Magnolia Venture v. MS Dept of Economic

REVISED, September 4, 1998

UNITED STATES COURT OF APPEALS

For the Fifth Circuit

___________________________

No. 97-60835

___________________________

MAGNOLIA VENTURE CAPITAL CORPORATION,

Plaintiff-Appellee,

VERSUS

PRUDENTIAL SECURITIES, INC., ET AL.,

Defendants,

MISSISSIPPI DEPARTMENT OF ECONOMIC

AND COMMUNITY DEVELOPMENT,

Defendant-Appellant.

___________________________________________________

Appeal from the United States District Court

For the Southern District of Mississippi

___________________________________________________

August 28, 1998

Before DAVIS, EMILIO M. GARZA, and BENAVIDES, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge:

In this appeal we are asked to consider whether the Eleventh

Amendment bars this suit. The district court ruled that the

Mississippi Department of Economic and Community Development

(“MDECD”) had waived its Eleventh Amendment immunity, and therefore

denied MDECD’s Motion to Dismiss. For reasons set forth below, we

reverse and remand this case to the district court.

I.

In 1994, the Mississippi Legislature enacted the Venture

Capital Act of 1994 (“the Act”), codified at Miss. Code Ann. §§ 57-

77-1 to 57-77-39. The legislature passed the Act to provide

capital to new growth-oriented businesses and create new jobs. In

accordance with the Act, the Mississippi Department of Economic and

Community Development, an agency of the State of Mississippi,

incorporated Magnolia Capital Corporation (“MCC”), a non-profit

corporation. MDECD also formed a for-profit corporation known as

Magnolia Venture Capital Corporation (“MVCC”), with MCC as the sole

shareholder. In turn, MVCC created and served as the general

partner in the Magnolia Venture Capital Fund Limited Partnership

(“the Partnership”), which was to provide venture capital to

Mississippi businesses.

In addition to creating these entities, the legislature

provided for funding of these corporations through the sale of

$20,000,000 in general obligation bonds by the State Bond

Commission. The proceeds of these bonds went to MDECD, which then

made a $20,000,000 non-recourse loan to MCC. MCC then deposited

approximately $6,200,000 of the funds with the State Treasurer for

investment in zero coupon bonds. MCC pledged these zero coupon

bonds to secure the loan. MCC then invested the balance of the

$20,000,000, or roughly $13,800,000, in MVCC as an equity

contribution. MCC became MVCC’s sole shareholder. MVCC then

invested approximately $8,000,000 in the Partnership and procured

a private investment totaling approximately $5,000,000. The

Partnership began accepting applications for loans in January of

1996.

In April of 1997, Lisa Looser, purporting to act on behalf of

MVCC, executed a Pledge Agreement purporting to grant a first

2

priority security in certain assets of MVCC to MDECD.1 This

agreement secured the obligations, indebtedness, and liabilities

under the Loan Agreement between MCC and MDECD. Later that month,

MDECD notified MVCC that it was in default under the terms of the

Loan Agreement and the Pledge Agreement, and requested that MVCC

deliver the pledged assets to MDECD. This requested amount

included approximately $11,000,000 that MVCC had invested with

Prudential Securities, Inc. (“Prudential”). MVCC refused to

deliver the assets and MDECD placed Prudential on notice of its

claim to the funds and demanded that Prudential provide the funds

to MDECD. Prudential responded by placing a “freeze” on the assets

in its possession. As a result of this freeze, MVCC filed for

protection under Chapter 11 of the Bankruptcy Code.

After instituting the Chapter 11 proceeding, MVCC filed an

adversary action against MDECD seeking a ruling that MDECD had no

lien or interest in the funds held by Prudential. After MDECD

moved to dismiss the proceeding on Eleventh Amendment grounds, MVCC

voluntarily dismissed the action. However, MVCC contemporaneously

filed a new adversary proceeding against Prudential seeking a

release of the freeze on MVCC’s assets in the Prudential investment

account. MVCC also alleged that MDECD held no perfected lien or

security interest in MVCC’s assets in the hands of Prudential.

