Case Information
*1 Before DAVIS, JONES, and DENNIS, Circuit Judges.
EDITH H. JONES, Circuit Judge:
This case presents a straightforward employment and contract dispute mired in a procedural thicket. Our task is to untangle the thicket, although, unhappily, we cannot finally resolve the merits. We conclude, first, that the case was correctly removed by University President Low, a counterclaim defendant newly-joined on a “separate and independent claim” for purposes of 28 U.S.C. § 1441(c). Second, the court did not err in *2 shielding the counterclaim defendants from Walker’s § 1983 claims on qualified immunity grounds. Third, Walker’s debt to the state for fees he owed before he filed for bankruptcy relief is dischargeable post- Seminole , although whether it is nondischargeable under 11 U.S.C. § 523(a)(6) is a question left to be addressed on remand.
I. Background
Dr. Walker was a heart surgeon and a tenured faculty member at the University оf Texas Health Science Center at Houston (“UTHSC”). As a condition of his employment, Walker joined the Medical Services, Research, and Development Plan (“MSRDP”) by executing the standard MSRDP contract in 1980. The MSRDP contract required Walker to remit all professional fees he earned to the University of Texas (“University”). The MSRDP’s by-laws define professional fees in part as fees for all court appearances, depositions, or legal consultations. During the period of his employment at UTHSC, Walker received substantial fees for court appearances, depositions, and legal consultations, but he never remitted any of them to the University. When Walker’s noncompliance with the MSRDP came to the attention of the University, it investigated Walker’s and other faculty members’ рersonal retention of professional fees. Walker and the other faculty members denied that they retained fees in violation of the MSRDP. After attempts to settle the resulting contractual *3 disagreement failed, Walker was terminated by the Board of Regents of the University of Texas System in August 1994.
Prior to his termination, Walker filed for bankruptcy relief under Chapter 7 on September 1, 1992. His debts were discharged by the bankruptcy court on January 19, 1993. The University was not identified as a creditor in Walker’s no-asset bankruptcy filing, and it did not file a proof of claim.
In February 1995, the State of Texas, by and through the Board of Regents of the University of Texas System and UTHSC (“State”), filed suit against Walker in state court. The State alleged conversion and breach of contract and sought an accounting of the fees retаined by Walker. Walker counterclaimed against the State, made additional claims against the Regents in their individual capacities (“Regents”), and impleaded as an additional defendant UTHSC’s president, M. David Low, in both his official and individual capacities. Walker alleged state tort and breach of contract claims, as well as substantive due process and equal protection claims pursuant to 42 U.S.C. § 1983, all of which were related to his allegedly improper termination.
The counter-defendants removed this case to federal court pursuant to 28 U.S.C. § 1441(c). The State and Walker subsequently filed motions for summary judgment. The district court granted partial summary judgment to the State, the Regents, and Low, dismissing Walker’s federal § 1983 claims with prejudice based on sovereign and qualified immunity. The district court аlso granted *4 partial summary judgment to Walker, holding that the fees Walker retained prior to his filing bankruptcy on September 1, 1992, were discharged. The district court remanded to state court Walker’s state-law claims against the State, the Regents, and Low, as well as the State’s claims against Walker for fees earned after September 1, 1992.
Walker now appeals the district court’s grant of summary judgment to the Regents and Low based on qualified immunity. The State appeals the district court’s grant of summary judgment to Walker based on discharge in bankruptcy for Walker’s fees earned pre-bankruptcy.
