Central Virginia Community College v. Katz
2006 U.S. LEXIS 917, 546 U.S. 356, 163 L. Ed. 2d 945 (2006)
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Rule of Law:
The Bankruptcy Clause of the U.S. Constitution, in creating a uniform national bankruptcy system, represents a subordination of state sovereign immunity for proceedings that are necessary to effectuate a bankruptcy court's in rem jurisdiction, such as a trustee's action to avoid preferential transfers.
Facts:
- Wallace's Bookstores, Inc., conducted business with several Virginia state institutions of higher education (petitioners).
- During the course of business, Wallace's Bookstores made payments to these state institutions for antecedent debts.
- At the time these payments were made, Wallace's Bookstores was insolvent.
- Subsequently, Wallace's Bookstores, Inc., filed a petition for relief under Chapter 11 of the Bankruptcy Code.
Procedural Posture:
- Bernard Katz, the liquidating supervisor for the bankrupt estate of Wallace's Bookstores, Inc., initiated adversary proceedings against petitioners, Virginia state colleges, in the U.S. Bankruptcy Court for the Eastern District of Kentucky.
- The proceedings sought to avoid and recover alleged preferential transfers made by the debtor to the state colleges.
- The state colleges filed motions to dismiss the proceedings on the grounds of sovereign immunity.
- The Bankruptcy Court denied the motions to dismiss.
- The U.S. District Court for the Eastern District of Kentucky affirmed the Bankruptcy Court's decision.
- The colleges, as appellants, appealed to the U.S. Court of Appeals for the Sixth Circuit, which affirmed the District Court's judgment, with Katz as appellee.
- The U.S. Supreme Court granted certiorari to review the decision of the Sixth Circuit.
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Issue:
Does a bankruptcy trustee's proceeding to avoid and recover preferential transfers made by a debtor to state agencies violate the state's sovereign immunity?
Opinions:
Majority - Justice Stevens
No. A bankruptcy trustee's proceeding to avoid and recover preferential transfers from state agencies does not violate sovereign immunity. The States, in ratifying the Bankruptcy Clause, consented in the plan of the Convention to a subordination of their sovereign immunity in proceedings necessary to effectuate the in rem jurisdiction of bankruptcy courts. The Framers intended to grant Congress the power to create a uniform bankruptcy system to solve the problem of states refusing to honor each other's discharge orders, a power that inherently includes the authority to subject states to proceedings, like preference avoidance actions, that are essential to the administration of the bankrupt's estate. This constitutional grant of power predates and is not limited by the Eleventh Amendment's general principles of sovereign immunity.
Dissenting - Justice Thomas
Yes. A proceeding to recover preferential transfers from a state is barred by sovereign immunity. The Court's long-established precedent holds that Article I of the Constitution cannot be used to abrogate state sovereign immunity. The majority's 'plan of the convention' theory for bankruptcy is a novel and unwarranted exception to this rule, which is not supported by the text or history of the Bankruptcy Clause. The historical evidence shows a desire for legislative uniformity, not a waiver of immunity from suit for money damages, which is a core attribute of sovereignty the Framers intended to preserve.
Analysis:
This decision carves out a significant 'bankruptcy exception' to the modern sovereign immunity doctrine articulated in cases like Seminole Tribe v. Florida. It holds that the ratification of the Bankruptcy Clause itself constituted a waiver of state sovereign immunity for certain bankruptcy proceedings, a 'plan of the convention' waiver. This reasoning shifts the source of abrogation from a clear congressional statute to the constitutional text and its historical context. The decision's impact is to ensure the supremacy and uniformity of federal bankruptcy law over state immunity claims, but it also raises questions about whether similar 'plan of the convention' arguments could be made regarding other Article I powers with unique historical underpinnings.
