Opinion
Case Nos. 02-22736 (ASH) through 02-22742 (ASH); 02-22744 (ASH) through 02-22746 (ASH); 02-22749 (ASH); 02-22751 (ASH) through 02-22754 (ASH), (Jointly Administered) Adv. Pro. No. 02-05283
July 29, 2002
KRONISH LIEB WEINER HELLMAN LLP, New York, NY, Lawrence C. Gottlieb (LG 6144), Ronald R. Sussman (RS 0641), Richard S. Kanowitz (RK 0677) Counsel for Metromedia Fiber Network, Inc., et al. Debtors and Debtors in Possession
INTRODUCTION
The Washington Metropolitan Area Transit Authority's ("WMATA") motion to dismiss for lack of jurisdiction on the basis of the Eleventh Amendment to the United States Constitution (the "Eleventh Amendment") fails for seven distinct reasons: (i) WMATA's compact explicitly waives any alleged Eleventh Amendment immunities in connection with disputes arising from contracts; (ii) the statutory venue provision specifically consents to suits in the United States District Court; (iii) the contract between WMATA and the Debtors expressly waives any alleged immunities and clearly states that the contract is governed and enforceable in accordance with all federal laws; (iv) the Ex parte Young doctrine allows for prospective relief notwithstanding the Eleventh Amendment; and (v) relief under section 105 of the Bankruptcy Code to enjoin prospective violations of the automatic stay and to prohibit discriminatory conduct by WMATA is not barred under the Eleventh Amendment; (vi) the instant proceeding is not a "suit" barred by the Eleventh Amendment; and (vii) policy reasons support the bankruptcy court's continuing jurisdiction over actions of this kind.
Importantly, the failure to enjoin WMATA from terminating its license agreement with the Debtors would impact not only these Debtors' reorganizations, but the jurisdiction of all Bankruptcy Courts over any bankruptcy in which the debtor conducts business with a state. Jurisdiction in the federal courts over all bankruptcy matters, including actions against states, is essential to the efficient and timely disposition of bankruptcy cases in which the debtor or a trustee has a bankruptcy claim against a state. Accordingly, this Court should rule against WMATA and its assertion that this Court lacks jurisdiction to hear this action.
BACKGROUND
WMATA was created in 1966 pursuant to a compact (the "Compact") that was executed by the State of Maryland, the Commonwealth of Virginia, and the District of Columbia to jointly develop and administer a comprehensive mass transit system for the Washington, DC metropolitan area. See Beebe v. WMATA, 129 F.3d 1283, 1285 (D.C. Cir. 1997). D.C. Code. Ann. § 1-2431 (2001) (codifying the WMATA).
On May 20, 2002, Metromedia Fiber Network, Inc. together with numerous of its subsidiaries (collectively, the "Debtors") filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. Metromedia Fiber Network Services, Inc. ("MFNS"), one of the Debtors herein, entered into a license agreement (the "License Agreement") with WMATA by which MFNS is granted a license to place and operate fiber optic cable and related equipment in the underground tunnels and surface transportation corridors maintained by WMATA.
WMATA notified MFNS that it intended to terminate its License Agreement the Debtors on July 19, 2002. On June 13, 2002, WMATA sent the Debtors a formal notification of default under the License Agreement in which WMATA threatened to terminate the license within 30 days, requiring MFNS to cease all business, including all communications activity, on the relevant fibers and equipment and denying MFNS any access to those fibers and equipment. During the week of July 8, 2002, WMATA repeated these threats orally.
The threatened termination is based solely on MFNS' failure to make certain payments for pre-petition rent and pre-petition labor.
On July 18, 2002, this Court entered an Order to Show Cause with Temporary Restraining Order enjoining WMATA from any attempt to (i) terminate, cancel, revoke or treat as cancelled the License Agreement; (ii) interfere in any manner with the Debtors' business; and (iii) seek to recover its pre-petition debt.
WMATA's conduct in this case violates both the letter and spirit of the Bankruptcy Code. WMATA's effort to cancel the License Agreement is flatly prohibited by the automatic stay provision of section 362 of the Bankruptcy Code as well as the plain language of section 525. Termination of the License Agreement would render inoperative hundreds of miles of fiber optic cable strands and shut down telecommunication services to many of the Debtors' customers. Moreover, if WMATA is not enjoined, it will deal a serious blow to the administration of these reorganization proceedings by allowing a quasi-state entity to circumvent the bankruptcy process for its own self-interest and pecuniary gain at the expense of other creditors who are no less deserving of payment.
ARGUMENT
I. WMATA's Compact Specifically Waives Any Alleged Eleventh Amendment Immunity
The Eleventh Amendment states: "The 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 Citizens or Subjects of any Foreign State." The Supreme Court of the United States has construed the Amendment to "establish that `an unconsenting State is immune from suits brought in federal courts by her own citizens as well as by citizens of another state.'" Pennhurst State School and Hospital v. Halderman, 465 U.S. 89, 100, 104 S.Ct. 900, 907 (1984) (quoting Employees v. Missouri Dept. of Public Health and Welfare, 411 U.S. 279, 280, 93 S.Ct. 1614, 1615 (1973)); see also Pennsylvania v. Union Gas Co., 491 U.S. 1, 29, 109 S.Ct. 2273, 2296 (1989) (SCALIA, J., concurring in part and dissenting in part); Welch v. Texas Dept. of Highways and Public Transp., 483 U.S. 468, 107 S.Ct. 2941 (1987) (plurality opinion).