II. Propriety of Removal
As an initial matter, Walker argues that the district
court lacked jurisdiction to hear this case because removal by the
Regents and Low under 28 U.S.C. § 1441(c) was improper. We review
a district court’s determination of the propriety of removal de
novo. See Vasquez v. Alto Bonito Gravel Plant Corp. ,
A. Carl Heck Engineers
Although there is a split among the circuits on the
point, this court has held that a third-party indemnity defendant
may remove a case to federal court pursuant to § 1441(c). See Carl
Heck Engineers v. Lafourch Parish Police Jury ,
Here, however, the consequence of permitting removal satisfied Carl Heck without breaching the well-pleaded complaint rule. We shall assume that the Regents cannot remove under § 1441(c) when joined in their individual capacities as counter- defendants, because (in their official capacities) they were the plaintiffs by and through whom the state sued Walker. Low, on the [1] For a discussion of the circuit split, see 14A C HARLES A LAN W RIGHT ET AL ., F EDERAL P RACTICE AND P ROCEDURE § 3724, at 388-393 (1985 & Supp. 1997). See generally Michael C. Massengale, Note, Riotous Uncertainty: A Quarrel with the “Commentators’ Rule” Against Section 1441(c) Removal for Counterclaim, Cross-Claim, and Third- Party Defendants, 75 T EX . L. R EV . 659 (1997) (citing relevant cases with analysis). The well-pleaded complaint rule bases removal jurisdiction
on the existence of a claim lying within federal jurisdiction on the face of a plaintiff’s well-pleaded complaint. There has never been a suggestion that a defendant could, by asserting an artful counterclaim, render a case removable in violation of the well- pleaded complaint rule. See, e.g., Rivet v. Regions Bank , 118 S. Ct. 921 (1998).
other hand, was not a party in the case in any way before Walker sued him for § 1983 violations. If the rationale of Carl Heck correctly affords third-party defendants the opportunity of § 1441(c) removal to federal court, to which they could have removed when sued alone, then that rationale protects Low.
B. Separate & Independent
Section 1441(c) authorizes removal to federal court of cases in which a “separate and independent” federal claim or cause of action is joined with a nonremovable claim or cause of action. [3] A federal claim is separate and independent if it involves an obligation distinct from the nonremovable claims in the case. See American Fire & Cas. Co. v. Finn , 71 S. Ct. 534, 540 (1951) (“[W]here there is a single wrong to plaintiff, for which relief is sought, arising from an interlocked series of transactions, there is no separate and independent claim or cause of action under § 1441(c).”); see also 14A C HARLES A LAN W RIGHT ET AL ., F EDERAL P RACTICE AND P ROCEDURE § 3724, at 364-66 (1985 & Supp. 1997).
Section 1441(c) states in full:
Whenever a separate and independent claim or cause of action within the jurisdiction conferred by section 1331 of this title is joined with one or more otherwise non-removable claims or causes of action, the entire case may be removed and the district court may determine all issues therein, or, in its discretion, may remand all matters in which State law predominates.
28 U.S.C. § 1441(c).
Walker contends that his claims against the Regents and Low were not “separate and independent” from his counterclaims against the State and, therefore, the district court lacked subject matter jurisdiction to hear this case. He is mistaken. Finn states that there is no “separate and independent” claim when the plaintiff
suffered but one actionable wrong and was entitled to but one recovery, whether his injury was due to one or the other of several distinct acts of alleged negligenсe or to a combination of some or all of them. In either view, there would be but a single wrongful invasion of a single primary right of the plaintiff, namely, the right of bodily safety, whether the acts constituting such invasion were one or many, simple or complex.
Finn ,
Inc. ,
In asserting that his claims against the State are not separate and independent from his claims against the Regents and Low, Walker is barking up the wrong tree. The proper comparison is between the State’s claims against Walker and Walker’s federal claims against the Regents and Low. The State seeks redress for Walker’s alleged failure to remit his professional fees to the University. In contrast, Walker seeks redress from the Regents and Low for allegedly improperly terminating him. The State’s claims against Walker and Walker’s claims against the Regents and Low thus involve two distinct wrongs. Whether Walker was improperly terminated is a distinct wrong not dependent on whether Walker improperly retained professional fees in violation of the MSRDP.
Second, proof of Walker’s § 1983 claims against the Regents and Low would not involve substantially the same facts as proof of the State’s claims against Walker. If a substantive due process claim is cognizable at all, Walker must show that he had and was arbitrarily deprived of a property right in his employment. See Regents of Univ. of Mich. v. Ewing , 106 S. Ct. 507, 511-12 (1985) (assuming without deciding that a substantive due process claim exists for an adverse decision of an academic institution). Regarding his equal protection claim, Walker must show that he was treated differently during his termination proceedings than were other similarly situated doctors, and that there was no rational *9 basis for this diffеrence in treatment. See United States v. Abou- Kassem , 78 F.3d 161, 165 (5th Cir. 1996). In contrast, for the State to succeed on its state-law claims against Walker, it must initially show that Walker breached his MSRDP contract, and its claims would not require proof of substantially the same facts as will be relevant to Walker’s § 1983 claims against the Regents and Low.
