In re Hechinger Inv. Co. of Delaware, Inc.

• Citation: 254 BR 306
• Decision Date: 10 October 2000
• Docket Number: No. 99-2261 (PJW).,99-2261 (PJW).
• Parties: In re HECHINGER INVESTMENT COMPANY OF DELAWARE, INC., et al., Debtors.
• Court: U.S. Bankruptcy Court — District of Delaware

254 B.R. 306 (2000)

In re HECHINGER INVESTMENT COMPANY OF DELAWARE, INC., et al., Debtors.

No. 99-2261 (PJW).

United States Bankruptcy Court, D. Delaware.

October 10, 2000.

COPYRIGHT MATERIAL OMITTED

Mark D. Collins, Richards, Layton & Finger, P.A., Wilmington, Marc Abrams, Willkie, Farr & Gallagher, New York City, for Debtors and Debtors in Possession.

J. Joseph Curran, Jr., Attorney General of Maryland, Julia M. Andrew, Assistant Attorney General, Baltimore, MD, for the State of Maryland.

Bernadette F. Lamson, Associate County Attorney, Rockville, MD, for Montgomery County, Maryland.

Sean D. Wallace, County Attorney, J. Michael Dougherty, Associate County Attorney, Upper Marlboro, MD, for Prince George's County, Maryland.

MEMORANDUM OPINION

PETER J. WALSH, Chief Judge.

Before the Court is the request by Hechinger Investment Co. of Delaware, Inc., et al. ("Debtors") for a declaration that certain real property transfers are exempt from state transfer and recording taxes pursuant to § 1146(c) of the Bankruptcy Code.¹ (Doc. # 993; Doc. # 1118). The State of Maryland objects on three grounds: first, that the proceeding is barred by the Eleventh Amendment; second, that the proceeding is barred by the Tax Injunction Act, 28 U.S.C. § 1341; and third, that § 1146(c) by its terms does not apply to pre-confirmation transfers. (Doc. # 1267; Doc. # 1268). Montgomery County, Baltimore County and Prince George's County, all of Maryland, join the State in its second and third objections. (Doc. # 1327, Doc. # 1324 and Doc. # 1342 respectively)(all counties collectively, the "Counties").

For the reasons set forth below, I will overrule the objections. The proceeding does not implicate the Eleventh Amendment nor is it barred by the Tax Injunction Act. I also hold that the property sales fall within the scope of § 1146(c) and are, subject to a plan being confirmed, exempt from state transfer and recording taxes.

Background

The relevant facts are not in dispute. The Debtors were leading retailers of home and garden care products and services. On June 11, 1999, the Debtors filed a voluntary petition for chapter 11 relief. At that time, the Debtors operated about 200 stores nationwide. They hoped to revive their business through reorganization, in part by closing underperforming locations. The Debtors, however, continued to face declining profits and liquidity problems.

On September 9, 1999, the Debtors publicly announced that they would cease operations and liquidate. On October 22, 1999, they filed a motion seeking authority under § 363 and § 365 to sell their interests in all remaining store locations. See Debtors' Motion for an Order (I)(A) Establishing Bid Procedures in Connection with the Sale of Certain Properties . . . (II) for Orders Approving the Sale of the Properties to successful Bidders . . . and (III) Granting Related Relief, (Doc. # 993) at p. 5, ¶ 9. The motion requested a variety of related relief, including a ruling that the proposed sales were exempt from state transfer and recording taxes by reason of § 1146(c).² Id. at pp. 33-34, ¶¶ 61-62. The sales were necessary to reduce the Debtors' indebtedness, improve liquidity, and to facilitate the formulation and ultimate confirmation of a chapter 11 plan. Id. at p. 34, ¶ 62.

On November 9, 1999, the Debtors filed a second motion requesting Court authority to sell assets, this time a specific leasehold interest located in Montgomery County, Maryland. See Motion by Hechinger Property Company for an Order: (A) Authorizing the Sale And/Or Assumption and Assignment of Certain Non-residential Real Property Leases . . . (B) Approving certain (i) Bid Procedures and (ii) Bidding Incentives . . . and(C) Granting Related Relief (Doc. # 1118). The Debtors' interest in this property was apparently subject to a number of subleases into which the Debtors had entered. Id. at p. 4, ¶ 10. The Debtors had an offer for the entire leasehold interest, including the subleases, and therefore sought Court authority to sell the Montgomery County property as a "package deal" separate from the properties included in the prior sale motion. Id. at p. 7, ¶ 14. As with their previous request, the Debtors sought approval of a variety of related matters including approval of the bidding procedures, bidding incentives and break up fee, and as previously, a declaration that the transfer would be exempt from state transfer and recording taxes under § 1146(c).

The Debtors filed both motions in accordance with Federal Rule of Bankruptcy Procedure 9014.³ Maryland, followed by the Counties, filed objections. They did not object to the sales themselves, but did object to the Debtors' request for a ruling that the sales were exempt from state and local recording taxes. I granted both sale motions but reserved judgment on the applicability of § 1146(c) pending further briefing of the issue. The parties modified the sale orders affecting properties in Maryland accordingly,⁴ and agreed to a briefing schedule (Doc. # 1631).

