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Nelson v. La Crosse County Dist. Attorney

August 23, 2002


Appeal from the United States District Court for the Western District of Wisconsin. No. 00 C 690--John C. Shabaz, Judge.

Before Flaum, Chief Judge, and Manion and Williams, Circuit Judges.

The opinion of the court was delivered by: Manion, Circuit Judge.


Ronald and Coralynn Nelson filed for personal bankruptcy. Although Mrs. Nelson received a discharge, the government filed a separate criminal charge against her for crimes connected with her operation of an incorporated business. Her appeal involves the scope of a State's sovereign immunity in the bankruptcy context. In this case, she filed an adversary complaint against the State of Wisconsin. The State moved to dismiss, arguing that the Eleventh Amendment barred the suit. The bankruptcy court disagreed, holding that the Eleventh Amendment does not apply to bankruptcy cases. On appeal, the federal district court reversed, concluding that the State had sovereign immunity from suit under the Eleventh Amendment and that it had not waived that immunity. The district court then remanded the case back to the bankruptcy court for dismissal of the adversary proceeding. The debtor appeals, and we affirm.


On April 8, 1999, Ronald and Coralyn Nelson filed for protection under Chapter 7 of the United States Bankruptcy Code. In re Nelson, No. 99-21588-7 (Bankr. W.D. Wis.). Mrs. Nelson set forth various obligations in her bankruptcy petition, some of which she incurred in her individual capacity and others on behalf of Discovery Child Care Center, Inc., a non-profit daycare facility located in La Crosse, Wisconsin, of which she was the executive director. That same day, Discovery filed its own Chapter 7 bankruptcy petition. See In re Discovery Child Care Center, Inc., No. 99-21587-7 (Bankr. W.D. Wis.). The State of Wisconsin, through its Department of Instruction, filed a claim in Discovery's separate bankruptcy proceeding, seeking damages from Discovery for breach of contract. The State did not file a claim in Mrs. Nelson's individual bankruptcy case. On July 27, 1999, Mrs. Nelson received a discharge in her individual bankruptcy case. The record does not reveal the current status of Discovery's separate bankruptcy proceeding.

On December 14, 1999, the La Crosse County District Attorney's Office commenced a three-count criminal action in state court, charging Mrs. Nelson with theft by bailee, theft by fraud and embezzlement, arising out of activities that she was alleged to have committed as Discovery's director. The next day, Mrs. Nelson commenced an adversary proceeding in her individual bankruptcy case against the District Attorney's Office and Tim Gruenke, the Assistant District Attorney primarily responsible for the prosecution of her criminal case. Specifically, Mrs. Nelson's adversary proceeding alleged that the District Attorney's Office and Gruenke violated 11 U.S.C. § 524, which enjoins creditors from taking steps to collect a discharged bankruptcy debt from a debtor by initiating a criminal action against her for the sole purpose of obtaining a restitution order. In her prayer for relief, Mrs. Nelson requested a permanent injunction against both the District Attorney's Office and Gruenke under 11 U.S.C. § 105 to preclude them from proceeding with the criminal indictment against her, *fn1 as well as actual and punitive damages from both defendants in an unspecified amount.

The State defendants filed a motion to dismiss the adversary complaint for lack of subject matter jurisdiction under the Eleventh Amendment and for failure to state a claim upon which relief could be granted. Alternatively, the defendants requested the bankruptcy court to abstain in favor of the pending state court criminal case pursuant to 28 U.S.C. § 1334 and the Younger abstention doctrine. *fn2 At a status conference, the defendants asked the bankruptcy court to decide the jurisdictional issue first, and the bankruptcy court agreed to do so. See Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 94-95 (1998) (holding that the "requirement that jurisdiction be established as a threshold matter springs from the nature and limits of the judicial power of the United States and is inflexible and without exception") (citations omitted). In its jurisdictional analysis, the bankruptcy court first noted that Section 106(a) of the Bankruptcy Code contains a specific abrogation of state sovereign immunity as a defense available to States as to certain matters arising thereunder, including Section 524. The bankruptcy court then acknowledged that, following the Supreme Court's decision in Seminole Tribe of Fla. v. Florida, 517 U.S. 44 (1996), a number of courts have held that Congress lacked authority under Article I of the Constitution to enact Section 106(a). See Nelson v. La Crosse County District Attorney (State of Wisconsin) (In re Nelson), 254 B.R. 436, 440 (Bankr. W.D. Wis. 2000). However, the bankruptcy court posited that the "real issue is whether the state actually has any immunity to waive." Id. at 442. The court concluded that it did not need to address the implication of Seminole Tribe because all of the States had generally waived their sovereign immunity in the bankruptcy context by ratifying the Constitution under the "plan of the Convention" doctrine. Id. at 443. Accordingly, the bankruptcy court denied the defendants' motion to dismiss based on lack of jurisdiction, concluding that the Eleventh Amendment was not applicable in bankruptcy cases. Id. at 447.

