Connecticut Performing Arts Foundation v. Brown
| Citation | 47 BR 911 |
| Decision Date | 07 January 1985 |
| Docket Number | Civ. No. B-83-295. |
| Parties | CONNECTICUT PERFORMING ARTS FOUNDATION, INC. v. Hon. George F. BROWN, Tax Commissioner of the State of Connecticut. |
| Court | U.S. District Court — District of Minnesota |
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John P. Mulqueen, Jr., Groob, Ressler & Mulqueen, New Haven, Conn., Robert Wechsler, Stamford, Conn., for plaintiff.
Richard K. Greenberg, Asst. Atty. Gen., Hartford, Conn., for defendant.
This action is an appeal from a decision of the bankruptcy court in an adversary proceeding originally brought in the Connecticut Court of Common Pleas as an appeal from a revocation of a tax exemption by the state tax commissioner. The plaintiff, Connecticut Performing Arts Foundation ("CPAF"), filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code in August, 1981. In November, 1981, CPAF removed the tax appeal to the bankruptcy court. After taking testimony and reviewing the record, the bankruptcy judge issued a decision on December 23, 1982, reversing the tax commissioner's revocation of CPAF's exemption and ordering the State of Connecticut to pay CPAF the amount of any funds collected from CPAF as a result of the revocation of the exemption. Because I construe the Connecticut law differently from the bankruptcy court and, in any event, disagree with the remedy, the decision of the bankruptcy court is reversed.
CPAF is a nonprofit corporation organized and existing under the laws of the State of Connecticut. In 1962 CPAF applied to the Internal Revenue Service ("IRS") for a federal income tax exemption under § 501(c)(4) of the Internal Revenue Code ("IRC"). The IRS denied the exemption, in part because it found that the operators of the Oakdale Musical Theater Company ("Oakdale") controlled CPAF's operations to the financial advantage of Oakdale. CPAF filed an appeal of this determination but withdrew the appeal before it was acted upon.
Sometime prior to April 27, 1971, CPAF met with representatives of the Connecticut Tax Department in order to obtain an exemption from the Connecticut tax on admissions2 which imposed a ten per cent tax on the sale of tickets to events such as those sponsored by CPAF, but permitted certain organizations to be exempted from the tax.3 CPAF claimed to qualify for an exemption because it was "of a similar nature" to an organization eligible for an exemption under § 501(c)(3) of the IRC.
At a hearing held on April 27, 1971, CPAF set forth facts showing that it was similar to organizations exempt under § 501(c)(3) of the IRC. It also disclosed that it had been denied an exemption under § 501(c)(4). In June, 1971, a new admissions tax was adopted by the Connecticut General Assembly and CPAF renewed its exemption application. Additional hearings were held on September 17 and 29, 1971, and on or about April 5, 1972, the tax commissioner ruled that CPAF was qualified for an exemption from the 1971 act. The exemption was made retroactive to July 1, 1971.
On April 27, 1973, the tax commissioner sent CPAF a letter advising CPAF that its exemption would expire at the end of 1973 unless CPAF obtained a ruling from the IRS that it qualified for a federal tax exemption. CPAF contested the commissioner's ruling at a hearing held on December 26, 1973. On January 25, 1974, the commissioner advised CPAF that its exemption was withdrawn because a "subsequent investigation by the department revealed that the organization was denied an exemption from federal income tax on March 9, 1962..." After a rehearing conducted on June 26, 1974, the tax commissioner ruled on December 11, 1974, that the exemption was properly revoked because of "new information", namely the March 9, 1962, denial of CPAF's application for a federal income tax exemption. CPAF brought its appeal to the Court of Common Pleas on January 5, 1975, and removed the action to the bankruptcy court in November, 1982.
The bankruptcy court reviewed the commissioner's decision to revoke the exemption pursuant to Conn.Gen.Stat. § 12-554.4 It found that the commissioner was aware of the 1962 IRS ruling when he granted CPAF's exemption. Therefore, since there was no "new information" to justify revoking the exemption, the bankruptcy court reversed the commissioner's ruling and ordered a refund of all admissions taxes paid by CPAF. The state has taken a timely appeal from the bankruptcy court's ruling.
The State of Connecticut argues that the bankruptcy court was without jurisdiction in this matter for two reasons. It claims, first, that the Eleventh Amendment and the doctrine of sovereign immunity bar the entry of a monetary judgment against the state and, second, that the state court proceeding was improperly removed to the bankruptcy court.
