Filed: May 28, 1998
Latest Update: Mar. 02, 2020
Summary: UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT _ No. 97-20106 _ THE STATE OF TEXAS, by and through the Board of Regents of The University of Texas System and University of Texas Health Science Center at Houston, Plaintiff-Appellant, versus WILLIAM E. WALKER, M.D., Defendant-Third Party Plaintiff, Appellee-Appellant, THOMAS OLLIS HICKS; ELLEN CLARKE TEMPLE; BERNARD RAPAPORT; THOMAS LOEFFLER; ROBERT JAMES CRUIKSHANK; ZAN W. HOLMES, JR.; MARTHA ELLEN SMILEY; LOWELL H. LEBERMANN, JR.; MARIO EF
Summary: UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT _ No. 97-20106 _ THE STATE OF TEXAS, by and through the Board of Regents of The University of Texas System and University of Texas Health Science Center at Houston, Plaintiff-Appellant, versus WILLIAM E. WALKER, M.D., Defendant-Third Party Plaintiff, Appellee-Appellant, THOMAS OLLIS HICKS; ELLEN CLARKE TEMPLE; BERNARD RAPAPORT; THOMAS LOEFFLER; ROBERT JAMES CRUIKSHANK; ZAN W. HOLMES, JR.; MARTHA ELLEN SMILEY; LOWELL H. LEBERMANN, JR.; MARIO EFR..
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UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________________
No. 97-20106
_______________________
THE STATE OF TEXAS, by and through the Board of Regents of
The University of Texas System and University of Texas Health
Science Center at Houston,
Plaintiff-Appellant,
versus
WILLIAM E. WALKER, M.D.,
Defendant-Third Party Plaintiff,
Appellee-Appellant,
THOMAS OLLIS HICKS; ELLEN CLARKE TEMPLE; BERNARD RAPAPORT; THOMAS
LOEFFLER; ROBERT JAMES CRUIKSHANK; ZAN W. HOLMES, JR.; MARTHA
ELLEN SMILEY; LOWELL H. LEBERMANN, JR.; MARIO EFRAIN RAMIREZ,
M.D.; M. DAVID LOW, M.D.,
Third Party Defendants-Appellees.
_________________________________________________________________
Appeals from the United States District Court
for the Southern District of Texas
_________________________________________________________________
May 28, 1998
Before DAVIS, JONES, and DENNIS, Circuit Judges.
EDITH H. JONES, Circuit Judge:
This case presents a straightforward employment and
contract dispute mired in a procedural thicket. Our task is to
untangle the thicket, although, unhappily, we cannot finally
resolve the merits. We conclude, first, that the case was
correctly removed by University President Low, a counterclaim
defendant newly-joined on a “separate and independent claim” for
purposes of 28 U.S.C. § 1441(c). Second, the court did not err in
shielding the counterclaim defendants from Walker’s § 1983 claims
on qualified immunity grounds. Third, Walker’s debt to the state
for fees he owed before he filed for bankruptcy relief is
dischargeable post-Seminole, although whether it is
nondischargeable under 11 U.S.C. § 523(a)(6) is a question left to
be addressed on remand.
I. Background
Dr. Walker was a heart surgeon and a tenured faculty
member at the University of Texas Health Science Center at Houston
(“UTHSC”). As a condition of his employment, Walker joined the
Medical Services, Research, and Development Plan (“MSRDP”) by
executing the standard MSRDP contract in 1980. The MSRDP contract
required Walker to remit all professional fees he earned to the
University of Texas (“University”). The MSRDP’s by-laws define
professional fees in part as fees for all court appearances,
depositions, or legal consultations. During the period of his
employment at UTHSC, Walker received substantial fees for court
appearances, depositions, and legal consultations, but he never
remitted any of them to the University. When Walker’s
noncompliance with the MSRDP came to the attention of the
University, it investigated Walker’s and other faculty members’
personal retention of professional fees. Walker and the other
faculty members denied that they retained fees in violation of the
MSRDP. After attempts to settle the resulting contractual
2
disagreement failed, Walker was terminated by the Board of Regents
of the University of Texas System in August 1994.
Prior to his termination, Walker filed for bankruptcy
relief under Chapter 7 on September 1, 1992. His debts were
discharged by the bankruptcy court on January 19, 1993. The
University was not identified as a creditor in Walker’s no-asset
bankruptcy filing, and it did not file a proof of claim.
In February 1995, the State of Texas, by and through the
Board of Regents of the University of Texas System and UTHSC
(“State”), filed suit against Walker in state court. The State
alleged conversion and breach of contract and sought an accounting
of the fees retained by Walker. Walker counterclaimed against the
State, made additional claims against the Regents in their
individual capacities (“Regents”), and impleaded as an additional
defendant UTHSC’s president, M. David Low, in both his official and
individual capacities. Walker alleged state tort and breach of
contract claims, as well as substantive due process and equal
protection claims pursuant to 42 U.S.C. § 1983, all of which were
related to his allegedly improper termination.
The counter-defendants removed this case to federal court
pursuant to 28 U.S.C. § 1441(c). The State and Walker subsequently
filed motions for summary judgment. The district court granted
partial summary judgment to the State, the Regents, and Low,
dismissing Walker’s federal § 1983 claims with prejudice based on
sovereign and qualified immunity. The district court also granted
3
partial summary judgment to Walker, holding that the fees Walker
retained prior to his filing bankruptcy on September 1, 1992, were
discharged. The district court remanded to state court Walker’s
state-law claims against the State, the Regents, and Low, as well
as the State’s claims against Walker for fees earned after
September 1, 1992.
