Wednesday, June 07, 2006

From Seminole to Katz: What A Long Strange Trip It's Been

On the surface, jurisdiction and immunity doctrines are deadly dull. However, over the past 14 years the extent to which non-consenting states can be subjected to bankruptcy court jurisdiction has been hotly debated based on a number of Supreme Court decisions which did not involve bankruptcy. For most of that time, states seemed to hold the upper hand. Now, a pair of recent Supreme Court decisions have apparently stripped states of most of their immunity and left them in much the same position as other litigants.

The Eleventh Amendment Means More Than It Says

Governmental entities generally enjoy sovereign immunity, which is the right of government not to be sued without its consent. Under the Supremacy Clause, Congress arguably has the right to waive sovereign immunity through legislation. However, states enjoy a second immunity doctrine under the Eleventh Amendment. On the surface, the Eleventh Amendment states that a state cannot be sued by a resident of another state in federal court. However, for over one hundred years, the Supreme Court has said that the Eleventh Amendment means more than it says. Idaho v. Couer D’Alene Tribe of Idaho, 521 U.S. 261 (1997); Hans v. Louisiana, 134 U.S. 1 (1890). Instead, the Eleventh Amendment reflects a larger immunity doctrine which is part of the very fabric of federalism. As a result, the contours of the Eleventh Amendment must be fleshed out through constant litigation.

Congress Sets the Stage for a Constitutional Confrontation

Prior to 1994, the law was clear that sovereign immunity prevented a non-consenting governmental body from being sued for a money judgment in bankruptcy court. United States v. Nordic Village, Inc., 503 U.S. 30 (1992); Hoffman v. Connecticut Department of Income Maintenance, 492 U.S. 96 (1989). However, in 1994, Congress revised 11 U.S.C. §106(a) to expressly “abrogate” the sovereign immunity of governmental units with regard to a number of specific sections of the Bankruptcy Code. Because the listed sections included the avoidance provisions of the Code, it became theoretically possible to sue a state to recover a preference or a fraudulent conveyance.

The Seminole Surprise

The efficacy of the immunity abrogation was abruptly questioned when the Supreme Court decided Seminole Tribe of Florida v. Florida, 517 U.S. 44 (1996). In that case, the Supreme Court held that Congress could not abrogate the Eleventh Amendment immunity of a state under the Indian Commerce Clause. Essentially, the Supreme Court held that the Indian Commerce Clause, being adopted prior to the Eleventh Amendment, could not provide authority for Congress to abrogate the immunity enjoyed by the states. Because the Indian Commerce Clause is located at art. I, §8, cl. 3 and the Bankruptcy Clause is found at art. I, §8, cl. 4, it appeared likely that Congress’s abrogation under 11 U.S.C. §106(a) would be invalid as well.

The Seminole decision prompted a lot of speculation as to the degree to which states would continue to be subject to bankruptcy laws. Were states subject to federal bankruptcy law at all? Could bankruptcy law be enforced indirectly through injunctive relief against state officials? To what extent did the bankruptcy court’s in rem jurisdiction apply against states? Could bankruptcy law be enforced in a non-federal forum?

States Protected From Florida to Alabama

During the period from Seminole in 1996 to University of Alabama v. Garrett, 531 U.S. 356 (2001), the answer appeared to be that states were subject to bankruptcy law but that enforcement against a state was problematic. In Idaho v. Coeur D’Alene Tribe of Idaho, decided in 1997, the Supreme Court held that state officials could be enjoined from violating federal law under the doctrine of Ex Parte Young, but that the doctrine did not apply in the specific case. In that case, the injunctive relief sought did not seek to enforce an unambiguous right, but rather, to determine a dispute between the tribe and the state. The injunctive relief sought in Coeur D’Alene rested on the legal fiction that a state official who violates federal law is acting outside of the scope of his duties and is not entitled to protection. However, a state official who is pursuing state policy acts on behalf of the state and a suit against that official is a de facto suit against the state. The doctrine also stated that relief could only be sought on a prospective basis.

As with Seminole, Coueur D’Alene was not a bankruptcy case, but appeared to have bankruptcy implications. It suggested that state officials were not still subject to federal laws, such as bankruptcy. Thus, a state official could be prospectively enjoined from violating the automatic stay. However, this remedy was cumbersome and largely symbolic. If a state official seized a debtor’s business in violation of the automatic stay, an injunction not to violate the stay in the future would be little help to the specific debtor whose property was seized. Additionally, unless the state had a policy of never recognizing the automatic stay, a violation in one case would not form the basis for relief in another case.

Alden v. Maine, 527 U.S. 706 (1999) also appeared to close another avenue for relief. Because the Eleventh Amendment foreclosed relief against non-consenting states in federal court, it was theoretically possible to enforce federal law in state court. Forcing a state to obey federal law in its own courts could be construed as less offensive to a state’s sovereignty. However, this door was shut as well. In Alden, the Supreme Court held that it would violate the sovereignty of a state to be subjected to a private suit to enforce federal rights even if the suit was brought in the state courts. This posed a real quandary. If a state could not be sued under federal law in either federal court or state court, to what extent was the state actually bound to obey federal law? The bankruptcy implication from Alden was that a trustee could not file an action to recover a preferential transfer from a state in either state court or federal court.

