In re Merry-Go-Round Enterprises, Inc., Bankruptcy No. 94-5-0161-SD to 94-5-0163-SD.
| Decision Date | 03 December 1998 |
| Docket Number | Bankruptcy No. 94-5-0161-SD to 94-5-0163-SD. |
| Citation | 227 BR 775 |
| Parties | In re MERRY-GO-ROUND ENTERPRISES, INC., MGR Distribution Corporation, MGRR, Inc., Debtors. |
| Court | U.S. Bankruptcy Court — District of Maryland |
Brooke Schumm, III, Daneker, McIntire, Davis, Schumm, Prince & Goldstein, P.C., Baltimore, MD, for Oakland County.
Deborah Hunt Devan, Neuberger, Quinn, Gielen, Rubin & Gibber, Baltimore, MD, Chapter 7 Trustee.
Karen H. Moore, Asst. U.S. Trustee, Office of U.S. Trustee, Baltimore, MD, for U.S. Trustee.
Joel I. Sher, Shapiro & Olander, Baltimore, MD, for trustee.
Before the court is the Chapter 7 Trustee's objection to the postpetition, preconversion secured claim of Oakland County, Michigan. The two questions submitted for resolution are: first, whether this court has jurisdiction to hear the Trustee's objection to the status of the county's claim for postpetition personal property taxes; and, second, whether a lien for an ad valorem tax assessed on personal property in Michigan may attach postpetition when the debtor's case commenced prior to the effective date of 11 U.S.C. § 362(b)(18).
Merry-Go-Round Enterprises, Inc., and certain of its affiliates (the "Debtor") filed a petition to reorganize under Chapter 11 of the Bankruptcy Code on January 11, 1994. The reorganization effort was unsuccessful, however, and this court converted the case to Chapter 7 on March 1, 1996. Prior to the conversion, on February 22, 1996 this court approved a going out of business (GOB) sale of Debtor's inventory. Under the terms of the order approving the GOB sale, whatever liens had attached to the items being sold would continue as liens on the proceeds from the sale.
Oakland County claims that its liens for postpetition Chapter 11 personal property taxes had attached to items sold at the GOB sale and continued in the GOB sale proceeds.
Personal property taxes were assessed on December 31, 1993, 1994, and 1995 in the amounts of $18,922.62, $189.76 and $14,536.40, respectively. The parties stipulated that the amount of Debtor's inventory in Michigan on the petition date exceeded the amount of Oakland County's claim. The parties also stipulated that the amount of inventory on February 29, 1996, the date of the GOB sale, and the amount of the GOB sale proceeds as of March 1, 1996, the date the case was converted, exceed the claim of Oakland County. Therefore, if Oakland County's statutory lien attached, its claim is fully secured.
At the hearing the parties agreed to continue the objection as to the prepetition component of the claim, i.e. the taxes assessed as of December 31, 1993. The Trustee represented that prepetition secured claims would be paid to the extent that collateral existed and was liquidated in the GOB sale, if the proceeds are traceable.
The basis of Trustee's objection to the December 31, 1994 and December 31, 1995 claims is that the automatic stay of 11 U.S.C. § 362(a)(4) prevented the perfection of Oakland County's personal property tax liens postpetition. Oakland County contends that its liens attached by operation of law and that perfection of its liens was not stayed by the filing of the bankruptcy petition. It also asserts that this court is without jurisdiction to decide the matter.
The challenge to the court's jurisdiction must be addressed first. Oakland County argues that under Seminole Tribe of Florida v. Florida, 517 U.S. 44, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996), this court is without jurisdiction to decide the status of its claim. It urges that the county did not consent to be sued in this court, and that it is protected by the Eleventh Amendment, which 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 (January 8, 1798).
There is nothing in this record to establish that Oakland County has standing to raise the issue of sovereign immunity. The Eleventh Amendment's protection of a State's sovereign immunity does not generally extend to a State's subdivisions. Lincoln County v. Luning, 133 U.S. 529, 530, 10 S.Ct. 363, 33 L.Ed. 766 (1890); Maryland v. Antonelli Creditors' Liquidating Trust, 123 F.3d 777, 786 (4th Cir.1997). In Antonelli, the Fourth Circuit stated:
It has long been the law that the Eleventh Amendment does not bar suits in federal court against political subdivisions of the state. . . . cf. Pennhurst State Sch. and Hosp. v. Halderman, 465 U.S. 89, 123, 104 S.Ct. 900, 920, 79 L.Ed.2d 67 (1984) ().
