Georgia Department of Revenue v. Burke

United States Court of Appeals,
Eleventh Circuit.
No. 97-8917.
In re: Gary BURKE, Pamela Burke, Debtors.
STATE OF GEORGIA DEPARTMENT OF REVENUE, Plaintiff-Appellant,
v.
Gary BURKE; Pamela Burke, Defendants-Appellees.
In Re; Raymond D. HEADRICK, Cynthia J. Headrick, Debtors.
The STATE OF GEORGIA, Department of Revenue, Plaintiff-Appellant,
v.
Raymond D. HEADRICK; Cynthia J. Headrick, Defendants-Appellees.
July 22, 1998.
Appeal from the United States District Court for the Southern District of Georgia. (Nos. 92-11482-
JSD, 94-12007-JSD), Dudley H. Bowen, Jr., Judge.
Before ANDERSON and BIRCH, Circuit Judges, and COHILL*, Senior District Judge.
ANDERSON, Circuit Judge:
In this consolidated appeal of two separate bankruptcy proceedings, the State of Georgia
Department of Revenue ("the State") appeals the district court's affirmance of two bankruptcy court
orders denying the State's motion to dismiss and motion for summary judgment based on Eleventh
Amendment immunity. Because we conclude that the State waived its Eleventh Amendment
immunity by filing a proof of claim in each of the bankruptcy proceedings, we affirm.
I. FACTS AND PROCEDURAL HISTORY
*
Honorable Maurice B. Cohill, Senior U.S. District Judge for the Western District of
Pennsylvania, sitting by designation.
The first bankruptcy case involves Gary and Pamela B. Burke ("the Burkes"). In August
1992, the Burkes sought relief under Chapter 13 of the Bankruptcy Code. The Georgia Department
of Revenue filed a proof of claim that included an unsecured priority claim of $12,437.40 for unpaid
state income taxes covering the tax years 1980-84. This claim was later adjudged to be a general
unsecured claim. After the case was converted to Chapter 7, the bankruptcy court entered a general
discharge order releasing the Burkes from liability for all dischargeable debts. Before the case was
closed, however, neither party requested that the bankruptcy court determine whether the taxes
accrued in 1980-84 were discharged. In May 1994, three months after the entry of the discharge,
the Department of Revenue wrote a letter to the Burkes demanding payment of these taxes and
warning that nonpayment could result in collection by garnishment, attachment, or levy. The Burkes
then reopened their Chapter 7 case and filed an adversary action against the State of Georgia,
alleging that the Department of Revenue violated the discharge injunction of 11 U.S.C. § 524(a) by
sending the demand letter for unpaid state income taxes.1 After its motion for summary judgment
was denied,2 the State moved to dismiss the Burkes' action, relying on Seminole Tribe of Florida v.
Florida, 517 U.S. 44, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996), and arguing that the relief sought by
the Burkes was barred by the Eleventh Amendment. The bankruptcy court initially declined to
1
Section 524(a) provides in relevant part that "[a] discharge in a case under this title ... (2)
operates as an injunction against the commencement or continuation of an action, the
employment of process, or an act, to collect, recover or offset any such debt as a personal
liability of the debtor, whether or not discharge of such debt is waived." 11 U.S.C. § 524(a)
(1993).
2
In its motion for summary judgment, the State argued that it could not have violated the
discharge injunction since the taxes in question were nondischargeable. In an August 9, 1995,
order, the bankruptcy court denied this motion, finding that the 1980-84 taxes including accrued
interest and penalties were discharged by the discharge order of February 1, 1994. See In re
Burke, 200 B.R. 282, 284 (Bankr.S.D.Ga.1996). This ruling is not challenged on appeal.
2
address this issue, relying instead on its finding that the State of Georgia had waived its sovereign
immunity by filing a proof of claim against the Burkes' bankruptcy estate. See In re Burke, 200 B.R.
