Waiver of State Soveriegn Immunity in Bankruptcy Matters
In Central Virginia Community College v. Katz, 546 U.S. 356 (2006), the United States Supreme Court held that the Bankruptcy Clause of the Constitution abrogates state sovereign immunity. Years earlier, Arizona bankruptcy Judge Haines had reached that same conclusion in the published decision of In re Bliemeister, 251 B.R. 383 (Bankr. D. Ariz. 2000) subsequently aff’d, 296 F.3d 858 (9th Cir. 2002). Ellett Law Offices was the counsel for Ms. Bliemeister.
The State of Arizona, in a curios use of tax payer money, appealed Judge Haines ruling to the United States District Court and lost. Once again, the State of Arizona appealed and lost again before th 9th Circuit. The 9th Circuit did not reach the issue of the U.S. Constitution’s abrogation of state sovereign immunity, despite request from both sides that it do so. Nonetheless, Judge Haines’s published decision placed the issue on every experienced attorney’s radar screen. Accordingly, it was only a matter of time before the issue would need to be resolved by the United States Supreme Court.
Below is the 9th circuit brief submitted on the Bliemeister case.
Statement of Jurisdiction
The Bankruptcy Court had jurisdiction to determine the priority of the State’s claim pursuant to 28 U.S.C. § 1334(b), § 157(b) and 11 U.S.C. § 523(a)(1). The State waived its sovereign immunity, if it had any, by voluntarily participating in the bankruptcy proceeding, filing an answer, moving for summary judgment, and by participating at the May 31, 2001, hearing where the bankruptcy court expressed serious doubts about the State’s interpretation of the transaction being taxed. Then, and only then, after participating in the proceeding and learning of the Court’s “leanings” did the State finally raise arguments of sovereign immunity. By this time any sovereign immunity that the State might have enjoyed had been fully waived. Additionally, decades of Supreme Court Eleventh Amendment jurisprudence, the text of the Constitution, and the Federalist papers conclusively demonstrate that it was the intent of the framers of the Constitution that state sovereignty over issues of naturalization and bankruptcy were ceded by the ratification of the Constitution. Finally, it is settled in the Ninth Circuit that states do not have sovereign immunity as to the in rem aspect of bankruptcy cases. The determination of the priority of the State’s claim under the Bankruptcy Code through payments from the bankruptcy estate is such an in rem proceeding.
The District Court had jurisdiction under 28 U.S.C. § 158(a) to review In re Bliemeister, 251 B.R. 383 (Bankr. Ariz. 2000).
This Court has jurisdiction under 28 U.S.C. § 158(d) to review the Order of the District Court, dated March 28, 2001.
Statement of Issues
Issue I: Whether the State of Arizona waived its sovereign immunity (to the extent it had any) by requesting the Bankruptcy Court to Order the debtor to file a Complaint “under the Federal Rules of Procedure” to determine the dischargeability of the state of Arizona’s claim, by filing an answer to the complaint, by filing a motion for summary judgment, by responding to appellee’s motion for summary judgment, by attending the oral argument where the Bankruptcy Court announced his “leanings,” and then, and only then, asserting sovereign immunity?
Issue II: Whether the State has sovereign immunity in a bankruptcy action determining the priority of its claim under the Bankruptcy Code?
Issue III: Whether, in determining the priority of the State’s claim, pursuant to 11 U.S.C. § 507(a)(8), the statutory period for an excise tax runs from the date of assessment or from the date of the transaction that is being taxed?
Issue IV: Whether the Bankruptcy Court erred by not ruling on summary judgment on the fact-intensive issue of equitable estoppel, when the Bankruptcy Court had other adequate grounds for granting Debtor summary judgment on Debtor’s alternative theory?
Standard of Review
The Debtor/Appellee hereby sets forth the Standard of Review because the State of Arizona did not set forth any standard of review in violation of Fed.R.App.P 28. The appropriate standard of review for a grant or denial of summary judgment is de novo. In re Tuma, 916 F.2d. 488, 490 (9th Cir. 1990). Jurisdictional issues in bankruptcy, including sovereign immunity, are also reviewed de novo. Mitchell v. Franchise Tax Bd. (In re Mitchell), 209 F.3d 1111, 1115 (9th Cir. 2000).
Statement of the Case
On July 13,1999 the debtor filed a motion to determine dischargeability. [Supp.ER #B10]. The State filed a response requesting “that the Court order the Debtor to file a complaint in accordance with the Federal Rules of Bankruptcy Procedure”. [Supp.ER #B11]. The Debtor voluntarily complied with the State of Arizona’s request that the debtor file a Complaint and filed her Complaint to Determine Dischargeability of Debt on January 7, 2000. [ER Docket #AP1]. The State filed an answer. [ER Docket #AP3]. The parties cross-moved for summary judgement. [ER Docket #AP5, Supp.ER #AP8, 9]. The Bankruptcy Court held oral argument on May 31, 2000, wherein it first announced its “leanings.” [ER #AP14]. The Court’s initial leanings flatly rejected the State’s arguments. The Court’s further comments signaled his disposition to rule against the State of Arizona.
