In re CJ Rogers, Inc., 91-20388-AJS

212 B.R. 265 (1997)

In re C.J. ROGERS, INC., Debtor William H. GRABSCHEID, plaintiff-Appellant, v. MICHIGAN EMPLOYMENT SECURITY COMMISSION, n/k/a Michigan Employment Security Agency, Defendant-Appellee.

No. 91-20388-AJS, Adversary No. 94-3188, Civil No. 95-CV-72187-DT.

United States District Court, E.D. Michigan, Southern Division.

August 15, 1997.

Marc A. Goldman, Bloomfield Hills, MI, for plaintiff-appellant.

Donna K. Welch, Detroit, MI, for defendant-appellee.

OPINION AND ORDER DISMISSING PLAINTIFF-APPELLANT'S APPEAL FOR LACK OF JURISDICTION

ROSEN, District Judge.

I. INTRODUCTION

This appeal involves an attempt to recover allegedly preferential transfers from the Michigan Employment Security Commission, which is now known as the Michigan Employment Security Agency ("MESA"). Appellant, William H. Grabscheid, Trustee of the Estate of C.J. Rogers, Inc. (the "Debtor"), contends that these transfers totalling $216,990.38 were made pursuant to an invalid lien and that they should be avoided as preferential under 11 U.S.C. § 547(b). In response, the MESA argues that this Court may not consider the validity of the lien on appeal and that the transfers were made outside of the preference period pursuant to a perfected security interest in the form of an administrative lien and a warrant for payment. After the Court received the parties' briefs, however, the Court requested supplemental briefing regarding the MESA's Eleventh Amendment sovereign immunity.

In the proceedings below before the United States Bankruptcy Court, the MESA brought a Motion for Summary Judgment arguing that, within the preference period, the Debtor no longer had an interest in the property transferred to the MESA because, prior to the 90-day preference period, the MESA had perfected its interests in the property and the transfer at issue had already occurred. The Bankruptcy Court granted the MESA's Motion because the Court found that the MESA's administrative lien and warrant on the Debtor's property in the Michigan National Bank ("MNB") made the MESA a secured creditor who had received no more from the transfer than it would have received through distribution under the Bankruptcy Code. The Debtor appeals this judgment to this Court. Having reviewed the parties' pleadings and conducted a hearing on this matter, the Court finds that it lacks jurisdiction over this matter pursuant to the Eleventh Amendment. Therefore, the Court must dismiss this appeal.

II. FACTUAL BACKGROUND

In order to collect outstanding taxes due on the Debtor's MESA employer account from the fourth quarter of 1988 through the fourth quarter of 1989, the MESA prepared, on December 4, 1990, a Notice to Withhold the Debtor's property that was in its bank accounts with MNB. On December 6, 1990, the MESA served this Notice on MNB pursuant to M.C.L. 421.15(b). After MNB received the Notice, MNB informed the MESA and the Debtor that it had withheld $216,990.38 from the accounts. On December 17, 1990, the MESA issued a Warrant for Payment of the funds sequestered under the Notice to Withhold. On December 19, 1990, incident to the Warrant, MNB made out a cashier's check payable to the MESA for the withheld funds. The cashier's check reached the MESA on December 27, 1990. On March 28, 1991, the Debtor filed under Chapter 11. Therefore, the 90-day preference period incident to this filing began to run on December 28, 1990. On July 15, 1991, the MESA filed a proof of claim in this matter for additional unpaid taxes and interest due under M.C.L.A. § 421.1 et seq.. Thereafter, the MESA amended its claim on several other occasions.

After filing its Bankruptcy Petition, the Debtor continued operations in Chapter 11 for about 18 months — the last six months of which were under the direction of Appellant as the Chapter 11 Trustee. On September 30, 1992, the Bankruptcy Court entered an Order converting the Debtor's case from Chapter 11 to Chapter 7 and appointed Appellant as the Chapter 7 Trustee of the Debtor's Estate.

III. PROCEDURAL BACKGROUND

On March 22, 1994, Appellant filed a Complaint to recover the allegedly preferential transfers made to the MESA. The MESA filed a Motion for Summary Judgment pursuant to Fed.R.Civ.P. 56 and Fed. R. Bankr.P. 7056 on February 9, 1995. On March 22, 1995, the Bankruptcy Court heard oral argument on the MESA's Motion. In an Opinion issued from the bench at the conclusion of the oral argument, the Bankruptcy Court granted the Motion, concluding that, pursuant to 11 U.S.C. § 547(e), the transfer was perfected on either December 6, 1990 (the date that the MESA served MNB with the Notice to Withhold) or on December 17, 1990 (the date that the MESA issued the Warrant for Payment of the funds that MNB had withheld). The Bankruptcy Court reasoned that either event constituted a basis for granting the MESA's Motion because both occurred outside the 90-day preference period.

