133 F.3d 237 (3rd Cir. 1998), 97-1126, In re Sacred Heart Hosp. of Norristown

Docket Nº:97-1126.
Citation:133 F.3d 237
Party Name:In re SACRED HEART HOSPITAL OF NORRISTOWN, dba Sacred Heart Hospital & Rehabilitation Center, Debtor. SACRED HEART HOSPITAL OF NORRISTOWN, dba Sacred Heart Hospital & Rehabilitation Center v. COMMONWEALTH OF PENNSYLVANIA, DEPARTMENT OF PUBLIC WELFARE. In re SACRED HEART HOSPITAL OF NORRISTOWN, d/b/a Sacred Heart Hospital & Rehabilitation Center, De
Case Date:January 08, 1998
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit
 
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Page 237

133 F.3d 237 (3rd Cir. 1998)

In re SACRED HEART HOSPITAL OF NORRISTOWN, dba Sacred Heart

Hospital & Rehabilitation Center, Debtor.

SACRED HEART HOSPITAL OF NORRISTOWN, dba Sacred Heart

Hospital & Rehabilitation Center

v.

COMMONWEALTH OF PENNSYLVANIA, DEPARTMENT OF PUBLIC WELFARE.

In re SACRED HEART HOSPITAL OF NORRISTOWN, d/b/a Sacred

Heart Hospital & Rehabilitation Center, Debtor.

SACRED HEART HOSPITAL OF NORRISTOWN

v.

COMMONWEALTH OF PENNSYLVANIA, DEPARTMENT OF PUBLIC WELFARE

Sacred Heart Hospital of Norristown, Appellant.

No. 97-1126.

United States Court of Appeals, Third Circuit

January 8, 1998

Argued Sept. 25, 1997.

As Amended Feb. 19, 1998.

Page 238

[Copyrighted Material Omitted]

Page 239

William A. Slaughter (argued), Matthew M. Strickler, Ballard, Spahr, Andrews & Ingersoll, Philadelphia, PA, for Appellant Sacred Heart Hospital of Norristown.

Sallie A. Rodgers, Commonwealth of Pennsylvania, Office of Legal Counsel, Department of Public Welfare, Harrisburg, PA, Thomas Blazusiak (argued), Pennsylvania Department of Public Welfare, Allentown, PA, for Appellee Commonwealth of PA, Department of Public Welfare.

Leonard H. Gerson, Angel & Frankel, New York City, for Amicus-Appellant Business Bankruptcy Law Committee of the New York County Lawyers' Association.

Before: COWEN, ROTH and LEWIS, Circuit Judges.

OPINION OF THE COURT

COWEN, Circuit Judge.

This appeal involves a challenge to the constitutionality of section 106(a) of the Bankruptcy Code, 11 U.S.C. § 106(a). That section purports to abrogate state sovereign immunity in federal court. The defendant-appellee, Commonwealth of Pennsylvania Department of Public Welfare ("DPW"), argued before the bankruptcy court that section 106(a) was not enacted pursuant to a valid exercise of congressional power. Therefore, DPW asserted that the Eleventh Amendment to the United States Constitution bars Debtor-appellant Sacred Heart Hospital of Norristown's ("Sacred Heart") lawsuit against DPW. The bankruptcy court denied DPW's claim of Eleventh Amendment immunity. It also entered an order on the merits granting declaratory judgment for Sacred Heart. The district court reversed the bankruptcy court's order dealing with Eleventh Amendment immunity and thereafter vacated the order of the bankruptcy court concerning the merits of the dispute. We will affirm the district court.

I.

Sacred Heart, an acute care community hospital in Norristown, Pennsylvania, began providing medical treatment to patients under Pennsylvania's Medical Assistance program ("the Program"), 55 Pa.Code § 1101.11 et seq., in 1967. By May of 1994, however,financial difficulties forced Sacred Heart to cease operations and lay off substantially all of its several hundred employees. Shortly thereafter, Sacred Heart filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code.

During the course of Sacred Heart's Chapter 11 proceedings, the Commonwealth asserted various claims against the Debtor. The Commonwealth's Department of Labor and Industry ("DLI") asserted claims against the Debtor for amounts claimed to be owed to the Commonwealth under the Commonwealth's Unemployment Compensation and Workers' Compensation statutes; the Commonwealth's Department of Revenue ("DOR") asserted claims against the Debtor for sales and use taxes; and DPW asserted a claim against the Debtor arising under a lease. 1

Earlier in the bankruptcy proceedings, the Debtor submitted invoices to DPW to obtain payment for some of the medical treatments it provided to patients under the Program. The Commonwealth's Office of Inspector General ("OIG") returned the invoices to the Debtor, however, because they were incorrectly completed. The Debtor resubmitted them to OIG in January of 1996, and submitted additional invoices to DPW in May of 1996. DPW denied all of the Debtor's claims because the Debtor failed to comply with 55 Pa.Code § 1101.68. This statute requires claims to be submitted to DPW within 180 days after the treatment is rendered.

