981 F.

2d 1135
71 A.F.T.R.2d 93-364, 61 USLW 2378,
93-1 USTC P 50,255,
28 Collier Bankr.Cas.2d 78, 24 Fed.R.Serv.3d 681,
23 Bankr.Ct.Dec. 1303, Bankr. L. Rep. P 75,078

In re Samuel Derek GRAHAM and Suzanne Genett Graham,

Debtors.
Samuel Derek GRAHAM and Suzanne Genett Graham,
Plaintiffs-Appellees,
v.
UNITED STATES of America, Defendant-Appellant.
No. 89-1371.

United States Court of Appeals,

Tenth Circuit.
Dec. 9, 1992.

Joel A. Rabinovitz, Attorney, Tax Div., Dept. of Justice, Washington, DC

(Shirley D. Peterson, Asst. Atty. Gen., Dept. of Justice, Washington, DC;
Gary R. Allen, Charles E. Brookhart, James H. Love, and David M.
Moore, Attorneys, Tax Div., Dept. of Justice, Washington, DC; and
Michael J. Norton, U.S. Atty., Denver, CO, of counsel, on the briefs), for
defendant-appellant.
Ralph A. Cantafio of McGill Professional Law Corp., Steamboat Springs,
CO, for plaintiffs-appellees.
Before SEYMOUR, BARRETT, and ANDERSON, Circuit Judges.
SEYMOUR, Circuit Judge.
In order to punish the Internal Revenue Service for the "extraordinarily
inept and confusing way [it] handled" this litigation, rec., vol. III, at 8, and
to compensate the debtors who were its adversaries, the Bankruptcy Court
for the District of Colorado imposed two awards of attorney's fees against
the government. It also granted a tax refund to the debtors. Because the
judicially-created tradition of sovereign immunity protects the federal

government from such awards, United States v. Nordic Village, Inc., --U.S. ----, ---- - ----, 112 S.Ct. 1011, 1017-20, 117 L.Ed.2d 181 (1992)
(Stevens, J., dissenting), we must reverse.

I.
1

Beginning in April 1983, Suzanne and Samuel Graham (Grahams) owned 45%
of Glow Electric, Inc., and Samuel's parents owned the remaining 55%.
Suzanne served as secretary-treasurer, and Samuel as vice-president. In
February 1987, the Internal Revenue Service alleged that the Grahams were
responsible for Glow's failure to pay taxes withheld from Glow employees, and
made assessments against the Grahams totalling $46,848.43.

The United States Bankruptcy Court for the District of Colorado acquired
jurisdiction over the matter when the Grahams filed for bankruptcy under
Chapter 7 of the Bankruptcy Code on June 8, 1987. Soon afterwards, the
Grahams filed a complaint asking the court to determine their tax liability for
all of 1985 and the first two quarters of 1986.

The resulting litigation unfortunately produced a long history of procedural

missteps, neglect, and mismanagement, leading to "seventeen months of
confusing, relatively useless and wasted time and expenses for both Plaintiffs
and Defendant." Rec., supp. vol. I, at 28. The government twice moved for
relief from the automatic stay in order to adjudicate the tax liability of the
Grahams and Samuel's parents. The first time, the government neglected to
serve the bankruptcy trustee. The second time, it filed the motion improperly.
The government then abandoned its motion to lift the stay but did not file a
responsive pleading to the Grahams' initial complaint. The Grahams moved for
an entry of default on April 11, 1988, and the court entered default one week
later. On April 19, the government filed both a motion for leave to answer out
of time and an answer. When the government then skipped the hearing on that
motion, the bankruptcy court denied the motion and entered default judgment in
favor of the Grahams. Following more motions by both parties, the court
vacated the default judgment, and it granted $3,788.82 in attorney's fees to the
Grahams. Rec., vol. I, doc. 34.