282, 287-88 (Bankr.S.D.Ga.1996). In denying the State's motion to alter or amend the previous
order, the bankruptcy court concluded that § 106(a)3 of the Bankruptcy Code unequivocally
expressed congressional intent to abrogate states' sovereign immunity for violations of the discharge
injunction of § 524 and that § 106(a) was enacted by a valid exercise of power under the Fourteenth
Amendment. See In re Burke, 203 B.R. 493, 497 (Bankr.S.D.Ga.1996) (reasoning that in light of
Seminole Tribe, the Bankruptcy Clause of Article I did not empower Congress to abrogate the
Eleventh Amendment, but that abrogation could be accomplished under the Fourteenth
Amendment). In an alternative holding, the bankruptcy court concluded that even if the State of
Georgia was immune from suit for its alleged violations of the discharge injunction, it had waived
that immunity by filing a proof of claim against the Burkes. In re Burke, 203 B.R. at 497-98.
3
Section 106(a), entitled "Waiver of Sovereign Immunity," provides:
Notwithstanding an assertion of sovereign immunity, sovereign immunity is
abrogated as to a governmental unit to the extent set forth in this section with
respect to the following:
(1) Sections ... 362, ... 524....
(2) The court may hear and determine any issue arising with respect to the
application of such sections to governmental units.
(3) The court may issue against a governmental unit an order, process or
judgment under such sections ... including an order or judgment awarding a
money recovery, but not including an award of punitive damages.
11 U.S.C. § 106(a) (Supp.1998).
3
In the second bankruptcy proceeding, Raymond D. and Cynthia J. Headrick ("the
Headricks") filed a petition for relief under Chapter 13 of the Bankruptcy Code in December 1994.
The Georgia Department of Revenue filed a proof of claim for state income taxes. Thereafter, in
October 1995, the Department of Revenue issued an "Official Assessment and Demand for
Payment" against the Headricks, and then issued a "Collection Notice" demanding immediate
payment of the taxes and warning that nonpayment would result in collection by levy, garnishment,
or attachment. Subsequently, the Headricks filed an adversary action against the State of Georgia,
alleging that the State's collection attempts violated the automatic stay prescribed by 11 U.S.C. §
362.4 The State moved for summary judgment, arguing that it was entitled to sovereign immunity
and, alternatively, that as a matter of law it had not violated the automatic stay. The bankruptcy
court found both grounds to be without merit and denied the motion. See In re Headrick, 200 B.R.
963, 965-69 (Bankr.S.D.Ga.1996) (adopting the same reasoning as in In re Burke, and thus finding
that the State's immunity was abrogated because § 106(a) was enacted by Congress pursuant to a
4
Section 362(a) provides in relevant part that
[e]xcept as provided in subsection (b) of this section, a petition filed under section
301, 302, or 303 of this title, ... operates as a stay, applicable to all entities, of (1)
the commencement or continuation ... of a judicial, administrative, or other action
or proceeding against the debtor that was or could have been commenced before
the commencement of the case under this title, or to recover a claim against the
debtor that arose before the commencement of the case under this title; ... (6) any
act to collect, assess, or recover a claim against the debtor that arose before the
commencement of the case under this title.
11 U.S.C. § 362(a)(1993).
Section 362(h) provides that "[a]n individual injured by any willful violation of a
stay provided by this section shall recover actual damages, including costs and attorneys'
fees." 11 U.S.C. § 362(h) (1993).
4
valid exercise of authority under the Fourteenth Amendment, or alternatively, that the State waived
its immunity by filing a proof of claim against the debtors). The State's motion to alter or amend
the previous order denying summary judgment was denied. See In re Headrick, 203 B.R. 805(Bankr.S.D.Ga.1996). The State of Georgia then appealed the bankruptcy court's orders in In re
Burke and In re Headrick to the District Court for the Southern District of Georgia. In affirming the
bankruptcy court's orders, the district court concluded that "the case law now uniformly
acknowledges that Congress did not have the power to enact § 106(a) pursuant to those powers
granted it under the Bankruptcy Clause of Article I," but that § 106(a) validly abrogates Georgia's
sovereign immunity because "the bankruptcy code creates privileges and immunities enforceable
by Congress under § 5 of the Fourteenth Amendment." District Court Order, at 6-8 (July 23, 1997).5
The State of Georgia appeals this order.
II. DISCUSSION
Our jurisdiction in this case arises from the district court's denial of the State of Georgia's
claim to Eleventh Amendment immunity; such a denial grants the State the right of an immediate,
interlocutory appeal. See Puerto Rico Aqueduct and Sewer Auth. v. Metcalf & Eddy, Inc., 506 U.S.