The Eleventh Amendment bar to suit, however, is not absolute. States may consent to suit in federal court. See, e.g., Astascadero State Hospital v. Scanlon, 473 U.S. 234, 241, 105 S.Ct. 3142, 3146 (1985);Clark v. Barnard, 108 U.S. 436, 447, 2 S.Ct. 878, 882 (1883).
The WMATA Compact explicitly and unequivocally waives its purported immunity in connection with contract disputes. Section 12(a) of the WMATA Compact provides in pertinent part that:
12. In addition to the powers and duties elsewhere described in this Title, and except as limited by this Title, the Authority may:
(a) Sue and be sued;
WMATA Compact, D.C. Code Ann. § 1-2431 (12)(a) (emphasis added).
In addition, the Compact expressly states that "[t]he Authority shall be liable for its contracts . . ." WMATA Compact, D.C. Code Ann. § 1-2431 (80).
Thus, "Section 80 of the Compact waives WMATA's sovereign immunity for contractual disputes." Beebe v. WMATA, 129 F.3d 1283, 1289 (D.C. Cir. 1997). WMATA's waiver of immunity was also recognized by the Fourth Circuit in Smith v. WMATA, 290 F.3d 201, 206 (4th Cir. 2002) ("[WMATA] has waived immunity in certain circumstances, i.e., when it is engaged in proprietary functions, while specifically preserving its immunity for "torts occurring in the performance of a governmental function.").
The gravamen of the instant dispute revolves around one specific contract — the License Agreement. WMATA has threatened to terminate the License Agreement. This threatened termination is based solely on MFNS' failure to make certain payments for pre-petition rent and pre-petition labor under the License Agreement.
Sections 12 and 80 of the WMATA Compact clearly waive any immunity as to contract disputes. As such, WMATA's motion to dismiss should be denied as WMATA has waived any alleged Eleventh Amendment immunities.
II. The Statutory Venue Provision Specifically Consents To Suits In The United States District Court
"[I]n order for a state statute or constitutional provision to constitute a waiver of Eleventh Amendment immunity, it must specify the State's intention to subject itself to suit in federal court."Astascadero State Hospital, 473 U.S. at 241 (emphasis added). The WMATA Compact does just that.
The statutory venue provision contained in section 81 of the Compact expressly provides that WMATA may be sued in federal court. It states: "The United States District Court shall have original jurisdiction, concurrent with the courts of Maryland, Virginia, and the District of Columbia, of all actions brought by or against the Authority. . . ." WMATA Compact, D.C. Code Ann. § 1-2431 (81) (emphasis added).
28 U.S.C. § 1334 (e) provides that the `district court in which a case under title 11 is commenced or is pending shall have exclusive jurisdiction of all the property, wherever located, of the debtor as of the commencement of such case, and of the property of the estate.' 28 U.S.C. § 1334 (e) (emphasis added). . . . Pursuant to 28 U.S.C. § 157 (a) and the Standing Order of Referral of Cases to Bankruptcy Court Judges of the District Court for the Southern District of New York, dated July 10, 1984 (Ward, Acting C.J.) (which has since been amended from time to time) this Bankruptcy Court exercises the District Court's bankruptcy jurisdiction.
In interpreting a venue provision very similar to WMATA's, the Supreme Court held in Port Authority Trans-Hudson Corp. v. Feeney, 495 U.S. 299, 110 S.Ct. 1868 (1990), that the Port Authority Trans-Hudson Corporation ("PATH") waived its sovereign immunity as a result of the statutory venue provision contained in the act governing suits against PATH. The venue section stated, in relevant part:
New York and New Jersey entered a bi-state compact creating the Port Authority of New York and New Jersey. PATH is a wholly-owned subsidiary of the Port Authority.
. . . venue in any suit, action or proceeding against the Port Authority shall be laid within a county or a judicial district, established by one of said States or by the United States, and situated wholly or partially within the Port of New York District. The Port Authority shall be deemed to be a resident of each such county or judicial district for the purpose of such suits, actions or proceedings.
N.J. Stat. Ann. § 32.1-162 (West 1963); N.Y. Unconsol. Laws § 7106 (McKinney 1979). The Court found that this provision "expressly indicat[ed] that the States' consent to suit extend[ed] to suit in federal court." Feeney, 495 U.S. at 307.
WMATA's venue provision performs the same function. In fact, it is even more explicit than the venue provision in Feeney in stating that federal courts have jurisdiction over actions brought against WMATA. WMATA's venue provision clarifies sections 12 and 80 of the Act (the consent to suit provisions); "it provides persuasive textual evidence that the consent to suit provisions encompass suits in federal court." Feeney, 495 U.S. at 308.
Because WMATA's venue provision expressly provides original jurisdiction to the United States District Court for suits brought against WMATA, WMATA has waived its Eleventh Amendment sovereign immunity.
III. The License Agreement Specifically Waives Any Alleged Eleventh Amendment Immunity In Connection With All Federal Laws
Moreover, the express language of the License Agreement indicates WMATA's intent to waive any alleged immunities in connection with the License Agreement, and expressly states that federal laws are applicable to both interpretation and performance of the contract.
Section 27.3 of the License Agreement states in pertinent part that:
27.3 Governing Law and Binding Effect. This License Agreement shall be governed by and construed and enforced in accordance with the laws (other than the law governing conflicts of law questions) and decisions of the District of Columbia, and all applicable federal laws, rules and regulations. . . .
License Agreement, § 27.3 (emphasis added). This section also indicates the parties' intentions that the terms and obligations arising out of the License Agreement be governed by federal laws including the Bankruptcy Code.
