BRANDT, Bankruptcy Judge.
The California Franchise Tax Board (CFTB) appeals the bankruptcy court's order rejecting CFTB's sovereign immunity defense and finding CFTB in contempt of the discharge order and imposing sanctions. We REVERSE.
Debtor Al Lapin, Jr. ("Lapin" or "Debtor") filed a petition for relief under Chapter 7
On 7 May 1997 CFTB sent a letter to Lapin demanding payment for unpaid taxes for 1979-1982. In August, CFTB issued an Earnings Withholding Order (EWO) to Lapin's employer. Subsequently CFTB applied Lapin's 1996 tax refund to taxes due for previous years. (Lapin asserts those years to be 1979-1982, but CFTB's Return Information Notice does not indicate the tax years involved. As no other evidence was presented, the bankruptcy court declined to find the refund was applied to those years.)
CFTB asserted that Lapin's tax obligation was excepted from discharge under § 523(a)(1)(B) (unfiled tax return) pursuant to In re Blutter, 177 B.R. 209 (Bankr. S.D.N.Y.1995). Blutter held that failure by a debtor to report to the state a change in federal tax was the equivalent of failing to file a required return under § 523(a)(1)(B)(i). Blutter, 177 B.R. at 211-12. However, between the time the collection letter was sent and the time the EWO was issued, the Ninth Circuit BAP ruled to the contrary in In re Jerauld, 208 B.R. 183 (9th Cir. BAP 1997),
On 21 October 1997, Lapin filed a motion to reopen the bankruptcy case and a motion for an order to show cause re: civil contempt against CFTB for violation of the discharge injunction. The court signed the order to show cause and set the matter for hearing on 24 November 1997. CFTB responded, asserting sovereign immunity, and Lapin filed a reply. After the hearing, the court took the matter under submission.
The bankruptcy court entered a memorandum decision and order on 31 December 1997, rejecting CFTB's sovereign immunity defense, finding CFTB in civil contempt of the court's discharge order for issuing the EWO against Lapin, and ordering the debtor to file and serve an itemization of his post-discharge attorneys' fees and costs incurred in connection with the motion. CFTB filed a notice of appeal on 12 January 1998, which was timely because 10 January 1998 fell on a Saturday. Rule 9006(a). Although the memorandum states that sanctions are warranted, and the order requires the debtor to provide evidence of his attorneys' fees and costs, neither the memorandum nor the order states that the sanction is in fact Lapin's attorneys' fees, or that CFTB must pay that amount to Lapin. After hearing on 4 February 1998, the court ordered CFTB to pay Lapin $10,085.03 as sanctions for its violation of the discharge injunction.
A. Whether the arguably premature filing of this appeal affects the panel's jurisdiction.
B. Whether the bankruptcy court has the power to impose civil contempt sanctions.
C. Whether Eleventh Amendment sovereign immunity bars the imposition of sanctions against CFTB for its violations of the discharge injunction.
D. Whether the Eleventh Amendment is not implicated when the bankruptcy court imposes sanctions to enforce its own order, as distinguished from the case where a private party sues a governmental unit.
STANDARD OF REVIEW
The granting or denial of a sovereign immunity defense is an issue of law subject to de novo review. In re Elias, 218 B.R. 80, 82 (9th Cir. BAP 1998). An order imposing sanctions is reviewed for abuse of discretion. In re Rainbow Magazine, Inc., 77 F.3d 278, 283 (9th Cir.1996).
A. Timing of Notice of Appeal.
The 31 December order does not explicitly order CFTB to pay sanctions. However, the order states that CFTB is in contempt, and the underlying decision states that sanctions are warranted. Arguably, the order appealed from should have been the court's 4 February order directing CFTB to pay Lapin's attorney's fees as a sanction for violating the discharge injunction.
Rule 8002(a). This rule appears to contemplate a situation, unlike this one, where the court has made an oral ruling which is then appealed before a written order has actually been entered. However, to the extent it can fairly be said that the 31 December memorandum and order implicitly (if not explicitly) imposed sanctions against CFTB and thus "announces" the court's decision, the notice of appeal should be treated as timely filed.
Alternatively, the 4 February order is arguably only an extension or clarification of the 31 December order. In any event, the issues on appeal were clearly raised in the 31 December order. Indeed, had CFTB waited and appealed the 4 February order, it would arguably have been foreclosed from arguing issues raised in connection with the 31 December order. The 31 December order is properly on appeal.
