I. Background



Article III, Section 2, of the U.S. Constitution states that the jurisdiction of the federal courts includes:

...all cases, in law and equity, arising under this Constitution, the laws of the United States...[and] to controversies...between a State and citizens of another State....

[Emphasis added.]



Just a few years after the adoption of the Constitution, the Supreme Court, reading this language literally, held that a citizen of South Carolina could sue the State of Georgia in federal court on a contract claim. Chisolm v. Georgia, 2 U.S. 419 (1793). As frequently stated in cases discussing the 11th Amendment, this decision shocked the nation. See Hans v. Louisiana, 134 U.S. 1, 10 (1890). (A key to why the decision was so shocking is that, at the time, Georgia and the other states had not waived their sovereign immunity on contract claims as most states now have. Thus, Georgia could not have been sued on this claim in its own courts.)



Congress responded by enacting the 11th Amendment which provides that:

The judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by citizens of another State, or by citizens or subjects of any foreign State.

Nearly a century later, the Supreme Court held that the principle represented by the 11th Amendment also applied to a suit brought in federal court by a citizen of the same state. Hans v. Louisiana, 134 U.S. 1 (1890). The Court reasoned that the state’s protection from suit in federal court was a product of the state’s sovereign immunity and that the 11th Amendment merely recognized one application of that immunity. Subsequent cases frequently refer to a state’s 11th Amendment rights in this broader sense: i.e., as a protection from suit in federal court by either its own citizens or by citizens of another state. The 11th Amendment thus serves as a convenient shorthand to distinguish between a state’s immunity from suit in its own courts and its immunity from suit in federal court.



In the last half of the 20th Century, a series of cases were decided by the Supreme Court raising, at least tangentially, the question of whether Congress, pursuant to the Interstate Commerce Clause, could abrogate a state’s 11th Amendment protection from suit in federal court. The decisions reflect a divided court. In Parden v. Terminal Railway of the Alabama State Docks Department, 377 U.S. 184 (1964), the Court held that by operating a railroad in interstate commerce, the state had waived its 11th Amendment protection from suit in federal court on claims under the Federal Employers’ Liability Act. It reasoned, in part, that the states consented to be sued in federal court on federal questions when they consented to the Constitution. Ten years later, however, in Edelman v. Jordan, 415 U.S. 651 (1974), the Court rejected the contention that the state had waived its 11th Amendment rights with respect to claims arising from the administration of that program by participating in a partially federally funded program. This rationale was repeated in Atascadero State Hospital v. Scanlon, 473 U.S. 234 (1985) in which the majority expressly rejected the proposition that the states consented to be sued on federal questions by ratifying the Constitution. (The dissent, on the other hand, called Hans v. Louisiana wrongly decided and voted to overrule it.)



Some of the cases decided during this period involved the proper application of the Ex Parte Young doctrine. (See discussion below.) These decisions are also closely divided. In Pennhurst State School & Hospital v. Halderman, 465 U.S. 89 (1984), the Court refused to extend the doctrine to enjoin a violation of state, as opposed to federal, law. In other decisions, the Court found that Congress had not expressed its intent to abrogate the state’s 11th Amendment rights with sufficient clarity. See Welch v. Texas Department of Highways and Public Transportation, 483 U.S. 468 (1987); Hoffman v. Connecticut Department of Income Maintenance, 492 U.S. 96 (1989)(Bankruptcy Code’s waiver of sovereign immunity insufficiently clear to abrogate state’s 11th Amendment rights).



As recently as 1989, in Pennsylvania v. Union Gas Company, 491 U.S. 1, in a plurality decision, the Court held that Congress had the power to abrogate a state’s immunity from suit in federal court based on claims arising from legislation enacted pursuant to the Interstate Commerce Clause. However, by 1996, the membership and dominant political philosophy of the Supreme Court had changed sufficiently to cause this decision to be overruled in Seminole Tribe of Florida v. Florida, 517 U.S. 44 (1996). In Seminole, the Court held that the 11th Amendment prevents an Indian tribe from suing a state in federal court without the state’s consent and that Congress did not have the power to abrogate the state’s immunity through legislation enacted pursuant to the Indian Commerce Clause. The Court expressly overruled Union Gas. It made it clear that its rationale applied equally to the Interstate Commerce Clause (and by logical extension to the Bankruptcy Clause). The Court excepted from its decision only 14th Amendment legislation. This exception was based on the theory that, because the 14th Amendment followed the 11th, the states had consented to limit their 11th Amendment rights by ratifying it.



