ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE (Dist. Court No. 01-cv-121) District Court Judge: Gregory M. Sleet
Before: Nygaard, Alito, and McKEE, Circuit Judges.
The opinion of the court was delivered by: Alito, Circuit Judge
Argued on December 16, 2002
The State of Maryland and three Maryland counties (Baltimore, Montgomery, and Prince George's) (collectively the "Taxing Authorities") appeal from an order of the United States District Court for the District of Delaware affirming two orders of the United States Bankruptcy Court for the District of Delaware. The first of these Bankruptcy Court orders declared that certain sales of real estate interests proposed by Hechinger Investment Company of Delaware, Inc. ("Hechinger") would be exempt under 11 U.S.C. § 1146(c) from transfer and recording taxes imposed by the Taxing Authorities. The second order directed the Taxing Authorities to refund any transfer and recording taxes previously paid by purchasers of the real estate interests once the Bankruptcy Court confirmed Hechinger's reorganization plan.
Agreeing with the only other court of appeals that has decided the issue, NVR Homes, Inc. v. Clerks of the Circuit Courts, 189 F.3d 442 (4th Cir. 1999), we hold that 11 U.S.C. § 1146(c) does not apply to real estate transactions that occur prior to the confirmation of a plan under Chapter 11 of the Bankruptcy Code. We therefore reverse the order of the District Court and remand for further proceedings consistent with this opinion.
The relevant facts are undisputed. Prior to its bankruptcy and cessation of operations, Hechinger was a "retailer[ ] of home and garden care products and services." App. at 17. In June 1999, Hechinger filed a voluntary petition for relief pursuant to Chapter 11 of the Bankruptcy Code, and in September of the same year, Hechinger announced its plan to liquidate its assets and cease operations.
In October 1999, Hechinger filed a motion in the Bankruptcy Court requesting permission to sell its interests in certain real estate pursuant to 11 U.S.C. §§ 363 and 365. Hechinger proposed to make these sales prior to the confirmation of a plan of reorganization by the Bankruptcy Court under 11 U.S.C. § 1129. The real estate interests at issue were all located within the Taxing Authorities' borders. Consequently, the Taxing Authorities — under normal circumstances — would have been able to collect transfer and recording taxes from the purchasers of those interests. Hechinger's motion sought a declaration by the Bankruptcy Court that the proposed sales would be exempt from these taxes on the ground that the sales constituted "the making or delivery of... instrument[s] of transfer under a plan confirmed under section 1129" of the Bankruptcy Code and thus could "not be taxed under any law imposing a stamp tax or similar tax." 11 U.S.C. § 1146(c).
In November 1999, Hechinger filed another motion seeking the authority to sell its leasehold interest in real estate located in Montgomery County, Maryland. As in its October motion, Hechinger proposed to make this sale prior to the confirmation of a reorganization plan, and Hechinger again sought a declaration by the Bankruptcy Court that the sale would not be subject to state and county transfer and recording taxes. Both the October and November motions were filed pursuant to Federal Rule of Bankruptcy Procedure 9014. As required by Rule 9014, the Taxing Authorities were served with the motions and informed of their opportunity to enter objections in the Bankruptcy Court. See Fed. R. Bankr. P. 9014(a)-(b).
The Taxing Authorities subsequently filed such objections. First, the Taxing Authorities claimed that the Bankruptcy Court proceedings concerning the declarations sought by Hechinger constituted a suit against the State of Maryland under the Eleventh Amendment and were therefore barred. Second, the Taxing Authorities maintained that the proposed declarations would effectively enjoin the collection of a tax imposed by state law in violation of the Tax Injunction Act, 28 U.S.C. § 1341.*fn2 Finally, the Taxing Authorities argued that the proposed sales did not constitute "deliver[ies]... of... instrument[s] of transfer under a plan confirmed under section 1129" of the Bankruptcy Code, as required by 11 U.S.C. § 1146(c), and that the proposed sales were thus ineligible for the tax exemption created by Section 1146(c). The Taxing Authorities contended that a property interest that is sold prior to the confirmation of a reorganization plan is not transferred "under a plan confirmed under section 1129" within the meaning of Section 1146(c) because a Chapter 11 plan must be confirmed before a property interest may be said to be sold "under" such a plan.
The Bankruptcy Court rejected the Taxing Authorities' contentions and issued the requested declarations. Two aspects of the Bankruptcy Court's opinion are pertinent to this appeal. First, the Bankruptcy Court held that Hechinger's motions seeking the declarations were not "suits" within the meaning of the Eleventh Amendment. Because the motions did not request "the turnover of property already in possession of a state," the Court reasoned, "adjudication of the motions [did] not require the Court to exercise jurisdiction over Maryland." App. at 27, 47. Second, the Bankruptcy Court held that Hechinger's proposed sales were "under a plan confirmed under section 1129" within the meaning of 11 U.S.C. § 1146(c), since "a transfer... that is essential to or an important component of the plan process, even if it occurs prior to plan confirmation, is 'under a plan' within the meaning of § 1146(c)." Id. at 47. Hence, the Bankruptcy Court concluded, the proposed sales were exempt from the Taxing Authorities' transfer and recording taxes.
The Bankruptcy Court's order made the operation of the tax exemption in Section 1146(c) conditional upon that court's eventual confirmation of a Chapter 11 plan. The Bankruptcy Court accordingly ordered Hechinger to escrow proceeds from the sales sufficient to pay the transfer and recording taxes that the purchasers would have been required to pay absent the Section 1146(c) exemption.