Finally, section 21.1 of the License Agreement, the "remedies" section, provides in pertinent part that:
21.1. Upon the occurrence and during the continuance of any event of default, the non-defaulting party may, at its option, declare this License Agreement to be in default and may, in addition to any other remedies provided herein, terminate this License Agreement. No remedy is intended to be exclusive, but each shall be cumulative and in addition to and may be exercised concurrently with an other remedy available to [MFNS] at law or in equity. . . .
License Agreement, § 21.1 (emphasis added). The inclusion of a "remedies" section in the License Agreement clearly evidences that the parties contemplated some sort of legal action to be taken by or against WMATA. Accordingly, WMATA contracted out any alleged immunities with respect to performance or enforcement arising under the License Agreement.
WMATA's effort to "read out" of the License Agreement the express language: (i) that each party shall perform its obligation under "all applicable laws . . . imposed by any governmental authority"; (ii) that the contract is governed by "all applicable federal laws, rules and regulations"; and (iii) that WMATA and the Debtors have remedies in law and equity, violates the fundamental axiom which prohibits a court from adopting a contractual interpretation which would leave any provision completely without force and effect. See Retail Clerks Intern. Ass'n Local No. 455, AFL-CIO v. N.L.R.B., 510 F.2d 802, (D.C. Cir. 1975)citing Ludwig Honold Mfg. Co. v. Fletcher, 405 F.2d 1123, 1131 (3d Cir. 1969); Cordovan Assoc., Inc. v. Dayton Rubber Co., 290 F.2d 858, 861 (6th Cir. 1961); Gray v. Travelers' Indemnity Co., 280 F.2d 549, 552 (9th Cir. 1960); J. C. Millet Co. v. Distillers Distributing Corp., 258 F.2d 139, 142 (9th Cir. 1958).
WMATA has unequivocally waived any alleged Eleventh Amendment immunities pursuant to the terms of both the Compact and the License Agreement. As such, WMATA's motion to dismiss should be denied.
IV. The " Ex parte Young " Doctrine Allows the Bankruptcy Court to Enjoin WMATA From Violating Federal Law
In Ex parte Young, 209 U.S. 1232 (1908), the Court allowed a party to sue a state official to enjoin a violation of federal law or the Constitution, even when the Eleventh Amendment bars suit against the state itself. In Ex parte Young, the Court reasoned that states have no authority to impart their officials with immunity from responsibility to the Constitution.
The Supreme Court continues to recognize the validity of the Ex parte Young doctrine. See Seminole, 517 U.S. at n. 16 ("We have already seen that several avenues remain open for ensuring state compliance with federal law. . . . Most notably, an individual may obtain injunctive relief under Ex parte Young . . . in order to remedy a state officer's ongoing violation of federal law."). However, since rendering its Ex parte Young decision, the Supreme Court has limited the doctrine's application in two ways. First, the doctrine may only apply in actions for prospective injunctive relief. See, e.g., Edelman v. Jordan, 415 U.S. 651, 662 (1974); Ford Motor Co. v. Department of Treasury of Indiana, 323 U.S. 459, 464 (1945). In other words, the Ex parte Young doctrine has been interpreted to prohibit suits against state officials for recovery of money damages. Second, as stated in Seminole, the doctrine may apply only in those instances where Congress has failed to establish a detailed scheme for remedying violations of federal law. See Seminole, 517 U.S. at 75.
Accordingly, the Seminole and Ex parte Young cases must be read together in order to determine the extent to which bankruptcy courts can assert jurisdiction over states. An analysis of the post-Seminole case law, as it applies to the bankruptcy system, prompted one commentator to make the following observation:
A general theme emerges: what Seminole takes away from bankruptcy courts jurisdiction over states that violate [a] provision of the Bankruptcy Code, the Ex parte Young doctrine replenishes to a substantial extent by allowing bankruptcy courts to assert jurisdiction over state officials to enjoin those violations.
See Teresa K. Groebel, Obtaining Jurisdiction Over States in Bankruptcy Proceeding After Seminole, 65 UNIV. CHI. L. REV. 911, 917 (1998).
Many courts have increasingly relied on the Ex parte Young doctrine to keep states within the reach of the bankruptcy system. See In re Berkelhammer, 2002 WL 1358671 (Bankr. S.D.N.Y. 2002) (discussed infra);In re LTV Steel Company, Inc. 264 B.R. 455 (Bankr. N.D. Ohio 2001) (relying on the Ex parte Young doctrine to grant debtor's motion to enforce the automatic stay against the state and noting that an analysis of the Ex parte Young doctrine leads to the conclusion that the Eleventh Amendment was intended to be used as a shield and not a sword); In re Pacific Gas Electric Co., 263 B.R. 306, 315-16 (Bankr. N.D. Cal. 2001) (declaring that the debtor "was entitled to have the court's ruling whether the automatic stay will `freeze' the status quo and give it a breathing spell from . . . alleged violations of Federal law and whether the court will enjoin such violations"); In re Pace, 2000 Bankr. LEXIS 272 (Bankr. E.D. Pa. 2000) (granting debtor's motion to enjoin defendants from collecting insurance surcharges concluding that an Ex parte Young action was appropriate and not precluded by the Eleventh Amendment); In re Ellett, 243 B.R. 741 (B.A.P. 9th Cir. 1999) (holding that debtor's suit to enjoin the director of the California Franchise Tax Board from taking action after discharge to recover pre-petition taxes owed was properly asserted under the Ex parte Young doctrine and denying the director's motion to dismiss for lack of jurisdiction); In re Thomas F. Zywiczynsky, 210 B.R. 924, 933 (Bankr. W.D.N.Y. 1997) (concluding, in part, that "the Ex parte Young doctrine is now of heightened importance"). See also In the Matter of Guiding Light Corp., 213 B.R. 489 (Bankr. E.D. Louis. 1997).
