59 F. 3d 630 - Merchants Grain Incorporated Mahern

Joseph H. Yeager, Jr., James M. Carr, Wendy W. Ponader (argued), Baker & Daniels, Indianapolis, IN, for Edmund M. Mahern.

William B. Logan, Jr. (argued), Kenneth M. Richards, Luper, Wolinetz, Sheriff & Neidenthal, Columbus, OH, Cheryl Minsterman, Ohio Dept. of Agriculture, Reynoldsburg, OH, for Ohio Agricultural Commodity Depositors Fund, Ohio Commodity Advisory Com'n.

James M. Carr, Baker & Daniels, Indianapolis, IN, for Merchants Grain, Inc.

Before BAUER and MANION, Circuit Judges, and GRANT, District Judge.*

GRANT, District Judge.

Edmund Mahern, as Trustee for Merchants Grain, Inc. (hereinafter "MGI"), initiated an adversary proceeding in the bankruptcy court against the defendants, the Ohio Agricultural Commodity Depositors Fund and the Ohio Commodity Advisory Commission, seeking to recover alleged preferential transfers made for the benefit of the Fund in the 90 days preceding the filing of MGI's bankruptcy petition under 11 U.S.C. Secs. 547 and 550. The defendants asserted an Eleventh Amendment defense, and the bankruptcy court dismissed the proceeding. The district court affirmed, and this appeal followed. For the following reasons, we now REVERSE and REMAND.

I. Factual Background

The Ohio Agricultural Commodity Depositors Fund was created by the Ohio legislature to indemnify grain depositors (primarily farmers) who lose money due to the insolvency of commodity handlers licensed by the State of Ohio. The money in the Fund comes from a per-bushel fee paid by the depositors to licensed commodity handlers, who in turn remit the money to the Fund. Pursuant to statute, the Fund is a part of the state treasury, and is administered by the Director of the Department of Agriculture. The Ohio Commodity Advisory Commission was established to aid the Director in his duties with respect to the Fund.

During 1990, MGI operated grain elevators and held commodity handlers licenses in Ohio and several other states. In the fall of 1990, MGI purchased large quantities of grain and other commodities at all of its facilities, including its elevator in Columbus, Ohio. MGI bought much of this grain under deferred pricing contracts, taking title to the grain without paying for it or immediately setting a price. The farmers became unsecured creditors of MGI for the purchase price of the grain, with the right to set that price and collect their money weeks or months later.

On November 8, 1990, the Ohio Department of Agriculture, fearing that MGI was insolvent, conditionally suspended its license. The Department directed MGI to liquidate all grain stored at its Columbus, Ohio facility to cover MGI's obligations to Ohio farmers under its deferred payment contracts.

As a result of the Department's intervention, Ohio farmers were paid over $3 million on antecedent debts within the 90 days preceding MGI's Chapter 11 petition, money which otherwise would have been paid out of the Fund. Although virtually all Ohio "delayed pricing" depositors were paid as a result of this action, over 700 farmers in three other states, including Indiana, were left with unpaid claims exceeding $19 million.

MGI filed its Chapter 11 petition in bankruptcy on May 9, 1991, and Edmund Mahern was appointed trustee on March 24, 1992. On March 12, 1992, Mr. Mahern initiated an adversary proceeding under 11 U.S.C. Secs. 547(b) and 550(a)(1) to recover the preferential transfers made for the benefit of the Fund to Ohio farmers in an amount exceeding $2.7 million. The defendants filed a motion to dismiss, contending that they were immune from suit for monetary damages under the Eleventh Amendment. The bankruptcy court agreed and granted the defendants' motion.

II. The Eleventh Amendment

A. The Defendants' Relationship to the State

At the time oral arguments were heard, the sole issue on appeal was whether the Fund and the Commission were "the State of Ohio" for Eleventh Amendment purposes.

The Trustee contends that the key factor in determining whether a state-created entity is "the State" for Eleventh Amendment purposes has always been the source of funds from which its debts and judgments are paid. He maintains that where, as here, the source of funding does not come from the general revenues of the State, the entity is not an "arm of the State" and, therefore, is not immune from suit.

