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In re Raphael

August 11, 1999

IN RE: ALMON RAPHAEL


The opinion of the court was delivered by: Irenas, District Judge:

HONORABLE JOSEPH E. IRENAS

OPINION

This bankruptcy appeal requires this Court to consider whether the Bankruptcy Court improperly issued an order directing the Municipal Court to notify the New Jersey Division of Motor Vehicles ("DMV") to restore a debtor's drivers license that was suspended pre-petition, when such debtor is making payments for his traffic and parking fines through his Chapter 13 bankruptcy plan. The Bankruptcy Court ordered the license restoration after finding that 1) the bankruptcy court was not bound by the decision of a district judge within its district; 2) the municipal court and not the DMV was the real party in interest; and 3) New Jersey municipal courts were not protected from suit in federal courts by the Eleventh Amendment. This Court finds that the Bankruptcy Court lacked jurisdiction to order the Municipal Court to restore Debtor's driving license and reverses the February 4, 1999, Order of the Bankruptcy Court.

I.

On August 28, 1998, the Debtor, Almon Raphael ("Raphael") filed a voluntary Chapter 13 petition under Title 11 of the United States Bankruptcy Code ("Bankruptcy Code"). The record reveals that as of October 26, 1998, prior to the filing date, Debtor's driving privileges were suspended by the DMV for failure to comply with the installment orders of Bass River and Clementon Municipal Courts to pay traffic fines, see N.J.S.A. 39:4-203.2, *fn1 N.J.S.A. 2B:12-31(a)(2), *fn2 as well as for failure to appear in Atlantic City court for a speeding ticket, see N.J.S.A. 39:5-30, *fn3 N.J.S.A. 2B:12-31(a)(1). *fn4 See October 26, 1998, Driver History Suspensions. As a result of the suspension of operating privileges, Debtor was not permitted to operate motor vehicles for any reason. Since Debtor operated motorized equipment at his place of business, he desired to regain his driver's license to retain his employment.

Debtor proposed to pay parking and traffic fines through his Chapter 13 plan of $33.40 per month for thirty-six months, totaling $1202.40. Of this amount, $480.00 was to be paid to Debtor's unsecured creditors on a pro rata basis, plus attorney and trustee fees, over the thirty-six month period. Debtor's plan indicated that his counsel fee of approximately $600 and trustee fee of approximately $120 were included in the balance of the plan.

Debtor's Chapter 13 unsecured creditors included four municipal courts for traffic and parking fines, the New Jersey Automobile Insurance Surcharge and Collections ("AISC") for motor vehicle surcharges, and the Beneficial Finance Co., for a personal bank loan. Debtor's plan also listed the Internal Revenue Service ("IRS") as holding a secured, priority claim in the amount of $600, which was to paid outside of his plan. Debtor did not propose to pay any of his penalties in full through his Chapter 13 plan.

Debtor's plan listed the following creditors and claims: 1) Absecon Municipal Court, for parking fines in the amount of $100; 2) Atlantic City Municipal Court, for parking fines in the amount of $124; 3) Bass River Municipal Court, for traffic fines in the amount of $600; 4) Clementon Municipal Court, for traffic fines in the amount of $450; 5) Beneficial Finance Co., for a personal loan in the amount of $682; 6) New Jersey AISC, for motor vehicle surcharges in the amount of $3500; and 7) the Internal Revenue Service ("IRS"), for federal income taxes in the amount of $600. See List of Creditors. The Debtor filed proofs of claim on behalf of each of the above-listed municipal courts. Two of the municipal courts, namely Bass River and Atlantic City, have also filed their own proofs of claim.

Debtor filed a motion, returnable November 9, 1998, to compel certain municipal courts to notify the DMV to restore Debtor's driving privileges. Such motion was directed to the three Municipal Courts holding claims against Rafael, namely Bass River Township, the City of Atlantic City, and Clementon Boro, *fn5 as well as the New Jersey Division of Motor Vehicles, AISC. Neither the municipalities nor the New Jersey AISC opposed this motion. *fn6 Essentially, Debtor sought to direct the municipal courts to rescind their respective suspensions of the Debtor's driving privileges since municipal court traffic fines were being paid through his Chapter 13 plan.

