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Sixth Circuit Rules That United States Lacks Standing in Case Against Bankruptcy Trustees

Posted in Recent Cases

The Sixth Circuit in United States v. Carroll, Case No. 10-1400, proposed a simple solution to an interesting and unusual sovereign immunity case.  The case arose from the events surrounding the influx of Chapter 13 bankruptcies in 2009.  Since one asset of Chapter 13 individual debtors is their tax refund, the bankruptcy judges of the Eastern District of Michigan began entering orders in Chapter 13 plans requiring the IRS to send individual tax refunds directly to the Chapter 13 trustees, not the individuals as contemplated by the Internal Revenue Code.  While the IRS did not initially oppose the orders, it had a change in heart in 2009 when the volume of Chapter 13 bankruptcies soared.  Upon the IRS’s request, the United States filed a lawsuit against the Chapter 13 bankruptcy trustees for the Eastern District of Michigan, alleging that the “refund-redirection” orders violated the United States’ sovereign immunity.

In an opinion by Judge Sutton, the Sixth Circuit held that the United States lacked standing to bring the suit because it had sued the wrong parties.  The harm that the United States suffered – the administrative costs associated with processing tax refunds – came from the bankruptcy court’s orders, not the trustees’ actions.  “When an entity does not like a court order, the answer is not to sue the lawyer or party who recommended the order; it is to appeal the order or, if utterly necessary, to sue the court.  Bankruptcy trustees do not control bankruptcy courts.”  The Sixth Circuit dismissed the case, suggesting that the government could have filed a direct appeal from the entry of a redirection order in any of the cases in which the IRS was a party.