In re York-Hannover Developments, Inc.
| Decision Date | 10 October 1996 |
| Docket Number | Bankruptcy No. 92-01424-5-ATS,Adversary No. S-94-00145-5-AP. |
| Citation | 201 BR 137 |
| Court | U.S. Bankruptcy Court — Eastern District of North Carolina |
| Parties | In re YORK-HANNOVER DEVELOPMENTS, INC., Debtor. Richard D. SPARKMAN, Trustee, Plaintiff, v. STATE OF FLORIDA DEPARTMENT OF REVENUE, Defendant. |
Richard D. Sparkman, Angier, NC, for Trustee.
Kent L. Weissinger, Assistant General Counsel, Florida Dept. of Revenue, Tallahassee, FL, for State of Florida Dept. of Rev.
Phillip M. Seligman, Civil Division, U.S. Department of Justice, Washington, DC, for U.S.
This is an adversary proceeding brought by Richard D. Sparkman, chapter 7 trustee for York-Hannover Developments, Inc. ("YHDI"), to recover alleged fraudulent transfers totaling $15,405 from the State of Florida Department of Revenue pursuant to 11 U.S.C. § 548 and the North Carolina fraudulent conveyance statutes pursuant to § 544(b).1 The defendant, the State of Florida, did not file a proof of claim in this case, did not previously participate in this case and has in no way consented to this court's jurisdiction.
The State of Florida filed a motion to dismiss on the grounds of sovereign immunity and a hearing was held in Raleigh, North Carolina on February 22, 1995. Section 106(a) of the Bankruptcy Code, as amended by the Bankruptcy Reform Act of 1994, Pub.L. No. 103-394, § 113, 108 Stat. 4106 (1994), expressly precludes the sovereign immunity defense in this proceeding.2 Section 106(a) provides that "notwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to the following: (1) Sections ... 544, and 548."3
The State of Florida, however, argued that Congress lacked constitutional authority to abrogate state sovereign immunity when legislating pursuant to the Constitution's Article I Bankruptcy Clause4 and that the Eleventh Amendment5 prevented such an abrogation. Mr. Sparkman, the trustee, asserted that in Pennsylvania v. Union Gas Co., 491 U.S. 1, 109 S.Ct. 2273, 105 L.Ed.2d 1 (1989), the Supreme Court recognized Congress' authority to abrogate state sovereign immunity under the Interstate Commerce Clause of Article I and that Congress had similar authority under Article I's Bankruptcy Clause. The State of Florida contended that the Supreme Court was considering similar issues in the then pending case of Seminole Tribe of Florida v. Florida, and that when that case was decided, the Court would overrule Union Gas.
On April 18, 1995, this court, based on the Seventh Circuit Court of Appeals' decision in McVey Trucking, Inc. v. Secretary of State of Illinois (In re McVey Trucking, Inc.), 812 F.2d 311 (7th Cir.1987), cert. denied sub nom. Edgar v. McVey Trucking Co., 484 U.S. 895, 108 S.Ct. 227, 98 L.Ed.2d 186 () and Union Gas, held that Congress acted within its constitutional authority under the Bankruptcy Clause when it amended § 106, and denied the State of Florida's motion to dismiss. Sparkman v. State of Florida Dept. of Revenue (In re York-Hannover Devs., Inc.), 181 B.R. 271 (Bankr.E.D.N.C. 1995). The State of Florida appealed to the United States District Court for the Eastern District of North Carolina, and relying on Union Gas, the district court affirmed, holding that "Congress may abrogate the presumption of immunity arising under the Eleventh Amendment when acting pursuant to its Article I powers, including its power to enact uniform bankruptcy laws." State of Florida Dept. of Revenue v. Sparkman (In re York-Hannover Devs., Inc.), 190 B.R. 62, 65 (E.D.N.C.1995).
The State of Florida appealed to the United States Court of Appeals for the Fourth Circuit, and while the appeal was pending, as predicted by the State of Florida, the United States Supreme Court overruled Union Gas in Seminole Tribe of Florida v. Florida, ___ U.S. ___, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996). The Fourth Circuit Court of Appeals vacated the district court's opinion and remanded this proceeding to the district court for reconsideration. In turn, the district court, on June 20, 1996, remanded the proceeding to this bankruptcy court for reconsideration in light of the Seminole decision.6
A hearing on the remand was conducted by telephone conference call on September 9, 1996, but Mr. Sparkman did not participate and the United States Department of Justice, which had initially intervened to uphold the constitutionality of § 106, was a party to the telephone hearing but did not state a position. While the plaintiff and the United States had no position on the subject, sovereign immunity and the Supreme Court's decision in Seminole have been the subject of considerable discussion and speculation.
