Magnolia Venture v. MS Dept of Economic ( 1998 )

REVISED, September 4, 1998
UNITED STATES COURT OF APPEALS
For the Fifth Circuit
___________________________
No. 97-60835
___________________________
MAGNOLIA VENTURE CAPITAL CORPORATION,
Plaintiff-Appellee,
VERSUS
PRUDENTIAL SECURITIES, INC., ET AL.,
Defendants,
MISSISSIPPI DEPARTMENT OF ECONOMIC
AND COMMUNITY DEVELOPMENT,
Defendant-Appellant.
___________________________________________________
Appeal from the United States District Court
For the Southern District of Mississippi
___________________________________________________
August 28, 1998
Before DAVIS, EMILIO M. GARZA, and BENAVIDES, Circuit Judges.
W. EUGENE DAVIS, Circuit Judge:
In this appeal we are asked to consider whether the Eleventh
Amendment bars this suit. The district court ruled that the
Mississippi Department of Economic and Community Development
(“MDECD”) had waived its Eleventh Amendment immunity, and therefore
denied MDECD’s Motion to Dismiss. For reasons set forth below, we
reverse and remand this case to the district court.
I.
In 1994, the Mississippi Legislature enacted the Venture
Capital Act of 1994 (“the Act”), codified at Miss. Code Ann. §§ 57-
77-1 to 57-77-39. The legislature passed the Act to provide
capital to new growth-oriented businesses and create new jobs. In
accordance with the Act, the Mississippi Department of Economic and
Community Development, an agency of the State of Mississippi,
incorporated Magnolia Capital Corporation (“MCC”), a non-profit
corporation. MDECD also formed a for-profit corporation known as
Magnolia Venture Capital Corporation (“MVCC”), with MCC as the sole
shareholder. In turn, MVCC created and served as the general
partner in the Magnolia Venture Capital Fund Limited Partnership
(“the Partnership”), which was to provide venture capital to
Mississippi businesses.
In addition to creating these entities, the legislature
provided for funding of these corporations through the sale of
$20,000,000 in general obligation bonds by the State Bond
Commission. The proceeds of these bonds went to MDECD, which then
made a $20,000,000 non-recourse loan to MCC. MCC then deposited
approximately $6,200,000 of the funds with the State Treasurer for
investment in zero coupon bonds. MCC pledged these zero coupon
bonds to secure the loan. MCC then invested the balance of the
$20,000,000, or roughly $13,800,000, in MVCC as an equity
contribution. MCC became MVCC’s sole shareholder. MVCC then
invested approximately $8,000,000 in the Partnership and procured
a private investment totaling approximately $5,000,000. The
Partnership began accepting applications for loans in January of
1996.
In April of 1997, Lisa Looser, purporting to act on behalf of
MVCC, executed a Pledge Agreement purporting to grant a first
2
priority security in certain assets of MVCC to MDECD.1 This
agreement secured the obligations, indebtedness, and liabilities
under the Loan Agreement between MCC and MDECD. Later that month,
MDECD notified MVCC that it was in default under the terms of the
Loan Agreement and the Pledge Agreement, and requested that MVCC
deliver the pledged assets to MDECD. This requested amount
included approximately $11,000,000 that MVCC had invested with
Prudential Securities, Inc. (“Prudential”). MVCC refused to
deliver the assets and MDECD placed Prudential on notice of its
claim to the funds and demanded that Prudential provide the funds
to MDECD. Prudential responded by placing a “freeze” on the assets
in its possession. As a result of this freeze, MVCC filed for
protection under Chapter 11 of the Bankruptcy Code.
After instituting the Chapter 11 proceeding, MVCC filed an
adversary action against MDECD seeking a ruling that MDECD had no
lien or interest in the funds held by Prudential. After MDECD
moved to dismiss the proceeding on Eleventh Amendment grounds, MVCC
voluntarily dismissed the action. However, MVCC contemporaneously
filed a new adversary proceeding against Prudential seeking a
release of the freeze on MVCC’s assets in the Prudential investment
account. MVCC also alleged that MDECD held no perfected lien or
security interest in MVCC’s assets in the hands of Prudential.
