In re Cable & Wireless Usa, Inc., 03-13711 (RB).

Citation331 B.R. 568
Decision Date24 June 2005
Docket NumberNo. 03-13711 (RB).,03-13711 (RB).
PartiesIn re CABLE & WIRELESS USA, INC., et al., Debtors.
CourtU.S. Bankruptcy Court — District of Delaware

Sean T. Greecher, Young Conaway Stargatt & Taylor, LLP, Curtis A. Hehn, Laura Davis Jones, Scotta Edelen McFarland, James E. O'Neill, Pachulski Stang Ziehl Young Jones, Wilmington, DE, for Debtor.

MEMORANDUM OPINION WITH RESPECT TO OPPOSITIONS TO THE FIFTEENTH AND SIXTEENTH OMNIBUS OBJECTIONS TO CERTAIN 2003 PROPERTY TAX CLAIMS1

JOHN L. PETERSON, Bankruptcy Judge.

The Trustee for the Omega Liquidating Trust (the "Trustee") created under the confirmed chapter 11 plan of reorganization, filed Fifteenth and Sixteenth Omnibus Objections involving 2003 property tax claims of local taxing authorities listed on Exhibits "A" and "B" attached hereto [Docket Nos. 2150 and 2151] (the "Objections"). In response to the Objections, the taxing authorities filed various responses, to which the Trustee has filed a reply [Docket No. 2260] (the "Reply").

Hearing on the Objections and responses was set for April 6, 2005. However, the tax authorities complained that they bad insufficient notice of the Objections2 and therefore requested time to file additional briefs together with time to take deposition testimony of the Trustee's witness. Accordingly, the Court continued the matter with respect to the taxing authorities' responses, granted the taxing authorities' requests and reset the hearing for May 5, 2005, and continued the hearing for the Florida taxing authorities to June 15, 2005. The Court advised the parties that certain issues raised by the taxing authorities would be decided by the Court in advance of the hearing after receiving memoranda from the taxing authorities. As noted by the Trustee's Reply, the taxing authorities advance five principle arguments, namely: (1) requests for abstention of the objections to state court or administrative agencies; (2) procedural and jurisdictional arguments; (3) valuation contests; (4) state sovereign immunity defenses; and (5) matters dealing with individual treatment of the objections (e.g., amounts owed and classification of the claims, whether priority or secured).

Responses to the Trustee's Reply have been filed by St. Johns County, Florida Property Appraiser, on behalf of six responding Florida county appraisers, as well as Texas and Tennessee tax authorities. These responses argue that the pending proceedings require the filing of an adversary proceeding, that this Court lacks jurisdiction under the Eleventh Amendment to the United States Constitution since each county appraiser is an "arm" of the State, that the appraisers are not properly joined as parties to this proceeding and that venue should be transferred to a bankruptcy court in the State of Florida to cure improper joinder, or this Court should abstain from jurisdiction.

In order to resolve the Trustee's Objections in an orderly manner, I determined the jurisdiction and other issues should be resolved prior to the May 5, 2005 hearing, including the taxing authorities' responses based on the Eleventh Amendment sovereign immunity doctrine, abstention invoking section 505 of the Bankruptcy Code3 and 28 U.S.C. section 1334, failure to join indispensable parties, improper joinder, change of venue and the proper legal standard for appraisal of the 2003 properties.

A. State Sovereign Immunity

The Eleventh Amendment to the United States Constitution 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 a foreign state.

The Eleventh Amendment was adopted to overrule Chisholm v. Georgia, 2 Dall. 419, 1 L.Ed. 440 (1793), holding a state was liable to suit by citizen of another state. After adoption, Hans v. Louisiana, 134 U.S. 1, 10 S.Ct. 504, 33 L.Ed. 842 (1890), held the Eleventh Amendment prohibits suits by individuals against states. In certain cases Congress may abrogate the states' sovereign immunity under sections 1 and 5 of the Fourteenth Amendment. Seminole Tribe of Florida v. Florida ("Seminole Tribe"), 517 U.S. 44, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996). Footnote 16 of Seminole Tribe, responding to the dissent's view that the holding would prohibit federal jurisdiction over suits to enforce bankruptcy laws, noted that position was exaggerated. Following Seminole Tribe, and after Congress attempted to abrogate state sovereign immunity by amending section 106(a), five circuit courts of appeal have held Section 106(a) unconstitutional. In re Creative Goldsmiths of Washington, D.C., 119 F.3d 1140, 1147 (4th Cir.1997); In re Nelson, 301 F.3d 820 (7th Cir.2002); In re Fernandez, 123 F.3d 241, 243-44 (5th Cir.1997); In re Mitchell, 209 F.3d 1111 (9th Cir.2000); In re Sacred Heart Hosp. of Norristown ("Sacred Heart"), 133 F.3d 237 (3d Cir.1998). One circuit has upheld section 106(a). In re Hood, 319 F.3d 755 (6th Cir.2003). As noted in Sacred Heart:

Eleventh Amendment immunity, however, is not absolute. When, as here, a plaintiff seeks recovery only from the state, and not from its officials, there are two ways to divest a state of its Eleventh Amendment sovereign immunity and hale the state into federal court. First, a state may waive its Eleventh Amendment immunity and consent to suit in federal court.