In Seminole, the Supreme Court considered whether Congress had acted pursuant to a valid grant of constitutional power when it abrogated state sovereign immunity under its Article I Indian Commerce Clause authority. U.S. CONST., art. I, § 8, cl. 3. The statute at issue in Seminole was the Indian Gaming Regulatory Act, 25 U.S.C.A. §§ 2701-2721 (West Supp.1996), that required States to negotiate in good faith with tribes regarding gaming compacts and permitted tribes to sue States in federal courts to enforce that duty.
Previously, in Pennsylvania v. Union Gas Co., 491 U.S. 1, 109 S.Ct. 2273, 105 L.Ed.2d 1 (1989), the Supreme Court held that Congress could abrogate state sovereign immunity pursuant to the interstate provision of Article I's Commerce Clause. U.S. CONST. art. I, § 8, cl. 3. The decision in Union Gas, however, was a plurality opinion and "a majority of the Court in Union Gas expressly disagreed with the rationale of the plurality." Seminole, ___ U.S. at ___, 116 S.Ct. at 1128 (citations omitted).
By a majority of five to four, the Supreme Court in Seminole specifically overruled Union Gas and held that Congress lacked authority under either the Interstate or Indian provisions of the Commerce Clause to avoid state sovereign immunity as embodied in the Eleventh Amendment. Chief Justice Rehnquist, writing for the majority, stated that the Eleventh Amendment and principles of state sovereign immunity embodied in that Amendment, "restrict the judicial power under Article III, and Article I cannot be used to circumvent the constitutional limitations thus placed upon federal jurisdiction." Seminole, ___ U.S. at ___ _ ___, 116 S.Ct. at 1131-32.
The State of Florida now argues that if Congress cannot abrogate state sovereign immunity under Article I's Interstate Commerce Clause or the Indian Commerce Clause, it may not do so under Article I's Bankruptcy Clause. This court agrees. Just as the Supreme Court found that there is "no principled distinction in favor of the States to be drawn between the Indian Commerce Clause and the Interstate Commerce Clause," Seminole, ___ U.S. at ___, 116 S.Ct. at 1127, this court can find no difference, with respect to Congress' Article I powers, between the Bankruptcy Clause and the Interstate Commerce Clause or the Indian Commerce Clause. The fact that bankruptcy law is federal law exclusively within the province of Congress does not make the Bankruptcy Clause different. The Supreme Court was quite clear in that regard. "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, like the regulation of Indian commerce, that is under the exclusive control of the Federal Government." Seminole, ___ U.S. at ___, 116 S.Ct. at 1131. Under Seminole, state governments that receive avoidable transfers may receive better treatment than other transferees, but "presumably the Supreme Court would opine that this lack of equality is the price we must pay for the Constitution's continuing recognition of the sovereignty of the states." S. Elizabeth Gibson, Sovereign Immunity in Bankruptcy: The Next Chapter, 70 AM.BANKR. L.J. 195, 202 (1996) (citing Seminole).
Consequently, the court now concludes, as have other courts that have considered the issue, that the Bankruptcy Clause in Article I does not authorize Congress to abrogate state sovereign immunity and, specifically, that the Bankruptcy Clause did not authorize Congress to abrogate state sovereign immunity under 11 U.S.C. § 106(a). In re Martinez, 196 B.R. 225 (D.P.R.1996); Ellenberg v. Board of Regents (In re Midland Mechanical Contractors, Inc.), 200 B.R. 453 (Bankr.N.D.Ga.1996); Burke v. State of Ga. ex rel. Department of Revenue (In re Burke), 200 B.R. 282 (Bankr.S.D.Ga.1996); Schulman v. California State Water Resources Control Bd. (In re Lazar), 200 B.R. 358 (Bankr.C.D.Cal.1996); and In re Sacred Heart Hosp., 199 B.R. 129 (Bankr.E.D.Pa. 1996).
Although not argued in this proceeding, it has been suggested that Congress had constitutional authority, other than pursuant to Article I, to enact § 106(a) and to abrogate state sovereign immunity.
In Seminole, the Court recognized that Congress may abrogate state sovereign immunity when acting pursuant to § 5 of the Fourteenth Amendment.7 Seminole ___ U.S. at ___, 116 S.Ct. at 1128 (citing Fitzpatrick v. Bitzer, 427 U.S. 445, 96 S.Ct. 2666, 49 L.Ed.2d 614 (1976)). This power had previously been upheld in Fitzpatrick v. Bitzer, 427 U.S. 445, 96 S.Ct. 2666, 49 L.Ed.2d 614 (1976), where the Court noted that the Fourteenth Amendment was adopted well after both the Eleventh Amendment and the States' ratification of the Constitution, thus allowing the Fourteenth Amendment "to alter the pre-existing balance between state and federal power achieved by Article III and the Eleventh Amendment." Seminole, ___ U.S. at ___, 116 S.Ct. at 1128 (citing Fitzpatrick, 427 U.S. 445, 96 S.Ct. 2666, 49 L.Ed.2d 614 (1976)).
Prior to the Supreme Court's decision in Semino...
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