In re Soileau
| Decision Date | 22 May 2007 |
| Docket Number | No. 05-20501.,05-20501. |
| Citation | 488 F.3d 302 |
| Parties | In the Matter of: Geraldine H. SOILEAU, Debtor. State of Texas, Appellant, v. Geraldine H. Soileau, Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
James L. Norris (argued), Houston, TX, for Appellant.
Alva Nell Wesley-Thomas (argued), Tonya Monique Felix (argued), Houston, TX, for Soileau.
Appeal from the United States District Court for the Southern District of Texas.
Before JONES, Chief Judge, and WIENER and PRADO, Circuit Judges.
The State of Texas ("the State") appeals the decisions of the bankruptcy and district courts denying the State's motion to dismiss the petition of Geraldine Soileau ("Soileau") for Chapter 7 bankruptcy protection. The State's challenge is grounded exclusively in Eleventh Amendment sovereign immunity, and the bankruptcy court and district court ruled on that ground alone. As the Supreme Court's decisions in Central Virginia Community College v. Katz1 and Tennessee Student Assistance Corp. v. Hood2 establish that the discharge of a debt like Soileau's is not barred by such immunity, the bankruptcy court had jurisdiction. We therefore affirm the denial of the State's dismissal motion.
The facts pertinent to this case are undisputed. As a licensed bail bondsman, Soileau served as surety on bail bonds for numerous criminal defendants in Texas. Over time, fifty-five of these defendants absconded while out on bail. The State sued Soileau as those defendants' surety and obtained state court money-judgments against her. In April 2004, Soileau filed a petition under Chapter 7 of the Bankruptcy Code, in which she sought to discharge a total of $650,897.71 in such judgments.
Two weeks later, the State moved to dismiss on sovereign immunity grounds, claiming that its refusal to consent to being made a party to the bankruptcy proceedings deprived the bankruptcy court of jurisdiction over it. Shortly thereafter, the bankruptcy court denied the State's motion, relying on both Hood and on our pre-Hood and pre-Katz decision in Hickman v. State of Texas (In re Hickman).3 The State appealed to the district court, but it affirmed. The State then timely filed a notice of appeal to this court.
In reviewing cases originating in bankruptcy, we "perform the same function, as did the district court: Fact findings of the bankruptcy court are reviewed under a clearly erroneous standard and issues of law are reviewed de novo."4
The only issue presented by this appeal is whether, on grounds of Eleventh Amendment sovereign immunity, the State may avoid discharge of Soileau's forfeiture judgments incurred as surety on bail bonds issued to the State in conformity with its statutory scheme.5 Under the Eleventh Amendment, the jurisdiction of the federal courts "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."6 As interpreted, however, the Eleventh Amendment is not limited to its text; the Supreme Court has "repeatedly held that an unconsenting State also is immune from suits by its own citizens."7 Despite this general prohibition of suits against a non-consenting or non-waiving state, "[s]tates, nonetheless, may still be bound by some judicial actions without their consent."8 Hood and Katz, both recent Supreme Court cases addressing sovereign immunity in the bankruptcy context, provide two such examples; and their holdings inform our analysis of the State's claim today.
