In re Lenke
| Decision Date | 17 May 2000 |
| Docket Number | Bankruptcy No. 96-02098-PHX-RJH. Adversary No. 00-00167. |
| Citation | 249 BR 1 |
| Parties | In re Jurgen Werner LENKE, Debtor. Jurgen Lenke, Plaintiff, v. Reinhold Tischler; Boulder Canyon Ranch, an Arizona corporation; Mark Svedja; The State of Arizona; and The Maricopa County Prosecutor's Office, Defendants. |
| Court | U.S. Bankruptcy Court — District of Arizona |
Peter H. Honigmann, Foley & Honigmann, Phoenix, AZ, for plaintiff/debtor.
Denise Ann Faulk, Assistant Attorney General, Phoenix, AZ, for State of Arizona.
Richard Romley, Maricopa County Attorney, Phoenix, AZ, Mark W. Bennink, Maricopa County Attorney's Office, Southeast Facility, Mesa, AZ, for Maricopa County.
Dale D. Ulrich, Phoenix, AZ, Chapter 7 Trustee.
Debtor Jurgen Lenke ("Lenke" or "Debtor") filed a Complaint to Determine Dischargeability of a Debt and an Application for Preliminary Injunction to enjoin his state criminal prosecution for theft. Defendant State of Arizona moved to dismiss, asserting Eleventh Amendment sovereign immunity and also arguing that the Ninth Circuit en banc decision in Gruntz v. County of L.A. (In re Gruntz), 202 F.3d 1074 (9th Cir.2000), precludes bankruptcy courts from enjoining a criminal prosecution even if it is a disguised effort by the prosecutor to enforce payment of a discharged debt.
The Court concludes that neither the Eleventh Amendment nor Gruntz precludes the relief sought, and therefore denies the State's Motion to Dismiss. But the Debtor has not shown either a likelihood of success on the merits nor imminent irreparable harm sufficient to warrant enjoining criminal prosecution, so the Debtor's Application for Preliminary Injunction is also denied.
In 1995, Lenke joined with Reinhold Tischler ("Tischler") to form a corporation, Boulder Canyon Ranch, Inc. (the "Corporation"), to conduct horseback riding tours in the Tonto National Forest north of Scottsdale, Arizona. They were each to invest $50,000, but Lenke was to do all the work and run the business. Either shareholder could dissolve the corporation by written notice to the other.
Within less than a year Tischler became dissatisfied and suspicious of Lenke's running of the business and elected to dissolve the corporation. Upon inspecting the corporate books and records he concluded that Lenke had used corporate funds for personal purposes, had withdrawn his own capital investment, had paid himself an unauthorized salary, and had otherwise misappropriated corporate funds and assets. In March, 1997, Tischler filed a criminal complaint against Lenke with the Maricopa County Sheriff's Office, alleging that Lenke had stolen or embezzled approximately $30,000 from the corporation. The Maricopa County Attorney's Office investigated the case and filed a criminal complaint against Lenke in the Maricopa County Justice Court, which conducted a probable cause hearing and concluded probable cause existed for a criminal action to proceed against Lenke. Consequently a criminal complaint was lodged against Lenke in Maricopa County Superior Court in December, 1998. After several continuances, trial was set for February 2, 2000.
Lenke had filed an individual chapter 11 petition in March of 1996, and converted his case to chapter 7 in August, 1997. He did not list Tischler or the Corporation as creditors and did not give them notice of the bankruptcy. Lenke asserts that Tischler had notice of the bankruptcy case, however, because Tischler's attorney Mark Svejda ("Svejda") filed a proof of claim on behalf of another creditor in that case, sought stay relief, conducted extensive discovery, opposed Lenke's proposed plan of reorganization and ultimately forced the conversion to chapter 7. Because it is not necessary to the result, the Court makes no finding as to whether Tischler had notice of Lenke's bankruptcy but will assume that he did. Tischler did not file any complaint objecting to the discharge of the "debt" Tischler believed Lenke owed him on account of the misappropriations from the Corporation, and Lenke's discharge was entered in October, 1998.
One day before his criminal trial was to commence, Lenke for the first time gave notice of his bankruptcy to the Superior Court and asserted that the criminal trial would violate his discharge injunction because it was a disguised effort to collect a discharged debt. The Superior Court informed Lenke that the trial would proceed unless he obtained injunctive relief from the Bankruptcy Court by April 21, 2000.
Lenke filed a First Amended Complaint to Determine Dischargeability of Debt on April 5, and the present Application for injunctive relief on April 10, naming as defendants Tischler, the dissolved Corporation, Svejda, the State of Arizona, and the Maricopa County Prosecutor's Office. After briefing by all parties, the Court heard oral argument on April 21, 2000 and ruled from the bench, denying both the State's motion to dismiss and Lenke's application for injunctive relief. This opinion amplifies the findings and conclusions issued from the bench in support of both of those rulings, particularly with respect to the proper roles of bankruptcy courts and state courts in light of sovereign immunity and the en banc opinion in Gruntz.