The only objection to the Debtor's motion was raised by the State of New Jersey, which entered a special appearance on behalf of the DMV for the limited purpose of asserting the protection of sovereign immunity under the Eleventh Amendment. In seeking to have the Debtor's motion dismissed, the DMV relied on Judge Tuohey's decision in In re Perez, 220 B.R. 216 (Bankr. D.N.J. 1998), aff'd, Civ. No. 98-2043/NHP (D.N.J. August 10, 1998) (unpublished letter opinion).

The Bankruptcy Court considered Debtor's motion at the hearings conducted on November 9 and 16, 1998. At these hearings, United States Bankruptcy Court Judge Wizmur expressed the view that the municipal courts were the real parties in interest in Debtor's quest for relief, and that the municipal courts did not have sovereign immunity under the Eleventh Amendment. Judge Wizmur agreed that the automatic stay precluded the conduct of collection activities against the Debtor by the municipal courts during the pendency of the case. Finally, Judge Wizmur determined that the municipal courts could be directed to rescind any pending suspensions of the Debtor's driving privileges which were based on the Debtor's failure to pay fines imposed by the municipal courts. See In Re Rafael, 230 B.R. 657, 661 (Bankr. D.N.J. 1999).

The matter was adjourned and reconvened by telephone conference call on November 30, 1998, because further clarification was needed regarding the bases of Debtor's various suspensions. See id. On that same date, Judge Wizmur entered an order directing the municipalities of Atlantic City, *fn7 Bass River, Clementon, and Pleasantville *fn8 to "issue an order rescinding the suspension of Debtor's driving privileges and communicate its issuance to the Division of Motor Vehicle." See November 30, 1998, Order to Municipalities to Issue Rescinding Orders. The rescission applied to any suspension that was not occasioned by the Debtor's failure to appear in response to a summons or a statutory suspension. On December 1, 1998, Clementon Boro complied with the Bankruptcy Court's November 30, 1998, Order.

During the November 30, 1998, conference call, the State asserted that because the District Court had affirmed the Perez decision, the Bankruptcy Court was bound by the conclusions drawn in such decision. The Bankruptcy Court decided to afford the State the opportunity to supplement the record on this argument and held a hearing on this issue on December 7, 1998. On February 4, 1999, Judge Wizmur issued an opinion to clarify the bases for the court's previous determinations and rulings.

In this opinion, the Bankruptcy Court considered three issues: 1) whether the bankruptcy court was bound by the decision of a district court within its district; 2) whether the DMV was the real party in interest; and 3) whether Clementon Municipal Court was entitled to sovereign immunity pursuant to the Eleventh Amendment.

The Bankruptcy Court concluded that it was not bound by the decision of a District Court within its district, In re Perez, 220 B.R. 216 (Bankr. D.N.J. 1998). The State argued that because the Perez decision was affirmed by the District Court, see Civ. No. 98-2043/NHP (D.N.J. August 10, 1998) (unpublished letter opinion), the Bankruptcy Court was bound by the Perez decision. Judge Wizmur rejected this argument since the Third Circuit has stated that "it is clear that there is no such thing as the law of the district." See In re Rafael, 230 B.R. at 664 (quoting Threadgill v. Armstrong World Indus., Inc., 928 F.2d 1366, 1371 (3d Cir. 1991) (citations omitted).

The Bankruptcy Court also concluded that the municipal court, and not the DMV, was the real party in interest.

The Court relied on N.J.S.A. 2B:12-31(e)(1), which provides:

When a defendant whose license has been suspended pursuant to subsection a. of this section satisfies the requirements of that subsection, the municipal court shall forward to the Division of Motor Vehicles a notice to restore the defendant's driving privileges. See also 39:4-139.11. *fn9

Focusing on the language of the statute, the court reasoned that the restoration of one's driver license was a ministerial act that is governed by state statute, and has no impact upon the DMV's oversight of the licensing process or upon the state treasury.

