Wolff v. Schaefer

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
at Greenbelt
In Re: 	*
Firstpay, Inc., 	* 	Case No. 	03-30102 PM
* 	Chapter 	7
*
Debtor. 	*
************************************* 	*
Michael G. Wolff, Chapter 7 Trustee, 	* 	Adv. Proc. No. 	04-01222
*
*
Plaintiff, 	*
vs. 	*
William Donald Schaefer, in his capacity as
Maryland State Comptroller,
*
*
*
Defendant. 	*
************************************* 	*
MEMORANDUM OF DECISION
Plaintiff, the Chapter 7 Trustee, commenced this adversary proceeding by filing a
Complaint for Avoidance and Recovery of Unauthorized Post-Petition Transfers. The
Comptroller of Maryland moved to dismiss the Complaint for lack of jurisdiction over the
Date signed May 18, 2004
Case 04-01222 Doc 9 Filed 05/19/04 Page 1 of 5

1 The Court notes that Plaintiff named William Donald Schaefer, in his capacity as
Maryland State Comptroller, in the style of this adversary proceeding; however, in paragraph 4
of the Complaint, Plaintiff states that Defendant is the State of Maryland.
-2-
subject matter under F.R.C.P. Rule 12(b)(1), made applicable in this adversary proceeding by
F.R.B.P. Rule 7012(b).
Plaintiff alleged in the Complaint that certain commingled funds collected pre-petition by
Debtor on behalf of its clients were paid over to and accepted by the Comptroller post-petition.
Plaintiff seeks to avoid the post-petition transfers pursuant to 11 U.S.C. § 549 and seeks the
turnover of the avoided funds.
The Comptroller of Maryland moved to dismiss the proceeding asserting that it neither
consented to being sued in federal court nor appeared in this action and, as a result, under the
Eleventh Amendment of the Constitution of the United States of America, it is immune from
suit.1 Plaintiff opposed, relying upon the United States Supreme Court’s decision in Ex Parte
Young, 209 U.S. 123 (1908), asserting that since William Donald Schaefer (“Schaefer”), a
particular government official, was sued, rather than the State or an agency of the State, that
Schaefer was susceptible to suit. Oral arguments were made by the parties on April 28, 2004. In
a supplemental filing, Plaintiff asserted that the State waived its defense of sovereign immunity
when the Maryland Department of Labor, Licensing and Regulation (“MDLLR”) filed a Proof of
Claim dated May 5, 2004 for $615.00 for “Court Costs/Other Penalty” in connection with
“Taxes.”
Case 04-01222 Doc 9 Filed 05/19/04 Page 2 of 5

2 The Court of Appeals for the Fourth Circuit (“the Fourth Circuit”) has found that 11
U.S.C. § 106(a) is unconstitutional and ineffective as Congress was not empowered to use
Article I authority to circumvent the Eleventh Amendment’s restriction on federal jurisdiction.
Schlossberg v. State of Maryland, Comptroller of the Treasury (In re Creative Goldsmiths of
Washington, D.C., Inc.), 119 F.3d 1140, 1147 (CA4 1997). The Fourth Circuit also determined
that 11 U.S.C. § 106(b), addressing waiver of immunity when a proof of claim has been filed,
was an improper exercise of Congressional power as Congress cannot deem a waiver as “[i]t lies
solely within a state’s sovereign power to waive its immunity voluntarily and to consent to
federal jurisdiction.” Id. The Fourth Circuit has not yet had the opportunity to decide whether
sovereign immunity may be waived with respect to setoff as set forth in 11 U.S.C. § 106(c). Id.
at 1149.
-3-
Analysis
A. 	Abrogation or Waiver of Sovereign Immunity
The Eleventh Amendment provides:
The Judicial power of the United States shall not be construed to extend to any
suit in law or equity, commenced or prosecuted against one of the United States
by Citizens of another State, or by Citizens or Subjects of any Foreign State.
U.S.CONST . amend. XI. This Amendment is understood to bar suits against states or their
agencies. See Seminole Tribe of Fla. v. Florida, 517 U.S. 44, 54 (1996); Regents of the Univ. of
Cal. v. Doe, 519 U.S. 425, 429-30 (1997). The Amendment is jurisdictional and renders a
federal court incompetent to entertain a suit against a non-consenting state. Employees of the
Dept. of Public Health & Welfare v. Mississippi, 411 U.S. 279, 280 (1973). A state’s sovereign
immunity is subject to two qualifications – abrogation by Congress or waiver by the state. Ossen
v. Dept. of Social Serv., State of Connecticut (In re Charter Oak Assoc.), 361 F.3d 760, 765
(CA2 2004). 	Section 106 of the United States Bankruptcy Code, entitled “Waiver of Sovereign
Immunity,” purports to abrogate and waive sovereign immunity as to governmental units under
certain circumstances. 2
Case 04-01222 Doc 9 Filed 05/19/04 Page 3 of 5