MVCC requested a declaratory judgment that the assets in

Prudential’s possession were free and clear of any claim or lien by

any third party.

1

MVCC alleges that Ms. Looser signed the document without

any authority to act in a representative capacity for MVCC.

3

In response, MDECD sought leave to intervene in this adversary

proceeding, which the bankruptcy court allowed. After MDECD

intervened, Prudential filed a counterclaim in the nature of an

interpleader against MVCC and named MDECD as a third-party

defendant to the adversary proceeding. MVCC then filed a cross-

claim against MDECD, alleging that MDECD had no interest in the

assets held by Prudential.

After its intervention, MDECD moved to dismiss the proceeding

based on a claim of Eleventh Amendment immunity. MDECD’s motion

focused mainly on establishing the unconstitutionality of § 106 of

the Bankruptcy Code, 11 U.S.C. § 106, in which Congress purported

to abrogate the sovereign immunity of states and state agencies

which file claims in bankruptcy proceedings. The district court,

relying on In re Estate of Fernandez, 123 F.3d 241 (5th Cir. 1997),

agreed with MDECD that § 106 violated the Eleventh Amendment and

was ineffectual as a waiver of sovereign immunity. However, the

district court further found that MDECD had waived its Eleventh

Amendment immunity through a venue clause in the Pledge Agreement,

and, therefore, denied MDECD’s Motion to Dismiss. MDECD now

appeals that ruling.

II.

A.

In Puerto Rico Aqueduct and Sewer Authority v. Metcalf & Eddy,

Inc., 506 U.S. 139, 113 S. Ct. 684 (1993), the Supreme Court held

that “States and state entities that claim to be ‘arms of the

State’ may take advantage of the collateral order doctrine to

appeal a district court order denying a claim of Eleventh Amendment

4

immunity.” Id. at 147, 113 S. Ct. at 689. Thus, we have appellate

jurisdiction to review the district court’s interlocutory order

denying MDECD’s Motion to Dismiss based on the Eleventh Amendment.

See also Earles v. State Bd. of Certified Pub. Accountants, 139

F.3d 1033, 1036 (5th Cir. 1998).

B.

In this appeal, we focus on whether the district court

correctly denied MDECD’s Motion to Dismiss based on Eleventh

Amendment immunity. The district court concluded that MDECD was

entitled to assert Eleventh Amendment immunity, but that MDECD had

waived such immunity by virtue of a provision in the Pledge

Agreement that provided as follows:

Section 6.03 Applicable Law. This Pledge shall be deemed

to have been made and to be performed in Jackson, Hinds

County, Mississippi, and shall be governed by and

construed in accordance with the laws of the State of

Mississippi. Courts within the State of Mississippi

shall have jurisdiction over any and all disputes between

the parties to this Pledge, whether in law or in equity,

including but not limited to, all disputes arising out of

or relating to this Pledge. Venue in any such dispute,

whether in federal or state court, shall be laid in Hinds

County, Mississippi.

(Emphasis added).

On appeal, MDECD makes a two-pronged argument. MDECD argues

first that the above language of the venue provision does not

clearly waive its Eleventh Amendment immunity. Second, MDECD

argues that even if the venue provision is construed as waiving

Eleventh Amendment immunity, MDECD had no authority to waive this

important right.

The district court, in rejecting both of MDECD’s arguments,

held that the language of the venue provision was sufficiently

5

clear to amount to a waiver of Eleventh Amendment immunity. The

district court also rejected MDECD’s argument that it had no

authority to waive Eleventh Amendment immunity. The district court

reasoned that Mississippi, by authorizing MDECD to enter into a

contract in which MDECD waived its Eleventh Amendment immunity,

must be considered as authorizing that waiver.

III.

A.