Thereafter, the State of Arizona, apparently anticipating the unfavorable decision that it was about to receive, filed a motion where it asserted sovereign immunity for the first time. [Supp.ER #AP18]. The Bankruptcy Court held that the State of Arizona had waived any claims it had to sovereign immunity and further held that the state did not have sovereign immunity to a non-dischargeability action. Further, the Bankruptcy Court granted Debtor’s cross-motion for summary judgement and denied Arizona’s motion for summary judgement. [ER#AP22, 23].
Facts of the Case
The facts upon which the court relied are not in dispute and the Bankruptcy Court correctly set the forth the facts in its published decision as follows:
“Kathryn Bliemeister and her husband owned a mechanic’s shop, which husband ran while Kathryn worked full time at another job. On October 8, 1993, husband hired Raymond Cole, Jr. to work at the shop, but within the first few hours of his employment he suffered an accident in which his finger was torn off. The Bliemeisters had not obtained workers’ compensation insurance as required by Arizona Revised Statutes (“A.R.S.”) § 23-961. Consequently, Mr. Cole applied to the Industrial Commission of Arizona (the “Commission” or (“ICA”)) for compensation for his injury and resulting medical expenses, pursuant to A.R.S. § 23-907(B).”
“The Commission held a formal hearing on Cole’s application on January 12, 1995, and the Administrative Law Judge issued a decision and award on March 24, 1995. That decision notified Mr. Cole that he was entitled to benefits under the Workers’ Compensation Act, but did not determine the amount. The Bliemeisters were given an opportunity to contest whether Cole was an employee or was injured within the scope of his employment, and they requested that review. The decision was upheld on July 12, 1995, and the Bliemeisters did not appeal that decision.”
“On September 13, 1996, the Commission issued a Final Award in the amount of $9,273.22, including medical, compensation and permanent benefits for Mr. Cole, and an assessment of penalties against the Bliemeisters. They did not appeal.”
“An uninsured employer is liable to reimburse the Commission for benefits paid to an injured worker, plus a penalty of $500 or 10% of the benefits paid, whichever is greater, plus interest. A.R.S. §§ 23-907(C) and 44-1201. An uninsured employer may also be assessed additional penalties pursuant to A.R.S. §§ 907(F) and (G). Consequently on October 7, 1998, the Commission sent the Bliemeisters a letter demanding payment. The demand letter state that the claim was entered on March 24, 1995. Kathryn Bliemeister (“Debtor”) filed her chapter 7 petition on October 29, 1998. Sometime between the accident and the filing of her petition, she was divorced from her husband.” In re Bliemeister, 251 B.R. 383 (Bankr. Ariz. 2000).
Summary of the Argument
Arizona incorrectly asserts the defense of sovereign immunity. Here, the State of Arizona waived its sovereign immunity (to the extent it had any) by: (1) requesting the Bankruptcy Court to Order the debtor to file a Complaint under the Federal Rules of Procedure to determine the dischargeability of the State of Arizona’s claim; (2) filing an answer to the complaint; (3) filing a motion for summary judgment; (4) responding to appellee’s motion for summary judgment; and (5) attending the oral argument where the Bankruptcy Court announced its “leanings,” and then, and only then, asserting sovereign immunity.
Moreover, decades of Supreme Court Eleventh Amendment jurisprudence, the text of the Constitution, and the Federalist papers conclusively demonstrate that it was the intent of the framers of the Constitution that state sovereignty over issues of naturalization and bankruptcy were ceded by the ratification of the Constitution. Further, states do not have sovereign immunity as to the In Rem aspects of bankruptcy cases such as determination of the priority status of claims against the bankruptcy estate.
Finally, 11 U.S.C. § 507(a)(8)(E)(ii) of the Bankruptcy Code provides that unsecured claims of governmental units have priority to the extent that such claims are an excise tax on “a transaction occurring during the three years immediately preceding the date of the filing of the petition.” Both the District Court and the Bankruptcy Court held that for the purposes of this statute, the “transaction” is the date that an uninsured employee is injured. Here, the employee was injured on October 8, 1993, more than three years before Ms. Bliemeister’s petition for bankruptcy. Accordingly, the claim against Ms. Bliemeister is dischargeable.
I. THE STATE WAIVED ANY CLAIMS TO SOVEREIGN IMMUNITY IN THIS CASE.
The State requested an order from the Bankruptcy Court that the debtor be compelled to file a complaint under the Federal Rules of Bankruptcy Procedure to determine the dischargeability of the State’s debt. [Docket #B11]. The debtor voluntarily complied with the State’s request and filed a complaint. [Docket #AP1]. The State then filed its answer and moved for summary judgment. [Docket #AP3, 5]. The debtor cross-moved for summary judgment. [Supp.ER #AP8]. The State participated at the May 31, 2000 hearing where Court expressed serious doubts about the State’s interpretation of the transaction being taxed. [ER #AP14]. The Court’s doubts were plain to all in the Courtroom. Indeed, Mr. Samuelson, on behalf of the Arizona Department of Revenue, attempted for twenty minutes to change the Bankruptcy Court’s mind from its preliminary leanings, which the Court had openly announced at the start of oral argument. [ER #AP14]. After Mr. Samuelson finished, it was apparent that he had not succeeded in changing the Bankruptcy Court’s mind. Accordingly, in an unusual move, Mr. Essig sought to be heard on behalf of State of Arizona even before the Court heard from debtor’s counsel. [ER #AP14]. Mr. Essig had no better success. In fact, the Court’s leanings were so apparent that debtor’s counsel began his presentation with “Your Honor I’ll try and be brief, because I agree with everything Your Honor said.” [ER #AP14].