B. The Bankruptcy Court's Power to Impose Sanctions.
CFTB asserts that under Plastiras v. Idell (In re Sequoia Auto Brokers, Ltd., Inc.), 827 F.2d 1281 (9th Cir.1987), the bankruptcy court lacked the authority to issue a civil contempt order. Sequoia held that bankruptcy courts do not have the inherent power of contempt and therefore bankruptcy judges seeking the issuance of contempt orders must certify facts to the district court for review de novo. However, CFTB's reliance on Sequoia is misplaced. In Rainbow Magazine, Inc., the court held that after Congress' revisions to rule 9020 and in light of the Supreme Court's holding in Chambers v. NASCO, Inc., 501 U.S. 32, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991), "[a]ny restriction of the bankruptcy courts' power to sanction that could be inferred from Sequoia is no longer pertinent", and that bankruptcy courts inherently have the power to sanction. Rainbow Magazine, 77 F.3d at 284-85.
Nevertheless, CFTB argues that the bankruptcy court could not sanction it because CFTB was not a party to the bankruptcy and did not file a proof of claim. Again, CFTB relies on a case that is no longer good law, the Panel decision in Rainbow Magazine, 136 B.R. 545 (9th Cir. BAP 1992). In that case, the BAP upheld the bankruptcy court's award of sanctions against the debtor, but reversed sanctions against the debtor's principal, Caldwell, who was neither a party nor a signatory. The BAP reasoned that the plain language of Rule 9011 "does not contemplate sanctions against a person who is neither the person who signed the offending pleading nor a party." Id., 136 B.R. at 552. Moreover, the BAP could find no case law involving the use of the court's inherent power as a basis to sanction an entity who is neither a party nor an attorney. Rainbow Magazine, 136 B.R. at 553.
On remand, the bankruptcy court reimposed sanctions, basing its action on the intervening decision in Lockary v. Kayfetz, 974 F.2d 1166 (9th Cir.1992), cert. denied sub nom. Pacific Legal Foundation v. Kayfetz, 508 U.S. 931, 113 S.Ct. 2397, 124 L.Ed.2d 298 (1993). In Lockary, the Ninth Circuit, interpreting Chambers, upheld an award of sanctions against an entity that was neither a party, attorney, nor signatory, but which had orchestrated a frivolous lawsuit. Caldwell appealed the sanction to the district court, which affirmed. The Ninth Circuit affirmed the district court, stating "our opinion in Lockary provided support for the exact proposition that the BAP was seeking — we allowed sanctions to be imposed against a nonparty and nonattorney under the court's inherent powers." Rainbow Magazine, 77 F.3d at 282.
Additionally, the Ninth Circuit has recognized the inherent power of the district court to impose attorneys' fees against a non-party to curb abusive litigation practices and to sanction a non-party whose actions or omissions caused the parties to incur additional expenses. Corder v. Howard Johnson & Co., 53 F.3d 225, 232 (9th Cir.1994).
Further, CFTB's premise that it was not a party to the proceedings is arguable. The term "party in interest" includes creditors.
Read together, the authorities make clear that the bankruptcy court has the inherent powers of contempt, to sanction, and to sanction non-parties in appropriate circumstances. If not barred by CFTB's sovereign immunity, the bankruptcy court could sanction CFTB for violation of the discharge injunction.
C. Sovereign Immunity.
CFTB asserted Eleventh Amendment sovereign immunity as a defense to Lapin's request for sanctions. As a result, CFTB argues, the bankruptcy court lacked the requisite subject matter jurisdiction to proceed with enforcement of its discharge injunction.
The Eleventh Amendment provides:
U.S. Const. amend. XI. The Supreme Court has interpreted this amendment as recognizing unconsenting states' immunity from suits brought by individuals. Seminole Tribe of Florida v. Florida, 517 U.S. 44, 67-68, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996). Congress may, however, abrogate the states' immunity from suit so long as Congress (1) unequivocally expresses its intent to do so and (2) acts pursuant to a valid exercise of power. Seminole, 517 U.S. at 55.
