995 Fifth Ave. Associates, L.P., In re

• Decision Date: 08 May 1992
• Docket Number: D,No. 416,416
• Citation: 22 B.C.D. 1420,963 F.2d 503
• Parties: , 26 Collier Bankr.Cas.2d 1162, 22 Bankr.Ct.Dec. 1420, Bankr. L. Rep. P 74,546 In re: 995 FIFTH AVENUE ASSOCIATES, L.P., Debtor. 995 FIFTH AVENUE ASSOCIATES, L.P., Plaintiff-Appellee, v. NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE; James W. Wetzler, as Commissioner of Taxation and Finance; Edward V. Regan, as Comptroller of the State of New York, Defendants-Appellants. ocket 91-5038.
• Court: U.S. Court of Appeals — Second Circuit

Page 503

963 F.2d 503

60 USLW 2671, 26 Collier Bankr.Cas.2d 1162,

22 Bankr.Ct.Dec. 1420, Bankr. L. Rep. P 74,546

In re: 995 FIFTH AVENUE ASSOCIATES, L.P., Debtor 995 FIFTH AVENUE ASSOCIATES, L.P., Plaintiff-Appellee, v. NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE; James W Wetzler, as Commissioner of Taxation and Finance Edward V. Regan, as Comptroller of the State of New York Defendants-Appellants.

No. 416, Docket 91-5038.

United States Court of Appeals, Second Circuit.

Argued Oct. 28, 1991.

Decided April 13, 1992.

Amended Opinion May 8, 1992.

David S. Cook, Sr. Atty., Atty. Gen.'s Office, State of N.Y., New York City (Robert Abrams, Atty. Gen., Frederic L. Lieberman, Marcie S. Mintz, Asst. Attys. Gen., of counsel), for defendants-appellants.

Joshua J. Angel, New York City (Leonard H. Gerson, Ira R. Abel, Angel & Frankel, P.C., of counsel), for plaintiff-appellee.

Before OAKES, Chief Judge, FEINBERG and ALTIMARI, Circuit Judges.

OAKES, Chief Judge:

This appeal requires us to decide whether the Eleventh Amendment bars a debtor's suit to recover taxes paid to the State of New York, and whether 11 U.S.C. § 1146(c) (1988) exempts the debtor from payment of the New York gains tax on the transfer of property, N.Y.Tax Law § 1441 (McKinney 1987). The United States Bankruptcy Court for the Southern District of New York, Tina L. Brozman, Bankruptcy Court Judge, found that the New York State Department of Taxation and Finance, James W. Wetzler, as New York Commissioner of Taxation and Finance, and Edward V. Regan, as Comptroller of the State of New York (collectively "State of New York," "New York," or "appellant") waived the State of New York's immunity from suit by filing a proof of claim in the bankruptcy proceeding, found that the debtor was exempt from the gains tax, and accordingly ordered New York to refund the gains tax paid by the debtor, 995 Fifth Avenue Associates, L.P. ("Fifth Avenue"). New York appealed to the United States District Court for the Southern District of New York. Leonard B. Sand, District Judge, affirmed the opinion and order of the bankruptcy court and the State of New York now appeals.

For the reasons set forth below, we affirm in part and reverse in part.

BACKGROUND

The relevant facts are not in dispute. The debtor, Fifth Avenue, operated the Stanhope Hotel. It filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code in February of 1988 and thereafter continued to operate the hotel as debtor in possession. Pursuant to a plan of reorganization, the bankruptcy court authorized the sale of Fifth Avenue's interest in the hotel at a price of $76 million. The court's order specifically declared that, because the sale was part of a plan of reorganization, § 1146(c) rendered the sale exempt from all transfer taxes.

On January 12, 1989, the day before the scheduled closing, in accordance with N.Y.Tax Law § 1447 (McKinney 1987), New York issued a Tentative Assessment and Return imposing a gains tax of $2,608,603.80 on the sale of the property. New York subsequently denied the debtor's request for an exemption from the tax under 11 U.S.C. § 1146(c). Because New York law prohibits recordation of the deed without payment of tax due under a Tentative Assessment and Return, Fifth Avenue could not close the sale as scheduled without paying the gains tax. Faced with this dilemma, the debtor paid the tax under protest, enabling it to record the deed and close the sale.

In March 1989, the debtor brought an adversary proceeding in bankruptcy court against the State of New York, seeking, inter alia, a declaration that § 1146(c) exempted the debtor from the gains tax, and an order directing that the payment made to New York be refunded. Some months later, after the bankruptcy court heard oral argument in the proceeding, the State of New York filed an administrative expense claim for gains tax liability of $2,137,496.76, an amount in addition to the approximately $2.6 million already imposed by the state and paid by the debtor.

The bankruptcy court found that the debtor's sale was exempt from the gains tax under § 1146(c). In response to the State of New York's Eleventh Amendment immunity argument, the bankruptcy court held that pursuant to 11 U.S.C. § 106(a) (1988), New York had waived its Eleventh Amendment immunity by filing the administrative expense claim for additional gains tax. The district court affirmed the decision and order of the bankruptcy court.