II. Effect of Seminole on Bankruptcy Cases and Proceedings

The full effect of Seminole on bankruptcy practice is still emerging. Some things appear certain. Others are unsettled. The issues are best described in terms of the procedural context in which they appear.



A. Adversary Proceeding

The clearest application of Seminole to the bankruptcy context is to an adversary proceeding against the state: e.g., a preference action. There have been few cases in which it has been contended that an adversary proceeding is not an action within the meaning of the 11th Amendment. For a rare exception, see In re Mitchell, 222 B.R. 877 (Bankr. 9th Cir. 1998), in which it was contended, unsuccessfully, that an action for declaratory relief was not an action against the state. (By contrast, as discussed below, in In re NVR L.P., 222 B.R. 514 (E.D. Va. 1998), the district court held that a motion for declaratory relief was not an action against the state. The court apparently viewed the motion as seeking a clarification of the order confirming the plan. See the discussion of NVR below.)

More often, the theories relied upon in support of a motion to dismiss an adversary proceeding on 11th Amendment grounds have have been that: (1) Congress effectively abrogated the state’s 11th Amendment rights pursuant to section 106(a) of the Bankruptcy Code, (2) the state has waived its 11th Amendment rights by filing a proof of claim, or (3) the Bankruptcy Code was enacted pursuant to the 14th Amendment of the Constitution. The two latter theories have been routinely and easily rejected. (The waiver theory is discussed below.)

Section 106(a) was amended in response to Hoffman v. Connecticut Department of Income Maintenance, 492 U.S. 96 (1989) which, as noted above, held that Congress had not expressed its intent with sufficient clarity. As amended, section 106(a) makes Congress’s intention unequivocally clear by specifying the various Code sections as to which a governmental unit’s sovereign immunity is waived. However, post-Seminole courts presented with the question of whether Congress has the power to abrogate a state’s 11th Amendment rights have almost all concluded that, based on the rationale expressed in Seminole, Congress does not have that power. In re Creative Goldsmiths of Washington, D.C., Inc., 119 F.3d 1140 (4th Cir. 1997); In re Fernandez, 123 F.3d 241 (5th Cir. 1997); In re Sacred Heart of Norristown, 133 F.3d 237 (3d Cir. 1998). The Ninth Circuit authority on this issue is In re Elias, 218 B.R. 80 (Bankr.9th Cir. 1997).

As noted above, in Seminole, the Supreme Court affirmed that a state may be sued by an individual in federal court on a claim based on legislation enacted pursuant to the 14th Amendment. However, virtually every court to consider the issue has concluded that the Bankruptcy Code was not enacted pursuant to the 14th Amendment. See In re Sacred Heart of Norristown, 133 F.3d 237, 244 (3d Cir. 1998); In re Creative Goldsmiths, Inc., 119 F.3d 1140, 1147 (4th Cir. 1997); In re Fernandez, 123 F.3d 241 (5th Cir. 1997); In re Elias, 218 B.R. 80 (Bank. 9th Cir. 1998).



B. Bankruptcy Case

The Fifth Circuit has held that the bankruptcy case is not an action against a state. As a result, a state’s claim may be discharged through the case even though the state does not participate in it in any fashion. The discharge is the result of federal law and thus compelled by the Supremacy Clause of the U.S. Constitution. Texas v. Walker, 142 F.3d 813 (5th Cir. 1998).

The Ninth Circuit failed to address this issue in In re White, 139 F.3d 1268 (9th Cir. 1998), reaching the right result for the wrong reason. In White, an Indian tribe filed an adversary proceeding in a chapter 7 case, seeking a determination that its tribal sovereign immunity prevented its claim from being discharged by the case. The Indian tribe had not filed a claim in the case but had participated in the plan process while the case was pending in chapter 11. The Court held that the Indian tribe’s participation in the case caused it to waive its sovereign immunity. The Court did not address the ability of case to discharge the claim as distinguished from the ability of the trustee or debtor to force the tribe to litigate the claim in bankruptcy court. The Court also did not comment on the fact that, because the Indian tribe filed the adversary proceeding, the doctrine of sovereign immunity really did not apply. The Seventh Circuit commits the same error in In re Platter, 140 F.3d 676 (7th Cir. 1998).



