State governments can be creditors of individuals, businesses and institutions that are debtors in bankruptcy in a variety of ways, most notably as tax and fine collectors but also as lenders. They can also be debtors of debtors, in their role, for example, as the purchasers of vast quantities of goods and services on credit. And they can also be transferees of a debtor’s property in (at least) every role in which they can be creditors.

It was inevitable that, once Congress decided in 1978 that the new Bankruptcy Code should deal more comprehensively with debtors’ assets and liabilities than the old Bankruptcy Act of 1898 had done, states would be involved to an even greater extent in the bankruptcy cases of all kinds of debtors. And that, in turn, made it inevitable that the exercise of sovereign immunity by states, to the extent permitted in bankruptcy court, would erode the comprehensive treatment of all a debtor’s assets and liabilities that Congress intended.

Foreseeing this, Congress baked an expansive abrogation of state sovereign immunity into the Code. Section 106 abrogates sovereign immunity with respect to approximately 60 sections of the Code, empowers bankruptcy courts to treat states almost like private parties, and attaches immunity waiver consequences to certain state actions in a bankruptcy case, such as filing a proof of claim.[i]

There are limits on Congress’ power to abrogate state sovereign immunity, which arises from the implications of our federal structure more than from any particular constitutional provision (although the Eleventh Amendment is frequently cited) and which generally is understood to deprive federal courts of power to entertain legal actions against a non-consenting state.[ii] A valid abrogation by Congress must usually have been expressed in “‘unequivocal statutory language’” and be based upon “some constitutional provision [that] allow[s] Congress to have thus encroached on the States’ sovereignty.”[iii]

It is not surprising that, with ways so various that a state may show up in a bankruptcy case, it took years for the issue of federal power over states in bankruptcy cases to be completely sorted out in the Supreme Court, but it was settled by Hood and, even more definitively, Katz. The Court had granted certiorari in Hood to definitively resolve the issue but ended up holding that the dischargeability of a student loan owed to an agency of the State of Tennessee did not even implicate the state’s sovereign immunity,[iv] allowing it to avoid deciding the constitutional issue.

The Court did finally resolve it in Katz, and in a surprising way. It held that a trustee’s adversary proceeding to avoid and recover a preferential transfer made to a state college was not barred by sovereign immunity, not based on the effect of Section 106 but because the grant of the bankruptcy power to Congress in Article 1, Section 8 of the Constitution itself effected the abrogation of state sovereign immunity in bankruptcy matters. Because the Constitution itself had done the job, “we are persuaded that the enactment of [Section 106] was not necessary to authorize the Bankruptcy Court’s jurisdiction over these preference avoidance proceedings.”[v]

Katz and Hood are old news, but the change in the composition of the Supreme Court since 2006 raised a question in the minds of some whether Katz’s strong defense of federal preeminence in bankruptcy unimpeded by state sovereign immunity would continue. They need not have been concerned.

On March 23, the Supreme Court declared the Copyright Remedy Clarification Act of 1990 (“CRCA”) to be unconstitutional.[vi] The CRCA had abrogated sovereign immunity for a state’s copyright infringement, but, declared a six-justice majority, Congress lacked the constitutional power to abrogate state sovereign immunity for copyright infringement notwithstanding Article 1’s grant of power to Congress to enact laws protecting intellectual property.[vii]

The Allen v. Cooper plaintiff asked the Court to overrule Florida Prepaid on the Katz principle that Article 1 grants of power to Congress can have a sovereign immunity abrogating effect ex proprio vigore. That argument was rejected with this strong reaffirmation of Katz by Justice Kagan:

The [Katz] Court might have concluded from its analysis that the [Bankruptcy] Clause allows Congress to abrogate the States’ sovereign immunity (as Allen argues the Intellectual Property Clause does). But it did not; it instead went further. . . . [T]he [Katz] Court found the Bankruptcy Clause itself did the abrogating. . . . [W]e decided that no congressional abrogation was needed because the States had already “agreed in the plan of the Convention not to assert any sovereign immunity defense” in bankruptcy proceedings. . . . Our decision . . . viewed bankruptcy as on a different plane, governed by principles all its own. . . . [The Katz understanding] points to a good-for-one-clause-only holding.[viii]

It seems to this blogger that a constitutional abrogation with no apparent limits is per se broader than the limited abrogation of Section 106. And, to conclude with the obvious, because the Constitution itself abrogated state sovereign immunity in bankruptcy, nothing but a constitutional amendment could ever restore it or limit the Constitution’s abrogating work.