Petition for Writ of Certiorari — Sheehan v. West Virginia Department of Environmental Protection, 124 S. Ct. 2386 (2004) (No. 02-1478)

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Supreme Court of the United Stales

MARTIN P. SHEEHAN,

Trustee for the Bankruptcy Estate of T & T Fuels, Inc.

and Sheehan & Nugent, P.L.L.C. and

Phillips, Gardill, Kaiser & Altmeyer, PLLC,

Petitioners,

WEST VIRGINIA DEPARTMENT OF

ENVIRONMENTAL PROTECTION,

Respondent.

ON PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

PETITION FOR WRIT OF CERTIORARI

Martin P. Sheehan William A. Kolibash

Counsel of Record PHILLIPS, GARDILL,

SHEEHAN & KAISFR & ALMEYER, PLLC

NUGENT, P.L.L.C. 61 Fourteenth Street

41 Fifteenth Street Wheeling, WV 26003

Wheeling, WV 26003 (304) 232-6810

(304) 232-1064

Counsel for Petitioners Counsel for Petitioners

THE LEX GROUP ¢ 1108 East Main Street # Suite 1400 ¢ Richmond, Virginia 23219 Tq) tf

(804) 644-4419 @ (800) 856-4419 @ Fax: (804) 644-3660 ¢ www.thelexgroup.com i

Rte ly hea Mintel ihe ca a oS hihi:

QUESTIONS PRESENTED

FOR REVIEW

Did the States surrender their sovereignty over

bankruptcy proceedings as part of the plan of

the constitutional convention so that Congress

had power resulting from the “uniform law”

provisions of Article I, Section 8, Clause 4 of the

Constitution to enact 11 US.C. § 106 and

abrogate the opportunity for States to claim the

protection of the Eleventh Amendment in the

Bankruptcy Courts?

Assuming a State is entitled to assert the

Eleventh Amendment in Bankruptcy Court

proceedings, does the litigation conduct of the

State in seeking and accepting the benefits of the

activities of a bankruptcy trustee and his counsel

constitute a waiver, under the common benefit

doctrine, of the Eleventh Amendment sufficient

to require the State to accept financial

responsibility for administrative expenses

incurred by the trustee and his counsel?

PARTIES TO THE LITIGATION

The petitioners are the bankruptcy trustee,

Maitin P. Sheehan, and two law firms employed by

him, Sheehan & Nugent, P.L.L.C. and Phillips, Gardill,

Kaiser & Altmeyer, PLLC. The respondent is the West

Virginia Department of Environmental Protection. The

Assistant United States Trustee for West Virginia has

had authority to appear and be heard on any issue in

this bankruptcy case pursuant to 11 U.S.C. § 307. The

Assistant United States Trustee has taken no role in any

stage of the instant controversy.

Neither Sheehan & Nugent, P.L.L.C. nor

Phillips, Gardill, Kaiser & Altmeyer, P.L.L.C. has a

parent company nor is the stock in either of these

entities held by any publicly traded corporation.

fanaa.

_TABLE OF CONTENTS

Page

QUESTIONS PRESENTED FOR REVIEW....-ccccccccceoeees. i

PARTIES TO THE LITIGATION. ...sssssssssssssessesnsssees beni ii

WP OF INT EIN TG veces cescssvsssscsusiesnosevsessnesnesvcesvane ili

BPOLE OF AUTHORITIES ....n....ncsuscoesesseossessssoessecoeees iv

OPINIONS AND ORDERS BELOW. ........cccccccsccssseseeseee 1

STATEMENT OF JURISDICTION ...0....ccecccccsccssssseseeseees 1

CONSTITUTIONAL AND STATUTORY

TMP MPM PED BRIA IE oo coscssscsscsunssesascecesoseseccensonssseees 2

STATEMENT OF PI ei ichcevensnisssenssavciserpssidendones 5

BASIS FOR JURISDICTION BELOW ................ 8

ARGUMENT FOR ALLOWANCE OF

NN a tcc elncsel da saeerpenscasinlatisiindievisviessuesneesasarsisoens 9

I. THE PLAN OF CONVENTION ............. 9

II. Ih bib sesvercstwcasscuriursesoenisneqvisuccieanss 15

I tin con sorties cpetaendoiiansslirsnnsavivssiserasamarore Appi

ili

TABLE OF AUTHORITIES

U.S. SUPREME COURT CASES

Alden v. Maine,

527 U.S. 706 (1999) ..cccccssssssseeesssssesssessee

Board of Trustees of University of

Alabama v. Garrett,

Pk Sh PO ERED vesinincnticstnriecemsinmetants

Central Railroad & Banking Co. v. Pettus,

TESS TIT ss hci

Chisolm v. Georgia,

2 US. (2 Dall) 419 (1793) ..eccccsssssseseseeee

Clark v. Barnard,

Fe he te CIE ie hessakdesnemceninerorennes

Dekalb County Division of Family and

Children v. Platter (In re: Platter),

BD Fe GF I i istssictaicceninrrsemetstcginns

Fairmont Creamery Co. v. Minnesota,

isd th, Yh, :; aE

Federal Maritime Commission v. South

Carolina State Ports Authority,

_, US. _, 122 S.Ct. 1864 (2000).........

Page(s)

ieeeasndinees 15

Florida Prepaid Post Secondary Education Experise

Board v. College Savings Bank,

RF SEs ET. COO vecerenietinisanicinntinsintniaeeiannnmle 9

Gardner v. New Jersey,

SE EE ID birncccensavcinaretasrennecinnsdnicerwmnctere 15

Gunter v. Atlantic Coast Line Railroad Co.,

BPE GLE: BED CRE sas vncnsitoniicnsnvetetansaseprenerisaons 15, 16

Hall v. Cole,

ES Ws BITE rics csccrepesivembactidceanaes 22

Harrison v. Perea,

De Sa Ok GEE DE sisrsicrexensipinemcenionmohdneein 21

Hobbs v. McLean,

BET Wi SOE (EE eiiisieteerieatnena 21

Hutto v. Finney,

ST Cis GA LG Fe priictnrirecnrencrnmacnetas 20, 21

Idaho v. Coeur d’ Alene Tribe of Idaho,

Ee Re PE GET E iicHasvaeni dei emncteenecennneian 11

Kimel v. Florida Board of Regents,

Ae Sa CE eicisss viesncshiciadbs candies aendaabaal 9

Lapides v. Board of Regents of the

University System of Georgia,

_ US. _, 1225.Ct. 1640 (2002).................... 15, 16

Mills v. Electric Auto Lite Co.,

Pe Sa FFP ESI tisidn iidskeaenemeeenienaas 22

Perez v. Campbell, ,

GRE US, GBF OFFA) ccascnsiscsnioncrsnencossssvnvernernsionsiiens 13

Principality of Monaco v. Mississippi,

292 IG. SIS GSES wsvesnsssersesssssesssassursqocoreesseseuseess 11

Puerto Rico Aqueduct and Sewer

Authority v. Metcalf and Eddy,

FOG CIS. TOF CIGD exetnvrrnterartscenerncorensnncinesisnisnaiens 19

Seminole Tribe of Florida v. Florida,

S27 US. GE FIG) ssisessnsssecsssesnnsesecsashverpentinensson 9,14

Sprague v. Ticonic National Bank,

FOZ US. 161 (ASD)... insesssasssercrscesoosrsennysssoernesesass 21

Trustees of the Improvement Funa of the

State of Florida v. Greenough,

TOS OS, SEF CEFR) os vessecenstsvoresnsnresinesasinanvnenneaons 21

Wyoming Department of Transportation v.

Straight (In re: Straight),

143 F.3d 1387 (10% Cir. 1996).........ssssscerseessees 17

FEDERAL CASES

Arecibo Community Health Care, Inc., v.

Commonwealth of Puerto Rico,

2PO F.Sk 27 C29 COR, TAREE) cxnvssenserssevesoneisvnvevecasnnie 19

College Savings Bank v. Florida Prepaid

Post Secondary Education Expense Board,

527 US. C66 (1999) ossiassssevsvssssvensssveseasvoventonnnnensngeee 9

Confederated Tribes of the Colville

Reservation Tribal Credit & White

(In re: White),

BF ee SE GP erincetsicinisieseniciseennibanmenennseoune 22

Fernandez v. PNL Asset Management

Co. LLC (In re: Fernandez),

123 F.3d 241 (5 Cir.) as amended by

BP On REO GME. BFGF) vesesesessocevesvisnsvonersens 15

Gaskill v. Gordon,

yt RT ial A | 22

Hood v. Tennessee Student Assistance

Corp. (In re: Hood),

J19 F.3d 755 (6™ Cir. 2003)........0ccessec0e0: 10, 11,13 ©

In re: Bliemeister,

251 B.R. 383 (Bankr. D. Ariz. 2000)

affd on alternate grounds,

SFO Fn OPO CF GIR. MUD sesvnseecessvnpisrnennenennsonens 10

In re: Bliemeister,

BPO FFE I CF CAE. BIE) wvscesscinsniensssexizesnesesoens 20

In re: Nelson,

254 B.R. 436 (Bankr. W.D. Wis. 2000),

rev'd Nelson v. LaCrosse County District

Attorney (State of Wisconsin),

Pk Dk ANI CT GME. ZINE) covvnasvsseseneresiosenenenns 10-11

Mitchell v. Franchise Tax Board (In re: Mitchell),

BFF Fe BERS CO GAD, DIOR vissnvsntenssasyorersoenessnves 14

Vil

Nelson v. LaCrosse County District

Attorney (State of Wisconsin),

301 F.3d 820 (7% Cir. 2002).................s.sceesees 11, 14

Rose v. United States (In re: Rose),

167 F.3d S26 BO Cin, TOFF) onsencnccesenssssevsessrers 10, 18

Sacred Heart Hospital of Pennsylvania

(In re: Sacred Heart Hospital of Norristown),

TO Pe Fae Ca ee Tp wicsscrnssvernacenensteonavetons 14

Schlossberg v. Maryland (In re: Creative

Goldsmith of Washington, D.C., Inc.,

119 F.3d 1140 (4 Cir. 1997), cert. denied,

ee ek I PE witriecrriencctireeninttincrnennnss 14, 16

Scholes v. Lehman,

56 F.3d 750 (7 Cir.), cert. denied sub.

nom African Enterprise, Inc. v. Scholes,

Re EA Fe EPID ersdienrncesecstnnitenninbianinenenninnstons 22

Schulman v. State of California,

237 F.3d 967 (9t Cir.) cert. denied

Bg Ba Ce Se a ncneveecescesiessesinn 18

State of Georgia Department of Revenue v.

