In Re: Fernandez ( 1997 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 96-31013
In The Matter Of: JULIAN E FERNANDEZ, Estate of
Debtor,
DEPARTMENT OF TRANSPORTATION AND DEVELOPMENT,
State of Louisiana,
Appellant,
versus
PNL ASSET MANAGEMENT COMPANY LLC;
JEAN O TURNER,
Appellees.
******************************************************************
No. 97-30529
In The Matter of: JULIAN E FERNANDEZ,
Debtor,
STATE OF LOUISIANA, Department of Transportation
and Development,
Appellee,
versus
JEAN O TURNER, trustee;
PNL ASSET MANAGEMENT COMPANY,
Appellants.
Appeals from the United States District Court
for the Eastern District of Louisiana
September 15, 1997
Before REYNALDO G. GARZA, HIGGINBOTHAM, and DAVIS, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
The State of Louisiana and the Louisiana Department of
Transportation and Development contend that the Eleventh Amendment
denies the Bankruptcy Court jurisdiction in this adversary action,
and Congress cannot constitutionally displace the State’s immunity
by Section 106(a) of the Bankruptcy Code1 (11 U.S.C. § 106(a)
(1994)). The district court agreed. We now affirm.
I.
On August 8, 1974, New Communities, Inc. sold property in
Terrebonne Parish, Louisiana, to Julian E. Fernandez who purported
to act as a general partner of a Louisiana partnership called JEF
Developers. But JEF came into existence only a day later on August
9, 1974, when the articles of partnership were executed.
PNL Asset Management Company LLC is the owner of a recorded
judgment against Fernandez. In 1984, the State of Louisiana
purchased two parcels of the property from JEF Developers in two
separate transactions. The title to the property is now disputed.
The State’s claim of title rests on the two sales transactions in
1984. PNL contends that the state’s title is flawed, since it is
Fernandez individually, and not JEF, the partnership, who owns the
property and has since 1974.
PNL’s predecessor in interest, NCNB Texas National Bank
brought this adversary action after Fernandez declared Chapter 11
bankruptcy on June 15, 1989. The State and the DOTD moved for
dismissal pointing to the Eleventh Amendment. The bankruptcy court
1
11 U.S.C. § 106(a) states in pertinent part:
Notwithstanding an assertion of sovereign immunity,
sovereign immunity is abrogated as to a
governmental unit to the extent set forth in this
section...
2
denied this motion and held that Section 106(a) of the Bankruptcy
Code abrogated the State’s Eleventh Amendment sovereign immunity
thus permitting the bankruptcy court to retain jurisdiction over
the State and the DOTD. The district court partially affirmed and
partially reversed the bankruptcy court’s judgment. On September
25, 1996, the DOTD filed its first appeal to this court contending
that the bankruptcy court did not have jurisdiction over the State
and the DOTD.
In light of the Supreme Court’s decision in Seminole Tribe of
Florida v. Florida2, on April 16, 1997, the district court issued
another order dismissing the State and the DOTD from this action.
In May, 1997, PNL and the trustee in bankruptcy, Jean O. Turner,
filed a second appeal to this court contending that Section 106(a)
was constitutional, and therefore, the federal courts had
jurisdiction over the State and the DOTD. These two appeals, which
raise the same jurisdictional question, have been consolidated.
II.
Seminole Tribe outlined a two-part test of abrogation: first,
has Congress unequivocally expressed its intent to abrogate the
immunity; and second, has Congress acted pursuant to a valid
exercise of its power. Seminole Tribe, 116 S. Ct. at 1123.
Section 106(a) clearly expresses Congressional intent to
abrogate sovereign immunity. No party contends otherwise. The
sole question then is whether Congress had the power to do so.
2
__ U.S. __, 116 S. Ct. 1114, 134 L. Ed. 2d 252 (1996).
3
A.
PNL and Turner contend that Congress had the power to abrogate
state sovereign immunity by enacting Section 106(a) pursuant to its
bankruptcy power in Art. I, § 8, cl. 43. We think not.
