The Seminole Decision and Its Impact on Bankruptcy

  1. Seminole Tribe v. Florida, 517 U.S. 44, 116 S.Ct. 114, 134 L.Ed.2d. 252 (1996).
    1. Pursuant to the Eleventh Amendment, States are not subject to suit in federal court without their consent.
    2. A State's sovereign immunity may be abrogated where Congress has unequivocally expressed its intent to abrogate that immunity, and where Congress has acted pursuant to a valid exercise of power.
    3. Holding: Article I of the Constitution (pursuant to which the Indian Gaming Regulatory Act was enacted) cannot be utilized to circumvent the restrictions on judicial power imposed by Article III, and thus abrogation of the States' sovereign immunity in the Indian Gaming Regulatory Act is unconstitutional.
    4. Although not a bankruptcy decision, Seminole suggests that abrogation of sovereign immunity by Congress in any Article I legislation (such as the Bankruptcy Code) is not a valid exercise of power and violates the Eleventh Amendment.
    5. Prior to Seminole, the Supreme Court recognized two valid sources of authority for Congressional abrogation of the States' sovereign immunity, §5 of the Fourteenth Amendment and the Interstate Commerce Clause. After Seminole, only the Fourteenth Amendment authorization survives.
    6. Is bankruptcy a Fourteenth Amendment "privilege and immunity" which would allow Congress to abrogate sovereign immunity pursuant to a valid exercise of power?
      1. See, U.S. v. Kras, 409 U.S. 434, 93 S.Ct. 631, 39 L.Ed.2d. 662, (1973), where the Court held there is no constitutional right to a discharge.
      2. Thus, in In re Sacred Heart Hospital of Norristown, 133 F.3d 237 (3rd Cir. 1998), the Third Circuit specifically rejected the debtor's attempt to justify the abrogation under the Fourteenth Amendment, stating there is no reason to resuscitate § 5 of the Fourteenth Amendment by holding bankruptcy is a privilege of citizenship. See also, In re Louis Elias, 1998 W.L. 106129 (9th Cir. B.A.P. February 23, 1997).
    7. In Ohio Agricultural Commodity Depositions Fund v. Mahern, 116 S.Ct. 1411 (1996), the Supreme Court specifically held that Seminole applied to the Bankruptcy Code.
  2. 11 U.S.C. §106(a) is a specific example of Congressional abrogation of sovereign immunity in the bankruptcy context.
    1. In light of Seminole, cases have held 11 U.S.C. § 106(a) is unconstitutional. See, Sacred Heart, supra; In re Creative Goldsmiths of Washington, D.C., Inc., 119 F.3d 1140 (4th Cir. 1997); Matter of Fernandez v. PNL Asset Management Company, LLC, 123 F.3d 241 (5th Cir. 1997); In re NVR L.P., 206 B.R. 831 (Bankr. E.D.Va. 1997).
  3. The consequence of Seminole and its progeny is that States cannot be sued in Bankruptcy Court without their consent.
  4. Questions which Seminole and its progeny raise.
    1. What agencies of the State can invoke sovereign immunity?
      1. See, In re Richard G. Christian and Claudia Christy, 1998 W.L. 47592 (Bankr. D.N.J. February 3, 1998), applying the "state treasury test" enunciated in Christy v. Pennsylvania Turnpike Commission, 54 F.3d 1140 (3rd Cir. 1995), and finding a county division of social services qualifies for immunity.
      2. Division of Motor Vehicles qualifies for immunity. Kish v. Verniero, 212 B.R. 808 (D.N.J. 1997); In re Fennelly, 212 B.R. 61 (D.N.J. 1997).
      3. Division of public welfare qualifies. Sacred Heart, supra.
      4. Note that 11 U.S.C. § 106(a) applies to a "governmental unit," and thus § 106(a) may still be valid as to "governmental units" which are not the "State."