Burke (In re: Burke),

BOB FSG TOES CEO Cae, TI) cvevecsssniscecnsesnrenesvnss 17

State of lowa v. Union Asphalt and

Roadoils, Inc.,

409 F.2d 1239 (8 Cir. 1969) ..............ccsccscssscesees 20

Vill

CONSTITUTIONAL PROVISIONS

Re SUD, IN. FER sisson cnnecencsiterimreoscaseevisnenievaden passim

U.S. Const. Article I, Section 8, Clause 4 ............ 2,9,12

STATUTES

Be See EE cesdiennsslinses oarcadatbansaeciganianeuiinnvduenas 4

Be Wis ee ckchtesnunianicininnonen i, 2,14

Be es OF EE ovata sams sceerashcecnsatinctotarensaeteeienaetes 14

Ee as eT upesaadondaciaacacidccsasntacntiaeeseeciinsdganhavinpcacostesidees 1

CORI a 17

Be a ee riilecsinennestiitenitihinseciaetviapbetaietanniceaiciniensanieds 18

FP ee Oe Ue serthaecasareeptideaah se pusensicleabnsarecletiideapinneinnivnih 8

gt | RS & Sete UNLeente ana eee oR eRe 8

ae ea Be I cd aaincae sexarasravnoaoiicla cs divlocsaddadowneaieseoidieds 8

Bc te I sesraestimnaanirtinsdee tices htiin Lbatnlensdalaatdnshesnaiadoraaaiae 1

Be ace Be MIE carat cscescaechvn aa iailin Shia iotelcanielaicanidadiesdnlisanenees 1

SG Ae BE apie aie achnsaesccsiincnbeeictbecetecintininsacataseinnebih 8

mE a Ut TPT caticrasicsiavenctelcasqastecenedanicainneicakesinenenctoxancis 1

Se ans Ae Rick seis dcbescssesasetcicannaseseneiniavenssans 3

RULES

Rs Ha PIII ak ops calothsde tid iasonaediceninedabialabaaibdlosanieeniinounisballen 16

SINE Sas Pads Us TI snicecsnsssansédienhenevaennbamirsoiinstisedehadandamaesiaetonsens 19

ee Pe i, Bia crcksenenieticciheoneenantiininiveneinantinnianeenina 16

PUBLICATIONS

Browning, M., Tough Bankruptcy Issues

Under the Eleventh Amendment,

7 Journal of Bankruptcy Law and

PN MIEN SI once nintsnharinkivacnseniancbiniinietenasatins 13

BR III BN, Disc santo ncesssnsicvessdesnsstcncencesiees 10, 11, 12

eB i eecthiiccatiiecs aerteinetniccnekctnisineeas 11, 12

Gebbia-Pinetti, K.M., State Sovereign

Immunity and the Bankruptcy Code [Part One],

7 Journal of Bankruptcy Law and

FE FEE SE eenscerskarsacionsisonsinntrsinnanesamcenenss 13

Gebbia-Pinetti, K.M., State Sovereign Immunity

and the Bankruptcy Code [Part Two],

8 Journal of Bankruptcy Law and

RN ae Ci iirnsecaitivsniincnincnasdinencerinsstionece 13-14

Klee, K.N., Jchnston, J.O., Winston,

State Defiance of Bankruptcy Law,

52 Vanderbilt Law Review 1528 (1999)............ 13

i ata iia te sate sill, ens ats

OPINIONS AND ORDERS BELOW

The written opinion of the United States Court

of Appeals for the Fourth Circuit in this matter was

entered on January 9, 2003 (App. 1-9) The Order of the

U.S. District Court for the Northern District of West

Virginia was entered December 12, 2001 (App. 10-28).

The Order of the United States Bankruptcy Court for

the Northern District of West Virginia was entered

August 21, 2000. (App. 29-36) All are unpublished.

STATEMENT OF JURISDICTION

The written opinion of the United States Court

of Appeals for the Fourth Circuit in this matter was

issued on January 9, 2003. This Court has jurisdiction to

grant a petition for a writ of certiorari to review a

decision of the United States Court of Appeals for the

Fourth Circuit pursuant to 28 U.S.C. § 1254.

The Assistant United States Trustee for West

Virginia, an appointee of the Attorney General

pursuant to 28 U.S.C. § 582, has had the right to appear

in this matter and be heard pursuant to 11 U.S.C. § 307,

but has not done so. It appears that no separate

certification under 28 U.S.C. § 2403 has been necessary.

CONSTITUTIONAL AND STATUTORY

PROVISIONS AT ISSUE

® Article I, Section 8, Clause 4 of the

Constitution of the United States

The Congress shall have power . . . To establish an

uniform Rule of Naturalization and uniform Laws on

the Subject of Bankruptcies throughout the United

States;

y Eleventh Amendment to the Constitution of

the United States

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.

3. 11U.S.C.§ 106

(a)(1) Notwithstanding an assertion of sovereign

immunity, sovereign immunity is abrogated as

to a governmental unit to the extent set forth in

this section with respect to the following: 105,

106, 107, 108, 303, 346, 362, 363, 364, 365, 366,

502, 503, 505, 506, 522, 523, 524, 525, 542, 542,

543, 544, 545, 546, 547, 548, 549, 550, 551, 552,

553, 722, 724, 725, 726, 728, 744, 749, 764, 901,

922, 926, 928, 929, 944, 1107, 1141, 1142, 1143,

1146, 1201, 1203, 1205, 1206, 1227, 1231, 1301,

1303, 1305, and 1327 of this title.

(2)

(4)

(9)

The court may hear and determine any

issue arising with respect to the

application of such _ sections to

governmental units.

The court may issue against a

governmental unit an order, process, or

judgment under such sections or the

Federal Rules of Bankruptcy Procedure,

including an order or judgment awarding

a money recovery, but not including an

award of punitive damages. Such order

or judgment for costs or fees under this

title or the Federal Rules of Bankruptcy

Procedure against any governmental unit

shall be consistent with the provisions

and limitations of section 2412(d)(2)(A) of

title 28.

The enforcement of any such order,

process, or judgment against any

governmental unit shall be consistent

with appropriate nonbankruptcy law

applicable to such governmental unit

and, in the case of a money judgment

against the United States, shall be paid as

if it is a judgment rendered by a district

court of the United States.

Nothing in this section shall create any

substantive claim for relief or cause of

action not otherwise existing under this

title, the Federal Rules of Bankruptcy

Procedure, or nonbankruptcy law.

(b) | A governmental unit that has filed

a proof of claim in the case is

deemed to have waived sovereign

immunity with respect to a claim

against such governmental unit

that is property of the estate and

that arose out of the same

transaction or occurrence out of

which the claim of — such

governmental unit arose.

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.

4. 110U.S.C.§101(27)

In this title . . (27) “governmental unit” means United

States; State; Commonwealth; District; Territory;

municipality; foreign state; department, agency or

instrumentality of the United States (but not a United

States Trustee while serving as a trustee in a case under

this title), a State, a Commonwealth, a District, a

Territory, a municipality, or a foreign state; or other

foreign or domestic government.

STATEMENT OF THE CASE

In 1995, T & T Fuels, Inc. filed for bankruptcy in

the United States Bankruptcy Court for the Northern

District of West Virginia. Martin P. Sheehan, petitioner,

was appointed as trustee. While T & T Fuels, Inc. listed

some equipment on its bankruptcy schedules, it

appeared that most of the assets were encumbered by

secured liens. There were no liquid assets.

T & T Fuels, Inc. had previously operated coal

mines in West Virginia. While the coal mining had

ceased, the mines remained an active source of acid

mine drainage. Whenever it would rain, water would

seep into the mines and react with the air and minerals

in the mines. As the mines filled, gravity would cause

polluted water to drain from the mine untreated.

Without assets, and with obligations to treat

polluted water, Sheehan threatened to resign as trustee

unless given personal immunity by the State and

Federal governments for the discharge of acid mine

drainage beyond his control. The relevant government

agencies agreed to this request. Thereafter, the West

Virginia Department of Environmental Protection

(hereinafter the DEP) assumed the day to day

management of the closed mine sites. In doing so, DEP

assumed the position that it was fulfilling the duties of

T & T Fuels, Inc. under relevant environmental statutes

and regulations, and made clear it would seek to be

reimbursed by the Bankruptcy Estate of T & T Fuels,

Inc. for its efforts.

Sheehan proceeded to liquidate the tangible

assets of T & T Fuels, Inc. not necessary for water

treatment. In addition, he employed counsel (the co-

petitioners) on a contingent fee basis, to pursue claims

against the principals of T & T Fuels, Inc, and several

related corporations for breach of fiduciary duty and

disguised fraudulent transfers of assets.

DEP filed a proof of claim. DEP was then

entitled to insist that the trustee exercise his fiduciary

obligations for the benefit of DEP as well as other

creditors. In the proof of claim, DEP sought in excess

of 36 million dollars to permanently correct water

pollution problems. After extensive hearings, the

Bankruptcy Court allowed the claim, as an unsecured

claim in the amount of approximately 6.7 million

dollars. DEP appealed to the District Court claiming

that the amount was inadequate, and accorded an

incorrect priority.

Meanwhile, attorneys for Sheehan (the co-

petitioners) continued to make substantial efforts to

develop the case against the principals in T & T Fuels,

Inc. The trustee filed a motion for summary judgment

seeking a judgment adequate to pay all creditors,

including the 6.7 million dollar claim allowed to DEP.

Although that motion was denied, the suit against the

principals was scheduled for trial.

One of the principals, Paul Thomas, opened

negotiations to make restitution to DEP as part of a

plea of guilty to criminal violations of the Clean Water

Act in the United States District Court for the Northern

District of West Virginia. At hearings in that forum,

Mr. Thomas and DEP agreed it was their collective

desire to maximize the recovery by DEP by not paying

the trustee or his counsel. DEP indicated if a direct deal

could not be reached, it would rely upon the trustees

efforts and seek to recover from the bankruptcy estate.

Making a separate agreement was contrary to a series

of representations made by DEP to the trustee and his

counsel (the co-petitioners) during the pendency of the

bankruptcy case.

Despite the representations made to Sheehan,

DEP concluded a restitution agreement with Mr.

Thomas. One of the conditions of the restitution

agreement was that DEP would withdraw its proof of.

claim in Bankruptcy Court. This substantially reduced

the size of the damage claim the trustee was making

against the principals.! Sheehan then concluded a

separate agreement with the principals. However even

in so doing Sheehan protected DEP. Specifically the

agreement between Sheehan and the principals of T &

T was made conditional on withdrawal of the DEP

proof of claim. Sheehan included such a provision

because DEP had not actually withdrawn its proof of

claim and relieved Sheehan of his fiduciary duties to

DEP.

Sheehan prepared a distribution report, and

convinced his counsel to reduce the amount they

sought as fees to guarantee a recovery by unsecured

creditors of fifty per cent. Meanwhile a separate motion

. Because the principals were, through several corporations,

the shareholders, the upper limit on damages could not exceed an

amount necessary to pay creditor claims. Any greater amount

would be paid back to the persons being sued.

aaa anal ece mee.

was filed by the trustee on behalf of his counsel (the co-

petitioners) seeking a quantum meruit attorneys’ fee

from DEP. The Bankruptcy Court sua sponte raised the

Eleventh Amendment as a threshold matter. After

briefing, the Bankruptcy Court held that the Eleventh

Amendment was an impediment to an award of

attorneys’ fees. However, the Bankruptcy Court did

recognize that DEP had a moral obligation to pay the

trustee and his counsel (the co-petitioners) for work

which in fact had benefited DEP.

On appeal, the District Court agreed their

Eleventh Amendment created a bar to the award of

quantum meruit fees that had been earned and

affirmed the Bankruptcy Court. The Court of Appeals

for the Fourth Circuit affirmed also.

