Magnolia Venture Capital Corp. v. Prudential Securities, Inc.

• Decision Date: 28 August 1998
• Docket Number: No. 97-60835,97-60835
• Citation: 151 F.3d 439
• Parties: , Bankr. L. Rep. P 77,775, 12 Tex.Bankr.Ct.Rep. 452 MAGNOLIA VENTURE CAPITAL CORPORATION, Plaintiff-Appellee, v. PRUDENTIAL SECURITIES, INC., et al., Defendants, Mississippi Department of Economic and Community Development, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 439

151 F.3d 439

33 Bankr.Ct.Dec. 153, Bankr. L. Rep. P 77,775,

12 Tex.Bankr.Ct.Rep. 452

MAGNOLIA VENTURE CAPITAL CORPORATION, Plaintiff-Appellee, v. PRUDENTIAL SECURITIES, INC., et al., Defendants Mississippi Department of Economic and Community Development, Defendant-Appellant.

No. 97-60835.

United States Court of Appeals, Fifth Circuit.

Aug. 28, 1998.

Patrick H. Scanlon, Jennifer Parkinson Burkes, Scanlon, Sessons, Parker & Dallas, Harry Jonas Rosenthal, Barney E. Eaton, III, Jackson, MS, for Plaintiff-Appellee.

James Charles Martin, Gene A. Wilkinson, James A. Peden, Jr., Stennett, Wilkinson & Peden, Jackson, MS, for Defendant-Appellant.

Appeal from the United States District Court for the Southern District of Mississippi.

Before DAVIS, EMILIO M. GARZA and BENAVIDES, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge:

In this appeal we are asked to consider whether the Eleventh Amendment bars this suit. The district court ruled that the Mississippi Department of Economic and Community Development ("MDECD") had waived its Eleventh Amendment immunity, and therefore denied MDECD's Motion to Dismiss. For reasons set forth below, we reverse and remand this case to the district court.

I.

In 1994, the Mississippi Legislature enacted the Venture Capital Act of 1994 ("the Act"), codified at Miss.Code Ann. §§ 57-77-1 to 57-77-39. The legislature passed the Act to provide capital to new growth-oriented businesses and create new jobs. In accordance with the Act, the Mississippi Department of Economic and Community Development, an agency of the State of Mississippi, incorporated Magnolia Capital Corporation ("MCC"), a non-profit corporation. MDECD also formed a for-profit corporation known as Magnolia Venture Capital Corporation ("MVCC"), with MCC as the sole shareholder. In turn, MVCC created and served as the general partner in the Magnolia Venture Capital Fund Limited Partnership ("the Partnership"), which was to provide venture capital to Mississippi businesses.

In addition to creating these entities, the legislature provided for funding of these corporations through the sale of $20,000,000 in general obligation bonds by the State Bond Commission. The proceeds of these bonds went to MDECD, which then made a $20,000,000 non-recourse loan to MCC. MCC then deposited approximately $6,200,000 of the funds with the State Treasurer for investment in zero coupon bonds. MCC pledged these zero coupon bonds to secure the loan. MCC then invested the balance of the $20,000,000, or roughly $13,800,000, in MVCC as an equity contribution. MCC became MVCC's sole shareholder. MVCC then invested approximately $8,000,000 in the Partnership and procured a private investment totaling approximately $5,000,000. The Partnership began accepting applications for loans in January of 1996.

In April of 1997, Lisa Looser, purporting to act on behalf of MVCC, executed a Pledge Agreement purporting to grant a first priority security in certain assets of MVCC to MDECD. ¹ This agreement secured the obligations, indebtedness, and liabilities under the Loan Agreement between MCC and MDECD. Later that month, MDECD notified MVCC that it was in default under the terms of the Loan Agreement and the Pledge Agreement, and requested that MVCC deliver the pledged assets to MDECD. This requested amount included approximately $11,000,000 that MVCC had invested with Prudential Securities, Inc. ("Prudential"). MVCC refused to deliver the assets and MDECD placed Prudential on notice of its claim to the funds and demanded that Prudential provide the funds to MDECD. Prudential responded by placing a "freeze" on the assets in its possession. As a result of this freeze, MVCC filed for protection under Chapter 11 of the Bankruptcy Code.

After instituting the Chapter 11 proceeding, MVCC filed an adversary action against MDECD seeking a ruling that MDECD had no lien or interest in the funds held by Prudential. After MDECD moved to dismiss the proceeding on Eleventh Amendment grounds, MVCC voluntarily dismissed the action. However, MVCC contemporaneously filed a new adversary proceeding against Prudential seeking a release of the freeze on MVCC's assets in the Prudential investment account. MVCC also alleged that MDECD held no perfected lien or security interest in MVCC's assets in the hands of Prudential. MVCC requested a declaratory judgment that the assets in Prudential's possession were free and clear of any claim or lien by any third party.

