Creative Goldsmiths of Washington, D.C., Inc., In re

• Decision Date: 22 July 1997
• Docket Number: No. 96-1895,96-1895
• Citation: 119 F.3d 1140
• Parties: 38 Collier Bankr.Cas.2d 574, 31 Bankr.Ct.Dec. 218, Bankr. L. Rep. P 77,457 In re CREATIVE GOLDSMITHS OF WASHINGTON, D.C., INCORPORATED, Debtor. Roger SCHLOSSBERG, Trustee, Plaintiff-Appellant, v. STATE OF MARYLAND, COMPTROLLER OF THE TREASURY, Defendant-Appellee, UNITED STATES TRUSTEE, Party-in-interest, v. UNITED STATES of America, Intervenor.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1140

119 F.3d 1140

38 Collier Bankr.Cas.2d 574, 31 Bankr.Ct.Dec. 218,

Bankr. L. Rep. P 77,457

In re CREATIVE GOLDSMITHS OF WASHINGTON, D.C., INCORPORATED, Debtor.

Roger SCHLOSSBERG, Trustee, Plaintiff-Appellant, v. STATE OF MARYLAND, COMPTROLLER OF THE TREASURY, Defendant-Appellee, UNITED STATES TRUSTEE, Party-in-interest, v. UNITED STATES of America, Intervenor.

No. 96-1895.

United States Court of Appeals, Fourth Circuit.

Argued April 11, 1997.

Decided July 22, 1997.

ARGUED: Roger Schlossberg, Schlossberg & Associates, Hagerstown, MD, for Appellant. Andrew Howard Baida, Assistant Attorney General, Annapolis, MD, for Appellee. ON BRIEF: J. Joseph Curran, Jr., Attorney General of Maryland, Gerald Langbaum, Assistant Attorney General, Annapolis, MD; Wallace E. Brooks, Sylvia J. Brokos, Comptroller of the Treasury, Baltimore, MD, for Appellee. Frank W. Hunger, Assistant Attorney General, Lynne A. Battaglia, United States Attorney for the District of Maryland, Mark B. Stern, Michael E. Robinson, Civil Division, United States Department of Justice, Washington, DC, for Intervenor.

Before HALL, WILKINS, and NIEMEYER, Circuit Judges.

Vacated and remanded with instructions to dismiss by published opinion. Judge NIEMEYER wrote the opinion, in which Judge K.K. HALL and Judge WILKINS joined.

OPINION

NIEMEYER, Circuit Judge:

Roger Schlossberg, a trustee in bankruptcy, sued the State of Maryland Comptroller of the Treasury in federal court to avoid as a preference the bankruptcy debtor's $4,382 payment of income taxes made to the state within 90 days of the filing of the bankruptcy petition. See 11 U.S.C. § 547(b). In the courts below, the state contended successfully that the debtor's income tax payment was not a preference because it was made in the "ordinary course of business." See 11 U.S.C § 547(c)(2)(B). On the trustee's appeal to this court, the state contends for the first time that it is immune from the trustee's suit under the Eleventh Amendment, and the trustee responds that, under the Bankruptcy Code, the state is "deemed to have waived [its Eleventh Amendment] sovereign immunity" because it filed a proof of claim for sales taxes and withholding taxes. See 11 U.S.C. § 106(b). Because the state challenges 11 U.S.C. § 106 under the Eleventh Amendment, the United States intervened. See 28 U.S.C. § 2403.

Because we conclude that Congress did not have the power to abrogate the state's sovereign immunity from federal jurisdiction and that the state did not waive its immunity with regard to the present suit, we vacate the district court's judgment for lack of jurisdiction and remand the case with instructions to dismiss the trustee's adversary action against the state.

I

On March 12, 1992, creditors of Creative Goldsmiths of Washington, D.C., Inc., a Maryland corporation, filed a petition for involuntary bankruptcy against Creative Goldsmiths under Chapter 7 of the Bankruptcy Code. The bankruptcy court appointed Roger Schlossberg as trustee for the bankruptcy estate. During the course of bankruptcy administration, the trustee filed an adversary proceeding in the bankruptcy court against the State of Maryland Comptroller of the Currency to avoid as a preference the payment of $4,382 in income taxes made by Creative Goldsmiths to the state within 90 days of the filing of the bankruptcy petition. The trustee alleged that when the taxes were paid, Creative Goldsmiths was insolvent, and as a result of the payment Maryland received more than it would have as a claimant for the taxes in the Chapter 7 proceeding. In response to the trustee's complaint, Maryland contended that the $4,382 payment was made "in the ordinary course of business between the debtor and the Comptroller, and as such, is not subject to avoidance." The parties stipulated to the following operative facts.

Pursuant to Creative Goldsmiths' application for an extension of time in which to file its 1990 corporate income tax return, the state granted a six-month extension as provided by Maryland law. See Md.Code Ann. Tax-Gen'l Art. § 10-823; Md. Regs.Code tit. 03 § 04.03.04(C). Creative Goldsmiths had filed for and obtained similar extensions in each of the two preceding tax years. With the extension for filing its 1990 income tax return, Creative Goldsmiths was required to pay taxes still owed, as well as any penalties and interest due, by December 14, 1991.

