Student Loan Discharge Proceeding Not a 'Suit'

Finally, the Court dealt with the use of the adversary proceeding as the mechanism to obtain an undue hardship determination. While acknowledging the dissent's argument that the procedure (ie, use of a summons and complaint, etc.) has “some similarities to a traditional civil trial,” the Court ruled that it is irrelevant when relying on the court's in rem jurisdiction. Accordingly, the Court rejected the dissent's application of Federal Maritime Comm'n v. South Carolina Ports Authority, 535 U.S. 743 (2002) (“FMC”) to the instant case. In FMC, an agency's administrative procedure against a state was held to violate the Eleventh Amendment because it was a procedure that was not in existence at the time the Constitution was adopted, and it relied on in personam jurisdiction over the state, something not needed in an undue hardship determination in bankruptcy.

The Bankruptcy Code

The Court observed that nothing in the Bankruptcy Code itself required use of an adversary proceeding and that an undue hardship determination, in the absence of the applicable Bankruptcy Rule, would be a contested matter brought by a motion. The Court stated that a motion would not have raised constitutional concerns (although the rationale for that conclusion is not explained). Reasoning that a summons in this context was “indistinguishable in practical effect from a motion,” the Court concluded that the “interests served by the Eleventh Amendment 'are not to be sacrificed to elementary mechanics of captions and pleading.'” The Bankruptcy Rules, the Court wrote, cannot modify or abridge the debtor's substantive right to an undue hardship. See 28 U.S.C. ' 2075. Having held that the bankruptcy court's in rem jurisdiction allowed it to make an undue hardship determination involving a state, the Court declined to reach the issue on which it granted certiorari, namely, whether a bankruptcy court's exercise of personal jurisdiction over a state would be valid under the Eleventh Amendment.

The Dissent

Justice Thomas wrote a dissent in which Justice Scalia joined. The dissenters would have reached the question the majority declined to decide, and ruled in favor of Tennessee. They agreed that had the undue hardship determination involved a motion instead of an adversary proceeding, the in rem nature of the proceeding might affect a state's rights, but found that to be far more complex question than the authority of Congress to abrogate state sovereignty under the Bankruptcy Clause. Moreover, the dissent observed, an adversary proceeding, and not a motion, was, in fact, what was used and at issue in the instant case. The majority, Justice Thomas observed, failed to explain why this adversary proceeding was “somehow less offensive to state sovereignty,” noting that the Eleventh Amendment is to prevent the “indignity of subjecting a state to coercive process of judicial tribunals at the instance of private parties.” The existence of an alternative proceeding, the dissent reasoned, is irrelevant.

Conceding that the adversary proceeding does not require the state to defend itself, Justice Thomas observed that once commenced, the state is compelled to subject itself to the bankruptcy court's jurisdiction or forfeit its rights. The dissent was skeptical that a default judgment could not be entered if the state failed to appear and answer the complaint, noting that the only support for the proposition accepted by the majority — that the bankruptcy court would have to independently determine the existence of an undue hardship — was a statement made by the debtor's counsel at oral argument.

Missouri v. Fiske

The dissent believed that the analysis of the in rem exception was too complex to have been dealt with without first having been fully briefed and considered by the lower courts. Among the issues Justice Thomas thought had not been fully examined was a reconciliation of the majority's decision with Missouri v. Fiske, 290 U.S. 18 (1933), in which individuals sought to enjoin the State of Missouri from prosecuting probate proceedings in state court, contending that the federal district court had already made a final determination of the ownership of the contested stock. In Fiske, the Court held that the federal court could not entertain the action because it had no authority to issue process against the State to compel it to subject itself to the court's judgment. The majority believed that Fiske was not inconsistent since the bankruptcy discharge itself operates as an injunction. Although the majority acknowledged the possibility that the state might be bound by the federal court's judgment in an in rem proceeding, but that the court's judgment could be not be enforced by injunction, it disposed of the issue as one not currently before the Court.

The dissent believed the mere fact that Fiske suggests that the state might not be bound because it was not a party to an in rem proceeding, “at least leaves in doubt the extent of any in rem exception in bankruptcy.” Finding other inconsistencies and issues raised by the majority's reasoning for an in rem exception, the dissent suggested that perhaps even the majority seemed to recognize them and, accordingly, was limiting its decision to the undue hardship exception, refusing to find an exception to every exercise of a bankruptcy court's in rem jurisdiction that might encroach on state sovereignty.

Finding Congress's clear intention in section 106(a) of the Bankruptcy Code to abrogate state sovereign immunity under the Bankruptcy Clause, the dissenters would have found that Congress did not have that authority under Article I of the Constitution.

The Supreme Court, in its May 17, 2004 decision in Tennessee Student Assistance Corporation v. Hood , __ U.S. ___ (2004), declined to reach the issue of whether the Bankruptcy Clause in Article I of the Constitution grants authority to Congress to abrogate state sovereign immunity from private suits. Instead, in a 7-2 decision, the Court ruled that a proceeding to determine whether an otherwise nondischargeable student loan can be discharged because of an undue hardship on the debtor is not a “suit” against the state for purposes of the Eleventh Amendment. The Court's decision, written by Chief Justice Rehnquist, turned on the in rem nature of the proceeding and reasoned that the bankruptcy court did not need jurisdiction over the state where it had jurisdiction over the debtor and her property.