3 The Second Circuit in Ossen found that 11 U.S.C. § 106(c) was constitutionally sound
and that the Eleventh Amendment permitted a debtor to assert a permissive counterclaim against
a governmental unit that has appeared in a case by the filing of a proof of claim. The Second
Circuit disagreed with the Fourth Circuit’s decision in Schlossberg, which found that only
compulsory counterclaims could be asserted against a state under the Eleventh Amendment.
Ossen at 767.
-4-
The State of Maryland, acting through MDLLR, invoked this Court’s jurisdiction when it
filed a Proof of Claim in Debtor’s bankruptcy case (See Gardner v. State of New Jersey, 329
U.S. 565, 574 (1946)) and, to a limited extent, waived its immunity. See Ossen, 361 F.3d at 767-
70. The fact that the agency that filed the claim differed from the one sued is of no consequence
as the two agencies act as an “unitary creditor.” Id. at 771.
The scope of the limited waiver is set forth in 11 U.S.C. § 106(c), which provides:
Notwithstanding any assertion of sovereign immunity by a
governmental unit, there shall be offset against a claim or interest
of a governmental unit any claim against such governmental unit
that is property of the estate.
The State of Maryland remains immune from defending against Plaintiff’s action; however, by
application of this section, the estate may offset against the State because MDLLR filed a Proof
of Claim. See Ossen, 361 F.3d at 767-70. This Court agrees with the Court of Appeals for the
Second Circuit that allowing states that are creditors to benefit from filing proofs of claim while
permitting them to withhold debts owed to the estate is inequitable. 3 Id. at 769. Thus, while
Plaintiff may not proceed herein against the State, the estate may, under 11 U.S.C.
§ 106(c), assert, as a setoff, that the State’s claim as filed by the MDLLR has been paid.
B. 	Ex Parte Young
Plaintiff named Schaeffer rather than the State or its agency, relying upon Ex Parte
Young. Federal jurisdiction over a suit against a state official may lie when the relief sought is
Case 04-01222 Doc 9 Filed 05/19/04 Page 4 of 5

4 With respect to Plaintiff’s estoppel argument made on the record, the Court will
address the Comptroller’s claim when and if one is filed.
-5-
only “prospective injunctive relief in order to ‘end a continuing violation of federal law.’”
Seminole Tribe of Fla., 517 U.S. at 73 (quoting Green v. Mansour, 474 U.S. 64, 68 (1986)). As
Ex Parte Young is limited to prospective rather than retroactive relief and since Plaintiff seeks
the return of already tendered and negotiated funds, there is no continuing violation of federal
law by a state official; accordingly, Ex Parte Young and its progeny are inapplicable.4
As the Court finds that the Eleventh Amendment prohibits Plaintiff from suing the
Comptroller of Maryland in this adversary proceeding and that the doctrine of Ex Parte Young is
inapplicable, an appropriate order shall be entered granting Defendant’s Motion to Dismiss
Complaint.
cc: 	Debtor
Chapter 7 Trustee
Plaintiff
Counsel for Plaintiff
Defendant
Counsel for Defendant
End of Memorandum Decision
Case 04-01222 Doc 9 Filed 05/19/04 Page 5 of 5