At the heart of the bankruptcy system is the ability of the court to provide a debtor with a fresh start by modifying or discharging any debts, including debts owed to a state. See In re Berkelhammer, supra. As a first step in this process, there is imposed for the benefit of the debtor, its estate and its creditors a stay which operates, in part, to ensure an equitable distribution of the debtor's assets to all the creditors. Since a state official's attempt to collect a debt or take possession over the debtor's property violates the stay established by the Bankruptcy Code (which is issued pursuant to federal law), the Ex parte Young doctrine permits the bankruptcy court to assert jurisdiction over the state official. See In re Louis, Harris, 213 B.R. 796 (Bankr. D. Conn. 1997) (holding that while Ex parte Young does not allow for the return of money from the state treasury, it does allow for prospective injunctive relief).
Recently, in In re Berkelhammer, supra, the Bankruptcy Court of the Southern District of New York addressed this very issue. The court affirmatively held that the Ex parte Young doctrine applied in a case where the debtor was seeking prospective relief against the Commissioner of the New York State Department of Health (the "Commissioner") to prevent the Commissioner's continuing violation of section 525(a)'s prohibition of certain kinds of discrimination as well as the Bankruptcy Code's fresh start policy. See id.
In Berkelhammer, the Commissioner — notwithstanding the automatic stay — attempted to enforce a reinstatement agreement between it and the debtor to recover pre-petition debt that the debtor had not paid subsequent to the debtor's bankruptcy filing. See id. Relying on the Ex parte Young doctrine the court concluded that it had jurisdiction over the proceeding as to the Commissioner because (a) the debtor sought only to preserve the status quo as mandated by the automatic stay imposed by section 362; (b) the Commissioner's unilateral action to call a default under the reinstatement agreement did not fall within the "police and regulatory" exception to the automatic stay under section 362(b)(4) of the Bankruptcy Code and was essentially pecuniary in nature; and (c) there is no detailed remedial scheme crafted by Congress to enforce section 525(a) of the Bankruptcy Code. Id.
The facts and issues raised in this case are virtually identical to those raised in Berkelhammer. Here, the Debtors are seeking to preserve the status quo; WMATA's threatened action to connect its pre-petition debt does not fall within the police and regulatory exception to the automatic section 362; and there is no detailed remedial scheme to enforce section 525.
Accordingly, consistent with both the case law and the spirit of the Ex parte Young doctrine, the doctrine applies in this case and allows the Bankruptcy Court to enjoin WMATA from violating federal law through the shield of sovereign immunity.
V. Relief Under Section 105 Of The Bankruptcy Code To Enjoin Prospective Violations Of The Automatic Stay And To Prohibit Discriminatory Actions By WMATA Is Not Barred Under The Eleventh Amendment
Section 106(a) of the Bankruptcy Code expressly waives immunity as to governmental units with respect to enumerated matters and claims under the Bankruptcy Code, including sections 105, 362 and 525, the sections implicated in this action. However, following the Supreme Court's decision in Seminole, there has been uncertainty as to whether Section 106(a) is constitutional. Two courts that have recently addressed the issue have upheld Section 106(a); other courts have disagreed. Neither the Supreme Court nor the Second Circuit have squarely dealt with the issue of whether the Eleventh Amendment bars Debtors from enjoining a quasi-state entity from violating sections 362 and 525 of the Bankruptcy Code.
In Seminole, the Supreme Court held that the Indian Gaming Regulatory Act, which was passed by Congress under its authority pursuant to Article I, Section 8, Clause 3 (the Indian Commerce clause of the Constitution), was unconstitutional under the Eleventh Amendment. In so holding, a bare majority of Justices expressly overruled a 1989 contrary ruling upholding abrogation by an Article I, Section 8, Clause 3 interstate commerce enactment issued by a plurality of the Court in another non-bankruptcy case, Pennsylvania v. Union Gas Co., 491 U.S. 1, 109 S.Ct. 2273, 105 L.Ed.2d 1 (1989). See Seminole, 116 S.Ct. at 1128. Seminole and its progeny, however, were not bankruptcy cases.
The impact of a state's Eleventh Amendment immunity defense to a federal suit on a bankruptcy claim was first referred to by the Supreme Court in the dissenting opinion of Justice Stevens in Seminole, which cautioned that the Court's ruling could stand in the way of the enforcement of bankruptcy and certain other federal laws. See Seminole, 116 S.Ct. at 1134 n. 1. Mr. Justice Rehnquist responded for the majority in a footnote in Seminole stating that Justice Stevens' dissent was "exaggerated both in its substance and in its significance," and "that several avenues remain open for ensuring state compliance with federal law;" Id. at 1131 n. 16. One of the avenues that the Supreme Court identified was the right of an individual to bring suit against a state officer to enjoin the officer's on-going violation of federal law, under the doctrine of "Ex parte Young" discussed supra.
As will be discussed below, centuries of Supreme Court Eleventh Amendment jurisprudence, the text of the Constitution and THE FEDERALIST PAPERS conclusively demonstrate that it was the intent of the framers of the Constitution that state sovereignty over issues of naturalization and bankruptcy were ceded by the ratification of the Constitution. Further, states do not have sovereign immunity as to the in rem aspects of bankruptcy cases such as aspects involving property of the estate. Accordingly, the Eleventh Amendment does not bar relief under section 105 of the Bankruptcy Code to enjoin prospective violations of sections 362 and 525 of the Bankruptcy Code.
