Creditors generally are not entitled to personal service before a bankruptcy court may discharge a debt. Because student loan debts are not automatically dischargeable, however, the Federal Rules of Bankruptcy Procedure provide creditors greater procedural protection. Fed. R. Bankr. P. 7001(6), 7003, and 7004. The current Bankruptcy Rules require the debtor to file an adversary proceeding against the state in order to discharge his student loan debt. The proceeding is considered part of the original bankruptcy case and still within the bankruptcy court's in rem jurisdiction. But, as prescribed by the Rules, an adversary proceeding requires the service of a summons and a complaint.
An individual with student-loan debt filed a petition under Chapter 7 of the Bankruptcy Code (11 USCS §§ 701 et seq.) in the United States Bankruptcy Court for the Western District of Tennessee. Although the individual received a general discharge, the individual had not listed her student loans in the bankruptcy proceeding, and the general discharge did not cover them. In September 1999, the individual reopened her bankruptcy petition for the limited purpose of seeking a determination by the Bankruptcy Court that her student loans were dischargeable. As prescribed by the Bankruptcy Rules, the individual filed a complaint against various defendants. Later, the individual filed an amended complaint in which she included, as an additional defendant, a Tennessee governmental corporation that was an assignee holder of the individual's student-loan debt. The complaint and the amended complaint were served, along with a summons, on each of the named parties.
The state governmental corporation filed a motion to dismiss the complaint for lack of jurisdiction on the asserted basis of immunity under the Federal Constitution's Eleventh Amendment, which generally prohibited private federal-court suits against states. However, the Bankruptcy Court, in denying the motion, expressed the view that 11 USCS § 106(a) validly abrogated the state governmental corporation's sovereign immunity.
The Bankruptcy Appellate Panel of the United States Court of Appeals for the Sixth Circuit affirmed (262 B.R. 412).
On appeal, the Court of Appeals for the Sixth Circuit, in affirming, expressed the view that the Federal Constitution's Art I, § 8, cl 4--in providing that Congress would have the power to establish "uniform Laws on the subject of Bankruptcies throughout the United States"--gave Congress the necessary authority to abrogate state sovereign immunity in § 106(a) (319 F.3d 755, 2003 FED App. 6 38P).
Was the proceeding instituted by the individual in the case at hand a suit against a state within the meaning of Eleventh Amendment?
On certiorari, the United States Supreme Court affirmed and remanded. It was held--without reaching the question of Congress' bankruptcy power under Art I, § 8, cl 4--that the proceeding instituted by the individual in the case at hand to determine, pursuant to § 523(a)(8), the dischargeability of her student-loan debt was not a suit against a state within the meaning of Eleventh Amendment, as:
(1) The Supreme Court had held that the Eleventh Amendment did not bar federal-court jurisdiction over in rem admiralty actions when a state was not in possession of the property. (2) The discharge of a debt by a bankruptcy court was similarly an in rem proceeding. (3) There was no reason why the exercise of the federal courts' in rem bankruptcy jurisdiction was more threatening to state sovereignty than the exercise of the federal courts' in rem admiralty jurisdiction. (4) The particular undue-hardship process by which student-loan debts were discharged did not unconstitutionally infringe a state's sovereignty. (5) The particular adversary-proceeding method used in the case at hand did not change the result.