US Supreme Court Rules That States Are Not Immune from Preference Actions

As reported here (SCOTUS blog), here (PrawfsBlawg), here (Volokh), here (Crime & Federalism), and here (Althouse), the US Supreme Court today ruled, in a 5-4 decision (pdf) authored by Justice Stevens, that states are not immune from bankruptcy preference actions. Central Virginia Community College v. Katz, No. 04-885, 2006 WL 151985. Here, I'll try and expand upon, not repeat, the above posts.

I think most would agree that the result in this case is a surprising one given the ample precedent that pointed to a contrary result. As noted here, the oral argument left many believing that the Court had again "dodged a bullet" and would not tackle the question directly, but instead would decide on the "lesser ground" of waiver (as suggested at oral argument by Justice Ginsburg, who ultimately sided with the majority). Indeed, Justice Souter, who also sided with the majority, himself signaled his deep reservation with the bankruptcy trustee's entire abrogation argument when he told the trustee's counsel at oral argument:

I'm not a big fan of sovereign immunity in these circumstances, but I'm not quite sure how to get around it, based on the fact that there is no alternative remedy here.... [B]asically, you're making the argument from the uniformity phrase - uniform bankruptcy laws.... And you're saying, in this case, that that trumps the sovereign immunity, and that gets you out of Seminole Tribe.

Looking back at the oral argument, we find the kernel of today's opinion in the following seemingly innocuous penultimate question posed by Justice Stevens himself, when he asked the state's counsel about "this argument out there" that had not yet been discussed during the entire preceding 59 minutes of argument:

May I ask if you think, within the text of the question presented, we could decide whether the sovereign immunity was abrogated by the convention itself, not by Congress? There is that argument out there, you know.

In response, the petitioner's counsel perhaps sealed his client's fate by conceding that "if you decided that the convention itself had intended for the States not to have sovereign immunity in bankruptcy, then you would conclude that the Article I Bankruptcy Clause includes the abrogation power." [Practice reminder: Be careful about those last couple of seemingly innocuous questions thrown at you at the end of oral argument; they're often not as simple as they sound.]

Well, to the sure chagrin of petitioner's counsel (and many Supreme Court watchers), that's exactly what the majority decided! Indeed, virtually the entire opinion focuses on this historical argument as to whether sovereign immunity was both considered and abrogated at the Constitutional Convention. As noted here, Professor Bruce Mann believed it had been, and Justice Stevens significantly amplified upon Professor Mann's historical review with an impressive, though selective, array of supporting historical sources, all pointing to a final, "ineluctable conclusion":

[T]ext aside, the Framers, in adopting the Bankruptcy Clause, plainly intended to give Congress the power to redress the rampant injustice resulting from States' refusal to respect one another's discharge orders. As demonstrated by the First Congress' immediate consideration and the Sixth Congress' enactment of a provision granting federal courts the authority to release debtors from state prisons, the power to enact bankruptcy legislation was understood to carry with it the power to subordinate state sovereignty, albeit within a limited sphere.


The ineluctable conclusion, then, is that States agreed in the plan of the Convention not to assert any sovereign immunity defense they might have had in proceedings brought pursuant to "Laws on the subject of Bankruptcies." See Blatchford, 501 U.S. at 779 (observing that a State is not "subject to suit in federal court unless it has consented to suit, either expressly or in the 'plan of the convention' "); Alden v. Maine, 527 U.S. at 713 (same). The scope of this consent was limited; the jurisdiction exercised in bankruptcy proceedings was chiefly in rem--a narrow jurisdiction that does not implicate state sovereignty to nearly the same degree as other kinds of jurisdiction. But while the principal focus of the bankruptcy proceedings is and was always the res, some exercises of bankruptcy courts' powers--issuance of writs of habeas corpus included--unquestionably involved more than mere adjudication of rights in a res. In ratifying the Bankruptcy Clause, the States acquiesced in a subordination of whatever sovereign immunity they might otherwise have asserted in proceedings necessary to effectuate the in rem jurisdiction of the bankruptcy courts. (Emphasis added)

In the end, the legacy of this opinion for future lower court cases grappling with this momentous decision may well be found in the last bolded sentence quoted above. States defending themselves in bankruptcy litigation are sure to question whether the suit against them involves "proceedings necessary to effectuate the in rem jurisdiction of the bankruptcy courts." In applying this murky test, perhaps these lower courts will frame the question in the more traditional manner in which they're used to speaking: that is, whether -- for sovereign immunity purposes -- the proceeding is "core" or "non-core." The Supreme Court first posed this question regarding the "core" jurisdiction of federal bankruptcy courts in Northern Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), when it turned the bankruptcy world upside-down by deciding that the broad statutory grant of jurisdiction to bankruptcy courts over "related to" (i.e., "non-core") proceedings violates Article III of the Constitution.

Adopting this approach, "proceedings necessary to effectuate the in rem jurisdiction of the bankruptcy courts" would be equated with those traditionally designated as "core" proceedings (like preference actions), whereas "proceedings [not] necessary to effectuate [such] in rem jurisdiction" would be equated with "non-core" proceedings (like breach of contract actions).

Either way, guess who benefits most from this decision?

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