Crook, In re

• Decision Date: 12 May 1992
• Docket Number: Nos. 91-6204,91-6206 and 91-6207,s. 91-6204
• Parties: , 27 Collier Bankr.Cas.2d 67, 23 Bankr.Ct.Dec. 1, Bankr. L. Rep. P 74,608 In re Randy L. CROOK and John Wedman, Debtors. STATE OF OKLAHOMA, EX REL. COMMISSIONERS OF THE LAND OFFICE, Appellant, v. Randy L. CROOK and John Wedman, Appellees, and United States of America, Defendant-Intervenor-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 539

966 F.2d 539

60 USLW 2735, 27 Collier Bankr.Cas.2d 67,

23 Bankr.Ct.Dec. 1,

Bankr. L. Rep. P 74,608

In re Randy L. CROOK and John Wedman, Debtors.

STATE OF OKLAHOMA, EX REL. COMMISSIONERS OF THE LAND OFFICE, Appellant, v. Randy L. CROOK and John Wedman, Appellees, and United States of America, Defendant-Intervenor-Appellee.

Nos. 91-6204, 91-6206 and 91-6207.

United States Court of Appeals, Tenth Circuit.

May 12, 1992.

Perry E. Kaufman, Asst. Gen. Counsel, State of Okl., Oklahoma City, Okl. (Dennis W. Arrow, Oklahoma City University School of Law, Oklahoma City, Okl., with him on the brief), for appellant.

Bruce G. Forrest, U.S. Dept. of Justice, Washington, D.C. (Stuart M. Gerson, Asst. Atty. Gen., Washington, D.C., Timothy D. Leonard, U.S. Atty., Oklahoma City, Okl., William Kanter, U.S. Dept. of Justice, Washington, D.C., with him on the brief), for defendant-intervenor-appellee.

John J. Jerome, Milbank, Tweed, Hadley & McCloy, Richard Lieb, Kronish, Lieb, Weiner & Hellman, New York City, filed an amicus curiae brief for the Ass'n of the Bar of the City of New York, The Committee on Bankruptcy and Corporate Reorganization.

Before ANDERSON, ALDISERT ^* and BRORBY, Circuit Judges.

ALDISERT, Senior Circuit Judge.

This appeal by the state of Oklahoma requires us to decide if the bankruptcy court's action in "writing down" a mortgage held by the state of Oklahoma violates the state's sovereign immunity under the Tenth and Eleventh Amendments. Oklahoma holds mortgages on property owned by two debtors in bankruptcy.

In reorganization proceedings, the bankruptcy code permits the court to "write down" certain debts, that is, to declare the debt to be secured up to the actual market value of the property, while any additional indebtedness becomes unsecured debt. 11 U.S.C. 506(a). ¹ This provision applies against the states. 11 U.S.C. § 106(c). Through the Commissioners of the Land Office, the state appeared specially in the bankruptcy court and argued that the Tenth and Eleventh Amendments to the United States Constitution forbade the court's segregation of the mortgages into secured and unsecured claims.

The bankruptcy court and the district court rejected Oklahoma's contention and reasoned that Congress' Article I bankruptcy power is superior to the state's Tenth and Eleventh Amendment sovereignty. We also reject Oklahoma's contention, but for different reasons. We conclude that the bankruptcy court had the power to write down the mortgages not on the basis of the comparative scope of Congress' Article I power, but rather on the basis of the particular species of relief granted here. The Supreme Court has long held that declaratory or injunctive relief against the states does not touch on the states' constitutional sovereignty, even though this relief results in some incidental expenditure of state funds. The bankruptcy court's order in the present case granted relief of exactly this sort; it did not award money damages. We affirm.

The debtors here sought the protection of the bankruptcy courts under the provisions of Chapter 12, 11 U.S.C. § 1201 et seq., covering family farms. The state argues that the bankruptcy court lacked jurisdiction to dispose of the state's mortgage. The district court's review of the bankruptcy court's final order was proper under 28 U.S.C. § 158(a). A timely appeal was taken, and this court has jurisdiction under 28 U.S.C. § 158(d).

I.

The facts in these consolidated cases are undisputed and identical in all material respects. Wedman and Crook each had mortgaged property to the Commissioners of the Land Office, an agency of the state of Oklahoma. The state foreclosed on the mortgages, and the debtors filed for bankruptcy under Chapter 12. As part of the debtors' reorganization plans, the bankruptcy court applied the provisions of 11 U.S.C. § 506(a):

An allowed claim of a creditor secured by a lien on property in which the estate has an interest ... is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property ... and is an unsecured claim to the extent that the value of such creditor's interest ... is less than the amount of such allowed claim.

Liens held by the state are also subject to this statutory mandate, by virtue of 11 U.S.C. § 106(c):

Except as provided in subsections (a) and (b) of this section and notwithstanding any assertion of sovereign immunity--

(1) a provision of this title that contains "creditor", "entity", of "governmental unit" applies to governmental units; and

(2) a determination by the court of an issue arising under such a provision binds governmental units.