A. State Immunity Was Surrendered As To Bankruptcy Matters Under The Plan Of The Constitutional Convention
Two courts have held recently that Section 106(a) is constitutional because, under the original Constitution, states did not retain immunity from core bankruptcy proceedings. In re Bliemeister v. Industrial Commission of Arizona (In re Bliemeister), 251 B.R. 383 (Bankr. D.Az. 2000); aff'd 2002 U.S. App. LEXIS 14536 (9th Cir. 2002); In re Hood, 262 B.R. 412, 414-19 (6th Cir. B.A.P. 2001). Both of these decisions relied heavily on Alexander Hamilton's analysis in THE FEDERALIST PAPER No. 81, which indicated that there were instances of a "surrender of this immunity in the plan of the [Constitutional] convention," which was reflected in the Constitution as enacted. See THE FEDERALIST No. 81, at 414 (A. Hamilton).
All citations to the federalist are to the Modern Library's 2000 edition, edited by Robert Scigliano. Copies of the federalist Nos. 32 and 81 are attached hereto.
THE FEDERALIST No. 81 cross-references Hamilton's work in THE FEDERALIST No. 32 in order to identify those areas where such a surrender of sovereign immunity had occurred in the original Constitution. One of the areas Hamilton specified was the naturalization clause of the Constitution, which grants Congress the exclusive power to establish "uniform" laws on that subject. In the same clause of the Constitution that addresses naturalization, Article I, Section 8, Clause 4, Congress is also granted power to "establish uniform Laws on the subjects of Bankruptcies throughout the United States."
It follows from Hamilton's conclusion regarding Congress' exclusive power to enact uniform naturalization laws that the states' immunity from bankruptcy claims was also abrogated by the original constitution. The states thus "no more retained sovereign powers over bankruptcy laws than they did over naturalization." Bliemeister, 251 B.R. at 390. Accordingly, at the inception of the Constitution, it was recognized that bankruptcy law required a subordination of state sovereignty.
As a result, the Bliemeister court found that "sovereign immunity is not assertable in a bankruptcy case governed by federal law. Congress did not need to adopt 11 U.S.C. § 106, because the states' sovereignty had been abrogated in the original Constitution once the federal government elected to enact bankruptcy laws." Bliemeister, 251 B.R. at 391-92.
This conclusion is supported in over two centuries of Supreme Court jurisprudence. Throughout that time, the Supreme Court has recognized the principle that the plan of the Constitutional Convention included a surrender of a portion of the states' sovereignty. See, e.g. Hans v. Louisiana, 134 U.S. 1, 10 S.Ct. 504, 506 (acknowledging that a measure of sovereignty was ceded by the states); Principality of Monaco v. Mississippi, 292 U.S. 313, 54 S.Ct. 745 (1934) (relying on THE FEDERALIST No. 81 and Hans for its conclusion that the states had not surrendered their immunity from collection suits by foreign states). Since Monaco, the Supreme Court has consistently maintained that a state is subject to suit if: (1) the plan of the convention included a surrender of state sovereignty in a particular area; or (2) Congress abrogated the state's immunity through constitutionally enacted legislation; or (3) the state itself had chosen to waive its immunity. See, e.g., Blatchford v. Native Village of Noatak, 501 U.S. 775, 779, 786, 111 S.Ct. 2578, 2580, 2584 (1991) (recognizing express consent to suit, consent in the plan of the convention, and abrogation as grounds for loss of immunity).
Bankruptcy courts maintain jurisdiction over actions involving states because, under the original Constitution, the states surrendered their sovereign immunity from suits in the federal courts on issues arising under bankruptcy statutes.
B. The Instant Proceeding Involves Property Of The Estate; Is Inherently "In Rem" In Nature Therefore The Eleventh Amendment Immunity Is Not Applicable
By enjoining WMATA this Court is exercising its in rem jurisdiction with respect to property of the estate, i.e., the License Agreement and WMATA's tunnels and corridors. Consequently, the in rem nature of bankruptcy is an independent basis for denying WMATA's Eleventh Amendment immunity. This in rem exception to the Eleventh Amendment has been recognized in several post-Seminole decisions. See e.g., In re Ellett, 254 F.3d 1135, 1141 (9th Cir. 2001); Maryland v. Antonelli Creditors' Liquidating Trust (Antonelli), 123 F.3d 777 (4th Cir. 1997); In re Barrett Refining Corp., 221 B.R. 795, 808 (Bankr. W.D. Okla. 1998); In re O'Brien, 216 B.R. 731, 736 (Bankr. D. Vt. 1998).
The Ninth Circuit in In re Ellett, supra explicitly ruled that an in rem bankruptcy exception to the Eleventh Amendment is a basis for holding that a bankruptcy court's discharge order is binding on a non-consenting state even if the state does not file a proof of claim. The Ninth Circuit relied on the Supreme Court's decision in California v. Deep Sea Research, Inc., 523 U.S. 491, 118 S.Ct. 1464 (1998), an admiralty case which upheld an Eleventh Amendment in rem exception. In holding that there is an in rem bankruptcy exception to the Eleventh Amendment, the Ninth Circuit stated in Ellett:
As the Fourth Circuit explained in In re Collins, the bankruptcy court exercises jurisdiction over the res of the bankruptcy estate when it issues its discharge order, not in personam jurisdiction over the estate's creditors. Cf. California v. Deep Sea Research, Inc., 523 U.S. 491, 506, 118 S.Ct. 1464, 140 L.Ed.2d 626 (1998) (holding that Eleventh Amendment does not apply to bar federal court jurisdiction over in rem admiralty actions where State claims an interest in, but does not actually possess, the res in dispute). Thus, we hold that a bankruptcy court's discharge order is binding on a State, despite the State's election not to share in the recovery of the bankruptcy estate's assets by filing a proof of claim.