Seminole Tribe held that Congress may not abrogate state
sovereign immunity by legislation passed pursuant to its Article I
powers. Id. at 1131-32. The Court stated:
Even when the Constitution vests in Congress complete
lawmaking authority over a particular area, the Eleventh
Amendment prevents congressional authorization of suits by
private parties against unconsenting States. The Eleventh
Amendment restricts the judicial power under Article III, and
Article I cannot be used to circumvent the constitutional
limitations placed upon federal jurisdiction.
Id.
Turner contends that Seminole Tribe only held that Congress
could not abrogate sovereign immunity pursuant to the Indian and
Interstate Commerce Clauses and did not address all of Congress’
Article I powers. In addition, Turner notes that the Bankruptcy
Clause is distinguishable from the Commerce Clause since it
contains an affirmative requirement of uniformity. We find both
arguments to be unpersuasive.
As the quoted passage from Seminole Tribe notes, Congress’
Article I powers cannot be used to circumvent the Eleventh
Amendment restrictions on federal judicial power. Seminole Tribe
3
Art. I, § 8, cl. 4 states in pertinent part:
The Congress shall have Power ... To establish ...
uniform Laws on the subject of Bankruptcies
throughout the United States...
4
explicitly overruled Pennsylvania v. Union Gas Co.4 -- the only
Supreme Court case that held Congress may abrogate sovereign
immunity pursuant to its Article I powers. Seminole Tribe, 116 S.
Ct. at 1128. With respect to Congress’ bankruptcy power in
particular, Chief Justice Rehnquist noted in Seminole Tribe that
“it has not been widely thought that the federal antitrust,
bankruptcy, or copyright statutes abrogated the States’ sovereign
immunity. This Court never has awarded relief against a State
under any of those statutory schemes.” Id. at 1131-32 n.16.
We find no principled reason to distinguish in a relevant way
Congress’ Commerce Clause power that it purported to exercise in
Seminole Tribe from its power under the Bankruptcy Clause for the
purposes of state sovereign immunity. See Hoffman v. Connecticut
Dep’t of Income Maintenance et al., 492 U.S. 96, 105, 109 S. Ct.
2818, 2825, 106 L. Ed. 2d 76 (1989) (Scalia, J., concurring in
judgment) (noting that “there is no basis for treating [Congress’]
powers under the Bankruptcy Clause any differently” from its powers
under the Commerce Clause); In re Sacred Heart Hosp. of Norristown,
204 B.R. 132, 138 (E.D. Pa. 1997) (noting that “[t]he Bankruptcy
Clause is identical to the Indian Commerce Clause in both wording
and scope.”) On the contrary, the Framers intended that the two
powers be treated similarly. As Madison noted in the Federalist
No. 42, “the power of establishing uniform laws of bankruptcy is ()
intimately connected with the regulation of commerce.” James
Madison, The Federalist No. 42 in The Federalist Papers, 271 (C.
4
491 U.S. 1, 109 S. Ct. 2273, 105 L. Ed. 2d 1 (1989).
5 H:\MAIL\FERNANDE.PEH
Rossiter ed. 1961). The large grant of power to the national
government by the Commerce Clause reflects the felt need to escape
the risks of economic balkanization attending the confederation.
The uniformity requirement in the Bankruptcy Clause is not a
relevant distinction. As the Supreme Court noted more than fifty
years ago, “[t]he Constitutional requirement of uniformity is a
requirement of geographic uniformity” and nothing more. Vanston
Bondholders Protective Comm. v. Green, 329 U.S. 156, 172, 67 S. Ct.
237, 244-45, 91 L. Ed. 162 (1946). Holding that federal courts do
not have jurisdiction over the states without their consent does
not frustrate this requirement of geographic uniformity since
sovereign immunity applies uniformly to all states and to all
parties in a bankruptcy proceeding.
Congress’ bankruptcy power in Article I may be contrasted with
its Fourteenth Amendment powers which are deemed “to intrude upon
the province of the Eleventh Amendment.” Seminole Tribe, 116 S.
