AER-Aerotron, Inc. v. Texas Dept. of Transp.

• Decision Date: 21 January 1997
• Docket Number: INCORPORATE,No. 95-2987,P,AER-AEROTRO,95-2987
• Citation: 104 F.3d 677
• Parties: , 37 Collier Bankr.Cas.2d 512, 30 Bankr.Ct.Dec. 264, Bankr. L. Rep. P 77,244 laintiff-Appellee, Holmes P. Harden, Trustee-Appellee, v. The TEXAS DEPARTMENT OF TRANSPORTATION, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 677

104 F.3d 677

65 USLW 2493, 37 Collier Bankr.Cas.2d 512,

30 Bankr.Ct.Dec. 264,

Bankr. L. Rep. P 77,244

AER-AEROTRON, INCORPORATED, Plaintiff-Appellee Holmes P. Harden, Trustee-Appellee, v. The TEXAS DEPARTMENT OF TRANSPORTATION, Defendant-Appellant.

No. 95-2987.

United States Court of Appeals Fourth Circuit.

Argued Sept. 26, 1996.

Decided Jan. 21, 1997.

ARGUED: Katherine E. Kasten, Assistant Attorney General, Transportation Division, Texas Attorney General's Office, Austin, TX, for Appellant. J. Stephen Ravel, Bickerstaff, Heath, Smiley, Pollan, Kever & McDaniel, Austin, TX, for Appellees. ON BRIEF: Trawick H. Stubbs, Jr., Judith L. Goldsborough, Neal Brickman, Stubbs, Perdue & Ayers, P.A., New Bern, NC, for Appellees.

Before HALL, NIEMEYER, and HAMILTON, Circuit Judges.

Reversed and remanded by published opinion. Judge HALL wrote the majority opinion, in which Judge HAMILTON joined. Judge NIEMEYER wrote a separate opinion concurring in the judgment.

OPINION

K.K. HALL, Circuit Judge:

The Texas Department of Transportation (TDOT) appeals the district court's order that affirmed the bankruptcy court's order denying TDOT's motion to dismiss an adversary proceeding brought against it by debtor AER-Aerotron, Inc., to recover on various contract claims. The lower courts ruled that the debtor's action was not barred by the Eleventh Amendment because TDOT had waived its immunity by filing a proof of claim in the bankruptcy proceeding. We hold that TDOT did not waive its Eleventh Amendment immunity. Accordingly, we reverse and remand.

I

In 1991, TDOT contracted with AER-Aerotron for the installation of a statewide radio system. Things did not go well, and each side blames the other. In any event, TDOT terminated the contract in December, 1992. In January, 1993, AER-Aerotron filed for chapter 11 bankruptcy in North Carolina. Although not listed in any of the schedules, TDOT was aware of the filing from the outset. Nevertheless, between February and October, 1993, TDOT sent four letters to AER-Aerotron demanding the refund of some $396,000 already paid under the contract.

On April 24, 1994, AER-Aerotron filed an adversary proceeding in the bankruptcy court against TDOT for $224,000 allegedly owed for equipment accepted under the contract, plus other damages arising out of the cancellation of the contract. ¹ Asserting that the action was barred by the Eleventh Amendment, TDOT moved to dismiss.

The bankruptcy court denied the motion to dismiss on the ground that the letters sent by TDOT after it was aware of the bankruptcy filing were an "affirmative demand" that constituted a waiver of its Eleventh Amendment right to immunity from suit in federal court under 11 U.S.C.A. § 106(a) (1993). In re Aer-Aerotron, 172 B.R. 202 (Bankr.E.D.N.C.1994). On appeal, the district court remanded to the bankruptcy court for reconsideration in light of the intervening enactment of the Bankruptcy Reform Act of 1994, Pub.L. No. 103-394, 108 Stat. 4150. On remand, the bankruptcy court found that the letters constituted a "written informal proof of claim" that was "sufficient to waive sovereign immunity" under the new statute. In re AER-Aerotron, Inc., 181 B.R. 268 (Bankr.E.D.N.C.1995). This order was affirmed by the district court, and TDOT brings this appeal.

II

A

The bankruptcy court decided the case the first time under the pre-Reform Act version of § 106(a), which provided that

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.

Although the States generally have Eleventh Amendment immunity from suit in federal court, this immunity may be waived. See, e.g., Port Auth. Trans-Hudson Corp. v. Feeney, 495 U.S. 299, 304, 110 S.Ct. 1868, 1872, 109 L.Ed.2d 264 (1990) ("The Eleventh Amendment bar to suit is not absolute. States may consent to suit in federal court."). The courts had not, however, reached a consensus as to what exactly constituted a waiver under this statute.