MVCC requested a declaratory judgment that the assets in
Prudential’s possession were free and clear of any claim or lien by
any third party.
1
MVCC alleges that Ms. Looser signed the document without
any authority to act in a representative capacity for MVCC.
3
In response, MDECD sought leave to intervene in this adversary
proceeding, which the bankruptcy court allowed. After MDECD
intervened, Prudential filed a counterclaim in the nature of an
interpleader against MVCC and named MDECD as a third-party
defendant to the adversary proceeding. MVCC then filed a cross-
claim against MDECD, alleging that MDECD had no interest in the
assets held by Prudential.
After its intervention, MDECD moved to dismiss the proceeding
based on a claim of Eleventh Amendment immunity. MDECD’s motion
focused mainly on establishing the unconstitutionality of § 106 of
the Bankruptcy Code, 11 U.S.C. § 106, in which Congress purported
to abrogate the sovereign immunity of states and state agencies
which file claims in bankruptcy proceedings. The district court,
relying on In re Estate of Fernandez, 123 F.3d 241 (5th Cir. 1997),
agreed with MDECD that § 106 violated the Eleventh Amendment and
was ineffectual as a waiver of sovereign immunity. However, the
district court further found that MDECD had waived its Eleventh
Amendment immunity through a venue clause in the Pledge Agreement,
and, therefore, denied MDECD’s Motion to Dismiss. MDECD now
appeals that ruling.
II.
A.
In Puerto Rico Aqueduct and Sewer Authority v. Metcalf & Eddy,
Inc., 506 U.S. 139, 113 S. Ct. 684 (1993), the Supreme Court held
that “States and state entities that claim to be ‘arms of the
State’ may take advantage of the collateral order doctrine to
appeal a district court order denying a claim of Eleventh Amendment
4
immunity.” Id. at 147, 113 S. Ct. at 689. Thus, we have appellate
jurisdiction to review the district court’s interlocutory order
denying MDECD’s Motion to Dismiss based on the Eleventh Amendment.
See also Earles v. State Bd. of Certified Pub. Accountants, 139
F.3d 1033, 1036 (5th Cir. 1998).
B.
In this appeal, we focus on whether the district court
correctly denied MDECD’s Motion to Dismiss based on Eleventh
Amendment immunity. The district court concluded that MDECD was
entitled to assert Eleventh Amendment immunity, but that MDECD had
waived such immunity by virtue of a provision in the Pledge
Agreement that provided as follows:
Section 6.03 Applicable Law. This Pledge shall be deemed
to have been made and to be performed in Jackson, Hinds
County, Mississippi, and shall be governed by and
construed in accordance with the laws of the State of
Mississippi. Courts within the State of Mississippi
shall have jurisdiction over any and all disputes between
the parties to this Pledge, whether in law or in equity,
including but not limited to, all disputes arising out of
or relating to this Pledge. Venue in any such dispute,
whether in federal or state court, shall be laid in Hinds
County, Mississippi.
(Emphasis added).
On appeal, MDECD makes a two-pronged argument. MDECD argues
first that the above language of the venue provision does not
clearly waive its Eleventh Amendment immunity. Second, MDECD
argues that even if the venue provision is construed as waiving
Eleventh Amendment immunity, MDECD had no authority to waive this
important right.
The district court, in rejecting both of MDECD’s arguments,
held that the language of the venue provision was sufficiently
5
clear to amount to a waiver of Eleventh Amendment immunity. The
district court also rejected MDECD’s argument that it had no
authority to waive Eleventh Amendment immunity. The district court
reasoned that Mississippi, by authorizing MDECD to enter into a
contract in which MDECD waived its Eleventh Amendment immunity,
must be considered as authorizing that waiver.