The defendants then filed an interlocutory appeal to the federal district court. See Cherry v. Univ. of Wisconsin Sys. Bd. of Regents, 265 F.3d 541, 546 (7th Cir. 2001) (denial of Eleventh Amendment immunity is immediately appealable). The district court reversed the decision of the bankruptcy court, holding that the Eleventh Amendment bars suits by private citizens against a State in bankruptcy court. See In re Nelson, 258 B.R. 374 (W.D. Wis. 2001). The district court also determined that the State had not waived its immunity by filing a claim in Discovery's bankruptcy case. Id. at 376. The district court further concluded that under the Younger abstention doctrine, the bankruptcy court could not enjoin a state criminal proceeding, noting that if the State eventually issued a restitution order in the criminal action, the bankruptcy court could then properly address whether such restitution qualified as a dischargeable debt. *fn3 Id. Accordingly, the district court reversed the decision of the bankruptcy court and remanded the matter for dismissal of the adversary proceeding. Coralynn Nelson appeals this decision.


On appeal, Mrs. Nelson argues that the district court erred in concluding that the Eleventh Amendment bars her adversary proceeding against the State defendants for two reasons: (1) Congress validly abrogated the States' sovereign immunity in bankruptcy cases by enacting Section 106(a) of the Bankruptcy Code; and (2) the States, by ratifying the Constitution, waived their sovereign immunity in the bankruptcy context. The State argues in response that under Seminole Tribe and its progeny, Congress lacked the authority to abrogate State sovereign immunity in Section 106(a) and that those cases implicitly negate Mrs. Nelson's "plan of the Convention" argument as well. We review the grant or denial of a state's sovereign immunity defense de novo. See Richman v. Sheahan, 270 F.3d 430, 434 (7th Cir. 2001). In reviewing this issue, we begin with Section 106(a), discussing whether it is a valid abrogation of State sovereign immunity under Article I of the Constitution. We then address Mrs. Nelson's "plan of the Convention" argument, and conclude by evaluating whether there are any other alleged limits on a State's sovereign immunity applicable in this case.

A. Abrogation of Sovereign Immunity under Section 106(a)

To understand the concept of sovereign immunity, it is important to put into historical context the framework and structure of our nation's federal Constitution. As the Supreme Court recently recognized, "[d]ual sovereignty is a defining feature of our Nation's constitutional blueprint. States, upon ratification of the Constitution, did not consent to become mere appendages of the Federal Government. Rather, they entered the Union with their sovereignty intact." Federal Maritime Comm'n v. South Carolina State Ports Auth., ___ U.S. ___, 122 S.Ct. 1864, 1870 (2002) (citations omitted). Thus, although "the Constitution establishes a National Government with broad, often plenary authority over matters within its recognized competence, the founding document 'specifically recognizes the States as sovereign entities.' " Alden v. Maine, 527 U.S. 706, 713 (1999) (citing Seminole Tribe, 517 U.S. at 71 n. 15). At the very core of sovereign immunity is the inherent right of the sovereign to be immune from private suit. See Alden, 527 U.S. at 715 ("The generation that designed and adopted our federal system considered immunity from private suits central to sovereign dignity.").

Notwithstanding the universal understanding of both the meaning and scope of sovereign immunity at the time of our nation's founding, the Supreme Court held, in Chisolm v. Georgia, 2 U.S. (2 Dall.) 419 (1793), that under the plain meaning of Article III a private citizen of another State could sue the State of Georgia in federal court without its consent. *fn4 Only Justice Iredell dissented in Chisolm, arguing that the language of Article III was insufficient to authorize a suit against a State without its consent. The "Court's decision fell upon the country with a profound shock," Alden, 527 U.S. at 720 (citations omitted), because "the state conventions which addressed the issue of sovereign immunity in their formal ratification documents . . . made clear that they . . . understood the Constitution as drafted to preserve the States' immunity from private suits." Id. at 718. In response to, and within a short time of the Chisolm decision, the Eleventh Amendment was proposed, approved by both houses of Congress and ratified by the States, the purpose of which was "not to change but to restore the original constitutional design." Alden, at 722 (emphasis added). Thus, as the Supreme Court has consistently emphasized, "sovereign immunity derives not from the Eleventh Amendment but from the structure of the original Constitution itself." Id. at 728. See also Federal Maritime Comm'n, 122 S.Ct. at 1871; Seminole Tribe, 517 U.S. at 54.

The Eleventh Amendment to the Constitution provides that "[t]he Judicial Power *fn5 of the United States shall not be construed to extend to any suit *fn6 in law or equity, commenced or prosecuted against one of the United States *fn7 by Citizens of another State, or by Citizens or Subjects of any Foreign State." U.S. Const. amend. XI. ...

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