The bankruptcy court concluded, however, that the real party in interest in this case was clearly the State of Ohio, and that the source of funds from which the recovery would come was, therefore, irrelevant. Paschal v. Jackson, 936 F.2d 940, 944 (7th Cir.1991), cert. denied, 502 U.S. 1081, 112 S.Ct. 992, 117 L.Ed.2d 152 (1992). We agree.

Where a state-created entity gets the money to pay its debts, including any judgments which may be entered against it, is relevant to an Eleventh Amendment inquiry if the nature of the entity in question is unclear. See Hess v. Port Authority Trans-Hudson Corp., --- U.S. ----, ---- - ----, 115 S.Ct. 394, 402-406, 130 L.Ed.2d 245 (1994); Mercer v. Magnant, 40 F.3d 893, 898-99 (7th Cir.1994); Paschal, 936 F.2d at 944. There can be no doubt in the present case, however, that the State of Ohio is the real party in interest.

Under Ohio law, the Fund is a part of the state treasury, O.S.C. Sec. 926.16(A), and is administered by the Director of the Ohio Department of Agriculture (a state official acting in his official capacity and compensated by the State). O.S.C. Sec. 926.16(D); Emerson v. Seville Elevator Co., 38 Ohio App.3d 55, 526 N.E.2d 95, 95 (1987). All claims for indemnification from the Fund are filed with the Director, who assesses the validity of the claim and provides for payment. O.S.C. Secs. 926.18(A) and (C). Pursuant to Sec. 926.18(D), "all disbursements from the [F]und shall be paid by the treasurer of state pursuant to vouchers authorized by the Director." Commission members are appointed by the Director of Agriculture, and serve only in an advisory capacity. O.S.C. Sec. 926.32(A). The Director designates who serves as chairman of the Commission, and may, after notice and public hearing, remove any member for neglect of duty or malfeasance in office. O.S.C. Sec. 926.32(B). The Director provides the meeting space, assistance, services, and data necessary to enable the Commission to carry out its functions. O.S.C. Sec. 926.32(G). The Director also designates "an official or employee of the department of agriculture to act as the executive secretary of the commission." O.S.C. Sec. 926.32(I). All costs of the Commission, including all of the expenses of its members and consultants, are paid from the commodity handler regulatory program fund created in section 926.19 pursuant to itemized vouchers which must be approved by the Director. O.S.C. Sec. 926.32(H). O.S.C. Sec. 926.19(C) expressly provides that: "If at any time the moneys deposited in the [regulatory program] fund ... are not sufficient to pay the examination and administrative costs of this chapter, the director shall request an appropriation from the general revenue fund to pay those costs." (Emphasis added).

The relationship between the defendants and the State of Ohio is further clarified in Sec. 926.33(B), which provides:

This chapter is enacted for the benefit of the state, and neither the state, its departments, agencies, or commissions, or its employees and officials either elected or appointed, shall be held liable for any injuries to third parties, for the exercise of their authority, or for the use of their discretion on the matters to which this chapter relates.

Section 926.33 thus evidences a clear intent to bring the Fund and the Commission within the protections accorded the State under the doctrine of sovereign immunity. As the bankruptcy court aptly noted: "The state treasurer and the Director, sued in his or her official capacity, and the Department of Agriculture would no doubt be considered 'the state' for Eleventh Amendment purposes (which is probably why none were named as a party)." See Mercer, 40 F.3d at 899 ("a state official sued in an official capacity ... is treated as a 'state' "); Allinder v. State of Ohio, 808 F.2d 1180, 1184 (6th Cir.1987) (Ohio Department of Agriculture and Director of Department, when sued in his official capacity, are the "State" for purposes of asserting Eleventh Amendment immunity).