Hechinger subsequently sold an unknown number of real estate interests pursuant to the authorization granted by the Bankruptcy Court, and the purchasers of those interests paid transfer and recording taxes to the Taxing Authorities. In October 2000, Hechinger filed a motion requesting that the Bankruptcy Court clarify its prior order. Hechinger asked the Bankruptcy Court to instruct the Taxing Authorities to refund the taxes paid by the purchasers as soon as the Bankruptcy Court confirmed Hechinger's proposed plan. The Bankruptcy Court granted Hechinger's motion in January 2001, and directed the Taxing Authorities to refund any transfer and recording taxes paid by the purchasers once the Bankruptcy Court confirmed Hechinger's reorganization plan. The Taxing Authorities took an appeal to the District Court. While the Taxing Authorities' appeal to the District Court was still pending, the Bankruptcy Court confirmed a plan of reorganization. In pertinent part, the plan required Hechinger to transfer all of its assets to the Hechinger Liquidation Trust (the "Trust").
In March 2002, the District Court affirmed the Bankruptcy Court's orders for the reasons stated by the Bankruptcy Court. On the issue of the Taxing Authorities' sovereign immunity, the District Court held that the Eleventh Amendment did not preclude the issuance of the declarations because they did not mandate a "direct recovery from [a] state's treasury" and thus did not require the Bankruptcy Court to "exercise jurisdiction over the State" of Maryland. Id. at 10. On the question whether 11 U.S.C. § 1146(c) applied to the real estate sales at issue, the District Court held that "it is the fact of plan confirmation, rather than its timing, that is critical" to a determination of whether a sale is "under a plan confirmed under section 1129" of the Bankruptcy Code. Id. at 13. So long as a plan authorizing a sale is eventually confirmed, the District Court reasoned, the proceeds of the sale are not subject to transfer and recording taxes. Thus, the District Court held, it was proper for the Bankruptcy Court to order Hechinger to escrow the sale proceeds until such time as the Bankruptcy Court made a final decision concerning Hechinger's proposed plan. The Taxing Authorities appealed the District Court's decision to this court. In June 2002, we granted Hechinger's motion to substitute the Trust for Hechinger as the appellee in this appeal.
On appeal, the Taxing Authorities make two contentions. First, they claim that the Rule 9014 proceedings concerning the propriety of the declarations violated the Eleventh Amendment. Second, they maintain that Section 1146(c) does not exempt sales of real estate interests from state transfer and recording taxes where those sales are made prior to the confirmation of a plan.
As we detail further below, we believe that the Bankruptcy Court and the District Court erred in holding that 11 U.S.C. § 1146(c) exempts the real estate sales at issue here from the Taxing Authorities' transfer and recording taxes. In view of this holding, we find it unnecessary to reach the question whether the Bankruptcy Court's orders declaring the transactions to be tax-exempt violated the Eleventh Amendment. We will first explain why we are not required to reach the Eleventh Amendment question, and we will then show why Section 1146(c) does not exempt Hechinger's proposed transactions from the taxes at issue.
As noted above, the Taxing Authorities claim that the Trust's motions seeking the declarations issued by the Bankruptcy Court were "suits... commenced or prosecuted against one of the United States" within the meaning of the Eleventh Amendment. The Supreme Court has stated that where a defendant successfully demonstrates that the Eleventh Amendment precludes a suit, the court in which the plaintiff filed the action lacks subject matter jurisdiction over that action. See Seminole Tribe v. Florida, 517 U.S. 44, 64 (1996) (stating that the Eleventh Amendment stands "for the constitutional principle that state sovereign immunity limit[s] the federal courts' jurisdiction under Article III"); Blake v. Kline, 612 F.2d 718, 721 (3d Cir. 1979) ("The eleventh amendment has been interpreted to bar jurisdictionally the federal courts from entertaining suits for damages when a state is the real party in interest."). When subject matter jurisdiction is at issue, a federal court is generally required to reach the jurisdictional question before turning to the merits. See Steel Co. v. Citizens for a Better Env't., 523 U.S. 83, 93-95 (1998) (rejecting the position previously taken by several courts of appeals that found it "proper to proceed immediately to the merits question" in a case "despite jurisdictional objections"); Larsen v. Senate of the Commw., 152 F.3d 240, 245 (3d Cir. 1998) ("A court that is without proper jurisdiction cannot proceed at all, and must merely note the jurisdictional defect and dismiss the suit.").
Eleventh Amendment immunity, however, has features that are atypical of doctrines that divest federal courts of subject matter jurisdiction. While "no action of the parties can confer subject-matter jurisdiction upon a federal court," Insurance Corp. of Ireland, Ltd. v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 702 (1982), a state may waive its Eleventh Amendment immunity. See Atascadero State Hosp. v. Scanlon, 473 U.S. 234, 238 (1985) ("[I]f a State waives its immunity and consents to suit in federal court, the Eleventh Amendment does not bar the action."). Similarly, while a federal court is obligated to consider whether it possesses subject-matter jurisdiction even if the issue is not raised by the parties, see Insurance Corp., 456 U.S. at 702, a federal court need not address the issue of sovereign immunity if neither party brings it to the attention of the court. See Wisconsin Dep't. of Corrections v. Schacht, 524 U.S. 381, 389 (1998) ("[T]he Eleventh Amendment grants the ...