In re Bliemeister

• Decision Date: 01 August 2000
• Docket Number: Bankruptcy No. 98-13899-PHX-RJH. Adversary No. 00-00019.
• Citation: 251 BR 383
• Parties: In re Kathryn BLIEMEISTER, Debtor. Kathryn Bliemeister, Plaintiff, v. Industrial Commission of Arizona, Defendant.
• Court: U.S. Bankruptcy Court — District of Arizona

251 B.R. 383 (2000)

In re Kathryn BLIEMEISTER, Debtor Kathryn Bliemeister, Plaintiff, v. Industrial Commission of Arizona, Defendant.

Bankruptcy No. 98-13899-PHX-RJH. Adversary No. 00-00019.

United States Bankruptcy Court, D. Arizona.

August 1, 2000.

Ronald J. Ellett, Phoenix, AZ, for debtor.

Tracy S. Essig, James S. Samuelson, Assistant Attorney General, Phoenix, AZ, for Industrial Commission of Arizona.

OPINION

RANDOLPH J. HAINES, Bankruptcy Judge.

This case raises difficult issues of States' sovereign immunity and the date of a "transaction" that gives rise to an excise tax that is nondischargeable if the transaction was within three years of the petition.

Factual Background

Kathryn Bliemeister and her husband owned a mechanic's shop, which husband ran while Kathryn worked full time at another job. On October 8, 1993, husband hired Raymond Cole, Jr. to work at the shop, but within the first few hours of his employment he suffered an accident in which his finger was torn off. The Bliemeisters had not obtained workers' compensation insurance as required by Arizona Revised Statutes ("A.R.S.") § 23-961. Consequently Mr. Cole applied to the Industrial Commission of Arizona (the "Commission") for compensation for his injury and resulting medical expenses, pursuant to A.R.S. § 23-907(B).¹

The Commission held a formal hearing on Cole's application on January 12, 1995, and the Administrative Law Judge issued a decision and award on March 24, 1995. That decision notified Mr. Cole that he was entitled to benefits under the Workers' Compensation Act, but did not determine the amount. The Bliemeisters were given an opportunity to contest whether Cole was an employee or was injured within the scope of his employment, and they requested that review. The decision was upheld on July 12, 1995, and the Bliemeisters did not appeal that decision.

On September 13, 1996, the Commission issued a Final Award in the amount of $9,273.22, including medical, compensation and permanent benefits for Mr. Cole, and an assessment of penalties against the Bliemeisters. They did not appeal.

An uninsured employer is liable to reimburse the Commission for benefits paid to an injured worker, plus a penalty of $500 or 10% of the benefits paid, whichever is greater, plus interest. A.R.S. §§ 23-907(C) and 44-1201. An uninsured employer may also be assessed additional penalties pursuant to A.R.S. §§ 907(F) and (G). Consequently on October 7, 1998, the Commission sent the Bliemeisters a letter demanding payment. The demand letter stated that the claim was entered on March 24, 1995. Kathryn Bliemeister ("Debtor") filed her chapter 7 petition on October 29, 1998. Sometime between the accident and the filing of her petition, she was divorced from her husband.

Procedural Background

Debtor duly listed the Commission's claim among her unsecured debts, and included the Commission in the mailing list of her creditors. Although her schedules listed the Commission's claim as not entitled to any priority, the Commission took no action to dispute that status. Debtor received her discharge on February 10, 1999.

The Commission apparently persisted in its efforts to collect, so Debtor filed a complaint to determine the dischargeability of the Commission's claim, and had a summons issued to the Commission on January 13, 2000.² The Commission answered the complaint, and on February 11, 2000, filed a motion for summary judgment. Its motion argued that the Commission's claim constitutes an excise tax that is entitled to priority under Bankruptcy Code § 507(a)(8)(E)(ii), and therefore excepted from discharge pursuant to 11 U.S.C. § 523(a)(1)(A). There can be no dispute that the Commission's claim constitutes an excise tax, because the Ninth Circuit so held in Industrial Comm'n of Arizona v. Camilli (In re Camilli), 94 F.3d 1330 (9th Cir.1996), cert. denied, 519 U.S. 1113, 117 S.Ct. 953, 136 L.Ed.2d 840 (1997). Rather, the issue is whether the excise tax falls within the three-year time period before the filing of the petition to qualify for such priority status.

Relying on Waldo v. Montana Dept. of Labor and Indus. Uninsured Employers Fund (In re Waldo), 186 B.R. 118 (Bankr. D.Mont.1995), aff'd, 108 F.3d 340 (9th Cir. 1997) (table case), the Commission argues that for purposes of the priority statute, the "transaction" giving rise to the Debtor's liability was the Commission's determination of the amount to be paid to the injured employee. The Commission's analysis is that the determination was made on September 13, 1996, less than three years prior to the October 29, 1998 petition date, therefore the claim qualifies for priority under 11 U.S.C. § 507(a)(8)(E)(ii).³

Debtor responded and filed a cross-motion for summary judgment. Debtor argued that the relevant date was March 24, 1995, when the determination of Cole's entitlement to benefits was made. Debtor further maintained that she had received a letter from the Commission stating that March 24, 1995 was the date that the determination became final, and that Debtor relied on this representation in deciding to file her chapter 7 petition, raising an estoppel argument.