As a consequence, the State’s claims against Walker are separate and independent from Walker’s federal claims against the Regents and Low, and removal under §1441(c) was procedurally proper. [5]
III. Qualified Immunity
The district court granted partial judgment as a matter
of law on the ground of qualified immunity to the Regents and Low,
in their individual capacities, with respect to Walker’s § 1983
claims. A grant of judgment as a matter of law is reviewed de
novo, examining the evidence in thе light most favorable to the
nonmovant. See Channer v. Hall ,
Qualified immunity shields a public official exercising
discretionary functions from liability for civil damages unless the
public official’s conduct violated clearly established
constitutional or statutory rights of whiсh an objectively
reasonable person should have known. See Harlow v. Fitzgerald , 102
S. Ct. 2727, 2738 (1982); Coleman v. Houston Indep. Sch. Dist. , 113
F.3d 528, 532-33 (5th Cir. 1997). This court reviews a claim of
qualified immunity under a two-part analysis. First, it must be
determined whether the plaintiff alleged the violation of a clearly
established constitutional right. See Coleman ,
The “touchstone” of the qualified immunity analysis is
the “objective legal reasonableness” of the public official’s
conduct. Anderson v. Creighton ,
A. Substantive Due Process
This court has said, “To succeed with a claim based on
substantive due process in the public employment context, the
plaintiff must show two things: (1) that he had a property
interest/right in his employment, and (2) that the public
employer’s termination of that interest was arbitrary or
capricious.” Moulton v. City of Beaumont ,
Walker essentially argues that when the Regents
terminated him at the instigation of Low, rejecting a faculty
tribunal’s contrary recommendation, the Regents denied him a proper
hearing, acted partially, and failed to fully consider his
arguments and defenses regarding his retention of professional
fees. Both the Supreme Court and this court have held in related
contexts that substantive due process requires only that public
officials exercise professional judgment, in a nonarbitrary and
noncapricious manner, when depriving an individual of a protected
*12
property interest. See Ewing ,
Walker did not remit to the University the substantial
outside professional fees he earned while a UTHSC professor. The
University alleged that his actions violated the MSRDP, and Walker
сontended that they did not or, even if they did, his debt was
discharged in bankruptcy. Walker was afforded a hearing before the
Regents regarding this dispute. They considered his side of the
story and rejected it. Having reviewed the record, we cannot
conclude that the Regents’ determinations -- that Walker retained
professional fees that belonged to the University and moreover,
that he refused to cooperate in resolving the matter -- so lacked
a basis in fact that their decision to terminate him was arbitrary,
capricious, or taken without professional judgment.
[6]
At best, one
might argue that reasonable minds could disagree on the propriety
of Walker’s termination, and that is insufficient to defeat a
public official’s qualified immunity. See Malley ,
Walker’s firing. The district court properly granted qualified immunity.
B. Equal Protection
“The Equal Protection Clause ‘is essentially a direction
that all persons similarly situated should be treated alike.’”
Brennan v. Stewart ,
Walker argues that the Regents and Low treated him differently from other similarly situated UTHSC faculty members who failed to remit their professional fees to the University. He is incorrect. Walker’s case is factually distinct because he defied the University and refused to cooperate in resolving the dispute over the MSRDP. The other “similarly situated” faculty members to whom Walker refers all cooperated with the University, and most eventually reached settlement agreements regarding their improperly retained professional fees. Because any difference in treatment between Walker and other faculty members was bаsed on distinctions in their factual situations, the Regents and Low had a rational basis for their treatment of Walker. The counter-defendants are entitled to qualified immunity from Walker’s equal protection claim.
IV. Discharge in Bankruptcy
The State contends that the district court erred in holding that Walker’s debt to the University for professional fees earned prior to September 1, 1992, was discharged. The State makes two arguments: (1) the Eleventh Amendment barred the bankruptcy court from discharging Walker’s debt to the State; and (2) Walker’s debt was nondischargeable under 11 U.S.C. § 523(a)(6) because it was a “willful and malicious injury” against the State. We hold, first, that the Eleventh Amendment did not preclude the discharge of Walker’s debt to the State, and second, that there exists a fact issue regarding whether Walker’s debt was nondischargeable under § 523(a)(6). [7]
A. The Eleventh Amendment and Bankruptcy Discharge
Walker’s bankruptcy filing did not list the State as a
creditor, and the State did not file a bankruptcy proof of claim.