C. Plan

The Fourth Circuit has held that a plan does not constitute an action against a state even if it contains a provision that affects the state. Maryland v. Antonelli Creditors’ Liquidating Trust, 123 F.3d 777 (4th Cir. 1997). The plan in question provided for the transfer of multiple parcels of real property to a creditors’ trust and the subsequent sale of the parcels by the trust. It provided that no transfer tax would be incurred as a result of any of the transfers pursuant to section 1146(c) of the Bankruptcy Code. Similarly, in In re NVR L.P., 222 B.R. 514 (E.D. Va. 1998), the district court held that a motion for declaratory relief seeking a determination that transfer tax could not be imposed on certain sales by the chapter 11 debtor was not an action against the state. (The bankruptcy court had held to the contrary. In re NVR L.P., 206 B.R. 831 (Bankr. E.D. Va. 1997).) The district court viewed the motion as merely seeking a clarification of the plan.



D. Motions

The area of the greatest uncertainty is whether a motion may constitute an action against a state. The case law is mirky on this issue. The correct answer may depend on the nature of the motion. A motion for sanctions against a state pursuant to 11 U.S.C. § 362(h) has been held to constitute an action for 11th Amendment purposes. In re Lapin, 226 B.R. 637 (Bankr. 9th Cir. 1998). The 10th Circuit rejected an 11th Amendment defense to a motion for sanctions in In re Straight, 143 F.3d 1387 (10th Cir. 1998) on the ground that the motion constituted a compulsory counterclaim to which the state had waived its 11th Amendment rights by filing a proof of claim pursuant to section 106(b) of the Bankruptcy Code. (See discussion of waiver below.) The Court did not consider whether the motion qualified as an action.

As discussed above, on the other hand, in In re NVR L.P., 222 B.R. 514 (E.D. Va. 1998), the district court held that a motion for declaratory relief seeking a clarification of a term of a confirmed plan that uniquely affected a state was not an action against the state. However, the district court made it clear that it was not ruling on whether the bankruptcy court’s decision on the issue would be binding in a future proceeding before a state agency or in state court.

Based on the rationale expressed in Texas v. Walker, it is doubtful that a generally noticed motion, such as a motion to sell property of the estate, would be viewed as an action against the state, even if the state were a creditor. However, it is less clear how a motion to sell property free and clear of a state tax lien would be viewed. The only reported case that the author has located on this issue pre-dates both Seminole and the Bankruptcy Code and contains potentially distinguishing facts. Gardner v. New Jersey, 329 U.S. 565 (1947). In Gardner, the Supreme Court held that a bankruptcy court could approve the sale of property of the estate free and clear of a state tax lien and could determine the validity and priority of the lien and amount of the state tax claim. The bankruptcy court’s power to do so was stated to be based on the court’s jurisdiction over property of the estate. 329 U.S. at 578-80. This is sometimes referred to as the court’s in rem jurisdiction. However, in Gardner, the state had filed a proof of claim in the bankruptcy case. It is unclear whether this fact was a critical element in the Court’s conclusion. Opponents of an in rem theory of the court’s jursidiction cite United States v. Nordic Village, Inc., 503 U.S. 30 (1992) as having rejected such a concept. However, Nordic Village involved an action to recover money from a governmental unit. There might be a different outcome in a different, less attenuated factual setting.



III. Waiver



A state may waive its sovereign immunity. However, only the state may do so. The federal government may not waive a state’s sovereign immunity; (this is sometimes referred to as “abrogation”). Section 106 of the Bankruptcy Code purports to waive the sovereign immunity of a governmental unit under certain circumstances. (A governmental unit is defined to include a state.) As discussed above, section 106(a) purports to waive (or abrogate) the sovereign immunity of all governmental units as to certain specified Code sections. However, as held by several post-Seminole Circuit courts, as applied to a state, section 106(a) is unconstitutional.