On November 3, 1988, the government filed a proof of claim against the

Grahams in the amount of $86,280.18 for the last quarter of 1986. As the
parties proceeded to prepare for a trial on the merits, a dispute emerged
regarding the government's unwillingness to produce certain documents. On

March 3, 1989, the court ordered the government to produce the administrative
file relating to Glow Electric. When the case was finally called for trial on
March 7, however, the government informed the court that the file in question
had been destroyed sometime after April 1987.1 After a one-week trial, the
court held that the Grahams were not responsible for the tax liability. In
addition, it assessed $233.90 in attorney's fees against the United States for its
failure to produce Glow's administrative file, and held that the Grahams were
entitled to a $1,567.32 tax refund.2
5

The government appealed to the district court both the merits of the bankruptcy
court's decision and the several fee assessments. The district court affirmed, and
the government now presses its arguments that the bankruptcy court lacked
jurisdiction to order a refund in the absence of a refund claim filed by the
Grahams, and that no waiver of sovereign immunity supported the award of
fees against the government.

II.
Refund Claim
6

The law regarding claims for tax refunds is unusually clear, and does not
appear to admit any exceptions: "No suit or proceeding shall be maintained in
any court for the recovery of any internal revenue tax ... until a claim for refund
or credit has been duly filed with the Secretary...." 26 U.S.C. 7422(a)
(emphasis added). More specifically, the bankruptcy court may not determine

7 right of the estate to a tax refund, before the earlier of--(i) 120 days after the
any
trustee properly requests such refund from the governmental unit from which such
refund is claimed; or (ii) a determination by such governmental unit of such request.
8

11 U.S.C. 505(a)(2)(B). Thus, the government does not waive sovereign

immunity in a suit for a tax refund until presented with an administrative claim
which it has either denied or ignored. The administrative claim itself must be
filed within the later of two years after the tax was paid or three years after the
return was filed. 26 U.S.C. 6511(a).

These rules are nonwaivable jurisdictional requirements. See United States v.

Dalm, 494 U.S. 596, 608, 110 S.Ct. 1361, 1368, 108 L.Ed.2d 548 (1990);
Goulding v. United States, 929 F.2d 329, 331-32 (7th Cir.1991); Gustin v.
United States, 876 F.2d 485, 488 (5th Cir.1989). While the Grahams argue
correctly that section 106 of the Bankruptcy Code provides a waiver of
sovereign immunity for refund claims under some circumstances, any such

general governmental waiver of the right not to be sued does not waive other
jurisdictional requirements. The Grahams do not contend that they have filed
the requisite administrative claim for a refund. Absent such a filing, the
bankruptcy court erred in awarding them a tax refund. Simply put, no claim, no
refund.
III.
Attorney's Fees
10

As with the refund claim, sovereign immunity is the potential obstacle to an

award of attorney's fees against the government. See Adamson v. Bowen, 855
F.2d 668, 670 (10th Cir.1988) ("[u]nless the United States has waived its
sovereign immunity, the government is immune from actions for attorney's
fees"). The bankruptcy court, the district court, and even the government
lawyer for this appeal agree that the IRS's conduct fell short of reasonable
expectations. In a standard bankruptcy or tax case, the court would not lack
avenues to impose a monetary sanction against a party for frivolous,
contemptuous, or vexatious practices. As we discuss below, however, a
provision authorizing sanctions does not automatically waive sovereign
immunity, and thus does not apply, without more, to fee awards against the
government. The Grahams must point to some explicit statutory waiver that
will support the bankruptcy court's award. See United States v. Mitchell, 463
U.S. 206, 212, 103 S.Ct. 2961, 2965, 77 L.Ed.2d 580 (1983) (federal
government immune from suit unless it expressly consents).

A.
11

The obvious waiver is located at 26 U.S.C. 7430, providing that a party who
substantially prevails on the merits in a tax case may be entitled to attorney's
fees.3 Under any traditional definition of "prevailing party," the Grahams'
award would probably be upheld. Section 7430(c)(4), however, defines the
party against whom fees may be awarded as one whose litigating position was
substantially unjustified.4 In this circuit, the relevant "position" is "the stance
taken by the United States in litigation," specifically, "the arguments relied
upon by the government in litigation." United States v. Balanced Fin.
Management, Inc., 769 F.2d 1440, 1450-51 & n. 12 (10th Cir.1985); United
States v. 2,116 Boxes of Boned Beef, 726 F.2d 1481, 1487 (10th Cir.), cert.
denied, 469 U.S. 825, 105 S.Ct. 105, 83 L.Ed.2d 49 (1984). In order to be
"substantially unjustified," the litigation must have been initiated unreasonably,
without a reasonable basis in law or in fact. Balanced Fin. Management, 769
F.2d at 1450-51. Under this definition, not every losing party will have been
substantially unjustified in its litigating position ab initio. Indeed, the Grahams

do not contend that the IRS was substantially unjustified in seeking to

determine the tax liability against them. Moreover, the government attorney's
failure to appear at a contempt hearing does not render the underlying litigating
position unreasonable for the purpose of a section 7430 award. See id. at 145051. Regardless of the government's inexcusably bad conduct during this
litigation, section 7430 does not support an award of attorney's fees here.
12