Given the plain language of the Ohio statutes, any judgment rendered against the Fund or the Commission would effectively be a judgment against the State of Ohio. "Where the state gets the money to pay [that] judgment ... is irrelevant ..." Mercer, 40 F.3d at 899 (citing Alabama v. Pugh, 438 U.S. 781, 98 S.Ct. 3057, 57 L.Ed.2d 1114 (1978)); Paschal, 936 F.2d at 944.

B. Abrogation of Immunity Under 11 U.S.C. Sec. 106

"[A]bsent waiver by the State or valid congressional override," the Eleventh Amendment would have barred the Trustee's action against the Fund and the Commission, Kentucky v. Graham, 473 U.S. 159, 169, 105 S.Ct. 3099, 3107, 87 L.Ed.2d 114 (1985). The Bankruptcy Code, however, contained a waiver provision at the time the defendants' filed their motion. 11 U.S.C. Sec. 106 provided that:

(a) A governmental unit is deemed to have waived sovereign immunity with respect to any claim against such governmental unit that is property of the estate and that arose out of the same transaction or occurrence out of which such governmental unit's claim arose.

(b) There shall be offset against an allowed claim or interest of a governmental unit any claim against such governmental unit that is property of the estate.

(c) Except as provided in subsections (a) and (b) of this section and notwithstanding any assertion of sovereign immunity--

(1) a provision of this title that contains "creditor", "entity", or "governmental unit" applies to governmental units; and

(2) a determination by the court of an issue arising under such a provision binds governmental units.

While subsections (a) and (b) unequivocally provided for a waiver of immunity when the "governmental unit" had filed a proof of claim and thereby consented to being sued, United States v. Nordic Village, Inc., 503 U.S. 30, 34, 112 S.Ct. 1011, 1014-1015, 117 L.Ed.2d 181 (1992); Hoffman v. Connecticut Dept. of Income Maintenance, 492 U.S. 96, 101-102, 109 S.Ct. 2818, 2822-2823, 106 L.Ed.2d 76 (1989); In re Price, 42 F.3d 1068, 1070 (7th Cir.1994); In re Midway Airlines, Inc., 175 B.R. 239, 244 (Bankr.N.D.Ill.1994), there was no indication in the present case that the State of Ohio had ever filed a claim against the bankruptcy estate. Which left subsection (c) as the Trustee's only line of defense.

In In re McVey Trucking, 812 F.2d 311, 326-327 (7th Cir.), cert. denied, 484 U.S. 895, 108 S.Ct. 227, 98 L.Ed.2d 186 (1987), we held that Sec. 106(c) clearly applied to preference avoidance actions initiated against a governmental unit under Sec. 547(b), and unequivocally waived the government's right to assert sovereign immunity as a bar to the proceeding. When the issue came before the Supreme Court two years later, however, the Court took a different viewpoint, and held that Sec. 106(c) did not contain the express and unequivocal language required to effectively abrogate the Eleventh Amendment immunity of the States. Hoffman, 492 U.S. at 100-104, 109 S.Ct. at 2822-2824. See also Nordic Village, 503 U.S. at 33-37, 112 S.Ct. at 1014-1016.

Citing Nordic Village and Hoffman as controlling authority, the bankruptcy court held that, absent the State's consent, the Eleventh Amendment barred the Trustee's action to recover the preferential transfers. While that was a correct statement of the law at the time the bankruptcy court issued its decision, the law has since changed.

On October 22, 1994, a month after oral arguments had been completed in this case, the Bankruptcy Reform Act of 1994, Pub.L. No. 103-394, 108 Stat. 4106 (1994), was enacted. One of the key changes effected was the amendment of Sec. 106.

Pursuant to section 113 of the Reform Act, 11 U.S.C. Sec. 106(c) was amended and recodified as Sec. 106(a), and provides:

Waiver of sovereign immunity

(a) Notwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to the following:

(1) Sections 105, 106, 107, 108, 303, 346, 362, 363, 364, 365, 366, 502, 503, 506, 510, 522, 523, 524, 525, 542, 543, 544, 545, 546, 547, 548, 549, 550, 551, 552, 553, 722, 724, 726, 728, 744, 749, 764, 901, 922, 926, 928, 929, 944, 1107, 1141, 1142, 1143, 1146, 1201, 1203, 1205, 1206, 1227, 1231, 1301, 1303, 1305, and 1327 of this title....

