Cent. Va. Cmty. Coll. v. Katz - 546 U.S. 356, 126 S. Ct. 990 (2006)

Rule:

Critical features of every bankruptcy proceeding are the exercise of exclusive jurisdiction over all of the debtor's property, the equitable distribution of that property among the debtor's creditors, and the ultimate discharge that gives the debtor a "fresh start" by releasing him, her, or it from further liability for old debts. Under longstanding U.S. Supreme Court precedent, States, whether or not they choose to participate in the proceeding, are bound by a bankruptcy court's discharge order no less than other creditors.

Facts:

The Bankruptcy Clause, Art. I, § 8, cl. 4, empowers Congress to establish "uniform Laws on the subject of Bankruptcies throughout the United States." In Tennessee Student Assistance Corporation v. Hood, 541 U.S. 440, 124 S. Ct. 1905, 158 L. Ed. 2d 764, the Supreme Court, without reaching the question whether the Clause gives Congress the authority to abrogate States' immunity from private suits, see id., at 443, 124 S. Ct. 1905, 158 L. Ed. 2d 764, upheld the application of the Bankruptcy Code, 11 U.S.C. § 101 et seq., to proceedings initiated by a debtor against a state agency to determine the dischargeability of a student loan debt. In this case, a proceeding commenced by respondent Bankruptcy Trustee under §§ 547(b) and 550(a) to avoid and recover alleged preferential transfers by the debtor to petitioner state agencies, the agencies claim that the proceeding is barred by sovereign immunity. The Bankruptcy Court denied petitioners' motions to dismiss on that ground, and the District Court and the Sixth Circuit affirmed based on the Circuit's prior determination that Congress has abrogated the States' sovereign immunity in bankruptcy proceedings.

Issue:

Is a bankruptcy trustee's proceeding to set aside the debtor's preferential transfers to state agencies barred by sovereign immunity?

Answer:

No.

Conclusion:

The Court held that those who crafted the Bankruptcy Clause, U.S. Const. art. I, § 8, cl. 4, would have understood it to give Congress the power to authorize courts to avoid preferential transfers and to recover the transferred property. The state institutions of higher education did not dispute that that authority had been a core aspect of the administration of bankrupt estates since at least the 18th century and operated free and clear of the State's claim of sovereign immunity. Insofar as orders ancillary to the bankruptcy courts' in rem jurisdiction, like orders directing turnover of preferential transfers, implicate States' sovereign immunity from suit, the States agreed in the plan of the Convention not to assert that immunity. The Court held that history strongly supported the view that the Bankruptcy Clause simply did not contravene the norms the United States Supreme Court had understood the Eleventh Amendment to exemplify. The Court held that Congress' determination that States should be amenable to proceedings to recover preferential transfers, 11 U.S.C.S. § 106(a) was within the scope of its power under the Bankruptcy Clause to enact laws on the subject of bankruptcies.