Assuming without deciding that the language in the venue

provision of the Pledge Agreement reflects a clear waiver of

Eleventh Amendment immunity, we are satisfied that MVCC has not

demonstrated that the state agency, MDECD, was authorized to waive

Mississippi’s important right of immunity from suit in federal

court.

In concluding that MDECD was authorized to waive Mississippi’s

Eleventh Amendment immunity, the district court reasoned as

follows: first, the court correctly concluded that under clear

Mississippi Supreme Court authority, "sovereign immunity does not

bar action against the State or its political subdivisions brought

on a breach of contract theory." Trammell v. State, 622 So. 2d

1257, 1262 (Miss. 1993). The district court observed that this

principle is based on the notion that "[w]here the state has

lawfully entered into a business contract with an individual, the

obligations and duties of the contract should be mutually binding

and reciprocal. There is no mutuality or fairness where a state or

county can enter into an advantageous contract and accept its

benefits but refuse to perform its obligations." Churchill v.

6

Pearl River Basin Dev. Dist., 619 So. 2d 900, 903 (Miss. 1993).

The district court reasoned next that because the venue

provision waived the state's Eleventh Amendment immunity, "there

would be ‘no mutuality or fairness’ in allowing the Department to

assert the Pledge Agreement in support of its claim to the funds in

question and yet at the same time permit it to avoid challenges to

the validity of the agreement or the correctness of the

Department's claim to an interest predicated on that agreement."

Thus, based on this reasoning, the district court concluded that

Mississippi also waived its Eleventh Amendment immunity defense by

giving general authority to MDECD to enter into contracts, and the

specific contract at issue included an Eleventh Amendment waiver.

The district court correctly recognized that under Mississippi

law, when the legislature authorizes a state agency to enter into

a contract, the state waives its immunity from suit for a breach of

that contract. See, e.g., Grant v. State, 686 So. 2d 1078, 1091-92

(Miss. 1996); Trammell v. State, 622 So. 2d 1257, 1261-62 (Miss.

1993); Churchill v. Pearl River Basin Dev. Dist., 619 So. 2d 900,

903 (Miss. 1993); Mississippi State Dept. of Public Welfare v.

Howie, 449 So. 2d 772, 777 (Miss. 1984). This rule is based on

mutuality and fairness. Mississippi State Dept. of Public Welfare,

449 So. 2d at 777. That principle is not in dispute. The issue

before us narrows to whether the district court correctly extended

Mississippi’s rule on waiver of common law sovereign immunity to

encompass Mississippi’s waiver of its Eleventh Amendment immunity

where the state authorized an agency to enter into a contract, and

that contract included a waiver of Eleventh Amendment immunity. We

7

are persuaded that important federalism concerns that underlie the

Eleventh Amendment will not permit this extension.2

B.

The doctrine of sovereign immunity embodies the maxim that

“the King can do no wrong,” and can be traced back to ancient

times.3 Sovereign immunity, as it has been interpreted in the

federal courts, actually encompasses two separate, but related,

concepts--state sovereign immunity, or common law sovereign

immunity, and Eleventh Amendment immunity, or constitutional

sovereign immunity. 13 CHARLES ALAN WRIGHT & ARTHUR R. MILLER, FEDERAL

PRACTICE AND PROCEDURE § 3524, at 171 (2d ed. 1984).4 These immunities

shield the sovereign, or the state, from suits against it in its

own courts as well as from suits against it in federal courts.

A state’s immunity, however, is not absolute. For example, a

state may choose to waive its immunity, thus consenting to suit.5

However, it is important to keep in mind that a state may waive its

2

See, e.g., Port Authority Trans-Hudson Corp. v. Feeney, 495

U.S. 299, 304-06, 110 S. Ct. 1868, 1872-73 (1990); Pennhurst State

Sch. & Hosp. v. Halderman, 465 U.S. 89, 99-100 & n.9, 104 S. Ct.