The transcript of hearing was independently reviewed by the District Court which accurately summarized the hearing as follows.
“[T]he Court finds that the bankruptcy court expressed serious doubts about the merits of the State’s claims at oral argument. The bankruptcy court stated ‘let me just tell you where I’m leaning based upon my review of the memoranda and the case law.’ The court agreed that ICA’s claim qualified as an excise tax. However, it announced that it was leaning toward an interpretation of the word ‘transaction’ that would put ICA’s claim outside the three-year priority period and render it dischargeable. The court pointed out logical flaws in the State’s arguments such as ‘how can you tax the employer and call it an excise tax,’ and ‘under your argument, the transaction on which the tax is assessed is the assessment of the tax. Does that make logical sense, how can you tax a tax assessment.’” [ER #DC27].
“The bankruptcy court addressed In re Waldo, 186 B.R. 118 (Bankr. D. Mont. 1995), the case primarily relied upon by the State in arguing that the ‘transaction’ to be taxed is the assessment. The court commented that ‘I do not find Waldo to be convincing.’ The court distinguished the only other published case cited by the State on this issue, stating that the case, ‘did not have an issue of when did the tax arise, or when did the transaction occur for purposes of priority.’ Although the court admonished counsel not to ‘rely’ on how it thought the court was going to rule, it acknowledged that the parties had ‘heard some of [its] thinking’ on the issue that the court requested supplemental briefing about. The bankruptcy court’s comments at oral argument clearly ‘signaled’ that the probable outcome of the case would not be favorable to the State.” [ER #DC27].
After the hearing, the State, now fully aware that it was going to receive an unfavorable ruling, decided that it no longer wished to have the issue resolved by the Bankruptcy Court. In doing so, the State had taken the opportunity of presenting its arguments to the Court and even discussing with the Bankruptcy Judge his preliminary “leanings.” Because the State of Arizona didn’t like those preliminary leanings, it decided to raise, for the first time, the argument of sovereign immunity. [Supp.ER #AP18].
The District Court properly recognized that the State’s action created the evils also found in Hill v. Blind Indust and Servs of Maryland, 179 F.3d 754 (9th Cir.1999). In Hill, the State was deemed to have waived sovereign immunity by waiting too long to raise the argument. Here, the State waited to learn the Court’s preliminary leanings before deciding it did not wish to be in the Bankruptcy Court. Accordingly, it had enjoyed the best of both worlds. It could have stayed in Bankruptcy Court if the Bankruptcy Judge was inclined to rule in its favor, but since learning that the Bankruptcy Court was not inclined to rule in its favor, it decided it no longer wished to participate in the Bankruptcy Court proceedings. Sovereign immunity was never intended to give the State the right to opt out of a court proceeding once it has an opportunity to learn the leanings of the court. The Ninth Circuit anticipated and condemned just such tactics in its opinion in Hill:
” By waiting until the first day of trial, (the State) hedged its bet on the trial’s outcome…. If (the State) prevailed at trial, it could withdraw its motion and let the jury verdict stand. If (it) lost at trial, it could ask to have the verdict set aside on the ground that the action was barred by the Eleventh Amendment….
Such conduct undermines the integrity of the judicial system. It also wastes judicial resources, burdens jurors and witnesses, and imposes substantial costs upon the litigants…
A party may gain an improper advantage through this tactic even without waiting until the first day of trial. The ruling on a motion for summary judgment, or on pre-trial matters such as motions in limine, can signal the probable outcome of the case. The integrity of the judicial process is undermined if a party, unhappy with the trial court’s rulings or anticipating defeat, can unilaterally void the entire proceeding and begin anew in a different forum.”
179 F.3d at 756-57.
The State’s attempts to distinguish Hill from this case are ineffective. Indeed, the Ninth Circuit in Hill specifically noted that the State could gain an improper advantage tactic by obtaining from the court a “signal of the probable outcome of the case.” Id. at 757. The Ninth Circuit specifically recognized that a motion for summary judgment could be used to obtain this signal of the probable outcome. Id. at 757. Here, the State of Arizona, having obtained the signal, indeed, having heard the court’s “leanings” against it, elected to attempt to unilaterally void the entire proceeding and begin anew in a different form. This is the precise evil that compelled the Hill holding of a waiver of sovereign immunity.
The State was perfectly happy to submit to federal jurisdiction, even though, as the Bankruptcy Judge pointedly remarks in his opinion, it had been aware of the Mitchell decision for sometime and even cited Mitchell in a different case before the same judge. It wasn’t until after it became privy to the bankruptcy court’s leanings and after they had argued for approximately forty minutes in an attempt to change those leanings that the State of Arizona decided that it did not wish to participate in a federal court. The State of Arizona’s motivation in seeking and asserting the defense of sovereign immunity is apparent, indeed, transparent. Such tactics threaten to undermine the judicial process and confer an unfair advantage on the State that already enjoys significant resources far in excess of a bankruptcy debtor. Accordingly, the District Court appropriately upheld the Bankruptcy Court’s ruling that the State of Arizona waived its sovereign immunity.
