11th Cir. holds no sovereign immunity in bankruptcy case

In a case involving a state’s efforts to recoup welfare payments, the Eleventh Circuit held that the state does not have sovereign immunity from a suit to enforce the automatic stay protections of bankruptcy laws. The court held that under the reasoning of Central Virginia Community College v. Katz, 126 S.Ct. 990 (2006), Congress has power under the Bankruptcy Clause of the Constitution to require states to comply with the automatic stay provisions of bankruptcy laws. The Katz case was a 5:4 decision in which Justice O’Connor was the swing vote. Justice Thomas wrote a vehement dissent, joined by Chief Justice Roberts, Justice Scalia and Justice Kennedy. With the replacement of Justice O’Connor by Justice Alito, the Supreme Court balance could tip, if this case is appealed. The Eleventh Circuit found an alternative grounds for its decision, holding that the state waived its sovereign immunity by filing a proof of claim in a bankruptcy proceeding. On all of this, the panel, consisting of 2 judges appointed by Bush I and a third by Reagan, was unanimous. Two of the judges went on to hold that, pursuant to a provision of the bankruptcy code addressing abrogation of sovereign immunity, punitive damages could not be awarded, and attorneys’ fees and costs were limited. The third judge dissented only on this last issue. In re Omine, 2007 WL 1373812, No. 06-11655 (11th Cir. May 11, 2007).

Mr. and Mrs. Omine filed for Chapter 13 bankruptcy in the state of Florida in 2001.  The Florida Department of  Revenue (DOR) filed a proof of claim in the bankruptcy court, seeking to recoup public assistance funds expended by the state of Hawaii to support Mr. Omine’s former wife and children who resided in Hawaii.  After the filing of the bankruptcy petition, DOR wrote a letter to Mr. Omine’s employer, directing the employer to garnish Mr. Omine’s wages to repay the Hawaii debt.  Counsel for both sides conferred and the DOR agreed to cease the garnishment.  A week later, Mr. Omine received a letter threatening penalties if he did not repay the Hawaii debt.  Counsel conferred again, and DOR stated it would cease collection efforts.  Shortly thereafter, Mr. Omine’s employer got another letter directing it to garnish his wages.  Again counsel conferred and agreed to halt the collection effort.  A few days later, the Omines received a letter informing them that their tax refund had been offset to repay the Hawaii debt.  The Omines then filed a motion for sanctions against DOR for repeatedly violating the automatic stay of debt collection upon the filing for bankruptcy.  In 2003, the district court (affirming the order of the bankruptcy court) issued an order holding that DOR had violated the stay, awarding damages and attorneys’ fees.  In 2004, the Eleventh Circuit affirmed in part and remanded.  On remand, the Omines alleged that the state had continued its collection efforts during the appeal, and the bankruptcy court awarded additional actual costs, sanctions, and attorneys’ fees.  The district court held a hearing on the case just days after the 2006 Katz decision.  The district court’s decision affirmed the bankruptcy court.  The second appeal to the Eleventh Circuit followed.

 

The Eleventh Circuit “agree[d] with the district court that, pursuant to Katz, actions to force a creditor to honor the automatic stay are the types of ‘proceedings necessary to effectuate the in rem jurisdiction of the bankruptcy court[],’ and that, therefore, the Florida DOR may not assert sovereign immunity here.”  The court concluded that “the bankruptcy court’s ancillary order to enforce an automatic stay, which is one of the fundamental debtor protections provided by the bankruptcy laws, operates free and clear of the Florida DOR’s claim of sovereign immunity.” 

 

The court held, in the alternative (perhaps thinking about possible appeal to the Supreme Court), that the state had waived its sovereign immunity by filing a proof of claim.  The court relied on an earlier Eleventh Circuit case to reach this conclusion.

 

The court then turned its attention to the bankruptcy code’s provision which explicitly abrogates sovereign immunity for specified sections of the bankruptcy code.  11 U.S.C. § 106(a)(3).  That provision prohibits an award of punitive damages against a governmental unit and limits an award of fees against any governmental unit.  The district court concluded that the provision did not apply, holding that the state should be treated as an ordinary creditor because it filed a proof of claim.  The majority of the Eleventh Circuit panel disagreed, basing its decision on the text of the provision and the majority’s view of congressional intent.  The majority stated that Katz “did not undermine Congress’s ability to limit awards against the States.”  (The dissent addressed this point alone and opined that § 106(a) which set forth a scheme for abrogating sovereign immunity did not apply when a court has in rem bankruptcy jurisdiction as per Katz or when the state filed a proof of claim.)

 

DOR then argued that the debt was not dischargeable in bankruptcy, because it was in the nature of support. DOR relied upon Hawaiian law which states that welfare payments are support obligations and non-dischargeable.  The Eleventh Circuit stated that under federal law, the issue is intent of the parties, and the burden of proof is on the party alleging the debt is non-dischargeable.  The court was persuaded by Mr. Omine’s testimony that the Hawaii debt was not in the nature of support.  The court stated that DOR “presented no evidence as to the intent of the parties.”  The court affirmed the ruling below that the debt was dischargeable.