In re Charter Oak Associates

• Citation: 361 F.3d 760
• Decision Date: 19 March 2004
• Docket Number: Docket No. 02-5068.
• Parties: In Re: CHARTER OAK ASSOCIATES, Debtor. Neal Ossen, Trustee, Plaintiff-Appellee, v. Department of Social Services, State of Connecticut, Defendant-Appellant.
• Court: U.S. Court of Appeals — Second Circuit

361 F.3d 760

In Re: CHARTER OAK ASSOCIATES, Debtor Neal Ossen, Trustee, Plaintiff-Appellee, v. Department of Social Services, State of Connecticut, Defendant-Appellant.

Docket No. 02-5068.

United States Court of Appeals, Second Circuit.

Argued November 14, 2003.

Decided March 19, 2004.

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Mark F. Kohler, Assistant Attorney General (Richard Blumenthal, Attorney General for the State of Connecticut, on the brief), Hartford, CT, for Defendant-Appellant.

G. Eric Brunstad, Jr., Bingham McCutchen LLP (Rheba Rutkowski, Susan Kim, Tanya Tymchenko, Melissa G. Liazos, on the brief), Hartford, CT, for Plaintiff-Appellee.

Before: WALKER, Chief Judge, LEVAL and CABRANES, Circuit Judges.

JOHN M. WALKER, Jr., Chief Judge.

Section 106 of the Bankruptcy Code purports to abrogate state sovereign immunity under certain circumstances in the bankruptcy context, see 11 U.S.C. § 106(a), and, in the absence of abrogation, to define circumstances under which a state will be deemed to have waived its immunity, see 11 U.S.C. §§ 106(b) and (c). In this case, we must decide whether a state agency's assertion of sovereign immunity precludes the adjudication under § 106(c) of a claim asserted by a bankruptcy trustee against that agency to offset recovery by another agency of the same state against the bankrupt estate.

BACKGROUND

For several years prior to 1991, Charter Oak Associates, Inc. ("Charter Oak") operated leased residential facilities for state-supported individuals with mental disabilities. On or about June 30, 1991, the company ceased its operations and, in December of that year, filed a Chapter 7 petition in the United States Bankruptcy Court for the District of Connecticut (Robert L. Krechevsky, Bankruptcy Judge). On March 27, 1992, the Connecticut Department of Revenue Services ("DRS") filed a proof of claim against Charter Oak's estate for unpaid use taxes in the amount of $148,643.34.

After an audit conducted in 1992 and 1993, defendant-appellant Connecticut Department of Social Services ("DSS") determined that it owed Charter Oak $225,309.29 in rental reimbursements. Plaintiff-appellee Neil Ossen, the bankruptcy trustee, then commenced an adversary proceeding against DSS in the bankruptcy court, seeking the amount of the withheld reimbursements either by an order of turnover pursuant to 11 U.S.C. § 542(b) or through a judgment. DSS moved to dismiss the complaint for lack of subject matter jurisdiction on the basis that, even though DRS had filed a proof of claim, the trustee's suit was barred by the Eleventh Amendment.¹

The bankruptcy court denied the motion to dismiss. It agreed with DSS that § 106(a) was unconstitutional because Congress did not have the power to abrogate sovereign immunity in the bankruptcy context, and that the claim against DSS did not fall within the ambit of § 106(b). However, the bankruptcy court concluded that the trustee's claim could proceed under § 106(c). See Ossen v. Connecticut (In re Charter Oak Assocs.), 203 B.R. 17, 24 (Bankr.D.Conn.1996). DSS filed an interlocutory appeal in the United States District Court for the District of Connecticut (Alvin W. Thompson, Judge), see P.R. Aqueduct & Sewer Auth. v. Metcalf & Eddy, Inc., 506 U.S. 139, 147, 113 S.Ct. 684, 121 L.Ed.2d 605 (1993) (denial of sovereign immunity is immediately appealable under collateral order doctrine), and the district court affirmed. Reviewing the district court's decision on this pure question of law de novo, see In re Bell, 225 F.3d 203, 209 (2d Cir.2000), we now affirm.

DISCUSSION

Section 106 of the Bankruptcy Code reads in pertinent part as follows:

(a) Notwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to [several enumerated bankruptcy provisions including 11 U.S.C. § 542] ....

(b) A governmental unit that has filed a proof of claim in [a bankruptcy] case is deemed to have waived sovereign immunity with respect to a claim against such governmental unit that is property of the estate and that arose out of the same transaction or occurrence out of which the claim of such governmental unit arose.

(c) Notwithstanding any assertion of sovereign immunity by a governmental unit, there shall be offset against a claim or interest of a governmental unit any claim against such governmental unit that is property of the estate.

11 U.S.C. § 106.

The narrow issue before us is whether the district court erred in holding that the trustee could, consistent with the Eleventh Amendment and the language of § 106(c), assert Charter Oak's claim against DSS to offset the state of Connecticut's tax claim against the bankrupt estate. We need not (and do not) decide whether § 106(a) constitutes a valid abrogation of state sovereign immunity (a question currently pending before the Supreme Court, see Tenn. Student Assistance Corp. v. Hood, 539 U.S. 986, 124 S.Ct. 45, 156 L.Ed.2d 703 (2003) (Mem) (granting certiorari)) or whether the trustee's claim meets the requirements of § 106(b).² However, some discussion of Eleventh Amendment immunity generally and of § 106(a) in particular is necessary to understand how, and in what circumstances, § 106(c) applies.

