Logic Waiver and Claims Whats Happening with the 11th Amendment
Courts also tend to jump to conclusions about the Eleventh Amendment that do not seem to square particularly well with their analysis of other analogous issues or the language of the Code itself. Whether the filing of a claim, for instance, "waives" the state's immunity has much in common with whether it also "waives" the right to a jury trial. Courts generally take a cautious approach to the latter question, noting that, properly speaking, the filing of a claim does not "waive" the constitutional right. At most, it means that the claimant has ventured into a forum that acts in equity and they must determine whether the issue actually invokes that process. See, e.g., In the Matter of RDM Sports Group Inc. (Hays v. Equitex Inc.), 2001 WL 337199 (N.D. Ga. April 2001). But few courts display any similar sense of caution in discussing if the filing of a claim is a "waiver" that allows the court to adjudicate stay and discharge issues against the state. The Eighth Circuit, for instance, in an unpublished opinion in In re May (May v. United States of America, Missouri Dept. of Revenue), 2001 WL 238077 (March 2001), summarily held that a discharge complaint should be dismissed where the state had not filed a proof of claim. It added, though, that the debtor will "no doubt" be entitled to raise the discharge issue if Missouri files a claim in the case. I suggest that, despite that cavalier view, there is in fact great "doubt" about that view.
So why doesn't the state "waive" the Eleventh Amendment when it files a claim? Well, to begin with, the Eleventh Amendment only applies to suits against the state. When the state files suit, nothing has been filed against it, so there is nothing to which the amendment applies. Instead, one must ask, does the filing of a suit by the state inherently mean that the state actually agrees to allow itself to be sued in return? And, if so, how is that consent shown, and how broad is it? The answer under the common law is clear—the only counterclaims that may be asserted are those in the nature of recoupment and, as such, may only be asserted to the extent that they serve to defeat the state's claim. No affirmative recovery is allowed. While some might think this is merely an arbitrary limit, the reason for this formula is clear once one examines the nature of recoupment.
As the courts often announce in other contexts, recoupment is not a separate claim at all; instead, it deals with matters that are so closely entwined with the merits of the original case that it is simply a defense. And, because it is a defense, it does not violate the automatic stay, it is not discharged, and post-petition and pre-petition debts may be combined. Thus, asserting rights of recoupment is no different from allowing a party sued by the state to assert any other defense it may have. Gardner v. New Jersey, 329 U.S. 565 (1947), held that asserting defenses to a claim filed by the state is not a violation of the Eleventh Amendment and allowing recoupment does no more than that. In short, because no separate claim has ever been allowed to proceed, waiver and consent really don't come into the picture at all. To be sure, the allowance of those defenses is often loosely referred to as "waiver," but the Supreme Court has repeatedly made clear that such a "waiver" extends only to those matters that defeat the precise claim filed by the state. See, e.g., U.S. v. U.S. Fidelity and Guaranty Co., 309 U.S. 506 (1940) (only recoupment allowed), and U.S. v. Shaw, 309 U.S. 495 (1940) (rejecting the argument that "when a sovereign voluntarily seeks the aid of the courts...it takes the form of a private suitor and thereby subjects itself to the full jurisdiction of the court"). See, also, Oklahoma Tax Commission v. Potawatomi Tribe, 498 U.S. 509 (1991) (state could not counterclaim for back taxes when it contested a declaratory judgment action by an Indian tribe arguing that the tribe need not collect the taxes).