Walker now appeals the district court’s grant of summary
judgment to the Regents and Low based on qualified immunity. The
State appeals the district court’s grant of summary judgment to
Walker based on discharge in bankruptcy for Walker’s fees earned
pre-bankruptcy.
II. Propriety of Removal
As an initial matter, Walker argues that the district
court lacked jurisdiction to hear this case because removal by the
Regents and Low under 28 U.S.C. § 1441(c) was improper. We review
a district court’s determination of the propriety of removal de
novo. See Vasquez v. Alto Bonito Gravel Plant Corp., 56 F.3d 689,
692 (5th Cir. 1995). Section 1441(c) is difficult to interpret,
but under this court’s precedent, it permitted removal of the case.
A. Carl Heck Engineers
Although there is a split among the circuits on the
point, this court has held that a third-party indemnity defendant
may remove a case to federal court pursuant to § 1441(c). See Carl
Heck Engineers v. Lafourch Parish Police Jury, 622 F.2d 133 (5th
4
Cir. 1980).1 Neither the Regents nor Low is a third-party
indemnity defendant because there is no basis for Walker to assert
that they are liable for any part of his alleged debt to the state.
See Fed. Rule Civ. P. 14; Tex. Rule Civ. P. 38. Rather, the
Regents, joined in their individual capacities, and Low, newly
joined both in his official and individual capacities, are counter-
defendants in Walker’s counterclaim. This court has not previously
extended the Carl Heck rationale to ordinary counter-defendants.
Doing so would fly in the face of the well-pleaded complaint rule
where the counter-defendants were the same parties as the state
court plaintiffs.2
Here, however, the consequence of permitting removal
satisfied Carl Heck without breaching the well-pleaded complaint
rule. We shall assume that the Regents cannot remove under
§ 1441(c) when joined in their individual capacities as counter-
defendants, because (in their official capacities) they were the
plaintiffs by and through whom the state sued Walker. Low, on the
1
For a discussion of the circuit split, see 14A CHARLES ALAN
WRIGHT ET AL., FEDERAL PRACTICE AND PROCEDURE § 3724, at 388-393 (1985 &
Supp. 1997). See generally Michael C. Massengale, Note, Riotous
Uncertainty: A Quarrel with the “Commentators’ Rule” Against
Section 1441(c) Removal for Counterclaim, Cross-Claim, and Third-
Party Defendants, 75 TEX. L. REV. 659 (1997) (citing relevant cases
with analysis).
2
The well-pleaded complaint rule bases removal jurisdiction
on the existence of a claim lying within federal jurisdiction on
the face of a plaintiff’s well-pleaded complaint. There has never
been a suggestion that a defendant could, by asserting an artful
counterclaim, render a case removable in violation of the well-
pleaded complaint rule. See, e.g., Rivet v. Regions Bank, 118 S.
Ct. 921 (1998).
5
other hand, was not a party in the case in any way before Walker
sued him for § 1983 violations. If the rationale of Carl Heck
correctly affords third-party defendants the opportunity of
§ 1441(c) removal to federal court, to which they could have
removed when sued alone, then that rationale protects Low.
B. Separate & Independent
Section 1441(c) authorizes removal to federal court of
cases in which a “separate and independent” federal claim or cause
of action is joined with a nonremovable claim or cause of action.3
A federal claim is separate and independent if it involves an
obligation distinct from the nonremovable claims in the case. See
American Fire & Cas. Co. v. Finn, 71 S. Ct. 534, 540 (1951)
(“[W]here there is a single wrong to plaintiff, for which relief is
sought, arising from an interlocked series of transactions, there
is no separate and independent claim or cause of action under §
1441(c).”); see also 14A CHARLES ALAN WRIGHT ET AL., FEDERAL PRACTICE AND
PROCEDURE § 3724, at 364-66 (1985 & Supp. 1997).
3
Section 1441(c) states in full:
Whenever a separate and independent claim or cause
of action within the jurisdiction conferred by section
1331 of this title is joined with one or more otherwise
non-removable claims or causes of action, the entire case
may be removed and the district court may determine all
issues therein, or, in its discretion, may remand all
matters in which State law predominates.
28 U.S.C. § 1441(c).
6
Walker contends that his claims against the Regents and
Low were not “separate and independent” from his counterclaims
against the State and, therefore, the district court lacked subject
matter jurisdiction to hear this case. He is mistaken. Finn
states that there is no “separate and independent” claim when the
plaintiff
suffered but one actionable wrong and was entitled to but
one recovery, whether his injury was due to one or the
other of several distinct acts of alleged negligence or
to a combination of some or all of them. In either view,
there would be but a single wrongful invasion of a single
primary right of the plaintiff, namely, the right of
bodily safety, whether the acts constituting such
invasion were one or many, simple or complex.