In the same year, the Supreme Court held that a state could not be sued for patent infringement, declining a suggestion to find that this was a deprivation of property without due process of law which would be actionable under the Fourteenth Amendment. Florida Pre-Paid Postsecondary Ed. Expense Board v. College Savings Bank, 527 U.S. 627 (1999). The Court also declined to enforce the Age Discrimination Employment Act, Kimel v. Florida Board of Regents, 528 U.S. 62 (2000) and the Americans with Disabilities Act, University of Alabama v. Garrett, 531 U.S. 356 (2001). The upshot of these cases appeared to be that, while federal law may apply against the states, enforcement of federal rights depended on the voluntary consent of those same states.

States Hood-winked By In Rem Jurisdiction

During the five years from Seminole to Garrett, bankruptcy lawyers watched as bankruptcy jurisdiction was apparently chipped away in non-bankruptcy cases. However, that was to change once the Supreme Court began to consider cases under Title 11. In Tennessee Student Assistance Corporation v. Hood, 544 U.S. ___, 124 S. Ct. 1905; 158 L. Ed. 2d 764; 2004 U.S. LEXIS 3387 (2004), the Supreme Court considered a bankruptcy issue for the first time since 1992. Hood involved whether a debtor could receive a determination that a student loan was dischargeable based on undue hardship over the objection of the state. This case did not look promising for the debtor. It involved an adversary proceeding brought against a non-consenting state in federal court seeking to enforce federal law. However, unlike most of the cases which preceded it, the plaintiff did not seek a money judgment against the state. Instead, the debtor sought declaratory relief that a debt should be discharged. The problem here was that bankruptcy law did not make discharge of student loan debts automatic. Instead, it required that the debtor prove “undue hardship.” 11 U.S.C. §523(a)(8). The procedural rules required that an adversary proceeding be filed and that the defendant be served with a summons. Fed.R.Bankr. Pro. 7001. Under the prior decisions of the court, this appeared to be a loser of a case for the debtor. However, it was not.

The Supreme Court ruled in favor of the debtor based upon the in rem jurisdiction of the federal courts. At first glance, there is nothing wrong with this rationale. Bankruptcy courts possess exclusive jurisdiction over the property of the estate and federal courts had previously recognized their in rem jurisdiction. However, this case did not involve property. Instead, it involved a declaration of the state’s right to enforce a debt against a debtor. The Supreme Court blatantly disregarded the difference between in rem relief (which would apply to specific property) and declaratory relief (which would apply to the parties). While declaratory relief does not impose a financial burden against the state, it clearly limits the ability of the state to seek in personam relief against the debtor. Here, the Supreme Court relied on a legal fiction to overrule the non-textual interpretation of the Eleventh Amendment which had prevailed for the prior 100 years.

Supreme Court Reverses Course To Allow Avoidance

The Supreme Court’s most recent decision on Eleventh Amendment immunity is nothing less than surprising. After multiple decisions invalidating claims for monetary relief against states, the Court allowed a claim to avoid a preference against a non-consenting state. Central Virginia Community College v. Katz, __ U.S. __ (2006). The Supreme Court relied in part upon Hood to suggest that recovering a preference was nothing more than exercising in rem jurisdiction over the payment. In doing so, it implicitly overruled its decision in Begier v. United States, 496 U.S. 53 (1990) which held that dollars were fungible and not subject to in rem relief. However, it also held that the power to establish uniform bankruptcy laws included the power to subject non-consenting states to avoidance actions. This was not a clear repudiation of the cases precluding money judgments. However, even the remedy of avoiding a transfer without necessarily recovering it was a dramatic break from the past. In dissent, Justice Thomas suggested that the Court at least have the decency to admit that they were overruling Seminole.

Katz represents a clear break with prior Eleventh Amendment jurisprudence. Unlike its predecessors, it does not hold that states are independent sovereigns who may ignore federal law with impunity. Instead, it continues the mis-reading of in rem jurisdiction found in Hood and seizes upon the word “uniform” in the Bankruptcy Clause to suggest that states surrendered their historical immunity when they acquiesced in the power to create uniform bankruptcy laws. Perhaps this decision does not allow a money judgment against a non-consenting state. However, that does not seem to be far away.


patbarsalou said...

Steve, I am shocked. Immunity and jurisdiction are not deadly dull! ;)

Do you suppose that the unsatisfactory way in which the Court supported Seminole's rationale was a signal? I guess if they had meant it to stick they'd have done it right.

You know this in rem thing is bogus, of course.

Thanks for the great post on my favorite issue. Let us be happy for Justice Stephens!

AmericanAbe said...

Can I stop the city of Fort Worth from collecting on post petition fines? According to your post on 11amemdment? My lawyers are not fimilar with such details. It was refreshing and incouraging to see that the state stop treating bankruptcy like third class citizens. And stop them from squeezing blood from a rock. No money means no money. I am amazed we have debtors jails in Texas.