Basis For Jurisdiction Below

The Court of Appeals for the Fourth Circuit had

jurisdiction of an appeal from a final order of the

United States District Court pursuant to 28 U.S.C.

158(d). The United States District Court for the

Northern District of West Virginia had jurisdiction

pursuant to 28 U.S.C. § 158 and § 1334. Pursuant to 28

U.S.C. § 157 jurisdiction was initially exercised by the

United States Bankruptcy Court for the Northern

District of West Virginia.

eo ee ee

eee

ARGUMENT FOR ALLOWANCE OF THE WRIT

I. THE PLAN OF CONVENTION

In Seminole Tribe of Florida v. Florida, 517 U.S.

44 (1996) this Court held that Congress lacked power

under the Indian Commerce Clause in Article I, Section

8, clause 3 of the Constitution to abrogate the

prohibition against private parties suing States in

federal court that is the essence of the protection in the

Eleventh Amendment. In that case, the Court

suggested that no power in Article I, section 8 existed

which would be adequate to permit a private party to

sue a non-consenting State. This view of Seminole

Tribe has also been expressed in Florida Prepaid Post

Secondary Education Expense _Board_v._ College

Savings Bank, 527 U.S. 627, 636 (1999); College Savings

Bank _v. Florida Prepaid Post Secondary Education

Expense Board, 527 U.S. 666, 672 (1999); Kimel_v.

Florida Board of Regents, 528 U.S. 62, 78 (2000); Board

of Trustees of University of Alabama v. Garrett, 531

US. 356, 364 (2001); and, Federal Maritime

Commission v. South Carolina State Ports Authority,

__US.__ , 1225. Ct. 1864, 1878-79 (2002).

Still this Court has never addressed whether the

specific power ceded to Congress under the

Bankruptcy Clause in Article I, Section 8, clause 4

would permit Congress to require non-consenting

States to be bound in bankruptcy matters initiated by

private parties. The general discussion of the limits of

congressional power under Article I, Section 8 is of

only limited usefulness when evaluating the

Bankruptcy Clause? for three reasons. First, unlike the

other powers granted to Congress, the Bankruptcy

Clause gave Congress the power to enact “uniform

laws on the subject of Bankruptcies.” Second,

bankruptcy law would inevitably involve some

adjudication by a tribunal of whether a person met the

standards established for bankrupts and decision-

making about the adjustment of debts as well as the

proper distribution of assets. Thirdly, the unique

phrasing of the Bankruptcy Clause, requiring uniform

laws, has been explained as crucial in understanding

the cession of State sovereignty in The Federalist, No.

32, in connection with similar language in the

Naturalization clause. Collectively, these reasons have

led to a division in the United States Courts of Appeals,

and other lower federal courts, on whether Congress

possessed the power to permit private parties to seek

adjudications against non-consenting States in

bankruptcy cases.

The United States Court of Appeals for the Sixth

Circuit recently held in Hood _v.Tennessee Student

Assistance Corp. (In re: Hood), 319 F.3d 755(6th Cir.

2003) that Congress had the power under the

Bankruptcy Clause to abrogate sovereign immunity.

Other cases which reached similar conclusions are In

re: Bliemeister, 251 B.R. 383 (Bankr. D. Ariz. 2000) aff'd

on alternate grounds 296 F.3d 858 (9 Cir. 2002); In re:

Nelson, 254 B.R. 436 (Bankr. W.D. Wis. 2000) rev’d

2 “[BJankruptcy has long been considered a special area of

the law and the Supreme Court's June 1999 rulings on sovereign

immunity have not resolved how far Congressional power

extends in the bankruptcy context.” Rose v. United States (In re:

Rose), 187 F.3d 926, 930 n.1 (8th Cir. 1999).

_———————

Nelson v. LaCrosse County Ditrict Attorney (State of

Wisconsin), 301 F.3d 820 (7th Cir. 2002).

The essence of the reasoning in Hood is that the

inclusion of a uniformity requirement in the

Bankruptcy Clause reflected a studied waiver of

sovereignty by the States over bankruptcy law issues as

part of the original plan of convention? Support for

this notion begins with The Federalist, No. 81, relied

upon repeatedly by this Court as describing the role of

the federal courts in the scheme of the Constitution.

While The Federalist, No. 81, recognizes limits on the

power of the federal courts over the States, it also

acknowledges that other aspects of state sovereignty

were discussed in other portions of The Federalist.*

[This is understood as a cross-reference to The

3 “ [Eleventh Amendment] immunity is one the States enjoy

save where there has been ‘a surrender of this immunity in the

plan of convention’ Principality of Monaco v. Mississippi, 292 US.

323 (1934)(quoting The Federalist No. 81)” Idaho v. Coeur d’ Alene

Tribe of Idaho, 521 U.S. 261, 268 (1997)

‘ In Principality of Monaco v. Mississippi, 292 U.S. 313, 324

(1934) this Court recounted that;

Hamilton, in the Federalist, No. 81, made the foilowing

emphatic statement of the general principals of immunity:

“It is inherent in the nature of sovereignty net to be amenable

to the suit of an individual without its consent. This is the general

sense and the general practice of mankind; and the exemption as

one of the attributes of sovereignty, is now enjoyed by the

government of every State in the Union. Unless, therefore, there is

a surrender to this immunity in the plan of convention, it will

remain with the States, and the danger intimated must be merely

ideal. The circumstances which are necessary to produce an

alienation of State sovereignty were discussed in considering the

article on taxation and need not be repeated here.”

Federalist, No. 32.] In that document, there is. an

express discussion of the surrender of sovereignty by

the States over naturalization, the other power in

Article I, Section 8, clause 4. The naturalization power

is the only other specific power subject to a uniformity

requirement in Article I, Section 8. In The Federalist

No. 32, Hamilton explained that there had been a

complete cession of sovereignty by the States over

naturalization matters as was made clear by the use of

a uniform law requirement.

The Court of Appeals for the Sixth Circuit also

recognized that the purpose of the Eleventh

Amendment was not to change the understanding of

the judicial power over the States as reflected in

Federalist Paper No. 81. Instead the adoption of the

Eleventh Amendment was recognized as restoring the

general understanding of that power at the time of the

adoption of the Constitution. Restoration of the limits

on federal power was necessary because the original

view, described in The Federalist, No. 81, had been

frustrated by the decision in Chisolm_v. Georgia, 2

U.S.(2 Dall) 419 (1793). Restoration of the plan of

convention has repeatedly been recognized as the

purpose of the Eleventh Amendment. See e.g., Alden v.

Maine, 527 1S. 706 (1999).

The Hood court found that there was a

surrender of sovereignty over naturalization and

bankruptcy in the plan of convention, and found that

the Eleventh Amendment had not been enacted to

upset the original plan of the convention, but rather to

restore the original plan. The Court of Appeals for the

Sixth Circuit then concluded that neither the Eleventh

Amendment, nor the principles behind it, limited

congressional power under the Bankruptcy Clause to

resolve issues involving the States. The Hood court

held the States had waived sovereign immunity over

bankruptcy matters as part of the waiver of

sovereignty in the original plan of convention.

This ruling obviates a number of difficulties that

would occur in the administration of current

bankruptcy legislation should States be immune from

the effect of bankruptcy proceedings. For example,

could States claim immunity from the automatic stay

and seize assets to satisfy obligations to a State? Or,

could States claim a discharge in bankruptcy is

ineffective against a State? Or, even if a general

discharge is effective, could a State claim immunity

from proceedings to obtain a discharge from an

obligation owed to a State when additional procedural

steps are required, such as institution of proceedings to

discharge a student loan as part of an effort to

discharge a student loan? Or, can a State be required to

return estate assets it has seized or been paid? Or, can a

State impose a sanction such as loss of license on those

who fail to pay certain debts?5 See Klee, K.N., Johnston,

J.O., Winston, E., State Defiance of Bankruptcy Law, 52

Vanderbilt Law Review 1528 (1999); Browning, M.,

Tough Bankruptcy __Issues__Under__the__Eleventh

Amendment, 7 Journal of Bankruptcy Law and Practice

219 (1998); Gebbia-Pinetti, K.M., State Sovereign

Immunity _and_the Bankruptcy Code [Part One] 7

Journal of Bankruptcy Law and Practice 521 (1998);

and, Gebbia-Pinetti, K.M., State Sovereign Immunity

° This Court held that was not possible in Perez __v.

Campbell, 402 U.S. 637 (1971).

and_the Bankruptcy Code [Part Two], 8 Journal of

Bankruptcy Law and Practice 3 (1998)

In contrast, the United States Court of Appeals

for the Seventh Circuit has rejected the claim that

Congress had any qualitatively different power under

the Bankruptcy Clause than elsewhere in Article I,

Section 8. See, Nelson _v. LaCrosse County _Ditrict

Attorney (State of Wisconsin), 301 F.3d 820 (7th Cir.

2002). It refused to consider the plan of convention

argument, later accepted in Hood Instead, the Nelson

court found that this Court's decision in Seminole Tribe

and its progeny precluded any evaluation of whether

the uniformity requirement of the Bankruptcy Clause

and the relevant provisions of The Federalist required a

different analysis. In the instant case, the plan of

convention argument was raised by petitioners and the

Court of Appeals for the Fourth Circuit declined to

address the argument (see slip opinion at page App.

vii). The Court of Appeals held it was bound by the

prior panel decision in Schlossberg v. Maryland (In re:

Creative Goldsmith of Washington, D.C., Inc.), 119 F.3d

1140 (4 Cir. 1997) cert. denied 523 U.S. 1075 (1998)

finding that 11 U.S.C § 106(a) was unconstitutional,

even though that decision did not address the plan of

convention issue argument.

Other Courts of Appeals have also held that 11

U.S.C. § 106 is unconstitutional without specific

analysis of the plan of convention argument. See e.g.,

Mitchell v. Franchise Tax Board (In re: Mitchell), 209

F.3d 1111 (9% Cir. 2000); Sacred Heart Hosp. of

Norristown _v. Pennsylvania (In_re: Sacred Heart

Hospital of Norristown), 133 F.3d 237 (3'4 Cir. 1998);

and Fernandez v. PNL Asset Management Co. LLC (In

re: Fernandez), 123 F.3d 241 (5t Cir.) amended by 130

F.3d 1138 (5'* Cir. 1997)(rejecting the importance of the

uniform law provision without addressing the plan of

convention issue).

WHEREFORE petitioner suggests that the

petition for certiorari should be granted because there ,

is now an important issue concerning the jurisdiction

of the federal courts over States in bankruptcy

proceedings in the face of claims by States of immunity

from jurisdiction under the Eleventh Amendment to

the Constitution and several of the Courts of Appeals

have considered this issue, and there is now a conflict

in those decisions.

Il. WAIVER

This Court has long held that a State can waive

the protection of the Eleventh Amendment by its

litigation conduct. In the seminal case of Clark _v.

Barnard, 108 U.S. 436 (1883), the Court held that where

a state intervened in a proceeding and claimed a fund

that had been paid into court, the State had “become a

party to the litigation to the full extent required for its »

complete determination.” Id. at 448. The notion of

waiver by “litigation conduct” continued to be

recognized in Gunter v. Atlantic Coast Line Railroad

Co., 200 U.S. 273 (1906) and Gardner _v. New Jersey,

329 U.S. 565 (1947). Last term, the principle of waiver

by litigation conduct was again recognized in Lapides

v. Board of Regents of the University System _of

Georgia, __ U.S. __, 122 S. Ct. 1640 (2002).