THE STATES DO NOT HAVE SOVEREIGN IMMUNITY IN A BANKRUPTCY DISCHARGE ACTION.
Decades of Supreme Court Eleventh Amendment Jurisprudence, The Text Of The Constitution, And The Federalist Papers Conclusively Demonstrate That It Was The Intent Of The Framers Of The Constitution That State Sovereignty Over Issues of Naturalization and Bankruptcy Were Ceded By the Ratification Of The Constitution.
Though the District Court did not reach the issue, the Ninth Circuit held in In re Mitchell, 209 F.3d. 111 (9th Cir. 2000) that a dischargeability complaint constitutes a suit for Eleventh Amendment purposes. The Ninth Circuit distinguished a dischargeability complaint from the discharge order itself to which a defense of sovereign immunity cannot be raised. Texas v. Walker, 142 F.3d. 813-822 (5th Cir., 1998) cert. denied, 525 U.S. 1102 (1999), Mitchell also held that 11 U.S.C. § 106(a) is unconstitutional. The Bankruptcy Court was aware of the Mitchell ruling and correctly recognized that there were additional relevant issues that had not yet been considered by Mitchell.
What neither the Ninth Circuit nor the Supreme Court has yet to determine is whether the Eleventh Amendment preserved the state sovereignty over the subject of bankruptcies because no reported decision to date has addressed whether the original Constitution was intended to preserve state sovereignty over the subject of bankruptcies. Decades of Supreme Court Eleventh Amendment jurisprudence, the text of the Constitution, and the Federalist papers conclusively demonstrate that it was the intent of the framers of the Constitution that state sovereignty over issues of naturalization and bankruptcy were ceded by the ratification of the Constitution. Specifically, U.S. Constitution Article 1, sect. 8, cl. 4 says “Congress shall have the power… To establish an uniform rule of naturalization and uniform laws on the subject of bankruptcies throughout the United States.”
Its well recognized and accepted that the states do not enjoy complete sovereignty in all areas. In order to form a more perfect union it was necessary for the states to cede their sovereignty in certain areas. These areas are set forth in the Constitution. The Supreme Court has recognized and adopted this analysis. For instance, the Supreme Court in Alden v. Maine, 527 U.S. 706, 119 S.Ct. 2240 (1999), pointed out “There is also the postulate that States of the Union, still possessing attributes of sovereignty shall be immune from suits, without their consent, save where there has been ‘a surrender of this immunity in the plan of convention.’” Alden, 527 U.S. at 719, 119 S. Ct. at 2253, quoting Principality of Monaco v. Mississippi, 292 U.S. 313, 323 (1934) and citing Seminole and Blatchford v. Native Village of Noatak and Circle Village, 501 U.S. 775, 781, 111 S.Ct. 2578, 115 L. Ed. 2d. 686 (1981). This quote, which originally comes from Hamilton’s Federalist No. 81, (at page 487) forms the underpinnings of Supreme Court jurisprudence on state sovereign immunity.
Hamilton’s Federalist No. 32 sets forth three areas where the states have surrendered their sovereign immunity in the plan of the convention that, upon ratification, became the United States Constitution. In explaining these three general areas, Hamilton explained the third area as follows “the third will be found in that clause which declares that Congress shall have the power “to establish an UNIFORM RULE of naturalization throughout the United States. This must necessary be exclusive; because if each state had the power to prescribe a DISTINCT RULE there could be no UNIFORM RULE.” The Federalist No. 32, at 152-153. (emphasis in original).
The bankruptcy power was granted to the Federal government by the very same clause that Hamilton used as an example of the third method by which the Constitution mandates a surrender of the state’s sovereignty and contains the same word to signify the limitation on state sovereignty “Congress shall have the power… to establish a uniform rule of naturalization, and uniform laws on the subject of bankruptcy throughout the United States.” U.S. Constitution Article 1, sect. 8, cl. 4. Also, the bankruptcy clause implied in a surrender of state sovereign immunity for the second of Hamilton’s reasons, found in Federalist No. 32, as well as the third. The bankruptcy clause necessary includes an ability to impair the obligations of contracts, a power which was expressly denied to the States by Article 1, sect.10. See Hanover Nat’l Bank v. Moyses, 186 U.S. 181, 22 S.Ct. 857, 46 L. Ed. 1113 (1902). On these points the Bankruptcy Court’s analysis is absolutely on point. The states agreed, in the original plan of Convention, that the states surrendered their sovereign powers on the subject of bankruptcy, upon Congress’ election to act upon the subject of bankruptcies. As Hamilton explained, the framers had taken the most pointed care to identity those areas where the states had surrendered their sovereignty. These areas, identified by the Constitution, included bankruptcy laws and naturalization laws.
Moreover, as explained by the Bankruptcy Court’s learned analysis, the issue of bankruptcy was an important issue between and among the 13 colonies. Thousands of debtors were imprisoned while several states passed discharge provisions that were applied to non-resident creditors. Indeed, some states had passed private acts to relieve individual debtors which clearly pointed to the problems inherent in allowing the states to retain sovereignty over bankruptcy laws and the need for a uniform bankruptcy law in which the states ceded their sovereignty.
