Schlossberg v. State of Maryland

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
In Re: CREATIVE GOLDSMITHS OF
WASHINGTON, D.C., INCORPORATED,
Debtor.
ROGER SCHLOSSBERG, Trustee,
Plaintiff-Appellant,
v.
No. 96-1895
STATE OF MARYLAND, Comptroller of
the Treasury,
Defendant-Appellee,
UNITED STATES TRUSTEE,
Party-in-interest,
v.
UNITED STATES OF AMERICA,
Intervenor.
Appeal from the United States District Court
for the District of Maryland, at Baltimore.
Peter J. Messitte, District Judge.
(CA-95-2693-PJM, BK-91-11468-SD)
Argued: April 11, 1997
Decided: July 22, 1997
Before HALL, WILKINS, and NIEMEYER, Circuit Judges.
_________________________________________________________________
Vacated and remanded with instructions to dismiss by published opin-
ion. Judge Niemeyer wrote the opinion, in which Judge Hall and
Judge Wilkins joined.
COUNSEL
ARGUED: Roger Schlossberg, SCHLOSSBERG & ASSOCIATES,
Hagerstown, Maryland, for Appellant. Andrew Howard Baida, Assis-
tant Attorney General, Annapolis, Maryland, for Appellee. ON
BRIEF: J. Joseph Curran, Jr., Attorney General of Maryland, Gerald
Langbaum, Assistant Attorney General, Annapolis, Maryland; Wal-
lace E. Brooks, Sylvia J. Brokos, COMPTROLLER OF THE TREA-
SURY, Baltimore, Maryland, for Appellee. Frank W. Hunger,
Assistant Attorney General, Lynne A. Battaglia, United States Attor-
ney for the District of Maryland, Mark B. Stern, Michael E. Robin-
son, Civil Division, UNITED STATES DEPARTMENT OF
JUSTICE, Washington, D.C., for Intervenor.
_________________________________________________________________
OPINION
NIEMEYER, Circuit Judge:
Roger Schlossberg, a trustee in bankruptcy, sued the State of Mary-
land Comptroller of the Treasury in federal court to avoid as a prefer-
ence the bankruptcy debtor's $4,382 payment of income taxes made
to the state within 90 days of the filing of the bankruptcy petition. See
11 U.S.C. § 547(b). In the courts below, the state contended success-
fully that the debtor's income tax payment was not a preference
because it was made in the "ordinary course of business." See 11
U.S.C. § 547(c)(2)(B). On the trustee's appeal to this court, the state
contends for the first time that it is immune from the trustee's suit
under the Eleventh Amendment, and the trustee responds that, under
the Bankruptcy Code, the state is "deemed to have waived [its Elev-
enth Amendment] sovereign immunity" because it filed a proof of
claim for sales taxes and withholding taxes. See 11 U.S.C. § 106(b).
Because the state challenges 11 U.S.C. § 106 under the Eleventh
Amendment, the United States intervened. See 28 U.S.C. § 2403.
Because we conclude that Congress did not have the power to
abrogate the state's sovereign immunity from federal jurisdiction and
that the state did not waive its immunity with regard to the present
suit, we vacate the district court's judgment for lack of jurisdiction
2
and remand the case with instructions to dismiss the trustee's adver-
sary action against the state.
I
On March 12, 1992, creditors of Creative Goldsmiths of Washing-
ton, D.C., Inc., a Maryland corporation, filed a petition for involun-
tary bankruptcy against Creative Goldsmiths under Chapter 7 of the
Bankruptcy Code. The bankruptcy court appointed Roger Schlossberg
as trustee for the bankruptcy estate. During the course of bankruptcy
administration, the trustee filed an adversary proceeding in the bank-
ruptcy court against the State of Maryland Comptroller of the Cur-
rency to avoid as a preference the payment of $4,382 in income taxes
made by Creative Goldsmiths to the state within 90 days of the filing
of the bankruptcy petition. The trustee alleged that when the taxes
were paid, Creative Goldsmiths was insolvent, and as a result of the
payment Maryland received more than it would have as a claimant for
the taxes in the Chapter 7 proceeding. In response to the trustee's
complaint, Maryland contended that the $4,382 payment was made
"in the ordinary course of business between the debtor and the Comp-
troller, and as such, is not subject to avoidance." The parties stipu-
lated to the following operative facts.