III.
A.
Assuming without deciding that the language in the venue
provision of the Pledge Agreement reflects a clear waiver of
Eleventh Amendment immunity, we are satisfied that MVCC has not
demonstrated that the state agency, MDECD, was authorized to waive
Mississippi’s important right of immunity from suit in federal
court.
In concluding that MDECD was authorized to waive Mississippi’s
Eleventh Amendment immunity, the district court reasoned as
follows: first, the court correctly concluded that under clear
Mississippi Supreme Court authority, "sovereign immunity does not
bar action against the State or its political subdivisions brought
on a breach of contract theory." Trammell v. State, 622 So. 2d
1257, 1262 (Miss. 1993). The district court observed that this
principle is based on the notion that "[w]here the state has
lawfully entered into a business contract with an individual, the
obligations and duties of the contract should be mutually binding
and reciprocal. There is no mutuality or fairness where a state or
county can enter into an advantageous contract and accept its
benefits but refuse to perform its obligations." Churchill v.
6
Pearl River Basin Dev. Dist., 619 So. 2d 900, 903 (Miss. 1993).
The district court reasoned next that because the venue
provision waived the state's Eleventh Amendment immunity, "there
would be ‘no mutuality or fairness’ in allowing the Department to
assert the Pledge Agreement in support of its claim to the funds in
question and yet at the same time permit it to avoid challenges to
the validity of the agreement or the correctness of the
Department's claim to an interest predicated on that agreement."
Thus, based on this reasoning, the district court concluded that
Mississippi also waived its Eleventh Amendment immunity defense by
giving general authority to MDECD to enter into contracts, and the
specific contract at issue included an Eleventh Amendment waiver.
The district court correctly recognized that under Mississippi
law, when the legislature authorizes a state agency to enter into
a contract, the state waives its immunity from suit for a breach of
that contract. See, e.g., Grant v. State, 686 So. 2d 1078, 1091-92
(Miss. 1996); Trammell v. State, 622 So. 2d 1257, 1261-62 (Miss.
1993); Churchill v. Pearl River Basin Dev. Dist., 619 So. 2d 900,
903 (Miss. 1993); Mississippi State Dept. of Public Welfare v.
Howie, 449 So. 2d 772, 777 (Miss. 1984). This rule is based on
mutuality and fairness. Mississippi State Dept. of Public Welfare,
449 So. 2d at 777. That principle is not in dispute. The issue
before us narrows to whether the district court correctly extended
Mississippi’s rule on waiver of common law sovereign immunity to
encompass Mississippi’s waiver of its Eleventh Amendment immunity
where the state authorized an agency to enter into a contract, and
that contract included a waiver of Eleventh Amendment immunity. We
7
are persuaded that important federalism concerns that underlie the
Eleventh Amendment will not permit this extension.2
B.
The doctrine of sovereign immunity embodies the maxim that
“the King can do no wrong,” and can be traced back to ancient
times.3 Sovereign immunity, as it has been interpreted in the
federal courts, actually encompasses two separate, but related,
concepts--state sovereign immunity, or common law sovereign
immunity, and Eleventh Amendment immunity, or constitutional
sovereign immunity. 13 CHARLES ALAN WRIGHT & ARTHUR R. MILLER, FEDERAL
PRACTICE AND PROCEDURE § 3524, at 171 (2d ed. 1984).4 These immunities
shield the sovereign, or the state, from suits against it in its
own courts as well as from suits against it in federal courts.
A state’s immunity, however, is not absolute. For example, a
state may choose to waive its immunity, thus consenting to suit.5
However, it is important to keep in mind that a state may waive its
2
See, e.g., Port Authority Trans-Hudson Corp. v. Feeney, 495
U.S. 299, 304-06, 110 S. Ct. 1868, 1872-73 (1990); Pennhurst State
Sch. & Hosp. v. Halderman, 465 U.S. 89, 99-100 & n.9, 104 S. Ct.