Ellett, 254 F.3d at 1141 (emphasis added).
Antonelli, supra, in essence also recognized an in rem bankruptcy exception. In Antonelli, the Court held that it could exercise jurisdiction over a state in a confirmation proceeding and that the confirmation order could bind a state without impinging on its Eleventh Amendment immunity. In so holding, the court in Antonelli reasoned that the power to confirm a plan of reorganization is derived from "jurisdiction over debtors and property of the estate" of debtors, not from "jurisdiction over a state or its creditors."
In O'Brien, supra, the court stated that a bankruptcy court has in rem jurisdiction over the debtor's property, which permits a determination of a claim by a state against such property.
In re Zywiczynski, 210 B.R. 924, 931-33 (Bankr. W.D.N.Y. 1997) applied the in rem theory in a bankruptcy case in which neither the bankruptcy trustee nor the state had possession of the property at issue, which was a bank certificate of deposit. The court held that the Eleventh Amendment did not preclude a bankruptcy court from ordering a turnover to the trustee of the certificate of deposit or the proceeds in the possession of the issuing bank, even though the state might subsequently become entitled to the proceeds. The court noted that the money in question was not owned by the state, but only claimed by it and ruled that the certificate of deposit constituted "property of the estate" subject to a turnover.
In addition to holding that states surrendered their sovereignty as to bankruptcy matters in the original Constitution, the court inBliemeister also held that immunity did not apply because core bankruptcy jurisdiction was inherently in rem in nature, particularly concerning the debtor's discharge.
Accordingly, WMATA's motion to dismiss on the basis of sovereign immunity should be denied as this Bankruptcy Court is exercising its in rem jurisdiction with respect to property of the estate and therefore this proceeding falls outside the realm of a state's Eleventh Amendment immunity.
C. The Bankruptcy Code § 106 Abrogates Sovereign Immunity Pursuant To The Fourteenth Amendment
WMATA's argument that it is cloaked with sovereign immunity fails because section 106 of the Bankruptcy Code abrogates sovereign immunity pursuant to the Fourteenth Amendment. Section 5 of the Fourteenth Amendment gives Congress the power to abrogate the states' Eleventh Amendment immunity. The Fourteenth Amendment protects the rights of the people from state deprivation of life, liberty or property without due process of law, and immunities protected by the Fourteenth Amendment. Section 5 specifically authorizes Congress to pass laws to effectuate the "provisions of this article."
The pertinent provisions of Section 1 and Section 5 of the Fourteenth Amendment to the United States Constitution are as follows:
Section 1. . . . No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.
* * *
Section 5. The Congress shall have power to enforce, by appropriate legislation, the provisions of this article.
Protection of property of the estate in a bankruptcy case is a legitimate objective under the Fourteenth Amendment. Accordingly, an Article I bankruptcy statute that abrogates sovereign immunity is constitutional pursuant to the Fourteenth Amendment.
The Supreme Court has clearly stated that the Eleventh Amendment may be abrogated by Congress pursuant to the Fourteenth Amendment under a statute to enforce the due process guarantee. Seminole, 517 U.S. at 55. Further, no express language is required to prove that a statute implicates the Fourteenth Amendment. "Congress need not `recite the words' `section 5' or `Fourteenth Amendment' . . . when enacting laws pursuant to this power . . . ." Sacred Heart Hospital, 133 F.3d at 244 (citations omitted); accord Kimel v. Florida Bd. of Regents, 120 S.Ct. 631, 644-45 (2000). It is sufficient that a statute "could reasonably" have been authorized by the Fourteenth Amendment, and it is not necessary that Congress actually intended to invoke that Authority.Franks v. Kentucky School for the Deaf, 142 F.3d 360, 363 (6th Cir. 1998).
WMATA wrongly asserts that the Bankruptcy Code cannot abrogate WMATA's alleged Eleventh Amendment immunity under the aegis of the Fourteenth Amendment. Additionally, WMATA argues that Seminole and its progeny render this Court's Order to Show Cause with Temporary Restraining Order unconstitutional. Many Courts have ruled otherwise.
In a case decided before Seminole a bankruptcy court ruled that section 106(a) of the Bankruptcy Code validly abrogated sovereign immunity by reason of section 5 of the Fourteenth Amendment. See Matner v. Oklahoma Employment Security Commission In re Southern Star Foods, Inc.) 190 B.R. 419, 426 (Bankr. E.D. Okla. 1995).
In decisions after Seminole, courts have upheld the constitutionality of section 106 on the ground that Congress had authority to abrogate immunity by virtue of the Fourteenth Amendment. In re Wilson v. South Carolina State Education Assistance Authority (In re Wilson), 258 B.R. 303 (Bankr. S.D. Ga. 2001); Arnold v. Sallie Mae Servicing Corporation, 255 B.R. 441 (Bankr. W.D. Tenn. 2000); Willis v. State of Oklahoma Tax Commission, 230 B.R. 619 (Bankr. E.D. Okla. 1999); Headrick v. State of Georgia (In re Headrick), 203 B.R. 805 (Bankr. S.D. Ga. 1996).
