Sovereign Immunity: Supreme Court Near Decision

Justice Stevens, in one of the two dissenting opinions in Seminole, observed that the Court's holding in Seminole would appear to be applicable, not only to Article I powers such as the Indian Commerce Clause, but to other areas where Congress could exercise preemptive legislative power, such as the Bankruptcy Clause.

In footnote 16 of Chief Justice Rehnquist's majority opinion in Seminole (joined in by Justices O'Connor, Kennedy, Thomas and Scalia), he responded to Justice Stevens by contending that bankruptcy was not traditionally thought to be an area where Congress had abrogated state sovereign immunity. The test of whether Seminole's rationale will be extended to bankruptcy is now before the Supreme Court in Tennessee Student Assistance Corporation v. Hood, a case argued before the Court on March 1, 2004.

'Undue Hardship' Discharge

In Hood, the debtor commenced an adversary proceeding to seek an “undue hardship” discharge from her otherwise non-dischargeable student loan guaranteed by the Tennessee Student Assistance Corporation (“Tennessee”). The bankruptcy court, the bankruptcy appellate panel, and the Sixth Circuit all held that Congress's abrogation of state sovereign immunity in section 106 of the Bankruptcy Code was valid to permit the action against the state in bankruptcy court. Relying on an analysis of The Federalist Papers, the Sixth Circuit distinguished Seminole on the basis that sovereign immunity from suit could not be reconciled with the uniformity requirement of the Bankruptcy Clause in Article I and that the complaint for an undue hardship discharge was more akin to a determination of an interest in a “res” in an in rem proceeding.

Tennessee, in its brief, argued that The Federalist Papers distinguished between the states ceding their sovereignty to prevent them from legislating inconsistently where Congress was given exclusive legislative authority under Article I, and sovereign immunity from private suits which had to be separately and expressly relinquished. Citing Seminole, it argued that state sovereign immunity was a core component of the Constitution as adopted and that “[e]ven when the Constitution vests in Congress complete lawmaking authority over a particular area, the Eleventh Amendment prevents congressional authorization of suits by private parties against unconsenting states. The Eleventh Amendment restricts the judicial power under Article III, and Article I cannot be used to circumvent the constitutional limitations placed upon federal jurisdiction.” Seminole, 517 U.S. at 72-73.

Constitutional Law and the Bankruptcy Clause

From the outset of oral argument, this complex area of constitutional law led to intensive, non-stop questioning by the same nine Justices who considered Seminole. Justice O'Connor began the questioning by stating that she might find the in rem nature of bankruptcy, like admiralty, sufficient to persuade her that the Bankruptcy Clause should be treated differently from the Indian Commerce Clause. (In California v. Deep Sea Research, Inc., 523 U.S. 491 (1998), sovereign immunity was held not to apply where the state did not possess the shipwrecked vessel.) She further observed that there might be “unfortunate consequences” if Tennessee's position was upheld. Daryl Brand, the associate state Solicitor General arguing for Tennessee, replied contending that the in rem exception is limited to admiralty.

Justice Kennedy asked if the state was bound by the discharge and whether the discharge could be asserted as a defense if the state pursued the debt. While at first not fully conceding that the state is bound by a bankruptcy discharge, it appeared based on responses later in the oral argument that Tennessee distinguished the effects of actions in bankruptcy that occurred by operation of law, such as the automatic stay and the discharge, from actions that required a specific proceeding against the state to be commenced, such as the one required to obtain an undue hardship discharge from an otherwise non-dischargeable student loan.

Justice Stevens suggested that this was not a “normal” suit, but was one seeking a bankruptcy discharge. Brand corrected Justice Stevens, explaining that that there are no actions required to be commenced against specific creditors in bankruptcy to obtain a general discharge and that it is only because Congress chose to declare student loans non-dischargeable, that a separate action has to be brought to establish undue hardship. Justice Scalia observed that Congress could have simply provided for a discharge of student loans without exception and then, if the state wanted any portion of the assets, it would have to affirmatively participate in the bankruptcy case [acknowledged to be a waiver of its sovereign immunity as to the claim in question].

