Department of Transportation & Development v. PNL Asset Management Co.

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 96-31013

In The Matter Of: JULIAN E FERNANDEZ, Estate of
Debtor,

DEPARTMENT OF TRANSPORTATION AND DEVELOPMENT,
State of Louisiana,
Appellant,

versus

PNL ASSET MANAGEMENT COMPANY LLC;
JEAN O TURNER,
Appellees.

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No. 97-30529

In The Matter of: JULIAN E FERNANDEZ,
Debtor,

STATE OF LOUISIANA, Department of Transportation
and Development,
Appellee,

versus

JEAN O TURNER, trustee;
PNL ASSET MANAGEMENT COMPANY,
Appellants.

Appeals from the United States District Court
for the Eastern District of Louisiana

September 15, 1997

Before REYNALDO G. GARZA, HIGGINBOTHAM, and DAVIS, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

The State of Louisiana and the Louisiana Department of

Transportation and Development contend that the Eleventh Amendment
denies the Bankruptcy Court jurisdiction in this adversary action,

and Congress cannot constitutionally displace the State’s immunity

by Section 106(a) of the Bankruptcy Code1 (11 U.S.C. § 106(a)

(1994)). The district court agreed. We now affirm.

I.

On August 8, 1974, New Communities, Inc. sold property in

Terrebonne Parish, Louisiana, to Julian E. Fernandez who purported

to act as a general partner of a Louisiana partnership called JEF

Developers. But JEF came into existence only a day later on August

9, 1974, when the articles of partnership were executed.

PNL Asset Management Company LLC is the owner of a recorded

judgment against Fernandez. In 1984, the State of Louisiana

purchased two parcels of the property from JEF Developers in two

separate transactions. The title to the property is now disputed.

The State’s claim of title rests on the two sales transactions in

1984. PNL contends that the state’s title is flawed, since it is

Fernandez individually, and not JEF, the partnership, who owns the

property and has since 1974.

PNL’s predecessor in interest, NCNB Texas National Bank

brought this adversary action after Fernandez declared Chapter 11

bankruptcy on June 15, 1989. The State and the DOTD moved for

dismissal pointing to the Eleventh Amendment. The bankruptcy court

1
11 U.S.C. § 106(a) states in pertinent part:
Notwithstanding an assertion of sovereign immunity,
sovereign immunity is abrogated as to a
governmental unit to the extent set forth in this
section...

2
denied this motion and held that Section 106(a) of the Bankruptcy

Code abrogated the State’s Eleventh Amendment sovereign immunity

thus permitting the bankruptcy court to retain jurisdiction over

the State and the DOTD. The district court partially affirmed and

partially reversed the bankruptcy court’s judgment. On September

25, 1996, the DOTD filed its first appeal to this court contending

that the bankruptcy court did not have jurisdiction over the State

and the DOTD.

In light of the Supreme Court’s decision in Seminole Tribe of

Florida v. Florida2, on April 16, 1997, the district court issued

another order dismissing the State and the DOTD from this action.

In May, 1997, PNL and the trustee in bankruptcy, Jean O. Turner,

filed a second appeal to this court contending that Section 106(a)

was constitutional, and therefore, the federal courts had

jurisdiction over the State and the DOTD. These two appeals, which

raise the same jurisdictional question, have been consolidated.

II.

Seminole Tribe outlined a two-part test of abrogation: first,

has Congress unequivocally expressed its intent to abrogate the

immunity; and second, has Congress acted pursuant to a valid

exercise of its power. Seminole Tribe, 116 S. Ct. at 1123.

Section 106(a) clearly expresses Congressional intent to

abrogate sovereign immunity. No party contends otherwise. The

sole question then is whether Congress had the power to do so.

2
__ U.S. __, 116 S. Ct. 1114, 134 L. Ed. 2d 252 (1996).

3
 A.

PNL and Turner contend that Congress had the power to abrogate

state sovereign immunity by enacting Section 106(a) pursuant to its

bankruptcy power in Art. I, § 8, cl. 43. We think not.

