Fugate v. Greeneville Light & Power Sys. (In re MD Recycling, Inc.)

• Citation: 57 Bankr.Ct.Dec. 9,475 B.R. 885
• Decision Date: 03 August 2012
• Docket Number: Adversary No. 12–5014.,Bankruptcy No. 10–52148.
• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Eastern District of Tennessee
• Parties: In re MD RECYCLING, INC., Debtor. Margaret B. Fugate, Trustee, Plaintiff, v. Greeneville Light & Power System, Defendant.

475 B.R. 885
57 Bankr.Ct.Dec. 9

In re MD RECYCLING, INC., Debtor.
Margaret B. Fugate, Trustee, Plaintiff,
v.
Greeneville Light & Power System, Defendant.

Bankruptcy No. 10–52148.
Adversary No. 12–5014.

United States Bankruptcy Court,
E.D. Tennessee.

Aug. 3, 2012.

[475 B.R. 886]

D. Stephen Duncan, Esq., Johnson City, TN, for Plaintiff Margaret B. Fugate, Trustee.

Jason Brill Shorter, Esq., Johnson City, TN, for Defendant Greeneville Light & Power System.

Cathy Moses, Esq., Washington, D.C., for Intervener United States of America.

MEMORANDUM
MARCIA PHILLIPS PARSONS, Chief Judge.

This is a preference action by the chapter 7 trustee to avoid and recover pursuant

[475 B.R. 887]

to 11 U.S.C. §§ 547 and 550 a $47,776.62 prepetition payment by the debtor MD Recycling, Inc. to Greeneville Light & Power System (“GLPS”). Presently before the court is GLPS's motion to dismiss based on its assertion that it has sovereign immunity from suit under the Eleventh Amendment to the United States Constitution. For the reasons set forth below, GLPS's motion to dismiss will be denied. This is a core proceeding. See28 U.S.C. § 157(b)(2)(F).

I.

On August 16, 2010, MD Recycling, Inc. filed for bankruptcy relief under chapter 7. Margaret B. Fugate was appointed trustee. On March 13, 2012, she timely commenced this preference adversary proceeding against GLPS. In response, GLPS filed on April 13, 2012, a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted.¹ GLPS asserts that as an agency of the Town of Greeneville, it is a division of the State of Tennessee, thus immune from suit under Eleventh Amendment sovereign immunity. In its motion, GLPS acknowledges that the United States Supreme Court has expressly held that sovereign immunity does not bar actions by a bankruptcy trustee to set aside preferential transfers to a state or state agency. See Cent. Va. Cmty. Coll. v. Katz, 546 U.S. 356, 126 S.Ct. 990, 163 L.Ed.2d 945 (2006). GLPS argues, however, that the Supreme Court implicitly rejected Katz in two recent decisions. The Trustee and the United States of America, as intervener, disagree. They also assert that GLPS has failed to establish that it is an arm of the state such that it is entitled to invoke sovereign immunity, even if GLPS is correct that Katz is no longer good law.

II.

Turning to the latter issue first, it is well-settled that not all governmental entities are entitled to assert Eleventh Amendment sovereign immunity. See Ernst v. Rising, 427 F.3d 351, 358 (6th Cir.2005). Rather, only arms of the state can assert the state's immunity. Gragg v. Ky. Cabinet for Workforce Dev., 289 F.3d 958, 963 (6th Cir.2002). “The entity asserting Eleventh Amendment immunity has the burden to show that it is entitled to immunity, i.e., that it is an arm of the state.” Lowe v. Hamilton Cnty. Dep't of Job & Family Servs., 610 F.3d 321, 324 (6th Cir.2010). Whether an entity is an arm of the state for sovereign immunity purposes is a question of federal law. Id. at 330 (citing

[475 B.R. 888]

