The Securities and Exchange Commission

[thepennyking]

Bankruptcy — Abrogation of State Sovereign Immunity. The U.S. Constitution’s Bankruptcy Clause, Art. I, § 8, Cl. 4, empowers Congress to establish "uniform laws on the subject of bankruptcies throughout the United States." The Supreme Court granted certiorari in Tennessee Student Assistance Corp. v. Hood, No. 02-1606, to determine whether the Bankruptcy Clause gave Congress the authority to abrogate state sovereign immunity in bankruptcy cases.

Pamela Hood signed promissory notes for student loans guaranteed by the Tennessee Student Assistance Corporation ("TSAC"), a governmental corporation created by the Tennessee legislature. In June 1999, Hood received a discharge on her no-asset Chapter 7 bankruptcy petition. Because 11 U.S.C. § 523(a)(8) prohibits the discharge of student debts held by a government body except upon a showing of "undue hardship," Hood subsequently filed an adversary proceeding in the Bankruptcy Court for the Western District of Tennessee, seeking a hardship discharge of her student loan under Section 523. In 11 U.S.C. § 106(a), Congress specifically abrogated state sovereign immunity with respect to such actions.

TSAC moved to dismiss the complaint, arguing that Congress lacked authority to abrogate its sovereign immunity. The bankruptcy court denied the motion to dismiss, holding that Section 106(a)’s abrogation of state sovereign immunity was a valid exercise of Congress’s power under the Bankruptcy Clause. 2002 WL 33965623 (July 24, 2000). The Bankruptcy Appellate Panel for the Sixth Circuit affirmed the district court’s decision. 262 B.R. 412 (2001).

The Sixth Circuit affirmed. 319 F.3d 755 (2003). The court acknowledged that in Seminole Tribe of Florida v. Florida, 517 U.S. 44, 72-73 (1996), the Supreme Court ruled that "[t]he Eleventh Amendment restricts the judicial power under Article III, and Article I cannot be used to circumvent the constitutional limitations placed upon federal jurisdiction." 319 F.3d at 761. The court of appeals concluded, however, that by including the Bankruptcy Clause in the Constitution and conferring on Congress "the power to make uniform laws" regarding bankruptcy (id. at 762), "the states shed their immunity from suit along with their power to legislate." Id. at 765. The Sixth Circuit recognized that its holding conflicts with decisions of five other circuits, which have held, relying on Seminole Tribe, that Congress may not validly abrogate state sovereign immunity by relying on its Bankruptcy Clause powers. See Sacred Heart Hosp. of Norristown v. Pennsylvania (In re Sacred Heart Hosp. of Norristown), 133 F.3d 237 (3d Cir. 1998); Schlossberg v. Maryland (In re Creative Goldsmiths of Wash. D.C., Inc.), 119 F.3d 1140 (4th Cir. 1997), cert. denied, 523 U.S. 1075 (1998); Department of Transp. & Dev. v. PNL Asset Mgmt. Co. LLC (In re Fernandez), 123 F.3d 241, amended by 130 F.3d 1138 (5th Cir. 1997); Nelson v. LaCrosse County Dist. Attorney (In re Nelson), 301 F.3d 820 (7th Cir. 2002); Mitchell v. Franchise Tax Bd. (In re Mitchell), 209 F.3d 1111 (9th Cir. 2000).

This case has important implications for the business community. States are creditors in the majority of the 1.5 million bankruptcy petitions filed each year. The Supreme Court’s decision will determine whether states and their agencies can be required to participate in adversary proceedings under the Bankruptcy Code — for example, proceedings to recover money or property or to determine the validity, priority or extent of a lien or other interest in property.