The Toxic Avenger Bankruptcy Court Jurisdiction over States

Journal Issue

Apr 2000

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Cases where states have environmental claims against debtors<a href="#1" name="1a">1</a> and cases where states raise the Eleventh
Amendment<a href="#2" name="2a">2</a> defense to bankruptcy court jurisdiction<a href="#3" name="3a">3</a> 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.<a href="#4" name="4a">4</a> 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,<a href="#5" name="5a">5</a> 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, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re St.
Lawrence Corp., 239 B.R. 420 (Bankr. D. N.J. 1999)</a>. This column will explore whether a state's active
litigation of a bankruptcy estate's right to abandon property under <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §554</a> constitutes a waiver of
the state's Eleventh Amendment immunity in that bankruptcy case.

<h3>General Issues on Waiving Immunity</h3>

The leading case on Eleventh Amendment immunity is <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Tribe v. Florida, 517 U.S. 44 (1996)</a>.
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

<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… I, 119 S.Ct. at 2204</a>. Such a waiver, however, will not be lightly implied and must be voluntary,
unequivocal and clearly expressed to be effective.<a href="#6" name="6a">6</a> In College I, the Supreme Court overruled the
"implied waiver doctrine" of <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Terminal Ry Co., 377 U.S. 184 (1964)</a>, 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,<a href="#7" name="7a">7</a> although the extent of that waiver is not entirely
defined.<a href="#8" name="8a">8</a>

<h3>Waiver by the State</h3>

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.<a href="#9" name="9a">9</a>

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 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… II, 119 S.Ct. at 2228</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Dept. of Corrections v. Schacht, ____
U.S. ____, 118 S.Ct. 2047 (1998)</a> (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.<a href="#10" name="10a">10</a>

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. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; 474 U.S. at 507,
n.9</a>. 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.<a href="#11" name="11a">11</a>

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"<a href="#12" name="12a">12</a> 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.<a href="#13" name="13a">13</a>

<h3>Conclusion</h3>

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.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> See, generally, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… National Bank v. New Jersey Department of Environmental Protection, 474 U.S. 494 (1984)</a>. <a href="#1a">Return to article</a>

<a name="2">2</a> 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. <a href="#2a">Return to article</a>

<a name="3">3</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Tribe v. Florida, 517 U.S. 44 (1996)</a>. <a href="#3a">Return to article</a>

<a name="4">4</a> See Midlantic; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re L.F. Jennings Oil Co., 4 F.3d 887 (10th Cir. 1993)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re St. Lawrence Corp.,
239 B.R. 720 (Bankr. D. N.J. 1999)</a>. <a href="#4a">Return to article</a>

<a name="5">5</a> See, generally, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Maine, ____ U.S. ____, 119 S.Ct. 2240 (1999)</a> (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, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Prepaid Postsecondary Education
Expense Board v. College Saving Bank, (College I), ___ U.S. ____ 199 S.Ct. 2199 (1999)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Prepaid Postsecondary
Education Expense Board v. College Savings Bank (College II), ___ U.S. ___, 119 S.Ct. 2219 (1999)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Tri-City
Turb Club, 203 B.R. 617 (Bankr. E.D. Ky. 1996)</a>. <a href="#5a">Return to article</a>

<a name="6">6</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Jordan, 445 U.S. 651, 673 (1974)</a>, 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..." <a href="#6a">Return to article</a>

<a name="7">7</a> See, generally, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Landy, 382 U.S. 323 (1966)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. New Jersey, 324 U.S. 565 (1947)</a>. <a href="#7a">Return to article</a>

<a name="8">8</a> Compare <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Straight, 143 F.3d 1387 (10th Cir.), cert. denied, ___ U.S. ___, 119 S.Ct. 446 (1998)</a>
(stating filing of a proof of claim was a broad waiver of a state's Eleventh Amendment immunity) with <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Creative Goldsmiths of
Washington, D.C., 119 F.3d 1140 (4th Cir. 1997), cert. denied, 118 S.Ct. 1517 (1998)</a> (stating filing
of a proof of claim was a narrow waiver). <a href="#8a">Return to article</a>

<a name="9">9</a> See, generally, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Platter, 140 F.3d 676 (7th Cir. 1998)</a> (state expressly waived Eleventh Amendment immunity
by filing adversary proceeding seeking to establish that its claim was non-dischargeable.). <a href="#9a">Return to article</a>

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

<a name="11">11</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Straight, 143 F.3d at 1387, 1389-90</a>; see, also, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re White, 139 F.3d 1268, (9th Cir.
1998)</a> (holding that a native American tribe waived its immunity by voting on a proposed chapter 11 plan and objecting to its
confirmation). <a href="#11a">Return to article</a>

<a name="12">12</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… of Virginia. v. Robinson, 243 B.R. 657, (W.D. Va. 2000)</a>. <a href="#12a">Return to article</a>

<a name="13">13</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re St. Lawrence Corp., 239 B.R. 720, 727 (Bankr. D. N.J. 1999)</a>, 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. <a href="#13a">Return to article</a>

Journal Authors

C. R. Bowles

John W. Ames

Journal Date

Saturday, April 1, 2000 - 12:00