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The Toxic Avenger Bankruptcy Court Jurisdiction over States

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Cases where states have environmental claims against debtors1 and cases where states raise the Eleventh Amendment2 defense to bankruptcy court jurisdiction3 represent the full range of a state's possible participation in a bankruptcy case. In environmental claim cases, states generally demand that bankruptcy courts force bankruptcy estates to fully comply with state environmental laws. States' intervention in environmental bankruptcy cases is most direct in cases where states seek to prevent bankruptcy estates from abandoning property due to environmental concerns.4 In other bankruptcy cases, however, states raise the Eleventh Amendment as a bar to bankruptcy court jurisdiction. In these cases, states argue that bankruptcy courts have no authority to either consider or adjudicate claims against them,5 unless they have effectively waived their Eleventh Amendment immunity.

In bankruptcy cases with environmental issues, states often intervene in the bankruptcy by objecting to the abandonment of property by a debtor-in-possession or bankruptcy trustee. See, generally, In re St. Lawrence Corp., 239 B.R. 420 (Bankr. D. N.J. 1999). This column will explore whether a state's active litigation of a bankruptcy estate's right to abandon property under 11 U.S.C. §554 constitutes a waiver of the state's Eleventh Amendment immunity in that bankruptcy case.

General Issues on Waiving Immunity

The leading case on Eleventh Amendment immunity is Seminole Tribe v. Florida, 517 U.S. 44 (1996). In this case, the Supreme Court greatly limited Congress' ability to waive the Eleventh Amendment immunity of states. Although not a bankruptcy case, it has wide-ranging application in the bankruptcy courts. While Seminole's interpretation of the Eleventh Amendment grants states broad immunity from suit in federal court, states have the right to voluntarily waive their Eleventh Amendment immunity. See College I, 119 S.Ct. at 2204. Such a waiver, however, will not be lightly implied and must be voluntary, unequivocal and clearly expressed to be effective.6 In College I, the Supreme Court overruled the "implied waiver doctrine" of Parden v. Terminal Ry Co., 377 U.S. 184 (1964), which held that states could waive their Eleventh Amendment immunity by engaging in certain types of conduct. In the bankruptcy context, a majority of courts have held that a state waives its Eleventh Amendment immunity by filing a proof of claim in a bankruptcy case,7 although the extent of that waiver is not entirely defined.8

Waiver by the State

Surprisingly, while there is a significant amount of case law since Seminole discussing whether a state waives its Eleventh Amendment immunity by filing a proof of claim, there is little bankruptcy case law discussing whether a state can waive its Eleventh Amendment immunity by taking other actions in a bankruptcy case.9

Outside of bankruptcy law, it is clear that if a state voluntarily intervenes in a federal court suit or voluntarily evokes federal court jurisdiction to pursue its own claims, the state has waived Eleventh Amendment immunity. See College II, 119 S.Ct. at 2228; Wisconsin Dept. of Corrections v. Schacht, ____ U.S. ____, 118 S.Ct. 2047 (1998) (holding a state's voluntary intervention in a federal court lawsuit waived its Eleventh Amendment immunity). The Supreme Court has held that where states purposefully invoke the jurisdiction of federal courts to further their interest, they have expressly waived their Eleventh Amendment immunity.10

In the context of a state's objection to a bankruptcy estate's proposed abandonment of property, it seems clear that the state's action should constitute an effective waiver of the bankruptcy court's jurisdiction over the state in that case. In these cases, the state is seeking to have the bankruptcy court affirmatively prevent the bankruptcy estate from performing an act (i.e., abandoning property) that it has a right to do unless an objecting party, such as a state, demonstrates that "imminent and indefinable harm" to health and safety of the public will result from the abandonment. Midlantic, 474 U.S. at 507, n.9. This type of legislation constitutes the voluntary, unequivocal and clearly expressed submission to the jurisdiction of the federal courts that courts have held will waive a state's Eleventh Amendment jurisdiction.11

Further, the argument can be made that by voluntarily invoking the general jurisdiction of the bankruptcy court by objecting to an aspect of the administration of the bankruptcy estate, the state has waived its immunity for all matters arising in that bankruptcy case. The state should not be permitted to argue that it has waived its Eleventh Amendment immunity merely for the limited purpose of arguing to enforce its environmental laws. Unlike the bankruptcy claims allowance process, where a state has a "Hobson's Choice"12 in environmental bankruptcy cases of either forgoing asserting a claim against a bankruptcy estate and retaining its Eleventh Amendment immunity, or filing a claim and submitting to federal court jurisdiction, the state has a real choice. It can allow the property to be abandoned, take action in state court against the property and later seek to assert a claim against the bankruptcy estate. Alternatively, it can attempt to have the bankruptcy court require the estate to attempt to comply with the state environmental laws by preventing the abandonment of the property. This meaningful choice should lead courts to find that the state's waiver in these cases should be broadly rather than narrowly interpreted.13

