Sheehan v. West Virginia Department of Environmental Protection

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
In Re: T&T FUELS, INCORPORATED, 
Debtor.
MARTIN P. SHEEHAN, Trustee for the
Bankruptcy Estate of T&T Fuels,
Inc. and/or Counsel for the Trustee
for the Bankruptcy Estate of T&T
Fuels, Inc.,
Plaintiff-Appellant,
v.
WEST VIRGINIA DEPARTMENT OF  No. 02-1026
ENVIRONMENTAL PROTECTION,
Defendant-Appellee,
and
WEST VIRGINIA STATE TAX
DEPARTMENT; PAUL THOMAS; LOWELL
THOMAS; BASS ENERGY,
INCORPORATED; T&T COALS,
INCORPORATED; T&T MANAGEMENT
COMPANY, INCORPORATED; UNITED
STATES BANKRUPTCY COURT,
Parties in Interest.

Appeal from the United States District Court
for the Northern District of West Virginia, at Elkins.
Frederick P. Stamp, Jr., District Judge.
(CA-00-83-2, BK-95-21264)
Argued: December 3, 2002
Decided: January 9, 2003
2 IN RE: T&T FUELS, INC.
Before WILLIAMS and TRAXLER, Circuit Judges, and
HAMILTON, Senior Circuit Judge.
Affirmed by unpublished per curiam opinion.
COUNSEL
ARGUED: Martin Patrick Sheehan, SHEEHAN & NUGENT,
P.L.L.C., Wheeling, West Virginia; William Anthony Kolibash,
PHILLIPS, GARDILL, KAISER & ALTMEYER, Wheeling, West
Virginia, for Appellant. Mark J. Rudolph, Office of Legal Services,
DEPARTMENT OF ENVIRONMENTAL PROTECTION, Charles-
ton, West Virginia, for Appellee. ON BRIEF: Denise Knouse-
Snyder, PHILLIPS, GARDILL, KAISER & ALTMEYER, Wheeling,
West Virginia, for Appellant. Christopher D. Negley, Office of Legal
Services, DEPARTMENT OF ENVIRONMENTAL PROTECTION,
Charleston, West Virginia, for Appellee.
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
OPINION
PER CURIAM:
Martin P. Sheehan, a trustee in bankruptcy for T&T Fuels, Inc.,
filed a motion in bankruptcy court for imposition of a constructive
trust and for a direct payment of quantum meruit fees by the West
Virginia Department of Environmental Protection (DEP). Sheehan’s
claim was based on work performed by counsel that he, as trustee,
retained to pursue causes of action against the two directors of T&T
Fuels, Paul and Lowell Thomas. The bankruptcy court concluded that
Sheehan’s claim against the DEP was barred by the Eleventh Amend-
IN RE: T&T FUELS, INC. 3
ment and thus denied the motion. The district court affirmed. Sheehan
now appeals the district court’s decision. Because we agree with the
district court’s analysis and conclusion, we affirm.
I.
T&T Fuels mined coal in Preston County, West Virginia from
1971 to 1993. These mining activities produced large quantities of
acid mine drainage, and in 1994, acid-laden water began to discharge
directly into the waters of West Virginia. The DEP issued several vio-
lation notices and cessation orders requiring T&T Fuels to treat the
discharge from its mines and assessed mandatory civil penalties.
On October 27, 1995, T&T Fuels filed a Chapter 7 bankruptcy
petition, and Sheehan was appointed as trustee. The DEP began treat-
ment of the site and immunized Sheehan from any personal liability.
The DEP filed a multimillion dollar proof of claim against the bank-
ruptcy estate, to which Sheehan objected. In September 1996, a trial
was held in bankruptcy court on the DEP’s claim, and on February
20, 1997, the bankruptcy court determined the amount of the DEP’s
claim at $6.7 million and changed its status from administrative prior-
ity to general unsecured. The DEP’s claim was intended to fund
twenty years of treatment of the damage caused by the acid mine
drainage. Although there were several claims filed against the debtor,
the DEP’s claim exceeded the total of all other claims filed.
Sheehan employed counsel on a contingent fee basis to pursue
claims against the two directors of T&T Fuels, Paul Thomas, and his
brother, Lowell Thomas, and several entities owned by them for
breach of fiduciary duty and a disguised fraudulent transfer. The
United States charged Paul Thomas with criminal violations of the
Clean Water Act. In the criminal case, which was not covered by the
automatic stay in the bankruptcy action, the United States and Paul
Thomas entered into a plea agreement whereby Thomas received five
years probation. Paul Thomas also entered into an agreement with the
United States in which he agreed to pay restitution to the DEP in the
amount of $443,400 for land reclamation costs and penalties, as well
as $33,000 per month to treat the water flowing from T&T Fuels as
long as acid drainage persisted. As a result of these agreements, the
4 IN RE: T&T FUELS, INC.
DEP withdrew its proof of claim against the bankruptcy estate. Shee-
han did not object to the DEP’s withdrawal.
Sheehan settled the claims that he brought against the Thomas
brothers and the various entities owned by them for a little over
$100,000. With the sums received from the settlement, and the funds
previously generated from the sale of T&T Fuel’s assets, Sheehan
prepared a report seeking authority to distribute the funds. Although
the attorneys Sheehan hired were entitled to fees on a contingent fee
basis measured by the benefit to the estate, they reduced their fees so
that unsecured creditors could receive at least 50% of the amount for
which the unsecured creditors had filed proofs of claim.