In fact, the State did not participate in any manner in Walker’s
The State raised the Eleventh Amendment defense for the
first time on appeal to this court, asserting that “it is . . . not
clear that the bankruptcy court had jurisdiction to discharge an
obligation to [UTHSC].” Specifically, the State (1) mentions a
potential Eleventh Amendment problem without substantive discussion
in a footnote of its reply brief, (2) filed a Fifth Circuit Rule
28(j) letter prior to oral argument bringing to this court’s
attention a somewhat relevant case, and (3) discussed the Eleventh
Amendment at oral argument. While the State has been less than
helpful in supplying any case law or arguments to support its
contention that the Eleventh Amendment barred the discharge of
Walker’s debt, it nonetheless has not waived the issue. Because of
the strong federalism concerns behind the Eleventh Amendment, we
may properly consider the issue even at this stage of the
proceeding. See Edelman v. Jordan ,
bankruptcy case. Subsequently, in this entirely separate proceeding, the State sued Walker for conversion and breach of contract. Walker asserted the affirmative defense that his debt to the State was discharged in bankruptcy. The district court agreed with Walker, insofar as his debt to the State consists of professional fees earned prior to Walker’s bankruptcy.
Consequently, the precise issue here is whether the Eleventh Amendment prevents the discharge of a debt owed to а state in a bankruptcy proceeding in which the state does not participate in any fashion. [8] In deciding that it does not, we mean only that the discharge may be raised as a defense to the state’s suit on the debt. [9]
[8]
Prior to Seminole Tribe v. Florida ,
barred the federal district court from adjudicating Walker’s defense of discharge in this case. Once the case was removed, the court had jurisdiction over the State’s claims against Walker, and
The Eleventh Amendment jurisdictionally bars a suit in
federal сourt by a private individual against an unconsenting
state—absent waiver or congressional abrogation of sovereign
immunity pursuant to section five of the Fourteenth
Amendment—regardless of the relief sought by the plaintiff. See
U.S. C ONST . amend. XI; Seminole Tribe v. Florida ,
Cases that have considered Seminole ’s impact on bankruptcy practice have generally concerned adversary proceedings brought by the trustee or a party in interest against the state in his assertion of the discharge defense was not equivalent to seeking affirmative relief, such as an injunction against further collection efforts under 11 U.S.C. § 524. We have no occasion to consider the road not taken by Walker. It is also well settled that suits against certain state
agents or instrumentalities fall within the Eleventh Amendment’s
compass. See Regents of Univ. of Cal. v. Doe ,
federal court to recover money damages.
[11]
Just as Seminole renders
11 U.S.C. § 106(a) unconstitutional, it perforce deprives federal
courts of jurisdiction over these unconsented-to suits against the
state. The extent to which filing a proof of claim constitutes
waiver of this immunity is uncertain. The Fourth Circuit has held
that even where the state filed a proof of claim for one type of
past due taxes, it did not waive Eleventh Amendment immunity
against an adversary proceeding in bankruptcy court to determine a
different type of tax. See In re Creative Goldsmiths, Inc., 119
Three recent lower court cases are representative. In Kish
v. Verniero ,
In In re Martinez ,
F.3d 1140, 1149 (4th Cir. 1997). Since UTHSC never filed a proof of claim, however, waiver is irrelevant to the present analysis. The pressing issue here is whether a bankruptcy case, in and of itself, constitutes an unconsented suit against a creditor state, so that the debtor’s discharge, which “operates as an injunction” against collection of the debt, 11 U.S.C. § 524(a)(2), is ineffectual against the state under the Eleventh Amendment.