Finn, 71 S. Ct. at 539-40 (quoting Baltimore S.S. Co. v. Phillips,
47 S. Ct. 600, 602 (1927)). Thus, a case involving the violation
of a single primary right or wherein a party seeks redress for one
legal wrong cannot contain separate and independent claims, despite
multiple theories of liability against multiple defendants. See
Finn, 71 S. Ct. at 540; Able v. Upjohn Co.,
829 F.2d 1330, 1332
(4th Cir. 1987).4 When applied to a third-party defendant, this
rule requires that the plaintiff’s claims against the original
defendant be “separate and independent” from the defendant’s
federal claims against the removing third-party defendant. See
Carl Heck
Eng’rs, 622 F.2d at 136; see also In re Wilson Indus.,
4
In addition, Finn has been read to question whether claims
can be separate and independent when they involve substantially the
same facts and transactions. See Eastus v. Blue Bell Creameries,
L.P., 97 F.3d 100, 104 (5th Cir. 1996);
Able, 829 F.2d at 1332-33;
Addison v. Gulf Coast Contracting Servs., Inc.,
744 F.2d 494, 500
(5th Cir. 1984).
7
Inc., 886 F.2d 93, 96 (5th Cir. 1989); 14A WRIGHT ET AL., supra, §
3724, at 392-94.
In asserting that his claims against the State are not
separate and independent from his claims against the Regents and
Low, Walker is barking up the wrong tree. The proper comparison is
between the State’s claims against Walker and Walker’s federal
claims against the Regents and Low. The State seeks redress for
Walker’s alleged failure to remit his professional fees to the
University. In contrast, Walker seeks redress from the Regents and
Low for allegedly improperly terminating him. The State’s claims
against Walker and Walker’s claims against the Regents and Low thus
involve two distinct wrongs. Whether Walker was improperly
terminated is a distinct wrong not dependent on whether Walker
improperly retained professional fees in violation of the MSRDP.
Second, proof of Walker’s § 1983 claims against the
Regents and Low would not involve substantially the same facts as
proof of the State’s claims against Walker. If a substantive due
process claim is cognizable at all, Walker must show that he had
and was arbitrarily deprived of a property right in his employment.
See Regents of Univ. of Mich. v. Ewing, 106 S. Ct. 507, 511-12
(1985) (assuming without deciding that a substantive due process
claim exists for an adverse decision of an academic institution).
Regarding his equal protection claim, Walker must show that he was
treated differently during his termination proceedings than were
other similarly situated doctors, and that there was no rational
8
basis for this difference in treatment. See United States v. Abou-
Kassem, 78 F.3d 161, 165 (5th Cir. 1996). In contrast, for the
State to succeed on its state-law claims against Walker, it must
initially show that Walker breached his MSRDP contract, and its
claims would not require proof of substantially the same facts as
will be relevant to Walker’s § 1983 claims against the Regents and
Low.
As a consequence, the State’s claims against Walker are
separate and independent from Walker’s federal claims against the
Regents and Low, and removal under §1441(c) was procedurally
proper.5
III. Qualified Immunity
The district court granted partial judgment as a matter
of law on the ground of qualified immunity to the Regents and Low,
in their individual capacities, with respect to Walker’s § 1983
claims. A grant of judgment as a matter of law is reviewed de
novo, examining the evidence in the light most favorable to the
nonmovant. See Channer v. Hall, 112 F.3d 214, 216 (5th Cir. 1997).
The moving party will prevail if he has demonstrated that there is
5
Walker incorrectly cites McKay v. Boyd Constr. Co., 769
F.2d 1084 (5th Cir. 1985), in support of his contention that
removal was improper. McKay involved removal under § 1441(a), not
§ 1441(c). The McKay court expressly distinguished its holding
under § 1441(a) from its understanding of how the case would have
come out had removal been proper under § 1441(c). See
id. at 1087-
88. McKay is inapplicable to our removal analysis in this case.
9
no genuine issue of material fact, and that he is entitled to
judgment as a matter of law. See id.
Qualified immunity shields a public official exercising
discretionary functions from liability for civil damages unless the
public official’s conduct violated clearly established
constitutional or statutory rights of which an objectively
reasonable person should have known. See Harlow v. Fitzgerald,
102
S. Ct. 2727, 2738 (1982); Coleman v. Houston Indep. Sch. Dist.,
113
F.3d 528, 532-33 (5th Cir. 1997). This court reviews a claim of
qualified immunity under a two-part analysis. First, it must be
determined whether the plaintiff alleged the violation of a clearly
established constitutional right. See
Coleman, 113 F.3d at 533.
Second, if so, we determine whether the defendant’s conduct was
objectively reasonable. See
id.
The “touchstone” of the qualified immunity analysis is
the “objective legal reasonableness” of the public official’s
conduct. Anderson v. Creighton,
107 S. Ct. 3034, 3038-39 (1987).
That is, “[t]he contours of the right must be sufficiently clear
that a reasonable official would understand that what he is doing
violates that right.”
Id. at 3039; see also Malley v. Briggs,
106
S. Ct. 1092, 1096 (1986) (stating that qualified immunity is
designed to shield from civil liability “all but the plainly
incompetent or those who knowingly violate the law”).
