In The Matter Of John Hamilton Cox v. Fox Brd. Co.

• Decision Date: 22 January 2010
• Docket Number: Adversary No. 09-1068-whd.,Bankruptcy No. 09-13461-WHD.
• Citation: 259 Ed. Law Rep. 155,433 B.R. 911
• Parties: In the Matter of John Hamilton COX, Jr., Kathryn Burgess Cox, Debtors.Gary W. Brown, Trustee of the Estate of John and Kathryn Cox, Plaintiff,v.Fox Broadcasting Company, Kathy Cox, in her capacity as State Superintendent of Schools, Georgia Department of Education, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Georgia

433 B.R. 911

259 Ed. Law Rep. 155

In the Matter of John Hamilton COX, Jr., Kathryn Burgess Cox, Debtors.Gary W. Brown, Trustee of the Estate of John and Kathryn Cox, Plaintiff,v.Fox Broadcasting Company, Kathy Cox, in her capacity as State Superintendent of Schools, Georgia Department of Education, Defendants.

Bankruptcy No. 09-13461-WHD.

Adversary No. 09-1068-whd.

United States Bankruptcy Court,

N.D. Georgia,

Newnan Division.

Jan. 22, 2010.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

A. Alexander Teel, Chris D. Phillips, James C. Cifelli, Lamberth, Cifelli, Stokes, Ellis & Nason, Atlanta, GA, for Plaintiff.

Oscar B. Fears, III, Georgia Department of Law, John C. Weitnauer, Alston & Bird LLP, Atlanta, GA, for Defendants.

ORDER

W. HOMER DRAKE, Bankruptcy Judge.

Before the Court is a Motion to Dismiss Complaint, filed by the defendant, Kathy Cox, in her capacity as State Superintendent of Schools (hereinafter the “Defendant”), and a Motion for Leave to File an Amended Complaint, filed by the plaintiff, Gary W. Brown (hereinafter the “Trustee”), in his capacity as the trustee of the bankruptcy estate of the Chapter 7 debtor, Kathryn Burgess Cox. Both motions are opposed. The motion to dismiss requires the Court to determine whether this Court has jurisdiction to entertain the Trustee's requests for a determination of whether certain funds are property of the Defendant's bankruptcy estate.

Facts and Procedural History

The Defendant is the Superintendent of Schools for the State of Georgia. In July and August of 2008, the Defendant completed questionnaires, releases, and contractual agreements necessary to become a contestant on the Fox Network Television show “Are You Smarter than a Fifth Grader?” Contestants on this game show compete to win up to $1 million by correctly answering eleven questions regarding elementary school subjects. One of the questionnaires completed by the Defendant asked “What would you do with $1 million?” In response, the Defendant stated that she would “Donate to Educational Charities.”

The Defendant appeared on the show on August 6, 2008 and answered all eleven questions correctly. When asked on the show what she intended to do with the prize money, the Defendant stated that she would donate the funds to certain educational institutions for the visual and hearing impaired. On that same date, the Defendant executed a Charitable Designation Document requesting that the prize money be transferred to the Fidelity Charitable Gift Fund (hereinafter “Fidelity”). By letter dated October 9, 2008, the Defendant designated as recipients of the charitable gift the Georgia Academy for the Blind in Macon, Georgia; the Georgia School for the Deaf in Cave Spring, Georgia; and The Atlanta Area School for the Deaf in Clarkston, Georgia.

On November 17, 2008, the Defendant and her husband filed a voluntary petition under Chapter 7 of the Bankruptcy Code. At some time in December 2008, Fox Broadcasting Company (hereinafter “Fox”) delivered a $1 million check to Fidelity. Fidelity returned the check to Fox due to its concerns that the funds may be subject to the claims of the Defendant's creditors. Fox retains control of the funds. By letter dated April 16, 2009, the State of Georgia asserted an interest in the funds and demanded the funds be paid to the three educational institutions designated by the Defendant. Likewise, the Trustee demanded turnover of the funds on July 2, 2009. As Fox is uncertain as to the rightful recipient of the funds, Fox continues to hold the funds, pending a determination by this Court.

On July 31, 2009, the Trustee filed a complaint against the Defendant, in her capacity as the State Superintendent of Schools, and Fox. The Trustee asserts that, pursuant to section 541 of the Bankruptcy Code, the funds are property of the Defendant's bankruptcy estate and is seeking a declaratory judgment, pursuant to Federal Rule of Bankruptcy Procedure 7001(9) and 28 U.S.C. § 2201 to the effect that the estate has all of the Defendant's right and title to the funds, notwithstanding the claims of the Georgia Department of Education. The Trustee also seeks an order directing Fox to turn over the funds to the Trustee.

Fox answered the Complaint and filed a counterclaim/crossclaim for interpleader on August 28, 2009, pursuant to Federal Rule of Bankruptcy Procedure 7022.¹ The Defendant answered the Trustee's Complaint on August 31, 2009 and filed a motion to dismiss the Complaint on September 4, 2009. The Defendant's motion to dismiss asserts that the Complaint fails to state a claim upon which relief can be granted and that the relief requested by the Trustee is barred by the Eleventh Amendment to the United States Constitution.