The principle behind a litigation conduct waiver

is that by some affirmative involvement in litigation, a

State’s decision to resolve a controversy in a federal

forum has been made manifest. Consequently, it

“cannot escape the result of its own voluntary act by

invoking the protection of the Eleventh Amendment.”

Id. at __, 122 S. Ct. at 1644 (quoting Gunter). The

Lapides case actually held that the removal of a suit

against a State by the State to a federal forum was a

clear example of litigation conduct that could only be

construed as a waiver of the Eleventh Amendment.

Obviously, it did not hold, nor has it been understood

to have held, that removal was the only example of

litigation conduct that might support a waiver.

The United States Court of Appeals for the

Fourth Circuit has held that another clear example of

waiver by litigation conduct is the mandatory counter-

claim rule. See Schlossberg v. Maryland (In re: Creative

Goldsmith of Washington, D.C., Inc), 119 F.3d 1140 (4%

Cir. 1997) cert. denied 523, U.S. 1025 (1998). The

essence of the mandatory counter-claim rule is that

when a State initiates action in federal court, as a

plaintiff, it must have agreed to resolve the entire

controversy between the parties that was placed at

issue by the plaintiff-State. This notion is widely

recognized in the bankruptcy context although its exact

scope is subject to different linguistic formulations. In

Schlossberg, which involved an adversary proceeding,

the Court focused on the details of Federal Rule of Civil

Procedure 13(a) made applicable to such proceedings

by Bankruptcy Rule of Procedure 7013. The Court held

that the filing of a proof of claim by the Maryland

agency responsible for tax collection for unpaid sales

taxes and withholding taxes were said not to arise out

of the same transaction involving the preferential

payment of corporate income taxes that the trustee

sought to recover.

This Court of Appeals for the Tenth Circuit in

Wyoming Department of Transportation v. Straight (In

re: Straight), 143 F.3d 1387 (10% Cir. 1998) applied

waiver principles more loosely. It held that where two

state agencies had filed a proof of claim for unpaid

taxes, the subsequent suspension of the debtor from a

Disadvantaged Business Enterprise program by a third

state agency for non-payment of those taxes the action

of all the agencies was the action of a single entity, the

State. The proofs of claim were sufficient connected to

the violation of the automatic stay to permit the

Bankruptcy Court to require the State to honor the

automatic stay issued pursuant to 11 U.S.C. § 362. The

award of attorneys’ fees necessary to enforce the

automatic stay was sustained.

In State of Georgia Department of Revenue v.

Burke (In re: Burke), 146 F.3d 1313 (11 Cir. 1998) the

State file a proof of claim to collect particular taxes and

the taxes were determined to be entitled to treatment as

unsecured debt. Thereafter, the State ignored the

discharge injunction issued by the bankruptcy court.

The State was found liable for attorneys’ fees incurred

in enforcing the automatic stay and the discharge

injunction.®

In Rose _v. United States Department_ of

Education (In re: Rose), 187 F.3d 926 (8 Cir. 1999) the

Court of Appeals for the Eighth Circuit found a waiver

was supported where the debtor filed for bankruptcy.

The State then filed a proof of claim to collect on a

student loan. The debtor then initiated an adversary

proceeding to declare the student loan debt

dischargeable under the undue hardship provisions of

11 USC. § 523. The State asserted Eleventh

Amendment immunity from suit in the adversary

proceeding. Speaking of the scope of the waiver, the

Court wrote, “waiver in one aspect may be sufficiently

intertwined so that a waiver in one aspect applies to

others as well.” Id. at 929. The Court found the filing of

the proof of claim was sufficient to permit adjudication

of the student loan debt in the dichargeability

proceeding.

In Schulman v. State of California (In re: Lazar),

237 F.3d 967 (9 Cir. 2001) cert. denied, U.S. __, 122

S. Ct. 458 (2001) the Court of Appeals for the Ninth

Circuit noted that no consensus had been reached on

the proper scope of waiver of the Eleventh

Amendment when a State had filed a proof of claim. Id.

at 978.

6 In a highly similar case, Dekalb County Division of

Family and Children v. Platter (In re: Platter), 140 F.3d 676 (1998)

the Court of Appeals for the Seventh Circuit found that by

initiating an adversary proceeding to determine a debt to be non-

dischargeable, the state agency had acted as a plaintiff and would

be bound by the decision of the bankruptcy court regarding

dischargeability.

Discussing both the same transaction and

occurrence test, and the logical relationship test of

Federal Rule of Civil Procedure 13, the Court

cautiously held that where the State had asserted a

claim for unpaid Underground Storage Tank fees, the

chapter 7 trustee was at least entitled to offset the cost

of environmental clean-up that would have ordinarily

been paid from the Underground Storage Tank fund

but which had been paid by the debtor. Holding that

the request arose out of the same transaction, even

though not part of the same transaction, the Court held

there was a waiver of the Eleventh Amendment. The

Court specifically declined however to determine if

only offsets against filed claims were permitted or

whether affirmative recoveries from a State were

possible.

Finally, in Arecibo Community Health Care, Inc.

v. Commonwealth of Puerto Rico, 270 F.3d 17 (1s Cir.

2001) it was held that the while the proper scope of the

rule of waiver when a proof of claim was filed was in

doubt, Puerto Rico” had not waived the protection of

the Eleventh Amendment sufficiently to be sued for

damages for breach of contract where it had previously

filed a proof of claim for damages under the contract.

This Court seemed to favor the “arising out of”

standard.

. The Eleventh Amendment has been held applicable to

Puerto Rico by the United States Court of Appeals for the First

Circuit. That conclusion has not been considered by this Court.

See Puerto Rico Aqueduct and Sewer Authority v. Metcalf and

Eddy, 506 U‘S. 139, 142 n.1 (1993).

In the instant case, the Court of Appeals for the

Fourth Circuit appears to have held that unless a

mandatory counter-claim is asserted there can be no

litigation conduct waiver of the Eleventh Amendment

in the bankruptcy context. This is inconsistent with the

views of at least the United States Court of Appeals for

the Ninth Circuit. In In_re: Bliemeister, 296 F.3d 858 (9th

Cir. 2002) the Court of Appeals found waiver had

occurred when a State appeared for a hearing on the

merits without raising the Eleventh Amendment

objection to jurisdiction until after a sense that

prevailing on the merits appeared unlikely This sneak-

a-peek approach to litigation was seen as a calculated

effort to attempt to escape the consequences of a

voluntary appearance.

It is also inconsistent with the views of the

United States Court of Appeals for the Eighth Circuit.

In State of Iowa v. Union Asphalt and Roadoils, Inc.,

409 F.2d 1239 (8t* Cir. 1969) the Court held that when

Iowa instituted an antitrust action in federal court, it

consented to entry of all valid judicial orders in that

case. Such orders could include the resolution of

requests for payment of quantum _meruit attorney’s

fees sought by its own counsel. The request for fees

was found to have been incident to the main case, and

within the ancillary jurisdiction of the federal court.8

. Costs and attorneys fees have been considered incident to

cases involving States and have long been assessed against States

in the face of Eleventh Amendment claims that such awards

cannot be made. See, Hutto v. Finney, 437 U.S. 678, 697 (1978)[” A]

federal court may treat a State like any other litigant when it

assesses costs....”) and Fairmont Creamery Co. v. Minnesota, 275

US. 70 (1927).

The trustee in the instant case asserted that

when the State filed a proof of claim, it clearly asserted

a claim to property of the estate, and required the

trustee to exercise his fiduciary duties on behalf of the

State. Further the proof of claim required the trustee’s

attorneys to exercise their fiduciary responsibilities so

as to benefit all creditors, including the State. These

acts resulted in acquiescence in the efforts expended by

the trustee sufficiently similar to that for which parties

have been held responsible for the expense of counsel

in litigation under the common benefit doctrine. See,

Hutto v. Finney, 437 U.S. 678, 698 (1978) (“In England,

costs ‘as between solicitor and client,’ are routinely

taxed today and have been since 1278.”) (citations

omitted) Accepting a benefit, requires payment of the

associated fees under the “common benefit” doctrine.

See, Trustees of the Improvement Fund of the State of

Florida _v. Greenough, 105 U.S. 527 (1882)(trust, and

therefore all beneficiaries, liable for fees of attorneys

whose litigation efforts, improved position of all

beneficiaries); Central Railroad _& Banking Co. _v.

Pettus, 113 U.S. 116 (1885) (lack of contractual

relationship with attorneys did not obviate need to

contribute to payment of fees that benefited group),

Hobbs v. McLean, 117 U.S. 567 (1886)(proportional

contribution from all who accept benefits of attorney

work product required); Harrison v. Perea, 168 U.S. 311

(1897) (defendant who was outed of independent claim

to fund, but entitled to retain part of fund as a

beneficiary, similar to plaintiffs, liable for pro rata

share of attorney’s fees on portion retained); Sprague v.

Ticonic National Bank, 307 U.S. 161 (1939) (attorney’s

fees awarded by Court from fund secured to benefit

group, including non-parties, even though no class

action formally alleged); Mills v. Electric Auto Lite Co.,

396 U.S. 375 (1970) (corporation, as holder of

shareholder equity, required to pay plaintiff's attorneys

where one _ plaintiff vindicated rights of all

shareholders); and Hall v. Cole, 412 U.S. 1 (1973)

(union required to pay plaintiff's attorneys where one

plaintiff vindicated rights of all union members).

In Confederated Tribes of the Colville

Reservation Tribal Credit v. White (In re: White), 139

F.3d 1268 (1998) (Involvement of Indian Tribe in

Chapter 11 proceedings sufficient to constitute a

waiver of sovereign immunity of tribe in converted

Chapter 7 proceedings.) Acquiescence® signaled the

intention to accept the benefits of the efforts expended

by counsel, and carried with it the burden of paying for

those efforts. After accepting benefits resulting from

litigation in a particular forum, there is a consequential

submission to the jurisdiction of that forum for a

determination of what should be paid. Accepting the

benefits is litigation conduct sufficient to constitute a

waiver of the Eleventh Amendment.

9 In Gaskill v. Gordon, 27 F.3d 248 (7 Cir. 1994) the Court

of Appeals held that a creditor had acquiesced in a receivership

and was liable to payment of fees of the receiver and his counsel,

even where the creditor had objected to the receivership and

ultimately prevailed in ousting the receiver. Acquiescence in this

case existed because the creditor took no immediate effort to oust

the receiver, and the creditor insisted upon holding the receiver to

his fiduciary duty to protect assets that ultimately benefited the

objecting creditor. The similarity between receivership and

bankruptcy law warrants borrowing concepts from one of these

areas to another. Scholes v. Lehman, 56 F.3d 750 (7'* Cir.) (Posner,

J.) cert. denied sub. nom African Enterprise, Inc. v. Scholes, 516

U.S. 1028 (1995).