The Debtor subsequently filed in the bankruptcy court the instant adversary proceeding

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against DPW, demanding judgment against DPW "in the amount to which it is entitled under the Medical Assistance program." Adv. Compl. at 5. The Debtor did not request a declaratory judgment, nor did it request any prospective injunctive relief against any Commonwealth officials.

DPW filed motions to dismiss based principally on the Eleventh Amendment to the United States Constitution. Sacred Heart responded by claiming that no Commonwealth agency was entitled to Eleventh Amendment immunity in these proceedings because the DLI and DOR claims in the bankruptcy proceedings constituted a waiver of the Commonwealth's sovereign immunity. 2 Sacred Heart did not argue that the Eleventh Amendment did not apply or that DPW had waived its immunity under 11 U.S.C. § 106(c).

The bankruptcy court denied DPW's motions. It held that the Eleventh Amendment was not implicated because: (1) the adversary complaint sought not monetary relief but only a declaration that section 108(a) of the Bankruptcy Code affected state billing rules to require that otherwise untimely invoices be accepted as timely; and (2) the Commonwealth waived its sovereign immunity as to all claims relating to Sacred Heart's bankruptcy proceedings when DLI filed its proof of claim for unreimbursed unemployment benefits. 3 The bankruptcy court subsequently issued a final order, stating that "[u]pon advice of the Debtor's counsel ... the Debtor would presently be satisfied with an Order declaring 11 U.S.C. § 108(a) applies here." App. at A52. 4 The bankruptcy court ordered that DPW accept as timely all billings that were not untimely under state rules as of the filing of Sacred Heart's bankruptcy. The Commonwealth appealed both orders to the district court.

The district court by order entered on January 21, 1997, reversed the bankruptcy court. Specifically, the district court held that 11 U.S.C. § 106(a), which purports to abrogate state sovereign immunity, violates the Eleventh Amendment to the United States Constitution in light of the Supreme Court's decision in Seminole Tribe of Florida v. Florida, 517 U.S. 44, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996). 5 The district court also determined that, because there was no contention that Sacred Heart's claims against DPW arose out of the same transaction or occurrence as either DLI's or DOR's claims against Sacred Heart, DPW did not waive its immunity pursuant to 11 U.S.C. § 106(b). In addition, because Sacred Heart never argued before the bankruptcy court that its claims were raised to offset DLI's or DOR's claims

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pursuant to 11 U.S.C. § 106(c), the district court found this issue waived. Finally, the district court held that the bankruptcy court lacked jurisdiction over the adversary proceeding after DPW appealed the August 7, 1996, order of the bankruptcy court, which was a collateral order dealing with the jurisdiction of the bankruptcy court. It also vacated the August 15, 1996, order of the bankruptcy court which dealt with the merits of the adversary proceedings. This appeal followed.

Sacred Heart essentially raises three arguments on appeal. First, it contends that the Eleventh Amendment does not limit bankruptcy court jurisdiction because bankruptcy courts do not exercise the judicial power of the United States under Article III. Second, it asserts that the Bankruptcy Clause, U.S. Const. art. I, § 8, cl. 4, vests Congress with the power to abrogate state sovereign immunity from suit in federal court. Third, it maintains that even if the Bankruptcy Clause itself does not authorize Congress to abrogate state sovereign immunity, Congress' abrogation of sovereign immunity in section 106(a) should be sustained as a valid exercise of its enforcement power under the Fourteenth Amendment. 6

II.

"Because in bankruptcy cases the district court sits as an appellate court, our review of the district court's decision is plenary." Brown v. Pennsylvania State Employees Credit Union, 851 F.2d 81, 84 (3d Cir.1988) (citing Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101-02 (3d Cir.1981)). We review the findings of fact of the bankruptcy court only for clear error. Id. (citing In re Morrissey, 717 F.2d 100, 104 (3d Cir.1983)). Findings of fact by a trial court are clearly erroneous when, after reviewing the evidence, the appellate court is "left with a definite and firm conviction that a mistake has been committed." Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985) (quotation marks omitted). We exercise plenary review over legal questions. In re Fegeley, 118 F.3d 979, 982 (3d Cir.1997) (citing In re Siciliano, 13 F.3d 748, 750 (3d Cir.1994)). It is error for a district court, when acting in the capacity of a court of appeals, to make its own factual...

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