Bankruptcy Court Cites Achilles in Well-Heeled Analysis of Sovereign Immunity for the State Revenue Department

Bankruptcy Court Cites Achilles in Well-Heeled Analysis of Sovereign Immunity for the State Revenue Department

It’s going to be an interesting opinion when the first line reads “In mythological lore, the Greek hero Achilles thought himself to be invincible, impervious to the swords and arrows of his enemies.” Judge Taddonio of the Bankruptcy Court for the Western District of Pennsylvania goes on to discuss the sovereign immunity claims by the Pennsylvania Department of Revenue (Revenue) in an opinion dated March 29, 2019.

The opinion consolidated adversaries from two sets of chapter 13 debtors. The adversaries were filed against Revenue to determine the nature and extent of various liens asserted against their real property. Revenue is a defendant because it holds tax liens on the affected properties. Revenue filed motions seeking dismissal of both adversary cases. In the first case the Debtors have property that is worth less than the mortgage liens. Their plan proposes to strip off Revenue’s liens. In the second case, the Debtors have equity in their real property which is less than Revenue’s secured claim. In their plan they seek to cram down Revenue’s claim to the amount of equity in the property.

Both cases present the question of whether sovereign immunity prohibits the debtors from removing unsecured or undersecured tax liens from their properties.

Revenue argued that its sovereign immunity bars relief sought be the debtors. First, Revenue argued that the bankruptcy court has no subject-matter jurisdiction and therefore the complaint should be dismissed pursuant to Fed.R.Civ.P. 12(b)(1) (made applicable to adversary proceedings by Fed.R.Bankr.P. 7012(b)). Revenue argued that it did not waive this immunity filing its claims because filing a claim did not arise out of the same “transaction or occurrence” as the Debtors’ adversary complaints pursuant to 11 U.S.C. §106(b). Revenue also argued that its rights as a lienholder cannot be modified under 11 U.S.C. § 1322(b)(2) because § 1322 is not among the Code sections for which Congress has statutorily abrogated sovereign immunity in 11 U.S.C. § 106(a)(1). Finally, Revenue insisted that the debtors are seeking “affirmative relief” against the state by stripping its liens, which takes the matter outside of the realm of purely in rem proceedings for which sovereign immunity would not attach.

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