Moreover, the Court in In re Headrick specifically held that the State of Georgia may not enforce its collections statutes in defiance of the automatic stay and that Congress, in a valid exercise of its power of enforcement under the Fourteenth Amendment, can abrogate Georgia's sovereign immunity against individual suits for breach of the automatic stay. In re Headrick, 203 B.R. at 808-809. See Also In re Beverly A. Straight, 209 B.R. 540 (D.Wy. 1997) aff'd 143 F.3d 1387 (10th Cir. 1998),cert. den. 525 U.S. 982 (holding that Congress has the authority to abrogate states' sovereign immunity from suit by individuals for violating provisions of the Bankruptcy Code, pursuant to the Fourteenth Amendment).
Accordingly, Congress had the power to abrogate a state's Eleventh Amendment immunity through section 106 of the Bankruptcy Code pursuant to the Fourteenth Amendment. As such, WMATA's argument that the Bankruptcy Code cannot abrogate WMATA's Eleventh Amendment immunity under the Fourteenth Amendment and that the Order to Show Cause with Temporary Restoring Order is unconstitutional fails.
VI. The Eleventh Amendment Does Not Apply Because There Has Been No "Suit" Against The State
Even if the Court were to reject all the foregoing arguments, the Eleventh Amendment does not provide WMATA with immunity because this action is not a "suit" within the meaning of the Eleventh Amendment. Under the applicable case law (including the cases cited by WMATA in its own papers), this action is outside the scope of the Eleventh Amendment. It may thus be maintained and heard before this Court.
While the Eleventh Amendment provides immunity for states from "suits" in federal court, states are not unaffected by federal law and the Eleventh Amendment does not preclude every federal judicial proceeding that may affect a state. See In re International Heritage, Inc., 239 B.R. 306, 309 (Bankr. E.D.N.C. 1999). Specifically, "[t]here are some bankruptcy proceedings that may adversely affect the rights of a state and that have been held not to violate the Eleventh Amendment." In re International Heritage, Inc., 239 B.R. at 309-10. "Before the Eleventh Amendment applies, the federal action must fairly be deemed a `suit' [and] when deciding whether a proceeding constitutes a `suit', the court must `consider both the procedural posture and the substantive nature of the proceeding.'" In re NVR, 189 F.3d at 450. A contested matter is not necessarily a "suit" against the state. See In re International Heritage, 239 B.R. at 309, citing In re NVR, 189 F.3d at 453. The crucial issue is the substance of the contested matter before the court. See id.
Courts generally consider a number of factors to determine whether an action is a "suit" for Eleventh Amendment purposes. The quintessential "suit" for Eleventh Amendment purposes is a proceeding which would require the disgorgement of funds from a state's treasury. See NVR, 189 F.3d at 453; Schlossberg v. State of Maryland, 119 F.3d 1140 (4th Cir. 1997) (debtor could not sue a state to recover a preference); In re Sacred Heart Hospital of Norristown, 133 F.3d 237 (3d Cir. 1998) (debtor could not sue Commonwealth of Pennsylvania for monetary recovery under Pennsylvania's Medical Assistance Program).
Although monetary relief was not sought in Seminole, Seminole is not to the contrary. In Seminole, affirmative injunctive relief was sought in the form of an order compelling Florida to negotiate. The case at bar, however, involves the contrary situation in which an order is sought which would require WMATA to do nothing.
Other factors courts consider are whether the state was served with a summons; whether the state was required to appear in a federal court; whether an adversary proceeding or contested matter was commenced against the state; whether the state voluntarily appeared in the federal court; and whether the subject of the dispute concerned preservation of the Debtors' estates. See In re NVR, 189 F.3d 442, 453 (4th Cir. 1999); In re Collins, 173 F.3d 924 (4th Cir. 1999); State of Maryland v. Antonelli Creditors' Liquidating Trust (Antonelli), 123 F.3d 777 (4th Cir. 1997).
Actions such as this one, which seek declaratory judgment to protect a bankruptcy estate or enforce the automatic stay, are not generally considered "suits" for Eleventh Amendment purposes. See, e.g., State of Texas v. Walker, 142 F.3d 813 (5th Cir. 1998) (use of bankruptcy court discharge as an affirmative defense not barred by Eleventh Amendment because there was no "suit" against the state); Antonelli, 123 F.3d 777 (4th Cir. 1992) (motion to determine that transfers were exempt under 1146(c) not barred by the Eleventh Amendment); In re Ellet, 254 F.3d 1135 (9th Cir. 2001) (bankruptcy court's discharge injunction, issued without service of process in proceeding against state, is binding upon non-consenting state, and the Eleventh Amendment does not confer immunity on the state). These types of actions do not compel states to take any affirmative action.
The automatic stay operates to "protect the estate assets from the actions of all entities, including states." See In re International Heritage, Inc., 239 B.R. 306, 310 (Bankr. E.D.N.C. 1999). It is, and was intended by Congress to be, "one of the fundamental debtor protections provided by the bankruptcy laws." In re Solis, 137 B.R. 121, 124 (Bankr. S.D.N.Y. 1992) (citations to legislative history omitted).