Justice Ginsburg noted the irony of the state's position that if Congress had simply declared student loans dischargeable, Tennessee would have no complaint, but because Congress tried to do the states a favor by providing for non-dischargeability with one exception, Tennessee claims Congress cannot compel it to participate in a proceeding to determine whether there should be an exception to non-dischargeability.

Justices Breyer and Ginsburg both pressed on whether the problem could be resolved by use of a notice procedure other than a formal adversary proceeding, with Justice Breyer suggesting that the nature of the undue hardship action was not a “suit” for Eleventh Amendment purposes. Tennessee's response, supported by comments of Justice Scalia in the context of defending an undue hardship suit, was that any proceeding which compelled the state to appear as a defendant in bankruptcy courts at the behest of a private party was improper.

Justice O'Connor was concerned that she read Tennessee's brief to say that the state is not bound by what happens in bankruptcy, including the automatic stay, and that the discharge would not affect, for example, state property liens. It was here that Tennessee seemed to concede that it was bound by those events that arise in bankruptcy by operation of law such as the automatic stay and the discharge. Interestingly, no Justice asked whether a violation of the automatic stay or an effort to collect a debt that was discharged by a state could be remedied by a private action brought by the debtor in bankruptcy court. The debtor cited in its brief a number of lower court cases where the courts held that, under Seminole, the state could not be held accountable in bankruptcy court for such violations.

Justice Kennedy asked if the United States Trustee could bring an action against the state to vindicate the debtor's rights, as that would be the federal government and not a private individual bringing an action. Brand was uncertain whether there was a United States Trustee in all jurisdictions, but acknowledged that the Eleventh Amendment did not preclude a suit by the federal government. Justice Ginsburg countered that it seemed unlikely that the United States Trustees would have the resources to act on behalf of all debtors.

The Debtor's Arguments

Leonard Gerson, arguing for the debtor, contended that the conflict between bankruptcy and sovereign immunity would affect such actions as purported sales of property free and clear of state liens and stressed the “in rem” nature of bankruptcy to support the debtor's argument that the Eleventh Amendment did not bar the undue hardship proceeding against Tennessee.

The questioning turned again to the process used under the Bankruptcy Rules. Justice O'Connor noted that the issue in dispute involved the use of an adversary proceeding against the state. Gerson replied that the adversary proceeding is merely an elevated form of notice informing parties seeking part of the res that they must come before the bankruptcy court. Gerson also noted that the Bankruptcy Rules, which mandate the use of an adversary proceeding, cannot abridge the substantive rights conferred on debtors by the Bankruptcy Code.

Justice Scalia asked if there would be a default judgment of undue hardship if the state failed to appear in response to the adversary complaint. Gerson, somewhat uncertainly, replied that he believed the bankruptcy court would have to evaluate whether an undue hardship existed even if the state did not appear, something the Sixth Circuit also believed to be the case, although nothing in section 523(a) of the Bankruptcy Code so provides. Chief Justice Rehnquist asked the same question about a preference implying that if a default judgment could be entered, then it must follow that a state cannot be sued for a preference in bankruptcy court.

Justice Ginsburg observing that Hood's argument seemed to turn on bankruptcy being an in rem proceeding and the existence of a res, wondered what the res would be in a “no asset” case such as this one. Gerson replied that under existing Supreme Court precedent, the debtor herself is part of the res and that most circuit courts have applied the reasoning of Seminole except when it comes to the discharge and the binding effect of a plan of reorganization, noting that the Court's decision in this case would resolve all of the outstanding issues. Justice Ginsburg replied that the Court's decision would only resolve the law in the area of discharge, not, for example, the ability to sue a state for a preference.

Brand's Rebuttal

On rebuttal, Brand agreed that even had the state not appeared, the bankruptcy court would have had to make an independent determination as to whether an undue hardship existed. In response to a question of whether section 105 of the Bankruptcy Code could be used by the bankruptcy judge to establish a mechanism to deal with the discharge issues instead of an adversary proceeding, Brand reiterated that whether an adversary proceeding mechanism or some other mechanism was used involving general notice of the discharge with an opportunity to object, either procedure is coercive and violative of the Eleventh Amendment.