10
A. Substantive Due Process
This court has said, “To succeed with a claim based on
substantive due process in the public employment context, the
plaintiff must show two things: (1) that he had a property
interest/right in his employment, and (2) that the public
employer’s termination of that interest was arbitrary or
capricious.” Moulton v. City of Beaumont, 991 F.2d 227, 230 (5th
Cir. 1993). Moulton exaggerated the status of a substantive due
process claim for academic protection, however, because the Supreme
Court has not squarely decided the issue. See Ewing, 106 S. Ct. at
at 511-12. Moulton held that no constitutionally protectible
property interest existed, so it did not reach the question of
arbitrary deprivation. In this case, as in Ewing, even if Walker’s
tenure is a property right, he has failed to show that the Regents’
or Low’s actions in terminating him were arbitrary or capricious.
Walker essentially argues that when the Regents
terminated him at the instigation of Low, rejecting a faculty
tribunal’s contrary recommendation, the Regents denied him a proper
hearing, acted partially, and failed to fully consider his
arguments and defenses regarding his retention of professional
fees. Both the Supreme Court and this court have held in related
contexts that substantive due process requires only that public
officials exercise professional judgment, in a nonarbitrary and
noncapricious manner, when depriving an individual of a protected
11
property interest. See Ewing, 106 S. Ct. at 513; Spuler v. Pickar,
958 F.2d 103, 107 (5th Cir. 1992).
Walker did not remit to the University the substantial
outside professional fees he earned while a UTHSC professor. The
University alleged that his actions violated the MSRDP, and Walker
contended that they did not or, even if they did, his debt was
discharged in bankruptcy. Walker was afforded a hearing before the
Regents regarding this dispute. They considered his side of the
story and rejected it. Having reviewed the record, we cannot
conclude that the Regents’ determinations -- that Walker retained
professional fees that belonged to the University and moreover,
that he refused to cooperate in resolving the matter -- so lacked
a basis in fact that their decision to terminate him was arbitrary,
capricious, or taken without professional judgment.6 At best, one
might argue that reasonable minds could disagree on the propriety
of Walker’s termination, and that is insufficient to defeat a
public official’s qualified immunity. See Malley, 106 S. Ct. at
1096. Consequently, the Regents’ and Low’s actions in terminating
Walker either were not unconstitutional or were not objectively
unreasonable in light of the law as it existed at the time of
6
Walker also argues that the Regents and Low acted
arbitrarily by (1) ignoring the fact that his debt had been
discharged and (2) violating 11 U.S.C. § 525(a) which prohibits a
governmental unit from terminating an employee because the employee
has not paid a dischargeable debt. Inasmuch as the
dischargeability of this debt is not yet settled, see infra Part
IV(B), appellees were entitled to qualified immunity against these
claims.
12
Walker’s firing. The district court properly granted qualified
immunity.
B. Equal Protection
“The Equal Protection Clause ‘is essentially a direction
that all persons similarly situated should be treated alike.’”
Brennan v. Stewart, 834 F.2d 1248, 1257 (5th Cir. 1988) (quoting
City of Cleburne v. Cleburne Living Center,
105 S. Ct. 3249, 3254
(1985)). As the district court correctly concluded, Walker is not
a member of a suspect class. Therefore, under equal protection
analysis, rational basis scrutiny applies. See Johnson v.
Rodriguez,
110 F.3d 299, 306 (5th Cir. 1997).
Walker argues that the Regents and Low treated him
differently from other similarly situated UTHSC faculty members who
failed to remit their professional fees to the University. He is
incorrect. Walker’s case is factually distinct because he defied
the University and refused to cooperate in resolving the dispute
over the MSRDP. The other “similarly situated” faculty members to
whom Walker refers all cooperated with the University, and most
eventually reached settlement agreements regarding their improperly
retained professional fees. Because any difference in treatment
between Walker and other faculty members was based on distinctions
in their factual situations, the Regents and Low had a rational
basis for their treatment of Walker. The counter-defendants are
entitled to qualified immunity from Walker’s equal protection
claim.
13
IV. Discharge in Bankruptcy
The State contends that the district court erred in
holding that Walker’s debt to the University for professional fees
earned prior to September 1, 1992, was discharged. The State makes
two arguments: (1) the Eleventh Amendment barred the bankruptcy
court from discharging Walker’s debt to the State; and (2) Walker’s
debt was nondischargeable under 11 U.S.C. § 523(a)(6) because it
was a “willful and malicious injury” against the State. We hold,
first, that the Eleventh Amendment did not preclude the discharge
of Walker’s debt to the State, and second, that there exists a fact
issue regarding whether Walker’s debt was nondischargeable under §
523(a)(6).7
A. The Eleventh Amendment and Bankruptcy Discharge
Walker’s bankruptcy filing did not list the State as a
creditor, and the State did not file a bankruptcy proof of claim.
In fact, the State did not participate in any manner in Walker’s
7
The State raised the Eleventh Amendment defense for the
first time on appeal to this court, asserting that “it is . . . not
clear that the bankruptcy court had jurisdiction to discharge an
obligation to [UTHSC].” Specifically, the State (1) mentions a
potential Eleventh Amendment problem without substantive discussion
in a footnote of its reply brief, (2) filed a Fifth Circuit Rule
28(j) letter prior to oral argument bringing to this court’s
attention a somewhat relevant case, and (3) discussed the Eleventh
Amendment at oral argument. While the State has been less than
helpful in supplying any case law or arguments to support its
contention that the Eleventh Amendment barred the discharge of
Walker’s debt, it nonetheless has not waived the issue. Because of
the strong federalism concerns behind the Eleventh Amendment, we
may properly consider the issue even at this stage of the
proceeding. See Edelman v. Jordan, 94 S. Ct. 1347, 1362-63 (1974);
Neuwirth v. Louisiana State Bd. of Dentistry,
845 F.2d 553, 555
(5th Cir. 1988).