Antonelli, 123 F.3d at 786. Similarly, the U.S. Supreme Court has found that unless a political subdivision of a State is the arm or alter ego of a State, it is a citizen for purposes of diversity jurisdiction. Moor v. County of Alameda, 411 U.S. 693, 717, 93 S.Ct. 1785, 1800, 36 L.Ed.2d 596 (1973). On this record the court concludes, therefore, that Oakland County, as a subdivision of the State, does not have standing to assert the State of Michigan's Eleventh Amendment's sovereign immunity.
The issue of whether Oakland County may assert the State of Michigan's Eleventh Amendment right of sovereign immunity, however, was not raised at the hearing, nor was it addressed in memoranda submitted by the parties. Further, the court recognizes that sovereign immunity is a jurisdictional issue that may be raised at any time, even for the first time on appeal. Schlossberg v. Maryland (In re Creative Goldsmiths of Washington, D.C., Inc.), 119 F.3d 1140, 1143-44 (4th Cir.1997). Consequently, the court will consider the jurisdictional issue on the merits, as if Oakland County is authorized to invoke Michigan's sovereign immunity.
The procedural context of the instant dispute is not in the form of a suit in law or equity; rather, it is an objection to claim, which is a contested matter. Fed.R.Bankr.P. 3007, 9014. Oakland County argues, however, that because the Trustee seeks to avoid or subordinate it's lien, the Trustee has made a demand for relief of the kind specified in Fed.R.Bankr.P. 7001(2) and (8). Consequently, the County urges that the objection "becomes an adversary proceeding." Id. at R. 3007.
Oakland County argues that the Trustee's objection amounts to a proscribed suit in law or equity because some affirmative step, i.e. an adversary proceeding, must be taken to avoid or modify a security interest in property, citing Cen-Pen Corp. v. Hanson, 58 F.3d 89, 92 (4th Cir.1995). In Cen-Pen, a debtor's confirmed chapter 13 plan attempted to void the liens of a secured creditor. The U.S. Court of Appeals for the Fourth Circuit stated that "the general rule is that liens pass through bankruptcy unaffected." Id. The court continued that "unless the debtor takes appropriate affirmative action to avoid a security interest in property of the estate, that property will remain subject to the security interest following confirmation." Id. The instant matter is distinguishable from Cen-Pen because the Trustee has objected to the secured status asserted by Oakland County in its proof of claim; she has not sought to avoid an acknowledged lien. Her objection is limited to an otherwise allowed secured claim in this case.
Further, Trustee's objection does not include either a prayer or counterclaim for the avoidance of a lien or a request for subordination of an allowed claim. Rather, the existence of a lien is at issue. Because the Trustee's objection does not request relief specified in Fed.R.Bankr.P. 7001(2) or (8), this dispute is a contested matter. See In re Therneau, 214 B.R. 782, 785 (Bankr. E.D.N.C.1997); Fed.R.Bankr.P. 3007 Advisory Committee Note (1983) (objections to claims are contested matters, unless a counterclaim is joined with the objection). Cf., 10 Collier on Bankr. ¶ 7.001.031 (15th ed. 1997) ("The validity of a lien may be determined in contexts other than adversary proceedings.").
The Supreme Court in Seminole Tribe stated: "notwithstanding Congress' clear intent to abrogate the States' sovereign immunity, the Indian Commerce Clause does not grant Congress that power, and therefore the statute at issue cannot grant jurisdiction over a State that does not consent to be sued." 116 S.Ct. at 1119. Chief Justice Rehnquist, who delivered the Court's opinion, wrote: "Even when the Constitution vests in Congress complete law-making authority over a particular area, the Eleventh Amendment prevents congressional authorization of suits by private parties against unconsenting States." Id. at 1131-32. The Seminole Tribe decision "reconfirmed that the background principle of state sovereign immunity embodied in the Eleventh Amendment is not so ephemeral as to dissipate when the subject of the suit is an area . . . that is under the exclusive control of the Federal Government." Id. at 1131.
Applying Seminole Tribe, the Fourth Circuit in Creative Goldsmiths held that § 106(a), which purported to abrogate states' Eleventh Amendment Immunity, was unconstitutional. See Creative Goldsmiths, 119 F.3d at 1147. Specifically, the court found: "Because the holding in Seminole extended to restrict all federal jurisdiction over the states based on Article I powers, we hold in this case that Congress has no authority under the Bankruptcy Clause, U.S. Const. art. I, § 8, cl. 4, to abrogate...
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