In In re Dairy Mart Convenience Stores, Inc., 411 F.3d 367 (2nd Cir. 2005), the Second Circuit held that a Chapter 11 debtor was entitled to injunctive relief compelling state officials to accept the debtor’s claims against the state’s environmental clean-up fund as timely filed, based on the extension of time provided to debtors by Bankruptcy Code section 108. Although the injunction might ultimately lead to the debtor receiving money on account of its claims, the main relief sought was prospective – to prevent the continuing violation of federal law that the refusal to give effect to section 108 constituted. Thus, the Second Circuit explicitly held that the suit was not barred by the Eleventh Amendment, because the relief sought fell within the Ex Parte Young exception to the bar of sovereign immunity.

The debtor, Dairy Mart, operated a large chain of convenience stores in multiple states. Some of the stores sold gasoline, which was stored in underground tanks. This subjected the debtor to the Resource Conservation and Recovery Act, which required that it pay for cleanup costs and third-party damage in the event of any contamination. However, as to any of its facilities located in Kentucky, the debtor was also entitled to seek reimbursement of these costs from a special Fund established by the Kentucky legislature, if certain regulatory qualifications were met. One of the many requirements for reimbursement was the timely filing of any claims. The debtor missed the claim filing deadline by a few days, which ultimately lead the Fund to deny the debtor’s claims.

The debtor asserted that it was entitled to the benefit of Bankruptcy Code section 108, which automatically extends claim deadlines like the one at issue by 60 days after the filing of a bankruptcy petition. The Fund contended that it was not bound by section 108, and denied the debtor’s claims as late-filed. The debtor then sought relief from the bankruptcy court, contending that the state officials running the Fund should be compelled to accept the claims as timely filed pursuant to section 108. In response, the state officials filed a motion to dismiss the action, arguing that the bankruptcy court lacked jurisdiction over them due to the sovereign immunity provided by the Eleventh Amendment. The bankruptcy court denied the motion to dismiss, finding that the prospective injunctive relief sought by the debtor fell within the exception to the Eleventh Amendment bar set forth in Ex Parte Young, 209 U.S. 123 (1908). This result was upheld by the United States District Court on appeal by the state officials.

The state officials then appealed to the Second Circuit, which again upheld the result. The Second Circuit concluded that the debtor was not seeking retroactive recovery of funds, even if it might ultimately be entitled to payment on its claims. Moreover, because the state officials would retain the ability to reject the debtor’s claims on numerous other grounds, the Federal courts were not effectively ordering the payment of money damages. Rather, they would only be granting an injunction to correct an ongoing violation of federal law – the Fund’s refusal to give effect to section 108 – which fell under the Ex Parte Young exception to sovereign immunity. As detailed by the U.S. Supreme Court in Ex Parte Young, sovereign immunity does not bar actions seeking this type of prospective injunctive relief, because a state cannot shield its officials from having to comply with the requirements of Federal law.

Written by Anastasia Jones