The state claims that the bankruptcy court was without jurisdiction to order it to refund taxes to CPAF by virtue of the Eleventh Amendment and the doctrine of sovereign immunity. It is true that, absent its consent, a state may not be sued in federal court. Pennhurst State School & Hospital v. Halderman, 465 U.S. 89, ___, 104 S.Ct. 900, 907, 79 L.Ed.2d 67 (1984). Furthermore, a suit against a state official is not permitted when the relief sought is the payment of money by the state as compensation for "a monetary loss resulting from a past breach of a legal duty." Edelman v. Jordan, 415 U.S. 651, 668, 94 S.Ct. 1347, 1358, 39 L.Ed.2d 662 (1974).5 Therefore, absent some bar to the application of the doctrine of sovereign immunity, the bankruptcy court should not have entertained this action.
Section 106(a) of the Bankruptcy Code, 11 U.S.C. § 106(a), provides 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." The state argues that this waiver is not applicable in this case because it is a waiver of "sovereign immunity," and not a waiver of the Eleventh Amendment. However, closer analysis shows that the immunity applicable in this case is sovereign immunity, and not the Eleventh Amendment.
By its terms, the Eleventh Amendment prohibits suits in federal court "commenced or prosecuted by one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State." (emphasis supplied) The amendment does not itself prevent suits against a state by its own citizens. However, in Hans v. Louisiana, 134 U.S. 1, 10 S.Ct. 504, 33 L.Ed. 842 (1890), the Supreme Court determined that the policy behind the Eleventh Amendment, namely state sovereignty, prevented a federal court from entertaining a suit brought against a state by its own citizens. The technical distinction between Eleventh Amendment "immunity" and sovereign immunity was noted by the court in Pennhurst:
That a State may not be sued without its consent is a fundamental rule of jurisprudence having so important a bearing upon the construction of the Constitution of the United States that it has become established by repeated decisions of this court that the entire judicial power granted by the Constitution does not embrace authority to entertain a suit brought by private parties against a state without consent given: not one brought by citizens of another State, or by citizens or subjects of a foreign State, because of the Eleventh Amendment; and not even one brought by its own citizens, because of the fundamental rule of which the Amendment is but an exemplification. Ex Parte State of New York No. 1, 256 U.S. 490, 497, 41 S.Ct. 588, 589, 65 L.Ed. 1057 (1921) (emphasis added)
465 U.S. at ___, 104 S.Ct. at 907. See also, Parden v. Terminal R. Co., 377 U.S. 184, 192, 84 S.Ct. 1207, 1212, 12 L.Ed.2d 233 (1964).
Because the Eleventh Amendment is an "exemplification" of the doctrine of sovereign immunity, it is understandable that the amendment has come to be used as a shorthand expression of the principle that a state may not be sued by either its own citizens or citizens of another state. However, in determining the extent of the waiver contained in § 106(a), it is necessary to differentiate between the doctrine of sovereign immunity and the application of the Eleventh Amendment.
Because CPAF is a "citizen" of the State of Connecticut, it is the doctrine of sovereign immunity that can be asserted by the state, and not the Eleventh Amendment. Therefore, if the waiver of sovereign immunity contained in § 106(a) is effective as a legitimate exercise of congressional authority, and is applicable in this case, the bankruptcy court could exercise its jurisdiction over the state.
In Parden v. Terminal R. Co., 377 U.S. 184, 84 S.Ct. 1207, 12 L.Ed.2d 233 (1964), the Supreme Court was confronted with the question of whether the Federal Employee Liability Act (FELA) permitted a suit against a state in federal court. The Court noted that a state can consent to a suit in federal court and also noted that, in adopting the Constitution, the states "surrender a portion of their sovereignty when they granted Congress the power to regulate commerce." Id. at 191, 84 S.Ct. at 1212. The court went on to note that when a state engaged in an activity subject to the commerce power, in that case operating a railroad, it necessarily consented to suits under the FELA. Id. at 192, 84 S.Ct. at 1212.
Similarly, the states have granted Congress authority under the bankruptcy clause of the Constitution. When a state engages in an activity that is subject to the bankruptcy power, it is proper for Congress to find that the state has waived its sovereign immunity.6 Section 106(a) provides that, when a governmental unit has made a claim against the estate, it has waived its immunity with respect to claims against the state that arose out of the same transaction.7 By making a claim against...
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