In response, MDECD sought leave to intervene in this adversary proceeding, which the bankruptcy court allowed. After MDECD intervened, Prudential filed a counterclaim in the nature of an interpleader against MVCC and named MDECD as a third-party defendant to the adversary proceeding. MVCC then filed a cross-claim against MDECD, alleging that MDECD had no interest in the assets held by Prudential.

After its intervention, MDECD moved to dismiss the proceeding based on a claim of Eleventh Amendment immunity. MDECD's motion focused mainly on establishing the unconstitutionality of § 106 of the Bankruptcy Code, 11 U.S.C. § 106, in which Congress purported to abrogate the sovereign immunity of states and state agencies which file claims in bankruptcy proceedings. The district court, relying on In re Estate of Fernandez, 123 F.3d 241 (5th Cir.1997), agreed with MDECD that § 106 violated the Eleventh Amendment and was ineffectual as a waiver of sovereign immunity. However, the district court further found that MDECD had waived its Eleventh Amendment immunity through a venue clause in the Pledge Agreement, and, therefore, denied MDECD's Motion to Dismiss. MDECD now appeals that ruling.

II.

A.

In Puerto Rico Aqueduct and Sewer Authority v. Metcalf & Eddy, Inc., 506 U.S. 139, 113 S.Ct. 684, 121 L.Ed.2d 605 (1993), the Supreme Court held that "States and state entities that claim to be 'arms of the State' may take advantage of the collateral order doctrine to appeal a district court order denying a claim of Eleventh Amendment immunity." Id. at 147, 113 S.Ct. at 689. Thus, we have appellate jurisdiction to review the district court's interlocutory order denying MDECD's Motion to Dismiss based on the Eleventh Amendment. See also Earles v. State Bd. of Certified Pub. Accountants, 139 F.3d 1033, 1036 (5th Cir.1998).

B.

In this appeal, we focus on whether the district court correctly denied MDECD's Motion to Dismiss based on Eleventh Amendment immunity. The district court concluded that MDECD was entitled to assert Eleventh Amendment immunity, but that MDECD had waived such immunity by virtue of a provision in the Pledge Agreement that provided as follows:

Section 6.03 Applicable Law. This Pledge shall be deemed to have been made and to be performed in Jackson, Hinds County, Mississippi, and shall be governed by and construed in accordance with the laws of the State of Mississippi. Courts within the State of Mississippi shall have jurisdiction over any and all disputes between the parties to this Pledge, whether in law or in equity, including but not limited to, all disputes arising out of or relating to this Pledge. Venue in any such dispute, whether in federal or state court, shall be laid in Hinds County, Mississippi.

(Emphasis added).

On appeal, MDECD makes a two-pronged argument. MDECD argues first that the above language of the venue provision does not clearly waive its Eleventh Amendment immunity. Second, MDECD argues that even if the venue provision is construed as waiving Eleventh Amendment immunity, MDECD had no authority to waive this important right.

The district court, in rejecting both of MDECD's arguments, held that the language of the venue provision was sufficiently clear to amount to a waiver of Eleventh Amendment immunity. The district court also rejected MDECD's argument that it had no authority to waive Eleventh Amendment immunity. The district court reasoned that Mississippi, by authorizing MDECD to enter into a contract in which MDECD waived its Eleventh Amendment immunity, must be considered as authorizing that waiver.

III.

A.

Assuming without deciding that the language in the venue provision of the Pledge Agreement reflects a clear waiver of Eleventh Amendment immunity, we are satisfied that MVCC has not demonstrated that the state agency, MDECD, was authorized to waive Mississippi's important right of immunity from suit in federal court.

In concluding that MDECD was authorized to waive Mississippi's Eleventh Amendment immunity, the district court reasoned as follows: first, the court correctly concluded that under clear Mississippi Supreme Court authority, "sovereign immunity does not bar action against the State or its political subdivisions brought on a breach of contract theory." Trammell v. State, 622 So.2d 1257, 1262 (Miss.1993). The district court observed that this principle is based on the notion that "[w]here the state has lawfully entered into a business contract with an individual, the obligations and duties of the contract should be mutually binding and reciprocal. There is no mutuality or fairness where a state or county can enter into an advantageous contract and accept its benefits but refuse to perform its obligations." Churchill v. Pearl River Basin Dev. Dist., 619 So.2d 900, 903 (Miss.1993).

The district court reasoned next that because the venue provision waived the state's Eleventh Amendment immunity, "there would be 'no mutuality or fairness' in allowing the Department to assert the Pledge Agreement in support of its claim to the funds in question and yet at the same time permit it to avoid challenges to the validity of the agreement or the correctness of the Department's claim to an interest predicated on that agreement." Thus, based on this reasoning, the district court concluded that Mississippi also waived its Eleventh Amendment immunity defense by giving general authority to MDECD to enter into contracts, and the specific contract at issue included an Eleventh...