Sections 106(b) and (c) provide that, by filing a proof of claim, a governmental unit waives its sovereign immunity as to certain types of claims against it. Section 106(b) provides that filing a claim forces the governmental unit to defend against any claim that arises out of the same transaction or occurrence that is property of the estate. Section 106(c) provides that filing a claim forces a governmental unit to defend any claims of offset that are property of the estate. Several Circuit courts have held that these provisions are also unconstitutional. They reason that “the power to define waiver can become the functional equivalent of the power to abrogate.” In re Creative Goldsmiths of Washington, D.C., Inc., 119 F.3d 1140, 1147 (4th Cir. 1997); Aer-Aerotron, Inc. V. Texas Dept. of Transportation, 104 F.3d 677, 681 (4th Cir. 1997); In re Del Mission Limited, 98 F.3d 1147, 1151, n.6 (9th Cir. 1996). However, these same cases recognize that sections 106(b) and (c) may accurately describe the result of filing a proof of claim under constitutional law. Creative Goldsmiths, 119 F.3d at 1147; Del Mission, 98 F.3d at 1151, n.6.



Otherwise, it appears virtually impossible under current law for a state that has not filed a claim in the case to waive its 11th Amendment rights. Most states require such a waiver to be by statute. (See discussion in Creative Goldsmiths, 119 F.3d at 1147-49.) State statutes frequently waive the state’s sovereign immunity to certain types of claims. However, to the author’s knowledge, no state has enacted a statute expressly waiving its 11th Amendment protections from suit in federal court on claims created by the Bankruptcy Code. A general waiver of sovereign immunity will not be considered a waiver of the state’s 11th Amendment rights. Moreover, a state official may appear generally in the action, litigate the proceeding unsuccessfully and raise the 11th Amendment defense for the first time on appeal. In re Creative Goldsmiths of Washington, D.C., Inc., 119 F.3d 1140 (4th Cir. 1997).



IV. Ex Parte Young Exception



In a case decided nearly a century ago, the Supreme Court created a legal fiction to prevent a state from violating federal law with impunity. Ex Parte Young, 209 U.S. 123 (1908), the Court held that the Attorney General could be sued in federal court to enjoin the enforcement of a state law that violated federal law. The Court reasoned that, if the law to be enforced is unconstitutional, the Attorney General’s enforcement of that law is an illegal act. Because the act is illegal, the official is “stripped of his representative character“ and “subjected in his person to the consequences of his individual conduct.”



While the Ex Parte Young exception has not been overruled, recent cases have undermined it. In Seminole, for example, the Court refused to apply the doctrine on the ground that it would be inconsistent with the detailed remedial scheme created by Congress in the legislation in question to apply an additional judicially created remedy.



The next year, in Idaho v. Coeur d’Alene Tribe of Idaho, 117 S.Ct. 2028 (1997), a majority of the justices refused to permit an Indian Tribe to enjoin state officials in federal court from violating their alleged property rights contrary to federal law. They held that the suit was the functional equivalent of a quiet title action against the state. One of the opinions in this plurality decision cited a new prerequisite for the application of the doctrine: i.e., the lack of an available state forum. It also recommended a case by case analysis of the appropriateness of the application of the doctrine rather than adherence to generally applicable standards.



V. Ability to Sue in State Court



The 11th Amendment only bars an action against a state in federal court. However, the broader doctrine of sovereign immunity may bar an action from being brought against the state in state court as well. State law waiving the state’s sovereiegn immunity as to certain types of claims will generally not include a waiver of claims based on federal legislation: e.g., a preference action. There is some authority that a state may not discriminate against the federal government by refusing to permit claims against the state based on federal legislation to be brought in state court while at the same time permitting the assertion of claims against the state of a similar nature based on state law.



Recent decisions addressing this issue have reached different conclusions. In the only decision involving a claim based on the Bankruptcy Code, Brewer v. New York, 672 N.Y.S.2d 650 (1998), the court held that preference action could be brought against the State of New York in state court, pled as a claim for money had and received. There are also a few recent cases involving other federal claims: e.g., the Fair Labor Standards Act claims. They reach inconsistent conclusions. Compare Jacoby v. Arkansas Dept. Of Education, 962 S.W. 2d 773 (1998)(suit may be maintained in state court) with Alden v. Maine, 715 A.2d 172 (1998)(suit may not be maintained in state court). The Supreme Court has granted certiorari in Alden v. Maine, 119 S.Ct. 443 (1998). Stay tuned.





CANB DocumentsNorthern District of California