206 B.R. 831 (Bkrtcy.E.D.Va. 1997), 92-11704, In re NVR L.P.

Docket Nº:Bankruptcy No. 92-11704-T.
Citation:206 B.R. 831
Party Name:In re NVR L.P., et al., Debtors-in-Possession.
Case Date:March 07, 1997
Court:United States Bankruptcy Courts, Fourth Circuit

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206 B.R. 831 (Bkrtcy.E.D.Va. 1997)

In re NVR L.P., et al., Debtors-in-Possession.

Bankruptcy No. 92-11704-T.

United States Bankruptcy Court, E.D. Virginia, Alexandria Division.

March 7, 1997

Order for Judgment March 25, 1997.

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[Copyrighted Material Omitted]

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Arnold M. Weiner, Allan P. Hillman, Heather H.P. Vovakes, Weiner, Astrachan,

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Gunst, Hillman & Allen, P.C. , Baltimore, MD.

Francis P. Dicello, Ann E. Schmitt, Robert M. Marino, Reed, Smith, Shaw & McClay, Washington, DC.

Robert B. Cave, Bruce W. Gilchrist, Hogan & Hartson, McLean, VA.

Julia M. Freit, Lawrence P. Fletcher-Hill, Assistant Attorneys General of Maryland, Baltimore, MD.

Norman A. West, Godard, West & Adelman P.C., Fairfax, VA.

Michael G. McCabe, David W. Rose, Goehring, Rutter & Boehm, Pittsburgh, PA.

Robert C. Edmundson, Senior Deputy Attorney General of Pennsylvania, Pittsburgh, PA.

Paul Stahl, Assistant Attorney General, Virginia Department of Transportation, Fairfax, VA.

Joy Flowers Conti, Catherine Welsh Aceto, Kirkpatrick & Lockhart, L.L.P., Pittsburgh, PA.

Charles R. Mills, Linda Gardner, Kirkpatrick & Lockhart, L.L.P., Washington, DC.

Bruce W. Henry, Henry & Henry, Fairfax, VA.

Matthew M. Hoffman, Steele & Hoffman, Pittsburgh, PA.

Lee V. Price, Maiello, Andrews & Price, Pittsburgh, PA.

Nancy E. Carr, Walker & Carr, Beaver, PA.

Frank W. Hunger, Helen F. Fahey, J. Christopher Kohn, Tracy J. Whitaker, Phillip M. Seligman, Department of Justice, Civil Division, Washington, DC.


DOUGLAS O. TICE, Jr., Bankruptcy Judge.

On October 23, 1995, the debtors-in-possession in these consolidated Chapter 11 cases moved the court to construe a section of their confirmed plan as requiring taxing authorities in Pennsylvania and Maryland to refund certain real property transfer and recordation taxes. On April 4, 1996, the court entered a declaratory judgment order under Fed.R.Bankr.P. 3020(d) granting the debtors' motion. Just days before, however, the Supreme Court had held in Seminole Tribe of Fla. v. Florida, 517 U.S. 44, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996), that Congress cannot abrogate a state's Eleventh Amendment immunity when exercising its powers under Article I of the Constitution.

In light of the Supreme Court's decision, the taxing authorities filed motions asking this court to reconsider and to amend the April 4, 1996, order on the ground that Seminole has rendered 11 U.S.C. § 106 1 unconstitutional and that the court therefore lacked jurisdiction to enter the declaratory judgment against them. The court held a hearing on these motions on September 18, 1996, and then took the matter under advisement. On December 9, 1996, the United States Department of Justice obtained leave to intervene in this proceeding and to lodge its support for the constitutionality of § 106.

For the reasons set forth in this memorandum opinion, the court holds that § 106 of the Bankruptcy Code is unconstitutional and that the Eleventh Amendment precludes this court's order of April 4, 1996, from binding the Commonwealth of Pennsylvania and the Maryland circuit court clerks as collectors of a state transfer tax. Accordingly, the motions of these authorities to reconsider and to amend the order must be granted.

Findings of Fact and Procedural History

The debtors 2 have built and financed new

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homes in Northern Virginia and the Maryland suburbs of Washington, D.C., for well over ten years. When the real estate market crumbled in the late 1980s, however, their once prosperous business suffered a bitter collapse. In the face of mounting financial pressure, the debtors were forced not only to implement an operational overhaul but to initiate negotiations with their bank group on a proposed restructuring of their working capital facilities. Even though the debtors prepared a detailed plan for reorganization, several of the banks balked at the idea of continuing to fund the enterprise. As a result, the debtors filed for relief under Chapter 11 of the Bankruptcy Code on April 6, 1992. 3

On July 22, 1993, the court confirmed the debtors' second amended joint plan of reorganization. Section 4.13 of the plan provided, in pertinent part, that:

[p]ursuant to section 1146(c) of the Bankruptcy Code, the issuance, transfer, or exchange of securities pursuant to the Plan, and the transfer of, or creation of any lien on, any property of any Debtor under, in furtherance of, or in connection with the Plan shall not be subject to any stamp tax, real estate transfer tax, recordation tax, or similar tax.