Subsequently, the Trustee filed a motion for leave to amend his complaint. The Trustee proposes to add two counts to the Complaint. These counts include: 1) avoidance and recovery of a fraudulent transfer; and 2) injunctive relief to prevent a continuing violation of the automatic stay. The Defendant opposes the Trustee's motion to amend on the basis that the additional counts fail to state a claim upon which relief can be granted and, therefore, permitting the amendment to add these claims would be futile.

Conclusions of Law

A. Whether the Trustee's Request for Declaratory Judgment Should be Dismissed as Barred by Sovereign Immunity

The Defendant seeks dismissal of the Trustee's request for declaratory judgment on the basis that prosecution of such a claim is barred by the Eleventh Amendment to the United States Constitution. ² “A federal court must dismiss an action barred by the Eleventh Amendment for lack of subject matter jurisdiction.” BHGDN, LLC v. Minnesota, 598 F.Supp.2d 995 (D.Minn.2009); Fed.R.Civ.P. 12(h)(3). Rule 12(b)(1) governs the dismissal of a complaint for lack of subject matter jurisdiction. See Fed. R. Bankr.P. 7012 (incorporating Fed.R.Civ.P. 12(b)(1)). When ruling on a motion to dismiss for lack of subject matter jurisdiction, “[a] court must accept the material factual allegations in the complaint as true, but need not draw inferences favorable to the plaintiff.” In re General Media, Inc., 335 B.R. 66, 71-72 (Bankr.S.D.N.Y.2005) (citing J.S. v. Attica Cent. Schools, 386 F.3d 107, 110 (2d Cir.2004); Shipping Fin. Servs. Corp. v. Drakos, 140 F.3d 129, 131 (2d Cir.1998)). The Court may consider “materials outside of the pleadings to resolve any jurisdictional disputes, but cannot rely on conclusory or hearsay evidence.” Id. at 72. The Trustee has the burden of proving the Court's subject matter jurisdiction by a preponderance of the evidence. See id. (citing Luckett v. Bure, 290 F.3d 493, 497 (2d Cir.2002)).

The Trustee's complaint seeks a declaratory judgment that would determine the true and lawful owner of the prize money. The Trustee asserts that the prize money became property of the Defendant's bankruptcy estate because she appeared on a game show in her personal capacity, won the prize, and, at the time she filed her Chapter 7 petition, had not yet made a charitable donation of the funds. The Defendant submits that this claim for relief is barred by the sovereign immunity of the State of Georgia.

The Eleventh Amendment states that 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. The Eleventh Amendment, however, has long been applied to reach suits against a state by its own citizens. See Tennessee Student Assistance Corp. v. Hood, 541 U.S. 440, 124 S.Ct. 1905, 158 L.Ed.2d 764 (2004); In re Burke, 146 F.3d 1313 (11th Cir.1998). In interpreting the Eleventh Amendment, the United States Supreme Court has held that each of the States is a sovereign entity and is, therefore, not “amenable to the suit of an individual without its consent.” Seminole Tribe of Florida v. Florida, 517 U.S. 44, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996) (quoting Hans v. Louisiana, 134 U.S. 1, 10 S.Ct. 504, 33 L.Ed. 842 (1890)). “Sovereign immunity is not just a ‘personal privilege’ of the state but also a jurisdictional limitation on the power of federal courts,” which “effectively places suits by private parties against states outside the ambit of Article III of the Constitution.” In re Charter Oak Assocs., 361 F.3d 760, 765 (2d Cir.2004) (internal citations omitted).

The sovereign immunity of the States is not absolute and can either be abrogated by Congress or waived by the state. First, “Congress can abrogate a state's immunity if it unequivocally expresses its intent to do so and acts ‘pursuant to a valid exercise of power.’ ” In re Charter Oak Assocs., 361 F.3d 760, 765 (2d Cir.2004) (quoting Seminole Tribe of Florida v. Florida, 517 U.S. 44, 55, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996)). For example, section 106(a) of the Bankruptcy Code attempts to abrogate the sovereign immunity of all governmental units with respect to most disputes that may arise under the Code. See 11 U.S.C.A. § 106(a) (enumerating sixty sections of the Bankruptcy Code and stating that the bankruptcy court “may hear and determine any issue arising with respect to the application of such sections to governmental units”).³ Section 106(b) provides for a deemed waiver of sovereign immunity when the governmental entity engages in certain types of conduct, such as filing a proof of claim for a claim that arises out of the same transaction or occurrence as claims held by the estate against the governmental entity ( i.e., compulsory counterclaims). See 11 U.S.C.A. § 106(b); see also In re Charter Oak Assocs., 361 F.3d 760, 768 (2d Cir.2004); In re Lazar, 237 F.3d 967 (9th Cir.2001); Schlossberg v. Maryland (In re Creative Goldsmiths of Washington, D.C., Inc.), 119 F.3d 1140 (4th Cir.1997). Congress further expanded the constructive waiver concept by enacting section 106(c),...