139, 147, 113 S.Ct. 684, 689, 121 L.Ed.2d 605 (1993) (applying collateral order doctrine of Cohen
v. Beneficial Indus. Loan Corp., 337 U.S. 541, 69 S.Ct. 1221, 93 L.Ed. 1528 (1949)); see also
Seminole Tribe of Florida v. Florida, 11 F.3d 1016, 1021 (11th Cir.1994); aff'd, 517 U.S. 44, 116
5
The district court acknowledged that the issue of waiver was raised by the debtors, but
declined to address the issue because the court concluded that the State's Eleventh Amendment
immunity was validly abrogated by 11 U.S.C. § 106(a). District Court Order, at 2 (July 23,
1997).
5
S.Ct. 1114, 134 L.Ed.2d 252 (1996). The grant or denial of a state's sovereign immunity defense
is an issue of law subject to de novo review by this court. See Seminole Tribe, 11 F.3d at 1021.
The Eleventh Amendment states:
The Judicial power of the United States shall not be construed to extend to any suit in law
or equity, commenced or prosecuted against one of the United States by Citizens of another
State, or by Citizens or Subjects of any Foreign State.
U.S. Const. amend. XI. Although the Eleventh Amendment only expressly prohibits suits against
states by citizens of other states, the Supreme Court has long held that the Eleventh Amendment also
bars suits brought against a state by its own citizens. Hans v. Louisiana, 134 U.S. 1, 15, 10 S.Ct.
504, 507, 33 L.Ed. 842 (1890). However, there are certain well-established exceptions to Eleventh
Amendment immunity. First, a state may waive its Eleventh Amendment immunity and consent to
suit in federal court. See Atascadero State Hosp. v. Scanlon, 473 U.S. 234, 238, 105 S.Ct. 3142,
3145, 87 L.Ed.2d 171 (1985). Second, Congress can abrogate states' Eleventh Amendment
immunity if Congress unequivocally expresses an intent to abrogate state immunity and acts
pursuant to a valid exercise of power. See Green v. Mansour, 474 U.S. 64, 68, 106 S.Ct. 423, 425-
26, 88 L.Ed.2d 371 (1985) (citing Pennhurst State School & Hosp. v. Halderman, 465 U.S. 89, 99,
104 S.Ct. 900, 907, 79 L.Ed.2d 67 (1984)).
Relying on Seminole Tribe of Florida v. Florida, 517 U.S. 44, 116 S.Ct. 1114, 134 L.Ed.2d
252 (1996), the State of Georgia contends that Congress' power to abrogate states' Eleventh
Amendment immunity only exists under § 5 of the Fourteenth Amendment and that § 106(a) of the
Bankruptcy Code was not enacted pursuant to the Fourteenth Amendment. The debtors6 respond
that § 106(a) validly abrogates states' sovereign immunity because § 106(a) was enacted pursuant
6
We refer to the Burkes and the Headricks collectively as "the debtors."
6
to § 5 of the Fourteenth Amendment in order to enforce a protected due process property interest
or the privileges and immunities of federal citizenship as recognized in § 1 of the Fourteenth
Amendment.7 However, we need not resolve this abrogation issue because assuming arguendo that
the State of Georgia has Eleventh Amendment immunity and it has not been validly abrogated by
§ 106(a), we conclude that in this case the State waived its sovereign immunity by filing a proof of
claim in the debtors' bankruptcy proceedings.
Waiver of Eleventh Amendment Immunity8
7
The amicus curiae, the Business Bankruptcy Law Committee of the New York County
Lawyers' Association, contends that Congress has the right to abrogate states' Eleventh
Amendment immunity pursuant to the power granted in the Bankruptcy Clause of Article I of the
U.S. Constitution. As noted in the text, we need not address the abrogation issue.
8
We note at the outset of this section that our waiver analysis is not based on 11 U.S.C. §
106(b). Section 106(b) provides that
[a] governmental unit that has filed a proof of claim in the case is deemed to have
waived sovereign immunity with respect to a claim against such governmental
unit that is property of the estate and that arose out of same transaction or
occurrence out of which the claim of such governmental unit arose.