14
bankruptcy case. Subsequently, in this entirely separate
proceeding, the State sued Walker for conversion and breach of
contract. Walker asserted the affirmative defense that his debt to
the State was discharged in bankruptcy. The district court agreed
with Walker, insofar as his debt to the State consists of
professional fees earned prior to Walker’s bankruptcy.
Consequently, the precise issue here is whether the
Eleventh Amendment prevents the discharge of a debt owed to a state
in a bankruptcy proceeding in which the state does not participate
in any fashion.8 In deciding that it does not, we mean only that
the discharge may be raised as a defense to the state’s suit on the
debt.9
8
Prior to Seminole Tribe v. Florida, 116 S. Ct. 1114 (1996),
some courts held that debts owed to a state were dischargeable in
bankruptcy even if the state had not filed a proof of claim. See
In re Glidden,
653 F.2d 85, 89 (2d Cir. 1981); Connecticut v.
Crisp,
521 F.2d 172, 178 (2d Cir. 1975); Iowa State Dep’t of Soc.
Servs. v. Morris,
10 B.R. 448, 455-56 (Bankr. N.D. Iowa 1981). The
rationale behind these cases is that the Eleventh Amendment only
protects a state from federal court money judgments paid out of the
state treasury. See
Crisp, 521 F.2d at 178;
Morris, 10 B.R. at
456. Because a judgment of discharge in a bankruptcy case does not
require payment out of a state’s coffers, discharge does not
implicate the Eleventh Amendment. See
Crisp, 521 F.2d at 178;
Morris, 10 B.R. at 456. The reasoning of these case is incorrect,
as expressed clearly and emphatically in Seminole: “The Eleventh
Amendment does not exist solely in order to prevent federal court
judgments that must be paid out of a State’s treasury, it also
serves to avoid the indignity of subjecting a State to the coercive
process of judicial tribunals at the instance of private parties.”
Seminole, 116 S. Ct. at 1124 (internal citations and quotations
omitted).
9
The State does not assert that the Eleventh Amendment
barred the federal district court from adjudicating Walker’s
defense of discharge in this case. Once the case was removed, the
court had jurisdiction over the State’s claims against Walker, and
15
The Eleventh Amendment jurisdictionally bars a suit in
federal court by a private individual against an unconsenting
state—absent waiver or congressional abrogation of sovereign
immunity pursuant to section five of the Fourteenth
Amendment—regardless of the relief sought by the plaintiff. See
U.S. CONST. amend. XI; Seminole Tribe v. Florida, 116 S. Ct. 1114,
1124 (1996). This court has recently held that even in an area of
the law under the exclusive control of the federal government, such
as bankruptcy, the Eleventh Amendment absolutely bars such suits.
See In re Estate of Fernandez,
123 F.3d 241 (5th Cir. 1997)
(holding attempted statutory waiver of sovereign immunity under 11
U.S.C. § 106(a) unconstitutional).10
Cases that have considered Seminole’s impact on
bankruptcy practice have generally concerned adversary proceedings
brought by the trustee or a party in interest against the state in
his assertion of the discharge defense was not equivalent to
seeking affirmative relief, such as an injunction against further
collection efforts under 11 U.S.C. § 524. We have no occasion to
consider the road not taken by Walker.
10
It is also well settled that suits against certain state
agents or instrumentalities fall within the Eleventh Amendment’s
compass. See Regents of Univ. of Cal. v. Doe, 117 S. Ct. 900, 903-
04 (1997). The parties in this case do not dispute that UTHSC and
the Regents of the University of Texas, sued in their official
capacities, may invoke the State’s Eleventh Amendment immunity;
they are “arms” of the state for purposes of the Eleventh
Amendment. See id.; United Carolina Bank v. Board of Regents of
Stephen F. Austin State Univ.,
665 F.2d 553, 556-61 (5th Cir. Unit
A 1982).
16
federal court to recover money damages.11 Just as Seminole renders
11 U.S.C. § 106(a) unconstitutional, it perforce deprives federal
courts of jurisdiction over these unconsented-to suits against the
state. The extent to which filing a proof of claim constitutes
waiver of this immunity is uncertain. The Fourth Circuit has held
that even where the state filed a proof of claim for one type of
past due taxes, it did not waive Eleventh Amendment immunity
against an adversary proceeding in bankruptcy court to determine a
different type of tax. See In re Creative Goldsmiths, Inc., 119
11
Three recent lower court cases are representative. In Kish
v. Verniero, 212 B.R. 808 (D.N.J. 1997) (Brown, J.), and Rose v.
United States Dept. of Educ.,
214 B.R. 372 (Bankr. W.D. Mo. 1997)
(Koger, J.), the debtors filed actions directly against the state
to determine the dischargeability of certain debts owed to the
state. In both cases, the state had not filed a proof of claim in
the debtors’ bankruptcy proceedings. Both courts held that they
lacked jurisdiction pursuant to the Eleventh Amendment to hear the
debtors’ claims against the state.