Applying this test to the Code, the first prong is satisfied by § 106(a), which provides:
11 U.S.C. § 106(a) (1998). By its plain language, this section "clearly reflects Congress' intent to abrogate the states' Eleventh
2. Valid Exercise of Power.
Two possible sources of power for this legislation are the Bankruptcy Clause and the Fourteenth Amendment.
a. The Bankruptcy Clause.
The Bankruptcy Clause provides:
U.S. Const. art. I, § 8, cl. 4. Notwithstanding this grant of power, the Eleventh Amendment prevents Congress, acting pursuant to its Article I powers, from subjecting unconsenting states to suits brought by private parties in federal court. Elias, 218 B.R. at 84 (citing Seminole, 517 U.S. at 71-72). As a result, § 106 is ineffective as an attempt to abrogate the states' sovereign immunity pursuant to Congress' Bankruptcy Clause power. Elias, 218 B.R. at 84.
b. The Fourteenth Amendment.
In this case, the bankruptcy court concluded that, after Seminole, Article I most likely does not provide sufficient power for Congress to have enacted § 106, but that the Fourteenth Amendment does. Judge Robles found persuasive Wyoming Dep't of Transp. v. Straight (In re Straight), 209 B.R. 540, 552 (D.Wyo.1997), aff'd on alternate holding of waiver, 143 F.3d 1387 (10th Cir. 1998), and In re Burke, 203 B.R. 493, 497 (Bankr.S.D.Ga.1996), both of which reasoned that the protections afforded debtors under the bankruptcy code are privileges and immunities of federal citizenship. Through Section 5 of the Fourteenth Amendment, Congress has the authority to pass laws to prevent states from abridging privileges and immunities. Burke, 203 B.R. at 497. Thus, the bankruptcy court concluded, "§ 106 represents a valid exercise of Congressional power under the Fourteenth Amendment."
Thereafter, however, this Panel decided Elias, which held, 218 B.R. at 84, that the Fourteenth Amendment does not provide the requisite power for Congress to abrogate states' sovereign immunity.
The Fourteenth Amendment provides, in relevant part:
U.S. Const. amend. XIV, § 1, § 5. "[T]he Fourteenth Amendment, by expanding federal power at the expense of state autonomy, had fundamentally altered the balance of state and federal power struck by the Constitution. . . . [T]hrough the Fourteenth Amendment, federal power extended to intrude upon the province of the Eleventh Amendment. . . ." Seminole, 517 U.S. at 59. Thus, under the Fourteenth Amendment, Congress may abrogate state sovereign immunity protected by the Eleventh Amendment, Elias, 218 B.R. at 84, but, to do so validly, the rights being advanced by Congress must be within the purview of the Fourteenth Amendment. See In re NVR L.P., 206 B.R. 831, 840 (Bankr.E.D.Va.1997), aff'd, 222 B.R. 514 (E.D.Va.1998).
Bankruptcy is not a privilege encompassed by the Fourteenth Amendment. Elias, 218 B.R. at 86; Accord, Sacred Heart Hosp. v. Dep't of Pub. Welfare (In re Sacred Heart Hosp.), 133 F.3d 237, 244-45 (3d Cir. 1998); NVR, 206 B.R. at 842. "The ability to use the bankruptcy laws as relief is simply a statutory benefit, not a Constitutional privilege or immunity." Elias, 218 B.R. at 86.
"The Privileges and Immunities Clause protects only those rights `which owe their existence to the Federal government, its National character, its Constitution, or its
Additionally, courts have been reluctant to presume that Congress enacted § 106 under a general Fourteenth Amendment power when the Bankruptcy Clause of Article I explicitly authorizes the Code. E.g., Schlossberg v. Maryland (In re Creative Goldsmiths of Washington, D.C., Inc.), 119 F.3d 1140 (4th Cir.1997), cert. denied, ___ U.S. ___, 118 S.Ct. 1517, 140 L.Ed.2d 670 (1998): "We will not presume that Congress intended to enact a law under a general Fourteenth Amendment power to remedy an unspecified violation of rights when a specific, substantive Article I power clearly enabled the law." 119 F.3d at 1146.
