A Magic Bullet to Beat Seminole

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Feb 1998

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Ever since a non-bankruptcy Indian gaming case (Seminole Tribe v. Florida)</a><a href="#note2">2</a> opened a floodgate of Eleventh Amendment litigation in bankruptcy courts, debtors' counsel and many bankruptcy judges have been searching for an end run around Seminole. Their objective is to acquire jurisdiction over non-consenting states, which have taken to flashing their copies of Seminole at almost every available opportunity.

Various suggestions have been made on how to get around Seminole, including having Congress re-enact the Bankruptcy Code and recite the magic words "Fourteenth <a name="foot3">Amendment";</a><a href="#note3">3</a> Seminole, and each has the potential to create as many (or more) new problems than it solves.

Pending Supreme Court Case

More recently, however, another possible end run around Seminole has emerged; a non-bankruptcy case pending (as of this writing) before the Supreme Court, California v. Deep Sea Research Inc.,<a href="#note4">4</a><a name="foot4"> involves the in rem jurisdiction of bankruptcy courts.

</a><a name="foot4"> Although Deep Sea Research is an admiralty case concerning the salvage of a sunken ship, the parallels between federal district court jurisdiction over vessels in admiralty cases and district court/bankruptcy court (through orders of reference) jurisdiction over property of bankruptcy estates are clear. At oral argument on December 1, 1997, several Supreme Court justices asked probing questions about the possible effect on bankruptcy cases of a decision in Deep Sea Research. The parallels are also suggested by dicta in a recent Fourth Circuit bankruptcy case.</a><a href="#note5">5</a><a name="foot5">

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<a name="foot5"><big>...bankruptcy cases in which an "in rem exception" </big></a><a name="foot5"><big>is being pushed by trustees and debtors are proceeding

</big></a><a name="foot5"><big>apace through the lower federal courts.

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<a name="foot5"> The ship salvage company’s argument in Deep Sea Research, and the possibility of overcoming Seminole in bankruptcy, are based on the assertion that a federal court’s in rem jurisdiction over property in admiralty essentially trumps a state’s Eleventh Amendment rights, at least where the state itself does not have possession of the property. Prior Supreme Court admiralty cases had declined to apply an in rem jurisdiction exception to the Eleventh Amendment, but the salvage company (joined by the federal Justice Department) argued that such cases involved property within states’ possession, or at least their constructive possession.</a><a href="#note6">6</a><a name="foot6"> If property is not possessed by a state, it was argued in Deep Sea Research, the state must subject itself to a federal court with in rem jurisdiction over the property, at least to some degree, to assert its claims. Similarly, in its recent Antonelli case, the Fourth Circuit suggested that a bankruptcy court’s "jurisdiction over debtors and their assets" may trump the states’ Eleventh Amendment immunity in some contexts.</a><a href="#note7">7</a><a name="foot7"> Could the bankruptcy solution to Seminole really be that simple? "Property of the estate" is a broad concept under 11 U.S.C. §541(a), encompassing not only tangible assets, but also intangibles such as pre-bankruptcy claims against states (tax refunds, for example) and post-bankruptcy avoidance actions under §§544-550. So can debtors and trustees simply sue states in bankruptcy court any time estate assets are involved? As usual, it’s not as simple as it looks.

</a><a name="foot7">Missouri v. Fiske

</a><a name="foot7"> The Supreme Court long ago addressed, in seemingly clear terms, the issue of whether in rem jurisdiction of federal courts trumps states’ immunity under the Eleventh Amendment:

</a><blockquote><a name="foot7"> The fact that a suit in a federal court is in rem, or quasi in rem, furnishes no ground for the issue of process against a non-consenting state...[W]hen the state does not come in and withholds its consent, the court has no authority to issue process against the state to compel it to subject itself to the court’s judgment, whatever the nature of the suit.</a><a href="#note8">8</a><a name="foot8">

</a><a name="foot8">Phrasing its holding another way, the Supreme Court also posed and answered the following question:

</a><blockquote><a name="foot8"> The question, then, is whether the purpose to protect the jurisdiction of the federal court, and to maintain its decree against the proceeding of the state in the state court, removes the suit from the application of the Eleventh Amendment. No warrant is found for such a limitation of its terms. The exercise of the judicial power cannot be protected by judicial action which the </a><a name="foot9">Constitution specifically provides is beyond the judicial power.</a><a href="#note9">9</a> </blockquote>

"Whatever the nature of the suit" certainly seems broad enough to cover even bankruptcy suits, particularly when bankruptcy courts are hearing cases and proceedings by orders of reference from district courts. "Whatever the nature of the suit" also seems broad enough to cover suits in admiralty. So, it is fair to ask, if the Supreme Court rejected any in rem jurisdiction exception to the Eleventh Amendment "whatever the nature of the suit" in Missouri v. Fiske, why are arguments for such an exception still being made and considered by the Supreme Court in an admiralty suit 54 years later?