At one end of the spectrum were those cases that had held that the mere existence of a claim by the state was sufficient for a waiver. See, e.g., In re Craftsmen, Inc., 163 B.R. 88 (Bankr.N.D.Tex.1993). Further along were cases finding a waiver in affirmative action by the state evidencing a claim, see In re Town & Country Home Nursing Services, Inc., 963 F.2d 1146 (9th Cir.1991) (offsetting overpayments against Medicare reimbursements due debtor), and in written demands to the debtor of the sort at issue in this case. At the furthest point were those cases finding waiver only upon the filing of a formal proof of claim with the court. Although we had not yet addressed the issue in a waiver of immunity case, we had tended to employ a fairly lenient definition of what constituted a claim in other contexts. See, e.g., In re Davis, 936 F.2d 771, 775-76 (4th Cir.1991) ("For an amended claim to be allowed in the absence of a prior written informal claim, the creditor ... must undertake some affirmative action to constitute sufficient notice that he has a claim against the estate."). ²

The bankruptcy court, after determining that "some affirmative conduct" was required before waiver would be found, held that the post-petition letters sent to AER-Aerotron constituted a waiver of the State's immunity from suit in federal court by the debtor to recover for a claim arising out of the same contract that was the source of TDOT's claim. TDOT appealed to the district court.

B

On October 22, 1994, while the appeal of the first bankruptcy court decision was pending, the 1994 Bankruptcy Reform Act went into effect. The Reform Act purports to abrogate state governmental immunity in numerous respects; for example, states may not claim immunity from sanctions for violating the automatic stay provisions. See 11 U.S.C.A. § 106(a)(1) (West Supp.1996). However, the waiver provisions of § 106(a) of the former statute found their way into the Reform Act in the following form:

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 governmental 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.A. § 106(b) (West Supp.1996) (emphasis added). In adding the language highlighted above, Congress clearly eliminated those situations in which the mere existence of a claim would suffice to constitute a waiver. The question on remand to the bankruptcy court was how much more the Reform Act had changed the rules for finding a waiver. ³

The bankruptcy court framed the question as whether the new § 106(b) required that a formal proof of claim be filed in order for a waiver to be found. The legislative history was sparse:

Section 106(b) is clarified by allowing a compulsory counterclaim to be asserted against a governmental unit only where such unit has actually filed a proof of claim in the bankruptcy case. This had the effect of overruling contrary case law, such as [3 named cases] that interpreted § 106(a) of [pre-Reform Act] law.

Bankruptcy Reform Act of 1994--Section-by-Section Description; 140 Cong.Rec. H10752-01, H10766 (1994). The district court noted that, inasmuch as each of the three cases cited in the congressional report held that the mere existence of a claim was enough to constitute a § 106(a) waiver, the legislative history points toward eliminating only those waivers unaccompanied by affirmative action by the governmental unit. The court then concluded that informal written proofs of claims, such as TDOT's letters to AER-Aerotron, continue to constitute waivers in the same manner as under pre-Reform Act law; instead of using the term "filed ... in the case," Congress "could very easily have chosen to include the phrase 'filed with the court.' " ⁴ Texas Dept. of Transp. v. AER-Aerotron, No. 5:95-CV-146-H at 11 (E.D.N.C. Oct. 10, 1995) (order). AER-Aerotron appealed again.

C

The statutory interpretation issue is simply stated: Does a written post-petition demand sent to a debtor ⁵ satisfy the statutory waiver requirement of a "filing of a proof of a claim in the case"? At a minimum, as noted above, § 106(b) removes from consideration the possibility that the mere existence of a claim against the debtor by the State still constitutes a waiver of that State's immunity. Even if the language of the statute were not sufficient on this point, the inclusion of the three cases noted in the legislative history as being expressly overruled settles the issue. The bankruptcy and district courts erred, however, in concluding that because only these three cases were expressly noted, Congress intended to maintain the expansive view of waiver "commonly found in bankruptcy practice...." Id. at 7.

When we are confronted with a question of whether a State has consented to be sued, the general rule is that we will find a waiver "only where stated by the most express language or by such overwhelming implications from the text as [will] leave no room for any other reasonable construction." Welch v. Texas Dept. of Highways and Public Transp., 483 U.S. 468, 473, 107 S.Ct. 2941, 2946, 97 L.Ed.2d 389 (1987) (internal citations and quotations omitted). Perhaps the standard should be no less stringent when we are considering a Congressional attempt to define waiver. However, our interpretation of § 106(b) rests on that most basic guide to the meaning of statutes, the words of the statute itself.

The new § 106(b) injects three new related requirements: "filed," "proof of claim," and "in the case." Surely something in writing--something capable of being "filed"--is required, and "in the case" connotes the involvement of the bankruptcy court clerk to some degree with the written filing. "Proof...