Justice Ginsburg concluded the questioning by challenging Tennessee's assertion in its brief that the debtor was free to raise the undue hardship defense if and when the state sued her to recover the student loan in state court. Justice Ginsburg suggested that the more likely state remedies would be garnishment of wages and interception of tax refunds and that the debtor would not be able to raise the undue hardship defense in a court proceeding. Without having the time to get into specifics, Brand stated that there were procedures under Tennessee law for the debtor to assert the defense in the context of the extra-judicial remedies.

Conclusion

Although neither Justice Thomas nor Justice Souter asked questions during argument, it appeared at press time, based on Justice Souter's and Justice Stevens' dissents in Seminole as well as the questioning from Justices Stevens, Ginsburg and Breyer, that the four dissenting Justices in Seminole are likely to side with the debtor. It also seemed apparent that Chief Justice Rehnquist and Justice Scalia are prepared to side with Tennessee. Justice Kennedy's question about the ability of the United States Trustee to be the debtors' federal government ombudsman may indicate that he too is prepared to apply the Seminole rationale to bankruptcy. Justice O'Connor may be the swing vote, as she appeared more troubled by the potential for problems arising from a decision in favor of Tennessee and perhaps more willing to decide the matter by extending the in rem distinction developed in the Deep Sea Research decision to bankruptcy. Note, however, that admiralty jurisdiction, unlike bankruptcy jurisdiction, is expressly conferred on the federal courts by Article III of the Constitution and has itself been the subject of much convoluted Supreme Court jurisprudence.

A decision on the case is expected this Spring.

In Seminole Tribe of Florida v. Florida, 517 U.S. 44 (1996), the Supreme Court, in a 5-4 decision, held that no private action could be brought by the Seminole Indian tribe against the state of Florida for violation of the Indian Gaming Regulatory Act because Congress did not have the authority under Article I of the Constitution to abrogate state sovereign immunity under the Eleventh Amendment of the Constitution. The Eleventh Amendment provides that:

The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.

The Court, prior to Seminole, had ruled only twice, once in the context of Section 5 of the Fourteenth Amendment and once under the Interstate Commerce Clause, that Congress had the power to abrogate state sovereign immunity to permit private suits in federal courts against a state to consider federal questions, consistent with the Eleventh Amendment. Among the rationales for the case reconciling the Fourteenth and Eleventh Amendments was that the Fourteenth Amendment was subsequent in time and intended to reduce state sovereignty. With respect to the decision under the Interstate Commerce Clause, Pennsylvania v. Union Gas Co. , 491 U.S. 1 (1989), a plurality of the Court found that the states ceded their sovereign immunity when they gave Congress plenary power to regulate interstate commerce in Article I of the Constitution. The majority in Seminole acknowledged that the Indian Commerce Clause in Article I, if anything, gave even broader power to Congress in the area and if Union Gas was properly decided, its rationale would necessarily apply under the Indian Commerce Clause. As the Seminole majority believed Union Gas was inconsistent with Supreme Court precedents interpreting the Eleventh Amendment going back to 1890, they expressly overruled Union Gas.

Justice Stevens, in one of the two dissenting opinions in Seminole, observed that the Court's holding in Seminole would appear to be applicable, not only to Article I powers such as the Indian Commerce Clause, but to other areas where Congress could exercise preemptive legislative power, such as the Bankruptcy Clause.

In footnote 16 of Chief Justice Rehnquist's majority opinion in Seminole (joined in by Justices O'Connor, Kennedy, Thomas and Scalia), he responded to Justice Stevens by contending that bankruptcy was not traditionally thought to be an area where Congress had abrogated state sovereign immunity. The test of whether Seminole's rationale will be extended to bankruptcy is now before the Supreme Court in Tennessee Student Assistance Corporation v. Hood, a case argued before the Court on March 1, 2004.

'Undue Hardship' Discharge

In Hood, the debtor commenced an adversary proceeding to seek an “undue hardship” discharge from her otherwise non-dischargeable student loan guaranteed by the Tennessee Student Assistance Corporation (“Tennessee”). The bankruptcy court, the bankruptcy appellate panel, and the Sixth Circuit all held that Congress's abrogation of state sovereign immunity in section 106 of the Bankruptcy Code was valid to permit the action against the state in bankruptcy court. Relying on an analysis of The Federalist Papers, the Sixth Circuit distinguished Seminole on the basis that sovereign immunity from suit could not be reconciled with the uniformity requirement of the Bankruptcy Clause in Article I and that the complaint for an undue hardship discharge was more akin to a determination of an interest in a “res” in an in rem proceeding.