(Emphasis added). 11 U.S.C. Sec. 106(a) (as amended Pub.L. 103-394, Title I, Sec. 113, Oct. 22, 1994, 108 Stat. 4117). The amendment was intended to effectively overrule Nordic Village and Hoffman, and to "clarify[ ] the original intent of Congress in enacting Section 106 of the Bankruptcy Code with regard to sovereign immunity." 140 Cong.Rec. H10752-01, H10772 and H10766. Congress accordingly provided that Sec. 113 was to be applied retroactively to bankruptcy cases which were "commenced before ... the date of the enactment". Pub.L. 103-394, Sec. 702(b)(2)(B) of the Reform Act (set out as a note under 11 U.S.C. Sec. 101).

The defendants do not dispute the fact that the abrogation language in Sec. 106(a) as amended is express and unequivocal, but rather contend that the abrogation provision is invalid because Congress has no authority under the Bankruptcy Clause, Art. I, Sec. 8, cl. 4, to abrogate the States' Eleventh Amendment immunity. According to the defendants, Congress can override the Eleventh Amendment only when it acts pursuant to Sec. 5 of the Fourteenth Amendment. Defendants contend, in the alternative, that even if Congress has the power, it cannot exercise it retroactively. We disagree.

That Congress can abrogate the States' Eleventh Amendment immunity when it acts pursuant to the plenary powers accorded it under Sec. 5 of the Fourteenth Amendment is not disputed. See Dellmuth v. Muth, 491 U.S. 223, 227, 109 S.Ct. 2397, 2400, 105 L.Ed.2d 181 (1989); Atascadero State Hospital v. Scanlon, 473 U.S. 234, 238, 105 S.Ct. 3142, 3145, 87 L.Ed.2d 171 (1985); Fitzpatrick v. Bitzer, 427 U.S. 445, 456, 96 S.Ct. 2666, 2671, 49 L.Ed.2d 614 (1976). The question before us is whether it may also do so under its Article I plenary powers. We held that it can in McVey Trucking, concluding that there was no constitutional basis for distinguishing between the plenary powers accorded Congress under the Fourteenth Amendment and those accorded under Article I. McVey Trucking, 812 F.2d at 316-323. Accord United States v. Union Gas Co., 832 F.2d 1343, 1352 (3d Cir.1987), aff'd, 491 U.S. 1, 109 S.Ct. 2273, 105 L.Ed.2d 1 (1989); County of Monroe v. Florida, 678 F.2d 1124 (2d Cir.1982), cert. denied, 459 U.S. 1104, 103 S.Ct. 726, 74 L.Ed.2d 951 (1983); Peel v. Florida Dept. of Transportation, 600 F.2d 1070, 1080-81 (5th Cir.1979); Mills Music, Inc. v. Arizona, 591 F.2d 1278 (9th Cir.1979). The Supreme Court reached the same conclusion in Pennsylvania v. Union Gas Co., 491 U.S. 1, 109 S.Ct. 2273, 105 L.Ed.2d 1 (1989).

Justice Brennan, who authored the plurality opinion in which Justices Marshall, Blackmun, and Stevens joined, concluded that:

Like the Fourteenth Amendment, the Commerce Clause with one hand gives power to Congress while, with the other, it takes power away from the States ... that is the meaning, in fact, of a "plenary" grant of authority, and the lower courts have rightly concluded that it makes no sense to conceive of Sec. 5 [of the Fourteenth Amendment] as somehow being an "ultraplenary" grant of authority. See, e.g., In re McVey Trucking, supra, at 316.

Union Gas, 491 U.S. at 16-17, 109 S.Ct. at 2283. Justice White cast the fifth and decisive vote, concluding that Congress did indeed have the authority under Article I to abrogate the States' Eleventh Amendment immunity. Union Gas, 491 U.S. at 57, 109 S.Ct. at 2296 (White, J. concurring).