DISCUSSION

I. Eleventh Amendment Immunity

Appellant argues that the Eleventh Amendment barred both the bankruptcy court and the district court from considering whether the debtor was exempt from payment of the New York gains tax. The Eleventh Amendment, where applicable, deprives a federal court of jurisdiction. See Edelman v. Jordan, 415 U.S. 651, 678, 94 S.Ct. 1347, 1363, 39 L.Ed.2d 662 (1974). Thus, prior to addressing the merits of this case we must first determine whether Eleventh Amendment immunity bars our jurisdiction. We hold that it does not.

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.

The reach of the amendment was judicially expanded beyond its text in Hans v. Louisiana 34 U.S. 1, 10 S.Ct. 504, 33 L.Ed. 842 (1890), to bar citizens from suing their own states in federal court. The Supreme Court has also consistently held that federal suits by private citizens that seek damages to be paid out of the state treasury are barred by the Eleventh Amendment. See, e.g., Quern v. Jordan, 440 U.S. 332, 337, 99 S.Ct. 1139, 1143, 59 L.Ed.2d 358 (1979).

Despite this general bar to suits against states created by the Eleventh Amendment, there are two well-established ways to provide judicial power over such cases: abrogation of immunity by Congress and waiver of immunity by a state. Pennhurst State School & Hosp. v. Halderman, 465 U.S. 89, 99, 104 S.Ct. 900, 907, 79 L.Ed.2d 67 (1984). A purported Congressional abrogation of Eleventh Amendment immunity is not effective, however, unless it meets a two-part test set forth by the Court. First, Congress must make its intent to abrogate Eleventh Amendment immunity "unmistakably clear." Pennsylvania v. Union Gas Co., 491 U.S. 1, 7, 109 S.Ct. 2273, 2277, 105 L.Ed.2d 1 (1989) (quoting Atascadero State Hosp. v. Scanlon, 473 U.S. 234, 242, 105 S.Ct. 3142, 3147, 87 L.Ed.2d 171 (1985)). Second, the constitutional provision under which Congress legislates its purported abrogation must grant Congress the power to override the Eleventh Amendment. Union Gas, 491 U.S. at 13-23, 109 S.Ct. at 2280-86. Abrogation of Eleventh Amendment immunity typically occurs when Congress enacts a new federal statutory cause of action. See, e.g., Fitzpatrick v. Bitzer, 427 U.S. 445, 456, 96 S.Ct. 2666, 2671, 49 L.Ed.2d 614 (1976) (Eleventh Amendment immunity abrogated for suit to recover damages from the State for gender-based employment discrimination under Title VII); Union Gas Co., 491 U.S. at 23, 109 S.Ct. at 2286 (Eleventh Amendment immunity abrogated for suit to recover costs from the State for environmental clean-up under CERCLA).

Waiver of Eleventh Amendment immunity, in contrast to abrogation, is not hinged to a specific federal statutory cause of action. Instead, it is triggered by some affirmative activity of a state, such as a state's enactment of legislation by which it consents to be sued in federal court, see, e.g., Port Auth. Trans-Hudson Corp. v. Feeney, 495 U.S. 299, 307-09, 110 S.Ct. 1868, 1873-75, 109 L.Ed.2d 264 (1990), and, as here, a state's participation in litigation in federal court. In Clark v. Barnard, 108 U.S. 436, 447-48, 2 S.Ct. 878, 882-84, 27 L.Ed. 780 (1883), for example, the State of Rhode Island was deemed to have waived its Eleventh Amendment immunity by intervening in a case as a claimant of a fund. And the Court in Gardner v. New Jersey, 329 U.S. 565, 574, 67 S.Ct. 467, 472, 91 L.Ed. 504 (1947), held that where the State of New Jersey filed a claim against a fund in bankruptcy court, in a case where no judgment was sought against the State, the State waived its immunity. Thus, as the district court noted, it is long-established that a state's participation in a bankruptcy proceeding can trigger a waiver of immunity.

The State of New York does not take issue with this general principle. Rather, it argues that the provision of the Bankruptcy Code under which the bankruptcy court deemed the State to have waived its Eleventh Amendment immunity--11 U.S.C. § 106(a)--represents an abrogation provision, not a waiver scheme. As an abrogation provision, New York contends, § 106(a) is unconstitutional because Congress lacks the authority to abrogate sovereign immunity when enacting legislation under the Bankruptcy Clause, U.S. Const. art. I, § 8, cl. 4. We disagree with New York's characterization of § 106(a).

Section 106(a) provides:

A governmental unit is deemed to have waived sovereign immunity with respect to any claim against such governmental unit that is property of the estate and that arose out of the same transaction or occurrence out of which such governmental unit's claim arose.

The plain meaning of these words obviously reflects Congress's intent to provide a waiver of immunity where "a governmental unit" files a claim in the bankruptcy court. The scope of the waiver, of course remains limited; upon filing a claim the governmental unit subjects itself only to claims that arose from the same transaction or occurrence that formed the basis of the governmental unit's claim. Our conclusion derives further support from two recent cases where the Supreme Court, albeit in dicta, stated that § 106(a) provides for a limited waiver of immunity. See Hoffman v. Connecticut Income Maint. Dept., 492 U.S. 96, 101-02, 109 S.Ct. 2818, 2822-23, 106...