Straight, In re, 97-8053

• Decision Date: 09 June 1998
• Docket Number: No. 97-8053,97-8053
• Citation: 143 F.3d 1387
• Parties: 40 Collier Bankr.Cas.2d 353, 32 Bankr.Ct.Dec. 877, Bankr. L. Rep. P 77,719, 98 CJ C.A.R. 2905, 15 Colo. Bankr. Ct. Rep. 291 In re Beverly A. STRAIGHT and Milton L. Straight, a.k.a. Milton Lloyd Straight, Milton Straight, Mickie Straight, Debtors, WYOMING DEPARTMENT OF TRANSPORTATION, Plaintiff-Appellant, v. Beverly A. STRAIGHT and Milton L. Straight, Appellees. Business Bankruptcy Law Committee of the New York County Lawyers' Association, Amicus Curiae.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1387

143 F.3d 1387

40 Collier Bankr.Cas.2d 353, 32 Bankr.Ct.Dec. 877,

Bankr. L. Rep. P 77,719, 98 CJ C.A.R. 2905,

15 Colo. Bankr. Ct. Rep. 291

In re Beverly A. STRAIGHT and Milton L. Straight, a.k.a.

Milton Lloyd Straight, Milton Straight, Mickie

Straight, Debtors, WYOMING DEPARTMENT OF TRANSPORTATION, Plaintiff-Appellant, v. Beverly A. STRAIGHT and Milton L. Straight, Appellees.

Business Bankruptcy Law Committee of the New York County

Lawyers' Association, Amicus Curiae.

No. 97-8053.

United States Court of Appeals, Tenth Circuit.

June 9, 1998.

Jennifer Ann Evans, Sr. Asst. Atty. Gen. (William U. Hill, Atty. Gen., with her on briefs), Cheyenne, WY, for Plaintiff-Appellant.

Leonard H. Gerson, Angel & Frankel, P.C., New York City, for Amicus Curiae.

David J. Bederman (Stephen R., Winship, Winship & Winship, P.C., Casper, WY, with him on briefs) Professor at Law, Emory University, Atlanta, GA, for Debtors-Appellees.

Before SEYMOUR, Chief Judge, PORFILIO, Circuit Judge, and HENRY, Circuit Judge.

JOHN C. PORFILIO, Circuit Judge.

The State of Wyoming, through its Department of Transportation (Department), challenges the jurisdiction of the bankruptcy court to enter an order directing the Department to pay attorneys' fees and costs related to its violation of stay provisions of the Bankruptcy Code found in 11 U.S.C. §§ 362 and 525. Wyoming claims the sovereign immunity vested in it by the Eleventh Amendment puts its agencies beyond the jurisdictional reach of the bankruptcy court. Sitting in its appellate capacity, the district court disagreed, ruling Congress had the power to abrogate states' immunity when enacting the Bankruptcy Code. In an alternative ruling, the district court also held the State of Wyoming waived its immunity when its Workers' Safety and Compensation Division and its Department of Employment filed proofs of claim in the bankruptcy case of appellee, Ms. Beverly Straight. We agree with the district court that when the State sought the benefits available to it under the Bankruptcy Code, it

acceded to the jurisdiction of the bankruptcy court. Therefore, it cannot stand upon sovereignty to avoid the onus of Code provisions it now finds disagreeable.

BACKGROUND

Ms. Straight, doing business as Centerline Traffic Control & Flagging, filed a petition for relief under Chapter 13 of the Bankruptcy Code. At the time of filing, Ms. Straight was certified by the State of Wyoming as a Disadvantaged Business Enterprise (DBE). Approximately one month after filing, the Department of Transportation notified Ms. Straight of its intent to decertify her DBE status. In its notice, the Department stated:

49 CFR 23.45(f)3(iv) require[s] Wyoming Department of Transportation to "analyze the bonding and financial capacity of the firm" for eligibility in the DBE program. DBE Definition 1.A(b) states a "disadvantaged business" means a small business concern is one "whose management and daily business operation are controlled by one or more of the socially and economically disadvantaged individuals who own it."

It is apparent that you have lost the ability to control the financial capacity of this firm. By filing for Chapter 13 bankruptcy, you have also lost the ability to control your business; that control now lies in the hands of the Bankruptcy Court and the Bankruptcy Trustee.

The following month, the Department did decertify Ms. Straight, and in response, she filed a motion in the bankruptcy court for an order to show cause and for a contempt citation. Upon consideration, the court issued an order finding the State had violated the automatic stay provision of 11 U.S.C. § 362 and held the decertification was "wrongful" under § 525(a) which prohibits certain discriminatory action against a bankruptcy debtor. The court ordered the Department to recertify Ms. Straight as a DBE and to pay Ms. Straight's attorneys' fees and costs.