Seminole Tribe held that Congress may not abrogate state

sovereign immunity by legislation passed pursuant to its Article I

powers. Id. at 1131-32. The Court stated:

Even when the Constitution vests in Congress complete
lawmaking authority over a particular area, the Eleventh
Amendment prevents congressional authorization of suits by
private parties against unconsenting States. The Eleventh
Amendment restricts the judicial power under Article III, and
Article I cannot be used to circumvent the constitutional
limitations placed upon federal jurisdiction.

Id.

Turner contends that Seminole Tribe only held that Congress

could not abrogate sovereign immunity pursuant to the Indian and

Interstate Commerce Clauses and did not address all of Congress’

Article I powers. In addition, Turner notes that the Bankruptcy

Clause is distinguishable from the Commerce Clause since it

contains an affirmative requirement of uniformity. We find both

arguments to be unpersuasive.

As the quoted passage from Seminole Tribe notes, Congress’

Article I powers cannot be used to circumvent the Eleventh

Amendment restrictions on federal judicial power. Seminole Tribe

3
Art. I, § 8, cl. 4 states in pertinent part:
The Congress shall have Power ... To establish ...
uniform Laws on the subject of Bankruptcies
throughout the United States...

4
explicitly overruled Pennsylvania v. Union Gas Co.4 -- the only

Supreme Court case that held Congress may abrogate sovereign

immunity pursuant to its Article I powers. Seminole Tribe, 116 S.

Ct. at 1128. With respect to Congress’ bankruptcy power in

particular, Chief Justice Rehnquist noted in Seminole Tribe that

“it has not been widely thought that the federal antitrust,

bankruptcy, or copyright statutes abrogated the States’ sovereign

immunity. This Court never has awarded relief against a State

under any of those statutory schemes.” Id. at 1131-32 n.16.

We find no principled reason to distinguish in a relevant way

Congress’ Commerce Clause power that it purported to exercise in

Seminole Tribe from its power under the Bankruptcy Clause for the

purposes of state sovereign immunity. See Hoffman v. Connecticut

Dep’t of Income Maintenance et al., 492 U.S. 96, 105, 109 S. Ct.

2818, 2825, 106 L. Ed. 2d 76 (1989) (Scalia, J., concurring in

judgment) (noting that “there is no basis for treating [Congress’]

powers under the Bankruptcy Clause any differently” from its powers

under the Commerce Clause); In re Sacred Heart Hosp. of Norristown,

204 B.R. 132, 138 (E.D. Pa. 1997) (noting that “[t]he Bankruptcy

Clause is identical to the Indian Commerce Clause in both wording

and scope.”) On the contrary, the Framers intended that the two

powers be treated similarly. As Madison noted in the Federalist

No. 42, “the power of establishing uniform laws of bankruptcy is ()

intimately connected with the regulation of commerce.” James

Madison, The Federalist No. 42 in The Federalist Papers, 271 (C.

4
491 U.S. 1, 109 S. Ct. 2273, 105 L. Ed. 2d 1 (1989).

5 H:\MAIL\FERNANDE.PEH
Rossiter ed. 1961). The large grant of power to the national

government by the Commerce Clause reflects the felt need to escape

the risks of economic balkanization attending the confederation.

The uniformity requirement in the Bankruptcy Clause is not a

relevant distinction. As the Supreme Court noted more than fifty

years ago, “[t]he Constitutional requirement of uniformity is a

requirement of geographic uniformity” and nothing more. Vanston

Bondholders Protective Comm. v. Green, 329 U.S. 156, 172, 67 S. Ct.

237, 244-45, 91 L. Ed. 162 (1946). Holding that federal courts do

not have jurisdiction over the states without their consent does

not frustrate this requirement of geographic uniformity since

sovereign immunity applies uniformly to all states and to all

parties in a bankruptcy proceeding.

Congress’ bankruptcy power in Article I may be contrasted with

its Fourteenth Amendment powers which are deemed “to intrude upon

the province of the Eleventh Amendment.” Seminole Tribe, 116 S.