WHEREFORE petitioner suggests that the

petition for a writ of certiorari should be granted

because there is now an important issue concerning the

evaluation of litigation conduct waivers of the Eleventh

Amendment in bankruptcy proceedings, and because

the decision of the United States Court of Appeals for

the Fourth Circuit is inconsistent with prior rulings of

this Court and decisions of other Courts of Appeal.

RESPECTFULLY SUBMITTED,

Martin P. Sheehan, Esq.

WV Bar #4812

TABLE OF CONTENTS

Appendix

Page

Opinion of the

U.S. Court of Appeals for the

Fourth Circuit

entered January 9, 200B............sssseseseseesesreeees 1

Order of the

U.S. District Court for the

Northern District of West Virginia

Re: Memorandum Opinion and Order

Affirming the Bankruptcy Court’s Order

entered December 12, 2001............::cccsseseseeeeeees 9

Order of the

U.S. Bankruptcy Court for the

Northern District of West Virginia

Re: Motion by Counsel for the Trustee for

Imposition of a Constructive Trust for a

Direct Payment of Quantum Meruit Fee by

West Virginia Department of Environmental

Protection with Supporting Authorities

entered August 21, 2000...........::csceeeseseeseeeees 28

App. i

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

Entered: January 9, 2003

In re: T&T FUELS, INCORPORATED,

Debtor.

MARTIN P. SHEEHAN, Trustee for the

Bankruptcy Estate of T&T Fuels,

Inc. and/or Counsel for the Trustee

for the Bankruptcy Estate of T&T

Fuels, Inc.,

Plaintiff-Appellant,

WEST VIRGINIA

DEPARTMENT OF No. 02-1026

ENVIRONMENTAL PROTECTION,

Defendant-Appellee,

and

WEST VIRGINIA STATE TAX

DEPARTMENT; PAUL THOMAS; LOWELL

THOMAS; BASS ENERGY,

INCORPORATED, T&T COALS,

INCORPORATED, T&T MANAGEMENT

COMPANY, INCORPORATED; UNITED

STATES BANKRUPTCY COURT

Parties in Interest.

App. 1

Appeal from the United States District Court for the

Northern District of West Virginia, at Elkins.

Frederick P. Stamp, Jr., District Judge.

(CA-00-83-2, BK-95-21264)

Argued: December 3, 2002

Entered: January 9, 2003

Before WILLIAMS and TRAXLER, Circuit Judges, and

HAMILTON, Senior Circuit Judge.

Affirmed by unpublished per curiam opinion.

COUNSEL

ARGUED: Martin Patrick Sheehan, SHEEHAN &

NUGENT, P.L.L.C., Wheeling, West Virginia; William

Anthony Kolibash, PHILLIPS, GARDILL, KAISER &

ALTMEYER, Wheeling, West Virginia, for Appellant,

Mark J. Rudolph, Office of Legal Services,

DEPARTMENT OF ENVIRONMENTAL

PROTECTION, Charleston, West Virginia, for

Appellee. ON BRIEF: Denise Knouse-Snyder,

PHILLIPS, GARDILL, KAISER & ALTMEYER,

Wheeling, West Virginia, for Appellant, Christopher d.

Negley, Office of Legal Services, DEPARTMENT OF

ENVIRONMENTAL PROTECTION, Charleston, West

Virginia, for Appellee.

Unpublished opinions are not binding precedent in this

circuit. See Local Rule 36(c).

App. 2

OPINION

PER CURIAM:

Martin P. Sheehan, a trustee in bankruptcy for

T&T Fuels, Inc., filed a motion in bankruptcy court for

imposition of a constructive trust and for a direct

payment of quantum meruit fees by the West Virginia

Department of Environ-mental Protection (DEP).

Sheehan's claim was based on work performed by

counsel that he, as trustee, retained to pursue causes of

action against the two directors of T&T Fuels, Paul and

Lowell Thomas. The bankruptcy court concluded that

Sheehan’s claim against the DEP was barred by the

Eleventh Amendment and thus denied the motion. The

district court affirmed. Sheehan now appeals the

district court’s decision. Because we agree with the

district court’s analysis and conclusion, we affirm.

T&T Fuels mined coal in Preston County, West

Virginia from 1971 to 1993. These mining activities

produced large quantities of acid mine drainage, and in

194, acid-laden water began to discharge directly into

waters of West Virginia. The DEP issued several

violation notices and cessation orders requiring T&T

Fuels to treat the discharge from its mines and assessed

mandatory civil penalties.

On October 27, 1995, T&T fuels filed a Chapter 7

bankruptcy petition, and Sheehan was appointed as

trustee. The DEP began treatment of the site and

immunized Sheehan from any personal liability. The

App. 3

DEP filed a multimillion dollar proof of claim against

the bankruptcy estate, to which Sheehan objected. In

September 1996, a trial was held in bankruptcy court

on the DEP’s claim, and on February 20, 1997, the

bankruptcy court determined the amount of the DEP’s

claim at $6.7 million and changed its status from

administrative priority to general unsecured. The

DEP’s claim was intended to fund twenty years of

treatment of the damage caused by the acid mine

drainage. Although there were several claims filed

against the debtor, the DEP’s claim exceed the total of

all other claims filed.

Sheehan employed counsel on a contingent fee

basis to pursue claims against the two directors of T&T

Fuels, Paul Thomas, and his brother, Lowell Thomas,

and several entities owned by them for breach of

fiduciary duty and a disguised fraudulent transfer.

The United States charged Paul Thomas with criminal

violations of the Clean Water Act. In the criminal case,

which was not covered by the automatic stay in the

bankruptcy action, the United States and Paul Thomas

entered into a plea agreement whereby Thomas

received five years probation. Paul Thomas also

entered into an agreement with the United States in

which he agreed to pay restitution to the DEP in the

amount of $443,400 for land reclamation costs and

penalties, as well as $33,000 per month to treat the

water flowing from T&T Fuels as long as acid drainage

persisted. As a result of these agreements, the DEP

withdrew its proof of claim against the bankruptcy

estate. Sheehan did not object to the DEP’s

withdrawal.

App. 4

Sheehan settled the claims that he brought

against the Thomas brothers and the various entities

owned by them for a little over $100,000 . With the

sums received from the settlement, and the funds

previously generated from the sale of T&T Fuel’s

assets, Sheehan prepared a report seeking authority to

distribute the funds. Although the attorneys Sheehan

hired were entitled to fees on a contingent fee basis

measured by the benefit to the estate, they reduced

their fees so that unsecured creditors creditors could

receive at least 50% of the amount for which the

unsecured creditors had filed proofs of claim.

On November 2, 1999, Sheehan filed a motion in

the bankruptcy court, requesting that a constructive

trust be imposed on the DEP and that the court require

the DEP to make a direct payment of a quantum meruit

fee for the benefit the DEP received as a result of the

efforts of Sheehan’s attorneys in the bankruptcy

proceedings. The bankruptcy court held that although

the attorneys per-formed valuable services for the DEP

and should, as a matter of moral principle, be

compensated by the DEP, the Eleventh Amendment

barred Sheehan’s claim for attorneys’ fees against the

DEP. Sheehan appealed the bankruptcy court's

decision to the district court, and on December 12,

2001, the district court affirmed the decision of the

bank-ruptcy court. This appeal followed. This court

has juris-diction pursuant to 28 U.S.C.A. § 1589d) (West

1993).

On appeal, Sheehan contends that by filing a

proof of claim, the DEP waived its Eleventh

Amendment immunity to his claim for attorneys’ fees.

App. 5

Because Sheehan’s appeal raises an issue of law, our

review is de novo. Accord Cypher Chiropractic Ctr. v.

Runski (In re Runsk1), 102 F.3d 744, 745 (45h Cir. 1996).

IT.

The Eleventh Amendment, in conjunction with

related principles of state sovereign immunity, bars

federal courts from hearing any suit “commenced or

prosecuted against one of the United States by Citizens

of another State,” U.S. Const. amend. XI, or by its own

citizens, Hans v. Louisiana, 134 U.S. 1, 10, 20 (1890). A

state, of course, remains free to waive its immunity

from suit in a federal court. See, e.g., Lapides v. Bd. of

Regents of the Univ. Sys. of Ga.,__U.S. _, 122 S.Ct. 1640,

1646 (2002) (holding that a state waives Eleventh

Amendment immunity when it removes a case from

state court to federal court). The only issue presented

in this appeal is whether the DEP waived its Eleventh

Amendment immunity."

While the Court in Lapides did not address the

scope of such a waiver, the Court previously has held

that when a state “files a claim against the fund [in a

bankruptcy action] it waives any immunity which it

otherwise might have had respecting the adjudication

eeteeeeeet

We do not address Sheehan's argument that our previous

decision holding that “Congress has no authority under the

Bankruptcy Clause, U.S. Const. art. I, § 8, cl. 4, to abrogate state

sovereign immunity in federal courts, “Schlossberg v. Maryland (In

re Creative Goldsmith of Washington, D.C., Inc.), 199 F.3d 1140, 1145

(4 Cir. 1997), should be reconsidered and overruled. See

Laughlin v. Metro. Wash. Airports Auth., 149 F.3d 253, 260 (4% Cir.

1998) (stating that a panel cannot overrule a decision of a prior

panel).

App. 6

‘iibeabese cities

of the claim.” See Gardner v. New Jersey, 329 U.S. 565,

574 (1947). The Court in Gardner reasoned that if a

state invokes the aid of the bankruptcy court in

collecting a debt, it must submit to the bankruptcy

court’s process of adjudicating the competing interests

in the bankruptcy estate. Id. We have held “that to the

extent a defendant’s assertions in a state-instituted

federal action, including those made with regard to a

state-filed proof of claim in a bankruptcy action,

amount to a compulsory counterclaim, a state has

waived any Eleventh Amendment immunity against

that counterclaim in order to avail itself of the federal

forum.” Schlossberg v. Maryland (In re Creative

Goldsmith of Washington, D.C., Inc.), 119 F.3d 1140, 1148

(4th Cir. 1997).

A counterclaim is compulsory “if it arises out of

the transaction or occurrence that is the subject matter

of the opposing party’s claim.” Fed. R. Civ. P. 13(a).

Sheehan’s action in this case, for attorney’s fees

incurred pursuing causes of action for the bankruptcy

estate, does not arise out of the same transaction or

occurrence supporting the DEP’s proof of claim for

pollution clean-up. Rather, Sheehan's claim arises

from the DEP’s decision to enter into a plea agreement

with Paul Thomas and withdraw its proof of claim.

Adjudicating Sheehan’s claim, therefore, would require

more than a determination of DEP’s interest in a

bankruptcy estate. Specifically, it would require the

bankruptcy court to exercise jurisdiction over the DEP,

as opposed to a bankruptcy estate, see Virginia v.

Collins (In re Collins), 173 F.3d 924, 928 (4 Cir. 1999)

(“[T]he power of the bankruptcy court to eriter an

order confirming a plan .. . derives not from

App. 7

jurisdiction over the state or other creditors, but rather

from jurisdiction over the state or other creditors, but

rather from jurisdiction over debtors and their estates”

(internal citation omitted)), and to determine whether

Sheehan’s attorneys should receive payment from the

West Virginia Treasury for the benefit of their services

to the state, thus possibly entering a judgment against

the DEP, see Gardner, 329 US. at 574 (explaining that

while a state’s proof of claim may be “rejected in toto,

reduced in part, given a priority inferior to that

claimed, or satisfied in some way other than payment

in case,” no judgment is entered against the state).