The argument for an Eleventh Amendment bar would assert
that although the State was not a named defendant in Walker’s
bankruptcy case, it was an indirect party because its legal rights
were adjudicated and altered (albeit without its knowledge) when
the bankruptcy court discharged Walker’s debt. Cf. Regents of
Univ. of Cal. ,
Put another way, discharging a debt owed to the state
either restrains the state from acting by enjoining it from
collecting the debt, or compels the state to act by forcing it to
file a proof of claim in bankruptcy court in order to collect the
debt.
[12]
The state is thus presented with a Hobson’s choice: either
subject yourself to federal court jurisdiction or take nothing.
[13]
If the state acts, it is potentially forced to waive its sovereign
immunity by filing a proof of claim in the bankruptcy court.
[14]
If
the state does nothing, it is permanently barred from collecting
its debt and from recovеring a pro rata share of the debtor’s
[12]
The Supreme Court has held that “[t]he general rule is that
a suit is against the sovereign if ‘the judgment would expend
itself on the public treasury or domain, or interfere with the
public administration,’ or if the effect of the judgment would be
‘to restrain the Government from acting, or to compel it to act.’”
Pennhurst State Sch. & Hosp. v. Halderman ,
its Eleventh Amendment immunity to some extent when it files a
proof of claim in a bankruptсy proceeding. See, e.g. , In re
Creative Goldsmiths,
Resting as it does on extrapolations from Supreme Court
cases, this argument is not specious, but it is ultimately
unpersuasive on the facts before us. Its key assumption is the
equation of a bankruptcy case with a suit against the state, but
this assumption is flawed. In a bankruptcy case, in its simplest
terms, a debtor turns over his assets, which constitute the estate,
for liquidation by a trustee for the benefit of creditors according
to their statutory priorities. Bankruptcy law modifies the state’s
collection rights with respect to its claims against the debtor,
but it also affords the state an opportunity to share in the
collective recovery. Bankruptcy operates by virtue of the
Supremacy Clause and without forcing the state to submit to suit in
federal court. See Maryland v. Antonelli Creditors’ Liquidating
Trust ,
the state or other creditors, but rather from jurisdiction over debtors and their estates.”).
From this standpoint, Walker’s entitlement to assert his discharge against the state’s claims invoked no Eleventh Amendment consequences. The state never was hauled into federal court against its will in the bankruptcy. In fact, because the state was never notified of the bankruptcy and never had the opportunity to file a timely claim, bankruptcy law should ordinarily expressly protect the state’s clаim from being discharged. See 11 U.S.C. § 523(a)(3)(B). [16] That is just the provision on which the state predicates its request for relief against the discharge defense here.
11 U.S.C. § 523(a)(3)(B) states that a debtor is not discharged from certain claims, including those for willful and malicious injury, if the creditor was not listed or scheduled by the debtor in time to permit timely filing of a proof of claim and timely request of a determination of dischargeability. Walker, mysteriously, filed a “no-asset” case, in which creditors are informed that they need not file proofs of claim because such filings would be futile. But his failure to notify the University also deprived it of the opportunity timely to pursue a nondischargeability action.
Another peculiarity about this case might have posed an Eleventh Amendment problem but has not been raised. The Bankruptcy Code provides that federal courts have exclusive jurisdiction of four types of nondischargeability claims, including the willful and malicious injury exception, § 525(a)(6), on which the state relies. See 11 U.S.C. § 523(c). This provision ordinarily requires a creditor to proceed only in federal court to obtain a nondischargeability ruling on any of those four grounds, whether or not the creditor received timely notice of the bankruptcy case. See 11 U.S.C. § 523(a)(3)(B). The state did not initially pursue this course, however, and does not challenge the current procedural posture of the case. Equally important, Dr. Walker has not challenged the state’s right to litigate nondischargeability under § 523(a)(6) under the circumstances before us.
Additional support for our view that the granting of a
bankruptcy discharge does nоt offend the Eleventh Amendment --
although commencement of certain adversary proceedings directly
against a state that has not filed a proof of claim in a bankruptcy
case would do so -- derives from hoary Supreme Court authority.