Bolstering the conclusion that § 106 was not enacted pursuant to the Fourteenth Amendment is the fact that there is no evidence to that effect in the legislative history of the Code. NVR, 206 B.R. at 840-41. On the other hand, the legislative history contains numerous references to the Bankruptcy Clause. Id.; Accord, In re Fernandez, 123 F.3d 241 (5th Cir.1997) amended on denial of reh'g, 130 F.3d 1138 (5th Cir. 1997): "[T]here 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." 123 F.3d at 245. While an explicit statement that Congress is acting pursuant to the Fourteenth Amendment is not essential, "there must be something about the act connecting it to recognized Fourteenth Amendment aims, specifically those concerned with discrimination by state actors on the basis of race or gender." NVR, 206 B.R. at 840 (citing Wilson-Jones v. Caviness, 99 F.3d 203, 209 (6th Cir.1996) amended on denial of reh'g, 107 F.3d 358 (6th Cir.1997)). Thus, Congress lacked the power to abrogate the states' sovereign immunity by enacting § 106. Elias, 218 B.R. at 86.
D. Enforcing the court's own order.
Notwithstanding the foregoing, Lapin argues that this appeal can be decided on non-constitutional grounds. He contends that the bankruptcy court imposed sanctions to enforce its own order, thus the Eleventh Amendment is not implicated because it is the court, not a private party, subjecting CFTB to sanctions. Here, Lapin argues, he did not subject CFTB to suit. Instead, he claims he merely brought CFTB's conduct to the court's attention, so that the court would enforce its own order.
Lapin cites Maryland v. Antonelli Creditors' Liquidating Trust, 123 F.3d 777 (4th Cir.1997), in which Maryland challenged the provisions of a confirmed plan exempting certain real property transfers from state and county taxes. On appeal, the state argued that the Eleventh Amendment barred the bankruptcy court from exercising jurisdiction over it in the confirmation proceeding. The Fourth Circuit disagreed:
Antonelli, 123 F.3d at 786-87 (citation omitted). The Fourth Circuit affirmed the bankruptcy court's ruling that the state and county were bound by the terms of the confirmed plan and could not collaterally attack it in a subsequent proceeding.
Lapin argues that his motion for an order to show cause is analogous to the plan of reorganization in Antonelli, and the discharge order is analogous to the confirmation order in Antonelli. He contends that his motion did not require any response from CFTB, did not require its appearance in court, nor did it result in the bankruptcy court issuing process requiring CFTB to appear. The discharge order, Lapin further argues, did not derive from the court's jurisdiction over CFTB or other creditors, but from its jurisdiction over debtors and their estates, and its power to grant discharges.
The analogy between the confirmation order in Antonelli and the discharge order here is appropriate, in that both orders are binding on creditors and are not subject to collateral attack. However, CFTB does not contend that it is not bound by the terms of the discharge order. Rather CFTB contends that because of its sovereign immunity, the bankruptcy court did not have jurisdiction to sanction it for violating that order.
The problem with Lapin's analogy between a motion for an order to show cause and a plan of reorganization is that it fails to address the effect of the order to show cause. That order, which was issued at Lapin's behest, required CFTB to appear before the court or risk being found in contempt, analogous to the summons in an adversary proceeding. When a plan of reorganization is submitted, creditors can choose to respond or appear or not, foregoing only the ability to contest the plan after confirmation if they do not. In contrast, the order to show cause in this case required CFTB to appear and explain why it should not be held in civil contempt.
Lapin's other argument, based on Antonelli, that the discharge order derived from the court's jurisdiction over the debtor and his estate, raises the question of whether the bankruptcy court would automatically have jurisdiction over the state in any subsequent proceeding to enforce that order. While there does not appear to be any authority directly on point, the case law does not support finding jurisdiction over a creditor properly claiming sovereign immunity, even when the violated order was within the court's jurisdiction.
For one thing, the idea that a bankruptcy court can bypass the sovereign immunity bar to monetary recovery by exercising in rem jurisdiction has been rejected. French v. Georgia Dep't of Revenue (In re ABEPP Acquisition Corp.), 215 B.R. 513, 516-17 (6th Cir. BAP 1997) (citing United States v. Nordic Village, Inc., 503 U.S. 30, 38, 112 S.Ct. 1011, 1017, 117 L.Ed.2d 181 (1992)). Lapin cites no authority holding the bankruptcy court's jurisdiction over the debtor is enough to abrogate the sovereign immunity of a creditor. Such a rule would render sovereign immunity all but meaningless in bankruptcy cases.