Jurisdiction vs. sovereign immunity
The threshold issue is jurisdictional. The State of Arizona has asserted Eleventh Amendment immunity which, if applicable, is jurisdictional. Mitchell v. Calif. Franchise Tax Bd. (In re Mitchell), 209 F.3d 1111 (9th Cir.2000).
An ordinary discharge order may not constitute a "suit" for Eleventh Amendment purposes even if it discharges a debt owed to a state. Mitchell, supra, citing Texas v. Walker, 142 F.3d 813, 820-25 (5th Cir.1998), cert. denied, 525 U.S. 1102, 119 S.Ct. 865, 142 L.Ed.2d 768 (1999) and Virginia v. Collins (In re Collins), 173 F.3d 924, 929 (4th Cir.1999), cert. denied, ___ U.S. ___, 120 S.Ct. 785, 145 L.Ed.2d 663 (2000). But it does rise to the level of a "suit" when the state is named as a party to an adversary proceeding, and in such cases may be barred by the Eleventh Amendment. Mitchell, supra, citing Walker and Maryland v. Antonelli Creditor's Liquidating Trust, 123 F.3d 777, 786-87 (4th Cir.1997). In Mitchell, the Ninth Circuit also considered and rejected the argument that Bankruptcy Code § 106(a) constituted a valid Congressional abrogation of Eleventh Amendment immunity which survived the Eleventh Amendment because it was passed pursuant to Congress' remedial powers under the Fourteenth Amendment. Because this is an adversary proceeding in which the State of Arizona was named and served as a defendant, Mitchell renders the State immune from the suit under the Eleventh Amendment.
But just because the State of Arizona is immune from this adversary proceeding does not mean that no effective relief could be granted. The Maricopa County Prosecutor's Office is also a named party. It is not clear whether the intent was to name the County, the County Attorney, or all the attorneys in the County Attorney's office. In either case, however, such a suit could proceed despite the State's Eleventh Amendment immunity.
The County is a political subdivision of the State, but because it is also a separate "body politic and corporate," A.R.S. § 11-202(A), it is generally not regarded as sharing the State's Eleventh Amendment immunity. Lincoln County v. Luning, 133 U.S. 529, 10 S.Ct. 363, 33 L.Ed. 766 (1890).
But the naming of the County Prosecutor's Office evidences an intent to name only an "office" of the County, not the entire County itself. The county prosecutor's office does not appear to be statutorily recognized by Arizona, though it undoubtedly exists as a practical matter. What the statutes do recognize is the county attorney, who "is the public-prosecutor of the county," and who is given the statutory duty to "conduct, on behalf of the state, all prosecutions for public offenses." A.R.S. § 11-532(A)(1). Under certain circumstances, the suit could proceed against the County Attorney, even though he is prosecuting "on behalf of the state."
The doctrine of Ex parte Young, 209 U.S. 123, 28 S.Ct. 441, 52 L.Ed. 714 (1908), does permit prospective injunctive relief against state officials to enjoin their actions that are contrary to constitutional rights or federal laws. Even though Eleventh Amendment immunity would preclude an action against the state itself, the Supreme Court recognized this alternative avenue of suing the state official in Seminole Tribe of Florida v. Florida, 517 U.S. 44, 70-72 nn. 14 & 16, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996), and reemphasized it just last year in Alden v. Maine, 527 U.S. 706, 119 S.Ct. 2240, 144 L.Ed.2d 636 (1999) (). The Ninth Circuit in Mitchell suggested a suit against the debt-collecting official is the proper procedural avenue for discharged debtors to protect themselves from state efforts to collect discharged debts. Id., 209 F.3d at 1116. Finally, the Ninth Circuit Bankruptcy Appellate Panel upheld the jurisdictional basis under Ex parte Young for a suit against a state official seeking a declaration that certain taxes had been discharged: Goldberg v. Ellett (In re Ellett), 243 B.R. 741, 746 (9th Cir. BAP 1999). Accord, Wilson v. Cumis Ins. Soc'y, Inc. (In re Wilson), 246 B.R. 600 (Bankr.E.D.Ark.2000); Pace v. Kamin (In re Pace), Nos. 99-17529DWS & 99-0838, 2000 WL 337599 (Bankr.E.D.Pa. March 24, 2000); Lesniewski v. Kamin (In re Lesniewski), 246 B.R. 202 (Bankr.E.D.Pa. 2000); DeAngelis v. Laskey (In re DeAngelis), 239 B.R. 426 (Bankr.D.Mass.1999).
Therefore the debtor's suit...
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