In re Claxton

• Decision Date: 05 February 2002
• Docket Number: Bankruptcy No. 00 B 13340.,Adversary No. 00 A 00893.
• Citation: 273 B.R. 174
• Parties: In re Christopher CLAXTON, Debtor. Christopher Claxton, Plaintiff, v. United States of America, et al., Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

273 B.R. 174

In re Christopher CLAXTON, Debtor Christopher Claxton, Plaintiff, v. United States of America, et al., Defendant.

Bankruptcy No. 00 B 13340.

Adversary No. 00 A 00893.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

February 5, 2002.

COPYRIGHT MATERIAL OMITTED

Joel A. Schechter, (Grossman Mitzenmacher & Schechter), Chicago, IL, for Movant or Plaintiff.

Faith Dolgin, Spaag, (Illinois Department of Revenue), Lara Ewens, (U.S. Department of Justice), for Respondent or Defendant.

MEMORANDUM OPINION ON MOTION OF STATE TO DISMISS COUNT II

JACK B. SCHMETTERER, Bankruptcy Judge.

Facts and Background

Plaintiff, Christopher Claxton, ("Plaintiff") filed a Chapter 7 bankruptcy petition on May 3, 2000. He scheduled $30,000 in back taxes owed to the State of Illinois (the "State") and $300,000 in back taxes owed to the United States of America ("United States"). Plaintiff received a general bankruptcy discharge on August 21, 2000, and his bankruptcy case was closed on August 25, 2000. He moved to reopen his bankruptcy on September 27, 2000, for the purpose of filing an action to declare dischargeability of the aforementioned taxes. The motion to reopen was granted and the instant Adversary Complaint was then filed.

Suit against the United States in Count I asserts that taxes due it were discharged because they were outside the exceptions to the general discharge under U.S.C. § 727 of taxes specified in 11 U.S.C. § 523(a)(1)(A) and (B). That Count is not the subject of this Memorandum Opinion, which focuses on Count II in which similar relief is sought on the same legal basis against taxes due to the State. Plaintiff prays for judgment declaring those State taxes discharged.

The State filed no claim in bankruptcy and did not willingly participate in the Bankruptcy proceeding in any way. It moved to dismiss Count II on the ground that it has sovereign immunity under the Eleventh Amendment of the United States Constitution from defending the suit in this court, citing supporting authority. Plaintiff argued in responsive briefs that under the Bankruptcy Clause of the Constitution Illinois and all states of the Union originally ceded their immunity in the area of bankruptcy law to the federal government. He further contends that: (1) Congress effected a valid abrogation of all state immunity under § 106(a) of the Bankruptcy Code, 11 U.S.C. § 106(a); and (2) alternatively, if the court finds that § 106(a) is invalid, Plaintiff's Complaint should be treated as a request for injunction under Ex Parte Young, 209 U.S. 123, 155-56, 28 S.Ct. 441, 52 L.Ed. 714 (1908), even though no injunction is sought in the Complaint, no state officials are sued, there is no allegation of specific efforts to collect the State taxes after plaintiff was granted his discharge, and no allegations were made as required for injunction under Rule 7065 Fed.R.Bankr.P Article XIII, Sec. 4 of the Illinois Constitution of 1970 provisionally abolished sovereign immunity:

Except as the General Assembly may provide by law, sovereign immunity in this State is abolished.

But with exceptions not relevant here, sovereign immunity was restored by the legislature with enactment of the Lawsuit Immunity Act, 745 ILCS 5/1 in 1972, which barred suit against the State in any of its courts with exceptions stated. Later, additional exceptions allowing judicial review of administrative decisions relating to taxes and taxpayer suits against the Illinois Department of Revenue were adopted and are discussed below. Therefore, the dispute here over meaning of jurisprudence under the Eleventh Amendment as to federal court cases against the State of Illinois must be resolved.

For reasons discussed below, the State's motion to dismiss is granted to the limited extent of striking Count II without prejudice so that Plaintiff may, if he can and so chooses, amend that Count to plead an action under Ex Parte Young. If he does not or cannot do so, Count II will be dismissed for lack of jurisdiction because the State's sovereign immunity was not waived here and is properly asserted.

DISCUSSION

I. SOVEREIGN IMMUNITY

Overview of Eleventh Amendment Jurisprudence

The Eleventh Amendment to the United States Constitution provides that "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 states of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State." U.S. Const. amend. XI. The Eleventh Amendment restricts the power of the federal courts, but not the power of Congress which has power under the Bankruptcy Clause to enact uniform bankruptcy laws. U.S. Const. art. I, § 8, cl. 4. Sovereign immunity is not absolute. College Sav. Bank v. Florida Prepaid Postsecondary Educ. Expense Bd., 527 U.S. 666, 670, 119 S.Ct. 2219, 144 L.Ed.2d 605 (1999). States may waive immunity, or Congress may abrogate states' immunity pursuant to the 14th Amendment. MCI Telecomm. Corp. v. Illinois Bell Tel. Co., 222 F.3d 323, 337 (7th Cir.2000).