900, 907-08 & n.9 (1984).

3

See generally 17 JAMES WM. MOORE ET AL., MOORE’S FEDERAL PRACTICE

¶ 123 App.01 (3d ed. 1998).

4

See also Seminole Tribe of Florida v. Florida, 517 U.S. 44,

54, 116 S. Ct. 1114, 1122 (1996) (“‘[W]e have understood the

Eleventh Amendment to stand not so much for what it says, but for

the presupposition . . . which it confirms.’ That presupposition,

first observed over a century ago in Hans v. Louisiana, has two

parts: first, that each State is a sovereign entity in our federal

system; and second, that ‘it is inherent in the nature of

sovereignty not to be amenable to the suit of an individual without

its consent.’”) (internal citations omitted); In re Allied-Signal,

Inc., 919 F.2d 277, 280 n.4 (5th Cir. 1990).

5

See generally 17 JAMES WM. MOORE ET AL., MOORE’S FEDERAL PRACTICE

¶ 123.21 (3d ed. 1998).

8

common law sovereign immunity without waiving its Eleventh

Amendment immunity under federal law. Port Authority Trans-Hudson

Corp. v. Feeney, 495 U.S. 299, 306, 110 S. Ct. 1868, 1873 (1990);

see also In re Allied Signal, Inc., 919 F.2d 277, 280 n.4 (5th Cir.

1990). Thus, a state may consent to being sued in its own courts,

while still retaining Eleventh Amendment immunity from suit in

federal court. See, e.g., Florida Dept. of Health and

Rehabilitative Servs. v. Florida Nursing Home Ass’n, 450 U.S. 147,

150, 101 S. Ct. 1032, 1034 (1981) (state’s general waiver of

sovereign immunity did not constitute waiver by state of Eleventh

Amendment immunity); Great N. Life Ins. Co. v. Read, 322 U.S. 47,

54-55, 64 S. Ct. 873, 877 (1944) (same); Sherwinski v. Peterson, 98

F.3d 849, 851-52 (5th Cir. 1996) (same).

The Supreme Court has made it clear that we may find a waiver

of a state's Eleventh Amendment immunity in only the most exacting

circumstances. “[T]he State's consent [to suit in federal court

must] be unequivocally expressed.” Pennhurst State Sch. & Hosp. v.

Halderman, 465 U.S. 89, 99, 104 S. Ct. 900, 907 (1984); see also

Port Authority Trans-Hudson Corp., 495 U.S. at 305, 110 S. Ct. at

1873 (“The Court will give effect to a State’s waiver of Eleventh

Amendment immunity only where stated by the most express language

or by such overwhelming implication from the text as [will] leave

no room for any other reasonable construction.”). A clear

declaration of the state’s intention to submit its fiscal problems

to other courts than those of its own creation must be found.

Pennhurst State Sch. & Hosp., 465 U.S. at 99 n.9, 104 S. Ct. at 907

n.9. As the Supreme Court has stated, the “reluctance to infer

9

that a State’s immunity from suit in the federal courts has been

negated stems from recognition of the vital role of the doctrine of

sovereign immunity in our federal system.” Pennhurst State Sch. &

Hosp., 465 U.S. at 99, 104 S. Ct. at 907; see also Port Authority

Trans-Hudson Corp., 495 U.S. at 304-06, 110 S. Ct. at 1872-73.

Additionally, the state’s waiver must be accomplished by someone to

whom that power is granted under state law. Ford Motor Co. v.

Department of Treasury, 323 U.S. 459, 467, 65 S. Ct. 347, 352

(1945); see also Dagnall v. Gegenheimer, 631 F.2d 1195, 1196 (5th

Cir. 1980).

With this background, we now consider the precise issue

presented in this case: whether the district court erred in

concluding that MDECD had authority to waive Mississippi's Eleventh

Amendment immunity from suit in federal court.6

C.