The court's order of confirmation, which incorporated the thrust of this language, retained jurisdiction over the "interpretation or enforcement of the Plan."

In the summer of 1995, local and state taxing authorities in Maryland 4 and Pennsylvania 5 refused the debtors' request for a refund of transfer and recordation taxes collected on the debtors' post-petition, pre-confirmation transfers of real property. In October, the debtors 6 moved this court for a declaratory judgment fixing their rights under Section 4.13 of the plan. On April 4, 1996, the court entered an order concluding that the pre-confirmation transfers "were essential to the formulation, confirmation and consummation of the Confirmed Plan and to Debtors' effective reorganization and emergence from bankruptcy...." The order consequently declared that all real property transfers made between April 6, 1992, and September 30, 1993, were exempt from transfer and recordation taxes pursuant to 11 U.S.C. § 1146(c). 7

Just days before the court's order, however, the United States Supreme Court had handed down its opinion in Seminole Tribe of Fla. v. Florida, 517 U.S. 44, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996). In Seminole, the Court considered whether Congress, by enacting the Indian Gaming Regulatory Act, had rightfully abrogated the states' immunity under the Eleventh Amendment. 8 Up until

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that time, only two provisions of the Constitution had been construed as bestowing upon Congress a power to do so. In Fitzpatrick v. Bitzer, 427 U.S. 445, 452-456, 96 S.Ct. 2666, 2669-71, 49 L.Ed.2d 614 (1976), the Court "recognized that the Fourteenth Amendment, by expanding federal power at the expense of state autonomy, had fundamentally altered the balance of state and federal power struck by the Constitution." 9 Seminole, 517 U.S. at ----, 116 S.Ct. at 1125. This being the case, § 5 of the Fourteenth Amendment was interpreted as one means by which Congress could abrogate the immunity from suit guaranteed by the Eleventh Amendment. Seminole, 517 U.S. at ----, 116 S.Ct. at 1125.

In Pennsylvania v. Union Gas Co., 491 U.S. 1, 109 S.Ct. 2273, 105 L.Ed.2d 1 (1989), a plurality of the Court construed a second provision of the Constitution as empowering congressional abrogation. Noting that it "would be difficult to overstate the breadth and depth of the commerce power," four Justices reaffirmed that the Interstate Commerce Clause "displaces state authority even where Congress has chosen not to act." Id. at 20, 109 S.Ct. at 2285. Against this backdrop, the plurality held that Congress enjoyed a prerogative to abrogate when legislating pursuant to Art. I, § 8, cl. 3 of the Constitution. Id. at 19, 109 S.Ct. at 2284. Justice White, who provided the fifth vote, wrote separately to indicate that, while he agreed that "Congress has the authority under Article I to abrogate the Eleventh Amendment immunity of the States," he could not concur with "much of the [the plurality's] reasoning." Id. at 57, 109 S.Ct. at 2296 (White, J., concurring in part and dissenting in part).

The Court in Seminole observed that, "[s]ince it was issued, Union Gas has created confusion among the lower courts that have sought to understand and apply the deeply fractured reasoning." Seminole, 517 U.S. at ----, 116 S.Ct. at 1127. Moreover, the Court found the plurality's rationale to have "deviated sharply from our established federalism jurisprudence and essentially eviscerated our decision in [Hans v. Louisiana, 134 U.S. 1, 10 S.Ct. 504, 33 L.Ed. 842 (1890) ]." Id. With the dissent making no effort to defend the decision, the majority felt "bound to conclude that Union Gas was wrongly decided and that it should be, and now is, overruled." Id. at ----, 116 S.Ct. at 1128. In doing so, the Court announced that, even when Article I of the Constitution "vests in Congress complete lawmaking authority over a particular area, the Eleventh Amendment prevents congressional authorization of suits by private parties against unconsenting States." Id. at ----, 116 S.Ct. at 1131.

In light of Seminole, the taxing authorities moved this court to reconsider and to amend the April 4, 1996, order. In essence, they maintain that the Supreme Court's decision renders 11 U.S.C. § 106 an unconstitutional bid by Congress to abrogate the several states' immunity under the Eleventh Amendment. 10 If the stance has merit, this court

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would have lacked the requisite jurisdiction to issue a declaratory judgment binding on the taxing authorities. The debtors of course take issue with this position and respond with several arguments: (1) that extending Seminole's reach to § 106 abridges the debtors' privileges and immunities and denies the debtors equal protection of the laws under the Fourteenth Amendment; (2) that their motion for declaratory judgment does not constitute a "suit" under the Eleventh Amendment; (3) that the circuit court clerks, townships, school districts, and other local taxing authorities have no immunity under the Eleventh Amendment; and (4) that the taxing authorities waived their Eleventh Amendment immunity. 11


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