As explained by the bankruptcy court, “bankruptcy law, and particularly the discharge, was very much an issue involved with state’s sovereignty, because it was a limitation on the power of the sovereign to imprison debtors and punish traders, or to grant individual relief. When the states agreed to a uniform federal rule, they had to understand they were surrendering their sovereignty over the subject of bankruptcies.” [ER #AP22]. Since the bankruptcy clause of the Constitution is one of the provisions where the state’s sovereignty has been surrendered in the plan of convention, the states may not now assert sovereign immunity in a bankruptcy case governed by federal law. The sovereign immunity of the states was surrendered as part of the plan of convention. Accordingly 11 U.S.C. § 106(a) is superfluous because the state’s sovereignty had already been surrendered when the plan of convention was ratified as our Constitution.
The Bankruptcy Court published its analysis at In re Bliemeister, 251 B.R. 383 (Bankr. D. Ariz. 2000). The Bankruptcy Court’s sovereign immunity analysis has been recognized and adopted by other courts including the Bankruptcy Appellate Panel for the Sixth Circuit. Hood v. Tenn. Student Assistance Corp., 262 B.R. 412 (B.A.P. 6th Cir. 2001)(adopting and expanding the reasoning of Bleimeister); H.J. Wilson Co. v. Comm’r of Revenue (In re Service Merchandise Co.), 262 B.R. 738 (Bankr. M.D. Tenn. 2001); see also Arnold v. Sallie Mae Servicing Corp. (In re Arnold), 255 B.R. 845 (Bankr. W.D. Tenn. 2000); Nelson v. LaCrosse County District Attorney (In re Nelson), 254 B.R. 436 (Bankr. W.D. Wisc. 2000). Accordingly, the Bankruptcy Court’s analysis of sovereign immunity is well grounded in the Constitution, the Federalist Papers, Supreme Court jurisprudence, and supported by recent court decisions that have adopted the analysis.
It Is Now Settled In The Ninth Circuit That the States Do Not Have Sovereign Immunity As To The In Rem Aspects of Bankruptcy Cases.
As an alternative ground why sovereign immunity does not apply here, the Bankruptcy Court correctly pointed out the fundamental in rem nature of bankruptcy cases. The in rem nature of bankruptcy cases has long been established. See, e.g., Gardener v. New Jersey, 329 U.S. 565, 67 S.Ct. 467, 91 LD. 504 (1947) and Hanover Nat’l Bank v. Moyses, 186 U.S. 192. Importantly, the Supreme Court recently held that state sovereign immunity does not extend to in rem proceedings. California and State Lands Comm’n v. Deep Sea Research, Inc., 523 U.S. 491, 118 S.Ct. 464, 140 L. Ed. 2d. 626 (1989). There, the Court held that the in rem nature of suits in admiralty created an exception to Eleventh Amendment immunity. The Ninth Circuit, in reaching Mitchell, did not address the in rem nature of the proceeding and accordingly did not consider Deep Sea Research so that issue has yet to be addressed by the Ninth Circuit. Further, the Bankruptcy Court was correct that the Supreme Court in Deep Sea Research did not rely solely on the fact that it involved in an admiralty action. Clearly, the Supreme Court has previously held the Eleventh Amendment had some application in admiralty. See, e.g., In re New York, 256 U.S. 490, 41 S.Ct. 588, 65 L.Ed. 1057 (1921). Instead, the important distinction for the Supreme Court was that the Plaintiff “asserts rights to a res that is not in the possession of the state.” Deep Sea Research, 523 U.S. at 504. Since this is the determining distinction for Eleventh Amendment purposes for the in rem exemption, then the Eleventh Amendment is not applicable to any Bankruptcy proceeding falling within the Bankruptcy Court’s summary jurisdiction which includes any discharge issues such as this case.
The appellant’s brief entirely misses this point and woodenly argues that Deep Sea Research was an admiralty case and therefore its reasoning could only apply in admiralty cases. The state provides no analysis of its point and its wooden interpretation of Deep Sea Research would make no more sense than if it argued that Deep Sea Research involved a party with the initial D.S.R. and therefore should only apply if one of the parties had the initial D.S.R. In short, the State of Arizona’s analysis establishes a superficial distinction but not a substantive or meritorious distinction to be recognized within the rule of law.
Furthermore, the Ninth Circuit recently settled the issue of whether bankruptcy discharge determinations are in rem proceedings in Goldberg v. Ellett (In re Ellett), 254 F.3d 1135 (2001). There, Mr. Ellett had received a general discharge after successfully completing a Chapter 13 plan. Despite the discharge, the Franchise Tax Board of California continued to attempt to collect pre-petition tax obligations from Mr. Ellett. In response, he filed an Ex Parte Young adversary proceeding against the director of the Franchise Tax Board seeking injunctive and declaratory relief to prevent further collection efforts. See id. at 1137-38.