Although the State did not appeal that order, it did appeal a subsequent order approving the amount of fees and costs to be awarded Ms. Straight. The district court affirmed, disagreeing with the State's contention the bankruptcy court had no jurisdiction over it. The court reasoned 11 U.S.C. § 106(a), putatively abrogating the State's Eleventh Amendment immunity, was constitutionally enacted pursuant to the Fourteenth Amendment; hence, Congress had the power and intent to abrogate Wyoming's sovereign immunity. In re Straight, 209 B.R. 540, 555 (D.Wyo.1997). Alternatively, the court held proofs of claim filed by the Wyoming Department of Employment and the Wyoming Workers' Safety and Compensation Division had waived the State's Eleventh Amendment immunity. Id. The district court held pursuant to 11 U.S.C. § 106(b), the State's claim for unpaid taxes arose from the same transaction as its attempt to decertify the Debtor. Thus, having filed the claims for unpaid taxes and premiums, the State waived its immunity against the Debtor's action. Id. at 557. This appeal followed.

I.

Relying principally on Seminole Tribe v. Florida, 517 U.S. 44, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996) (upholding Eleventh Amendment immunity in the face of a federal statute granting federal courts jurisdiction over a state), the State urges us to hold the district court erred in concluding 11 U.S.C. § 106(a) abrogates the State's immunity in bankruptcy. Nonetheless, we do not reach that argument. While we do not denigrate the importance of the § 106(a) issue raised by the State, we believe it has been mooted by the State's own action.

We start from the general premise that the law of bankruptcy is founded upon principles of equity. That foundation requires all persons or entities in the same class must be treated alike. Thus, creditors coming to the bankruptcy court for relief expect they will fare no better or no worse than others of their stature. Moreover, the whole concept of bankruptcy cannot succeed without a careful application of these principles and a forthright dedication to their significance.

For that reason, any governmental entity which elects to join the ranks of creditors seeking benefits the bankruptcy court can allocate must recognize that resort is subject to the mantle of equity. Indeed, "[w]hen the State becomes the actor and files a claim against the [bankruptcy] fund, it In 1994, Congress amended 11 U.S.C. § 106(b) to alert any governmental unit that when it voluntarily enters the arena of the bankruptcy court seeking relief in a debtor's case, it may do so as a creditor and not a sovereign. The statute provides:

waives any immunity which it otherwise might have had respecting the adjudication of the claim." Gardner v. New Jersey, 329 U.S. 565, 574, 67 S.Ct. 467, 472, 91 L.Ed. 504 (1947). The Seventh Circuit has recently reached a similar conclusion. In Dekalb County v. Platter, 140 F.3d 676 (7th Cir.1998), the court was called upon to resolve whether the state's claim of Eleventh Amendment immunity barred an action in bankruptcy court to determine dischargeability of a debt. Relying in part upon Gardner, the court concluded it did not because the state had waived the bar by filing the case in the first instance. Neither of these cases relies upon any basis for decision other than the state's having acceded to the jurisdiction of the bankruptcy court by seeking its relief against the debtor.

A governmental unit that has filed a proof of claim in the case is deemed to have waived sovereign immunity with respect to a claim against such governmental unit that is property of the estate and that arose out of the same transaction or occurrence out of which the claim of such governmental unit arose.

This enactment codifies the Gardner rule, see 2 Collier on Bankruptcy p 106.05 (15th ed. rev.1997), but narrows its applicability to permit the debtor to proceed only against claims asserted by the state that arose out of the same transaction or occurrence as a claim previously filed by the state in the bankruptcy estate.

II.

Ms. Straight contends § 106(b) appropriately governs the State's claim of Eleventh Amendment immunity in this case. Consideration of the contention, then, requires we answer four questions: 1) What is a "governmental unit" and does Wyoming fit that definition in this case; 2) if so, has the Debtor asserted a claim against Wyoming that is "property of the estate"; 3) did that claim arise "from the same transaction or occurrence" as the proofs of claim previously filed by the State? Finally, if we decide § 106(b) is germane, we then must determine whether it has been adversely affected by Seminole Tribe.

The foundation for the State's argument that § 106(b) is inapplicable is based upon a creative, albeit limited, view of the definition of "governmental unit" as that term is used in § 106(b). Wyoming maintains its Department of Transportation is a different "governmental unit" from the Department of Employment and the Workers' Safety and Compensation Division, both of which filed claims against the estate. ¹ Indeed, appellant asserts the Department of Transportation is a governmental unit distinguishable from the State itself. That position is unsupportable.

In the context of the Bankruptcy Code, "governmental unit" means:

United States; State; Commonwealth; District; Territory; municipality; foreign state; department, agency, or instrumentality of the United States (but not a United States trustee while serving as a trustee in a case under this title), a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state; or other foreign or domestic government....

11 U.S.C. § 101(27). The plain language of this section, then, makes clear a state, or a department, agency, or instrumentality of a state are governmental units for the purposes of the Bankruptcy Code. Nonetheless, Wyoming argues the conjunction "or" separating the word "State" from the words "department, agency, or instrumentality of ... a State" implies a governmental unit "can mean...