Tennessee, in its brief, argued that The Federalist Papers distinguished between the states ceding their sovereignty to prevent them from legislating inconsistently where Congress was given exclusive legislative authority under Article I, and sovereign immunity from private suits which had to be separately and expressly relinquished. Citing Seminole, it argued that state sovereign immunity was a core component of the Constitution as adopted and that “[e]ven when the Constitution vests in Congress complete lawmaking authority over a particular area, the Eleventh Amendment prevents congressional authorization of suits by private parties against unconsenting states. The Eleventh Amendment restricts the judicial power under Article III, and Article I cannot be used to circumvent the constitutional limitations placed upon federal jurisdiction.” Seminole, 517 U.S. at 72-73.

Constitutional Law and the Bankruptcy Clause

From the outset of oral argument, this complex area of constitutional law led to intensive, non-stop questioning by the same nine Justices who considered Seminole. Justice O'Connor began the questioning by stating that she might find the in rem nature of bankruptcy, like admiralty, sufficient to persuade her that the Bankruptcy Clause should be treated differently from the Indian Commerce Clause. (In California v. Deep Sea Research, Inc., 523 U.S. 491 (1998), sovereign immunity was held not to apply where the state did not possess the shipwrecked vessel.) She further observed that there might be “unfortunate consequences” if Tennessee's position was upheld. Daryl Brand, the associate state Solicitor General arguing for Tennessee, replied contending that the in rem exception is limited to admiralty.

Justice Kennedy asked if the state was bound by the discharge and whether the discharge could be asserted as a defense if the state pursued the debt. While at first not fully conceding that the state is bound by a bankruptcy discharge, it appeared based on responses later in the oral argument that Tennessee distinguished the effects of actions in bankruptcy that occurred by operation of law, such as the automatic stay and the discharge, from actions that required a specific proceeding against the state to be commenced, such as the one required to obtain an undue hardship discharge from an otherwise non-dischargeable student loan.

Justice Stevens suggested that this was not a “normal” suit, but was one seeking a bankruptcy discharge. Brand corrected Justice Stevens, explaining that that there are no actions required to be commenced against specific creditors in bankruptcy to obtain a general discharge and that it is only because Congress chose to declare student loans non-dischargeable, that a separate action has to be brought to establish undue hardship. Justice Scalia observed that Congress could have simply provided for a discharge of student loans without exception and then, if the state wanted any portion of the assets, it would have to affirmatively participate in the bankruptcy case [acknowledged to be a waiver of its sovereign immunity as to the claim in question].

Justice Ginsburg noted the irony of the state's position that if Congress had simply declared student loans dischargeable, Tennessee would have no complaint, but because Congress tried to do the states a favor by providing for non-dischargeability with one exception, Tennessee claims Congress cannot compel it to participate in a proceeding to determine whether there should be an exception to non-dischargeability.

Justices Breyer and Ginsburg both pressed on whether the problem could be resolved by use of a notice procedure other than a formal adversary proceeding, with Justice Breyer suggesting that the nature of the undue hardship action was not a “suit” for Eleventh Amendment purposes. Tennessee's response, supported by comments of Justice Scalia in the context of defending an undue hardship suit, was that any proceeding which compelled the state to appear as a defendant in bankruptcy courts at the behest of a private party was improper.

Justice O'Connor was concerned that she read Tennessee's brief to say that the state is not bound by what happens in bankruptcy, including the automatic stay, and that the discharge would not affect, for example, state property liens. It was here that Tennessee seemed to concede that it was bound by those events that arise in bankruptcy by operation of law such as the automatic stay and the discharge. Interestingly, no Justice asked whether a violation of the automatic stay or an effort to collect a debt that was discharged by a state could be remedied by a private action brought by the debtor in bankruptcy court. The debtor cited in its brief a number of lower court cases where the courts held that, under Seminole, the state could not be held accountable in bankruptcy court for such violations.