In analyzing the Ex Parte Young claim, the Ellett court determined that “the threshold question in this case is whether a State that does not consent to a bankruptcy court’s jurisdiction by filing a proof of claim or otherwise participating in the bankruptcy proceeding is nonetheless bound by the bankruptcy court’s § 524 discharge injunction.” Id. at 1139. The court concluded that the discharge injunction was binding on the state because “the bankruptcy court exercises jurisdiction over the res of the bankruptcy estate when it issues its discharge order, not in personam jurisdiction over the estate’s creditors.” Id. at 1141 (citing Virgina v. Collins (In re Collins), 173 F.3d 924, 928-31 (4th Cir. 1999), cert. denied, 120 S.Ct. 785 (2000); Deep Sea Research, 523 U.S. at 506, 118 S.Ct. at 1472. Consequently, the Ellett court found that the discharge determination was not a suit against the state under the Eleventh Amendment and the decision of the Bankruptcy Court could bind the state without implicating its sovereign immunity.1
Ms. Bleimeister initiated an adversary proceeding against the State only because the State insisted. Initially, Ms. Bliemeister merely filed a motion to determine the dischargeability of the State’s claim, a procedure that would not have implicated Eleventh Amendment immunity. See Ellett, 254 F.3d at 1140 (explaining that sovereign immunity does not apply where the state is not served with compulsory process); In re Mitchell, 209 F.3d at 1116 (discussing Collins, 173 F.3d at 929, in which “the court found that there was no Eleventh Amendment suit where the debtors asked for their bankruptcy case to be reopened – but did not directly sue the state – for a determination that certain debts owed the state were discharged pursuant to a previous order”).
The State, however, responded to Ms. Bliemeister’s uncoercive motion by insisting that she proceed by way of complaint under Federal Rule of Bankruptcy Procedure 4007. A proceeding under Rule 4007 is an adversary proceeding under Rule 7001(6) that requires service of process under Rule 7004. Where, as here, the State chooses to insist that a debtor pursue a discharge determination through a complaint and summons issued out of the Bankruptcy Court, it should not then be able to complain that it has been unduly coerced into the Bankruptcy Court by means of the very process it demanded.
The State may argue that Bankruptcy Rules 4007, 7001(6), and 7001(9) require that a debtor initiate an adversary proceeding to resolve certain discharge questions, such as those at issue in this case. But the Federal Rules of Bankruptcy Procedure cannot “abridge, enlarge or modify any substantive right” granted by the Bankruptcy Code. 28 U.S.C. § 2075 (2000). See also Committe Note, FED. R. BANKR. P. 1001; United States v. Towers (In re Pacific Atlantic Trading Co.), 33 F.3d 1064, 1066 (9th Cir. 1994).
The Code provides for the discharge of certain state claims, and, as shown by Ellett, a court has the authority to discharge these claims without an adversary proceeding. Therefore, if Rules 4007 and 7001 require an adversary proceeding for all disputed discharge determinations, and the states can raise state sovereign immunity only in adversary proceedings but not otherwise, the rules would effectively alter debtors’ statutory rights by preventing discharge determinations as to state debts. Under 28 U.S.C. § 2075, the rules cannot have this effect, and the State should not be able to interfere with a debtor’s discharge rights by invoking their requirements.
Nor should the particular procedure used to reach a discharge issue affect the outcome. Regardless of how discharge matters come before the court, discharge determinations remain in the nature of in rem proceedings to determine the status of debtors and their assets and liabilities. See Ellett, 254 F.3d at 1141. Thus, the initiation of an adversary proceeding and the issuance of a summons against the State is not necessary to provide the Bankruptcy Court with jurisdiction to settle the scope of the discharge.
The Ellett court was not confronted with the issuance of process against the State itself. Nonetheless, in dicta and with no analysis or discussion, the court did reiterate an earlier Ninth Circuit decision that “a discharge order clearly cannot be enforced against non-consenting States in an adversary proceeding where the State or a state agency is named a defendant.” Ellett, 254 F.3d at 1141 (citing Mitchell, 209 F.3d 1111).
In Mitchell, the court concluded that the dischargeability proceeding at issue was a “suit” under the Eleventh Amendment. See Mitchell, 209 F.3d at 1116. The debtors in Mitchell had commenced an adversary proceeding directly against the state through a complaint containing multiple claims, the first of which sought a discharge determination, and served a summons on the state. See id. In light of this “coercive” process, the court permitted the state to raise an Eleventh Amendment defense. See id. at 1116-1117.
As discussed above, Ms. Bliemeister sought no such coercive process against the State, and proceeded by way of complaint and summons only at the State’s insistence. In addition, the Mitchell court did not consider the impact of the Supreme Court’s holding in Deep Sea Research.
In Deep Sea Research, the Supreme Court rejected a sovereign immunity defense through an analysis that also applies to bankruptcy discharge determinations. At issue in Deep Sea Research was the authority of a federal court to adjudicate a state’s rights to a sunken vessel located in its territorial waters. Focusing on the “important distinction” that the case involved “rights to a res that is not in the possession of the State,” the Court concluded that state sovereign immunity did not apply to in rem proceedings. Id. at 504, 118 S.Ct. at 1471. The Court relied on a series of admiralty cases confirming that federal jurisdiction is “only forbidden in cases where, in order to sustain the proceeding, the possession of the United States must be invaded under process of the court.” Id. at 506, 118 S.Ct. at 1473 (quoting The Davis, 77 U.S. (10 Wall.) 15, 20 (1870)).