Pursuant to Creative Goldsmiths' application for an extension of
time in which to file its 1990 corporate income tax return, the state
granted a six-month extension as provided by Maryland law. See Md.
Code Ann. Tax-Gen'l Art. § 10-823; Md. Regs. Code tit. 03
§ 04.03.04(C). Creative Goldsmiths had filed for and obtained similar
extensions in each of the two preceding tax years. With the extension
for filing its 1990 income tax return, Creative Goldsmiths was
required to pay taxes still owed, as well as any penalties and interest
due, by December 14, 1991.
Within the extension period, Creative Goldsmiths paid Maryland
$4,382 in taxes but paid no penalties or interest. At the time Creative
Goldsmiths paid its taxes, it was insolvent and it made payment
within 90 days of the subsequently filed involuntary petition in bank-
ruptcy.
Although Creative Goldsmiths owed Maryland $1,653.48 in inter-
est and penalties with respect to its 1990 corporate income taxes, the
3
state did not seek relief from the automatic stay imposed by statute,
see 11 U.S.C. § 362, or otherwise attempt to improve its position for
payment of that sum. Moreover, it did not file a proof of claim for it.
But Maryland did file a proof of claim for $1,400.85 in sales taxes
and withholding taxes that Creative Goldsmiths collected or should
have collected from third persons.
On cross-motions for summary judgment, the bankruptcy court
ruled in favor of Maryland, concluding that "the Transfer, in the
amount of $4,382 to the Comptroller of the Treasury, was made in the
ordinary course of business and is not avoidable under 11 U.S.C.
§ 547." The district court affirmed and entered judgment in favor of
Maryland. This appeal followed.
II
The trustee, observing that the state raises Eleventh Amendment
immunity for the first time on this appeal, contends that in any event
the Bankruptcy Code, 11 U.S.C. § 106(a) abrogates that immunity
and authorizes his action against the state. He also argues that Mary-
land waived any sovereign immunity by filing a proof of claim in the
bankruptcy court for sales taxes and withholding taxes. See 11 U.S.C.
§ 106(b). Accordingly, we address first the question of whether Mary-
land can assert Eleventh Amendment immunity for the first time on
appeal.
The Eleventh Amendment provides, "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." It is well-established that this bar to suits against states in fed-
eral courts applies not only to actions brought by citizens of another
state, but also to those brought by citizens of the state involved. See
Hans v. Louisiana, 134 U.S. 1, 10 (1890). The Eleventh Amendment
confirms that each state is a sovereign entity and that "it is inherent
in the nature of sovereignty not to be amenable to the suit of an indi-
vidual without its consent." Seminole Tribe of Florida v. Florida, 116
S. Ct. 1114, 1122 (1996) (internal quotations and citations omitted).
Accordingly, the Supreme Court has long held that"[t]his express
constitutional limitation denies to the federal courts authority to enter-
4
tain a suit brought by private parties against a state without its con-
sent." Ford Motor Co. v. Department of Treasury of Indiana, 323
U.S. 459, 464 (1945).
Although Maryland did not assert its Eleventh Amendment immu-
nity in the courts below, "it has been well settled since the decision
in Ford Motor Co. v. Department of Treasury . . . that the Eleventh
Amendment defense sufficiently partakes of the nature of a jurisdic-
tional bar so that it need not be raised in the trial court." Edelman v.
Jordan, 415 U.S. 651, 677-78 (1974) (emphasis added). The Court in
Ford Motor explained:
The Eleventh Amendment declares a policy and sets forth
an explicit limitation on federal judicial power of such com-
pelling force that this Court will consider the issue arising
under this Amendment in this case even though urged for
the first time in this Court.
