Source: https://law.justia.com/cases/federal/appellate-courts/F2/966/539/142757/
Timestamp: 2019-07-23 22:00:43
Document Index: 475755589

Matched Legal Cases: ['§ 2', '§ 550', '§ 1227', '§ 524', '§ 106', '§ 505', '§ 505', '§ 106', '§ 106']

In Re Randy L. Crook and John Wedman, Debtors.state of Oklahoma, Ex Rel. Commissioners of the Land Office, Appellant, v. Randy L. Crook and John Wedman, Appellees,andunited States of America, Defendant-intervenor-appellee, 966 F.2d 539 (10th Cir. 1992) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Tenth Circuit › 1992 › In Re Randy L. Crook and John Wedman, Debtors.state of Oklahoma, Ex Rel. Commissioners of the Land O...
In Re Randy L. Crook and John Wedman, Debtors.state of Oklahoma, Ex Rel. Commissioners of the Land Office, Appellant, v. Randy L. Crook and John Wedman, Appellees,andunited States of America, Defendant-intervenor-appellee, 966 F.2d 539 (10th Cir. 1992)
US Court of Appeals for the Tenth Circuit - 966 F.2d 539 (10th Cir. 1992)
The bankruptcy court then consolidated the cases and sat en banc to hear argument on the jurisdictional issue. The state's argument proceeded as follows: under the Oklahoma Enabling Act, Pub. L. No. 59-234, 34 Stat. 267 (1906), Oklahoma received certain lands and funds to be held in trust; the Oklahoma Constitution requires that the state reimburse the trust in the event of any losses, Okla. Const. art. XI, § 2; the Commissioners of the Land Office invested trust funds in the mortgages involved here; if a portion of the debt is unrecoverable as a result of the bankruptcy court's "write down," the state will be obliged to reimburse the fund out of the state treasury; such a federal court judgment therefore results in "depletion of state coffers through the exercise of unconsented state jurisdiction," Appellant's Br. at 6, and violates the state's sovereign immunity.
The court rejected the state's contentions. First, the court followed Pennsylvania v. Union Gas, 491 U.S. 1, 109 S. Ct. 2273, 105 L. Ed. 2d 1 (1989), in which the Supreme Court held that Congress' commerce power permitted it to abrogate the states' Eleventh Amendment immunity from suit. The bankruptcy court reasoned that, because Article I makes no distinctions between the commerce power and bankruptcy power, the latter also permits Congress to abrogate the states' immunity.
Next, the court noted that abrogation of the states' immunity can only occur by "unmistakably clear" statutory language. Atascadero State Hospital v. Scanlon, 473 U.S. 234, 242, 105 S. Ct. 3142, 3147, 87 L. Ed. 2d 171 (1985). The court then observed that in Hoffman v. Connecticut Income Maint. Dept., 492 U.S. 96, 109 S. Ct. 2818, 106 L. Ed. 2d 76 (1989), the Supreme Court split 4-4 on the question whether Section 106(c) contains such "unmistakably clear" language. The bankruptcy court stepped into the breach and stated that Section 106(c) is "unmistakably clear," and the states therefore are subject to its provisions.
This appeal raises questions of law reviewable de novo in this court. Matter of Tri-State Equip., Inc., 792 F.2d 967, 970 (10th Cir. 1986).
The first issue was addressed by the Supreme Court only two weeks before oral argument in this case. In United States v. Nordic Village, Inc., --- U.S. ----, 112 S. Ct. 1011, 117 L. Ed. 2d 181 (1992), a corporate officer used corporate funds to pay his individual tax liability to the Internal Revenue Service. The corporation previously had filed for reorganization under Chapter 11, and the trustee in bankruptcy commenced adversary proceedings against the IRS, under 11 U.S.C. § 550(a), to recover the corporate funds paid.
The Supreme Court has long recognized that the Eleventh Amendment does not immunize the states from all judicial actions in federal courts. The foundational case in this area is Ex parte Young, 209 U.S. 123, 28 S. Ct. 441, 52 L. Ed. 714 (1908), in which the Court held that the Eleventh Amendment does not bar a federal court injunction to stop state officials from enforcing state laws that violate the United States Constitution.