"Governmental unit" is elsewhere defined to include the states and their departments, agencies and instrumentalities. Id. § 101(27). The exceptions set out in subsections (a) and (b) concern offsets and compulsory counterclaims and are not relevant here.

Applying these provisions, the bankruptcy court declared the state's notes to be secured only to the extent of the current market value of the properties; the amount of the debt exceeding the current market value was converted to unsecured debt. The state did not file proofs of claim but appeared specially to contest the bankruptcy court's constitutional authority to exercise jurisdiction over the state's mortgage interests. The court entered orders approving the debtors' reorganization plans, which included the writing down of the state's mortgage notes. These orders were made subject to the state's jurisdictional objection.

The bankruptcy court then consolidated the cases and sat en banc to hear argument on the jurisdictional issue. The state's argument proceeded as follows: under the Oklahoma Enabling Act, Pub.L. No. 59-234, 34 Stat. 267 (1906), Oklahoma received certain lands and funds to be held in trust; the Oklahoma Constitution requires that the state reimburse the trust in the event of any losses, Okla. Const. art. XI, § 2; the Commissioners of the Land Office invested trust funds in the mortgages involved here; if a portion of the debt is unrecoverable as a result of the bankruptcy court's "write down," the state will be obliged to reimburse the fund out of the state treasury; such a federal court judgment therefore results in "depletion of state coffers through the exercise of unconsented state jurisdiction," Appellant's Br. at 6, and violates the state's sovereign immunity.

The court rejected the state's contentions. First, the court followed Pennsylvania v. Union Gas, 491 U.S. 1, 109 S.Ct. 2273, 105 L.Ed.2d 1 (1989), in which the Supreme Court held that Congress' commerce power permitted it to abrogate the states' Eleventh Amendment immunity from suit. The bankruptcy court reasoned that, because Article I makes no distinctions between the commerce power and bankruptcy power, the latter also permits Congress to abrogate the states' immunity.

Next, the court noted that abrogation of the states' immunity can only occur by "unmistakably clear" statutory language. Atascadero State Hospital v. Scanlon, 473 U.S. 234, 242, 105 S.Ct. 3142, 3147, 87 L.Ed.2d 171 (1985). The court then observed that in Hoffman v. Connecticut Income Maint. Dept., 492 U.S. 96, 109 S.Ct. 2818, 106 L.Ed.2d 76 (1989), the Supreme Court split 4-4 on the question whether Section 106(c) contains such "unmistakably clear" language. The bankruptcy court stepped into the breach and stated that Section 106(c) is "unmistakably clear," and the states therefore are subject to its provisions.

Following this ruling, the orders confirming the reorganization plans became final. The state appealed, and the United States intervened pursuant to 28 U.S.C. § 2403(a) to answer the state's challenge to the constitutionality of Section 106(c). The district court affirmed, employing the same analysis used by the bankruptcy court. The district court also rejected Oklahoma's argument that the bankruptcy court has interfered with the state's sovereign functions in violation of the Tenth Amendment.

The appeal came before this court with the United States briefing and arguing the case for all appellees.

II.

This appeal raises questions of law reviewable de novo in this court. Matter of Tri-State Equip., Inc., 792 F.2d 967, 970 (10th Cir.1986).

III.

Three issues are presented for our consideration: Whether Section 106(c) contains "unmistakably clear" language indicating that Congress meant it to apply against the states, thus abrogating the states' Eleventh Amendment immunity; if so, we must decide whether the Article 1 bankruptcy power authorizes Congress to abrogate the states' Eleventh Amendment immunity and whether the bankruptcy court's determination here violates the Tenth Amendment.

The first issue was addressed by the Supreme Court only two weeks before oral argument in this case. In United States v. Nordic Village, Inc., --- U.S. ----, 112 S.Ct. 1011, 117 L.Ed.2d 181 (1992), a corporate officer used corporate funds to pay his individual tax liability to the Internal Revenue Service. The corporation previously had filed for reorganization under Chapter 11, and the trustee in bankruptcy commenced adversary proceedings against the IRS, under 11 U.S.C. § 550(a), to recover the corporate funds paid.

The bankruptcy court ordered the IRS to return the funds, and the district court and court of appeals affirmed. The Supreme Court reversed, stating, "Neither Sections 106(c) nor any other provision of law establishes an unequivocal textual waiver of the Government's immunity from a bankruptcy trustee's claims for monetary relief.... Congress has not empowered a bankruptcy court to order a recovery of money from the United States...."

At first blush, this holding may appear to dictate a reversal here. There is, however, a distinction between the bankruptcy proceedings in Nordic Village and the bankruptcy proceedings here, a difference that takes this case outside the holding of Nordic Village and also forecloses the...