323 U.S. at 467.
Accordingly, even though Maryland asserts Eleventh Amendment
immunity for the first time on appeal, we will consider the defense.
III
The trustee contends that after the Supreme Court's decision in
Hoffman v. Connecticut Dep't of Income Maintenance , 492 U.S. 96,
101 (1989), which stated that "to abrogate the States' Eleventh
Amendment immunity from suit in federal court . . . Congress must
make its intention ``unmistakably clear in the language of the statute,'"
Congress enacted the Bankruptcy Improvement Act of 1994, 11
U.S.C. § 106, expressly abrogating the state's sovereign immunity.
See also United States v. Nordic Village, Inc., 503 U.S. 30 (1992)
(stating that former 11 U.S.C. § 106(c) is not sufficiently unequivocal
to waive immunity). The language of new § 106(a), entitled "Waiver
of sovereign immunity," would seem to confirm the trustee's argu-
ment that Congress has now clearly abrogated state sovereign immu-
nity from suit in federal court. That section reads in pertinent part:
5
Notwithstanding an assertion of sovereign immunity, sover-
eign immunity is abrogated as to a governmental unit
[including a state] to the extent set forth in this section with
respect to the following:
(1) Sections . . . 106 [and] . . . 547 . . . of this
title.
(2) The court may hear and determine any issue
arising with respect to the application of such sec-
tions to governmental units.
(3) The court may issue against a governmental
unit an order, process, or judgment under such sec-
tions or the Federal Rules of Bankruptcy Proce-
dure, including an order or judgment awarding a
money recovery, but not including an award of
punitive damages. . . .
(4) The enforcement of any such order, process,
or judgment against any governmental unit shall
be consistent with appropriate nonbankruptcy law
applicable to such governmental unit and, in the
case of a money judgment against the United
States, shall be paid as if it is a judgment rendered
by a district court of the United States.
(Emphasis added). Accordingly, the trustee contends that Congress
abrogated Eleventh Amendment immunity both for his 11 U.S.C.
§ 547 action against Maryland and with respect to other provisions of
11 U.S.C. § 106 that define the circumstances in which a state waives
immunity.
While the trustee's arguments based on the clarity of Congress'
intent are supportable as far as he takes them, he fails to recognize
that following the enactment of the Bankruptcy Reform Act of 1994,
the Supreme Court emphasized that any Eleventh Amendment analy-
sis must also include an inquiry into whether Congress has the power
to abrogate a state's sovereign immunity. See Seminole, 116 S. Ct. at
6
1124-25. That case reminds us that the Constitution establishes a fed-
eral government of enumerated powers whose boundaries must be
observed.
Were we to read only the Bankruptcy Clause of the Constitution,
art. I, § 8, cl. 4 (conferring on Congress the power "[t]o establish . . .
uniform Laws on the subject of Bankruptcies throughout the United
States"), and Article III (authorizing Congress to vest the judicial
power of the United States in lower federal courts), we might readily
conclude that the states in subscribing to the Constitution conferred
on the federal government the power to enact bankruptcy laws for
enforcement in federal courts which, for that purpose, would have
jurisdiction over the states. But as the Court in Seminole instructed,
a proper understanding of the structural balance between state sover-
eignty and congressional power must take into account the effects of
the Eleventh and Fourteenth Amendments.
As Seminole explains, the Eleventh Amendment was passed to
counteract an expansion of federal jurisdiction to suits by private per-
sons against unconsenting states, which had never been contemplated
by the founders in establishing the judicial power under Article III.
See Seminole, 116 S. Ct. at 1124, 1130-32. The Eleventh Amendment
thus expressly limited federal judicial power over the states. Accord-
ingly, to give the Eleventh Amendment effect, Congress' powers
under Article I cannot be construed to empower it to expand federal
jurisdiction by abrogating the states' sovereign immunities.