900, 907-08 & n.9 (1984).
3
See generally 17 JAMES WM. MOORE ET AL., MOORE’S FEDERAL PRACTICE
¶ 123 App.01 (3d ed. 1998).
4
See also Seminole Tribe of Florida v. Florida, 517 U.S. 44,
54, 116 S. Ct. 1114, 1122 (1996) (“‘[W]e have understood the
Eleventh Amendment to stand not so much for what it says, but for
the presupposition . . . which it confirms.’ That presupposition,
first observed over a century ago in Hans v. Louisiana, has two
parts: first, that each State is a sovereign entity in our federal
system; and second, that ‘it is inherent in the nature of
sovereignty not to be amenable to the suit of an individual without
its consent.’”) (internal citations omitted); In re Allied-Signal,
Inc., 919 F.2d 277, 280 n.4 (5th Cir. 1990).
5
See generally 17 JAMES WM. MOORE ET AL., MOORE’S FEDERAL PRACTICE
¶ 123.21 (3d ed. 1998).
8
common law sovereign immunity without waiving its Eleventh
Amendment immunity under federal law. Port Authority Trans-Hudson
Corp. v. Feeney, 495 U.S. 299, 306, 110 S. Ct. 1868, 1873 (1990);
see also In re Allied Signal, Inc., 919 F.2d 277, 280 n.4 (5th Cir.
1990). Thus, a state may consent to being sued in its own courts,
while still retaining Eleventh Amendment immunity from suit in
federal court. See, e.g., Florida Dept. of Health and
Rehabilitative Servs. v. Florida Nursing Home Ass’n, 450 U.S. 147,
150, 101 S. Ct. 1032, 1034 (1981) (state’s general waiver of
sovereign immunity did not constitute waiver by state of Eleventh
Amendment immunity); Great N. Life Ins. Co. v. Read, 322 U.S. 47,
54-55, 64 S. Ct. 873, 877 (1944) (same); Sherwinski v. Peterson, 98
F.3d 849, 851-52 (5th Cir. 1996) (same).
The Supreme Court has made it clear that we may find a waiver
of a state's Eleventh Amendment immunity in only the most exacting
circumstances. “[T]he State's consent [to suit in federal court
must] be unequivocally expressed.” Pennhurst State Sch. & Hosp. v.
Halderman, 465 U.S. 89, 99, 104 S. Ct. 900, 907 (1984); see also
Port Authority Trans-Hudson Corp., 495 U.S. at 305, 110 S. Ct. at
1873 (“The Court will give effect to a State’s waiver of Eleventh
Amendment immunity only where stated by the most express language
or by such overwhelming implication from the text as [will] leave
no room for any other reasonable construction.”). A clear
declaration of the state’s intention to submit its fiscal problems
to other courts than those of its own creation must be found.
Pennhurst State Sch. & Hosp., 465 U.S. at 99 n.9, 104 S. Ct. at 907
n.9. As the Supreme Court has stated, the “reluctance to infer
9
that a State’s immunity from suit in the federal courts has been
negated stems from recognition of the vital role of the doctrine of
sovereign immunity in our federal system.” Pennhurst State Sch. &
Hosp., 465 U.S. at 99, 104 S. Ct. at 907; see also Port Authority
Trans-Hudson Corp., 495 U.S. at 304-06, 110 S. Ct. at 1872-73.
Additionally, the state’s waiver must be accomplished by someone to
whom that power is granted under state law. Ford Motor Co. v.
Department of Treasury, 323 U.S. 459, 467, 65 S. Ct. 347, 352
(1945); see also Dagnall v. Gegenheimer, 631 F.2d 1195, 1196 (5th
Cir. 1980).
With this background, we now consider the precise issue
presented in this case: whether the district court erred in
concluding that MDECD had authority to waive Mississippi's Eleventh
Amendment immunity from suit in federal court.6
C.
