In re Lees

• Decision Date: 26 July 2001
• Docket Number: No. 00-2808 D/A.,00-2808 D/A.
• Citation: 264 BR 884
• Parties: In re Daniel J. LEES, Debtor. Daniel J. Lees, Plaintiff, v. Tennessee Student Assistance Corporation, et al., Defendant.
• Court: U.S. District Court — Western District of Tennessee

264 B.R. 884 (2001)

In re Daniel J. LEES, Debtor Daniel J. Lees, Plaintiff, v. Tennessee Student Assistance Corporation, et al., Defendant.

No. 00-2808 D/A.

United States District Court, W.D. Tennessee, Western Division.

July 26, 2001.

COPYRIGHT MATERIAL OMITTED

Russell W. Savory, Gotten Wilson & Savory, Memphis, TN, for plaintiff.

Marvin E. Clements, Jr., Office of the Attorney General, Criminal Justice Division, Sally Ramsey, Office of the Attorney General, Tax Division, Bankruptcy Unit, Martha S. Davis, Attorney General and Reporter, Tax Division, Nashville, TN, for defendant.

David S. Kennedy, U.S. Bankruptcy Court Judge, Memphis, TN, pro se.

Jed G. Weintraub, Clerk of Court, United States Bankruptcy Court, Memphis, TN, pro se.

ON APPEAL FROM THE BANKRUPTCY COURT, OPINION AFFIRMING, ON ALTERNATIVE GROUNDS, THE BANKRUPTCY COURT'S DECISION DENYING DEFENDANT'S MOTION TO DISMISS FOR LACK OF SUBJECT MATTER JURISDICTION

DONALD, District Judge.

Defendant, the Tennessee Student Assistance Corporation ("TSAC"), appeals the Bankruptcy Court's finding that it has subject matter jurisdiction. Defendant asserts that it is an arm of the state, and under the Eleventh Amendment, immune from suit. The Court has jurisdiction to review the Bankruptcy Court's decision under 28 U.S.C. § 1334 and 11 U.S.C. § 158(a). For the reasons herein, the Court AFFIRMS, on alternative grounds, the Bankruptcy Court's decision denying Defendant's motion to dismiss for lack of subject matter jurisdiction.

I. Factual and Procedural Background

Title 11 U.S.C. § 523(a)(8) provides that educational loan payments (student loans) may be discharged in bankruptcy if making such payments imposes an undue hardship on the debtor. Specifically, § 523(a)(8) states:

(a) A discharge under section 727, 1141, 1228(a), 1228(b) of this title does not discharge an individual debtor from any debt —

(8) for an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or non profit institution, or for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless —

(B) excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor\'s dependents.

Plaintiff Daniel Lees filed a complaint demanding that TSAC discharge his student loans pursuant to § 523(a)(8)(B). In response, TSAC asserted that, under the Eleventh Amendment, it was immune from Plaintiff's federal bankruptcy claim. Although Plaintiff did not agree that TSAC was an arm of the state and therefore eligible to assert sovereign immunity, Plaintiff invoked § 106(a) of the Bankruptcy Code, which provides that "sovereign immunity is abrogated as to a governmental unit" regarding claims brought under § 523.

Bankruptcy Judge David S. Kennedy found that TSAC was a state agency, but nevertheless subject to suit under 11 U.S.C. § 106(a). Judge Kennedy reasoned that the Bankruptcy Clause gave Congress the power to abrogate Eleventh Amendment immunity. Alternatively, Judge Kennedy found that § 106(a) removed the Eleventh Amendment shield because Congress passed it pursuant to § 5 of the Fourteenth Amendment. On August 2, 2000, TSAC filed a notice of appeal with the Bankruptcy Court of the Western District of Tennessee. Pursuant to Fed. R.Bankr.P. 8003(c), this Court found interlocutory review appropriate.

II. Analysis

Sovereign immunity derives from the theory that states retain attributes of their pre-Constitution sovereignty, and from the structure of the Constitution itself. Alden v. Maine, 527 U.S. 706, 748, 119 S.Ct. 2240, 2263, 144 L.Ed.2d 636. The Eleventh Amendment shields states from federal claims brought by individuals in either state or federal courts. Id. at 752, 754, 119 S.Ct. at 2265-66. Courts treat sovereign immunity issues with great care, sensitive to the impropriety of subjecting a sovereign to the unlawful will of another sovereign. See Seminole Tribe of Fla. v. Florida, 517 U.S. 44, 58, 116 S.Ct. 1114, 1124, 134 L.Ed.2d 252 (1996) (stating that the Eleventh Amendment serves to avoid the "indignity of subjecting a state to the coercive process of judicial tribunals at the instance of private parties"); Alpha Therapeutic Corp. v. Nippon Hoso Kyokai, 199 F.3d 1078, 1087-88 (9th Cir.1999); Vickery v. Jones, 100 F.3d 1334, 1346-47 (7th Cir.1996).

Plaintiff first contends that the bankruptcy court has subject matter jurisdiction because TSAC is not an arm of the state, and therefore is not afforded Eleventh Amendment immunity. Alternatively, Plaintiff asserts that, even if TSAC is an arm of the state, Congress has power to abrogate sovereign immunity through its power pursuant to either (1) the Bankruptcy Clause; or (2) § 5 of the Fourteenth Amendment.