In In re Martinez, 196 B.R. 225 (D.P.R. 1996), the debtors
filed for bankruptcy under Chapter 13 in 1985. The debtors listed
a tax debt to the Treasury of the Commonwealth of Puerto Rico
(“Treasury”) on their schedule of creditors, but the Treasury did
not file a proof of claim. The district court found that the
Treasury was aware of the debtors’ bankruptcy petition. A
reorganization plan was confirmed by the bankruptcy court in 1986.
In 1989, the Treasury (an arm of a state for purposes of the
Eleventh Amendment), filed a tax lien on the debtors’ property.
The debtors alleged that the Treasury had violated the automatic
stay and, therefore, should be liable for actual and punitive
damages. See
id. at 226-27. The district court held that “it is
clear that Treasury violated the debtors’ automatic stay when
Treasury filed a tax lien over debtors’ property after the Chapter
13 petition had been filed.”
Id. at 228. Nonetheless, it also
held that it did not have jurisdiction over the debtors’ claim
against Treasury for willful violation of the automatic stay
because of Treasury’s sovereign immunity, which had not been
waived. See
id. at 230. Treasury’s lien remained in place despite
the fact that Treasury both had actual knowledge of debtors’
bankruptcy proceeding and refused to participate in that
proceeding.
17
F.3d 1140, 1149 (4th Cir. 1997). Since UTHSC never filed a proof
of claim, however, waiver is irrelevant to the present analysis.
The pressing issue here is whether a bankruptcy case, in and of
itself, constitutes an unconsented suit against a creditor state,
so that the debtor’s discharge, which “operates as an injunction”
against collection of the debt, 11 U.S.C. § 524(a)(2), is
ineffectual against the state under the Eleventh Amendment.
The argument for an Eleventh Amendment bar would assert
that although the State was not a named defendant in Walker’s
bankruptcy case, it was an indirect party because its legal rights
were adjudicated and altered (albeit without its knowledge) when
the bankruptcy court discharged Walker’s debt. Cf. Regents of
Univ. of Cal., 117 S. Ct. at 904-05 (holding that the “underlying
Eleventh Amendment question” is the state’s “potential legal
liability,” not whether any award of damages would actually come
from the state’s coffers); Kish v. Verniero,
212 B.R. 808, 814 n.5
(D.N.J. 1997) (citing Regents of University of California v. Doe
and stating that “the relevant inquiry for Eleventh Amendment
purposes is whether a state’s potential legal rights are
affected”). If Walker’s discharge was valid, then the State was
enjoined in perpetuity from collecting that debt. See 11 U.S.C.
§ 524(a)(2). This can be viewed as both subjecting the state to
the indignity of the coercive powers of a federal court, see
Seminole, 116 S. Ct. at 1124, and significantly altering the legal
18
rights of the state, see Regents of Univ. of Cal., 117 S. Ct. at
904.
Put another way, discharging a debt owed to the state
either restrains the state from acting by enjoining it from
collecting the debt, or compels the state to act by forcing it to
file a proof of claim in bankruptcy court in order to collect the
debt.12 The state is thus presented with a Hobson’s choice: either
subject yourself to federal court jurisdiction or take nothing.13
If the state acts, it is potentially forced to waive its sovereign
immunity by filing a proof of claim in the bankruptcy court.14 If
the state does nothing, it is permanently barred from collecting
its debt and from recovering a pro rata share of the debtor’s
12
The Supreme Court has held that “[t]he general rule is that
a suit is against the sovereign if ‘the judgment would expend
itself on the public treasury or domain, or interfere with the
public administration,’ or if the effect of the judgment would be
‘to restrain the Government from acting, or to compel it to act.’”
Pennhurst State Sch. & Hosp. v. Halderman, 104 S. Ct. 900, 908 n.11
(1984) (quoting Dugan v. Rank,
83 S. Ct. 999, 1006 (1963)).
13
But see DeKalb County Div. of Family and Child Servs. v.
Platter, 1998 WL 138847, at *3 (7th Cir. Mar. 26, 1998) (arguing
that “the imposition of this decision by Congress on the states
‘does not amount to the exercise of federal judicial power to hale
a state into federal court against its will and in violation of the
Eleventh Amendment.’” (quoting Maryland v. Antonelli Creditors’
Liquidating Trust,
123 F.3d 777, 787 (4th Cir. 1997))).
14
After Seminole, some courts have held that a state waives
its Eleventh Amendment immunity to some extent when it files a
proof of claim in a bankruptcy proceeding. See, e.g., In re
Creative Goldsmiths, 119 F.3d 1140, 1148-49 (4th Cir. 1997); Rose
v. United States Dept. of Educ.,
215 B.R. 755, 761-62 (Bankr. W.D.
Mo. 1997); In re NVR L.P.,
206 B.R. 831, 850-51 (Bankr. E.D. Va.
1997) (collecting cases and extensively discussing waiver).