The government contends that section 7430 is the sole waiver of sovereign
immunity in cases to which it applies. Relying on a statement in the legislative
history to this effect, the government essentially proposes that it be shielded
from any kind of reprimand for its activities in the course of otherwise justified
adversary proceedings. Furthermore, the government contends that sanctions
can be awarded only in cases in which it not only loses on the merits, but also
had no business initiating the litigation. Whether section 7430 is or is not the
sole waiver of sovereign immunity for grants of attorney's fees on the merits of
a case, it does not necessarily preclude a separate waiver for intermediate
sanctions for procedural missteps.

B.
13

Some of the authorities advanced by the Grahams and the bankruptcy court to
support monetary sanctions against the government are clearly inadequate.
Bankr. R. 2016,5 only permits awards against the bankruptcy estate and is
therefore inapplicable here. While the Grahams are correct that bankruptcy
courts have the power to sanction a party for contempt under 11 U.S.C.
105(a),6 Mountain Am. Credit Union v. Skinner (In re Skinner), 917 F.2d 444
(10th Cir.1990), that general power does not include any express waiver of
immunity that would authorize a monetary sanction against the government, see
Barry v. Bowen, 884 F.2d 442 (9th Cir.1989); but see McBride v. Coleman,
955 F.2d 571, 581-83 (8th Cir.1992) (Lay, J., dissenting). Similarly, 28 U.S.C.
1927 provides that "[a]ny attorney or other person admitted to conduct cases
in any court of the United States ... who so multiplies the proceedings in any
case unreasonably and vexatiously may be required ... to satisfy personally the
excess costs, expenses, and attorneys' fees reasonably incurred because of such
conduct." (emphasis added). The government contends that the statute, by its
language, authorizes only fees against an attorney. Cf. Braley v. Campbell, 832
F.2d 1504 (10th Cir.1987) (fees imposed against attorney). Even if we were to
read the statute as encompassing awards against the party, see Island Club
Marina, Ltd. v. Lee County (In re Island Club Marina, Ltd.), 41 B.R. 359, 361
(Bankr.N.D.Ill.1984), we would still require some independent waiver of
sovereign immunity in order to apply it against the United States.

14

District courts are authorized generally to apply litigation sanctions under the
authority of Rule 11 of the Federal Rules of Civil Procedure. The Ninth Circuit
has held that the Rules' stated intention to apply to parties in all civil actions,
see Fed.R.Civ.P. 1, suffices to waive sovereign immunity for the purpose of
Rule 11 monetary awards against the United States. In a case similar to this one,
the Ninth Circuit thus refused to be bound by the "prevailing party" limitation
for attorney's fees based on the merits of the litigation, and awarded Rule 11
monetary sanctions for a government attorney's improper conduct and
procedures. Mattingly v. United States, 939 F.2d 816, 818-19 (9th Cir.1991)
(limiting sanction in tax case to section 7430 would "conflict with any rational
application of discovery sanctions ... since such sanctions have no relationship
whatsoever to whether the party sanctioned eventually wins or loses"); but see
United States v. McPherson, 840 F.2d 244, 246 (4th Cir.1988) (applying Rule
11 in tax cases would defeat specific provisions of section 7430).