To apply these principles to a federal statute passed pursuant to the
Indian Commerce Clause, U.S. Const. art. I, § 8, cl. 3, which clearly
purported to abrogate the states' sovereign immunities, the Court in
Seminole posed the fundamental question,"Was the Act in question
passed pursuant to a constitutional provision granting Congress the
power to abrogate?" Seminole, 116 S. Ct. at 1125. The Court
answered that question in the negative, explaining:
Even when the Constitution vests in Congress complete law-
making 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,
7
and Article I cannot be used to circumvent the constitutional
limitations placed upon federal jurisdiction.
Seminole, 116 S. Ct. at 1131-32. The Court thereby overruled its only
prior case finding congressional authority to abrogate state sovereign
immunity pursuant to an Article I power -- a plurality opinion in
Pennsylvania v. Union Gas Co., 491 U.S. 1 (1989), that had found
such power in the Commerce Clause, U.S. Const. art. I, § 8, cl. 3.
Because the holding in Seminole extended to restrict all federal
jurisdiction over the states based on Article I powers, we hold in this
case that Congress has no authority under the Bankruptcy Clause,
U.S. Const. art. I, § 8, cl. 4, to abrogate state sovereign immunity in
federal courts. We find unpersuasive the argument of the United
States that the Bankruptcy Clause's provision for the enactment of
"uniform laws on the subject of Bankruptcies," id. (emphasis added),
requires Congressional powers under this clause to be distinguished
from other Article I powers for purpose of reconciliation with the
restraints imposed by the Eleventh Amendment. As Justice Marshall
observed in his dissenting opinion in Hoffman ,
I see no reason to treat Congress' power under the Bank-
ruptcy Clause any differently [than the Commerce Clause
power, as addressed in Union Gas], for both constitutional
provisions give Congress plenary power over national eco-
nomic activity. See The Federalist No. 42, p. 271 (C. Ros-
siter ed. 1961) (J. Madison) (describing the Bankruptcy
Clause and the Commerce Clause as "intimately con-
nected").
Hoffman, 492 U.S. at 111 (Marshall, J., dissenting).
Despite its recognition of the limitations placed on Article I powers
by the Eleventh Amendment, the Seminole Court did acknowledge a
legitimate source of congressional power to abrogate states' immuni-
ties. Section 5 of the Fourteenth Amendment, which was ratified 70
years after the Eleventh Amendment, appears to take back some of
the earlier amendment's limitations because, "by expanding federal
power at the expense of state autonomy, [it] fundamentally altered the
balance of state and federal power struck by the Constitution" and
8
"expressly provided that ``The Congress shall have the power to
enforce, by appropriate legislation, the provisions of this article.'"
Seminole, 116 U.S. at 1125 (quoting U.S. Const. amend. XIV, § 5).
"As a result, when acting pursuant to § 5 of the Fourteenth Amend-
ment, Congress can abrogate the Eleventh Amendment without the
States' consent." Atascadero State Hosp. v. Scanlon, 473 U.S. 234,
238 (1985); see also Fitzpatrick v. Bitzer, 427 U.S. 445, 456 (1976).
The United States thus urges us to sustain § 106 under the authority
granted Congress by § 5 of the Fourteenth Amendment. But as the
Supreme Court's recent pronouncement in City of Boerne v. Flores
indicates, § 5 of the Fourteenth Amendment does not grant Congress
a plenary power. 1997 WL 345322, *12 (U.S., June 25, 1997) ("Any
suggestion that Congress has a substantive non-remedial power under
the Fourteenth Amendment is not supported by our case law.").
In this case, there is no evidence to indicate that in enacting the
Bankruptcy Reform Act of 1994, Congress acted under§ 5 of the
Fourteenth Amendment. See Seminole, 116 S. Ct. at 1125 (stating that
operative question is under what constitutional provision an act of
Congress was passed and noting that litigants had not challenged
lower court's finding that Indian gaming regulation was not passed
pursuant to Fourteenth Amendment). Indeed, the conclusion seems
logically inescapable that in passing the 1994 Act Congress exercised
the same specifically enumerated Article I bankruptcy power that it
has traditionally relied on in enacting prior incarnations of the bank-
ruptcy law dating back to 1800 -- 68 years before the passage of the
Fourteenth Amendment. See Law of Apr. 4, 1800, ch. 19, 2. Stat. 19
(repealed 1803). We will not presume that Congress intended to enact
a law under a general Fourteenth Amendment power to remedy an
unspecified violation of rights when a specific, substantive Article I
power clearly enabled the law.