The court concluded:

An order which compels the municipal courts to rescind their notices of suspension which recission, by statute, requires the DMV to restore the Debtors' driving privileges, cannot be extended to make the DMV a real party in interest. Such an order does not affect the DMV's potential or actual legal rights. The only real party in interest is the municipal court. The DMV is merely carrying out a related administrative task. See In re Rafael, 230 B.R. 657, 664 (D.N.J. 1999).

Finally, the Bankruptcy Court concluded that a New Jersey municipal court, in particular Clementon Municipal Court, was not entitled to sovereign immunity pursuant to the Eleventh Amendment. The Bankruptcy Court first determined that Clementon was the only municipal court whose sovereign immunity was at issue because Bass River and Atlantic City were deemed to have waived sovereign immunity by filing proofs of claim in this case. See In re Rafael, 230 B.R. at 665-66 (citing In re Burke, 146 F.3d 1313 (11th Cir. 1998) (the filing of a proof of claim waives sovereign immunity); In re Straight, 143 F.3d 1387 (10th Cir. 1998), cert. denied, 119 S. Ct. 446 (1998); In re Fennelly, 212 B.R. 61, 64 (D.N.J. 1997) ("majority rule [is] that filing a proof of claim constitutes a waiver of a State's sovereign immunity"); but see In re Chen, 22 B.R. 614, 623 (D.N.J. 1998) ("state may still raise the defense of sovereign immunity after filing a proof of claim, however, the state must do so at the outset")). *fn10

In finding that a New Jersey municipal court is not entitled to sovereign immunity and is therefore subject to suit in federal court, the Bankruptcy Court applied the factors articulated in Fitchik v. New Jersey Transit Rail Operations, Inc., 873 F.2d 655 (3d Cir. 1989).

In Fitchik, the Third Circuit devised a three factor test to be used to determine whether a state agency or entity is entitled to invoke Eleventh Amendment immunity:

1) whether payment of the judgment would come from the state's treasury;

2) the status of the agency under state law; and 3) the degree of autonomy the agency enjoys. See id. at 659. See also Christy v. Pennsylvania Turnpike Comm'n, 54 F.3d 1140, 1144-45 (3d Cir. 1989).

Applying the Fitchik factors to the Clementon Municipal Court, the Bankruptcy Court determined that the funding factor weighed against sovereign immunity, while the status and autonomy factors weighed in favor of a finding that New Jersey municipal courts are alter egos of the state and thus entitled to sovereign immunity. See In re Rafael, 230 B.R. at 672. The Bankruptcy Court concluded that Clementon Municipal Court did not have sovereign immunity because the funding factor is the most significant factor. See id. (citing Fitchik, 873 F.2d at 659; Hess v. Port Authority Trans-Hudson Corp., 513 U.S. 30, 49) (other citations omitted).

The instant appeal was filed on March 1, 1999. In appealing the February 4, 1999, decision of the Bankruptcy Judge, the State of New Jersey ("State") argues that the State is the real party in interest and is entitled to sovereign immunity under the Eleventh Amendment. The State emphasizes that the Bankruptcy Court Order compels the State to act, and interferes with the State's police power and its mandate to administer the licensing of drivers. The State asserts that bankruptcy is not intended to be used to avoid state imposed punishment for illegal behavior and that this is precisely what is permitted by the bankruptcy court order.

The State also disputes the Bankruptcy Judge's reliance on N.J.S.A. 2B:12-31(e)(1) to support its conclusion that the State's compulsion to act was mandated by state statute. The State argues that the statute provides that a municipal court shall forward the DMV a notice to restore defendant's driving privileges when a defendant whose license has been suspended satisfies the requirements of that subsection (subsection a). The State contends, however, that the statutes do not mandate a judge to order restoration of ...


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