562 B.R. 632
Bankr. E.D. Va.2016Background
- Patriot Coal and affiliates filed chapter 11 (New York → Missouri); Missouri court approved a Settlement Agreement with the West Virginia State Tax Department resolving claims against fifteen entities and retaining Missouri court jurisdiction over disputes.
- Debtors later filed a new chapter 11 in the Eastern District of Virginia; assets vested in a Liquidating Trust and Trustee filed this adversary Complaint seeking turnover of at least $5,082,011.72 in tax refunds (severance and franchise taxes) allegedly owed to Patriot, Panther, Catenary, and Coyote.
- Trustee invoked 11 U.S.C. § 541 (estate property) and § 542 (turnover), and alternatively § 505(a)(2)(B) to have the court determine refund liability after more than 120 days passed on refund requests.
- West Virginia Tax Department moved to dismiss on sovereign-immunity grounds (Eleventh Amendment), and alternatively asked the court to abstain under 28 U.S.C. § 1334(c)(1); Tax Dept. also argued statutory/state-law defects to refund claims and asserted setoffs.
- Court examined whether Katz’s ratification-waiver of state sovereign immunity in bankruptcy permits this § 542 turnover, but found the Complaint failed to allege undisputed estate ownership of the refunds (i.e., a matured, non‑controversial res) and instead sought determination of entitlement under § 505 — which would amount to a suit against the State.
- Court dismissed the Complaint without prejudice for failure to state a § 542 turnover claim (premature; not shown undisputed property of the estate), noting possible waiver issues from Tax Department’s prior proofs of claim in the Missouri cases and suggesting relief could be sought in the Missouri Bankruptcy Court.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Eleventh Amendment bars Trustee’s turnover suit | Katz means states waived immunity by ratifying Constitution; turnover under §542 is in rem and permissible | §106(a) abrogation is invalid in Fourth Circuit (Schlossberg); NVR treats such actions as suits against the state when they impact treasury | Dismissed: sovereign immunity remains a risk; but court dismissed on §542 pleading failure rather than resolved constitutional abrogation question |
| Whether §542 turnover is appropriate here (is property undisputed/matured?) | Trustee: refunds are estate property; requests were made and Tax Dept. refused — turnover appropriate | Tax Dept.: refunds are disputed, subject to setoff/state-law prerequisites and appeals — not undisputed property | Held: Trustee failed to allege an undisputed, matured right to the refunds; §542 relief premature and improper here |
| Whether Katz’s ratification waiver covers this action (i.e., is determination ancillary to in rem jurisdiction) | Trustee: Katz permits in rem turnover to equalize creditors and distribute estate assets | Tax Dept.: Katz is limited; resolving tax liability under §505(a) does not necessarily further uniform creditor treatment here and would intrude on state treasury | Held: Court applied Katz principles but found §505 claims not shown to fit Katz’s limited waiver; §542 turnover (as pleaded) was not within Katz’s protective scope |
| Whether prior conduct (proofs of claim/settlement in Missouri cases) waived Tax Dept. immunity now | Trustee implicitly relies on prior settlement and Tax Dept. concessions to show entitlement | Tax Dept. argued actions do not constitute waiver in this proceeding; prior setoffs and pending appeals complicate matters | Held: Court noted Tax Dept. likely waived immunity in the Prior Cases by filing claims and litigating, but that waiver issue is better addressed in the Missouri Bankruptcy Court; dismissal without prejudice allowed pursuit there |
Key Cases Cited
- Seminole Tribe v. Florida, 517 U.S. 44 (1996) (Congress may not abrogate state sovereign immunity under Article I powers)
- Schlossberg v. Maryland (In re Creative Goldsmiths of Washington, D.C.), 119 F.3d 1140 (4th Cir. 1997) (held §106(a) abrogation unconstitutional in Fourth Circuit)
- NVR Homes, Inc. v. Clerks of the Circuit Courts (In re NVR, LP), 189 F.3d 442 (4th Cir. 1999) (articulated tests for when a bankruptcy action constitutes a "suit" against a state for Eleventh Amendment purposes)
- Cent. Va. Cmty. Coll. v. Katz, 546 U.S. 356 (2006) (held states waived certain sovereign-immunity defenses by ratifying Constitution as to bankruptcy in rem jurisdiction; waiver is limited)
- Edelman v. Jordan, 415 U.S. 651 (1974) (monies required to be paid from state treasury implicate Eleventh Amendment and are barred absent consent)
- United States v. Nordic Village, Inc., 503 U.S. 30 (1992) (discusses in rem jurisdiction where state is not in possession of property and limits on suits against the state)