In Re: Michael S. Rose; in Re: Jennifer R. Rose; Debtors.jennifer R. Rose, Plaintiff-appellee, v. U.S. Department of Education; Coordinating Board of Higher Education Defendants,missouri Student Loan Program, Defendant -- Appellant,university of Missouri; Illinois Guarantors Student Assistance; Nebraska Student Loan Program; North Star Guarantee; United Student Aid Funds, Inc., Defendants.business Bankruptcy Law Committee, New York County Lawyers' Association, Amicus on Behalf of Appellee, 187 F.3d 926 (8th Cir. 1999)

This case involves student loans which Jennifer Rose and her husband Michael sought to discharge in a Chapter 7 bankruptcy proceeding. Both the bankruptcy court¹  and the district court²  on appeal ruled that the Missouri Student Loan Program (MSLP) had waived the right to claim sovereign immunity through the filing of proofs of claim to recover on some of the loans. The bankruptcy court also ruled that Rose's loans were dischargeable under 11 U.S.C. 523(a) (8) because of undue hardship, and the district court remanded that issue for further consideration. Now before this court is MSLP's interlocutory appeal on the issue of sovereign immunity.

Jennifer Rose received her law degree in 1995 from the University of Missouri-Kansas City. Rose was unemployed for almost a year after her graduation and then. took a position as a law clerk for a Missouri judge for a year. Jennifer and Michael Rose have two children; Michael cares for them and is not otherwise employed. Jennifer funded both her undergraduate and law school educations with loans. The Roses found it difficult to repay the loans, and they filed for bankruptcy under Chapter 7 in 1997.

The Missouri Higher Education Loan Authority and Sallie Mae held rights to repayment on some of the student loans, and they filed proofs of claim with the bankruptcy court. These loans had been guaranteed by MSLP, which is a state program administered through the Missouri Coordinating Board for Higher Education, a state agency. The guarantee agreement provided that MSLP would purchase the loans from the lenders after they filed proofs of claim. After MSLP purchased the loans, the Missouri Higher Education Loan Authority and Sallie Mae filed transfers of claim requesting the bankruptcy court to transfer their rights to MSLP. Shortly after the Roses filed their bankruptcy petition, Jennifer initiated an adversary proceeding against MSLP and seven other lenders and guarantee agencies seeking a declaration that her student loans were dischargeable on the grounds of undue hardship. MSLP filed an answer, began discovery, and prepared for a hearing on the discharge issues.

Immediately prior to the dischargeability hearing, one of Rose's other student loan creditors filed a motion to dismiss based on Eleventh Amendment immunity. At the end of the hearing another state creditor requested permission to brief its own position on immunity, and later MSLP also moved to dismiss. The creditors challenged the constitutionality of provisions in the bankruptcy code purporting to abrogate sovereign immunity and to establish conditions for waiver. See 11 U.S.C. 106 (a), (b).³  The bankruptcy court dismissed the University of Missouri-Kansas City on Eleventh Amendment grounds because it had not filed a proof of claim and because the court viewed 106(a) to be an unconstitutional attempt to abrogate sovereign immunity.⁴  The bankruptcy court found, however, that MSLP had waived its Eleventh Amendment immunity as a matter of common law by the filing of proofs of claim in the Roses' bankruptcy proceeding, and it denied its motion to dismiss. The court then found that Rose's circumstances qualified as undue hardship and declared her student loans dischargeable under 11 U.S.C. 523(a) (8).

Appeals were taken to the district court by the lenders and guarantee agencies to contest the hardship determination, and MSLP also appealed the ruling that it had waived its sovereign immunity. The district court affirmed the ultimate rulings on sovereign immunity, but remanded the undue hardship issues for further consideration. The district court agreed with the bankruptcy court that 11 U.S.C. 106(a) is an unconstitutional attempt to abrogate sovereign immunity, but it disagreed about the 106(b) waiver provision which it upheld, and under which it concluded that MSLP had waived its immunity by filing a claim.

MSLP appeals, arguing that its submission of claims in the bankruptcy action did not waive its immunity in the discharge proceeding. We review de novo the district court's denial of a motion to dismiss based on Eleventh Amendment immunity. See Thomas v. FAG Bearings Corp., 50 F.3d 502, 504 (8th Cir. 1995).