Ct. at 1125. While the history and language of the Fourteenth

Amendment make plain that it “fundamentally altered the balance of

state and federal power struck by the Constitution,” the same

cannot be said of Congress’ bankruptcy power and its uniformity

requirement. See Seminole Tribe, 116 S. Ct. at 1125 (quoting

Fitzpatrick v. Bitzer, 427 U.S. 445, 455, 96 S. Ct. 2666, 2671, 49

L. Ed. 2d 614 (1976)).

Finally, several other courts that have reached this issue in

the wake of Seminole Tribe agree that the Bankruptcy Clause does

not enable Congress to abrogate state sovereign immunity

6 H:\MAIL\FERNANDE.PEH
unilaterally. See, e.g., In re Creative Goldsmiths of Washington,

D.C., Inc., 1997 WL 406254, *5 (4th Cir. 1997); AER-Aerotron, Inc.

v. Texas Dep’t of Transp., 104 F.3d 677, 680-81 (4th Cir. 1997)

(“[P]erhaps the handwriting is on the wall that the abrogation

provisions of the Bankruptcy Reform Act will suffer the same fate

as the statutes involved in Seminole.” (dictum)); id. at 681

(Niemeyer, J., concurring in judgment) (reading Seminole Tribe as

rejecting the notion that “states are amenable to suits in federal

courts when Congress, acting pursuant to its Article I bankruptcy

power, deems it so”); In re Sacred Heart Hosp. of Norristown, 204

B.R. 132, 138 (E.D. Pa. 1997) ; In re NVR, L.P., 206 B.R. 831, 837

(Bankr. E.D. Va. 1997); In re York-Hannover Devs., Inc., 201 B.R.

137, 140 (Bankr. E.D.N.C. 1996); In re Tri-City Turf Club, Inc.,

203 B.R. 617, 619-620 (Bankr. E.D. Ky. 1996); In re Midland

Mechanical Contractors, Inc., 200 B.R. 453, 457-58 (Bankr. N.D. Ga.

1996); In re Burke, 200 B.R. 282, 286 (Bankr. S.D. Ga. 1996) and In

re Martinez, 196 B.R. 225, 230 (D.P.R. 1996).

B.

Turner also contends that Congress has the authority to

abrogate state sovereign immunity pursuant to § 5 of the Fourteenth

Amendment to enforce either a protected due process property

interest or a privilege of federal citizenship, namely, the right

to a uniform system of bankruptcy. We are not persuaded.

There is no evidence that the 1994 Act was passed pursuant to

the Fourteenth Amendment or any constitutional provision other than

7 H:\MAIL\FERNANDE.PEH
the bankruptcy power of Article I, § 8, cl. 4. See Seminole Tribe,

116 S. Ct. at 1125 (noting that the Indian Gaming Regulatory Act

was not passed pursuant to Congress’ power under either the

Fourteenth Amendment or the Interstate Commerce Clause; rather it

was passed pursuant to the Indian Commerce Clause).5 Equally,

there is no indication that Congress passed the 1994 Act to remedy

any incipient breaches or even some unarticulated, general

violation of the rights specified in § 1 of the Fourteenth

Amendment. See In re Tri-City Turf Club, Inc., 203 B.R. at 620

(“The court can find no hint that Congress had in its collective

mind Fourteenth Amendment concerns when it enacted Section 106(a)

of the Bankruptcy Code.”). To cede to Congress the power to pass

general, substantive legislation which abrogates state sovereign

immunity, pursuant to the Enforcement Clause, would render Eleventh

Amendment state sovereign immunity meaningless and eviscerate the

fundamental construct of federalism in our constitutional form of

government. See City of Boerne v. Flores, __ U.S. __, __, 117 S.

Ct. 2157, 2164-66, 138 L. Ed. 2d 624 (1997); In re NVR, L.P., 206

B.R. at 842 (“[T]his court can conceive of no ground which might

warrant the ‘discovery’ of a bankruptcy privilege in the Fourteenth

Amendment.”).

5
In Seminole Tribe, the Supreme Court did not address
whether the Fourteenth Amendment authorized Congress to
enforce the Indian Gaming Regulatory Act against the
States because the petitioner abandoned this issue after
the Eleventh Circuit Court of Appeals rejected its
argument that the Act created a liberty and property
interest subject to Congress’ protection under the
Fourteenth Amendment. Seminole Tribe, 116 S. Ct. at
1125.

8 H:\MAIL\FERNANDE.PEH
 C.

We do not doubt that after Seminole Tribe, a State may

voluntarily choose to participate in a bankruptcy proceeding and

waive its Eleventh Amendment sovereign immunity. But this remains

a choice to be made by the State.

