Feds waived appeal in rehabilitation case, Wisconsin Supreme Court
Wisconsin Supreme Court says the federal government failed to preserve
its right to appeal because it did not get involved in circuit
By org jforward wisbar Joe Forward, Legal Writer,
State Bar of Wisconsin
2012 – The federal government’s failure to preserve issues
in the Dane County Circuit Court means it can’t appeal those
issues now, the Wisconsin Supreme Court has ruled.
With a $700 million tentative tax refund at stake, the U.S. Justice
Department wanted to appeal a circuit court order that blocked the
Internal Revenue Service (IRS) from pursuing claims against the
segregated account of a deteriorating financial guaranty insurer.
But in Nickel
v. United States, 2012 WI 2012 (March 8, 2012), the Wisconsin
Supreme Court unanimously said no, concluding the U.S. waived its
ability to appeal the circuit court order.
Rehabilitation Act and tax liability
Rehabilitation and Liquidation Act allows state intervention to
protect creditors and policyholders from the failure of a financially
In 2010, Wisconsin’s then-Commissioner of Insurance,
Sean Dilweg, proposed a rehabilitation plan to assist Ambac
Assurance Corp., a Wisconsin-based financial guaranty insurer that was
financially troubled. The rehabilitation plan established a
“segregated account” to separate potentially damaging
liabilities from Ambac’s general account, liabilities such as
mortgage-backed securities and other risky financial products, to be
rehabilitated through protective measures.
One of those protective measures prevented the IRS from pursuing claims
against the segregated account, which included a federal tax liability.
Specifically, the IRS gave Ambac – through its parent corporation
– a $700 million tentative tax refund for corporate taxes.
Tentative tax provisions are designed to give ailing companies cash
refunds quickly based on tentative estimates, but the IRS is entitled to
later examine whether the full refund is allowed.
The rehabilitation plan temporarily prevented the IRS from seeking tax
liability payments from Ambac’s segregated account if an
examination revealed a corporate tax liability outstanding.
Appeals court decides based on pro hac
The U.S. and the IRS had received notice of the court’s
rehabilitation plan confirmation hearings and the injunction, which
allowed interested parties to object within 45 days of the order. The
U.S. did not object to the order, and it did not appear at the
Instead, the U.S. tried to remove the case to federal court, and filed
a notice of appeal in state court to reserve that right, signed by an
attorney from the tax division of the U.S. Department of Justice (DOJ)
who was not licensed to practice law in Wisconsin.
The notice asked the state appeals court to hold the appeal in abeyance
while the federal court decided whether it had subject matter
jurisdiction (note: a U.S. District Court in Wisconsin ruled that the
federal court lacked subject matter jurisdiction to hear the case. The
U.S. has appealed the case to the U.S. Court of Appeals for the Seventh
Meanwhile, a Wisconsin appeals court granted the Wisconsin Insurance
Commissioner’s motion to dismiss the federal government’s
appeal, concluding that state statute requires all filings in the
Wisconsin state courts to be signed by a Wisconsin licensed attorney, or
by a non-resident attorney admitted pro hac vice. The DOJ
lawyer was not admitted pro hac vice.
On appeal to the Wisconsin Supreme Court, the U.S. argued that federal
law preempts any state law or regulation that precludes DOJ attorneys
from appearing in state court.
Specifically, 28 U.S.C. section 517 provides that a DOJ attorneys
“may be sent by the attorney general to any state or district in
the United States to attend to the interests of the United States”
in a suit pending in state court.
State supreme court decides case based on waiver
In its March 8 opinion, the Wisconsin Supreme Court affirmed the state
appeals court decision, but on different grounds. It ruled that the
federal government waived its ability to appeal the circuit
court’s temporary injunction of IRS claims against Ambac’s
“In reaching our conclusion, we focus not on the signature, but
on the fact that the notice of appeal itself was the only effort by the
United States to involve itself with the circuit court,” wrote
Justice Patrick Crooks for the supreme court. “Our case law is
clear and consistent: failure to preserve issues at the circuit court
means that they are waived.”
The supreme court explained that the “waiver rule” bars a
party’s requested “do-over” after sitting by while
other interested parties endure expensive litigation.
“The United States never appeared in the circuit court
proceedings” Justice Crooks wrote. “It has acknowledged its
strategic decision not to litigate in state courts. A party is entitled
to make such a decision, but it is not entitled to a reversal when its
strategy has ‘proved ineffective.’”
Having decided the case on grounds of waiver, the supreme court did not
address whether a federal DOJ attorney can appear in state courts
without a state license or pro hac vice status.
Chief Justice Shirley Abrahamson filed a concurring opinion to declare
that “forfeiture,” not “waiver” is the proper
term to use when a party fails to raise issues in circuit court.
Assistant U.S. Attorney Richard Humphrey, Madison, and Anthony Sheehan
of the U.S. Department of Justice, Washington D.C., represented the
Daniel Stolper and Barbara Neider of Stafford Rosenbalm LLP, Madison,
and Richard Reinthaler, Peter Ivanick, Henry Ricardo, and Emily Saffittz
of Dewey & LeBoef LLP, New York, represented Ambac Assurance
Michael Van Sicklen, Naikang Tsao, and Matthew Lynch of Foley &
Lardner LLP, Madison, represented Wisconsin Office of the Insurance
Commissioner, Ted Nickel.