I. The Eleventh Amendment, Abrogation, and § 106(a)

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.

U.S. Const. amend. XI. "Although the text of the Amendment would appear to restrict only the Article III diversity jurisdiction of the federal courts," it has been construed more broadly to render states and their agencies immune from suits brought by private parties in federal court. Seminole Tribe of Fla. v. Florida, 517 U.S. 44, 54, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996); see Fla. Dep't of State v. Treasure Salvors, Inc., 458 U.S. 670, 684, 102 S.Ct. 3304, 73 L.Ed.2d 1057 (1982) (sovereign immunity extends to state agencies). The doctrine of state sovereign immunity is the product of two principles underlying our constitutional framework: "first, that each State is a sovereign entity in our federal system; and second, that it is inherent in the nature of sovereignty not to be amenable to the suit of an individual without its consent." Seminole Tribe, 517 U.S. at 54, 116 S.Ct. 1114 (internal quotation marks and punctuation omitted). State sovereign immunity is not just a "personal privilege" of the state, see Coll. Sav. Bank v. Fla. Prepaid Postsecondary Educ. Expense Bd., 527 U.S. 666, 675, 119 S.Ct. 2219, 144 L.Ed.2d 605 (1999), but also a jurisdictional limitation on the power of federal courts. The Eleventh Amendment effectively places suits by private parties against states outside the ambit of Article III of the Constitution. See Seminole Tribe, 517 U.S. at 54, 116 S.Ct. 1114.

State sovereign immunity is not absolute, however. It is subject to two qualifications. First, Congress can abrogate a state's immunity if it unequivocally expresses its intent to do so and acts "pursuant to a valid exercise of power." See id. at 55, 116 S.Ct. 1114 (internal quotation marks omitted). Second, a state can waive its immunity from suit. See, e.g., Lapides v. Bd. of Regents of the Univ. Sys., 535 U.S. 613, 618, 122 S.Ct. 1640, 152 L.Ed.2d 806 (2002); Coll. Sav. Bank, 527 U.S. at 675, 119 S.Ct. 2219.

Section 106(a) of the Code undertakes to effectuate the first kind of limitation; it purports to abrogate a state's immunity to certain bankruptcy suits. See 11 U.S.C. § 106(a). Most of our sister circuits, however, have concluded that this abrogation is constitutionally infirm. See, e.g., Nelson v. La Crosse County Dist. Attorney, 301 F.3d 820, 832 (7th Cir.2002); Mitchell v. Franchise Tax Bd. (In re Mitchell), 209 F.3d 1111, 1121 (9th Cir.2000); Sacred Heart Hosp. v. Pennsylvania (In re Sacred Heart Hosp.), 133 F.3d 237, 245 (3d Cir.1998); Dep't of Trans. & Dev. v. PNL Asset Mgmt. Co. (In re Estate of Fernandez), 130 F.3d 1138, 1139 (5th Cir.1997) (per curiam) ("Fernandez II"), amending 123 F.3d 241 (5th Cir.1997) ("Fernandez I"); Schlossberg v. Maryland (In re Creative Goldsmiths), 119 F.3d 1140, 1145 (4th Cir.1997). But see Hood v. Tenn. Student Assistance Corp. (In re Hood), 319 F.3d 755, 767-68 (6th Cir.) (holding that § 106(a) is constitutional), cert. granted, Tenn. Student Assistance Corp. v. Hood, 539 U.S. 986, 124 S.Ct. 45, 156 L.Ed.2d 703 (2003) (Mem). These rulings are generally to the effect that § 106(a) fails the second prong of the abrogation test; although Congress obviously intended to abrogate state sovereign immunity when it enacted § 106(a), these circuits have held that it did not act pursuant to a "valid exercise of power" in carrying out that intent. Section 106(a) is an exercise of Congress's powers under the Bankruptcy Clause of Article I of the Constitution. See Mitchell, 209 F.3d at 1119; Sacred Heart Hosp., 133 F.3d at 244-45; Fernandez I, 123 F.3d at 245; Schlossberg, 119 F.3d at 1146-47. Although the Supreme Court has yet to address squarely whether the Bankruptcy Clause provides a legitimate basis for abrogation, cf. Tenn. Student Assistance Corp., 539 U.S. 986, 124 S.Ct. 45, 156 L.Ed.2d 703, the Court's precedents have uniformly rejected attempts to abrogate pursuant to other Article I powers. See Fed. Mar. Comm'n v. S.C. State Ports Auth., 535 U.S. 743, 749-50, 122 S.Ct. 1864, 152 L.Ed.2d 962 (2002) ("Congress, pursuant to its Article I powers, cannot abrogate state sovereign immunity...."); Bd. of Trustees v. Garrett, 531 U.S. 356, 364, 121 S.Ct. 955, 148 L.Ed.2d 866 (2001) ("Congress may not, of course, base its abrogation of the States' Eleventh Amendment immunity upon the powers enumerated in Article I."); Kimel v. Fla. Bd. of Regents, 528 U.S. 62, 78, 120 S.Ct....