Because Sheehan's claim for attorneys’ fees does not

amount to a compulsory counterciaim against DEP’s

proof of claim, the DEP has not waived its Eleventh

Amendment immunity with respect to the adjudication

of Sheehan’s claim.

If.

Having reviewed the record, briefs, and

applicable law and having considered the oral

arguments of the parties, we conclude that the district

court was correct. Accordingly, we affirm on the basis

of the district court’s well-reasoned opinion. See

Sheehan v. W. Va. Dep’t of Envtl. Prot. (In re T&T

Fuels, Inc.), 2:00CV83 (N.D. W. Va. Dec 12, 2001).

AFFIRMED

App. 8

IN THE UNITED STATES DISTRICT COURT FOR

THE NORTHERN DISTRICT OF WEST VIRGINIA

IN RE:

Civil Action No. 2:00CV83

Bankruptcy No. 95-21264

(STAMP)

T&T FUELS, INC.,

Debtor.

MARTIN P. SHEEHAN, Trustee for the

Bankruptcy Estate of T&T Fuels, Inc.

and/or Counsel for the Trustee for the

Bankruptcy Estate of T&T Fuels, Inc.,

Appellant,

¥.

WEST VIRGINIA DIVISION OF ENVIRONMENTAL

PROTECTION,

Appellee.

Entered December 12, 2001

App. 9

———

MEMORANDUM OPINION AND ORDER

AFFIRMING THE BANKRUPTCY COURT'S

ORDER

I. Procedural History

On August 21, 2000, the Bankruptcy Court

entered an order denying the motion of appellant,

Martin P. Sheehan, Trustee in Bankruptcy for T&T

Fuels, Inc., for imposition of a constructive trust and

for a direct payment of quantum meruit fees by the

West Virginia Department of Environmental

Protection. On August 30, 2000, the appellant filed a

notice of appeal. After receiving the bankruptcy

records, the Honorable Robert E. Maxwell transferred

this action to the undersigned judge on October 20,

2000.

This Court has reviewed the applicable law, the

Bankruptcy Court record, and the briefs in support of

and in opposition to this appeal. For the reasons stated

below, this Court finds that the Bankruptcy Court's

order should be affirmed.

II. Jurisdiction and Standard of Review

This Court has jurisdiction over this bankruptcy

appeal pursuant to 28 U.S.C. § 158(a) and Bankruptcy

Rule 8001. This Court has reviewed the factual

findings of the Bankruptcy Judge under a clearly

erroneous standard of review, Bankruptcy Rule 8013,

and has reviewed the conclusions of law under a de

novo standard of review. See In re NVR, 189 F.3d 442,

448 (4th Cir. 1999).

App. 10

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III. Facts

T&T Fuels, Inc. (“T&T”) mined coal owned by

Kingwood Coal Company in Preston County, West

Virginia from 1971 to 1993. These mining activities

produced large quantities of acid mine drainage and in

1994, a large breakout of acid-laden water began to

discharge directly into the waters of West Virginia.

The West Virginia Department of Environmental

Protection (“DEP”) issued several notices of violations

and cessation orders requiring T&T to treat the

discharge from its mines and assessing mandatory civil

penalties. On October 27, 1995, T&T filed a Chapter 7

bankruptcy petition and Martin Sheehan was

appointed as trustee. The DEP filed a multimillion

dollar proof of claim against the bankruptcy estate, to

which the trustee objected. In September 1996, a trial

was held on the DEP’s claim and on February 20, 1997,

the Bankruptcy Court issued its memorandum opinion

and order settling the DEP’s claim at $6.7 million and

changing the status from administrative priority to

general unsecured. This money was to fund 20 years of

treatment of the damage done by the acid mine

drainage. Although there were several claims filed

against the debtor, the claim of the DEP exceeded the

total of all other claims filed.

The trustee employed counsel on a contingent

fee basis to pursue claims against the directors of T&T

for breach of fiduciary duty and a disguised fraudulent

transfer. Various suits were pursed against Paul

Thomas, his brother, Lowell Thomas, and several

entities owned by them. In addition to the litigation

brought by the trustee, Paul Thomas was eventually

App. 11

prosecuted by the United States for violations of the

Clean Water Act. Thomas entered into a plea

agreement with the United States and received five

years probation. In addition, the United States and

Thomas entered into an agreement whereby Thomas

agreed to pay restitution to the DEP. The order of

restitution directed Thomas to pay the State of West

Virginia $443,400.00 for penalties and land reclamation

costs and $33,000.00 per month to treat the water

flowing from the T&T mines as long as acid mine

drainage exists. As a result of this compromise, the

DEP withdrew its proof of claim against the

bankruptcy estate. The trustee did not object to the

DEP’s withdrawal.

The trustee settled the claims that he brought

against the Thomas brothers and the various entities

owned by them for a little over $100,000.00. With the

sums received from the settlement, and the funds

previously generated by the trustee from the sale of

T&T assets, a report seeking authority to distribute

funds was prepared. Although the attorneys hired by

the trustee were entitled to fees on a contingent fee

basis measured by the benefit to the estate, they

reduced their fees so that unsecured creditors could

receive at least fifty percent of the amount for which

they had filed proofs of claim.

On November 2, 1999, the trustee filed a motion

in the Bankruptcy Court, moving the court to order

that a constructive trust be imposed on the DEP and

that the DEP be required to make a direct payment of a

quantum meruit fee to the trustee and his attorneys ‘or

the benefits enjoyed by the DEP as a result of the

App. 12

trustee and his attorneys’ efforts in the bankruptcy

proceedings. The Bankruptcy Court made no finding

as to the trustee’s rights under quantum meruit. It

held, instead, that although the attorneys for the

trustee performed valuable services for the DEP and

the court believed that the State of West Virginia,

should, at a minimum as a matter of moral principle,

reimburse the estate attorneys for the amount of money

they reduced their hourly fee, the Eleventh

Amendment barred the trustee’s claim for attorney’s

fees against the DEP.

The appellant has presented two issues on

appeal. The first issue is whether the Eleventh

Amendment is available as a jurisdictional defense to a

state agency tnat has filed a claim in Bankruptcy Court.

The appellan! states that he recognizes that at this level

of appeal, this issue must be determined adversely to

him because the Fourth Circuit has held that the

Eleventh Amendment is available as a jurisdictional

defense, at least in some circumstances, to a state

agency that has filed a claim in Bankruptcy Court. The

appellant asserts that this issue is included, in good

faith, solely to preserve the issue, should it be

necessary for review by the Fourth Circuit or the

United States Supreme Court. Therefore, the second

and only issue presented to this Court is whether the

DEP waived the protection of the Eleventh

Amendment and consented to jurisdiction in

Bankruptcy Court as a result of filing a proof of claim

in the Bankruptcy Court, participating in the

bankruptcy proceedings, acquiescing in and

supporting the bankruptcy trustee’s actions in carrying

out his fiduciary duty to the bankruptcy estate, and

App. 13

benefiting from the efforts of the trustee’s counsel

which may have helped the DEP to reach a restitution

agreement in a separate criminal action. The appellant

asks this Court to declare that the Eleventh

Amendment is unavailable as a defense and to remand

this matter for further proceedings to determine the

appropriate fee.

The appellee argues in response that it did not

waive its Eleventh Amendment immunity nor give

actual consent to federal jurisdiction. The appellee

further argues that the appellant is limited in federal

court to those strict fee application standards set forth

in the Bankruptcy Code or he must pursue common

law equity claims in the state court of claims.

IV. Discussion

The Eleventh Amendment to the United States

Constitution 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.” USS.

Const. Amend. XI. Thus, under the Eleventh

Amendment, federal courts are denied the authority to

entertain a suit brought by a private party against a

state without that state’s consent. See Ford Motor Co.

v. Dep’t of Treasury of Indiana, 323 U.S. 459 (1945). It

is well established, though not expressly stated in the

Constitution, that the Eleventh Amendment also

prohibits a state from being sued by its own citizens.

See Hans v. Louisiana, 134 U.S. 1, 20-21 (1890). It is

also well established that Eleventh Amendment

App. 14

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immunity extends to “arms of the state” such as state

agents, officials, and instrumentalities. See Regents of

the Univ. of California v. Doe, 519 U.S. 425, 429 (1997).

In the present case, the parties do not dispute that DEP

is an arm of the state for Eleventh Amendment

purposes.

In Schlossberg v. State of Maryland, 119 F.3d

1140, 1147 (4th Cir. 1997), the Fourth Circuit held that

the Bankruptcy Improvement Act of 1994, 11 U.S.C. §

106, which expressly abrogates sovereign immunity as

to a governmental unit including a state, is

unconstitutional and ineffective. The court held that

“in the absence of a constitutional authorization, it lies

solely within a state’s sovereign power to waive its

immunity voluntarily and to consent to federal

jurisdiction. Only if it waives such immunity may a

private citizen sue the state in federal court.” Id.

Generally, a state will be deemed to have

waived its immunity from federal-court jurisdiction if

it voluntarily invokes the court's jurisdiction or makes

a clear declaration that it intends to submit to federal

jurisdiction. See College Savings Bank v. Florida

Prepaid Postsecondary Educ. Expense Bd., 527 US.

666, 676 (1999). In order to determine whether a state

has waived its Eleventh Amendment immunity and

has consented to jurisdiction, a court must examine

whether a state’s consent to be sued in federal court is

“clearly intended by its state law and implemented by

an officer acting properly under that law.”

Schlossberg, 119 F.3d 1148. The court also must “look

to state law when a state has voluntarily initiated an

action in federal court to determine whether the state

App. 15

officer is authorized to proceed in federal court.” - Id.

“When a state authorizes its officials voluntarily to

invoke federal process in a federal forum, the state

thereby consents to the federal forum’s rules of

procedure and may not invoke sovereign immunity to

protect itself against the interposition of defenses to its

action.” Id. However, a state’s waiver of immunity

must be “narrowly construed.” Id.

The appellant does not contend that the law of

West Virginia expressly waives the state’s Eleventh

Amendment immunity in the context of bankruptcy

proceedings. Rather, the appellant essentially argues

that the DEP impliedly or constructively waived its

immunity by filing a proof of claim in the Bankruptcy

Court.

“It has long been held that when a state is a

creditor, bankruptcy procedure for proof and

allowance of claims does not operate as a suit against a

state in violation of the Eleventh Amendment.” In re

Collins, 173 F.3d 924, 930 (4th Cir. 1999); see

also Gardner v. New Jersey, 329 U.S. 565, 574-75 (1947).

This is because the filing of a bankruptcy petition is not

considered a suit against the state, but rather the state

may voluntarily submit to federal jurisdiction as a

creditor so that it has the opportunity to share in the

estate. Seeid. The Bankruptcy Court does not have

jurisdiction over the state, but has jurisdiction over the

debtor and his estate. See id. Thus, by filing a proof of

claim, the state essentially waives its Eleventh

Amendment immunity, at least by some degree.