In determining whether a state official or entity has
authority to waive Eleventh Amendment immunity, the Supreme Court
has directed that we look to the “general policy of the state as
expressed in its Constitution, statutes and decisions.” Ford Motor
Co., 323 U.S. at 467, 65 S. Ct. at 352; see also Dagnall, 631 F.2d
at 1196. This authority must be clearly expressed. In Freimanis
6
As an initial matter, MVCC argues that MDECD is not
entitled to raise Eleventh Amendment immunity because MVCC does not
seek a money judgment against the state. MVCC therefore contends
that Mississippi is not a real party in interest in the suit. As
the district court noted in rejecting this argument, “application
of the Eleventh Amendment is not limited to those cases in which a
money judgment is sought against a state.” See, e.g., Cory v.
White, 457 U.S. 85, 102 S. Ct. 2325 (1982). Additionally, this
action involves rights to allegedly public funds claimed by the
state. We therefore agree with the district court that MDECD, a
state agency, is entitled to assert Eleventh Amendment immunity.
10
v. Sea-Land Service, Inc., 654 F.2d 1155 (5th Cir. 1981), this
Court considered whether the State of Louisiana had waived its
Eleventh Amendment immunity when an attorney representing the
Louisiana Department of Transportation entered into a consent
judgment with the defendant, Sea-Land. In answering this question
in the negative, we stated that “[t]he short answer to this
contention is that the attorney for the Department had no clearly
expressed authority to waive Eleventh Amendment immunity. Indeed,
Louisiana has clearly expressed its intention to preserve its
immunity.” Id. at 1160 (emphasis added); see also Santee Sioux
Tribe v. Nebraska, 121 F.3d 427, 431 (8th Cir. 1997) (“a state
official may waive the state’s immunity only where specifically
authorized to do so by that state’s constitution, statutes, or
decisions”); Estate of Porter v. Illinois, 36 F.3d 684, 690 (7th
Cir. 1994) (“state officials can only waive a state’s Eleventh
Amendment immunity if they are specifically authorized to do so by
the state’s constitution, statutes, or decisions”); Silver v.
Baggiano, 804 F.2d 1211, 1214 (11th Cir. 1986) (“waiver of Eleventh
Amendment immunity by state officials must be explicitly authorized
by the state ‘in its Constitution, statutes and decisions’”).7
7
Indeed, given the recognition of strong federalism concerns
and the concomitant strict solicitude federal courts give to a
state’s purported waiver of Eleventh Amendment immunity, see, e.g.,
Port Authority Trans-Hudson Corp., 495 U.S. at 305-06, 110 S. Ct.
at 1872-73, other circuits have gone so far as to conclude that
affirmative acts by state officials did not amount to the state’s
waiver of Eleventh Amendment immunity where the state official was
not specifically authorized to waive the immunity. In Estate of
Porter v. Illinois, 36 F.3d 684 (7th Cir. 1994), the Seventh
Circuit held that the Illinois Attorney General was not authorized
to waive Illinois’ Eleventh Amendment immunity, and therefore,
could not make a valid waiver of immunity by removing the case to
federal court. Id. at 691; see also Silver v. Baggiano, 804 F.2d
11
 As noted above, the district court was entirely correct in
concluding that Mississippi law is clear that when the legislature
authorizes an agency to enter into contracts, the state waives its
immunity from suit in state court for a breach of a contract. But
none of these cases involved the waiver of Eleventh Amendment
immunity and consent to suit in federal court. In other words,
while Mississippi may waive immunity from suit in its own courts by
authorizing state agencies to enter into contracts, there is no
Mississippi law to support the implication that MDECD had the
authority to waive Mississippi’s Eleventh Amendment immunity.