Furthermore, reliance on § 5 of the Fourteenth Amendment as a
post hoc justification for Congress's attempted abrogation in 11
U.S.C. § 106 would require us to ignore the result in Seminole. It is
self-evident that the Fourteenth Amendment protects individuals from
state deprivations of property without due process of law and thus, at
some level of generality, could arguably apply to authorize bank-
ruptcy court adjudications of property rights. But see City of Boerne,
1997 WL 345322, *10 ("The Enforcement Clause[of the Fourteenth
9
Amendment] . . . did not authorize Congress to pass ``general legisla-
tion upon the rights of the citizen, but corrective legislation . . . .' The
power to ``legislate generally upon' life, liberty, and property, as
opposed to the ``power to provide modes of redress' against offensive
state action, was ``repugnant' to the Constitution.") (citations omitted).
If the Fourteenth Amendment is held to apply so broadly as to justify
Congress' enactment of the Bankruptcy Code as a requirement of due
process, then the same argument would justify every federal enforce-
ment scheme as a requirement of due process under the Fourteenth
Amendment. Clearly, the Indian gaming regulation at issue in
Seminole would itself have been subject to this style of constitutional-
ization, for the statute provided for arbitration enforceable in federal
court and governed property rights in the form of future gaming pro-
ceeds. Thus, Seminole itself is inconsistent with any reading that
would extend Congressional power under § 5 of the Fourteenth
Amendment to reincorporate express Article I powers.
In summary, we conclude in light of Seminole that Congress is not
empowered to use Article I authority, specifically the Bankruptcy
Clause, to circumvent the Eleventh Amendment's restriction on fed-
eral jurisdiction. Because there is no evidence that Congress either
passed the Bankruptcy Code under § 5 of the Fourteenth Amendment
or sought to preserve the core values specifically enumerated in that
amendment, we hold that Congress' effort to abrogate the states'
Eleventh Amendment immunity through its 1994 enactment of 11
U.S.C. § 106(a) is unconstitutional and ineffective. See Seminole, 116
S. Ct. at 1131-32.
Because 11 U.S.C. § 106(a) purports to abrogate state immunity
also for § 106(b), our analysis likewise applies to § 106(b). But even
the language of 11 U.S.C. § 106(b) itself-- that a state is "deemed
to have waived sovereign immunity" -- amounts to language of abro-
gation. In that section, Congress unequivocally purports to say when
states have no immunity from private suits in federal court. Cf. United
States v. Nordic Village, Inc., 503 U.S. 30, 34 (1992) (11 U.S.C.
§ 106(b), then numbered § 106(a), is an unequivocal expression that
governmental units, including states, waive sovereign immunity).
While 11 U.S.C. § 106(b) may correctly describe those actions that,
as a matter of constitutional law, constitute a state's waiver of the
Eleventh Amendment, it is nevertheless not within Congress' power
10
to abrogate such immunity by "deeming" a waiver. Rather, in the
absence of a constitutional authorization, it lies solely within a state's
sovereign power to waive its immunity voluntarily and to consent to
federal jurisdiction. Only if it waives such immunity may a private
citizen sue the state in federal court.
IV
In considering whether a state has waived its Eleventh Amendment
immunity, the Supreme Court has consistently held that "a State will
be deemed to have waived its immunity only where[the waiver is]
stated by the most express language or by such overwhelming impli-
cation from the text as will leave no room for any other reasonable
construction." Atascadero, 473 U.S. at 239-40 (internal quotations
omitted). The court explained:
A State may effectuate a waiver of its constitutional immu-
nity by a state statute or constitutional provision, or by oth-
erwise waiving its immunity to suit in the context of a
particular federal program. In each of these situations, we
require an unequivocal indication that the State intends to
consent to federal jurisdiction that otherwise would be
barred by the Eleventh Amendment. As we said in Edelman
v. Jordan, 415 U.S. 651, 673 (1974), "constructive consent
is not a doctrine commonly associated with the surrender of
constitutional rights, and we see no place for it here."