The Deep Sea Research exception to sovereign immunity for in rem proceedings is as applicable to bankruptcy discharge determinations as it is to admiralty cases. As discussed in Ellett, a bankruptcy court’s discharge order affects rights in the bankruptcy estate – a res that is not in the possession of the State. The Bankruptcy Court does not need to issue process and invade a possessory interest of the State to find that a particular debt is discharged.2 See Ellett, 254 F.3d at 1140-41.
In light of the factual differences between Mitchell and Ms. Bliemeister’s proceedings, coupled with the holdings of Deep Sea Research and Ellett, Mitchell should not control the outcome here. Ms. Bliemeister sought relief through an adversary proceeding only because the State insisted; in all other respects her situation is identical to that in Ellett. The form of proceeding dictated by the Bankruptcy Rules should not – and, under 28 U.S.C. § 2075, cannot – control the outcome. The discharge determination, regardless of its origin, was an in rem proceeding that did not implicate the State’s sovereign immunity.
III. THE THREE-YEAR PERIOD IN 507(a)(8)(E)(ii) FOR AN EXCISE TAX RUNS FROM THE TRANSACTION DATE AND NOT FROM THE DATE OF THE ASSESSMENT.
This tax is dischargeable under 11 U.S.C. § 523 unless it is a priority tax under 11 U.S.C § 507(a)(8). 11 U.S.C. § 507(a)(8) evidences Congress’ ability to express itself. Congress triggers the running of the time period for different types of taxes within that section alternatively from: (1) the date of the tax assessment (for insistence for property taxes); (2) the due date for the tax returns (for income taxes); or (3) the date of the transaction (for excise taxes). Congress could have established a law for excise taxes that the three-year statutory period would run from the date of assessment but it choose not to do so. Instead it ran the three-year period from the transaction being taxed.
The State of Arizona is unhappy with the statute and dearly wishes that Congress had decided to run the statutory period from the date of assessment such as Congress provided for property taxes. Clearly, Congress knew how to use the word “assessed” and used it in 507(a)(8)(A)(ii) as well as 507(a)(8)(B). However, Congress did not use the word “assessed” in defining the beginning of the statutory period for excise taxes. See 507 (a)(8)(E)(ii).
Confronted with Congress’ decision to run the statutory period from the date of the transaction, the State seeks to change the meaning of the statute by arguing that the transaction and the assessment are one. Indeed, according to the State, each time it assesses a tax on a debtor, the debtor is deemed to have engaged in the transaction. That is, the transaction of being assessed a tax. Both the District Court and the Bankruptcy Court recognize that such a result is absurd. “To equate the transaction with the assessment of the tax means the act being taxed is the imposition of the tax. To avoid this absurd result it is necessary that the transaction be some act by the Debtor other than the State’s tax assessment.”
The bankruptcy court further pointed out that the State admits that an excise tax is a tax “imposed on the performance of act, the engaging in an occupation, or the enjoyment of privilege.” In advancing this argument, the State relied on Black’s Law Dictionary, Sixth Edition, 1990. The Bankruptcy Court went on to point out that “only a tax collector could argue that the imposition of tax is a “privilege” enjoyed by the taxpayer.” [ER #AP22]. The Bankruptcy Court, echoed by the District Court, further stated that the appropriate application of the statute is that the three-year period found in 11 U.S.C.§ 507 (a)(8)(E)(ii) began to run from the time that the Debtor’s husband hired a worker, who was injured on the first day of employment without the Debtor’s husband having secured workers compensation insurance.
The Bankruptcy Court correctly held that the State of Arizona’s reliance on In re Camilli, 94 F.3d. 1330 (9th Cir. 1996) was misplaced. In Camilli, the bankruptcy was filed within two years of the date of the injury. The Ninth Circuit’s analysis of the “obligation to repay” is irrelevant because the three-year statutory period was not even implicated in the case nor considered by the court.
Similarly, the State of Arizona argues (incorrectly) that Congress intended them to have three years to collect from the date of assessment. Again, had Congress intended for the State of Arizona to have three years to collect from the date of assessment, it could have used the date of assessment as the trigger date in 507(a)(8)(E)(ii). It didn’t use the date of assessment for that provision even though a few subsections earlier, in dealing with property taxes, it did use the assessment as the trigger date. The only logical inference from Congress’s statutory construction is that it did not intend the date of assessment to be the trigger date for 507(a)(8)(E)(ii).
Furthermore, the State’s appeal to public policy is incorrect. There is an important public policy in favor of granting dating debtors a fresh start. There are only limited and clearly defined exceptions to this fresh start which Congress has enacted in the bankruptcy code. Congress, who is authorized by the Constitution to enact uniform bankruptcy laws is vested with the power to determine public policy. Had Congress intended to make worker’s compensation claims dischargeable from three years from the date of assessment, it could have enacted such a public policy. Congress elected not to do so.