Ct. at 1125. While the history and language of the Fourteenth
Amendment make plain that it “fundamentally altered the balance of
state and federal power struck by the Constitution,” the same
cannot be said of Congress’ bankruptcy power and its uniformity
requirement. See Seminole Tribe, 116 S. Ct. at 1125 (quoting
Fitzpatrick v. Bitzer, 427 U.S. 445, 455, 96 S. Ct. 2666, 2671, 49
L. Ed. 2d 614 (1976)).
Finally, several other courts that have reached this issue in
the wake of Seminole Tribe agree that the Bankruptcy Clause does
not enable Congress to abrogate state sovereign immunity
6 H:\MAIL\FERNANDE.PEH
unilaterally. See, e.g., In re Creative Goldsmiths of Washington,
D.C., Inc., 1997 WL 406254, *5 (4th Cir. 1997); AER-Aerotron, Inc.
v. Texas Dep’t of Transp., 104 F.3d 677, 680-81 (4th Cir. 1997)
(“[P]erhaps the handwriting is on the wall that the abrogation
provisions of the Bankruptcy Reform Act will suffer the same fate
as the statutes involved in Seminole.” (dictum)); id. at 681
(Niemeyer, J., concurring in judgment) (reading Seminole Tribe as
rejecting the notion that “states are amenable to suits in federal
courts when Congress, acting pursuant to its Article I bankruptcy
power, deems it so”); In re Sacred Heart Hosp. of Norristown, 204
B.R. 132, 138 (E.D. Pa. 1997) ; In re NVR, L.P., 206 B.R. 831, 837
(Bankr. E.D. Va. 1997); In re York-Hannover Devs., Inc., 201 B.R.
137, 140 (Bankr. E.D.N.C. 1996); In re Tri-City Turf Club, Inc.,
203 B.R. 617, 619-620 (Bankr. E.D. Ky. 1996); In re Midland
Mechanical Contractors, Inc., 200 B.R. 453, 457-58 (Bankr. N.D. Ga.
1996); In re Burke, 200 B.R. 282, 286 (Bankr. S.D. Ga. 1996) and In
re Martinez, 196 B.R. 225, 230 (D.P.R. 1996).
B.
Turner also contends that Congress has the authority to
abrogate state sovereign immunity pursuant to § 5 of the Fourteenth
Amendment to enforce either a protected due process property
interest or a privilege of federal citizenship, namely, the right
to a uniform system of bankruptcy. We are not persuaded.
There is no evidence that the 1994 Act was passed pursuant to
the Fourteenth Amendment or any constitutional provision other than
7 H:\MAIL\FERNANDE.PEH
the bankruptcy power of Article I, § 8, cl. 4. See Seminole Tribe,
116 S. Ct. at 1125 (noting that the Indian Gaming Regulatory Act
was not passed pursuant to Congress’ power under either the
Fourteenth Amendment or the Interstate Commerce Clause; rather it
was passed pursuant to the Indian Commerce Clause).5 Equally,
there is no indication that Congress passed the 1994 Act to remedy
any incipient breaches or even some unarticulated, general
violation of the rights specified in § 1 of the Fourteenth
Amendment. See In re Tri-City Turf Club, Inc., 203 B.R. at 620
(“The court can find no hint that Congress had in its collective
mind Fourteenth Amendment concerns when it enacted Section 106(a)
of the Bankruptcy Code.”). To cede to Congress the power to pass
general, substantive legislation which abrogates state sovereign
immunity, pursuant to the Enforcement Clause, would render Eleventh
Amendment state sovereign immunity meaningless and eviscerate the
fundamental construct of federalism in our constitutional form of
government. See City of Boerne v. Flores, __ U.S. __, __, 117 S.
Ct. 2157, 2164-66, 138 L. Ed. 2d 624 (1997); In re NVR, L.P., 206
B.R. at 842 (“[T]his court can conceive of no ground which might
warrant the ‘discovery’ of a bankruptcy privilege in the Fourteenth
Amendment.”).
5
In Seminole Tribe, the Supreme Court did not address
whether the Fourteenth Amendment authorized Congress to
enforce the Indian Gaming Regulatory Act against the
States because the petitioner abandoned this issue after
the Eleventh Circuit Court of Appeals rejected its
argument that the Act created a liberty and property
interest subject to Congress’ protection under the
Fourteenth Amendment. Seminole Tribe, 116 S. Ct. at
1125.
8 H:\MAIL\FERNANDE.PEH
C.
We do not doubt that after Seminole Tribe, a State may
voluntarily choose to participate in a bankruptcy proceeding and
waive its Eleventh Amendment sovereign immunity. But this remains
a choice to be made by the State.
