Not All Waivers of Sovereign Immunity Construed Narrowly

The Second and Ninth Circuits, in different contexts, have held that when a state voluntarily invokes the jurisdiction of a federal court, thereby waiving sovereign immunity, the scope of those waivers need not be viewed narrowly.

Rather, following Lapides v. Bd. of Regents of Univ. Sys. Of Ga., 535 U.S. 613, 620 (2002), the courts ruled that the guiding principle is not the states' intent but rather the "need to avoid inconsistency, anomaly, and unfairness."

In Embury v. King, 2004 WL 503813 (9th Cir. Mar. 16, 2004), the state removed to federal court a wrongful discharge case that included both state and federal claims, and then moved to dismiss based on sovereign immunity. The district court denied the motion, and the state appealed. In the interim, the Supreme Court held in Lapides that "removal is a form of voluntary invocation of a federal court's jurisdiction sufficient to waive the State's otherwise valid objection to litigation of a matter (here of state law) in a federal forum." 535 U.S. at 624. The Supreme Court reserved, however, the question of whether the defense was also waived as to the federal claims, which were dismissed on other grounds in the Lapides case.

The Ninth Circuit addressed that question, and held that the affirmative act of removal waived the sovereign immunity defense over the entire case, including both federal and state law claims, and also over claims that were only asserted for the first time after removal. The court declined to view the waiver narrowly. "[T]he State removed the case, not the claims, and like all cases in federal court, it became subject to liberal amendment of the complaint." The court found that "the federal court's power extends, once immunity is waived, to the entire case, consistent with Article III's grant of power to decide 'Cases.'" The court concluded that "[a]llowing a State to waive immunity to remove a case to federal court, then 'unwaive' it to assert that the federal court could not act, would create a new definition of chutzpah."

Using like reasoning, the Second Circuit has held that when a state agency has asserted a claim in a bankruptcy proceeding, that State may not then assert a sovereign immunity defense to a claim the bankruptcy trustee seeks to assert against another state agency as an offset against the first agency's claim. In Re: Charter Oak Associates v. Department of Social Svcs., 2004 WL 541129 (2d Cir. Mar. 19, 2004). The court declined to address the issue, currently pending before the Supreme Court, whether Congress had the power in the Bankruptcy Code to abrogate sovereign immunity, or to "deem" a waiver that is broader than that permitted by the 11th Amendment. Rather, the court found that the Bankruptcy Code provision permitting such offset claims was consistent with the 11th Amendment because the state's litigation conduct in affirmatively invoking the power of a federal court by filing the proof of claim was a sufficient waiver of sovereign immunity to extend to the offset claim. The court noted that the trustee's claim against the state was merely an offset, and that limitation "protects the state's coffers because the state will never be liable to pay anything."

Like the Ninth Circuit, the Second Circuit thought it inappropriate to construe the state's waiver narrowly, reaching only the claim which the state wants to present. Relying on Lapides, the Second Circuit found that the narrow construction rule applies only to waivers effected through language, such as a statute, in which the issue is the state's intent. Waivers by conduct, in contrast, are "driven not by the state's 'actual preference or desire,' which might weigh in favor of construing a waiver narrowly, but rather by the 'need to avoid inconsistency, anomaly, and unfairness,' which requires a general assessment of the equities associated with the state's participation in the bankruptcy litigation." Quoting Lapides, 535 U.S. at 620. To permit states to invoke the court's jurisdiction selectively would enable them to collect from bankrupt estates "while permitting them to withhold the debts they owe to the estate, giving them a distinct and unfair advantage over other (non-state) creditors."