The argument that it is the court, and not a private party, which forced CFTB to appear, thus the Eleventh Amendment is not implicated, has surface appeal. However, Lapin cites no authority supporting this assertion, nor does he give any reason why such a distinction should be made. No case law squarely addresses the propriety of such a distinction, but those sovereign immunity cases involving enforcement of a court's order use the same analysis as those in which a private party has brought a complaint against a governmental unit.
For example, in Coleman v. Espy, 986 F.2d 1184 (8th Cir.1993) cert. denied, 510 U.S. 913, 114 S.Ct. 301, 126 L.Ed.2d 249
Lapin advances no substantive reason why, when the court imposes sanctions for violations of its own order, the Eleventh Amendment is not implicated. He asserts that, technically, it is not a private party imposing the sanctions. Lapin's argument ignores the fact that the court's discharge order arose out of a request for relief (the bankruptcy petition) made by Lapin, a private party. Enforcement of that order necessarily advances a private right. That the court issued the order to show cause (at Lapin's behest) does not change that private right into something else, nor does it provide a distinction from a suit against a state — judgments, as well as discharges, are entered by courts.
If a court cannot impose sanctions against a governmental unit for violations of its orders, how, Lapin asks, is the court to enforce them? According to Lapin, the logical result is that state claims would be forever open to collection, notwithstanding a bankruptcy discharge, with the bankruptcy court having no weapon to prevent such abuse. This is not entirely true.
Under the Ex Parte Young doctrine, a federal court may, consistent with the Eleventh Amendment, enjoin state officials to conform their future conduct to the requirements of federal law. "[P]ersons aggrieved by a state's continuing violation of [the bankruptcy code] may obtain injunctive relief under Ex Parte Young in order to remedy a state officer's ongoing violation of Federal law." Schmitt v. Missouri Western State College (In re Schmitt), 220 B.R. 68, 72 (Bankr.W.D.Mo.1998) (citing Seminole, 116 S.Ct. at 1131 n. 16). While the Ex Parte Young doctrine does not allow for the relief being requested here — damages from the state for violations of the discharge order — it does empower the court to prohibit CFTB officials from continuing their collection efforts.
Where, as here, the state has already seized funds, the Ex Parte Young solution is hardly satisfactory from the debtor's standpoint — the doctrine allows only for prospective relief, precluding recovery of the seized funds. There is another alternative, however: suing the state in state court. See generally, S. Elizabeth Gibson, Sovereign Immunity in Bankruptcy: The Next Chapter, 70 Am.Bankr.L.J. 195, 203-208 (1996) (discussing state court litigation against states as a bankruptcy remedy still available after Seminole). The Eleventh Amendment does not apply in state courts. Hilton v. South Carolina Pub. Rys. Comm'n, 502 U.S. 197, 205, 112 S.Ct. 560, 116 L.Ed.2d 560 (1991). While bankruptcy courts' jurisdiction over "cases under title 11" is exclusive, their jurisdiction over "civil proceedings arising under title 11 or arising in or related to cases under title 11" is not. See 28 U.S.C. § 1334(a)-(b). Thus, state courts have concurrent jurisdiction over the latter. Furthermore, under the Supremacy Clause, state courts must exercise jurisdiction over federal
The Fifth Circuit has recently held that the Eleventh Amendment does not prevent the discharge in bankruptcy of a debt owed to a state and that the discharge can be raised as a defense against the state's enforcement efforts. Texas v. Walker, 142 F.3d 813, 823 (5th Cir.1998). Likewise, sovereign immunity does not preclude a debtor from initiating an action in state court to enforce a discharge injunction or to recover damages for a violation of that injunction.
While the court's 31 December 1997 order did not explicitly impose sanctions against CFTB, that order is properly before the panel.
The bankruptcy court has the inherent power to impose contempt sanctions, even against non-parties. Nevertheless, the Eleventh Amendment bars the bankruptcy court from imposing sanctions against CFTB for violation of the discharge order. Congress' abrogation of sovereign immunity in § 106 was not pursuant to a valid grant of power under either the Bankruptcy Clause or Section 5 of the Fourteenth Amendment. Lapin's remedies are to seek prospective injunctive relief against state officials in federal court under Ex Parte Young, or to sue for damages in state court. We REVERSE.