On April 21, 1995, the Bankruptcy Court denied Appellant's Motion for Reconsideration. In this Motion, Appellant had argued that the decision granting Summary Judgment was in error because it did not address the issue of the lien's validity under M.C.L. 421.15. The Bankruptcy Court, however, found that the Motion for Reconsideration merely presented issues that the Court had already ruled upon and that an appeal was the proper vehicle for Appellant's arguments. On June 19, 1995, Appellant filed an appeal of the Bankruptcy Court's decision in this Court.

IV. ANALYSIS

A. Standard of Appellate review.

The Bankruptcy Court's interpretations of the Bankruptcy Code and Michigan statutes constitute conclusions of law subject to de novo review on appeal. Bankr.R. 8013; Hardin v. Caldwell (In re Caldwell), 851 F.2d 852, 857 (6th Cir.1988). With respect to the Bankruptcy Court's findings of fact, the Court applies the "clearly erroneous" standard of review, Bankr.R. 8013; Fed.R.Civ.P. 52(a), so that these findings will not be disturbed "unless there is `most cogent evidence of mistake or miscarriage of justice.'" Newton v. Johnson (In re Edward M. Johnson and Associates, Inc.), 845 F.2d 1395, 1401 (6th Cir.1988) (citations omitted).

B. The Court's Jurisdiction over This Matter.

In an Order for Supplemental Briefing, the Court asked the parties to address whether or not the Court had jurisdiction over this matter in light of the recent Supreme Court decision in Seminole Tribe of Florida v. Florida, ___ U.S. ___, 116 S.Ct. 1114, 134 L.Ed.2d 252 (1996), which held that Congress only has the power to abrogate State sovereign immunity under the Fourteenth Amendment. In response, the MESA has argued that Congress cannot abrogate Michigan's sovereign immunity under the Bankruptcy Power, and therefore, that the Court should dismiss the instant appeal for lack of jurisdiction. Appellant, however, contends that Michigan has waived its sovereign immunity in this matter because on July 15, 1991 and on dates thereafter, the MESA filed proofs of claim against the instant bankruptcy estate. Because jurisdiction is a threshold issue, the Court must resolve it before turning to the merits of the appeal. See U.S. Const. art. III.

1. The Hoffman Decision.

For the purposes of this case, the starting point for an analysis of sovereign immunity in relation to the Bankruptcy Code is the Supreme Court's decision in Hoffman v. Connecticut Department of Income Maintenance, 492 U.S. 96, 101-02, 109 S.Ct. 2818, 2822-23, 106 L.Ed.2d 76 (1989), where the Plurality discussed 11 U.S.C. § 106, the sovereign immunity provision of the Bankruptcy Code, at length, and where, in concurring opinions, two members of the Court foreshadowed the Seminole Tribe of Florida, supra, decision. At the time of Hoffman, § 106 read as follows:

(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.

11 U.S.C. § 106 (1989).

The question before the Court in Hoffman was whether Congress had abrogated the States' Eleventh Amendment sovereign immunity in § 106(c). The Plurality held that Congress had not because this intention was not clear in the statutory language. Thus, under § 106(c), the Court concluded that "a State that files no proof of claim in a bankruptcy would be bound, like other creditors, by a discharge of debts, including unpaid taxes, but would not be subjected to monetary recovery." Id. at 102, 109 S.Ct. at 2823 (citations omitted). In their concurrences, however, Justices O'Connor and Scalia stated that regardless of Congress' intent in § 106(c), Congress simply could not abrogate the States' Eleventh Amendment sovereign immunity by enacting a statute under its Bankruptcy Power. Id. at 105, 109 S.Ct. at 2824-25 (O'Connor, J., concurring; Scalia, J., concurring in the judgment)

2. The Amendment to 11 U.S.C. § 106.

In response to the Plurality's decision, Congress amended § 106 to provide, in relevant part, the following:

(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) Section . . . 547. . . .

(b) A governmental unit that has filed a proof of claim in the case is deemed to have waived sovereign immunity with respect to a claim against such governmental unit that is the

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