Opinion ID: 77691
Heading Depth: 2
Heading Rank: 3

Heading: Subordination of Sovereign Immunity

Text: 18 Both parties attempt to define the contours of the Supreme Court's Katz decision, issued only days before the district court's hearing. In Katz, the trustee commenced proceedings in bankruptcy court to recover alleged preferential transfers made to several institutions of higher education prior to the debtor's bankruptcy filing. 546 U.S. at 356, 126 S.Ct. at 994-95. The institutions of higher education filed motions to dismiss, claiming sovereign immunity. Id. at 994-95. The Supreme Court granted certiorari to consider whether Congress' attempt to abrogate state sovereign immunity in 11 U.S.C. § 106(a) is valid. Id. (footnote omitted). Instead, the Court recast the issue and stated that [t]he relevant question is not whether Congress has `abrogated' States' immunity in proceedings to recover preferential transfers. See 11 U.S.C. § 106(a). The question, rather, is whether Congress's determination that States should be amenable to such proceedings is within the scope of its power [under the Bankruptcy Clause]. Id. at 1005 (footnote omitted). The Supreme Court concluded that Congress's determination is within such power, explaining that States agreed in the plan of the Convention not to assert any sovereign immunity defense they might have had in proceedings brought pursuant to `Laws on the subject of Bankruptcies.' Id. at 1004. In other words, Congress's power, either [to] treat States in the same way as other creditors . . . or exempt them from [the] operation of [bankruptcy] laws . . . arises from the Bankruptcy Clause itself; the relevant `abrogation' is the one effected in the plan of the Convention, not by statute. Id. at 1005. 19 Katz held that 11 U.S.C. § 106(a)'s statutory abrogation of state sovereign immunity was unnecessary to authorize the Bankruptcy Court's jurisdiction over the preference avoidance proceedings at issue, and recognized that historically courts adjudicating disputes concerning bankrupts' estates had the power to issue ancillary orders to enforce its in rem jurisdiction, including granting in personam relief. Id. at 995, 1000-01. While the Supreme Court clarified that it did not mean to suggest that every law labeled a `bankruptcy' law could, consistent with the Bankruptcy Clause, properly impinge upon state sovereign immunity, it did not delineate, other than authorizing the Bankruptcy Court's jurisdiction over the preference avoidance proceedings at issue in Katz, where or how that line would be drawn. Id. at 1005 n. 10. The action by the bankruptcy court in this case now launches us into the remaining gray area as to what power provided by the bankruptcy code cannot be used against the State. 20 The Florida DOR argues that Katz recognized a waiver of sovereign immunity limited to core bankruptcy issues, including the determination of discharge and the marshaling of estate assets, but did not extend to allow public funds held by a state treasury to be at risk to benefit an individual. The Omines essentially argue that Katz 's ancillary order theory is broad enough to preclude the Florida DOR from asserting immunity as a defense to any proceeding grounded on a provision of the Bankruptcy Code or that affects property of the debtor estate. See id. at 1000. 21 Courts have long recognized that [t]he automatic stay is fundamental to the reorganization process . . . . Small Bus. Admin. v. Rinehart, 887 F.2d 165, 168 (8th Cir.1989) (citations omitted). Basic bankruptcy doctrine posits that a bankruptcy court's actions in protecting the automatic stay stems from the need to prevent abusive debt-collection practices. The bankruptcy processes of proof, allowance, and distribution are all fundamentally about the adjudication of interests claimed in a res and are all inextricably intertwined. As the Katz court acknowledged, [c]ritical features of every bankruptcy proceeding are the exercise of exclusive jurisdiction over all of the debtor's property, the equitable distribution of that property among the debtor's creditors, and the ultimate discharge that gives the debtor a `fresh start' . . . . 126 S.Ct. at 996. Katz made clear that, [i]n ratifying the Bankruptcy Clause, the States acquiesced in a subordination of whatever sovereign immunity they might otherwise have asserted in proceedings necessary to effectuate the in rem jurisdiction of the bankruptcy courts. Id. at 1005. A bankruptcy court's authority to issue compulsory orders to facilitate the administration and distribution of the res flows from that jurisdiction and, as such, does not implicate a State's sovereignty in the same way as other kinds of jurisdiction, even where the orders take the form of money damage awards against a State. While motions for contempt and seeking sanctions that include attorney's fees and costs for violating the automatic stay may resemble money damage lawsuits in form, it is their function that is critical, and their function is to facilitate the in rem proceedings that form the foundation of bankruptcy. See In re Burke, 146 F.3d 1313, 1319 (11th Cir.1998) (We conclude that the substance of the Headricks' action [alleging that the Georgia Department of Revenue violated the discharge injunction by sending a demand letter for unpaid state income taxes] is a motion to enforce the bankruptcy court's automatic stay order.). 22 As a result, we agree with the district court that, pursuant to Katz, actions to force a creditor to honor the automatic stay are the types of proceedings necessary to effectuate the in rem jurisdiction of the bankruptcy court[], and that, therefore, the Florida DOR may not assert sovereign immunity here. See 126 S.Ct. at 1005. And while the Florida DOR insists that the Katz decision should be read narrowly, the Court's broad language makes clear that the jurisdiction of courts adjudicating rights in the bankrupt estate include[s] the power to issue compulsory orders to facilitate the administration and distribution of the res. Id. at 996. In fact, in holding that the States could not assert their sovereign immunity to defeat preference recovery proceedings, the Court in Katz did not limit its decision by singling out any other specific types of ancillary bankruptcy proceedings that remain subject to the States' Eleventh Amendment immunity. 3 We hold that the bankruptcy court's ancillary order to enforce an automatic stay, which is one of the fundamental debtor protections provided by the bankruptcy laws, operates free and clear of the Florida DOR's claim of sovereign immunity. 23 It is well settled that a panel of this court may depart from circuit precedent based on an intervening opinion of the Supreme Court that undermines the prior precedent. United States v. Dennis, 786 F.2d 1029, 1049 (11th Cir.1986). As a result of the Supreme Court's opinion in Katz, it is necessary to point out that our pre- Katz reasoning of In re Crow, 394 F.3d at 922, invalidating § 106(a), in part, on the basis that Congress may not abrogate state sovereign immunity by legislation passed pursuant to its Article I powers, is no longer good law. See 126 S.Ct. at 996 (acknowledging that statements in Seminole Tribe of Florida v. Florida, 517 U.S. 44, 72, 116 S.Ct. 1114, 1132, 134 L.Ed.2d 252 (1996), reflected an erroneous assumption that its holding that Article I cannot be used to circumvent the constitutional limitations placed upon federal jurisdiction, would apply to the Bankruptcy Clause). 24 Moreover, as we shall discuss, even without Katz 's pronouncement regarding state abrogation of sovereign immunity under the Bankruptcy Clause, the Florida DOR filed a proof of claim in this case, which raises issues of waiver of sovereign immunity. 4