App. 16

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The Fourth Circuit has held that “to the extent

that a defendant’s assertions in a_ state-instituted

federal action, including those made with regard to a

state-filed proof of claim in a bankruptcy action,

amount to a compulsory counterclaim, a state has

waived any Eleventh Amendment immunity against

that counterclaim in order to avail itself of the federal

forum.” Schlossberg, 119 F.3d at 1148. However, in

order for a claim against the state to be construed as a

compulsory counterclaim to the state’s proof of claim,

the claim must arise out of the same transaction or

occurrence affording the state’s proof of claim. See id.

at 1149.

The appellant sets forth that the dispute in this

appeal is whether Schlossberg holds that consent to

jurisdiction from voluntary participation in federal

litigation can be inferred whenever there has been

voluntary participation or whether consent may be

inferred only where a mandatory counterclaim exists.

The appellant argues that the voluntariness of state

participation in litigation and the necessary scope of

the litigation are the relevant criteria for determining if

there has been a voluntary waiver of the Eleventh

Amendment. The appellee argues in response that its

proof of claim does not arise out of the same

transaction or occurrence as the trustee’s claim and

therefore, according to Schlossberg, the DEP has not

waived its sovereign immunity by filing its proof of

claim.

This Court has not found case law in the Fourth

Circuit or anywhere else that has similar facts or

answers this question. However, the principles set

App. 17

forth by several Fourth Circuit cases lead this Court to

find that the Bankruptcy Court decision should be

affirmed.

There is no doubt that the ultimate resolution of

the dispute between the trustee and the DEP requires

that this Court exercise jurisdiction over the State of

West Virginia. Further, the appellant is demanding

payment from the West Virginia Treasury. The

criminal restitution money that is being paid by Paul

Thomas is deposited in West Virginia’s Special

Reclamation Fund, which is held in the State Treasury.

This money is designated to go directly to the costs

associated with the treatment of the acid mine drainage

at the former T&T site. “The demand for money from

the state is a strong indication that a federal judicial

proceeding is indeed a suit against the state under the

Eleventh Amendment.” In re NVR, 189 F.3d at 454.

The Bankruptcy Court’s decision was based on the

compelling fact that the only fund available to pay the

trustee and his attorneys is the money in the state

treasury, which is protected by the Eleventh

Amendment. This Court agrees with that assertion as

well as the Bankruptcy Court's finding that the DEP

did not waive its Eleventh Amendment immunity.

Although, as the appellant contends, the

Schlossberg opinion may not have considered the

impact of the Eleventh Amendment on every possible

type of suit that may arise when a state files a proof of

claim in the Bankruptcy Court, the case law presented

by the appellant does not convince this Court that the

state has waived its Eleventh Amendment immunity in

this particular factual situation. In the case at hand, the

App. 18

debtor corporation, T&T Fuels, filed a voluntary

petition for bankruptcy. A creditor, which happened

to be the State of West Virginia, filed a proof of claim in

that bankruptcy proceeding. This creditor also

happened to be a victim of a crime. The owner of the

debtor corporation was prosecuted, and the victim of

the crime agreed to withdraw its claim in bankruptcy

and accept restitution instead. It is quite evident from

the transcript of a status conference held on November

21, 1997 in the criminal action against Paul Thomas that

the DEP was motivated to accept restitution and

withdraw its proof of claim from the bankruptcy

proceeding by the fact that any award from the

bankruptcy court would be reduced by trustee and

attorneys’ fees. By accepting restitution, all of the

money would go directly to the state to treat the acid

mine drainage. This Court agrees with the Bankruptcy

Court’s finding that the trustee and his attorneys

performed valuable services for the State of West

Virginia during the time that the state had a proof of

claim in the bankruptcy proceeding and that the effort

by the trustee and these attorneys benefited the state in

its ultimate restitution agreement. This Court also

agrees with the Bankruptcy Court's further finding that

the State of West Virginia should, at a minimum, as a

matter of moral principle reimburse the trustee and his

attorneys for the amount of money they reduced their

hourly fees. Nevertheless, the Bankruptcy Court

correctly concluded that it did not have jurisdiction to

order the DEP to pay the attorneys’ fees claimed by the

trustee because the state is protected from such a suit

by the Eleventh Amendment.

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App. 19

This Court does not find that the DEP waived

the protection of the Eleventh Amendment and

consented to the jurisdiction of the Bankruptcy Court

over the trustee’s quantum meruit claim as a result of

filing a proof of claim. It is well established that a state

may not constructively or impliedly waive its

sovereign or Eleventh Amendment immunity, but

must “unequivocally express [ ]” its waiver of

immunity. College Savings Bank, 527 U.S. at 682.

Fourth Circuit case law makes it clear that the filing of

a proof of claim in a bankruptcy proceeding by a state

does not implicate the Eleventh Amendment because

the state is not being compelled to come into court.

Further, the Fourth Circuit has carved out a very

narrow exception of when a state that files a proof of

claim in a bankruptcy action can have a claim asserted

against it. As stated above, the Schlossberg court held

that if a claim asserted against a state amounts to a

compulsory counterclaim, then the state has waived its

Eleventh Amendment immunity against _ that

counterclaim. Schlossberg, 119 F.3d at 1148.

In Schlossberg, the State of Maryland filed a

proof of claim in the debtor’s bankruptcy to recover

one type of tax, and the trustee filed an adversary

proceeding in the bankruptcy court against the state to

avoid as a preference the payment of another type of

tax made by the debtor. The court held that the

trustee’s action “cannot be construed under federal law

as a claim in the nature of a compulsory counterclaim

to the state’s proof of claim.” Id. at 1149. The court

accordingly found that it had “no authority to entertain

this action absent Maryland’s consent.” Id. at 1150

(citation omitted). It is possible, as the appellant

App. 20

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argues, that the Schlossberg court may not have meant

that this is the only time that a state that files a proof of

claim waives its Eleventh Amendment immunity.

However, in light of the principles discussed above,

most importantly the principle that any waiver of

immunity must be narrowly construed, this Court

refuses to expand the situations when a state waives its

immunity any further.

The appellant attempts to borrow from the law

of receivership in order to further boost his argument

that the DEP has waived its immunity and should be

required to pay under these circumstances. The

appellant sites Scholes v. Lehmann, 56 F.3d 750 (7th

Cir. 1995), to stand for the proposition that receivers

and trustees are similar and therefore it is appropriate

~to borrow law from one area to the other. A receiver is

akin to a trustee and is traditionally defined as:

A person appointed by a court for the

purpose of preserving property of a

debtor pending an action against him, or

applying the property in satisfaction of a

creditor's claim, whenever there is danger

that, in the absence of such an

appointment, the property will be lost,

removed, or injured.

Black’s_ Law Dictionary 1268 (1990). A _ receiver

generally looks to the property that he has managed for

payment. However, even in the event that the

property is unavailable or the receiver was improperly

appointed, the receiver most often gets paid. The

appellant also cites cases that stand for the proposition

App. 21

that if the receivership is wrongfully invoked, the party

initiating the receivership must pay. The few cases

cited by the appellant that have required government

entities to pay for the receivership are easily

distinguishable and do not persuade this Court.

In Theaters of America, Inc. v. Texas, 577 S.W.2d

542 (Tex. Civ. App. 1979), the state of Texas filed a

petition for a temporary restraining order and

ultimately a permanent injunction in state court against

a corporation to prevent that corporation from

conducting any business in the state without a proper

certificate of authority. The state requested that the

court appoint a receiver to take charge of the affairs

and the property of the corporation in order to

preserve the property and recover certain funds due to

the state. See id. at 543. The defendants then filed suit

in United States District Court against the Texas

Attorney General, the receiver, and others, claiming

that at least one of the motives of the state in filing for a

temporary restraining order and permanent injunction

was to shut down the theater due to the content of the

films which the state officials believed to be

pornographic, thereby violating the First Amendment

rights of the defendants. See id. at 544. The district

court found that the state’s actions were done in bad

faith and for the purpose of harassing the plaintiffs and

suppressing their Constitutionally protected conduct.

See id. The receiver was enjoined from acting as a

receiver in the state court case. See id. The state court

then ordered that certain fees of the receivership be

taxed against the state and that the rest of the fees be

taxed against the defendant corporation. See id. at 546.

The corporation appealed and the Court of Civil

App. 22

Appeals found that the state must pay the entire cost of

the receivership because ‘[t]he expenses of the

receivership must come from the party whose

wrongful act brought about the appointment of the

receiver.” Id. at 548. Theaters of America can be

distinguished from the case at hand because the DEP

did not cause the bankruptcy petition to be filed, and

did not engage in any wrongful conduct in order to

bring about the petition for bankruptcy or the

appointment of the trustee. Further, sovereign

immunity was not an issue that was raised in Theaters

of America.

Another case cited by the appellant is United

States v. Paccione, 730 F.Supp. 1237 (S.D. N.Y. 1990). In

Paccione, during a criminal RICO prosecution, the

government asked the court to appoint a receiver to

oversee the defendant's assets and business interests

pending trial. See id. at 1237. The court concluded that

the government should initially pay for the cost of the

receivership because a provision of the RICO statute,

18 U.S.C. § 1963(f), provides the government with the

ability to recover any expenditures in the event that it

obtains a RICO conviction and forfeiture. See id. at

1239. The court found that “[t]he only time the

Government is at risk for the costs of the [receiver] is

the period in which the presumption of innocence

continues to provide defendants protection and then,

ultimately, only if defendants are acquitted or the

property deemed not forfeitable.” Id. The Eleventh

Amendment was not raised as a defense in this case

and the court only required the government to pay for

the receivership because the RICO statute allows the

government to be reimbursed for its expenditures.

App. 23

In United States v. Ianniello, 824 F.2d 203 (2d

Cir. 1987), after prosecuting a criminal RICO case

against defendants who were ultimately convicted for

skimming the receipts of several restaurants, the

government commenced a civil RICO suit. See id. at

203. The civil complaint sought injunctive relief

against the participation by several of the defendants in

the restaurant business, and an order compelling

divestiture of their holdings in any bars or restaurants,

including a restaurant called Umberto’s. See id. The

government moved for the appointment of receiver for

Umberto’s, which was granted. On appeal, the Second

Circuit held:

Since the benefit of the receivership is...

enjoyed by the public, it seems

appropriate at this stage to impose the

costs of the receivership on_ the

government, at least pending a resolution

of the charges against the defendants. If

it is established that Umberto’s as a

corporate entity has benefitted from the

receivership, it might then be appropriate

to reimburse the government for some, or

perhaps all, of the expenses of the

receiver.

Id. at 209. There is no indication that the government

asserted the Eleventh Amendment as a defense in this

action. Further, the receivership in Ianniello was

initiated by the government whereas the bankruptcy

petition in the case at hand was not. The DEP had the

App. 24

as arrehicial i SOURED SMO ON '5

option of filing a proof of claim, which was ultimately

withdrawn without objection from the trustee.

Based on the foregoing, this Court finds that

even if it were to apply the law of receivership to the

case at hand, the appellant has not demonstrated that

the DEP has waived its Eleventh Amendment

immunity and should be required to pay the attorneys’

fees. The receivership cases cited by the appellant that

required the state to pay for the receivership, contain

very particular factual situations that cannot be applied

to the case at hand.