Regents of the Univ. Cal. v. Doe, 519 U.S. 425, 429, n. 5, 117 S.Ct. 900, 137 L.Ed.2d 55 (1997)). Under federal law, sovereign immunity does not generally extend to units of local government such as cities and counties. See Bd. of Trs. of the Univ. of Ala. v. Garrett, 531 U.S. 356, 369, 121 S.Ct. 955, 148 L.Ed.2d 866 (2001); see also N. Ins. Co. of New York v. Chatham Cnty., 547 U.S. 189, 193–94, 126 S.Ct. 1689, 164 L.Ed.2d 367 (2006) (“Municipalities, unlike States, do not enjoy a constitutionally protected immunity from suit.” “This is true even when ... such entities exercise a slice of state power.”) (quoting Jinks v. Richland Cnty., 538 U.S. 456, 466, 123 S.Ct. 1667, 155 L.Ed.2d 631 (2003), and Lake Cnty. Estates, Inc. v. Tahoe Reg'l Planning Agency, 440 U.S. 391, 401, 99 S.Ct. 1171, 59 L.Ed.2d 401 (1979)); 2 Collier on Bankruptcy ¶ 106.02[2][c] (16th ed. 2012). Stated differently, “state instrumentalities that properly are characterized as political subdivisions, rather than arms of the state, are not entitled to sovereign immunity.” Lowe, 610 F.3d at 325 (citing Ernst, 427 F.3d at 358–59).

Whether a governmental entity is an “arm of the state” entitled to assert Eleventh Amendment sovereign immunity, as distinguished from a “political subdivision,” which is not immune, is governed by four factors: (1) the state's potential liability for a judgment against the entity; (2) the language employed by state courts and state statutes to describe the entity, as well as the degree of control and veto power which the state has over the entity; (3) whether state or local officials appoint the entity's board members; and (4) whether the entity's functions fall under the traditional purview of state or local government. Lowe, 610 F.3d at 325. The first factor, the potential liability of the State for the judgment, is the “foremost factor.” Id. Moreover, the fact that a governmental entity's programs “are designed to serve a specific local community weighs against characterizing it as an arm of the state, rather than a political subdivision.” Id. at 332.

In the present case, as the sole support for its proposition that it is an arm of the State of Tennessee, GLPS cites a 1932 Tennessee Supreme Court decision, White v. Callis, 164 Tenn. 462, 51 S.W.2d 485 (1932), wherein the court stated, in the context of holding that the Tennessee Legislature may constitutionally regulate the amount of the privilege tax levied by a chartered municipality, that “[t]he municipality is an arm of the state, was created by it, and the Legislature may repeal its charter altogether or modify or amend it at pleasure.” Id. at 485. As an expression of state law, the Tennessee Supreme Court's statement is instructive as evidence regarding the second factor of the four Lowe factors. However, GLPS has presented no proof as to the remaining three factors, including the most important, the State of Tennessee's potential liability for the judgment. Further, although far from determinative, the fact that GLPS is named after the Town of Greeneville suggests that its programs are designed to serve a specific local community, the Town of Greeneville and its surrounding area. Because cities and their agencies are generally recognized as non-immune political subdivisions and otherwise because GLPS has failed to carry its burden of establishing that it is an arm of the State of Tennessee entitled to invoke Eleventh Amendment sovereign immunity, GLPS's motion to dismiss on the basis of sovereign immunity must be denied.

Notwithstanding this conclusion, the court will address the more substantive basis for GLPS's motion to dismiss, its argument that the Supreme Court's Katz decision is no longer controlling. At issue in Katz was whether Congress's abrogation of state sovereign immunity in

[475 B.R. 889]

§ 106(a) of the Bankruptcy Code was valid. Katz, 546 U.S. at 361, 126 S.Ct. 990. Pursuant to this section, “[n]otwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to [certain enumerated provisions of the Bankruptcy Code set forth in 11 U.S.C. § 106(a)(1), including §§ 547 and 550].” 11 U.S.C. § 106(a). Under the Bankruptcy Code, the term “governmental unit” is defined broadly to include federal, state, local, and foreign governmental units. See11 U.S.C. § 101(27).

Prior to Katz, the circuits were split over whether Congress has the constitutional authority under the Bankruptcy Clause of the United States Constitution to abrogate the states' Eleventh Amendment immunity. 2 Collier on Bankruptcy ¶ 106.02[1] (16th ed. 2012). Five concluded that it did not, while one, the Sixth Circuit Court of Appeals, concluded that it did. See Hood v. Tenn. Student Assistance Corp. (In re Hood), 319 F.3d 755, 761 (6th Cir.2003) (citing cases). The disagreement concerned the Supreme Court's 1996 decision in Seminole Tribe v. Florida, 517 U.S. 44, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996), wherein the Court held that the Indian Commerce Clause of the Constitution, which authorizes...