19
estate. It can be argued that the Eleventh Amendment should
prevent a state from being forced to make such a choice.15
Resting as it does on extrapolations from Supreme Court
cases, this argument is not specious, but it is ultimately
unpersuasive on the facts before us. Its key assumption is the
equation of a bankruptcy case with a suit against the state, but
this assumption is flawed. In a bankruptcy case, in its simplest
terms, a debtor turns over his assets, which constitute the estate,
for liquidation by a trustee for the benefit of creditors according
to their statutory priorities. Bankruptcy law modifies the state’s
collection rights with respect to its claims against the debtor,
but it also affords the state an opportunity to share in the
collective recovery. Bankruptcy operates by virtue of the
Supremacy Clause and without forcing the state to submit to suit in
federal court. See Maryland v. Antonelli Creditors’ Liquidating
Trust, 123 F.3d 777, 787 (4th Cir. 1997) (“While resolution of an
adversary proceeding against a state depends on court jurisdiction
over that state, the power of the bankruptcy court to enter an
order confirming a plan . . . derives not from jurisdiction over
15
But see New Jersey v. Mocco, 206 B.R. 691 (D.N.J. 1997)
(holding that a potential state-court fraud judgment owed to a
state that had notice of a pending bankruptcy proceeding and failed
to file a proof of claim could be discharged without violating the
Eleventh Amendment); In re Kings Terrace Nursing Home & Health
Related Facility,
184 B.R. 200 (S.D.N.Y. 1995) (holding that a
state may not recoup pre-petition Medicaid overpayments to the
debtor because the state knowingly and intentionally failed to file
a proof of claim and, therefore, the debt was discharged when the
debtor’s bankruptcy plan was confirmed).
20
the state or other creditors, but rather from jurisdiction over
debtors and their estates.”).
From this standpoint, Walker’s entitlement to assert his
discharge against the state’s claims invoked no Eleventh Amendment
consequences. The state never was hauled into federal court
against its will in the bankruptcy. In fact, because the state was
never notified of the bankruptcy and never had the opportunity to
file a timely claim, bankruptcy law should ordinarily expressly
protect the state’s claim from being discharged. See 11 U.S.C.
§ 523(a)(3)(B).16 That is just the provision on which the state
predicates its request for relief against the discharge defense
here.
16
11 U.S.C. § 523(a)(3)(B) states that a debtor is not
discharged from certain claims, including those for willful and
malicious injury, if the creditor was not listed or scheduled by
the debtor in time to permit timely filing of a proof of claim and
timely request of a determination of dischargeability. Walker,
mysteriously, filed a “no-asset” case, in which creditors are
informed that they need not file proofs of claim because such
filings would be futile. But his failure to notify the University
also deprived it of the opportunity timely to pursue a
nondischargeability action.
Another peculiarity about this case might have posed an
Eleventh Amendment problem but has not been raised. The Bankruptcy
Code provides that federal courts have exclusive jurisdiction of
four types of nondischargeability claims, including the willful and
malicious injury exception, § 525(a)(6), on which the state relies.
See 11 U.S.C. § 523(c). This provision ordinarily requires a
creditor to proceed only in federal court to obtain a
nondischargeability ruling on any of those four grounds, whether or
not the creditor received timely notice of the bankruptcy case.
See 11 U.S.C. § 523(a)(3)(B). The state did not initially pursue
this course, however, and does not challenge the current procedural
posture of the case. Equally important, Dr. Walker has not
challenged the state’s right to litigate nondischargeability under
§ 523(a)(6) under the circumstances before us.
21
Additional support for our view that the granting of a
bankruptcy discharge does not offend the Eleventh Amendment --
although commencement of certain adversary proceedings directly
against a state that has not filed a proof of claim in a bankruptcy
case would do so -- derives from hoary Supreme Court authority.
The Court has long held that a federal bankruptcy court decision
can affect the lien interests of the states. See Gardner v. New
Jersey, 67 S. Ct. 467 (1947). In Gardner, the Court overruled an
apparent Eleventh Amendment objection to the process of
adjudicating the validity and priority of competing liens where the
state had filed a proof of claim:
It is traditional bankruptcy law that he who invokes
the aid of the bankruptcy court by offering a proof of
claim and demanding its allowance must abide the
consequences of that procedure. If the claimant is a
State, the procedure of proof and allowance is not
transmitted into a suit against the State because the
court entertains objections to the claim. The State is
seeking something from the debtor. No judgment is sought
against the State. The whole process of proof,
allowance, and distribution is, shortly speaking, an
adjudication of interests claimed in a res. It is none
the less such because the claim is rejected in toto,
reduced in part, given a priority inferior to that
claimed, or satisfied in some way other than payment in
cash. When the State becomes the actor and files a claim
against the fund it waives any immunity which it
otherwise might have had respecting the adjudication of
the claim.
The extent of the constitutional authority of the
bankruptcy court in this respect was passed upon in
People of State of New York v. Irving Trust Co., 288 U.S.
329,
53 S. Ct. 389,
77 L. Ed. 815. In that case the Court
sustained an order of the bankruptcy court which barred
a State’s tax claim because not filed within the time
fixed for the filing of claims. The Court stated, “If a
state desires to participate in the assets of a bankrupt,
she must submit to appropriate requirements by the
22
controlling power; otherwise, orderly and expeditious
proceedings would be impossible and a fundamental purpose
of the Bankruptcy Act would be frustrated.”
In the present circumstances there is, therefore, no
collision between § 77 and the Constitution.
Gardner, 67 S. Ct. at 472 (internal citations omitted). Until
these cases are overruled, Seminole does not and should not impair
their force.