A. Arm of the state

The Eleventh Amendment helps ensure that a state enjoy the undisturbed discretion to structure its government and administer its public affairs. Blake v. Kline, 612 F.2d 718, 725. Eleventh Amendment protection, however, only extends to suits prosecuted against a governmental entity that has a close nexus to the state. Alden, 527 U.S. at 706, 119 S.Ct. at 2267; Rogers, Alex E., Clothing State Governmental Entities with Sovereign Immunity: Disarray in the Eleventh Amendment Arm-of the State Doctrine, 92 Colum.L.Rev. 1243, 1243, (1992). The spectrum ranges from protected entities such as states and state officials to unprotected entities such as counties and municipal corporations. Mt. Healthy City School Dist. v. Doyle, 429 U.S. 274, 97 S.Ct. 568, 50 L.Ed.2d 471 (1977). TSAC and other similarly hybrid entities fall somewhere in the middle of this spectrum.

The term "arm of the state" refers to an entity that receives Eleventh Amendment protection, and the term "political subdivision" refers to an entity that does not. Lake Country Estates v. Tahoe Regional Planning Agency, 440 U.S. 391, 401, 99 S.Ct. 1171, 1177, 59 L.Ed.2d 401 (1979). Determining whether an entity is an arm of the state or a political subdivision may settle whether an entity is permitted to perform its public functions free from the fear that its resources are vulnerable to federal claims brought by individuals. This determination therefore deserves careful scrutiny, as receiving the status of "arm of the state" is the first step required of any entity attempting to place its own parochial interests above the Nation's. City of Lafayette, La. v. Louisiana Power & Light Co., 435 U.S. 389, 413, 98 S.Ct. 1123, 1136, 55 L.Ed.2d 364 (1978).

Whether a local entity is an arm of the state under the Eleventh Amendment is a question of federal law. Regents of University of Calif. v. Doe, 519 U.S. 425, 430 n. 5, 117 S.Ct. 900, 904, 137 L.Ed.2d 55 (1997). That question, however, can only be answered by referring to state law provisions defining the agency's character. Id. Courts consider numerous factors in evaluating the nexus between the entity and the state, including (1) state law characterization of the entity; (2) whether state treasury funds would be used to satisfy the judgment, and the degree to which the state has insulated itself from responsibility for the agency's operations; (3) the degree the state controls the entity's operations, and conversely the degree of discretion an entity has in controlling its own affairs, such as the power to issue bonds and to levy taxes; (4) the source of the agency's funding; and (5) whether the agency is performing a governmental or proprietary function. Mt. Healthy, 429 U.S. at 280, 97 S.Ct. at 572-73; Lake Country Estates, 440 U.S. at 401-402, 99 S.Ct. at 1177-78; Brotherton v. Cleveland, 173 F.3d 552, 560 (6th Cir.1999) (citing Hufford v. Rodgers, 912 F.2d 1338 (11th Cir.1990); Duke v. Grady Mun. Schs., 127 F.3d 972, 978 (10th Cir.1997); Puerto Rico Ports Auth. v. M/V Manhattan Prince, 897 F.2d 1, 9 (1st Cir.1990)). The Sixth Circuit approves of a multi-factored analysis. Brotherton, 173 F.3d at 560 (citing to the Second, Third, Fourth, Eighth Circuits, and emphasizing the Tenth Circuit's treatment, as well as the Eleventh Circuit's approach, which focused on the first four prongs listed above).

Various bankruptcy courts have found, implicitly or explicitly, that because TSAC is created by the state, it is an arm of the state. See, e.g., Seay v. TSAC, 244 B.R. 112, 114 & n. 2 (Bankr.E.D.Tenn. 2000) (finding that "TSAC is a governmental corporation created by the statutes of Tennessee for the purpose of facilitating student loans in the state. As such it is an arm or agency of the state of Tennessee."); Arnold v. TSAC, 255 B.R. 845, 848 (Bankr. W.D.Tenn.2000); Dodson v. TSAC, 259 B.R. 635, 638 (Bankr.E.D.Tenn.2001) (citing Seay, 244 B.R. at 114). These decisions, however, fail to consider factors that the United States Supreme Court and Sixth Circuit¹ apply in determining whether an entity is an arm of the state. Further, the mere fact that a state creates an entity has little bearing on whether it is an arm of the state. See Hess v. Port Authority Trans-Hudson Corp., 513 U.S. 30, 47, 115 S.Ct. 394, 404, 130 L.Ed.2d 245 (1994); Southwestern Bell Telephone Co. v. City of El Paso, 243 F.3d 936, 940 (5th Cir.2001).

1. State law characterization of TSAC

Courts find the state law's characterization of the entity a decisive factor. Rogers, 92 Colum.L.Rev. at 1269 (citing Korgich v. Regents of N.M. Sch. of Mines, 582 F.2d 549, 551 (10th Cir.1978); Blake v. Kline, 612 F.2d 718, 722 (3d Cir.1979)). Courts first look to the enabling statute to determine how the state characterizes the entity at issue. See, e.g., Mt. Healthy, 429 U.S. at 280, 97 S.Ct. at 572-73. In Mt. Healthy, for example, the Court found that under Ohio law (1) the "state" did not include "political subdivisions"; and (2) school boards were defined as political subdivisions. Ohio law therefore weighed against affording the school board sovereign immunity. C...