    2. What acts by the State constitute consent to be used?
      1. Filing proof of claim? 11 U.S.C. § 106(b) may itself be unconstitutional following the reasoning of Seminole. See, Richard G. Christy, supra, where the court states that 11 U.S.C. §106(b) appears to be unconstitutional, but nevertheless finds the filing of a proof of claim to constitute an act of general waiver of sovereign immunity. See also, In re York-Hanover Developments, Inc., 201 B.R. 137 (Bankr. E.D.N.C. 1996); In re Tri-City Turf Club, Inc., 203 B.R. 617 (Bankr. E.D. Ky. 1996); In re Stoecker, 202 B.R. 429 (Bankr. N.D. Ill. 1996); In re Midland Mechanical Contractors, Inc., 200 B.R. 453 (Bankr. N.D. Ga. 1996); In re Burke, 200 B.R. 282 (Bankr. S.D. Ga. 1996); In re Headrick, 200 B.R. 963 (Bankr. S.D. Ga. 1996); In re Martinez, 196 B.R. 225 (D. P.R. 1996).
      2. But see Charter Oak Associates v. Dept. of Social Services, 203 B.R. 17 (Bankr. D. Ct. 1996), where the court holds §106(b) does not conflict with Seminole in light of Gardner v. New Jersey, 329 U.S. 565, 67 S.Ct. 467, 91 L.Ed.2d. 504, (1947).
      3. In dicta the court in In re Mocco, 206 B.R. 691 (D.N.J. 1997) states the filing a proof of claim is not a waiver of sovereign immunity.
      4. The filing of a counterclaim is sufficient to constitute a waiver. Koehler v. Iowa College Student Aid Commission, 204 B.R. 210 (Bankr. D. Minn. 1997).
      5. The making of a general appearance may constitute a waiver. In re Laszar, 200 B.R. 358 (Bankr. S.D. Cal. 19996).
      6. The filing of a motion to dismiss does not constitute a waiver. Kisch, supra.
    3. Whether waiver by one state agency constitutes waiver as to all state agencies?
      1. Broad view. Filing of a claim by any agency constitutes waiver as to all. Sacred Heart, 204 B.R. 132 (E.D. Pa. 1997), affirmed; 133 F.3d 353 (3rd Cir. 1998); Ossen v. State of Connecticut, Dept. of Social Services, 203 B.R. 17 (Bankr. D. Ct. 1996); In re Hughes-Bechtol, 214 B.R. 107 (Bankr. S.D. Oh. 1991).
      2. Narrow view. Laszar, supra, where the court determines the scope of the waiver depends upon the logical relationship of the filed claim to the claim against the state. See also, William Ross v. Dean Construction, Inc., 199 B.R. 551 (Bankr. W.D. Pa. 1996).; Wyoming Dept. of Transportation v. Straight, 209 B.R. 540 (D. Wyo. 1997).
  5. What to do?
    1. Ex-Parte Young, 209 U.S. 123 (1908), supports the proposition that a suit seeking prospective, injunctive relief against a state official may overcome sovereign immunity. Thus, rather than sue the state, seek an injunction against the appropriate official.
    2. However, the Ex-Parte Young doctrine is limited. Where Congress has prescribed a detailed remedial scheme for the enforcement against the state of a statutory, creative right, actions against an officer based on Ex-Parte Young should not be allowed. Seminole, supra.
    3. Idaho v. Coeur d'Alene Tribe of Idaho, 117 S.Ct. 2028, 138 L.Ed.2d. 438, (1997) addressed the application of Ex-Parte Young in light of Seminole and prohibits suits against state officials if the state is the real substantial party in interest.
    4. Use of Ex-Parte Young doctrine in the bankruptcy context.
      1. Guiding Light Corp. v. Louisiana, 213 B.R. 489 (Bankr. E.D. La. 1997); In re Zywiczynski, 210 B.R. 924 (Bankr. W.D.N.Y. 1997).
  6. Thus, bankruptcy practitioners may now be forced to assert substantive, bankruptcy claims in the state courts in order to obtain effective relief!