The somewhat surprising answer seems to be that none of the parties in Deep Sea Research appears to have cited, in briefs or oral argument, the in rem jurisdiction discussion in Missouri v. Fiske. What’s more, none of the questions from the Supreme Court at oral argument suggested any consideration of the applicability of Fiske to the in rem suit before the court. The possibility is therefore presented of a Supreme Court opinion involving in rem jurisdiction and the Eleventh Amendment that fails to address one of the leading Supreme Court cases on point. (However, it should be noted that the Supreme Court could resolve Deep Sea Research without addressing the existence of an in rem jurisdiction exception to the Eleventh Amendment, and the interest expressed by several justices at oral argument in bankruptcy implications of the case may or may not surface in the opinion.)

Other Pending Cases

In the meantime, bankruptcy cases in which an "in rem exception" is being pushed by trustees and debtors are proceeding apace through the lower federal courts. The Sixth Circuit Bankruptcy Appellate Panel has just weighed in with an opinion expressly rejecting a trustee’s argument that "the bankruptcy court could burrow past [the Eleventh Amendment] by exercising in rem jurisdiction."<a href="#note10">10</a><a name="foot10"> A comprehensive opinion on Eleventh Amendment issues in bankruptcy by Judge Douglas O. Tice Jr. in In re NVR L.P.</a><a href="#note11">11</a><a name="foot11"> is currently on appeal at the district court level within the Fourth Circuit, which dropped the tantalizing suggestion of an in rem jurisdiction exception in Antonelli. The NVR L.P. appeal will likely provide the Fourth Circuit with an opportunity to elaborate on its Antonelli discussion. Informal reports from various state attorneys general offices around the country indicate that numerous other cases involving this issue are forthcoming.

</a><a name="foot11"> In summary, whether the in rem jurisdiction argument will prove to be the proverbial magic bullet to defeat states’ Eleventh Amendment arguments, post-Seminole, remains to be seen. Deep Sea Research may or may not provide an answer, and any answer from that case that fails to address Missouri v. Fiske may well prove not to be a final answer. Bankruptcy practitioners and judges may have to wait until a bankruptcy in rem jurisdiction case reaches the Supreme Court before the issue is definitively resolved. From all appearances, upcoming cases may provide the Supreme Court an opportunity to provide that resolution.

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<h3><a name="foot11">Footnotes</a></h3>

</a><a name="note1">1The views expressed herein are those of the author and are not necessarily those of the Office of the Attorney General of Texas or any client agencies it may represent. </a><a href="#foot1">[Return to Text]</a>

</a><a name="note2">2Seminole Tribe of Florida v. Florida, 517 U.S. 544, 116 S.Ct. 1114, 134 L. Ed. 2d 252 (1996). </a><a href="#foot2">[Return to Text]</a>

</a><a name="note3">3 Congress can abrogate states’ Eleventh Amendment immunity if it truly is legislating under the Fourteenth Amendment. Fitzpatrick v. Bitzer, 427 U.S. 85, 102 S. Ct. 2666 (1976). But the courts, not Congress, get to decide if legislation is really a proper exercise of Fourteenth Amendment authority. Woods v. Cloyd W. Miller Co., 333 U.S. 138, 144, 68 S. Ct. 421, 424 (1948) ("The constitutionality of action taken by Congress does not depend on recitals of the power which it undertakes to excise.") </a><a href="#foot3">[Return to Text]</a>

</a><a name="note4">4Case No. 96-1400, October Term, 1996. Opinion below: Deep Sea Research v. The Brother Jonathan, 102 F.3d 379 (9th Cir. 1996). </a><a href="#foot4">[Return to Text]</a>

</a><a name="note5">5Maryland v. Antonelli Creditors’ Liquidating Trust, 123 F.3d 777, 787 (4th Cir. 1997) </a><a href="#foot5">[Return to Text]</a>

</a><a name="note6">6Ex parte New York, 256 U.S. 490 (1921); Ex parte New York, 256 U.S. 503 (1921); United States v. Peters, 9 U.S. 115, 139 (1809). </a><a href="#foot6">[Return to Text]</a>

</a><a name="note7">7 123 F.3d at 787. Antonelli involved a situation where (1) no adversary proceeding was filed against a state, (2) the state failed to file a special appearance to raise any Eleventh Amendment objection to jurisdiction at confirmation, thereby precluding it from belatedly raising the issue later, and (3) the ultimate issue involved an automatically-effective statute—11 U.S.C. õ1146(c)—which arguably did not implicate the Eleventh Amendment in the first place. Those distinctions made the in rem jurisdiction part of Antonelli somewhat academic, but that part of Antonelli comes very close to restating the respondents’ position in Deep Sea Research. </a><a href="#foot7">[Return to Text]</a>

</a><a name="note8">8Missouri v. Fiske, 290 U.S. 18, 28, 54 S.Ct. 18, 21 (1933). </a><a href="#foot8">[Return to Text]</a>

</a><a name="note9">9Id. </a><a href="#foot9">[Return to Text]</a>

</a><a name="note10">10 French v. Georgia (In re Abepp Acquisition Corp.), 1997 WL 799584, at 3 (6th Cir. BAP; Dec. 30, 1997). </a><a href="#foot10">[Return to Text]</a>

</a><a name="note11">11 206 B.R. 831 (Bankr. E.D.Va. 1997). </a><a href="#foot11">[Return to Text]

Journal Authors

Mark Browning

Journal Date

Sunday, February 1, 1998 - 12:00