News and Analysis on Today’s Decision in Katz
on Jan 23, 2006 at 1:40 pm
Today, the Court issued a 5-4 decision in Central Virginia Community College v. Katz, holding that States do not have sovereign immunity to suits by bankruptcy trustees seeking the return of preferential transfers under the federal bankruptcy act. Justice Stevens wrote the majority, joined by Justices O’Connor, Souter, Ginsburg and Breyer. Justice Thomas wrote a dissent, joined by the Chief Justice and Justices Scalia and Kennedy.
The case is interesting in its own right to those who follow the Court’s federalism and sovereign immunity cases. It is also interesting in that it is the first (and in all likelihood only) decision of the Term in which Justice O’Connor cast a deciding vote in a case that might have gone the other way if the Court had delayed the decision until her replacement took the bench. Whether this reflects the Chief Justice’s determination not to allow such strategic considerations to play a role in the timing of opinions, or whether the Chief and the other dissenters simply did not care enough about this decision to try to achieve a different outcome through delay, we may never know.
Background
A little background: first, the Court has held for a while now that States are generally immune to suits by private individuals unless they voluntarily waive that immunity or Congress has clearly abrogated that immunity pursuant to a valid exercise of its constitutional powers. The Court has further said that Congress’s power to abrogate a State’s sovereign immunity is limited. It is clear that Congress can abrogate immunity pursuant to an exercise of its power to enforce the Fourteenth Amendment (and, presumably, other post-Civil War amendments like it). On the other hand, the Court has held that Congress lacks the right to abrogate a State’s immunity through the exercise of certain of Congress’s power enumerated in Article I of the Constitution, including under its power to regulate interstate or Indian commerce and to make patent law. Many read those decisions to more or less categorically rule out any reliance on any of Congress’s Article I powers, including its powers under the Bankruptcy Clause (which empowers Congress to establish “unform Laws on the subject of Bankruptcies throughout the United States”).
The federal bankruptcy statute, enacted pursuant to that Article I power, generally gives a federal bankruptcy court exclusive jurisdiction over the property of someone who files for bankruptcy, in order to allow that court to work out a plan that treats all the debtor’s creditors uniformly and fairly (e.g., greatly simplified, to give each creditor 50% of the money it is owed if the debtor does not have enough to pay all the creditors in full). In order to prevent the debtor from playing favorites among her creditors by paying off some debts in full (e.g., debt owed to a friend) right before declaring bankruptcy (in which case her credit card company gets a smaller payoff than it would otherwise), the federal bankruptcy law permits the bankruptcy trustee (the person in charge of collecting the debtors assets for distribution) the right to sue to get those “preferential transfers” back.
The question in this case is whether the trustee may sue a State (or, in this case, a state university’s bookstore, which is treated the same as the State for sovereign immunity purposes), to get back a preferential transfer.
The Opinion
A sharply divided Supreme Court held that it could. In essence, the Court concluded that States had agreed to be subject to such suits when they signed off on the Constitution, which had authorized the creation of a uniform national bankruptcy system. Justice Stevens, writing for the majority, explained that bankruptcy had, by that time, long been understood to be a type of “in rem” proceeding — that is, a suit that focuses on a particular piece of property, like a boat or, in this case, the bankruptcy “estate” — and the Court had held last Term in Tennessee Student Assistance Corp. v. Hood, 541 U.S. 440 (2004), that a State’s sovereign immunity was not implicated by a bankruptcy court’s resolution of rights in the bankruptcy estate, even if that meant extinguishing a debt owed to a State.
The majority recognized that this case required it to go a step further, since the bankruptcy court did more than simply adjudicate the State’s right to a piece of the estate, but actually reached out and seized property that was in the State’s possession in order to put it back into the bankruptcy estate. Although that action looks a lot like a traditional lawsuit against a State for money damages, the Court held that States had contemplated and agreed to such suits at the time of the Founding when they agreed to give Congress the power to establish national bankruptcy laws.
The majority drew support for this conclusion in the fact that very early on, Congress had passed a bankruptcy statute that allowed bankruptcy courts to to issue some orders directly against States — e.g., issuing orders to release debtors from state debtor’s prisons — that the majority thought was very similar to the sort of order issued in this case.
The dissent disagreed with the majority’s interpretation of the history, thinking that it showed only that States agreed that Congress would have broad powers to make uniform bankruptcy law, but not that this power would extend to subjecting States to suits of this sort.
Analysis
Although the question decided was quite narrow — involving only preferential transfers, not suits to recover other sorts of debts the State might owe a debtor — the language and rationale of the majority opinion is quite broad. The Court eschewed the efforts of some of the parties and amici to make fine technical distinctions about the nature of the claims and bankruptcy law and prior cases, instead reaching the broader (and vaguer) conclusion that “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.”
Just what counts as a proceeding “necessary to effectuate” that jurisdiction remains to be seen. The majority opinion suggests that this includes, at a minimum, the powers created in the early bankruptcy acts. But the impending change in the composition of the Court will likely (in my view) mean that everything is up for grabs in the next case.
The other interesting thing about this opinion is that the majority declined to apply the rather settled requirement that if Congress intends to exercise its power to abrogate a state’s immunity, it must do so expressly in the text of the statute. The Court self-consciously refused to ask that question in this case, holding that “the relevant ‘abrogation’ is the one effected in the plan of the Convention, not by statute.” It is somewhat mysterious (at least to me) why the same could not have been said in cases in which Congress subjected States to suit under its power to enforce the Fourteenth Amendment.
Interestingly, this is the second time the Court has rejected a constitutional challenge to the Bankruptcy Act in which the Solicitor General has declined to defend the statute on the grounds that there was no reasonable argument to be made in favor of its constitutionality (the other being Hood). While one could argue whether that decision was correct, I think it is more relfective of the somewhat surprising outcome in this case than any lack of zeal on the part of the SG (who has been vigorously defending other federal statutes against Eleventh Amendment challenge).