The Court has long held that a federal bankruptcy court decision
can affect the lien interests of the states. See Gardner v. New
Jersey ,
It is traditional bankruptcy law that he who invokes the aid of the bankruptcy court by offering a proof of claim and demanding its allowance must abide the consequences of that procedure. If the claimant is a State, the procedure of proof and allowance is not transmitted into a suit against the State because the court entertains objections to the claim. The State is seeking something from the debtor. No judgment is sought against the State. The whole process of proof, allowance, and distribution is, shortly speaking, an adjudication of interests claimed in a res. It is none the less such because the claim is rejected in toto, reduced in part, given a priority inferior to that claimed, or satisfied in some way other than payment in cash. When the State becomes the actor and files a claim against the fund it waives any immunity which it otherwise might have had respecting the adjudication of the claim.
The extent of the constitutional authority of the
bankruptcy court in this respect was passed upon in
People of State of New York v. Irving Trust Co ., 288 U.S.
329,
Gardner , 67 S. Ct. at 472 (internal citations omitted). Until these cases are overruled, Seminole does not and should not impair their force.
This is а roundabout way to concluding that unless Walker’s debt was nondischargeable under § 523(a)(6), his discharge could be raised against the state’s lawsuit to collect a prepetition debt.
B. The Willful and Malicious Injury Exception to Discharge The final issue is the applicability of § 523(a)(6) to Walker’s acts in breaching his contract and failing to account to UTHSC for his outside earnings.
Section 523(a)(6) bars the discharge of a debt “for
willful and malicious injury by the debtor to another entity or to
the property of another entity.” 11 U.S.C. § 523(a)(6). A
“willful and malicious injury” results from an act done with the
actual intent to cause injury, not from an act done intentionally
that causes injury. See Kawaauhau v. Geiger ,
Neither a claim for breach of contract nor the tort of
conversion necessarily involves an intentional injury. See
Kawaauhau ,
Walker admits that he acted intentionally when he kept the professional fees he earned while a UTHSC faculty member. Consequently, the issue before this court is whether it is appropriate to grant Walker judgment as a matter of law that his pre-bankruptcy debt to the University is discharged and to conclude that § 523(a)(6) is inapplicable because the injury suffered by the State allegedly was not intended by Walker ( i.e. , was not “willful and malicious”).
The district court found that Walker’s retention of his
professional fees was an “innocent and technical” act rather than
a “willful and malicious injury.” See Davis v. Aetna Acceptance
Co. , 55 S. Ct. 151, 153 (1934) (Cardozo, J.) (“[A] willful and
malicious injury does not follow as of course from every act of
conversion, without reference to the circumstances. There may be
a conversion which is innocent or technical, an unauthorized
assumption of dominion without willfulness or malice.”); see also
Kawaauhau ,
Walker signed his MSRDP contract in 1980. The MSRDP contract expressly states that all fees received by a faculty member for “professional services” are to be assigned to the University. The MSRDP’s by-laws expressly state that “professional fees” include fees for all “court appearances, depositions, or legal consultations.” The MSRDP contract and by- law language is crystal clear, and all MSRDP participants were sent a memorandum in November 1990 reminding them that “fees for all court appearances, depositions and legal consultations (including expert witness fees) shall be deposited in the departmental MSRDP *26 account.” Walker claims that he did not receive this memorandum and that he did not read the MSRDP by-laws until 1993, months after his September 1992 bankruptcy filing. He also testified that the general belief among UTHSC faculty members was that professional fees earned for legal consulting need not be remitted to the University. The UTHSC faculty tribunal that reviewed Walker’s case as part of UTHSC’s grievance procedures found that there was a lack of undеrstanding among faculty members about the MSRDP’s requirements. Based upon these conflicting facts alone, what Walker knew regarding his obligations under the MSRDP and when he knew it are disputed. If a factfinder were to decide that Walker knew of his obligations under the MSRDP contract and its by-laws, either at the time he signed the contract or received the November 1990 memorandum, then it might also find that Walker knowingly retained his professional fees in violation of the MSRDP, an act which he knew would necessarily cause the University’s injury. This, in turn, could result in a finding of “willful and malicious injury.” Such factual issues must be submitted to a trier of fact in order to determine if Walker’s debt was nondischargeable under § 523(a)(6).
V. Conclusion
For the foregoing reasons, we affirm the district court’s judgment upholding the Regents’ and Low’s qualified immunity, and we reverse the district court’s judgment regarding Walker’s discharge in bankruptcy.
AFFIRMED IN PART, REVERSED IN PART , and REMANDED .