Oral argument was heard on May 31, 2000. After extensive exploration of numerous issues, the Court requested supplemental briefing on (1) the nature of an excise tax, (2) the kinds of "transactions" that are subject to excise taxes, (3) case law addressing the dates of transactions that give rise to various excise taxes, and (4) any other decisions on the issue, whether published or not, including the status of In re DeRoche, 94-10496-PHX-CGC (Bankr.D.Ariz. March 27, 1998), aff'd, DeRoche v. Industrial Comm'n (In re DeRoche), 98-1270-PHX-EHC (D.Ariz. March 25, 1999), appeal filed May 25, 1999, which is currently awaiting oral argument before the Ninth Circuit.

Simultaneously with filing its supplemental brief on July 7, 2000, the Commission filed a motion to dismiss the complaint, raising for the first time immunity from suit pursuant to the Eleventh Amendment. The Commission relied on Mitchell v. California Franchise Tax Bd. (In re Mitchell), 209 F.3d 1111 (9th Cir. 2000), for the propositions that a dischargeability complaint constitutes a "suit" for Eleventh Amendment purposes,⁴ that 11 U.S.C. § 106(a) is unconstitutional under Seminole Tribe of Florida v. Florida, 517 U.S. 44, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996) ("Seminole"), and therefore ineffective to abrogate the State's sovereign immunity, that the defense is jurisdictional in nature and therefore can be raised at any time, and that no state official was named in the dischargeability complaint so the case could not proceed under the doctrine of Ex parte Young, 209 U.S. 123, 28 S.Ct. 441, 52 L.Ed. 714 (1908).

Sovereign Immunity and Bankruptcy

The Ninth Circuit held in Mitchell that a dischargeability complaint constitutes a "suit" for Eleventh Amendment purposes. That is, it is the kind of bankruptcy proceeding to which a sovereign immunity defense can be raised, as distinguished from, for example, the entry of a discharge order, distinguishing Texas v. Walker, 142 F.3d 813, 820-22 (5th Cir.1998), cert. denied, 525 U.S. 1102, 119 S.Ct. 865, 142 L.Ed.2d 768 (1999). 209 F.3d at 1116. Mitchell also held that 11 U.S.C. § 106(a) is unconstitutional because it was not an effort to remedy violations of rights protected by the Fourteenth Amendment. 209 F.3d at 1119.

But what neither the Ninth Circuit nor the Supreme Court has yet determined in the post-Seminole era, however, is whether the Eleventh Amendment preserved states' sovereignty over the subject of bankruptcies. As will be seen, this requires a textual and historical analysis of the original Constitution and the framers' understanding of those areas where states surrendered their sovereignty. It is a relatively easy conclusion to reach that if the Eleventh Amendment preserved the states' sovereign immunity in bankruptcies, then it could not be abrogated by a mere Article I power that is subject to the later adopted Amendment. What is more difficult to determine, however, and which has not yet been addressed in any reported decision that has come to this Court's attention, is whether the original Constitution was intended to preserve states' sovereignty over the subject of bankruptcies. Both Congress, in 11 U.S.C. § 106, and the Ninth Circuit in Mitchell, simply assumed that Eleventh Amendment immunity applied to bankruptcy cases just the same as it applied to all other suits, but closer examination of decades of Supreme Court Eleventh Amendment jurisprudence suggests that assumption may not be sound. Consequently, that is the first question that must be addressed.

For over a century now, the law has been that the scope of the Eleventh Amendment is not to be determined by its words. That was the holding of Hans v. Louisiana, 134 U.S. 1, 10 S.Ct. 504, 33 L.Ed. 842 (1890), and in the following 110 years, the Supreme Court has not deviated from that holding. Indeed, particularly in Alden v. Maine, 527 U.S. 706, 119 S.Ct. 2240, 144 L.Ed.2d 636 (1999), the Court significantly expanded its approach. For that fundamental reason, simply because a proceeding constitutes a "suit" in the words of the Eleventh Amendment cannot be the final answer on the applicability of the defense. For that, as all of the Supreme Court's decisions since Hans have held, we must more closely examine the history of the adoption of the Eleventh Amendment and the intent of the framers of the Constitution. "These holdings reflect a settled doctrinal understanding, consistent with the views of the leading advocates of the Constitution's ratification, that sovereign immunity derives not from the Eleventh Amendment but from the structure of the original Constitution itself." Alden, 119 S.Ct. at 2254.

Sovereignty Over Bankruptcy Proceedings Was Ceded In the Original Constitution

As clearly stated in Alden, the Eleventh Amendment did not create or...