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In re Berger

United States District Court, W.D. Pennsylvania

October 21, 2019

IN RE Elleni Berger and Randy Berger, Debtors,
v.
Elleni Berger and Randy Berger, Appellees. Commonwealth of Pennsylvania, Department of Revenue, Appellant, Adv. No. 18-02130-GLT

         Chapter 13

          OPINION

          Joy Flowers Conti Senior United States District Judge

         Pending before the court is an appeal of the bankruptcy court's order of March 29, 2019, filed by the Commonwealth of Pennsylvania Department of Revenue (the “State”), with brief in support (ECF Nos. 1, 2). Appellees Elleni and Randy Berger (the “Bergers”) filed a brief in opposition and the State filed a reply brief (ECF Nos. 7, 11). The court also considered the amicus brief filed by Ronda Winnecour, Chapter 13 Standing Trustee for the Western District of Pennsylvania (“Trustee”) (ECF No. 9). The appeal is ripe for disposition.

         Factual and Procedural Background

         The facts are not in dispute. The Bergers filed a voluntary Chapter 13 petition on March 1, 2018, and subsequently proposed a payment plan. The Bergers own a residence and some rental property in Allegheny County, Pennsylvania. In Schedule A, the Bergers valued the residence at $390, 000.00 and the rental property at $175, 000.00.

         The State filed a proof of claim for unpaid personal income taxes totaling $11, 050.82. Because four liens had been entered and docketed in Allegheny County, the State asserted that its claims were secured within the meaning of 11 U.S.C. § 506(a)(1), in the amount of $10, 824.43. The federal government (“IRS”) also filed a proof of claim for unpaid federal personal income taxes totaling $526, 068.96. The IRS asserted that its claim was secured in the amount of $13, 141.00.

         The properties were encumbered by mortgages. The residence was subject to a first mortgage with a face amount of $443, 000 and a payoff amount of $488, 805. The rental property was subject to a first mortgage with a face amount of $176, 000 and a payoff amount of $197, 063.84. Because the outstanding mortgages exceeded the market value of the properties, the Bergers valued the State's secured claim at $0.00.

         The Bergers commenced an adversary action to strip the tax liens from the properties. The State filed a partial motion to dismiss, contending that it was entitled to immunity under the Eleventh Amendment to the United States Constitution. On March 29, 2019, the bankruptcy court issued a 20-page opinion and order denying the State's motion. This appeal followed.

         Legal Analysis

         The parties agree that this court may properly exercise jurisdiction over the appeal. Although denials of motions to dismiss are not ordinarily appealable, the United States Supreme Court held in Puerto Rico Aqueduct & Sewer Auth. v. Metcalf & Eddy, Inc., 506 U.S. 139, 147 (1993), that state entities may take advantage of the collateral order doctrine to immediately appeal an order denying a claim of Eleventh Amendment immunity.

         The State presents the following issues on appeal: (1) whether a debtor's adversary action seeking to strip tax liens constitutes a “suit against the State” for purposes of the Eleventh Amendment; (2) whether the State waived its immunity by filing a proof of claim in the Bergers' Chapter 13 case; and (3) whether Congress abrogated the State's immunity through the enactment of 11 U.S.C. § 106(a)(1). The parties agree that each issue presents a pure question of law which is subject to plenary review.

         The bankruptcy court denied the State's motion to dismiss the Bergers' adversary proceeding for three separate reasons. It held that the State waived any claim of sovereign immunity pursuant to 11 U.S.C. § 106(b) by filing a proof of claim in the Bergers' Chapter 13 case.[1] The bankruptcy court explained that the State's proof of claim and the Bergers' adversary proceeding were devices by which both parties sought to declare their rights to the same underlying property of the estate. The bankruptcy court noted that it was bound by International Finance Corp. v. Kaiser Group International, Inc., 399 F.3d 558, 569 (3d Cir. 2005), to liberally construe whether the claims arose out of the same transaction or occurrence.

         The bankruptcy court held, in the alternative, that the State's immunity had been abrogated by Congress. The bankruptcy court rejected the State's reliance on Ryan v. United States, 725 F.3d 623 (7th Cir. 2013) (holding that Dewsnup v. Timm, 502 U.S. 410 (1992) applied equally in the Chapter 7 and Chapter 13 contexts), because that decision involved § 502(d), while under Third Circuit Court of Appeals' decisions, lien stripping is accomplished by a combination of § 506(a)[2] and § 1322(b)(2).[3] (ECF No. 3-6 at 16-18) (citing McDonald v. Master Financial, Inc. (In re McDonald), 205 F.3d 606 (3d Cir. 2000)). The bankruptcy court reasoned that although § 106(a) does not enumerate § 1322 in the list of provisions abrogating sovereign immunity, the lack of specific reference to § 1322 was irrelevant because § 1327[4](which is enumerated in § 106)[5] is the enabling provision that makes the terms of a confirmed plan binding on creditors. Id.

         Finally, the bankruptcy court concluded that because the nature of the lien stripping remedy was an in rem proceeding, the State never had sovereign immunity to invoke. As explained in Central Virginia Community College v. Katz, 546 U.S. 356 (2006) (holding that an adversary proceeding to set aside preferential transfers was not barred by sovereign immunity), “[i]n ratifying the Bankruptcy Clause[6] [at the Constitutional Convention in 1787], the States acquiesced in a subordination of whatever sovereign immunity they might otherwise have asserted in proceedings necessary to effectuate the in rem jurisdiction of the bankruptcy courts.” Id. at 378. Even if a proceeding is “merely ancillary to the Bankruptcy Court's exercise of its in rem jurisdiction, ” it does not implicate state sovereign immunity. Id. at 371 (citing Tennessee Student Asst. Corp. v. Hood, 541 U.S. 440 (2004) (a proceeding to discharge student loan was ancillary to bankruptcy court's in rem jurisdiction and did not implicate state sovereign immunity)). The bankruptcy court explained that “[l]ien stripping is nothing more than a determination of the rights in a debtor's res, in exactly the same way as the discharge of student loan debt in Hood and the avoidance of a preferential transfer in Katz.” (ECF No. 3-6 at 20). The bankruptcy court characterized the assessment and modification of liens against estate assets as “the ...


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