The Decision

The Court observed that it was well established that states are bound by a bankruptcy court's discharge order no less than other creditors, citing cases in which the Court held that a state could be barred from sharing in the debtor's assets if it did not timely file a claim ( New York v. Irving Trust Co. , 288 U.S. 329 (1933)), and that a bankruptcy court could sell property free and clear of a state's tax lien ( Van Huffel v. Harkelrode , 284 U.S. 225 (1931)). Rejecting the Tennessee Student Assistance Corporation's (“Tennessee”) argument that the use of an adversary proceeding against the state to obtain an “undue hardship” determination” violated the Eleventh Amendment, the Court stated that Tennessee misunderstood the “fundamental nature of the proceeding.” The Court reasoned that “the bankruptcy court's jurisdiction is premised on the res, not on the persona; that states were granted the presumptive benefit of nondischargeability does not alter the court's underlying authority.” Noting that in the bankruptcy and admiralty contexts the Court had previously held that individualized determinations of states' interests within the federal courts' in rem jurisdiction did not infringe state sovereignty, the Court similarly held that the bankruptcy court's in rem jurisdiction to discharge a student loan does not infringe state sovereignty.

Finally, the Court dealt with the use of the adversary proceeding as the mechanism to obtain an undue hardship determination. While acknowledging the dissent's argument that the procedure (ie, use of a summons and complaint, etc.) has “some similarities to a traditional civil trial,” the Court ruled that it is irrelevant when relying on the court's in rem jurisdiction. Accordingly, the Court rejected the dissent's application of Federal Maritime Comm'n v. South Carolina Ports Authority , 535 U.S. 743 (2002) (“FMC”) to the instant case. In FMC, an agency's administrative procedure against a state was held to violate the Eleventh Amendment because it was a procedure that was not in existence at the time the Constitution was adopted, and it relied on in personam jurisdiction over the state, something not needed in an undue hardship determination in bankruptcy.

The Bankruptcy Code

The Court observed that nothing in the Bankruptcy Code itself required use of an adversary proceeding and that an undue hardship determination, in the absence of the applicable Bankruptcy Rule, would be a contested matter brought by a motion. The Court stated that a motion would not have raised constitutional concerns (although the rationale for that conclusion is not explained). Reasoning that a summons in this context was “indistinguishable in practical effect from a motion,” the Court concluded that the “interests served by the Eleventh Amendment 'are not to be sacrificed to elementary mechanics of captions and pleading.'” The Bankruptcy Rules, the Court wrote, cannot modify or abridge the debtor's substantive right to an undue hardship. See 28 U.S.C. ' 2075. Having held that the bankruptcy court's in rem jurisdiction allowed it to make an undue hardship determination involving a state, the Court declined to reach the issue on which it granted certiorari, namely, whether a bankruptcy court's exercise of personal jurisdiction over a state would be valid under the Eleventh Amendment.

The Dissent

Justice Thomas wrote a dissent in which Justice Scalia joined. The dissenters would have reached the question the majority declined to decide, and ruled in favor of Tennessee. They agreed that had the undue hardship determination involved a motion instead of an adversary proceeding, the in rem nature of the proceeding might affect a state's rights, but found that to be far more complex question than the authority of Congress to abrogate state sovereignty under the Bankruptcy Clause. Moreover, the dissent observed, an adversary proceeding, and not a motion, was, in fact, what was used and at issue in the instant case. The majority, Justice Thomas observed, failed to explain why this adversary proceeding was “somehow less offensive to state sovereignty,” noting that the Eleventh Amendment is to prevent the “indignity of subjecting a state to coercive process of judicial tribunals at the instance of private parties.” The existence of an alternative proceeding, the dissent reasoned, is irrelevant.

Conceding that the adversary proceeding does not require the state to defend itself, Justice Thomas observed that once commenced, the state is compelled to subject itself to the bankruptcy court's jurisdiction or forfeit its rights. The dissent was skeptical that a default judgment could not be entered if the state failed to appear and answer the complaint, noting that the only support for the proposition accepted by the majority — that the bankruptcy court would have to independently determine the existence of an undue hardship — was a statement made by the debtor's counsel at oral argument.

Missouri v. Fiske

The dissent believed that the analysis of the in rem exception was too complex to have been dealt with without first having been fully briefed and considered by the lower courts. Among the issues Justice Thomas thought had not been fully examined was a reconciliation of the majority's decision with Missouri v. Fiske , 290 U.S. 18 (1933), in which individuals sought to enjoin the State of Missouri from prosecuting probate proceedings in state court, contending that the federal district court had already made a final determination of the ownership of the contested stock. In Fiske, the Court held that the federal court could not entertain the action because it had no authority to issue process against the State to compel it to subject itself to the court's judgment. The majority believed that Fiske was not inconsistent since the bankruptcy discharge itself operates as an injunction. Although the majority acknowledged the possibility that the state might be bound by the federal court's judgment in an in rem proceeding, but that the court's judgment could be not be enforced by injunction, it disposed of the issue as one not currently before the Court.

The dissent believed the mere fact that Fiske suggests that the state might not be bound because it was not a party to an in rem proceeding, “at least leaves in doubt the extent of any in rem exception in bankruptcy.” Finding other inconsistencies and issues raised by the majority's reasoning for an in rem exception, the dissent suggested that perhaps even the majority seemed to recognize them and, accordingly, was limiting its decision to the undue hardship exception, refusing to find an exception to every exercise of a bankruptcy court's in rem jurisdiction that might encroach on state sovereignty.

Finding Congress's clear intention in section 106(a) of the Bankruptcy Code to abrogate state sovereign immunity under the Bankruptcy Clause, the dissenters would have found that Congress did not have that authority under Article I of the Constitution.