Id. at 238 n.1.
Determining whether a state has waived its Eleventh Amendment
immunity and consented to federal jurisdiction requires us first to
look at the state's law. In Ford Motor, the State of Indiana defended
on the merits against a diversity suit for a state tax refund brought in
federal court under the state's own law, and it did not raise the Elev-
enth Amendment objection until its appeal reached the Supreme
Court. In examining whether Indiana had waived its Eleventh Amend-
ment immunity, the Supreme Court concluded that the state law
authorizing refunds should be construed narrowly and that, therefore,
its law waived sovereign immunity only for refund suits brought in
state court. See Ford Motor, 323 U.S. at 465-66; accord Atascadero,
11
473 U.S. at 241; Barfield v. Blackwood (In re Sec. of Dep't of Crime
Control and Public Safety), 7 F.3d 1140, 1146-47 (4th Cir. 1993)
(Eleventh Amendment immunity not waived by statute requiring state
to pay judgments awarded by courts of competent jurisdiction against
state employees, even if the statute waived immunity in state courts);
Westinghouse Elec. Corp. v. West Virginia Dep't of Highways, 845
F.2d 468, 471 (4th Cir. 1988) (statutes precluding assertion of "consti-
tutional immunity" or "governmental status" at most waived immu-
nity in state courts). The absence of a specific state statute waiving
the state's immunity did not, however, conclude the Supreme Court's
analysis in Ford Motor. The Court stated:
It remains to be considered whether the attorney general
for the State of Indiana in his conduct of the present pro-
ceeding has waived the state's immunity from suit. The state
attorney general is authorized to represent the state in
actions brought under the Indiana refund statute. He
appeared in the federal District Court and the Circuit Court
of Appeals and defended the suit on the merits.
* * *
It is conceded by the respondents that if it is within the
power of the administrative and executive offices of Indiana
to waive the state's immunity, they have done so in this pro-
ceeding. The issue thus becomes one of their power under
state law to do so. As this issue has not been determined by
state courts, this Court must resort to the general policy of
the state as expressed in its Constitution, statutes and deci-
sions.
Ford Motor, 323 U.S. at 466-67 (footnotes omitted) (emphasis
added). After examining the relevant state constitutional provisions
and case law, which required any waiver of sovereign immunity to
apply to an entire category of cases and which did not grant the Indi-
ana Attorney General the power to make case-by-case waiver deci-
sions, the Ford Motor Court concluded that no properly authorized
state official had waived the state's Eleventh Amendment immunity
and thus that the federal courts lacked jurisdiction. See id. at 468-69.
In sum, the Supreme Court indicated that a state's consent to be sued
12
in federal court must be clearly intended by its state law and imple-
mented by an officer acting properly under that law.
As we look to state law to determine whether the state has waived
sovereign immunity and whether its officers have properly acted
under that law, we also look to state law when a state has voluntarily
initiated an action in federal court to determine whether the state offi-
cer is authorized to proceed in federal court. Only if we determine
that he has such an authority do we look to federal law to determine
the scope of waiver attending the state's federal suit. The Eleventh
Amendment, which applies only to suits "commenced or prosecuted
against one of the United States," presents no bar to a state affirma-
tively 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. When a state authorizes its offi-
cials voluntarily to invoke federal process in a federal forum, the state
thereby consents to the federal forum's rules of procedure and may
not invoke sovereign immunity to protect itself against the interposi-
tion of defenses to its action. The scope of these available defenses
and the state's concomitant waiver of immunity is a question of fed-
eral law and procedure, but well-established principles of sovereign
immunity dictate that this waiver be narrowly construed. See, e.g.,
Atascadero, 473 U.S. at 239-40. 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.