The authorities discussed above lead us to conclude that a
state, through its constitution, statutes, or court decisions, must
expressly authorize a state agency or representative to waive the
state's Eleventh Amendment immunity. Such authority cannot be
implied from the circumstances. Although the district court's
conclusion that the state implicitly authorized the waiver of its
Eleventh Amendment right has a logical and equitable tug, no
Mississippi authority supports this determination. Given the
reluctance of courts generally to find a waiver of Eleventh
Amendment immunity and the strong general rule that authority to
make an effective waiver must be express, we conclude that the
1211, 1214-15 (11th Cir. 1986) (holding removal by state officials
of suit containing state law claims not a valid waiver of Eleventh
Amendment immunity where officials were not authorized to waive
immunity). Similarly, in In re Creative Goldsmiths of Washington,
D.C., Inc., 119 F.3d 1140 (4th Cir. 1997), the Fourth Circuit
concluded that the State of Maryland’s defense on the merits of a
suit arising out of a bankruptcy proceeding did not amount to a
waiver of Eleventh Amendment immunity because the Maryland Attorney
General lacked authority to waive Maryland’s Eleventh Amendment
immunity. Id. at 1149.
12
district court erred in determining that MDECD had authority to
waive Mississippi's Eleventh Amendment immunity.8
Although it is unnecessary to our decision, the parties have
called our attention to a recent Mississippi statute that confirms
our conclusion that Mississippi did not authorize MDECD to waive
the state’s Eleventh Amendment immunity.9
8
In addition to arguing that MDECD waived its Eleventh
Amendment immunity, MVCC also argues that alternative grounds exist
to support the district court’s denial of MDECD’s Motion to
Dismiss. See In re Sims, 994 F.2d 210, 214 (5th Cir. 1993)
(holding that appellee’s arguments in support of a favorable
judgment should be included in appellee’s answering brief, not in
a cross-appeal). MVCC argues, as it did in the district court,
that MDECD lacks standing as a party in interest to the adversary
proceeding filed by MVCC against Prudential because MDECD is
neither a creditor of MVCC, nor does MDECD hold any interest in the
property at issue. As we stated above, our appellate jurisdiction
is limited to reviewing the district court’s denial of Eleventh
Amendment immunity. See Puerto Rico Aqueduct and Sewer Auth., 506
U.S. at 144-45; 113 S. Ct. at 688.
9
On April 17, 1998, Mississippi adopted House Bill No. 1240
regarding the Venture Capital Act of 1994. Specifically, Miss.
Code Ann. § 57-77-3, as amended, provides in pertinent part as
follows:
Except as provided in Section 57-77-33(7), it is, and has
always been, the intent of the Legislature that nothing
in this chapter shall be construed to waive the sovereign
immunity of the State of Mississippi or the department
pursuant to either state law or the Eleventh Amendment to
the United States Constitution. It is, and always has
been, the intent of the Legislature that no action by the
State of Mississippi or by the department, or by any
officer or agent of the State of Mississippi or of the
department, shall be considered a waiver of the sovereign
immunity of the State of Mississippi or the department
pursuant to either state law or the Eleventh Amendment to
the United States Constitution. It is, and always has
been, the intent of the Legislature that the entering
into of any contract, loan agreement, pledge agreement,
or other instrument by the State of Mississippi or the
department shall not be considered a waiver of the
sovereign immunity of the State of Mississippi pursuant
to either state law or the Eleventh Amendment to the
United States Constitution. It is, and always has been,
the intent of the Legislature that the sovereign immunity
13
IV.
In summary, because MDECD lacked specific express
authorization to waive Mississippi’s Eleventh Amendment immunity,
the district court erred in denying MDECD’s Motion to Dismiss on
Eleventh Amendment grounds. However, because our review is limited
to the immunity question, we are unable to resolve the remaining
issues in this case and we REMAND it to the district court for
further proceedings consistent with this opinion.
REVERSED and REMANDED.
of the State of Mississippi pursuant to either state law
or the Eleventh Amendment to the United States
Constitution may only be waived by express authorization
set forth in an enactment of the Mississippi Legislature.
14