15

Whatever the merits of the argument that sovereign immunity is waived under
the Federal Rules of Civil Procedure, the situation is necessarily different in
bankruptcy court. Rule 81 states that the rules are not applicable in bankruptcy
court, except as they are specifically adopted by the Bankruptcy Rules. See In
re Akros Installations Inc., 834 F.2d 1526, 1531 (9th Cir.1987). The
Bankruptcy Rules have no provision comparable to Rule 1. We can therefore
find no waiver of sovereign immunity sufficiently explicit in the Bankruptcy
Rules to justify applying the bankruptcy equivalent of Rule 11, see Bankr.R.
9011, to award fees against the government.7

C.
16

The last possible avenue available to the Grahams is 11 U.S.C. 106, which
waives sovereign immunity in three categories of cases in bankruptcy.8 The last
section, 106(c), provides that "(1) a provision of [the bankruptcy code] that
contains 'creditor,' 'entity,' or 'governmental unit' applies to governmental units;
and (2) a determination by the court of an issue arising under such a provision
binds governmental units." The Supreme Court has construed the broad
language of this subsection to permit the recovery of only "declaratory and
injunctive relief," and not monetary awards, against governmental entities.
United States v. Nordic Village, Inc., --- U.S. ----, ----, 112 S.Ct. 1011, 1015,
117 L.Ed.2d 181 (1992) (federal sovereign immunity); see Hoffman v.
Connecticut Dep't of Income Maintenance, 492 U.S. 96, 109 S.Ct. 2818, 106
L.Ed.2d 76 (1989) (state sovereign immunity); Small Business Admin. v.
Rinehart, 887 F.2d 165, 169-70 (8th Cir.1989) (applying Hoffman to federal
government). Under the Supreme Court's interpretation, section 106(c) is
therefore of no assistance to the Grahams in authorizing the bankruptcy court's

award of attorney's fees.

17

18

Subsection (b) is similarly unhelpful in this case. While the IRS filed the
necessary proof of claim, see Hoffman, 492 U.S. at 101, 109 S.Ct. at 2822, and
the subsection does permit monetary awards, it is "a narrow waiver of
sovereign immunity, with the amount of the offset limited to the value of the
governmental unit's allowed claim." Id. at 102. In other words, the provision
does not allow affirmative recovery, but only a set-off. United States v.
McPeck, 910 F.2d 509 (8th Cir.1990) (where IRS's claim exceeds debtor's
claim, offset provision applies). In order for a party to recover from the
government, the government must also win some part of its suit, because absent
some award to the government there is nothing against which to set-off. The
merits of this case were decided against the IRS, and it received nothing.
Accordingly, subsection (b) does not advance the Grahams' cause.
Subsection (a), finally, has three requirements: the government must have filed
a claim against the estate; the claim against the government must be property of
the estate; and the claim against the government must arise from the same
transaction or occurrence as the government's claim. Thus, the government may
not claim against the estate without subjecting itself to compulsory
counterclaims attaching to its claim. 2 L. King, Collier on Bankruptcy 106.02
(15th ed. 1992). The IRS concedes it has filed a proof of claim, but contends
that the fees at issue here arise only out of the course of litigation itself, rather
than out of the tax payments which were the subject of the litigation. We agree.
Separated in time by several years, and incorporating entirely different facts,
these two events cannot be considered the "same transaction or occurrence," as
that phrase would be interpreted under Fed.R.Civ.P. 13(a), or under section
106(a). Compare In re Lile, 103 B.R. 830, 835 (Bankr.S.D.Tex.1989) (both
proof of claim and claim against IRS for improper levy on personal property
arise out of same operative facts, namely failure to pay taxes); In re Price, 103
B.R. 989, 995 (Bankr.N.D.Ill.1989) (same transaction or occurrence underlies
proof of claim and claim for violation of automatic stay). The bankruptcy
court's well-intentioned award fails under this subsection as well.

IV.
19

We can find no waiver of sovereign immunity to support either of the court's

awards of attorney's fees to the Grahams or its refund award. We therefore must
reverse. This case makes clear that Congress has yet to enact a waiver of
sovereign immunity in a case such as this one so as to hold the government to
the same standards imposed on private litigants. Unless Congress enacts such a
waiver, bankruptcy courts will have to find some method other than a monetary

sanction against the government itself for disciplining government lawyers who
conduct their cases as poorly as this one was conducted.
20