Prior to the decision in Seminole Tribe of Florida v. Florida, 517 U.S. 44, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996), it was generally held that Congress could abrogate sovereign immunity by exercising its Article I powers under the Constitution. Pennsylvania v. Union Gas Co., 491 U.S. 1, 23, 109 S.Ct. 2273, 105 L.Ed.2d 1 (1989) (Congress has power to render states liable for money damages under its Article I powers); Matter of Merchants Grain, Inc., 59 F.3d 630, 634-36 (7th Cir.1995) ("there was no constitutional basis for distinguishing between the plenary powers accorded Congress under the Fourteenth Amendment and those accorded under Article I.") vacated and remanded sub nom for review consistent with Seminole Tribe, Ohio Agric. Commodity Depositors Fund v. Mahern, 517 U.S. 1130, 116 S.Ct. 1411, 134 L.Ed.2d 537 (1996); McVey Trucking, Inc. v. Secretary of State, 812 F.2d 311, 314-23 (7th Cir.1987) (Congress may abrogate immunity under any of its plenary powers); In re HPA Assoc., 191 B.R. 167, 174 (9th Cir. BAP 1995) (Congress has power under Bankruptcy Clause to abrogate sovereign immunity); Mills Music, Inc. v. Arizona, 591 F.2d 1278, 1285 (9th Cir.1979) (Congress can abrogate states' immunity under Copyright and Patent clause of Article I); Peel v. Florida Dept. of Transportation, 600 F.2d 1070, 1080 (5th Cir.1976) (Congress can abrogate states' immunity under its war powers in Article I).

However, in Seminole Tribe, a Supreme Court majority opinion held that Congress cannot abrogate immunity of states under its Constitutional Article I powers, but can only do so pursuant to § 5 of the Fourteenth Amendment. Seminole Tribe of Florida v. Florida, 517 U.S. 44, 72, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996). The high court went even further in several subsequent majority opinions. In Alden v. Maine, in a non-bankruptcy case, it was held that states could raise sovereign immunity as a defense in state court to suits created by Congress under its Article I powers. Alden v. Maine, 527 U.S. 706, 748, 119 S.Ct. 2240, 144 L.Ed.2d 636 (1999). The court also struck down federal legislation that authorized suits against states for patent infringement as unconstitutional. Florida Prepaid Postsecondary Educ. Expense Bd. v. College Sav. Bank, 527 U.S. 627, 648, 119 S.Ct. 2199, 144 L.Ed.2d 575 (1999). In a further devolution of power to the states, another opinion limited the doctrine of constructive waiver of sovereign immunity. College Sav. Bank v. Florida Prepaid Postsecondary Educ. Expense Bd., 527 U.S. 666, 670, 119 S.Ct. 2219, 144 L.Ed.2d 605 (1999). See also MCI Telecomm. Corp. v. Illinois Bell Tel. Co., 222 F.3d 323, 339-40 (7th Cir.2000).

Application of Section 106(a) after Seminole

Congress amended § 106 of the Bankruptcy Code in 1994 to clarify that sovereign immunity was abrogated in bankruptcy cases after the Supreme Court in Hoffman v. Connecticut held that Congress had to make its intent to abrogate states' immunity "unmistakably clear." Hoffman v. Connecticut Dep't of Income Maintenance, 492 U.S. 96, 101, 109 S.Ct. 2818, 106 L.Ed.2d 76 (1989) (citation omitted); See Bankruptcy Reform Act of 1994, Pub.L. No. 103-394, 108 Stat. 4106. In Hoffman, a divided court had reserved judgment on whether Congress could abrogate states' immunity pursuant to its Article I powers. Id. at 104, 109 S.Ct. 2818.

Section 106(a) provides in relevant part that "notwithstanding any assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section." 11 U.S.C. § 106(a). Prior to Seminole Tribe, § 106(a) was read to permit the instant form of action against states, so that discharged debtors could obtain the comfort and protection of a judgment in bankruptcy specifically declaring the state tax debt to have been discharged. Although the Supreme Court has not directly dealt with the issue of sovereign immunity in bankruptcy, however, most opinions of lower courts issued since Seminole Tribe have held 11 U.S.C. § 106(a) unconstitutional. According to those opinions, § 106(a) fails the second prong of the two-pronged test used by the Seminole court to determine if Congress has abrogated sovereign immunity: (1) whether Congress unequivocally expressed its intent to abrogate immunity; and (2) whether Congress acted pursuant to a valid exercise of power. Seminole Tribe, 517 U.S. at 55, 116 S.Ct. 1114. Those opinions in recent years concluded that § 106(a) was enacted pursuant to Congress' powers under the Bankruptcy Clause, but under Seminole Tribe § 106(a) is invalid against the states because it was enacted under authority of Const. Article I. In re Ellett, 254 F.3d 1135, 1139 (9th Cir.2001); In re Franceschi, 268 B.R. 219, 223 (9th Cir. BAP 2001); In re Mitchell, 209 F.3d 1111, 1121 (9th Cir.2000); In re Chandler, 251 B.R. 872, 874 (10th Cir. BAP 2000); In re...