Conclusion

Although state involvement in a bankruptcy case involving toxic tort issues is ordinarily undesirable for the bankruptcy estate, in cases where the debtor may have a claim against a state, it may be a blessing in disguise. If a state attempts to enforce its environmental laws against the debtor by evoking the jurisdiction of the bankruptcy court, it may be waiving its Eleventh Amendment immunity and allowing the bankruptcy estate to pursue its valid claims against the state in the bankruptcy forum. This may be the only benefit of a debtor having toxic tort problems in a bankruptcy proceeding, but it is one that should not be ignored.


Footnotes

1 See, generally, Midlantic National Bank v. New Jersey Department of Environmental Protection, 474 U.S. 494 (1984). Return to article

2 The Eleventh Amendment provides: "[t]he judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by citizens of another state or by citizens of a foreign state." See, also, Klee, Johnston & Winston, "State Defiance of Bankruptcy Law," 52 V and L.R. 1527 (1999) for a full discussion of the Eleventh Amendment problems in the context of bankruptcy proceedings and the full scope of a state's Eleventh Amendment Immunity. Return to article

3 See Seminole Tribe v. Florida, 517 U.S. 44 (1996). Return to article

4 See Midlantic; In re L.F. Jennings Oil Co., 4 F.3d 887 (10th Cir. 1993); In re St. Lawrence Corp., 239 B.R. 720 (Bankr. D. N.J. 1999). Return to article

5 See, generally, Alden v. Maine, ____ U.S. ____, 119 S.Ct. 2240 (1999) (states can invoke common law sovereign immunity to a suit to enforce federal rights even when the suit is filed in federal court); See, also, Florida Prepaid Postsecondary Education Expense Board v. College Saving Bank, (College I), ___ U.S. ____ 199 S.Ct. 2199 (1999); Florida Prepaid Postsecondary Education Expense Board v. College Savings Bank (College II), ___ U.S. ___, 119 S.Ct. 2219 (1999); In re Tri-City Turb Club, 203 B.R. 617 (Bankr. E.D. Ky. 1996). Return to article

6 See Edelmar v. Jordan, 445 U.S. 651, 673 (1974), where the Supreme Court stated that waiver of a state's Eleventh Amendment immunity will be found "only where stated by the most express language or by such overwhelming implication..." Return to article

7 See, generally, Katchen v. Landy, 382 U.S. 323 (1966); Gardner v. New Jersey, 324 U.S. 565 (1947). Return to article

8 Compare In re Straight, 143 F.3d 1387 (10th Cir.), cert. denied, ___ U.S. ___, 119 S.Ct. 446 (1998) (stating filing of a proof of claim was a broad waiver of a state's Eleventh Amendment immunity) with In re Creative Goldsmiths of Washington, D.C., 119 F.3d 1140 (4th Cir. 1997), cert. denied, 118 S.Ct. 1517 (1998) (stating filing of a proof of claim was a narrow waiver). Return to article

9 See, generally, In re Platter, 140 F.3d 676 (7th Cir. 1998) (state expressly waived Eleventh Amendment immunity by filing adversary proceeding seeking to establish that its claim was non-dischargeable.). Return to article

10 See, also, Lieb, "Do States Have Eleventh Amendment Immunity from Suit in a Bankruptcy Court?" 2000 Annual Norton Bankruptcy Litigation Institute. Return to article

11 See In re Straight, 143 F.3d at 1387, 1389-90; see, also, In re White, 139 F.3d 1268, (9th Cir. 1998) (holding that a native American tribe waived its immunity by voting on a proposed chapter 11 plan and objecting to its confirmation). Return to article

12 See University of Virginia. v. Robinson, 243 B.R. 657, (W.D. Va. 2000). Return to article

13 See In re St. Lawrence Corp., 239 B.R. 720, 727 (Bankr. D. N.J. 1999), for an overview of the lengths to which a state will go to force a debtor to police the conduct of even tenants on property owned by the estate. Return to article

Journal Date: 
Saturday, April 1, 2000

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