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In re Friendship Medical Center

July 11, 1983

IN RE FRIENDSHIP MEDICAL CENTER, LTD., BANKRUPT; JAMES JONES AND RUDOLPH MORAGNE, PLAINTIFFS-APPELLANTS,
v.
NATHAN YORKE, SUCCESSOR TRUSTEE FOR THE ESTATE OF FRIENDSHIP MEDICAL CENTER, LTD., BANKRUPT, AND ILLINOIS DEPARTMENT OF PUBLIC AID, DEFENDANTS-APPELLEES.



Appeal from the United States District Court for the Northern District of Illinois. No. 80 C 3826 -- Nicholas J. Bua, Judge.

Author: Pell

Before CUMMINGS, Chief Judge, PELL and NICHOLS,*fn* Circuit Judges.

PELL, Circuit Judge. This is an appeal from the district court's decision affirming the bankruptcy court's dismissal of the appellants' complaint against the Illinois Department of Public Aid (IDPA).The bankruptcy court held that it had no jurisdiction over the appellants' action against IDPA because the case did not involve property owned by or in the actual or constructive possession of the bankrupt. The court further held that the action was barred by the Eleventh Amendment. The appellants contend that the courts erred in deciding both issues because the bankrupt had constructive possession of the property at issue and because the state agency waived its sovereign immunity defense.

I. FACTS

Because the bankruptcy court decided this case on a motion to dismiss, we will adopt the appellants' statement of the facts for purposes of this appeal.

On July 7, 1978, plaintiffs-appellants James Jones and Rudolph Moragne filed a complaint against IDPA and David Taylor, the trustee for the estate of the Friendship Medical Center, Ltd. (Friendship or the bankrupt), who has since been succeeded as trustee by Nathan Yorke. IDPA administers the Illinois Medicaid program which reimburses physicians who treat eligible patients. The appellants are physicians who provided patients with treatment at Friendship between January 1976 and September 1977.

The appellants contend that, pursuant to an agreement between IDPA, Friendship, and the doctors, IDPA sent warrants to Friendship payable to the appellants as reimbursement for services rendered. They allege that, instead of passing the warrants on to the doctors, Friendship fraudulently indorsed the warrants and appropriated them to their own use. They further assert that IDPA realized that this was occurring but did not alter their practice of sending the warrants to Friendship. Allegedly because Friendship owed IDPA money for unrelated matters, the agency began to offset part of Friendship's debt to it by withholding the warrants payable to the doctors.

In their complaint, the appellants sought to obtain (or reclaim, as they entitled it) three groups of funds. The first was funds in IDPA's possession used to offset Friendship's indebtedness to IDPA. The second was other funds never paid by IDPA for services rendered by the appellants. The third, which the appellants state in their brief is not at issue in this appeal, was funds paid by brief is not at issue in this appeal, was funds paid by IDPA to Friendship but never turned over to the appellants.

IDPA filed its answer to the complaint on August 7, 1978, raising both the Eleventh Amendment objection and the challenge on the bankruptcy court's subject matter jurisdiction. On March 26, 1980, the bankruptcy court dismissed the complaint against IDPA, holding both that the Eleventh Amendment barred the action and that the court lacked subject matter jurisdiction. Jones v. Taylor (In re Friendship Medical Center, Ltd.), 3 (Bankr. N.D.Ill. 1980). The district court affirmed this decision on September 20, 1982.

II. DISCUSSION

A. The Eleventh Amendment

The bankruptcy and district courts held that the appellants' action against appellee IDPA was barred by the Eleventh Amendment. Both courts relied upon the holding in Edelman v. Jordan, 415 U.S. 651, 663, 39 L. Ed. 2d 662, 94 S. Ct. 1347 (1974), that federal courts may not enter judgments to be paid out of public funds in the state treasury without the consent of the state.

The appellants seek to avoid the sovereign immunity defense by titling their action a "reclamation" suit. The suggestion is that they are seeking to reclaim property belonging to them that is wrongfully held by the state. The Eleventh Amendment, however, cannot be so easily circumvented by the clever choice of words. First, neither the appellants nor the bankrupt ever had possession of the money allegedly withheld by IDPA, so neither can "reclaim" it. Second, a judgment against IDPA would be paid out of the Illinois treasury regardless of what the action is called and thus the case still runs afoul of the rule in Edelman v. Jordan, which recognizes no exception to its rule. Finally, we note that allowing a party to overcome the sovereign immunity defense by titling an action a reclamation suit would virtually eliminate the defense, because almost any action against a state could be characterized as involving money in some sense wrongfully withheld.

A state may waive its Eleventh Amendment defense, however, and the appellants contend that IDPA has done so. A plaintiff bears a heavy burden in showing waiver. In Florida Department of Health & Rehabilitative Services v. Florida Nursing Home Association, 450 U.S. 147, 150, 67 L. Ed. 2d 132, 101 S. Ct. 1032 (1981) (per curiam), the Supreme Court reaffirmed the holding in Jordan that "we will find waiver only where stated "by the most express language or by such overwhelming implication from the text [of a statute] as [will] leave no room for any other reasonable construction." 415 U.S. at 673 (quoting Murray v. Wilson Distilling Co., 213 U.S. 151, 171, 53 L. Ed. 742, 29 S. Ct. 458 (1909)). To meet ...


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