Discussion

I The Eleventh Amendment.

Maryland first argues that the Eleventh Amendment bars this Court from exercising jurisdiction to determine that the sales are exempt from state transfer and recording taxes.

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 Amendment expressly bars only suits against States by citizens of other States, the Supreme Court has long held that the Amendment also bars suits against the State by its own citizens. Hans v. Louisiana, 134 U.S. 1, 15, 10 S.Ct. 504, 33 L.Ed. 842 (1890); Sacred Heart Hospital of Norristown v. Pennsylvania (In re Sacred Heart Hospital of Norristown), 133 F.3d 237, 241 (3d Cir.1998). The Amendment divests federal courts from jurisdiction over private suits against unconsenting states. Seminole Tribe of Florida v. Florida, 517 U.S. 44, 54, 116 S.Ct. 1114, 1122, 134 L.Ed.2d 252 (1996). Nor may Congress pass a law under its Article I powers to vest federal courts with jurisdiction to hear such suits. Seminole Tribe, 517 U.S. at 72-73, 116 S.Ct. at 1131-32; see also Alden v. Maine, 527 U.S. 706, 119 S.Ct. 2240, 2266, 144 L.Ed.2d 636 (1999) (holding that states likewise retain immunity from private suit in their own courts which Congress may not abrogate by Article I legislation).

Eleventh Amendment immunity derives from the axiom that each state is a sovereign entity in our federal system, and as such, is not amendable to the suit by an individual without its consent. Seminole Tribe, 517 U.S. at 54, 116 S.Ct. at 1122. The immunity exists to prevent a federal court from entering a private judgment that a state must pay from its treasury. Seminole Tribe, 517 U.S. at 58, 116 S.Ct. at 1124. "It also serves to avoid the `indignity of subjecting a state to the coercive process of federal judicial tribunals at the instance of private parties'". Id. (quoting Puerto Rico Aqueduct and Sewer Authority v. Metcalf & Eddy, Inc., 506 U.S. 139, 146, 113 S.Ct. 684, 689, 121 L.Ed.2d 605 (1993)).

The immunity granted by the Eleventh Amendment is not absolute. Most fundamentally, it only applies to "suits against a State." U.S. CONST. amend. XI; see, e.g., Mitchell v. Franchise Tax Board, State of Calif. (In re Mitchell), 209 F.3d 1111, 1116 (9th Cir. 2000); Chandler v. Oklahoma ex rel. Oklahoma Tax Comm'n (In re Chandler), 251 B.R. 872, 875 (10th Cir. BAP 2000). A precise definition of a "suit" as contemplated by the Eleventh Amendment is elusive. The only well-established rule is that an action by a private party against a state, which seeks entry of a monetary judgment against the state, is a suit for purposes of the Eleventh Amendment.⁵ See, e.g., Edelman v. Jordan, 415 U.S. 651, 663, 94 S.Ct. 1347, 1355-56, 39 L.Ed.2d 662 (1974). The majority view in bankruptcy is that an adversary proceeding against a state is a suit under the Eleventh Amendment. Chandler, 251 B.R. at 875-76 (collecting cases); but see In re Bliemeister, 251 B.R. 383 (Bankr.D.Ariz.2000) (debtor's adversary proceeding to determine dischargeability of debt to Industrial Commission of Arizona not barred by Eleventh Amendment).

Maryland argues that the Eleventh Amendment applies to the present proceedings because the Debtors' motions are "suits." It reasons that the defining characteristic of an Eleventh Amendment suit is whether the action results in a loss to the State, either via a direct judgment against the state or by a declaration that will ultimately adversely affect the State's interests. Thus it urges the Court to consider the effect of the proceeding, not its procedural posture, when determining whether the proceeding is a suit. In the present case, Maryland argues that the effect of the motions is to preclude Maryland from collecting revenue, thus rendering the motions suits under the Eleventh Amendment. It claims that whether the Debtors seek relief in the form of a declaratory ruling or an affirmative injunction or judgment, or whether they proceed by motion rather than by adversary proceeding, is immaterial.

Maryland relies primarily on NVR Homes, Inc. v. Clerks of the Circuit Courts Anne Arundel County (In re NVR, L.P.), 189 F.3d 442 (4th Cir.1999), cert. denied, 528 U.S. 1117, 120 S.Ct. 936, 145 L.Ed.2d 815 (2000), for its position. In NVR Homes, the reorganized debtor filed a motion the purpose of which was to obtain a declaration under § 1146(c) that it was exempt from transfer and recording taxes already paid. 189 F.3d at 448. The debtor hoped to use the ruling against Maryland and Pennsylvania to obtain a refund of the taxes. See id.

The Court of Appeals for the Fourth Circuit held that the debtor's motion was a "suit" against the states for purposes of the Eleventh Amendment. Id. at...