11 U.S.C. § 106(b) (Supp.1998). We decline to rely on § 106(b) because, in deciding the
instant case, we have assumed arguendo that the State of Georgia's Eleventh Amendment
immunity has not been validly abrogated by § 106(a) and because we acknowledge that
"the power to define waiver can become the functional equivalent of the power to
abrogate." AER-Aerotron v. Texas Dep't of Transp., 104 F.3d 677, 681 (4th Cir.1997);
see also Schlossberg v. Maryland Comptroller of the Treasury (In re Creative
Goldsmiths of Washington, D.C., Inc.), 119 F.3d 1140, 1147 (4th Cir.1997) (concluding
that the language of § 106(b) "amounts to language of abrogation" and that it is "not
within Congress' power to abrogate such immunity by "deeming' a waiver"), cert. denied,
--- U.S. ----, 118 S.Ct. 1517, 140 L.Ed.2d 670 (1998). However, we note that, although
we do not rely on § 106(b) and it does not control our analysis, the language of § 106(b)
may well be a correct restatement of the jurisprudence regarding waiver of Eleventh
Amendment immunity. See Wyoming Dep't of Transp. v. Straight (In re Straight), 143
F.3d 1387 (10th Cir.1998) (concluding that § 106(b) "follows the lead already established
by the Supreme Court in Gardner v. New Jersey " and "merely codifies an existing
equitable circumstance under which a state can choose to preserve its immunity by not
7
The State of Georgia contends that, under its constitution, only the Georgia General
Assembly may waive the State's sovereign immunity, and that waiver is limited to the extent
provided in the Georgia Constitution.9 Subsection (f) of article I, section 2, paragraph 9 of the
Georgia Constitution clearly provides that the constitution's limited waiver of sovereign immunity
does not include the State's Eleventh Amendment immunity, and the debtors have identified no
legislation providing that the State has waived its Eleventh Amendment immunity for violations of
a bankruptcy court's discharge injunction or automatic stay. However, in the absence of explicit
consent by state statute or constitutional provision, a state may consent to a federal court's
jurisdiction through its affirmative conduct. See Gardner v. New Jersey, 329 U.S. 565, 573-74, 67
S.Ct. 467, 472, 91 L.Ed. 504 (1947); Schlossberg v. Maryland Comptroller of the Treasury (In re
participating in a bankruptcy proceeding or to partially waive that immunity by filing a
claim"); In re Creative Goldsmiths, 119 F.3d at 1147 (acknowledging that § 106(b) "may
correctly describe those actions that, as a matter of constitutional law, constitute a state's
waiver of the Eleventh Amendment"); AER-Aerotron, 104 F.3d at 683 (Niemeyer, J.,
concurring) (concluding that although § 106 "may restate the law of Eleventh
Amendment waiver, it does not establish the law on the subject").
9
The Georgia Constitution provides in relevant part that:
(e) Except as specifically provided in this Paragraph, sovereign immunity
extends to the state and all of its departments and agencies. The sovereign
immunity of the state and its departments can only be waived by an Act of the
General Assembly which specifically provides that sovereign immunity is thereby
waived and the extent of such waiver.
(f) No waiver of sovereign immunity under this Paragraph shall be
construed as a waiver of any immunity provided to the state or its departments,
agencies, officers, or employees by the United States Constitution.
Ga. Const. Art. I., § II, Para. IX (Supp.1997).
8
Creative Goldsmiths of Washington, D.C., Inc.), 119 F.3d 1140, 1148-49 (4th Cir.1997), cert.