133 F.3d at 242 (citing Atascadero State Hosp. v. Scanlon, 473 U.S. 234, 238, 105 S.Ct. 3142, 87 L.Ed.2d 171 (1985)). The second method involved Congress's abrogation of immunity where adoption is specific and express under a valid exercise of congressional power, for example, Seminole Tribe's decision on the Fourteenth Amendment.

As to waiver of sovereign immunity in bankruptcy reorganization cases, it has long been held since Gardner v. New Jersey, 329 U.S. 565, 67 S.Ct. 467, 91 L.Ed. 504 (1947), that:

It is traditional bankruptcy law that he who invokes the aid of the bankruptcy court by offering a proof of claim and demanding its allowance must abide the consequences of that procedure. If the claimant is a State, the procedure of proof and allowance is not transmitted into a suit against the State because the court entertains objections to the claim. The State is seeking something from the debtor. No judgment is sought against the State. The whole process of proof, allowance, and distribution is, shortly speaking, an adjudication of interests claimed in a res. It is none the less such because the claim is rejected in toto, reduced in part, given a priority inferior to that claimed, or satisfied in some way other than payment in cash. When the State becomes the actor and files a claim against the fund it waives any immunity which it otherwise might have had respecting the adjudication of the claim.

Id. at 573-74, 67 S.Ct. 467 (internal citations omitted); see also State of Maryland v. Antonelli Creditors' Liquidating Trust, 123 F.3d 777, 786 (4th Cir.1997) (holding that the liquidating plan binds state taxing authorities despite the Eleventh Amendment because confirmation is not a "suit" against the state even if the state did not appear in the chapter 11 case, since jurisdiction of the bankruptcy court is jurisdiction over the debtor, its assets and creditors).

Tennessee Student Assistance Corporation v. Hood ("Hood'), 541 U.S. 440, 124 S.Ct. 1905, 158 L.Ed.2d 764 (2004), recently reinforced the rationale of the Gardner decision regarding res and in rem jurisdiction of the bankruptcy court to defeat state sovereign immunity. In Hood, the Court held the bankruptcy court's in rem jurisdiction over the res and the bankruptcy court's exercise of its jurisdiction to discharge debt does not infringe on state sovereign immunity.4 Id. at 447-48, 124 S.Ct. 1905.

Other bankruptcy courts have relied extensively on Gardner in holding that a tax liability determination is not a "suit" within the scope of the Eleventh Amendment. See, e.g., In re Psychiatric Hospitals of Florida, Inc., 216 B.R. 660, 661 (M.D.Fla. 1998). The same is true of Gardner's holding on waiver by filing a proof of claim. In re NVR L.P., 206 B.R. 831, 851-52 (Bankr.E.D.Va.1997), aff'd in part and reversed in part, 189 F.3d 442 (4th Cir. 1999), cert. denied, 528 U.S. 1117, 120 S.Ct. 936, 145 L.Ed.2d 815 (2000).

Moreover, political subdivisions of states do not qualify for Eleventh Amendment immunity. Mt. Healthy City School District Board of Education v. Doyle, 429 U.S. 274, 280, 97 S.Ct. 568, 50 L.Ed.2d 471 (1977); Lincoln County v. Luning, 133 U.S. 529, 530, 10 S.Ct. 363, 33 L.Ed. 766 (1890) (Immunity does not extend to counties and similar municipal corporations). To circumvent such doctrine, the Florida taxing authorities argue that each taxing authority is an "arm of the state" and thus enjoys state sovereign immunity, citing Christy v. Pennsylvania Turnpike Comm'n., 54 F.3d 1140, 1144-45 (3d Cir.1995). The party asserting such doctrine bears the burden of proof. Id. at 1144. The criteria of such test is well settled in Christy, as well as in the cases of In re Polygraphex Systems, Inc., 275 B.R. 408 (Bankr.M.D.Fla.2002), and In re L. Luria & Sons, Inc., 282 B.R. 504 (Bankr. S.D.Fla.1999), following Eleventh Circuit decisions that:

Our oft-reiterated test entails three distinct inquiries: (1) whether, in the event the plaintiff prevails, the payment of the judgment would come from the state (this includes three considerations: whether the payment will come from the state's treasury, whether the agency has sufficient funds to satisfy the judgment, and whether the sovereign has immunized itself from responsibility for the agency's debts); (2) the status of the agency under state law (this includes four considerations: how state law treats the agency generally, whether the agency is separately incorporated, whether the agency can sue and be sued in its own right, and whether it is immune from...

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