In Hood, the debtor had signed promissory notes for educational loans guaranteed by the Tennessee Student Assistance Corporation ("TSAC"), a governmental corporation created by the State to administer student loans. Early in 1999, Hood filed a Chapter 7 bankruptcy petition and was granted a general discharge that did not cover her student loans. Later that year, Hood reopened her petition, filing an adversary proceeding against, inter alia, TSAC, seeking a determination by the bankruptcy court that her student loans were dischargeable. TSAC sought dismissal on sovereign immunity grounds.9
The bankruptcy court concluded that Hood's debt to the state was dischargeable, rejecting TSAC's contention that the court lacked jurisdiction because of sovereign immunity. A Bankruptcy Appellate Panel ("BAP") affirmed, as did the Sixth Circuit Court of Appeals thereafter.10 The Supreme Court granted certiorari to determine whether the Bankruptcy Clause of the Constitution11 "grants Congress the authority to abrogate state sovereign immunity from private suits."12
The Hood Court affirmed the BAP and the Court of Appeals, but did so without reaching the broader question whether 11 U.S.C. § 106(a)13 is a valid abrogation of sovereign immunity. The Court held more narrowly that "a proceeding initiated by a debtor to determine the dischargeability of a student loan debt is not a suit against the State for purposes of the Eleventh Amendment."14 As the Court explained, "[t]he discharge of a debt by a bankruptcy court is . . . an in rem proceeding," as the bankruptcy court is concerned with the estate of the debtor.15 The Court in Hood concluded that, "[a]t least when the bankruptcy court's jurisdiction over the res is unquestioned, our cases indicate that the exercise of its in rem jurisdiction to discharge a debt does not infringe state sovereignty."16
The Supreme Court went on in Hood to reject another of TSAC's contentions, i.e., that because the proceedings to challenge the dischargeability of a student loan debt were inherently adversarial,17 the discharge of the student loan debt was an infringement on state sovereignty. In rejecting this argument, the Court ruled that, despite the adversarial nature of the proceeding, 18 Accordingly, the Court held that, for purposes of the Eleventh Amendment, the undue-hardship determination under § 523(a)(8) of the Bankruptcy Code is not a suit against the state.19
In Katz, decided two years after Hood and two years after Soileau filed her Chapter 7 petition, the Court assayed to answer the question left open in Hood, viz, "whether Congress' attempt to abrogate the states sovereign immunity in 11 U.S.C. § 106(a) is valid."20 Katz involved a proceeding initiated by a bankruptcy trustee under Sections 547(b) and 550(a) of the Bankruptcy Code to set aside the debtor's pre-petition preferential transfers of funds to state agencies.21 The State contended that sovereign immunity barred the proceedings to avoid and recover the preferential transfers.22 The Court concluded that the transfer did not offend state sovereign immunity, holding that, "[i]n ratifying the Bankruptcy Clause [of the United States Constitution], the States acquiesced in a subordination of whatever sovereign immunity they might otherwise have asserted in proceedings necessary to effectuate the in rem jurisdiction of the bankruptcy courts."23 Discussing the transfer involved in Katz, the Court held that "[i]nsofar as orders ancillary to the bankruptcy courts' in rem jurisdiction, like orders directing turnover of preferential transfers, implicate States' sovereign immunity from suit, the States agreed in the plan of the Convention not to assert that immunity."24
Applying Hood and Katz to the instant case, we conclude that the State here has no claim to sovereign immunity. Whatever uncertainty there may be as to the outer limits of the holdings of Katz and Hood, at the very least they together establish beyond cavil that an in rem bankruptcy proceeding brought merely to obtain the discharge a debt or debts by determining the rights of various creditors in a debtor's estate—such as is brought here—in no way infringes the sovereignty of a state as a creditor.25
There can be no serious question that the proceeding at issue here is purely in rem: The bankruptcy court's exercise of jurisdiction is focused only on Soileau's estate. Katz describes three crucial facets of the exercise of in rem jurisdiction that prevent it from interfering with state sovereign immunity: (1) exercise of jurisdiction over the estate of the debtor, (2) equitable distribution of the estate's property among creditors, and (3) discharge.26 In this case, the State challenges the in rem discharge of a debt, a specie of imposition on the states' sovereignty undeniably countenanced by Katz and Hood.
To the extent that Hood implies in a footnote that there could possibly be some exercise of in rem jurisdiction that conceivably might offend the sovereignty of the state,27 "such concerns are not present here."28 Indeed, Soileau's is even a stronger case for rejection of the State's sovereign immunity defense than was Hood's or Katz's. Hood, after all, addressed an adversarial proceeding involving a state, and Katz addressed an order for the avoidance of preferential transfers to a state to allow the trustee to recoup those transfers from the state's treasury— each proceeding carrying with it some of the trappings traditionally associated with a suit against a state. Soileau's, in contrast, carries none: She is neither seeking the return of any funds already in the State's possession nor bringing an adversarial proceeding against the State. She asks nothing more than that the bankruptcy court exercise its in rem jurisdiction over her bankruptcy estate by adjudicating the rights of the State as a creditor. As such an exercise of in rem jurisdiction is indisputably contemplated by Katz,29 the State's...
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