denied, --- U.S. ----, 118 S.Ct. 1517, 140 L.Ed.2d 670 (1998).10
10
In In re Creative Goldsmiths, 119 F.3d at 1148-49, the court analyzed Maryland
constitutional and statutory law and concluded that Maryland law did not indicate a waiver of the
state's Eleventh Amendment immunity nor grant the Maryland Attorney General the power to
waive that immunity by defending a case on the merits. However, after undertaking this
analysis, the court separately considered whether the state's filing of a proof of claim in the
debtor's bankruptcy proceeding constituted consent to the trustee in bankruptcy's suit in federal
court seeking to recover income taxes paid to the state. Id. at 1149. The court reasoned that if
the state official has authority under state law to file a proof of claim in the debtor's bankruptcy
proceeding and thus initiate a federal action, then the court would "look to federal law to
determine the scope of waiver attending the state's federal suit." Id. at 1148. The court
explained that
The Eleventh Amendment ... presents no bar to a state affirmatively entering a
federal forum voluntarily to pursue its own interest. But it would violate the
fundamental fairness of judicial process to allow a state to proceed in federal
court and at the same time strip the defendant of valid defenses because they
might be construed to be affirmative claims against the state.... For this reason,
we hold that to the extent a defendant's assertions in a state-instituted federal
action, including those made with regard to a state-filed proof of claim in a
bankruptcy action, amount to a compulsory counterclaim, a state has waived any
Eleventh Amendment immunity against that counterclaim in order to avail itself
of the federal forum.
Id. Applying these principles, the court concluded that the trustee's adversary action
against the State of Maryland to avoid the payment of the debtor's corporate income
taxes did not "arise out of the same transaction or occurrence supporting Maryland's
proof of claim for unrelated [sales and withholding] taxes" and thus the trustee's action
could not be "construed under federal law as a claim in the nature of a compulsory
counterclaim to the state's proof of claim." Id. at 1149 (emphasis added). Therefore, the
court held that it did not have authority to entertain the action by the trustee. Id. at 1150.
Unlike in In re Creative Goldsmiths, the debtors' adversary action in the instant
case involves the same state income taxes that the State of Georgia sought to recover by
filing proofs of claim in the debtors' respective bankruptcy proceedings. Therefore, we
conclude that the debtors' actions for violation of the automatic stay and discharge
injunction "arise out of the same transaction or occurrence" as the State's proofs of claim.
See, e.g., In re Price, 42 F.3d 1068, 1073-74 (7th Cir.1994); In re Pinkstaff, 974 F.2d
113, 115 (9th Cir.1992).
9
In Gardner v. New Jersey, 329 U.S. 565, 67 S.Ct. 467, 91 L.Ed. 504 (1947), the Supreme
Court addressed the effect of filing a proof of claim in a bankruptcy proceeding on a state's assertion
of Eleventh Amendment immunity. In that case, the State of New Jersey filed a proof of claim for
unpaid taxes against the debtor. Id. at 570, 67 S.Ct. at 470. After the debtor and various creditors
filed objections to the state's claim, the trustee in bankruptcy filed a petition for adjudication of the
conflicting claims with the bankruptcy court. Id. at 571, 67 S.Ct. at 470. The Attorney General of
New Jersey thereupon entered a special appearance in the proceedings, contending that the petition
"would constitute a prohibited suit against the State." Id. In rejecting New Jersey's sovereign
immunity argument, the Court concluded that
It is traditional bankruptcy law that he who invokes the aid of the bankruptcy court by
offering a proof of claim and demanding its allowance must abide the consequences of that
procedure. If the claimant is a State, the procedure of proof and allowance is not transmitted
into a suit against the State because the court entertains objections to the claim. The State
is seeking something from the debtor. No judgment is sought against the State.... When the
State becomes the actor and files a claim against the fund it waives any immunity which it
otherwise might have had respecting the adjudication of the claim.