In determining whether a state official or entity has

authority to waive Eleventh Amendment immunity, the Supreme Court

has directed that we look to the “general policy of the state as

expressed in its Constitution, statutes and decisions.” Ford Motor

Co., 323 U.S. at 467, 65 S. Ct. at 352; see also Dagnall, 631 F.2d

at 1196. This authority must be clearly expressed. In Freimanis

6

As an initial matter, MVCC argues that MDECD is not

entitled to raise Eleventh Amendment immunity because MVCC does not

seek a money judgment against the state. MVCC therefore contends

that Mississippi is not a real party in interest in the suit. As

the district court noted in rejecting this argument, “application

of the Eleventh Amendment is not limited to those cases in which a

money judgment is sought against a state.” See, e.g., Cory v.

White, 457 U.S. 85, 102 S. Ct. 2325 (1982). Additionally, this

action involves rights to allegedly public funds claimed by the

state. We therefore agree with the district court that MDECD, a

state agency, is entitled to assert Eleventh Amendment immunity.

10

v. Sea-Land Service, Inc., 654 F.2d 1155 (5th Cir. 1981), this

Court considered whether the State of Louisiana had waived its

Eleventh Amendment immunity when an attorney representing the

Louisiana Department of Transportation entered into a consent

judgment with the defendant, Sea-Land. In answering this question

in the negative, we stated that “[t]he short answer to this

contention is that the attorney for the Department had no clearly

expressed authority to waive Eleventh Amendment immunity. Indeed,

Louisiana has clearly expressed its intention to preserve its

immunity.” Id. at 1160 (emphasis added); see also Santee Sioux

Tribe v. Nebraska, 121 F.3d 427, 431 (8th Cir. 1997) (“a state

official may waive the state’s immunity only where specifically

authorized to do so by that state’s constitution, statutes, or

decisions”); Estate of Porter v. Illinois, 36 F.3d 684, 690 (7th

Cir. 1994) (“state officials can only waive a state’s Eleventh

Amendment immunity if they are specifically authorized to do so by

the state’s constitution, statutes, or decisions”); Silver v.

Baggiano, 804 F.2d 1211, 1214 (11th Cir. 1986) (“waiver of Eleventh

Amendment immunity by state officials must be explicitly authorized

by the state ‘in its Constitution, statutes and decisions’”).7

7

Indeed, given the recognition of strong federalism concerns

and the concomitant strict solicitude federal courts give to a

state’s purported waiver of Eleventh Amendment immunity, see, e.g.,

Port Authority Trans-Hudson Corp., 495 U.S. at 305-06, 110 S. Ct.

at 1872-73, other circuits have gone so far as to conclude that

affirmative acts by state officials did not amount to the state’s

waiver of Eleventh Amendment immunity where the state official was

not specifically authorized to waive the immunity. In Estate of

Porter v. Illinois, 36 F.3d 684 (7th Cir. 1994), the Seventh

Circuit held that the Illinois Attorney General was not authorized

to waive Illinois’ Eleventh Amendment immunity, and therefore,

could not make a valid waiver of immunity by removing the case to

federal court. Id. at 691; see also Silver v. Baggiano, 804 F.2d

11

As noted above, the district court was entirely correct in

concluding that Mississippi law is clear that when the legislature

authorizes an agency to enter into contracts, the state waives its

immunity from suit in state court for a breach of a contract. But

none of these cases involved the waiver of Eleventh Amendment

immunity and consent to suit in federal court. In other words,

while Mississippi may waive immunity from suit in its own courts by

authorizing state agencies to enter into contracts, there is no

Mississippi law to support the implication that MDECD had the

authority to waive Mississippi’s Eleventh Amendment immunity.