Although this Court finds that the DEP is

immune from the trustee’s quantum meruit suit in this

Court, the appellants are not without a remedy. The

appellee does not seem to deny that it may have a

moral obligation to reimburse the trustee and his

attorneys for the amount that they reduced their hourly

fees, as suggested by the Bankruptcy Judge. As the

appellee notes, the appellants could bring their claim

for attorneys’ fees in the West Virginia Court of Claims

pursuant to West Virginia Code § 14-2-13(1). The

Supreme Court of Appeals of West Virginia described

the Court of Claims in the following way:

The Court of Claims is an administrative

arm of the West Virginia Legislature, not

a court created within the judicial branch

of the government. The Legislature has

established the Court of Claims by law

and delegated to it the Legislature’s

power to investigate certain claims

against the State that may not be

App. 25

prosecuted in the courts because of the

State’s sovereign immunity. The Court of

Claims is also charged by law with the

duty of recommending payment of such

of those claims as it finds worthy, in

specified amounts, to be paid by specific

appropriations designated by _ the

Legislature for payment of claims against

the State, which it recognizes as a moral

obligation of the State notwithstanding

the immunity of the State from suit in its

various courts.

West_Virginia_ex_ rel McLaughlin v. West_Virginia

Court of Claims, 549 S.E.2d 286, 289 (W. Va. 2001)

(citations omitted). The appellant has not refuted the

DEP’s contention that appellant's quantum meruit

action could be brought ir: the Court of Claims.

V. Conclusion

For the reasons stated above, this Court finds

that the August 21, 2000 order of the Bankruptcy Court

denying the appellant’s motion for the imposition of a

constructive trust and for a direct payment of a

quantum meruit fee by the DEP should be and hereby

is AFFIRMED. It is further ORDERED that this appeal

should be and hereby is DISMISSED and STRICKEN

from the active docket of this Court.

IT ISSO ORDERED.

App. 26

q <

The Clerk is DIRECTED to transmit copies of

this order to counsel of record herein. Pursuant to

Federal Rule of Civil Procedure 58, the Clerk is

DIRECTED to enter judgment on this matter.

DATED: December 12, 2001

s/Frederick P. Stamp, Ir.

FREDERICK P. STAMP, JR.

UNITED STATES DISTRICT JUDGE

App. 27

UNITED STATES BANKRUPTCY COURT .

FOR THE NORTHERN DISTRICT OF WEST

VIRGINIA

IN RE 8

T & T FUELS, INC., § BK NO. 95-21264

Debtor(s). 8

Entered August 21, 2000

ORDER

The Trustee nas filed a “Motion by Counsel for

the Trustee for Imposition of a Constructive Trust and

for a Direct Payment of Quantum Meruit Fee by the

West Virginia Department of Environmental Protection

with Supporting Authorities.” By this motion, the

attorneys for the trustee seek to impose a constructive

trust of funds of the West Virginia Department of

“environmental Protection.

The first issue to address is the 11% Amendment

or state sovereign immunity. Both parties have

submitted briefs in this regard.

FACTS

T & T Fuels, Inc. (“T&T”) is a corporation

organized to do business in the State of West Virginia.

Its primary business had been mining coal in Preston

County from 1971 to 1993. In 1994, large breakout of

water occurred on the T&T premises. T&T was unable

App. 28

to treat the large quantity of water flowing from the

mine. On October 27, 1995, T&T filed its Chapter 7

bankruptcy petition.

T&T leased the real property and owned some

coal mining equipment. There were several claims

filed against the Debtor, but the claim of the State of

West Virginia for $36 million to pay for the damages

caused by the acid mine drainage and for future

treatment far exceeded the total of all other claims

filed.

A hearing was held on the State’s claim and the

Court valued it at $6.7 million. The Debtor’s assets

were less than $200,000.

Under state law, the State had not only remedies

against the Debtor, but could also pursue criminal

actions against the operator of T&T, Paul Thomas

(“Thomas”). As a part of the criminal proceedings,

Thomas and the State of West Virginia entered into a

compromise whereby Thomas had to pay the State

$43,400 for penalties and land reclamation costs. In

addition, Thomas agreed to pay $36,000 per month to

treat the water flowing from the T&T mine as long as

acid mine drainage exists. Due to the compromise, the

State withdrew its claim of $36 million (Court reduced

to $6.7 million) against the Debtor, T&T.

The funds generated from the sale of T&T assets

have been distributed to creditors. There are no assets

remaining. The trustee seeks payment from the State

for payment of the quantum merit fee. The trustee

asserts that his actions in instituting an adversary

App. 29

proceeding and the activities pursued by him in that

action brought about the criminal restitution

agreement signed by Thomas.

The Court makes no finding as to the Trustee’s

rights under quantum merit. The sole issue addressed

herein is the State’s protection from this claim under

the Eleventh Amendment.

The recent issue of state sovereign immunity

under the 11 Amendment arose with the case of

Seminole Indian Tribe of Florida v. Florida, 517 U‘S.

44,116 S.Ct. 1114 (1996). This was not a bankruptcy

case, but it soon became apparent that the case had

bankruptcy implications.

The Fourth Circuit soon confronted the issue in

bankruptcy. In In re Schlossberg, 119 F.3d 1140 (4% Cir.

1997) the Court held that the Bankruptcy Code

provision purporting to abrogate states’ sovereign

immunity was unconstitutional. The issue was

whether or not the state had waived its defense of

sovereign immunity. The court said that as to

compulsory counterclaim in state instituted actions, the

state had waived.

In In_re Creative Goldsmith of Washington,

D.C., Inc.., 119 F.3d 1140 (4 Cir. 1997) the court held

the state’s proof of claim or other participation in a

bankruptcy did not waive the state’s defense of

immunity in an action brought against it by the trustee.

In In re N.R.R., 189 F.3d 442 (4% Cir. 1999), a

Chapter 11 debtor moved for an order requiring the

App. 30

state taxing authorities to refund real estate recording

taxes. This case was brought by motion and not an

adversary proceeding. However, the court stressed the

need to look not only at the form but the substance.

The court concluded the substance of the motion was

to receive the return of a payment made to the state,

and the state was entitled to defend upon the basis of

sovereign immunity.

In In re Collins, 173 F.3d 924 (48 Cir. 1999) the

state started garnishment proceedings after the debtor

had been discharged in bankruptcy. The debtor filed a

motion to reopen the bankruptcy case to determine the

dischargeability of the debt to the state. The Fourth

Circuit found that the case was not a suit against the

state and that the bankruptcy court did not deed to

assert jurisdiction over the state to determine the

dischargeability of the debt - - the Court had the power

to determine the dischargeability issue because it had

jurisdiction over the debtor and his case.

There have been numerous decisions outside the

Fourth Circuit, but this Court is bound by the decisions

of this Circuit. Commentators have attempted to

establish guiding principles with respect to the cases

involving sovereign immunity and these principles

generally comport with the findings of the Fourth

Circuit. A summary of these decisions follows.

First, the filing of a bankruptcy petition in itself

does not constitute a suit against the state.

Second, certain orders and rulings entered by

the bankruptcy court in the course of a bankruptcy case

App. 31

are not issued in the context of a suit against the state

and thus not prohibited by the Eleventh Amendment

irrespective of the impact on a state’s interest. For

example, entry of a discharge order, confirmation of a

plan and allowance or disallowance of a proof of claim

filed by the state.

Lastly, the state may not be a defendant in a suit

that requires the state to pay out money.

Of all the reasoning for the sovereign immunity

defense, the inability to raid the state’s treasury is the

most compelling. Funds received by the state from its

taxing revenue are to be spent for the general welfare

of the state’s citizens and not to benefit one individual

plaintiff.

The State of West Virginia and the West Virginia

Division of Environmental Protection have not

explicitly waived their Eleventh Amendment

immunity. West Virginia Constitution Article VI,

Section 35 provides that “the State of West Virginia

shall never be made a defendant in any court of law or

equity, except the State of West Virginia, including any

subdivision thereof, or any municipality therein, or any

officer, agent, or employee thereof, may be a defendant

in any garnishment or attachment proceeding, of

garnishee or suggestee.”

The Fourth Circuit, considering that West

Virginia had waived some constitutional immunity in

cases which the State carried applicable insurance

policies, found that those waivers could at most “be

App. 32

construed as waiving the State’s immunity from suit in

state court.”

Westinghouse Elec. Corp. v. W.Va. Dept. of

Highways, 845 F.2d 468, 470 (4" Cir. 1988).

Although a_= state can waive’ Eleventh

Amendment immunity by initiating legal action, the

state has not waived immunity from suit by filing a

proof of claim in the bankruptcy court. A state can

waive its sovereign immunity when it voluntarily

enters a federal forum and institutes an action in its

own interests. Specifically, a state cannot initiate an

action and then invoke sovereign immunity to protect

itself against the imposition of defense to its action. To

the extent that a defendant’s assertions amount to a

compulsory counterclaim, a state has waived its

sovereign immunity. In_re Creative Goldsmith of

Washington. D. D., Inc., supra.

The Court agrees that the attorneys for the

Trustee performed valuable services and their time

records submitted to the Court reveal a substantial

amount of time expended in the adversary proceeding

against the operator of the Debtor, Paul Thomas.

The firm of Phillips, Gardill, Kaiser and

Altmeyer had over 400 hours accumulated and the firm

of Sheehan and Nugent of 450 hours. The defense

lawyers were avidly representing their client and

several hearings were held by the Court and some

matters appealed. The accounting records were

voluminous and many hours were spent by the estate

attorneys coordinating their efforts with the efforts of

App. 33

the State of West Virginia and the United States. The

Court is persuaded that the efforts by the attorneys for

the estate benefitted the State of West Virginia in its

ultimate restitution agreement.

The estate assets were not sufficient to pay all

the creditors’ claims and the hourly fees charged by the

attorneys for the estate. In a spirit of compromise, the

attorneys for the estate reduced their claims to allow

the priority claimants to be paid in full and the general

unsecured creditors to receive 50 percent of their

claims.

It is the court’s personal opinion that the State of

West Virginia should at a minimum as a matter of

moral principle reimburse the estate attorneys for the

amount of money they reduced their hourly fees. But

the Court’s personal opinion is not relevant. The

rulings of this Court must have a basis of law.

The Trustee’s motion seeks to have the State pay

him money that the State would otherwise receive

from Thomas. Thomas is not a debtor and as

previously stated, the Debtor has no assets. Thomas is

payment $36,000 per month to the State of West

Virginia. The State of West Virginia is expending

$36,000 per month to prevent acid mine drainage at the

T & T mine site. There is not a fund that the State is

holding on behalf of the Debtor and/or Thomas. The

only “fund” available to pay the money is the State

Treasury. The State Treasury is protected by the

Eleventh Amendment.

App. 34

Accordingly, the Motion by Counsel for the

Trustee for Imposition of a Constructive Trust and for a

Direct Payment of Quantum Meruit Fee by the West

Virginia Department of Environmental Protection is

DENIED and it is SO ORDERED.

The Clerk is directed to transmit copies of this

Order to the parties in interest.

ENTER: 8/21/01

s/ L. Edward Friend, II

U.S. Bankruptcy Judge

App. 35

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.