Within the extension period, Creative Goldsmiths paid Maryland $4,382 in taxes but paid no penalties or interest. At the time Creative Goldsmiths paid its taxes, it was insolvent and it made payment within 90 days of the subsequently filed involuntary petition in bankruptcy.

Although Creative Goldsmiths owed Maryland $1,653.48 in interest and penalties with respect to its 1990 corporate income taxes, the state did not seek relief from the automatic stay imposed by statute, see 11 U.S.C. § 362, or otherwise attempt to improve its position for payment of that sum. Moreover, it did not file a proof of claim for it. But Maryland did file a proof of claim for $1,400.85 in sales taxes and withholding taxes that Creative Goldsmiths collected or should have collected from third persons.

On cross-motions for summary judgment, the bankruptcy court ruled in favor of Maryland, concluding that "the Transfer, in the amount of $4,382 to the Comptroller of the Treasury, was made in the ordinary course of business and is not avoidable under 11 U.S.C. § 547." The district court affirmed and entered judgment in favor of Maryland. This appeal followed.

II

The trustee, observing that the state raises Eleventh Amendment immunity for the first time on this appeal, contends that in any event the Bankruptcy Code, 11 U.S.C. § 106(a) abrogates that immunity and authorizes his action against the state. He also argues that Maryland waived any sovereign immunity by filing a proof of claim in the bankruptcy court for sales taxes and withholding taxes. See 11 U.S.C. § 106(b). Accordingly we address first the question of whether Maryland can assert Eleventh Amendment immunity for the first time on appeal.

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." It is well-established that this bar to suits against states in federal courts applies not only to actions brought by citizens of another state, but also to those brought by citizens of the state involved. See Hans v. Louisiana, 134 U.S. 1, 10, 10 S.Ct. 504, 505, 33 L.Ed. 842 (1890). The Eleventh Amendment confirms that each state is a sovereign entity and that "it is inherent in the nature of sovereignty not to be amenable to the suit of an individual without its consent." Seminole Tribe of Florida v. Florida, 517 U.S. 44, ----, 116 S.Ct. 1114, 1122, 134 L.Ed.2d 252 (1996) (internal quotations and citations omitted). Accordingly, the Supreme Court has long held that "[t]his express constitutional limitation denies to the federal courts authority to entertain a suit brought by private parties against a state without its consent." Ford Motor Co. v. Department of Treasury of Indiana, 323 U.S. 459, 464, 65 S.Ct. 347, 351, 89 L.Ed. 389 (1945).

Although Maryland did not assert its Eleventh Amendment immunity in the courts below, "it has been well settled since the decision in Ford Motor Co. v. Department of Treasury ... that the Eleventh Amendment defense sufficiently partakes of the nature of a jurisdictional bar so that it need not be raised in the trial court." Edelman v. Jordan, 415 U.S. 651, 677-78, 94 S.Ct. 1347, 1363, 39 L.Ed.2d 662 (1974) (emphasis added). The Court in Ford Motor explained:

The Eleventh Amendment declares a policy and sets forth an explicit limitation on federal judicial power of such compelling force that this Court will consider the issue arising under this Amendment in this case even though urged for the first time in this Court.

323 U.S. at 467, 65 S.Ct. at 352.

Accordingly, even though Maryland asserts Eleventh Amendment immunity for the first time on appeal, we will consider the defense.

III

The trustee contends that after the Supreme Court's decision in Hoffman v. Connecticut Dep't of Income Maintenance, 492 U.S. 96, 101, 109 S.Ct. 2818, 2822, 106 L.Ed.2d 76 (1989), which stated that "to abrogate the States' Eleventh Amendment immunity from suit in federal court ... Congress must make its intention 'unmistakably clear in the language of the statute,' " Congress enacted the Bankruptcy Improvement Act of 1994, 11 U.S.C. § 106, expressly abrogating the state's sovereign immunity. See also United States v. Nordic Village, Inc., 503 U.S. 30, 112 S.Ct. 1011, 117 L.Ed.2d 181 (1992) (stating that former 11 U.S.C. § 106(c) is not sufficiently unequivocal to waive immunity). The language of new § 106(a), entitled "Waiver of sovereign immunity," would seem to confirm the trustee's argument that Congress has now clearly abrogated state sovereign immunity from suit in federal court. That section reads in pertinent part:

Notwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit [including a state] to the extent set forth in this section with respect to the following:

(1) Sections ... 106 [and] ... 547 ... of this title.

(2) The court may hear and determine any issue arising with respect to the application of such sections to governmental units.

(3) The court may issue against a governmental unit an order, process, or judgment under such sections or the Federal Rules of Bankruptcy Procedure, including an order or judgment awarding a money recovery, but not including an award of punitive damages....

(4) The enforcement of any such order, process, or judgment against any governmental unit shall be consistent with appropriate nonbankruptcy law applicable to such...