Yet, only a few months ago, the Ninth Circuit issued a curious opinion (In re Lazar, 237 F.3d 967 (2001)) in which it stated that the scope of allowed counterclaims is an open issue—while failing to cite the Supreme Court cases noted above, which settled the issue 60 years ago. It also missed many appellate court cases that state the same principle, such as Miller v. Tony & Susan Alamo Found., 134 F.3d 910 (8th Cir. 1998), and U.S. v. Forma, 42 F.3d 759, 765 (2nd Cir. 1994) ("it has long been absolutely clear that the exception does not permit any affirmative recovery...on a counterclaim that lacks an independent jurisdictional basis), and bankruptcy cases such as In re Friendship Medical Center Ltd. (Jones v. Yorke), 710 F.2d 1297 (7th Cir. 1983), and Ohio v. Madeline Marie Nursing Homes #1 and #12, 694 F.2d 449 (6th Cir. 1982). (The opinion is even more unusual in that it fails to acknowledge In re Mitchell, 209 F.3d 1111 (9th Cir. 2000), even when that case had decided issues that this panel deemed to be still open.) The panel's attempt to set a standard, unencumbered by any knowledge of the past law, is discussed below. For now, it is enough to say that there is a standard and that it is clear—and stringent.
Indeed, Congress presumably passed §106 precisely because the common law of "waiver" is so narrow. Section 106(a) attempts to broadly abrogate state immunity with respect to numerous core provisions of the Code, including §§105, 362 and 524. Sections 106(b) and (c) attempt to extend the common-law waiver by allowing affirmative recovery on mandatory counterclaims and recoupment-type relief on related matters—neither of which would fall within the common law standard. It is abundantly clear by now that §106(a) is unconstitutional, but the courts have only recently begun to grapple with §§106(b) and (c).
Because those sections were phrased in terms of "waiver," many courts reflexively assumed that they were lawful. However, that belief should have been shattered by College Savings Bank v. Florida Prepaid Postsecondary Education Expense Board, 527 U.S. 666, 683 (1999), which emphatically rejected the concept of a constructive or deemed waiver. As Justice Scalia said, "Forced waiver and abrogation are not even different sides of the same coin; they are the same side of the same coin." That holding surely spells the death knell for §§106(b) and (c), which attempt to impose a broad waiver upon the states if they file a claim. Some lower courts, such as In re Seay, 244 B.R. 112 (Bankr. E.D. Tenn. 2000), have so held, but Arecibo Community Health Care Inc. v. Com. of Puerto Rico, 244 F.3d 241 (1st Cir., April 2001), is the first appellate case to do so. The court concluded that there was "no principled reason to distinguish the legislation in this case" from that at issue in College Savings, and that as a result, §106(b) (and, by extension, §106(c)) are unconstitutional. Thus, the common law remains intact.
Clearly, at least some monetary counterclaims will fit within the common law. Section 106(b) refers to claims arising out of the "same transaction or occurrence" requirement, which is usually equated to the Rule 13 standard for mandatory counterclaims. At a minimum, a claim for recoupment must satisfy that requirement. But are all Rule 13 counterclaims allowed? Potawatomi Tribe says "no"—some claims may be highly related in the Rule 13 sense, but yet do not serve to defeat the state's claim. If they do not, then they cannot fall within the scope of the litigation that the state chose to bring to the federal courts.
In re Dept of Energy Stripper Well Exemption Litigation (Anadarko Prod. Co. v. New Mexico), 956 F.2d 282 (Temp. Emer. Ct. App. 1992), is instructive in this regard. Just as in Lazar, the issue concerned monies that were owed to a trust fund, and claims for payment from that trust fund. Unlike Lazar, though, the court in Anadarko noted that resolution of the issues in the private party's claim would not affect the merits of the state claim; as such, it was irrelevant that both claims related to the same fund.
As the courts often announce in other contexts, recoupment is not a separate claim at all; instead, it deals with matters that are so closely entwined with the merits of the original case that it is simply a defense.
Lazar, though, fails to cite those cases either. Instead, it asserts that Rule 13 is the only standard and cites a 1966 decision to show that the Rule has "recently" been given a "liberal interpretation." The case Lazar cited for that proposition, though, had nothing to do with sovereign immunity—which is not surprising, since the Supreme Court has always required that impositions on sovereign immunity be construed narrowly, not "liberally." However, even if one uses the "logical relationship" test for Rule 13 counterclaims, one must first analyze the criteria to which the "logic" is being applied. Rule 13 is designed to deal with issues of judicial economy and case management, while sovereign immunity waivers deal with what matters the state can be said to have actually consented to having heard. The "logic" of relating cases together for the convenience of the judiciary has little or nothing to say about what it is "logical" to believe the state consented to by filing suit.