Further, Ms. Bliemeister worked a full-time job at another location and only became saddled with this obligation because of the acts of her then-husband from who she has long been divorced. Ms. Bliemeister suffered through an abusive and unhappy marriage and then was forced into bankruptcy because of this debt which she could not repay. There is no public policy to be served by punishing someone who had nothing to do with the hiring of the employee and had no power to prevent the unfortunate accident that occurred at a place where she wasn’t even working. Further, Ms. Bliemeister filed this bankruptcy relying in part upon the representations of the State of Arizona in order to discharge this debt. Now, the State, unhappy with Ms. Bliemeister’s filing the bankruptcy and obtaining her discharge, seeks to keep her liable for a debt which she had no part in creating and that the law clearly provides that she be discharged. Public policy is not served by such a harsh result.
Finally, the State of Arizona’s public policy arguments have been repeated and amplified by Amicus Curiae brief filed by the State of California. The Amicus Curiae brief by the State of California focuses only on public policy arguments and entirely ignores the language of the statute. The State of California has chosen to focus on policy arguments and ignore the statutory construction because the language of the statute is contrary to California’s policy concerns. Rather than focus on the plain language of the statute, which contradicts its policy arguments, the State of California wishes to focus on what it believes the statute should be as a matter of public policy instead of focusing on what the statute is and what the statute says. The statute clearly does not use the date of assessment as the trigger date for excise taxes. See 11 U.S. C. § 507(a)(8)(E)(ii). Yet a few paragraphs earlier in that very statute, Congress used the date of assessment as the trigger date for property taxes. See 11 U.S.C. § 507(a)(8)(B). Clearly, Congress knew how to use the date of assessment as the trigger date if it desired. Here Congress did not desire to use the date of assessment as trigger date for excise taxes. It could have enacted a statute that would have furthered the public policy aims expressed by the State of California and the State of Arizona but Congress decide not to do so. Instead, Congress enacted a statute that allows Ms. Bliemeister the protections of the fresh start wish is a central and essential policy of the Bankruptcy Code.
IV. NEITHER THE DISTRICT COURT OR THE BANKRUPTCY COURT NEEDED TO REACH THE EQUITABLE ESTOPPEL ARGUMENT, BUT THIS COURT COULD GRANT SUMMARY JUDGMENT ON THIS GROUND IF IT IS SO INCLINED.
The debtor’s equitable estoppel argument was fact intensive. The Bankruptcy Court announced its leanings at oral argument and indicated that the record on this theory was “unclear.” When the Bankruptcy Court entered its opinion it did not address the equitable estoppel argument at all. Instead, it relied on the facts that were undisputed and reached its decision in favor of the debtor on debtor’s alternative theory. As the State of Arizona recognizes, the Bankruptcy Court’s opinion does not indicate that it ruled one way or another on the equitable estoppel argument. The District Court declined to address the issue. The Bankruptcy Court did not need to reach this issue, nor did the District Court, because equitable estoppel only comes into play if the State had prevailed in its principal theory of the case. The State did not prevail. Accordingly, both the District Court and the Bankruptcy Court were proper in not ruling on the issue since the issue became moot by Bankruptcy Court’s grant of summary judgment in favor of the debtor. If this Court decides it needs to reach the issue of equitable estoppel it should grant judgment in favor of the debtor on this ground as well.
On October 7, 1998, David R. Glass collector for the State of Arizona sent a letter stating “after request for review by Steven Gonzales on your behalf the claim entered on March 24, 1995 is fully supported by the evidence and is affirmed. No appeals on your behalf by Steven Gonzales or any other counsel where filed therefore the claim currently unpaid still remains due please remit payment in full to my attention no later than August 21, 1999.” [ER #AP9]. Relying on the representation of Mr. Glass that the claim was entered on March 24, 1995, Ms. Bliemeister filed a chapter 7 bankruptcy on October 29, 1998 in order to discharge this and other debts. The filing date was more than three years after the date that Mr. Glass had informed her that the claim had entered. It has been repeatedly held that taxpayers may relay upon written representations of government officials. See Haber v. United States, 831 F.2d 1051 (Fed. Cir. 1987)(taxpayer had right to rely on IRS oral representation to taxpayer’s accountant that prior notice of disallowance had been withdrawn, so that later notice of disallowance initiated period for filing suit); Miller v. United States, 500 F.2d 1007 (2d Cir. 1974) (IRS’ inadvertently sending of a second notice of disallowance extended time to bring suit); Engelken v.United States, 823 F. Supp. 845, 849-50 (Colo. 1993) (where taxpayer and IRS entered into written agreement extending time to file claim for refund, the taxpayer was entitled to rely on the governments agreement). The State, having induced Ms. Bliemeister to file a bankruptcy through Mr. Glass’s letter is now arguing that Mr. Glass does not have authority bind the State. [Docket #AP5]. Based on the above cases, the government is wrong as a matter of law and is wrong as a matter of equity and fairness.
The State waived whatever sovereign immunity it enjoyed by voluntarily participating in the Bankruptcy Court past the point where it had learned of the Court’s leanings. Further, the both the District Court’s and the Bankruptcy Court’s learned analysis is correct that the states do not enjoy sovereign immunity in dischargeability actions. Moreover, both courts correctly ruled that the three-year statutory period for establishing a priority debt runs from the date of the transaction that the employee was hired and injured and not from the date of the tax assessment by the State of Arizona. Finally, the State of Arizona’s position is contrary to the principle of equitable estoppel.