In Re: Jackson v. CA. Franchise Tax Bd.

• Decision Date: 11 December 1998
• Docket Number: No. 98-56014,98-56014
• Citation: 184 F.3d 1046
• Parties: (9th Cir. 1999) In re: MARION DALE JACKSON; PATRICIA L. JACKSON, Debtors. CALIFORNIA FRANCHISE TAX BOARD, Appellant, v. MARION DALE JACKSON; PATRICIA L. JACKSON, Appellees
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1046

184 F.3d 1046 (9th Cir. 1999)

In re: MARION DALE JACKSON; PATRICIA L. JACKSON, Debtors.

CALIFORNIA FRANCHISE TAX BOARD, Appellant, v. MARION DALE JACKSON; PATRICIA L. JACKSON, Appellees.

No. 98-56014

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted December 11, 1998--San Francisco, California

Filed July 22, 1999

[Copyrighted Material Omitted]

COUNSEL: Gregory S. Price, Deputy Attorney General, San Diego, California, for the appellant.

James A. Hayes, Jr., Ainsworth, Hayes & Moran, Laguna Niguel, California, for the appellees.

Appeal from the United States District Court for the Central District of California Audrey B. Collins, District Judge, Presiding. D.C. No. CV-98-00189-ABC.

Before: Harry Pregerson, Charles E. Wiggins, and Melvin Brunetti, Circuit Judges.

OPINION

BRUNETTI, Circuit Judge:

I. FACTS AND PROCEEDINGS BELOW

The facts of this case are not in dispute. The Internal Revenue Service ("IRS") reassessed the Jacksons' federal income tax liabilities for the 1982, 1983, and 1989 tax years, but the Jacksons did not notify the California Franchise Tax Board ("Board") of the federal reassessments as they were required to do under California law. The Jacksons filed for bankruptcy in 1996 and the Board filed a proof of claim for unpaid state income taxes for the '82, '83, and '89 tax years based upon the IRS reassessments. The Jacksons objected to the Board's claim and the bankruptcy court sustained the Jacksons' objection disallowing the Board's claim for state income taxes. The United States District Court for the Central District of California affirmed the bankruptcy court's order concluding that the Jacksons' California tax liabilities were discharged despite the fact that the Jacksons failed to report the IRS reassessments to the Board. The district court reasoned that the failure to report a tax reassessment did not constitute a failure to file a tax return and, therefore, the Jacksons' California tax liabilities were not excepted from the bankruptcy code's discharge provisions. The Board appeals from the district court's judg- ment. We have jurisdiction under 28 U.S.C. S 158(d) and affirm.

II. DISCUSSION

A. ELEVENTH AMENDMENT SOVEREIGN IMMUNITY

Neither party has discussed or raised the Eleventh Amendment sovereign immunity issue this case presents, but we must resolve that issue before we reach the merits of this case. See Edelman v. Jordan, 415 U.S. 651, 677-78 (1974); Charley's Taxi Radio Dispatch Corp. v. Sida of Hawaii, Inc., 810 F.2d 869, 873 n.2 (9th Cir. 1987). Eleventh Amendment sovereign immunity limits the jurisdiction of the federal courts and can be raised by a party at any time during judicial proceedings or by the court sua sponte. See Edelman, 415 U.S. at 677-78; Charley's Taxi Radio Dispatch Corp., 810 F.2d 873 n.2. Unlike other jurisdictional limitations, Congress can abrogate Eleventh Amendment sovereign immunity through the Fourteenth Amendment and states can waive their Eleventh Amendment sovereign immunity and consent to federal jurisdiction. Seminole Tribe of Florida v. Florida, 517 U.S. 44, 55 (1996); Atascadero State Hospital v. Scanlon, 473 U.S. 234, 238 (1985); BV Engineering v. University of California, Los Angeles, 858 F.2d 1394, 1395-96 (9th Cir. 1988).

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.

U.S. Const. amend. XI. Despite its narrow language, the Eleventh Amendment bars suits in federal court against a state and its agencies brought by its own citizens and citizens of other states. Edelman, 415 U.S. at 662-63; Hans v. Louisiana, 134 U.S. 1, 9-21 (1890); Franceschi v. Schwartz, 57 F.3d 828, 831 (9th Cir. 1995). The State of California has not made a general waiver of its Eleventh Amendment sovereign immunity, see Atascadero State Hospital, 473 U.S. at 241, and will only be deemed to have done so in this case if it has unequivocally expressed its consent to federal jurisdiction. Actmedia, Inc. v. Stroh, 830 F.2d 957, 963 (9th Cir. 1986). The Board waived its Eleventh Amendment sovereign immunity in this case when it filed a proof of claim for unpaid state income taxes.

Section 106(b) of the Bankruptcy Code provides:

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 gov ernmental unit that is property of the estate and that arose out of the same transaction or occurrence out of which the claim of such governmental unit arose.