Deciding the latter issue should involve the same sort of a searching and considered review that is undertaken with respect to jury trial issues, but that is not usually the case. In In re Burke, 146 F.3d 1313 (1998), for instance, which was decided before College Savings but was relied on heavily by Lazar, the Eleventh Circuit held that the "adjudication of the claim" also included determination of actions to enjoin purportedly unlawful actions outside the bankruptcy court that had no possible impact on whether the claim was allowed or disallowed, or on the amount or priority of that claim. Yet, in the recent case of In re Piper Aircraft Corp., 244 F.3d 1289 (2001), that same court took a far more nuanced and careful approach to the issue of what is the "same cause of action" in deciding the scope of res judicata. In doing so, it rejected the kind of "but-for" reasoning that was at the heart of Burke—i.e., but for the desire to collect the claim there wouldn't have been a violation of the stay.
If we do undertake that more careful approach, what do we find? Are stay or discharge issues always or even routinely litigated together with the merits of the claim, as they would be if they were mandatory counterclaims? Clearly not. Indeed, Congress explicitly stated that "an action seeking relief from the stay is not the assertion of a claim which would give rise to the right or the obligation to assert counterclaims" and that determining the merits of claims is "collateral [and] unrelated to" the automatic stay issue." (S.Rep. No. 989, 95th Cong., 2nd Sess. at 55, reprinted U.S. Code Cong. and Admin. News 5787, 5841). If that is true when the issue is lifting the stay, it is equally true when the issue is enforcing the stay. Similarly, in Board of Governors of the Federal Reserve System v. MCorp Finan. Inc., 502 U.S. 32 (1991), the court made clear that courts are not to inquire into the merits of police and regulatory actions when deciding stay issues. Similarly, most discharge issues have no bearing on the merits of the claim—student loan discharges turn on hardship, not whether the money is owed or not, and tax claims are valid, even if the taxes have become stale and can be discharged. As such, those issues clearly are not the type of defensive counterclaims the common law allows.
Indeed, the simplest way to reach this result is to just apply §§106(b) and (c) literally. Because they were only meant to supplement §106(a), they do not purport to impose a broad waiver from the filing of a claim. Instead, they merely allow "claims" (in the bankruptcy sense) that are "property of the estate" to be brought against the state. But are injunctive actions to enforce the stay or the discharge "claims?" I think that the answer is, in general, "no." Nor are such rights to injunctive relief "property," and even if they were, the right to the discharge is not property "of the estate." The discharge is, after all, personal to the debtor and provides no value to the estate. By their own terms, then, §§106(b) and (c) do not impose a waiver as to injunctive relief merely because a claim has been filed. See Seay, supra.
Does this mean the states may violate the stay and the discharge with impunity? No, because Ex Parte Young allows state officials who violate federal law to be sued. What it does bar is the use of discretionary §105 injunctions where the automatic stay has not been violated. While this undoubtedly concerns courts that believe they need that sanction, the impact is likely to be slight. There are fewer than 10 reported cases in which police and regulatory actions were ultimately enjoined under §105. Even assuming that all of those were correctly decided (a point the states do not concede), the number is still de minimis. In far more cases, the courts sooner or later agreed with the states that their actions were justified—but often only after considerable time and expense. Eliminating that delay tactic, once and for all, would be greatly welcomed by the states. If the Eleventh Amendment is the key to that goal, then so be it.
1 The views expressed herein are solely those of the author and should not be taken as representing the views of the National Association of Attorneys General or any individual attorney general or member of his or her staff. Return to article
2 Indeed, in Seminole Tribe of Florida v. Florida, 517 U.S. 44 (1996), after the state's motion to dismiss was denied, the district court granted the state's motion for summary judgment, finding that the state had bargained in good faith with the tribe. The state still pursued its appeal because it believed its immunity meant that it need not litigate suits that it would win just anymore than those that it would lose. Return to article