The authorities discussed above lead us to conclude that a

state, through its constitution, statutes, or court decisions, must

expressly authorize a state agency or representative to waive the

state's Eleventh Amendment immunity. Such authority cannot be

implied from the circumstances. Although the district court's

conclusion that the state implicitly authorized the waiver of its

Eleventh Amendment right has a logical and equitable tug, no

Mississippi authority supports this determination. Given the

reluctance of courts generally to find a waiver of Eleventh

Amendment immunity and the strong general rule that authority to

make an effective waiver must be express, we conclude that the

1211, 1214-15 (11th Cir. 1986) (holding removal by state officials

of suit containing state law claims not a valid waiver of Eleventh

Amendment immunity where officials were not authorized to waive

immunity). Similarly, in In re Creative Goldsmiths of Washington,

D.C., Inc., 119 F.3d 1140 (4th Cir. 1997), the Fourth Circuit

concluded that the State of Maryland’s defense on the merits of a

suit arising out of a bankruptcy proceeding did not amount to a

waiver of Eleventh Amendment immunity because the Maryland Attorney

General lacked authority to waive Maryland’s Eleventh Amendment

immunity. Id. at 1149.

12

district court erred in determining that MDECD had authority to

waive Mississippi's Eleventh Amendment immunity.8

Although it is unnecessary to our decision, the parties have

called our attention to a recent Mississippi statute that confirms

our conclusion that Mississippi did not authorize MDECD to waive

the state’s Eleventh Amendment immunity.9

8

In addition to arguing that MDECD waived its Eleventh

Amendment immunity, MVCC also argues that alternative grounds exist

to support the district court’s denial of MDECD’s Motion to

Dismiss. See In re Sims, 994 F.2d 210, 214 (5th Cir. 1993)

(holding that appellee’s arguments in support of a favorable

judgment should be included in appellee’s answering brief, not in

a cross-appeal). MVCC argues, as it did in the district court,

that MDECD lacks standing as a party in interest to the adversary

proceeding filed by MVCC against Prudential because MDECD is

neither a creditor of MVCC, nor does MDECD hold any interest in the

property at issue. As we stated above, our appellate jurisdiction

is limited to reviewing the district court’s denial of Eleventh

Amendment immunity. See Puerto Rico Aqueduct and Sewer Auth., 506

U.S. at 144-45; 113 S. Ct. at 688.

9

On April 17, 1998, Mississippi adopted House Bill No. 1240

regarding the Venture Capital Act of 1994. Specifically, Miss.

Code Ann. § 57-77-3, as amended, provides in pertinent part as

follows:

Except as provided in Section 57-77-33(7), it is, and has

always been, the intent of the Legislature that nothing

in this chapter shall be construed to waive the sovereign

immunity of the State of Mississippi or the department

pursuant to either state law or the Eleventh Amendment to

the United States Constitution. It is, and always has

been, the intent of the Legislature that no action by the

State of Mississippi or by the department, or by any

officer or agent of the State of Mississippi or of the

department, shall be considered a waiver of the sovereign

immunity of the State of Mississippi or the department

pursuant to either state law or the Eleventh Amendment to

the United States Constitution. It is, and always has

been, the intent of the Legislature that the entering

into of any contract, loan agreement, pledge agreement,

or other instrument by the State of Mississippi or the

department shall not be considered a waiver of the

sovereign immunity of the State of Mississippi pursuant

to either state law or the Eleventh Amendment to the

United States Constitution. It is, and always has been,

the intent of the Legislature that the sovereign immunity

13

IV.

In summary, because MDECD lacked specific express

authorization to waive Mississippi’s Eleventh Amendment immunity,

the district court erred in denying MDECD’s Motion to Dismiss on

Eleventh Amendment grounds. However, because our review is limited

to the immunity question, we are unable to resolve the remaining

issues in this case and we REMAND it to the district court for

further proceedings consistent with this opinion.

REVERSED and REMANDED.

of the State of Mississippi pursuant to either state law

or the Eleventh Amendment to the United States

Constitution may only be waived by express authorization

set forth in an enactment of the Mississippi Legislature.

14