III.
PNL asserts another statutory basis for federal subject matter
jurisdiction in this case. PNL’s predecessor, the Federal Deposit
Insurance Corporation, prosecuted this claim from April 1992 to
August 1996, when it sold to PNL the judgment that is the basis for
this action. Relying on the concept of continuing federal
jurisdiction6, PNL contends that since the FDIC is an agency of the
United States under 12 U.S.C. § 1819(b)(1)7, federal jurisdiction
is provided by 28 U.S.C. § 13458. We fail to see the relevance of
this assertion.
6
Walker v. FDIC, 970 F.2d 114, 120 (5th Cir. 1992)
(“[F]ederal jurisdiction persists even though the FDIC is
subsequently dismissed.”); Bank One Texas, N.A. v.
Morrison, 26 F.3d 544, 547 (5th Cir. 1994) (“[T]he FDIC’s
subsequent dismissal from this case did not deprive the
court of subject matter jurisdiction.”)
7
12 U.S.C. § 1819(b)(1) states:
The Corporation, in any capacity, shall be an agency
of the United States for purposes of § 1345 of Title 28,
without regard to whether the Corporation commenced the
action.
8
28 U.S.C. § 1345 states in pertinent part:
[T]he district courts shall have original
jurisdiction of all civil actions, suits or proceedings
commenced by the United States, or by any agency or
officer thereof, expressly authorized to sue by Act of
Congress.
9 H:\MAIL\FERNANDE.PEH
It is well-established that the Eleventh Amendment does not
bar the United States government from filing suit in federal court
against a state. United States v. Mississippi, 380 U.S. 128, 140,
85 S. Ct. 808, 815, 13 L. Ed. 2d 717 (1965) (noting that “nothing
in the [Eleventh Amendment] or any other provision of the
Constitution prevents or has ever been seriously supposed to
prevent a State’s being sued by the United States.”); United States
v. Texas, 143 U.S. 621, 641-46, 12 S. Ct. 488, 492-94, 36 L. Ed.
285 (1892). It is, however, a great leap to suggest that by
granting federal jurisdiction, 12 U.S.C. § 1819(b)(1) and 28 U.S.C.
§ 1345 in tandem, permit the FDIC to avoid the Eleventh Amendment
by slipping into the shoes of the United States. While a state’s
consent to being sued by the United States is deemed to be given
when admitted into the Union, the same cannot be automatically said
with respect to an agency of the federal government which may be
seen to lie “outside the structure of the [original] Union.” See
Monaco v. Mississippi, 292 U.S. 313, 322-23, 330, 54 S. Ct. 745,
748, 751, 78 L. Ed. 1282 (1934) (stating that states possess
immunity from unconsented suit except where there has been ``a
surrender of this immunity in the plan of the convention’) (quoting
The Federalist No. 81); United States v. Texas, 143 U.S. 621, 646,
12 S. Ct. 488, 494, 36 L. Ed. 285 (1892) (stating that Texas
consented to being sued by the United States when admitted into the
Union). In other words, the FDIC, as an agency of the national
government, does not enjoy the status accorded the national
government for Eleventh Amendment purposes. It follows that there
10 H:\MAIL\FERNANDE.PEH
must be a clear expression of purpose to abrogate the Eleventh
Amendment in the grant of agency status for the purpose of
jurisdiction. We find no such clarity of purpose, and these
statutes fail the first prong of the abrogation test of Seminole
Tribe. Seminole Tribe, 116 S. Ct. at 1123.
IV.
We hold that Section 106(a) of the Bankruptcy Code is
unconstitutional. Congress cannot locate the authority claimed
here to abrogate sovereign immunity in either the Bankruptcy Clause
or in Section 5 of the Fourteenth Amendment. Nor does the grant of
agency status for purposes of federal jurisdiction allow the FDIC
to avoid the reach of the Eleventh Amendment.
We AFFIRM the order of the district court dismissing the State
of Louisiana and the Department of Transportation and Development,
VACATE all district court and bankruptcy court judgments involving
the State and the DOTD and REMAND for further proceedings not
inconsistent with this opinion.
11 H:\MAIL\FERNANDE.PEH