11 U.S.C. S 106(b). Section 106(b) codifies the Supreme Court's decision in Gardner v. New Jersey, 329 U.S. 565 (1947), which held that a state waives its sovereign immunity when it files a proof of claim in a bankruptcy proceeding. Id. at 573-74. The Supreme Court stated:

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. . . . 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. The Board waived its Eleventh Amendment sovereign immunity in regard to the bankruptcy court's determination that the Jacksons' tax liability debts were dischargeable because the Board filed a proof of claim in this case for unpaid state income taxes and the Jacksons only objected to the Board's claim that their tax liability debts were nondischargeable.

Relying on the Supreme Court's decision in Seminole Tribe of Florida v. Florida, 517 U.S. 44, 66-72 (1996) (Congress cannot use its Article I powers to abrogate Eleventh Amendment sovereign immunity), the Fourth Circuit has held that S 106(b) amounts to an unconstitutional attempt by Congress to abrogate the sovereign immunity of the states. See In re Creative Goldsmiths, 119 F.3d 1140, 1147 (1997), cert. denied, _______ U.S._______, 118 S. Ct. 1517 (1998). The Fourth Circuit stated:

While 11 U.S.C. S 106(b) may correctly describe those actions that, as a matter of constitutional law, constitute a state's waiver of the Eleventh Amend ment, it is nevertheless not within the Congress' power 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 con sent to federal jurisdiction. Only if it waives such immunity may a private citizen sue the state in fed eral court.

Id. at 1147. Despite holding S 106(b) unconstitutional, the Fourth Circuit recognized, consistent with Gardner v. New Jersey, that, when a state files a proof of claim in a bankruptcy proceeding, the state waives its sovereign immunity in regard to the debtor's claims which arise out of the same transaction or occurrence as the state's proof of claim. Id. at 1148.

In contrast to the Fourth Circuit's decision in In re Creative Goldsmiths, the Tenth Circuit has held thatS 106(b) is not affected by the Supreme Court's decision in Seminole Tribe. See In re Straight, 143 F.3d 1387 (10th Cir. 1998). The Tenth Circuit stated:

[Section] 106(b) does not pretend to abrogate a state's immunity, it merely codifies an existing equi table circumstance under which a state can choose to preserve its immunity by not participating in a bank ruptcy proceeding or to partially waive that immu nity by filing a claim. The choice is left to the state. Thus, S 106(b) follows the lead already established by the Supreme Court in Gardner v. New Jersey .

Id. at 1392.

We decline to address the issue of whether S 106(b) is constitutional because the Board's conduct falls squarely under the Supreme Court's decision in Gardner v. New Jersey. See Crowder v. Kitagawa, 81 F.3d 1480, 1486 (9th Cir. 1996) ("It is `a fundamental rule of judicial restraint' that federal courts `ought not pass on questions of constitutionality. . . unless such adjudication is unavoidable.' ") (quoting Jean v. Nelson, 472 U.S. 846, 854 (1985)). The Seventh and Eleventh Circuits recently declined to address the constitutionality of S 106(b) and instead relied exclusively on Gardner v. New Jersey to conclude that a state waives its sovereign immunity when it files a proof of claim in a bankruptcy proceeding. See In re Burke, 146 F.3d 1313, 1317-20 (11th Cir. 1998); In re Platter, 140 F.3d 676, 678-80 (7th Cir. 1998). We follow the lead of the Seventh and Eleventh Circuits and conclude that, based upon the Supreme Court's decision in Gardner v. New Jersey, the Board waived its sovereign immunity in this case when it filed a proof of claim for unpaid state income taxes against the Jacksons.¹ The federal courts have jurisdiction to hear this case and we must determine whether the Jacksons' tax liability debts are excepted from the Bankruptcy Code's discharge provisions.

B. DISCHARGEABILITY OF THE JACKSONS' STATE INCOME TAX LIABILITY

The bankruptcy court's interpretation of the Bankruptcy Code is reviewed de novo, In re Federated Group, Inc., 107 F.3d 730, 732 (9th Cir. 1997); In re Harrell, 73 F.3d 218, 219 (9th Cir. 1996)(per curiam), and we review the district court's decisions on an appeal from a bankruptcy court de novo applying the same standard of review applied by the district court. In re Wilbur, 126 F.3d 1218, 1219 (9th Cir. 1997); In re Claremont Acquisition Corp., 113 F.3d 1029, 1031 (9th Cir. 1997).

Section 523 of the Bankruptcy Code² excepts from the Bankruptcy Code's discharge provisions a tax liability debt if: (1) the tax underlying the tax liability debt required a return; and (2) the debtor failed to file the required return. See 11 U.S.C. S 523 (a)(1)(B)(i). Former section 18451 of the California Revenue and Taxation...