With these principles in hand, we turn first to Maryland law to
determine whether the state has waived its Eleventh Amendment
immunity and whether the state's officers were authorized to act in
the federal bankruptcy forum, and then to federal law to determine
whether the state's filing of a proof of claim or other participation in
the bankruptcy court on the merits effected a waiver of immunity to
the trustee's action before us.
Under state law, in Maryland's own courts, "[a] waiver of sover-
eign or governmental immunity from suit generally requires that two
13
conditions be met. First, the Legislature must authorize suits for dam-
ages, and second, there must be provision for the payment of judg-
ments." Kee v. State Highway Administration , 545 A.2d 1312, 1317
(Md. 1988). State courts maintain this requirement of legislative
authorization for waiver of immunity despite the fact that under the
Maryland Constitution, art. V, § 3:
(a) The Attorney General shall:
(1) Prosecute and defend on the part of the State
all cases pending in the appellate courts of the
State, in the Supreme Court of the United States or
the inferior Federal Courts, by or against the State,
or in which the State may be interested, except
those criminal appeals otherwise prescribed by the
General Assembly.
(2) Investigate, commence, and prosecute or
defend any civil or criminal suit or action or cate-
gory of such suits or actions in any of the Federal
Courts or in any Court of this State, or before
administrative agencies and quasi legislative
bodies, on the part of the State or in which the
State may be interested, which the General Assem-
bly by law or joint resolution, or the Governor,
shall have directed or shall direct to be investi-
gated, commenced and prosecuted or defended.
While this constitutional language undoubtedly grants the Maryland
Attorney General authority to defend federal suits, including the cur-
rent bankruptcy action, it does not unequivocally grant him the
authority to waive the state's sovereign immunity, as required by
Atascadero and like cases. Nor is there a necessary implication of
such authority, because the Attorney General may, as in this case,
defend an action brought in federal court by asserting Eleventh
Amendment immunity.
Thus, we conclude that Maryland's defense of this case on the mer-
its in the district court does not indicate a waiver of Eleventh Amend-
ment immunity. Absent legislative authorization, the Maryland
14
Attorney General's power to waive the state's immunity under the
Eleventh Amendment is strongly circumscribed. We are satisfied that
the action taken in this bankruptcy has not waived the state's immu-
nity with regard to the trustee's action to avoid and recover the pay-
ment of income taxes.
Maryland did, however, file an affirmative proof of claim in the
debtor's bankruptcy to recover from the bankruptcy estate sales and
withholding taxes which the debtor collected for the state from third
parties (i.e. employees and clients of the debtor). Under state law, the
debtor was obligated to collect these taxes and hold them in trust for
the state. See Md. Code Ann. Tax-Gen'l Art.§ 10-906 (withholding
of employees' income taxes); Tax-Gen'l Art. § 11-401 (collecting
sales and use taxes). The trustee's action in this case, however, to
avoid the payment of the debtor's corporate income taxes, does not
arise out of the same transaction or occurrence supporting Maryland's
proof of claim for unrelated taxes. Thus, this action by the trustee can-
not be construed under federal law as a claim in the nature of a com-
pulsory counterclaim to the state's proof of claim. See Fed. R. Civ.
P. 13(a) (compulsory counterclaims), made applicable to bankruptcy
proceedings, Fed. R. Bankr. P. 7013.
Because of the procedural and factual context of this case, our
holding does not reach any defenses that the trustee may have to the
state's proof of claim for sales taxes and withholding taxes collected
by the debtor from third persons or the possibility of a setoff to that
claim in the nature of a permissive counterclaim. Because the trustee
has neither pleaded a setoff in this case nor sought to allege a claim
in the nature of a permissive counterclaim, we do not have occasion
to decide to what extent sovereign immunity might be waived with
respect to a setoff. Any consideration of these issues by us would
have to await a final order processing the state's proof of claim on the
unrelated tax claims.
Accordingly, because we have no "authority to entertain" this
action absent Maryland's consent, see Ford Motor , 323 U.S. at 464,
we vacate the judgment and remand with instructions to dismiss this
adversary action between the trustee and the State of Maryland.
IT IS SO ORDERED
15