As an alternative means of discipline, for example, a court may notify the

Attorney General, or other appropriate supervisor, of attorney misconduct that
would otherwise be subject to sanction. A court may also report misconduct by
a government attorney to that attorney's bar association for the purpose of
instituting disciplinary proceedings. We also observe that although a default
judgment cannot be entered against the United States as a sanction, see
Bankr.R. 7055 (applying Fed.R.Civ.P. 55(e), which bars default judgments
against the United States absent a showing of right to relief), a bankruptcy court
may nonetheless sanction the government in ways that do not run afoul of
current sovereign immunity doctrine, see Bankr.R. 7037 (applying Fed.R.Civ.P.
37); see generally 10 C. Wright, A. Miller & M.K. Kane, Federal Practice &
Procedure 2702, at 548-51 (2d ed. 1983). In addition, bankruptcy courts have
authority to exercise both civil and criminal contempt powers against
recalcitrant government attorneys. See In re Skinner, 917 F.2d 444 (civil
contempt powers); Bankr.R. 9020 (criminal contempt proceedings).

21

Finally, it is established general law that lawyers can be sanctioned personally

under Bankr. R. 9011, the bankruptcy court equivalent to Fed.R.Civ.P. 11. See,
e.g., Taylor v. Freeland & Kronz, --- U.S. ----, ----, 112 S.Ct. 1644, 1648, 118
L.Ed.2d 280 (1992); see also In re Excello Press, 967 F.2d 1109 (7th Cir.1992).
We see no reason why government attorneys should be exempt from this rule.
Cf. EEOC v. Waterfront Comm'n of New York Harbor, 665 F.Supp. 197, 201
(S.D.N.Y.1987) ("government attorneys on notice that they are not exempt
from the federal rules and that they will be held to the highest standards of the
Bar").

22

The judgment of the district court granting a tax refund to debtors and awarding
them attorney's fees as a sanction against the government is REVERSED.

The government claims, contrary to the Grahams' representations, that the IRS
agent in charge of the case did not wait for trial to disclose this information, but
rather testified during his deposition in February 1989 that the file was
destroyed. Since the government discreetly chooses not to challenge the
bankruptcy court's wisdom, but only its jurisdiction, the factual disagreement is
not relevant to our consideration of the issues

An additional award against the government of $15,878.59 in attorney's fees for

the entire litigation is not before us

3

"In any administrative or court proceeding which is brought by or against the

United States in connection with the determination, collection, or refund of any
tax ... the prevailing party may be awarded a judgment or a settlement for ...
reasonable litigation costs incurred in connection with such court proceeding."
26 U.S.C. 7430(a)(2)

"The term 'prevailing party' means any party ... which establishes that the
position of the United States in the proceeding was not substantially
justified...." 26 U.S.C. 7430(c)(4)

The relevant portion of that rule reads, "[a]n entity seeking interim or final
compensation for services, or reimbursement of necessary expenses, from the
estate shall file an application setting forth a detailed statement [of expenses or
services]." Bankr. R. 2016

The relevant portion of 11 U.S.C. 105(a) states: "The court may issue any
order, process, or judgment that is necessary or appropriate to carry out the
provisions of this title."

In Adamson v. Bowen, 855 F.2d 668 (10th Cir.1988), we held that the Equal
Access to Justice Act (EAJA), 28 U.S.C. 2412(b) (1988), expressly waives
the federal government's sovereign immunity with respect to fee sanctions
imposed against it under Fed.R.Civ.P. 11. We cannot rely on that waiver here,
however, because the EAJA expressly states that "[t]he provisions of this
section shall not apply to any costs, fees, and other expenses in connection with
any proceedings to which section 7430 of the Internal Revenue Code of 1954
applies...." 28 U.S.C. 2412(e)

The text of 11 U.S.C. 106 reads as follows:

(a) A governmental unit is deemed to have waived sovereign immunity with
respect to any claim against such governmental unit that is property of the
estate and that arose out of the same transaction or occurrence out of which
such governmental unit's claim arose.
(b) There shall be offset against an allowed claim or interest of a governmental
unit any claim against such governmental unit that is property of the estate.
(c) Except as provided in subsections (a) and (b) of this section and
notwithstanding any assertion of sovereign immunity-(1) a provision of this title that contains "creditor", "entity", or "governmental

unit" applies to governmental units; and

(2) a determination by the court of an issue arising under such a provision binds
governmental units.