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IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA In re PAUL and BARBARA RANSTROM, No. 97-10704 Debtors. ___________________________/ PAUL and BARBARA RANSTROM, Plaintiffs, v. A.P. No. 97-1149 INTERNAL REVENUE SERVICE, et al., Defendants. ______________________________/ Memorandum of Decision on Motion of Franchise Tax Board to Dismiss ___________ The debtors commenced this adversary proceeding initially for the sole purpose of obtaining a judgment determining that their tax debts have been discharged as a result of their Chapter 7 bankruptcy. The Internal Revenue Service readily stipulated to judgment. The State of California Franchise Tax Board, however, set off the debtor's postpetition tax refund against their discharged taxes. The debtors then amended their complaint to add a claim for damages for violation of the automatic stay. The State
has moved to dismiss this action based on its claim of sovereign
immunity under the Eleventh Amendment to the Constitution.

In the wake of the Supreme Court decision in Seminole Tribe
of Florida v. Florida, -- U.S. --, 116 S.Ct. 1114, 134 L.Ed.2d 252
(1996), most courts appear to be holding that Congress has no
power to allow suits against a state in bankruptcy court absent
the state's waiver of sovereign immunity. See, e.g., In re
Fernandez, 123 F.3d 241 (5th Cir.1997); In re Creative Goldsmiths
of Washington, D.C., Inc., 119 F.3d 1140 (4th Cir.1997). Under
this interpretation of the law, the debtor's claim for damages
must be prosecuted in state court. However, the state seeks
complete dismissal based on lack of personal jurisdiction. The
court has great difficulty with this position insofar as the
dischargeability determination is concerned.

The court begins by noting the benign nature of a
dischargeability proceeding, which seeks only a determination that

the State's tax claims have been discharged and are no longer
enforceable. The court also notes that Congress gave the
bankruptcy courts the power to determine dischargeability issues
in 1970 in order to address serious deficiencies in a bankruptcy
system which left it to the states to determine the effect of a
discharge issued by a federal court. See Countryman, "The New
Dischargeability Law," 45 Am.Bankr.L.J. 1 (1971). It would be a
major step backward to remove such a fundamental issue of
bankruptcy law from the proper jurisdiction of the federal courts.


The court further notes that nothing actually in the Eleventh
Amendment prohibits this action, as the State is being sued by one
of its own citizens. Only hoary case law extends the Eleventh
Amendment to such cases, despite clear wording in the Amendment
that it applies to suits brought against a state by citizens of
another state. Perhaps it is time to revisit this issue, in light
of the Supreme Court's holding that the Eleventh Amendment trumps
Article I. If the Eleventh Amendment is being so strictly
interpreted that it interferes with Congress' power to make
effective bankruptcy laws, it should also be strictly limited to
its express terms. As a policy matter, allowing the
bankruptcy courts to determine whether a tax has been discharged
is a small price for the states to pay, considering the millions
of dollars poured into state treasuries every year from bankruptcy
estates at no cost to the states. In light of this benefit to the
states, it is not asking too much to require them to abide by
bankruptcy court decisions concerning their rights under the
Bankruptcy Code.

There is significant authority for treating dischargeability
determinations differently from actions which seek monetary or
other affirmative relief. In Hoffman v. Connecticut Income Dept.,
492 U.S. 96, 109 S.Ct. 2818, 106 L.Ed.2d 76, 84-85 (1989), the
court noted:

We therefore construe section 106(c) as not
authorizing monetary recovery from the States.
Under this construction of section 106(c), a
State that files no proof of claim would be
bound, like other creditors, by discharge of
debts in bankruptcy, including unpaid taxes . .
.
but would not be subjected to monetary recovery.

While the Court in Hoffman was dealing with interpretation of
the prior version of section 106 of the Bankruptcy Code, its
ruling made great practical sense. In essence, it was holding
that a dischargeability determination was not "a suit in law or
equity" and could therefore be heard in bankruptcy court
notwithstanding a state's claim of sovereign immunity. Here
again, the Eleventh Amendment should be narrowly interpreted if it
severely inhibits the power of Congress to exercise its Article I
authority.

For the foregoing reasons, the court finds that the State is
immune from money judgment in this court but that this court may
proceed, notwithstanding the State's immunity, to determine
whether its claims against the debtors have been discharged. The
court will accordingly grant the State's motion as to the debtors'
claim for damages but deny it as to the request for a
determination of dischargeability. Counsel for the debtors shall
submit an appropriate form of order.



Dated: December 15, 1997 _______________________
Alan Jaroslovsky
U.S. Bankruptcy Judge


CANB DocumentsNorthern District of California