In Edelman v. Jordan, 415 U.S. 651, 94 S. Ct. 1347, 39 L. Ed. 2d 662 (1974), the Court built on the Ex parte Young holding when it considered a private action against the Illinois Department of Public Aid for violations of federal regulations establishing procedures for payment of disability and other benefits. The district court had ordered the state both to follow the federal regulations and to "release and remit ... benefits wrongfully withheld." Id., 415 U.S. at 656, 94 S. Ct. at 1352.
On appeal, the state argued that both forms of relief violated the Eleventh Amendment, because both would require payments from the state's funds; the retroactive award of benefits clearly did, and the prospective order to follow federal regulations would result in additional benefits' being paid as a consequence of the change in procedures. The court of appeals affirmed, and the Supreme Court reversed in part. The Court held that the order to pay past benefits was "indistinguishable in many respected from an award of damages against the State." Id. at 668, 94 S. Ct. at 1358. Such an award infringed on the state's sovereign immunity and was barred by the Eleventh Amendment. Id. at 665, 94 S. Ct. at 1356.
As in most areas of the law, the difference between the type of relief barred by the Eleventh Amendment and that permitted under Ex parte Young will not in many instances be that between night and day. The injunction issued in Ex parte Young was not totally without effect on the State's revenues, since the state law which the Attorney General was enjoined from enforcing provided substantial monetary penalties against railroads which did not conform to its provisions. Later cases from this Court have authorized equitable relief which has probably had greater impact on state treasuries than did that awarded in Ex parte Young. [citing Graham v. Richardson, 403 U.S. 365 [91 S. Ct. 1848, 29 L. Ed. 2d 534] (1971) (state prohibited from denying welfare benefits on basis of alienage); Goldberg v. Kelly, 397 U.S. 254 [90 S. Ct. 1011, 25 L. Ed. 2d 287] (1970) (state prohibited from terminating welfare benefits without prior notice and hearing) ]. But the fiscal consequences to state treasuries in these cases were the necessary result of compliance with decrees which by their terms were prospective in nature. State officials, in order to shape their official conduct to the mandate of the Court's decrees, would more likely have to spend money from the state treasury than if they had been left free to pursue their previous course of conduct. Such an ancillary effect on the state treasury is a permissible and often an inevitable consequence of the principle announced in Ex parte Young.
Id., 415 U.S. at 667-68, 94 S. Ct. at 1357-58. Our role is to apply these precepts to the facts before us.
The relief granted in the present case is declaratory and injunctive in nature. It is not an award of monetary damages. Under Section 362(a) of the bankruptcy code, the filing of the debtors' petitions "operate [d] as a stay, applicable to all entities," of Oklahoma's foreclosure action against the debtors. The bankruptcy court's approval of the debtors' reorganization plans, including the written-down mortgages, took the form of a declaratory order that binds each creditor, including the state. 11 U.S.C. § 1227(a). Discharge under Section 1228 is governed by the general provisions in Section 524(a); discharge "voids any judgment" obtained against the debtor concerning his or her personal liability for debts covered, and "operates as an injunction" against any action to recover on such debts. Id. § 524(a).
The Supreme Court has endorsed the view that Section 106(c) by its terms authorizes declaratory and injunctive relief only. In Hoffman v. Connecticut Income Maint. Dept., 492 U.S. 96, 109 S. Ct. 2818, 106 L. Ed. 2d 76 (1989), two debtors in bankruptcy brought adversary proceedings against the state in the bankruptcy court to recover monetary relief. One debtor claimed overpayment of taxes and the other claimed Medicaid fees owed for services rendered. The bankruptcy court awarded money judgments on the grounds that Section 106(c) subjected the state to suit and authorized such relief.
Both the district court and the court of appeals held that Section 106(c) did not have this effect, and the Supreme Court agreed. Writing for the plurality, Justice White noted that Section 106(c) (2) makes the "determination ... of an issue" binding on the states but does not speak of "claims" or "proceedings" against the states:
The language of § 106(c) (2) is more indicative of declaratory and injunctive relief than of monetary recovery. The clause echoes the wording of sections of the [Bankruptcy] Code such as § 505, which provides that "the court may determine the amount or legality of any tax," 11 U.S.C. § 505(a) (1), a determination of an issue that obviously should bind the governmental unit but does not require a monetary recovery from a State. We therefore construe § 106(c) as not authorizing monetary recovery from the States. Under this construction of § 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, [citations omitted], but would not be subjected to monetary recovery.