Justice Kennedy asked if the United States Trustee could bring an action against the state to vindicate the debtor's rights, as that would be the federal government and not a private individual bringing an action. Brand was uncertain whether there was a United States Trustee in all jurisdictions, but acknowledged that the Eleventh Amendment did not preclude a suit by the federal government. Justice Ginsburg countered that it seemed unlikely that the United States Trustees would have the resources to act on behalf of all debtors.

The Debtor's Arguments

Leonard Gerson, arguing for the debtor, contended that the conflict between bankruptcy and sovereign immunity would affect such actions as purported sales of property free and clear of state liens and stressed the “in rem” nature of bankruptcy to support the debtor's argument that the Eleventh Amendment did not bar the undue hardship proceeding against Tennessee.

The questioning turned again to the process used under the Bankruptcy Rules. Justice O'Connor noted that the issue in dispute involved the use of an adversary proceeding against the state. Gerson replied that the adversary proceeding is merely an elevated form of notice informing parties seeking part of the res that they must come before the bankruptcy court. Gerson also noted that the Bankruptcy Rules, which mandate the use of an adversary proceeding, cannot abridge the substantive rights conferred on debtors by the Bankruptcy Code.

Justice Scalia asked if there would be a default judgment of undue hardship if the state failed to appear in response to the adversary complaint. Gerson, somewhat uncertainly, replied that he believed the bankruptcy court would have to evaluate whether an undue hardship existed even if the state did not appear, something the Sixth Circuit also believed to be the case, although nothing in section 523(a) of the Bankruptcy Code so provides. Chief Justice Rehnquist asked the same question about a preference implying that if a default judgment could be entered, then it must follow that a state cannot be sued for a preference in bankruptcy court.

Justice Ginsburg observing that Hood's argument seemed to turn on bankruptcy being an in rem proceeding and the existence of a res, wondered what the res would be in a “no asset” case such as this one. Gerson replied that under existing Supreme Court precedent, the debtor herself is part of the res and that most circuit courts have applied the reasoning of Seminole except when it comes to the discharge and the binding effect of a plan of reorganization, noting that the Court's decision in this case would resolve all of the outstanding issues. Justice Ginsburg replied that the Court's decision would only resolve the law in the area of discharge, not, for example, the ability to sue a state for a preference.

Brand's Rebuttal

On rebuttal, Brand agreed that even had the state not appeared, the bankruptcy court would have had to make an independent determination as to whether an undue hardship existed. In response to a question of whether section 105 of the Bankruptcy Code could be used by the bankruptcy judge to establish a mechanism to deal with the discharge issues instead of an adversary proceeding, Brand reiterated that whether an adversary proceeding mechanism or some other mechanism was used involving general notice of the discharge with an opportunity to object, either procedure is coercive and violative of the Eleventh Amendment.

Justice Ginsburg concluded the questioning by challenging Tennessee's assertion in its brief that the debtor was free to raise the undue hardship defense if and when the state sued her to recover the student loan in state court. Justice Ginsburg suggested that the more likely state remedies would be garnishment of wages and interception of tax refunds and that the debtor would not be able to raise the undue hardship defense in a court proceeding. Without having the time to get into specifics, Brand stated that there were procedures under Tennessee law for the debtor to assert the defense in the context of the extra-judicial remedies.

Conclusion

Although neither Justice Thomas nor Justice Souter asked questions during argument, it appeared at press time, based on Justice Souter's and Justice Stevens' dissents in Seminole as well as the questioning from Justices Stevens, Ginsburg and Breyer, that the four dissenting Justices in Seminole are likely to side with the debtor. It also seemed apparent that Chief Justice Rehnquist and Justice Scalia are prepared to side with Tennessee. Justice Kennedy's question about the ability of the United States Trustee to be the debtors' federal government ombudsman may indicate that he too is prepared to apply the Seminole rationale to bankruptcy. Justice O'Connor may be the swing vote, as she appeared more troubled by the potential for problems arising from a decision in favor of Tennessee and perhaps more willing to decide the matter by extending the in rem distinction developed in the Deep Sea Research decision to bankruptcy. Note, however, that admiralty jurisdiction, unlike bankruptcy jurisdiction, is expressly conferred on the federal courts by Article III of the Constitution and has itself been the subject of much convoluted Supreme Court jurisprudence.

A decision on the case is expected this Spring.