The Eleventh Amendment can bar federal actions by private parties against a state unless it has waived its immunity or Congress has abrogated it in a valid exercise of power under the enforcement clause of the Fourteenth Amendment. See Florida Prepaid Postsecondary Educ. Expense Bd. v. College Sav. Bank (College Savings Bank I), 119 S. Ct. 2199, 2204-05 (1999); Seminole Tribe v. Florida, 517 U.S. 44, 72-73 (1996); cf. Ex parte Young, 209 U.S. 123 (1908) (authorizing suits for declaratory and injunctive relief against state officers in their individual capacities). The full reach of the Eleventh Amendment may not yet be clear, but its force has been shown in several cases during the last Supreme Court term. See Alden v. Maine, 119 S. Ct. 2240 (1999 (allowing state to claim sovereign immunity in its courts for private actions under Fair Labor Standards Act); College Savings Bank I, 119 S. Ct. 2199 (finding no federal jurisdiction for patent infringement claim against state agency); Florida Prepaid Postsecondary Educ. Expense Bd. v. College Sav. Bank (College Savings Bank II), 119 S. Ct. 2219 (1999) (finding no federal jurisdiction for alleged violations of the Lanham Act by state agency).

The case before this court does not present a general question of Eleventh Amendment immunity, however, for waiver has long been a factor in bankruptcy proceedings. There is a well-established common law rule that submission of a proof of claim by a state is sufficient to "waive any immunity which it otherwise might have had respecting the adjudication of the claim." Gardner v. New Jersey, 329 U.S. 565, 574 (1946) (bankruptcy court could entertain a trustee's objections to a claim filed by the state despite its assertion of sovereign immunity); see also Burke v. Georgia Dep't of Revenue (In re Burke), 146 F.3d 1313, 1319-20 (11th Cir. 1998) (applying Gardner to hold that state's filing of proofs of claim rendered it subject to liability for violation of automatic stay and enforcement of discharge injunction), cert. denied, 119 S. Ct. 2410 (1999). In June the Supreme Court reaffirmed Gardner's validity in College Savings Bank II, 119 S. Ct. 2219, a case involving the Lanham Act. The Court commented that Gardner "stands for the unremarkable proposition that a State waives its sovereign immunity by voluntarily invoking the jurisdiction of the federal courts." College Savings Bank II, 119 S. Ct. at 2228 n.3.

MSLP points out that educational loans sponsored by the government are generally exempt from discharge in bankruptcy. See 11 U.S.C. 523 (a) (8). Other debts of a Chapter 7 petitioner may be discharged under 11 U.S.C. 727 regardless of whether proofs of claims have been filed, but the filing of proofs of claims on ordinary debts triggers an adjudication process to determine the validity, amount, and priority of the claims, and the bankruptcy court considers any objections after notice and hearing. See 11 U.S.C. 502(a), (b). Section 523 exempts certain debts, including educational debt, from a general discharge; such debts may only be discharged upon. a finding that otherwise there would be "undue hardship on the debtor and the debtor's dependents."⁵  11 U.S.C. 523(a). In order to discharge student loan debt, the debtor must initiate a separate action to prove undue hardship. Fed. R. Bankr. P. 4007, 7001.

MSLP contends that the Roses' bankruptcy filing and Jennifer's discharge proceeding are separate cases for immunity purposes, but the bankruptcy case and the adversary proceeding on dischargeability are interrelated. Disputes arising out of the adjudication of a single debt may be sufficiently intertwined so that a waiver in one aspect applies to the others as well. See Price v. United States (In Re Price), 42 F.3d 1068, 1073 (7th Cir. 1994) ("The basis of both claims [tax liability and stay violation] revolve around the same aggregate core of facts -- the debtors' unpaid taxes."). The bankruptcy court's claim adjudication and discharge processes were both related to the scope and status of MSLP's claim against the Roses' bankruptcy estate.⁶  The text of the bankruptcy code makes clear that these procedures are both part of a larger whole the same section that exempts educational debt from a general discharge establishes the ground of undue hardship as the exception to the exemption. By pressing its claim on the bankruptcy estate, MSLP seeks to gain the benefit of the exemption from discharge without subjecting itself to its limitations. After studying the record we agree with the bankruptcy court's conclusion that MSLP's submission of proofs of claims in Roses' bankruptcy case waived its immunity in related proceedings required to adjudicate the dischargeability of those claims.⁷ 

In this case we are faced with a narrow issue. We decide only that MSLP has waived its Eleventh Amendment immunity on this record. We therefore need not reach issues of the constitutionality of the abrogation provision of 106(a) and the statutory waiver provision of 106(b)⁸  MSLP's invocation of the authority of the bankruptcy court waived sovereign immunity in regard to the claims for which it filed proofs. We affirm the denial of its motion to dismiss and remand for further proceedings on whether Rose's student loan debts are dischargeable.