492 U.S. at 102, 109 S. Ct. at 2823. See also Nordic Village, --- U.S. at ----, 112 S. Ct. at 1013. This analysis applies with equal force in the case at bar.
The state's argument, however, suffers from a more fundamental infirmity. The line of cases begun in Ex parte Young is not concerned so much with righting wrongs as with the relations between sovereigns in our federal system. " [T]he Young doctrine has been accepted as necessary to permit the federal courts to vindicate federal rights and hold state officials responsible to 'the supreme authority of the United States.' " Pennhurst State School & Hosp. v. Halderman, 465 U.S. 89, 105, 104 S. Ct. 900, 910, 79 L. Ed. 2d 67 (1984) (quoting Ex parte Young, 209 U.S. at 160, 28 S. Ct. at 454).
What the Pennhurst court characterized as " [t]his need to reconcile competing interests" of the states and the United States is at the center of the present dispute. A bankruptcy court endeavors to settle the debtors' accounts according to the provisions of federal bankruptcy law. The state endeavors to protect its fiscal interests by putting its mortgage notes beyond the reach of federal law. That this appeal does not follow an encroachment by the state on federal constitutional or statutory rights is no more than a procedural by-product of the point at which the state chose to challenge the bankruptcy court's order. The issues would be unchanged had the state pressed its foreclosure action and waited for the debtors to use the order as a shield. In either event, federal law is supreme. The bankruptcy court's vindication of the debtors' federal statutory rights accords with Eleventh Amendment jurisprudence.
Oklahoma also argues that this court should oust the bankruptcy court of authority to interfere with the mortgages held by the state because of the interposition of the Eleventh Amendment as interpreted in Pennhurst and Dugan v. Rank, 372 U.S. 609, 620, 83 S. Ct. 999, 1006, 10 L. Ed. 2d 15 (1963) ("The general rule is that a suit is against the sovereign ... if the effect of the judgment would be 'to restrain the Government from acting, or to compel it to act.' ") (quoting Larsen v. Domestic & Foreign Corp., 337 U.S. 682, 704, 69 S. Ct. 1457, 1468, 93 L. Ed. 1628 (1949)). Although Pennhurst is useful for its general description of the Eleventh Amendment, the case concerned proceedings in federal court against state officials for violations of state law. The Court took care to note that the state's immunity in state-law cases is far broader than in cases where federal law is at issue. 465 U.S. at 105-06, 104 S. Ct. at 910-11. Dugan was an action against the federal government and did not raise Eleventh Amendment concerns. 372 U.S. at 610, 83 S. Ct. at 1001. For the reasons heretofore expressed, we conclude that nothing in Pennhurst or Dugan affects the reasoning or result we reach here.
The state also argues that the Tenth Amendment bars the relief granted here. The Tenth Amendment provides: "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people." In National League of Cities v. Usery, 426 U.S. 833, 852, 96 S. Ct. 2465, 2474, 49 L. Ed. 2d 245 (1976), the Court held that this provision immunizes the states from suit in federal courts to enforce federal statutes that concern "areas of traditional government functions." Usery was explicitly overruled in Garcia v. San Antonio Metropolitan Transit Auth., 469 U.S. 528, 105 S. Ct. 1005, 83 L. Ed. 2d 1016 (1985). Oklahoma nevertheless argues that this court should follow Usery because it is better reasoned and is likely to rise to new life in the near future. This court, however, must live in the present. The state's arguments here are unavailing.
The state also contends that the passage of Section 106(c) as a "last-minute floor amendment to a less restrictive bill" constitutes an extraordinary failure of the national political process of the sort envisioned in South Carolina v. Baker, 485 U.S. 505, 512, 108 S. Ct. 1355, 1360, 99 L. Ed. 2d 592 (1988). The Court allowed that such a failure might warrant relief under the Tenth Amendment, but the Court articulated no test. Id. at 512-13, 108 S. Ct. at 1360-61. We do not conclude that the enactment of a floor amendment, a common occurrence in our political system, violates the Tenth Amendment.
Not present here is a liquidation proceeding under Chapter 7. Thus, we are not faced with any problem associated with the teachings of Dewsnup v. Timm, --- U.S. ----, 112 S. Ct. 773, 116 L. Ed. 2d 903 (1992). See In re Bellamy, 962 F.2d 176 (2d Cir. 1992)