An action to strip off a wholly unsecured State tax lien is an in rem proceeding that does not implicate the State’s Eleventh Amendment immunity. Commonwealth of Pa. v. Berger, No. 19-417 (W.D. Pa. Oct. 21, 2019).
The debtors entered chapter 13 bankruptcy with outstanding State tax liens on their real property. Because the property was subject to mortgage liens amounting to more than its value, the debtors filed an adversary proceeding seeking to strip off the State’s tax lien as wholly unsecured. The bankruptcy court rejected the State’s Eleventh Amendment argument and denied its motion to dismiss. The State immediately appealed the denial to the district court as authorized by Puerto Rico Aqueduct & Sewer Auth. v. Metcalf & Eddy, Inc., 506 U.S. 139, 147 (1993).
On appeal, the State raised three issues addressing the alternative bases upon which the bankruptcy court denied its motion to dismiss: “(1) whether a debtor’s adversary action seeking to strip tax liens constitutes a ‘suit against the State’ for purposes of the Eleventh Amendment; (2) whether the State waived its immunity by filing a proof of claim in the [debtors’] Chapter 13 case; and (3) whether Congress abrogated the State’s immunity through the enactment of 11 U.S.C. § 106(a)(1).”
Key to the resolution of this case was the court’s finding, based on Central Virginia Community College v. Katz, 546 U.S. 356 (2006), that bankruptcy in general, and an action to strip a lien in particular, are not actions against creditors, but in rem actions intended for the proper distribution of property interests. That Court held that the absence of sovereign immunity in the context of in rem jurisdiction of bankruptcy courts harkens back to 1787 when the Bankruptcy Clause of the Constitution, Art. I § 8, was ratified and the states acquiesced to the subordination of any immunity they might have had.
The court here analogized the case of Tennessee Student Asst. Corp. v. Hood, 541 U.S. 440 (2004), where the Supreme Court found that a proceeding to discharge a student loan was ancillary to the court’s in rem jurisdiction and, therefore, not an action against the State for Eleventh Amendment purposes. The court rejected the State’s counterarguments as merely echoing those stated in the dissent in Katz.
Having found that the case was properly decided on the first issue—that the Eleventh Amendment was not implicated by the action—the court did not address the remaining two issues. It affirmed.
Tags: Lien Stripping, sovereign immunity
