2010-12-12 10:56:40 by admin
In Central Virginia Community College v. Katz (2006), the U.S. Supreme Court held that Eleventh Amendment sovereign Immunity, which protects states and their agencies from litigation, did not bar adversarial proceedings brought by a Chapter 11 bankruptcy trustee to set aside alleged preferential payments that operators of a bankrupt bookstore made to public institutions of higher education. In other words, the Court affirmed an earlier order that when four colleges in Virginia received funds from a bookstore that was operating under the protection of a federal bankruptcy court, they were not immune from litigation to recover these monies in an action filed by the judicially appointed liquidating supervisor. The Court rejected the colleges’ argument that their Eleventh Amendment Immunity protected them from such claims as “arms of the state.” In light of the impact that this case may have on the sovereign Immunity of public colleges and universities, this entry examines the background and rationale in Katz.
Katz arose when a bookstore that engaged in business with four public institutions of higher education in Virginia sought bankruptcy protection under Chapter 11. Chapter 11 bankruptcy actions ordinarily involve corporations or partnerships that file petitions seeking to reorganize their businesses so that they can survive and to repay their creditors over time. Individual debtors can also rely on Chapter 11. Entities that seek the protection of Chapter 11 bankruptcy courts ordinarily work with court-appointed trustees in determining repayment schedules and preferences in repaying their debts.
When the owner of the bookstore sought bankruptcy protection, the judicially appointed liquidating supervisor attempted to recover allegedly preferential payments that bookstore officials had made to the institutions of higher education in Virginia when it was insolvent. However, public institutions of higher learning are arms of the state, meaning that those in Katz were created by officials of the Commonwealth of Virginia to carry out the public function of education. College officials therefore refused to comply with the order that they return the payments that they received, on the ground that they had sovereign Immunity from the litigation initiated by the liquidating supervisor under the Eleventh Amendment. A federal bankruptcy court in Kentucky, home to the bookstore, refused to dismiss the proceedings despite the claim of sovereign Immunity that the colleges advanced. Subsequently, the Sixth Circuit, based on its own precedent that Congress abrogated the states’ sovereign Immunity in bankruptcy proceedings, affirmed its order, leading the colleges to appeal to the Supreme Court.
On further review, in Katz, in a five-to-four opinion written by Justice Stevens, the Supreme Court affirmed that when states ratified the Bankruptcy Clause in Article 1, Section 8, Clause 4 of the U.S. Constitution, they acquiesced in the subordination of whatever sovereign Immunity defense that they might otherwise have raised in proceedings necessary to effectuate the jurisdiction of bankruptcy courts. In this context, in rem (literally “the things” as opposed to persons) jurisdiction refers to judicial powers over the assets of entities that declare bankruptcy rather than over their persons. This judicial authority includes the power to recover assets that were Fraudulently transferred to others or to recover payments that improperly favored some creditors at the expense of others.
At the outset of its analysis, the Supreme Court found that the Bankruptcy Clause granted Congress the authority to establish uniform laws regulating bankruptcy in the United States. Because some jurisdictions went so far as to imprison debtors, while others seized their assets to repay their debts, the framers sought to establish a uniform system for the treatment of debtors, and the Bankruptcy Clause was intended to accomplish this. At this point, the Court conceded that it had not resolved the question of whether the Bankruptcy Clause conferred the ability on Congress to abrogate the Immunity of states from such private suits. Even so, the Court noted that in Tennessee Student Assistance Corporation v. Hood (2004), it had upheld the application of the Bankruptcy Code to proceedings initiated by debtors against state agencies to evaluate whether student loans could be so discharged, ruling that doing so did not infringe on state sovereignty. The Court explained that regardless of whether states choose to participate in actions, they are bound by the orders of bankruptcy courts and since they are not entitled to any special treatment, they must wait their turns to be paid like other creditors.
Turning to the nature of bankruptcy proceedings as in rem, the Supreme Court maintained that these actions did not allow Immunity to states to the same degree that other types of legal proceedings did. Therefore, the Court thought that the framers would have interpreted the authority of the Bankruptcy Clause as including the congressional right to adopt laws addressing more than the status of rights in the res, or thing, namely money or other assets. To this end, the Court observed that judges resolving bankruptcy disputes have the power to issue ancillary orders enforcing their in rem adjudications, an interplay that the justices believed was evident in Katz. Regardless of whether actions such as the one at issue were properly characterized as in rem, the Court was convinced that the framers would have interpreted the Bankruptcy Clause as granting Congress the authority to permit the judiciary to forbid preferential transfers and to recover properties that were transferred under such circumstances.
In addressing the in rem jurisdiction of bankruptcy courts and their ancillary powers over matters such as preferential transfers, the Supreme Court examined the history of the Bankruptcy Clause, as well as early federal statutes. This led the Court to decide that while this judicial in rem authority implicated the states’ sovereign Immunity from litigation, the states agreed with the plan that was adopted at the Constitutional Convention that they would not raise this defense in such litigation, essentially subordinating, or abrogating, their sovereignty to the bankruptcy courts in this limited manner.
The Supreme Court found it unnecessary to address the question of whether the Bankruptcy Clause granted Congress the authority to abrogate states’ Immunity from such private suits that it addressed earlier in its analysis of Hood. Instead, the Court identified the key question not as whether Congress intended to abrogate sovereign Immunity in actions to recover preferential treatments but as whether the congressional determination that states should be subject to preferential transfer proceedings was within the scope of its power to enact laws addressing bankruptcy.
Insofar as the Supreme Court was of the view that because the Bankruptcy Clause granted Congress the authority to enact statutes regulating bankruptcy, it added that Congress could either treat states in the same way as other creditors or could exempt them from the operation of such laws. In thus concluding that the relevant abrogation of judicial authority that essentially allowed states to subject themselves to the jurisdiction of the bankruptcy courts was the one identified in the plan enunciated at the Constitutional Convention, not by statute, the Court affirmed the judgment of the Sixth Circuit.
Justice Thomas’s dissent, which was joined by Chief Justice Roberts as well as Justices Scalia and Kennedy, essentially maintained that the majority ignored the long-established principles that states are not subject to suit by private parties for monetary relief absent their consent or a valid congressional abrogation. The dissent reasoned that the outcome in Katz could not have been justified by the text, structure, or history of the Constitution and that it failed to comport with the Court’s settled jurisprudence with regard to the sovereign Immunity of the states.
In sum, Katz stands for the proposition that public colleges and universities do not enjoy sovereign Immunity for suits seeking the recovery of preferential transfers that are necessary to effectuate the in rem jurisdictional authority of bankruptcy courts. Yet the Supreme Court failed to address whether sovereign Immunity bars claims for breach of contract that are unnecessary to effectuate the jurisdiction of bankruptcy courts. Unlike its other sovereign Immunity cases, Katz is significant because it turned not on whether Congress has the power to abrogate sovereign Immunity but on whether the states surrendered their Immunity when they ratified the Constitution.
Charles J. Russo
See also College Savings Bank v. Florida Prepaid; Florida Prepaid v. College Savings Bank; Kimel v. Florida Board of Regents
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