Upholding Bankruptcy Judge Gregory T. Taddonio, a district judge in Pittsburgh held that stripping off a state’s tax lien is an in rem proceeding in which the state has no Eleventh Amendment sovereign immunity defense.
The Strip Down and Strip Off Cases
In March, Judge Taddonio ruled on two cases. In one, the state’s tax lien was subordinate to a mortgage for more than the real property was worth. In the second case, there was enough value in the real estate to cover only a portion of the state’s subordinate tax lien.
The state had filed secured proofs of claim in both cases. After the debtors commenced proceedings to strip down or strip off the tax liens, the state filed motions to dismiss for lack of subject matter jurisdiction and failure to state a claim under Rules 12(b)(1) and 12(b)(6). The state’s motions were based on the idea that Eleventh Amendment sovereign immunity precluded that bankruptcy court from impairing the state’s tax liens.
The chapter 13 debtors persuaded Judge Taddonio to strip off the tax lien where the state’s interest was completely underwater and to strip down the tax lien where the property’s value covered only a portion of the state’s interest in the estate’s property.
To no avail, the State of Pennsylvania appealed to District Judge Joy Flowers Conti.
The Courts’ Rationales
Judge Taddonio concluded that the power to strip off or strip down is not derived from Section 506(d), but rather from Sections 506(a) and 1322(b). He then identified three reasons why the state had no sovereign immunity when the debtor sought to strip down or strip off a tax lien: (1) By filing a proof of claim, the state had waived its sovereign immunity defense; (2) the state’s sovereign immunity was waived by Section 106(a); and (3) the state never had sovereign immunity to begin with, because lien stripping is an in rem proceeding.
To read ABI’s report on Judge Taddonio’s decision, click here.
After reciting Judge Taddonio’s analysis at length, District Judge Conti decided that the in rem nature of the proceedings was enough reason by itself to declare that the sovereign immunity defense did not apply.
Judge Conti rested her decision on Supreme Court authority, beginning with Central Virginia Community College v. Katz, 546 U.S. 356 (2006). In Katz, the high court held that proceedings to set aside a preference were not barred by sovereign immunity because the proceedings were essentially in rem.
In her October 21 opinion, Judge Conti also relied on Tennessee Student Asst. Corp. v. Hood, 541 U.S. 440 (2004), where the Supreme Court said that the bankruptcy court had authority to sell a debtor’s property free and clear of a state tax lien.
From Supreme Court authority, Judge Conti concluded that the “exercise of the bankruptcy court’s in rem jurisdiction to discharge a debt does not infringe state sovereignty.” Next, she said that lien stripping falls within the bankruptcy court’s in rem jurisdiction because the procedure “does not result in recovery of monetary damages or any other affirmative relief against the State.”
Affirming Judge Taddonio, Judge Conti said that the “State had no sovereign immunity” because stripping the “tax lien on the [debtor’s] property was an in rem proceeding.”
In other words, a debtor can strip off a lien even if the taxing authority has not filed a proof of claim, and even if there remain any infirmities in the statutory waiver of sovereign immunity in Section 106(a).
Note: As amicus, the standing chapter 13 trustee for the Western District of Pennsylvania, Ronda Winnecour, urged Judge Conti to affirm, saying that Judge Taddonio correctly decided the case.
Upholding Bankruptcy Judge Gregory T. Taddonio, a district judge in Pittsburgh held that stripping off a state’s tax lien is an in rem proceeding in which the state has no Eleventh Amendment sovereign immunity defense.
The Strip Down and Strip Off Cases
In March, Judge Taddonio ruled on two cases. In one, the state’s tax lien was subordinate to a mortgage for more than the real property was worth. In the second case, there was enough value in the real estate to cover only a portion of the state’s subordinate tax lien.
The state had filed secured proofs of claim in both cases. After the debtors commenced proceedings to strip down or strip off the tax liens, the state filed motions to dismiss for lack of subject matter jurisdiction and failure to state a claim under Rules 12(b)(1) and 12(b)(6). The state’s motions were based on the idea that Eleventh Amendment sovereign immunity precluded that bankruptcy court from impairing the state’s tax liens.
The chapter 13 debtors persuaded Judge Taddonio to strip off the tax lien where the state’s interest was completely underwater and to strip down the tax lien where the property’s value covered only a portion of the state’s interest in the estate’s property.
To no avail, the State of Pennsylvania appealed to District Judge Joy Flowers Conti.