In re Hechinger Investment Co. of Delaware, Inc., 254 B.R. 306 (Bankr. Del. 2000), is particularly on point. The Hechinger debtors sought an order declaring the sale of certain properties in aid of plan confirmation to be exempt from state transfer and recording taxes. The taxing authorities argued that the motions were barred by the Eleventh Amendment. The court found that it had jurisdiction over the dispute because the debtors' motion was not a "suit" under the Eleventh Amendment. In a ruling equally applicable to this case, the court held:
A declaratory ruling interpreting bankruptcy law as it applies to transfers of the Debtors' real property interests is based on the Court's jurisdiction over the Debtors and their estate. . . . It does not depend on jurisdiction over [the state]. The State is free to participate or not as it deems fit. That the effect of the ruling precludes [the state] from collecting transfer taxes is a function of substantive federal law, not a violation of its constitutional rights.
254 B.R. at 314 (citations omitted). See also In re International Heritage, Inc., 239 B.R. at 310 ("proceedings by the bankruptcy court to ascertain the reach of the automatic stay . . . may affect the rights of a state, but nevertheless, these proceedings are not precluded by the Eleventh Amendment"); In re Berkelhammer, 2002 WL 1358671 (Bankr. S.D.N.Y. June 13, 2002) (Bankruptcy Code generally and automatic stay particularly applied "to prevent the Commissioner [of the New York State Department of Health] from changing the status quo" by seeking, unilaterally, to call a default under its Reinstatement Agreement with the debtor).
Here, too, the Court's jurisdiction arises from its jurisdiction over the Debtors and their estate. WMATA is free to participate or not, as it deems fit. The Debtors are seeking no affirmative relief from WMATA, either in the form of monetary relief or any other affirmative action from WMATA. On the contrary, the Debtors are seeking only to enforce their automatic stay and prevent the termination of service due them based upon a failure to pay pre-petition debt.
VII. The Debtors And The Bankruptcy Process Are Threatened By A Holding That This Court Lacks Jurisdiction Against Quasi-State Entities
The ruling on WMATA's motion to dismiss impacts both the future administration of this estate and the federal bankruptcy system as a whole in a variety of ways.
First, allowing WMATA to terminate the License Agreement would render inoperative hundreds of miles of the Debtors' fiber optic cable strands and shut down telecommunication services to both the Debtors' governmental and private customers. The Debtors and their customers would suffer irreparable damages from lost business and lost reputation.
Second, to permit the states to by-pass the federal bankruptcy system through sovereign immunity would not only impair the effective operation of the federal bankruptcy system, but would also contradict the design of the Constitution. The Constitution contemplates a national, "uniform" system for bankruptcy. If states are allowed to opt out of the federal bankruptcy system, major variations would develop concerning the distribution of property of the estate and claims held by states against bankrupt debtors. Litigation over bankruptcy issues would proliferate in both federal and state courts. State immunity to the Bankruptcy Code would thus undermine the system of national uniformity in bankruptcy as called for by the Constitution.
State governments are typically among the largest creditors in any bankruptcy. See Leonard H. Gerson, A Bankruptcy Exception to Eleventh Amendment Immunity: Limiting the Seminole Tribe Doctrine, 74 AM. BANKR. L.J. 1, 3 (2000). The potential for unrestricted state sovereign immunity in bankruptcy threatens debtors by restricting the possibility of a fresh start, the paramount objective of the federal bankruptcy system. It threatens creditors by allowing either states or quasi-state entities to circumvent the bankruptcy process for their own self-interest and pecuniary gain at the expense of other creditors who are no less deserving of payment. Further, state immunity also threatens the ability of the bankruptcy system to provide for the efficient disposition of estates in a single forum.
In his article, Eleventh Amendment Immunity of a State in Bankruptcy Cases: A New Jurisprudential Approach, Richard Lieb writes that:
If states were immune from litigating ownership and priority issues in a bankruptcy court, serious complications would exist as to whether property of the estate could be sold, and as to distribution of the bankruptcy estate. Delays would be experienced and assets could deteriorate in the interim if ownership and priority had to be litigated in a bankruptcy court and separately in a state court with respect to claims by a state. Immunity of the states would thus impair the property rights of debtors and creditors.
Richard Lieb, Eleventh Amendment Immunity of a State in Bankruptcy Cases: A New Jurisprudential Approach, 7 AM. BANKR. INST. L. REV. 269, 292 (1999).
Respectfully, the Court should deny WMATA's motion to dismiss as it calls for an inequitable result not contemplated by either the framers of the Constitution nor Congress.
CONCLUSION
WMATA waived its alleged sovereign immunity through the express terms of both its Compact and the License Agreement, which clearly states that the contract is governed by and enforceable in accordance with all federal laws. The Ex parte Young doctrine allows for prospective relief notwithstanding the Eleventh Amendment and, in any event, the instant proceeding is not a "suit" barred by the Eleventh Amendment. Finally, relief under section 105 of the Bankruptcy Code to enjoin prospective violations of the automatic stay and to prohibit discriminatory conduct by WMATA is not barred under the Eleventh Amendment as the original Constitution, the Fourteenth Amendment together with section 106 of the Bankruptcy Code abrogate states' Eleventh Amendment immunity.
The failure to enjoin WMATA from terminating its license agreement with the Debtors would harm not only these Debtors' reorganizations, but all present and future debtors, creditors as well as the jurisdiction of all Bankruptcy Courts over any bankruptcy matter in which a state is in any way involved.
WHEREFORE, the Debtors respectfully request that the Court enter an order (i) denying WMATA's motion to dismiss; (ii) preliminarily enjoining WMATA from any attempt to terminate, cancel, revoke or treat as cancelled the License Agreement; (iii) preliminarily enjoining WMATA from interfering in any manner with the Debtors' business; (iv) preliminarily enjoining WMATA from seeking to recover its pre-petition debt; and (v) granting the Debtors such other relief as is just and proper.