On November 2, 1999, Sheehan filed a motion in the bankruptcy
court, requesting that a constructive trust be imposed on the DEP and
that the court require the DEP to make a direct payment of a quantum
meruit fee for the benefit the DEP received as a result of the efforts
of Sheehan’s attorneys in the bankruptcy proceedings. The bank-
ruptcy court held that although the attorneys performed valuable ser-
vices for the DEP and should, as a matter of moral principle, be
compensated by the DEP, the Eleventh Amendment barred Sheehan’s
claim for attorneys’ fees against the DEP. Sheehan appealed the bank-
ruptcy court’s decision to the district court, and on December 12,
2001, the district court affirmed the decision of the bankruptcy court.
This appeal followed. This court has jurisdiction pursuant to 28
U.S.C.A. § 158(d) (West 1993).
On appeal, Sheehan contends that by filing a proof of claim, the
DEP waived its Eleventh Amendment immunity to his claim for attor-
neys’ fees. Because Sheehan’s appeal raises an issue of law, our
review is de novo. Accord Cypher Chiropractic Ctr. v. Runski (In re
Runski), 102 F.3d 744, 745 (4th Cir. 1996).
II.
The Eleventh Amendment, in conjunction with related principles of
state sovereign immunity, bars federal courts from hearing any suit
"commenced or prosecuted against one of the United States by Citi-
zens of another State," U.S. Const. amend. XI, or by its own citizens,
Hans v. Louisiana, 134 U.S. 1, 10, 20 (1890). A state, of course,
IN RE: T&T FUELS, INC. 5
remains free to waive its immunity from suit in a federal court. See,
e.g., Lapides v. Bd. of Regents of the Univ. Sys. of Ga., ___ U.S. ___,
122 S.Ct. 1640, 1646 (2002) (holding that a state waives Eleventh
Amendment immunity when it removes a case from state court to fed-
eral court). The only issue presented in this appeal is whether the DEP
waived its Eleventh Amendment immunity.*
While the Court in Lapides did not address the scope of such a
waiver, the Court previously has held that when a state "files a claim
against the fund [in a bankruptcy action] it waives any immunity
which it otherwise might have had respecting the adjudication of the
claim." See Gardner v. New Jersey, 329 U.S. 565, 574 (1947). The
Court in Gardner reasoned that if a state invokes the aid of the bank-
ruptcy court in collecting a debt, it must submit to the bankruptcy
court’s process of adjudicating the competing interests in the bank-
ruptcy estate. Id. We have held "that to the extent a defendant’s asser-
tions 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." Schlossberg v. Maryland (In re Creative
Goldsmith of Washington, D.C., Inc.), 119 F.3d 1140, 1148 (4th Cir.
1997).
A counterclaim is compulsory "if it arises out of the transaction or
occurrence that is the subject matter of the opposing party’s claim."
Fed. R. Civ. P. 13(a). Sheehan’s action in this case, for attorneys’ fees
incurred pursuing causes of action for the bankruptcy estate, does not
arise out of the same transaction or occurrence supporting the DEP’s
proof of claim for pollution clean-up. Rather, Sheehan’s claim arises
from the DEP’s decision to enter into a plea agreement with Paul
*We do not address Sheehan’s argument that our previous decision
holding that "Congress has no authority under the Bankruptcy Clause,
U.S. Const. art. I, § 8, cl. 4, to abrogate state sovereign immunity in fed-
eral courts," Schlossberg v. Maryland (In re Creative Goldsmith of
Washington, D.C., Inc.), 119 F.3d 1140, 1145 (4th Cir. 1997), should be
reconsidered and overruled. See Laughlin v. Metro. Wash. Airports
Auth., 149 F.3d 253, 260 (4th Cir. 1998) (stating that a panel cannot
overrule a decision of a prior panel).
6 IN RE: T&T FUELS, INC.
Thomas and withdraw its proof of claim. Adjudicating Sheehan’s
claim, therefore, would require more than a determination of DEP’s
interest in a bankruptcy estate. Specifically, it would require the bank-
ruptcy court to exercise jurisdiction over the DEP, as opposed to a
bankruptcy estate, see Virginia v. Collins (In re Collins), 173 F.3d
924, 928 (4th Cir. 1999) ("[T]he power of the bankruptcy court to
enter an order confirming a plan . . . derives not from jurisdiction over
the state or other creditors, but rather from jurisdiction over debtors
and their estates" (internal citation omitted)), and to determine
whether Sheehan’s attorneys should receive payment from the West
Virginia Treasury for the benefit of their services to the state, thus
possibly entering a judgment against the DEP, see Gardner, 329 U.S.
at 574 (explaining that while a state’s proof of claim may be "rejected
in toto, reduced in part, given a priority inferior to that claimed, or
satisfied in some way other than payment in cash," no judgment is
entered against the state). Because Sheehan’s claim for attorneys’ fees
does not amount to a compulsory counterclaim against DEP’s proof
of claim, the DEP has not waived its Eleventh Amendment immunity
with respect to the adjudication of Sheehan’s claim.
III.
Having reviewed the record, briefs, and applicable law and having
considered the oral arguments of the parties, we conclude that the dis-
trict court was correct. Accordingly, we affirm on the basis of the dis-
trict court’s well-reasoned opinion. See Sheehan v. W. Va. Dep’t of
Envtl. Prot. (In re T&T Fuels, Inc.), No. 2:00CV83 (N.D. W. Va.
Dec. 12, 2001).
AFFIRMED