III.

PNL asserts another statutory basis for federal subject matter

jurisdiction in this case. PNL’s predecessor, the Federal Deposit

Insurance Corporation, prosecuted this claim from April 1992 to

August 1996, when it sold to PNL the judgment that is the basis for

this action. Relying on the concept of continuing federal

jurisdiction6, PNL contends that since the FDIC is an agency of the

United States under 12 U.S.C. § 1819(b)(1)7, federal jurisdiction

is provided by 28 U.S.C. § 13458. We fail to see the relevance of

this assertion.

6
Walker v. FDIC, 970 F.2d 114, 120 (5th Cir. 1992)
(“[F]ederal jurisdiction persists even though the FDIC is
subsequently dismissed.”); Bank One Texas, N.A. v.
Morrison, 26 F.3d 544, 547 (5th Cir. 1994) (“[T]he FDIC’s
subsequent dismissal from this case did not deprive the
court of subject matter jurisdiction.”)
7
12 U.S.C. § 1819(b)(1) states:
The Corporation, in any capacity, shall be an agency
of the United States for purposes of § 1345 of Title 28,
without regard to whether the Corporation commenced the
action.
8
28 U.S.C. § 1345 states in pertinent part:
[T]he district courts shall have original
jurisdiction of all civil actions, suits or proceedings
commenced by the United States, or by any agency or
officer thereof, expressly authorized to sue by Act of
Congress.

9 H:\MAIL\FERNANDE.PEH
 It is well-established that the Eleventh Amendment does not

bar the United States government from filing suit in federal court

against a state. United States v. Mississippi, 380 U.S. 128, 140,

85 S. Ct. 808, 815, 13 L. Ed. 2d 717 (1965) (noting that “nothing

in the [Eleventh Amendment] or any other provision of the

Constitution prevents or has ever been seriously supposed to

prevent a State’s being sued by the United States.”); United States

v. Texas, 143 U.S. 621, 641-46, 12 S. Ct. 488, 492-94, 36 L. Ed.

285 (1892). It is, however, a great leap to suggest that by

granting federal jurisdiction, 12 U.S.C. § 1819(b)(1) and 28 U.S.C.

§ 1345 in tandem, permit the FDIC to avoid the Eleventh Amendment

by slipping into the shoes of the United States. While a state’s

consent to being sued by the United States is deemed to be given

when admitted into the Union, the same cannot be automatically said

with respect to an agency of the federal government which may be

seen to lie “outside the structure of the [original] Union.” See

Monaco v. Mississippi, 292 U.S. 313, 322-23, 330, 54 S. Ct. 745,

748, 751, 78 L. Ed. 1282 (1934) (stating that states possess

immunity from unconsented suit except where there has been `a

surrender of this immunity in the plan of the convention’) (quoting

The Federalist No. 81); United States v. Texas, 143 U.S. 621, 646,

12 S. Ct. 488, 494, 36 L. Ed. 285 (1892) (stating that Texas

consented to being sued by the United States when admitted into the

Union). In other words, the FDIC, as an agency of the national

government, does not enjoy the status accorded the national

government for Eleventh Amendment purposes. It follows that there

10 H:\MAIL\FERNANDE.PEH
must be a clear expression of purpose to abrogate the Eleventh

Amendment in the grant of agency status for the purpose of

jurisdiction. We find no such clarity of purpose, and these

statutes fail the first prong of the abrogation test of Seminole

Tribe. Seminole Tribe, 116 S. Ct. at 1123.

IV.

We hold that Section 106(a) of the Bankruptcy Code is

unconstitutional. Congress cannot locate the authority claimed

here to abrogate sovereign immunity in either the Bankruptcy Clause

or in Section 5 of the Fourteenth Amendment. Nor does the grant of

agency status for purposes of federal jurisdiction allow the FDIC

to avoid the reach of the Eleventh Amendment.

We AFFIRM the order of the district court dismissing the State

of Louisiana and the Department of Transportation and Development,

VACATE all district court and bankruptcy court judgments involving

the State and the DOTD and REMAND for further proceedings not

inconsistent with this opinion.

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