This is a roundabout way to concluding that unless
Walker’s debt was nondischargeable under § 523(a)(6), his discharge
could be raised against the state’s lawsuit to collect a
prepetition debt.
B. The Willful and Malicious Injury Exception to Discharge
The final issue is the applicability of § 523(a)(6) to
Walker’s acts in breaching his contract and failing to account to
UTHSC for his outside earnings.
Section 523(a)(6) bars the discharge of a debt “for
willful and malicious injury by the debtor to another entity or to
the property of another entity.” 11 U.S.C. § 523(a)(6). A
“willful and malicious injury” results from an act done with the
actual intent to cause injury, not from an act done intentionally
that causes injury. See Kawaauhau v. Geiger, 118 S. Ct. 974, 977-
78 (1998). In other words, “for willfulness and malice to prevent
discharge under § 523(a)(6), the debtor must have intended the
actual injury that resulted.” In re Delaney,
97 F.3d 800, 802 (5th
Cir. 1996). “[D]ebts arising from recklessly or negligently
inflicted injuries do not fall within the compass of § 523(a)(6).”
23
Kawaauhau, 118 S. Ct. at 978. “[I]ntent to injure may be
established by a showing that the debtor intentionally took action
that necessarily caused, or was substantially certain to cause, the
injury.” In re Delaney, 97 F.3d at 802.
Neither a claim for breach of contract nor the tort of
conversion necessarily involves an intentional injury. See
Kawaauhau, 118 S. Ct. at 977 (negligence and breach of contract);
National Union Fire Ins. Co. v. Care Flight Air Ambulance Serv.,
Inc.,
18 F.3d 323, 325 (5th Cir. 1994) (conversion); Moody v.
Smith,
899 F.2d 383, 385 (5th Cir. 1990) (conversion). The act of
conversion, however, can result in a “willful and malicious
injury.” See McIntyre v. Kavanaugh,
37 S. Ct. 38 (1916); see also
Kawaauhau, 118 S. Ct. at 978 (reaffirming the holding of McIntyre).
In addition, under Texas law, a claim for breach of contract and
the tort of conversion may arise from the same set of facts. See
Care Flight Air Ambulance
Serv., 18 F.3d at 326.
Walker admits that he acted intentionally when he kept
the professional fees he earned while a UTHSC faculty member.
Consequently, the issue before this court is whether it is
appropriate to grant Walker judgment as a matter of law that his
pre-bankruptcy debt to the University is discharged and to conclude
that § 523(a)(6) is inapplicable because the injury suffered by the
State allegedly was not intended by Walker (i.e., was not “willful
and malicious”).
24
The district court found that Walker’s retention of his
professional fees was an “innocent and technical” act rather than
a “willful and malicious injury.” See Davis v. Aetna Acceptance
Co., 55 S. Ct. 151, 153 (1934) (Cardozo, J.) (“[A] willful and
malicious injury does not follow as of course from every act of
conversion, without reference to the circumstances. There may be
a conversion which is innocent or technical, an unauthorized
assumption of dominion without willfulness or malice.”); see also
Kawaauhau, 118 S. Ct. at 978 (reaffirming the holding of Davis).
For the following reasons, we reverse the district court’s grant of
judgment as a matter of law to Walker on the issue of § 523(a)(6)
nondischargeability. An issue of fact exists regarding whether
Walker was aware of his obligations to the University under the
MSRDP and nonetheless knowingly kept his professional fees with the
intent of depriving the University of money owed to it.
Walker signed his MSRDP contract in 1980. The MSRDP
contract expressly states that all fees received by a faculty
member for “professional services” are to be assigned to the
University. The MSRDP’s by-laws expressly state that
“professional fees” include fees for all “court appearances,
depositions, or legal consultations.” The MSRDP contract and by-
law language is crystal clear, and all MSRDP participants were sent
a memorandum in November 1990 reminding them that “fees for all
court appearances, depositions and legal consultations (including
expert witness fees) shall be deposited in the departmental MSRDP
25
account.” Walker claims that he did not receive this memorandum
and that he did not read the MSRDP by-laws until 1993, months after
his September 1992 bankruptcy filing. He also testified that the
general belief among UTHSC faculty members was that professional
fees earned for legal consulting need not be remitted to the
University. The UTHSC faculty tribunal that reviewed Walker’s case
as part of UTHSC’s grievance procedures found that there was a lack
of understanding among faculty members about the MSRDP’s
requirements. Based upon these conflicting facts alone, what
Walker knew regarding his obligations under the MSRDP and when he
knew it are disputed. If a factfinder were to decide that Walker
knew of his obligations under the MSRDP contract and its by-laws,
either at the time he signed the contract or received the November
1990 memorandum, then it might also find that Walker knowingly
retained his professional fees in violation of the MSRDP, an act
which he knew would necessarily cause the University’s injury.
This, in turn, could result in a finding of “willful and malicious
injury.” Such factual issues must be submitted to a trier of fact
in order to determine if Walker’s debt was nondischargeable under
§ 523(a)(6).
V. Conclusion
For the foregoing reasons, we affirm the district court’s
judgment upholding the Regents’ and Low’s qualified immunity, and
we reverse the district court’s judgment regarding Walker’s
discharge in bankruptcy.
26
AFFIRMED IN PART, REVERSED IN PART, and REMANDED.
27
