money, so file the proof of claim, or there was an avoidance action, preference of fraudulent transfer, and the state didn't sign up for it. [00:32:02] Speaker 02: I kind of look at it as a reasonable expectations question at the bottom of it. [00:32:06] Speaker 02: What's the reason for the complete determination piece? [00:32:09] Speaker 02: of Clark v. Barnard and the litigation waiver doctrine. [00:32:14] Speaker 02: And the answer, I think, in part is, you know, states shouldn't, the whole point of sovereign immunity, right, is to prevent states from being hailed into courts, you know, where they haven't agreed to do it because the sovereigns are entitled not to do that. [00:32:25] Speaker 02: That's just not a consideration here because they already hailed themselves into the court. [00:32:31] Speaker 02: They invoked it. [00:32:32] Speaker 02: They said, you know, and they knew what the consequences of that would be. [00:32:37] Speaker 02: expectation interests to protect, number one. [00:32:41] Speaker 02: And number two, I think a lot of the compulsory counterclaim analysis is about, do the facts overlap and so do we have efficiency here, right? [00:32:48] Speaker 02: Is this necessary to determine the same stuff, to reach a comprehensive ruling? [00:32:53] Speaker 02: Otherwise we have things split up, or even worse, a forfeiture. [00:32:57] Speaker 02: And that's really what we're talking about here. [00:32:58] Speaker 02: If the court grants sovereign immunity, which I really think is sovereign impunity to Montana in this circumstance, [00:33:05] Speaker 02: then Mr. Blixoth has no remedy that he can pursue for what happened here. [00:33:09] Speaker 02: Now, that may be true in lots of sovereign immunity cases, but that doesn't have to do with the fact that the state availed itself of federal bankruptcy court jurisdiction to pursue remedies offensively against Mr. Blixoth. [00:33:22] Speaker 04: We understand your argument, Counsel. [00:33:23] Speaker 04: Do you think it would be fruitful for us to remand for the bankruptcy court to analyze this issue in the first instance? [00:33:33] Speaker 02: I, before we had this dialogue today, I would have said categorically no. [00:33:40] Speaker 02: Because, you know, from our perspective, it's so clear and the parties did, you know, fully brief the merits of this. [00:33:48] Speaker 04: But the district court, but the bankruptcy court didn't. [00:33:51] Speaker 02: I think the bankruptcy court did not undertake a CATS analysis. [00:33:55] Speaker 02: I think if the court concluded that CATS is required, which I understand, Your Honor, clearly understand my point that it's not. [00:34:02] Speaker 03: We just need to conclude that maybe it's relevant, maybe it's not, but I can't see why it wouldn't be useful to have the bankruptcy court take a look at it being the relative expert. [00:34:11] Speaker 03: I should have put it a different way. [00:34:12] Speaker 03: I'm sorry. [00:34:13] Speaker 03: Right, exactly. [00:34:14] Speaker 02: Yeah, I apologize. [00:34:14] Speaker 02: I should have put it differently, which is if the court is not comfortable concluding that [00:34:20] Speaker 02: my client should prevail, notwithstanding Katz, that Katz may be relevant, then yes, I think the court could remand for the bankruptcy court to conduct that analysis. [00:34:30] Speaker 04: The bankruptcy court could look at all of these issues. [00:34:33] Speaker 04: Now, in all fairness, I feel the issues have been fleshed out more on appeal than they were before the bankruptcy court. [00:34:42] Speaker 04: And that's part of the challenge to me is that [00:34:47] Speaker 04: I would feel more comfortable in your phrasology if the Bankruptcy Court, which has the expertise in this area, first analyzed it and then we could review it after that. [00:35:02] Speaker 04: And so that's why I was asking, do you think it might be fruitful to return this to the Bankruptcy Court to do the analysis in the first instance? [00:35:11] Speaker 02: I think that under that scenario, I think that it could be helpful. [00:35:16] Speaker 02: Yes, Your Honor. [00:35:17] Speaker 04: Thank you, Counsel. [00:35:18] Speaker 04: All right, rebuttal. [00:35:27] Speaker 00: The crux of my friend's contention that the compulsory counterclaim analysis does not apply here is that it doesn't apply when a state takes offensive action. [00:35:38] Speaker 00: Circuits have already held that when a state takes offensive action by filing a complaint, and there's no more offensive action than that, that the compulsory counterclaim analysis applies. [00:35:47] Speaker 00: The Fifth Circuit in Caremark said explicitly that what is required for the complete determination of the case is limited to compulsory