Id. at 573-74, 67 S.Ct. at 472 (citation omitted). See New York v. Irving Trust Co., 288 U.S. 329,
332, 53 S.Ct. 389, 391, 77 L.Ed. 815 (1933) (concluding that "[i]f a state desires to participate in the
assets of a bankrupt, she must submit to appropriate requirements by the controlling power;
otherwise, orderly and expeditious proceedings would be impossible"); see also Clark v. Barnard,
108 U.S. 436, 447-48, 2 S.Ct. 878, 883, 27 L.Ed. 780 (1883) (holding that the State of Rhode Island
had waived its sovereign immunity by voluntarily intervening as a claimant to a bankruptcy fund
paid into federal court).11
11
In a recent decision, the Fifth Circuit Court of Appeals concluded that Seminole Tribe "does
not and should not impair [the] force" of Gardner and Irving Trust. Texas v. Walker, 142 F.3d
813 (5th Cir.1998) (relying on Gardner and Irving Trust in holding that, although the state did
10
We conclude that the Court's reasoning in Gardner applies to the instant cases. See Dekalb
County Div. of Family and Child Servs. v. Platter (In re Platter), 140 F.3d 676 (7th Cir.1998)
(applying Gardner and rejecting the State of Indiana's Eleventh Amendment immunity defense
because a state agency had initiated an adversary proceeding in bankruptcy court against the debtor
seeking a ruling that the debt owed to the agency was nondischargeable). In In re Headrick, the
State of Georgia invoked the aid of the bankruptcy court by filing a proof of claim for unpaid state
income taxes in the Headricks' bankruptcy proceeding. However, after the bankruptcy court entered
an automatic stay order in the case to prevent creditors from attempting to collect on the Headricks'
debts, the State sent a collection notice and official assessment to the Headricks. We conclude that
the substance of the Headricks' action is a motion to enforce the bankruptcy court's automatic stay
order. Enforcement of this order is merely the bankruptcy court's exercise of its jurisdiction over
the State in the course of adjudicating the proof of claim filed by the State in the Headricks'
bankruptcy proceeding. Similarly, in In re Burke, the Burkes' action is in substance one to enforce
the discharge injunction entered by the bankruptcy court. We note that in In re Burke, the State of
Georgia sent a demand letter to the Burkes after the Burkes' bankruptcy proceeding was closed.
Therefore, the Burkes reopened their bankruptcy case in order to file an adversary action against the
State. We conclude that the bankruptcy court retained jurisdiction over the State in order to enforce
the judgment it had entered as part of adjudicating the State's claim in the Burkes' bankruptcy case.
The Supreme Court's decision in Gardner establishes that, by filing a proof of claim in the
debtors' respective bankruptcy proceedings, the State waived its sovereign immunity for purposes
not file a proof of claim in the debtor's bankruptcy proceeding, the debtor could raise discharge
as an affirmative defense against the state's suit on the debt).
11
of the adjudication of those claims. We hold that this waiver includes the bankruptcy court's
enforcement of the discharge injunction and the automatic stay in the instant cases. We believe that
the enforcement of the bankruptcy court's orders in both of the instant cases falls easily within the
waiver of immunity "respecting the adjudication of the claim" found by the Supreme Court in
Gardner, 329 U.S. at 574, 67 S.Ct. at 472. We emphasize that our holding regarding the State's
waiver of Eleventh Amendment immunity is quite narrow because the debtors seriously seek to
recover only the costs and attorneys' fees incurred in enforcing the bankruptcy court's automatic stay
and discharge injunction.12 Therefore, addressing only the live issues in this case, we hold that the
State of Georgia has waived its Eleventh Amendment immunity to the extent of the attorneys' fees
and costs incurred by the debtors in enforcing the bankruptcy court's automatic stay and discharge
injunction.13
III. CONCLUSION
12
The district court noted that "the Burkes and the Headricks will have difficulty proving that
they suffered any real damage from the Revenue Department's actions, which amounted to
nothing more than sending a few collection letters. Perhaps only nominal damages will flow
from the Revenue Department's actions." District Court Order, at 8 n. 3 (July 23, 1997). At oral
argument, the debtors' attorney conceded that there was no indication that damages in the two
cases would go beyond the costs and attorneys' fees incurred in enforcing the bankruptcy court's
automatic stay and discharge injunction.
13
In dicta, the court in In re Creative Goldsmiths, 119 F.3d at 1148, indicated that "to the
extent a defendant's assertions in a state-instituted federal action, including those made with
regard to a state-filed proof of claim in a bankruptcy action, amount to a compulsory
counterclaim, a state has waived any Eleventh Amendment immunity against the counterclaim in
order to avail itself of the federal forum." In the instant case, we need not address whether the
scope of the State's waiver of Eleventh Amendment immunity extends to the full scope indicated
by the Fourth Circuit in In re Creative Goldsmiths.
12
For the foregoing reasons, we affirm the district court's affirmance of the bankruptcy court's
orders denying the State of Georgia's motion to dismiss in In re Burke and its motion for summary
judgment in In re Headrick.
AFFIRMED.
13