counterclaims. [00:35:55] Speaker 00: And so to Judge Malloy's point earlier, an involuntary petition is much closer to filing a proof of claim in bankruptcy court, where a state is invoking the in-rem jurisdiction of the court [00:36:06] Speaker 00: than to filing a complaint. [00:36:09] Speaker 00: And this court has held that the waiver is as to compulsory counterclaims. [00:36:14] Speaker 04: Well, counsel, what's your response to appellating counsel's observation that the remedy that they seek is included within the same provision that you used to invoke involuntary bankruptcy? [00:36:29] Speaker 04: And so you could not have been unaware that this was part of the [00:36:35] Speaker 04: of the statutory scheme. [00:36:37] Speaker 04: And so why isn't that akin to a compulsory counterclaim? [00:36:41] Speaker 00: So a predicate of a 303i claim is that the petition was dismissed. [00:36:48] Speaker 00: It doesn't become a claim that's lie that you can bring until the claim is dismissed, just like a Melissa's prosecution claim. [00:36:55] Speaker 00: It requires that the previous proceeding ended before you can bring one. [00:37:00] Speaker 00: And to address Your Honor's points I think made earlier, that the fact that section 303i [00:37:05] Speaker 00: exists and is in the Bankruptcy Code doesn't do anything for the sovereign immunity analysis because the Congress tried to waive a 303i claim in 106a. [00:37:17] Speaker 00: Its inclusion in the statute on its own doesn't do anything for sovereign immunity. [00:37:21] Speaker 00: The fact that it exists and it's there, if this Court were to hold that the fact that it's merely included in Section 303 waives sovereign immunity, that would undo congressional obligation. [00:37:33] Speaker 00: Congress needs to stay clearly and unequivocally [00:37:35] Speaker 00: that states, that states have waived their sovereign immunity in a statute, and so the fact- 303-I is not, it's not embedded in 303-B is what you're- No, it's not. [00:37:46] Speaker 00: It's a separate provision. [00:37:47] Speaker 00: It comes later, and it's the full statute. [00:37:49] Speaker 00: Here's section 303, and Congress tried to abrogate it in section 106-A by saying the states have waived, have waived their, are deemed to have waived their sovereign immunity in all these proceedings, right? [00:37:59] Speaker 00: If the fact that it existed on its own [00:38:02] Speaker 00: means that the states waive their sovereign immunity, then Congress wouldn't have needed to include it in 106A, not that 106A is relevant to the analysis anymore. [00:38:11] Speaker 00: And this court, my friend mentioned the Southern California Sun Belt Developers, Section 303-I claim is not, this court rejected the analogy to Rule 11. [00:38:19] Speaker 00: It said it's more analogous to a fee-shifting provision, and we don't dispute that courts have the authority to regulate [00:38:25] Speaker 00: the conduct of appearing parties free and clear of sovereign immunity, but it's not a sanction statute. [00:38:30] Speaker 00: The court can impose 303i damages or attorney's fees on its own. [00:38:34] Speaker 00: It needs to be brought by the party, and that can only be done after the involuntary petition. [00:38:41] Speaker 00: And so just like a malicious prosecution claim, it's not compulsory to the original voluntary. [00:38:48] Speaker 00: And I want to just touch on one thing that Judge Rawlinson said, if I could have a just... [00:38:53] Speaker 00: Inherent in sovereign immunity is is someone fairness right this is the 11th amendment arose out of the Chisholm vote versus Georgia case which shocked the nation and that. [00:39:04] Speaker 00: Granted, there are some rules and litigation that that favor favor the states that they are entitled to some protection and that's a decision that. [00:39:12] Speaker 00: our country made in the constitutional structure a long time ago. [00:39:16] Speaker 00: And so I get that it does bring up some questions of fairness and how they are treated as with other creditors, but that's inherent in the doctrine of sovereign immunity. [00:39:27] Speaker 00: We ask that this court reverse the bankruptcy court's order, and we would appreciate if this court would conduct the analysis themselves. [00:39:34] Speaker 04: Thank you. [00:39:34] Speaker 04: All right. [00:39:34] Speaker 04: Thank you, counsel. [00:39:35] Speaker 04: Thank you to both counsel for your helpful arguments. [00:39:37] Speaker 04: The case just argued is submitted for decision by the court that completes our calendar for the morning. [00:39:42] Speaker 04: We are on recess until 9.30 AM tomorrow morning. [00:39:48] Speaker 01: All rise. [00:39:55] Speaker 01: This court for this session stands adjourned.