United States: Eleventh Amendment Does Not Bar Bankruptcy Courts’ In Rem Jurisdiction Over The Bankruptcy Estate

The United States Supreme Court recently held, in Tennessee Student Assistance Corp. v. Hood, 124 S.Ct. 1905, 541 U.S. ___ (2004), that a proceeding initiated by a debtor to determine the dischargeability of a student loan debt owed to a State is not a suit against a State for purposes of sovereign immunity under the Eleventh Amendment. Accordingly, the bankruptcy court’s jurisdiction to discharge the debt owed to the State was upheld. The Court left unresolved the issue of whether Congress has the power to abrogate State sovereign immunity under the Eleventh Amendment through its power to establish uniform bankruptcy laws, as set forth in Article I, §8, cl. 4 of the Constitution. The United States Court of Appeals for the Sixth Circuit previously held that States ceded their immunity from suits in bankruptcy in the Constitutional Convention, and Congress therefore had the authority to validly abrogate that immunity pursuant to the Bankruptcy Clause when it enacted 11 U.S.C. §106(a).¹

Notably, for students of the Court’s ongoing State sovereign immunity jurisprudence, Justices Souter and Ginsberg concurred in the Court’s opinion but noted that in so doing they did not implicitly approve of the Court’s holding in Seminole Tribe of Fla. v. Florida.² Justices Thomas and Scalia dissented from the Court’s opinion, insisting that the Bankruptcy Clause did not empower Congress to abrogate State sovereign immunity.³

Between July 1988 and February 1990, Pamela Hood, a Tennessee resident, signed promissory notes for loans guaranteed by the Tennessee Student Assistance Corporation ("TSAC"). In February 1999, Hood filed a Chapter 7 bankruptcy petition in the United States Bankruptcy Court for the Western District of Tennessee. Sallie Mae Service, Inc. ("Sallie Mae"), the original holder of Hood’s student loan debt, submitted a proof of claim for the debt. TSAC, however, did not participate in the original bankruptcy. Sallie Mae later assigned its proof of claim to TSAC. In June 1999, the Bankruptcy Court granted Hood a general discharge pursuant to 11 U.S.C. §727(a). But Hood did not list her student loans in the bankruptcy, and the general discharge did not cover them.⁴

In September 1999, Hood reopened her bankruptcy petition to seek discharge of her student loan debt as an "undue hardship" pursuant to Bankruptcy Code §523(a)(8). As required by the Federal Rules of Bankruptcy Procedure, Hood served the complaint and a summons upon TSAC.⁵ TSAC moved to dismiss the complaint for lack of jurisdiction, arguing that the Bankruptcy Court had no jurisdiction over TSAC because of its sovereign immunity under the Eleventh Amendment. The Bankruptcy Court denied the motion, holding that Congress validly abrogated State sovereign immunity under the authority of the Bankruptcy Clause by enacting 11 U.S.C. §106(a). The Sixth Circuit agreed, and TSAC appealed to the United States Supreme Court.⁶

The Court rejected the TSAC’s sovereign immunity argument and overruled its motion to dismiss for lack of jurisdiction. The Court held that the discharge of a debt by a bankruptcy court is an in rem proceeding that is not premised on jurisdiction over the creditors, such as TSAC or a State, and therefore does not implicate State sovereign immunity. Instead, the discharge of a debt is based on the bankruptcy court’s exclusive jurisdiction over the debtor’s property, wherever located, and over the estate.

Because these in rem proceedings do not implicate State sovereign immunity, States, under long-standing precedent, are bound by a bankruptcy court’s discharge orders no less than other creditors, whether or not they participate in the bankruptcy proceeding. This is true even when the underlying proceedings are mostly identical to a proceeding under in personam jurisdiction.

Although the TASC conceded that States are bound generally by a bankruptcy court’s discharge order, it claimed that the procedure in Bankruptcy Code §523(a)(8), whereby a student loan guaranteed by a State is not subject to general discharge but may be discharged in an "individualized adjudication" constituting an "adversary proceeding", violated State sovereign immunity. More specifically, the TSAC focused on the fact that for an "undue hardship" proceeding under §523(a)(8), Bankruptcy Rules require that a creditor must be served with a summons and complaint.⁷

The Court did not find these claims any more persuasive than the petitioner’s first argument, stating that it showed TASC’s misunderstanding of "the fundamental nature" of a bankruptcy proceeding. The Court noted:

The Court was no more persuaded by the service of summons issue. Noting that even though it observed in Seminole Tribe v. Florida that the Eleventh Amendment does not exist solely to prevent federal-court judgments but also to avoid the "indignity of subjecting a State to the coercive process of judicial tribunals at the instance of private parties," the Bankruptcy Court’s exercise of in rem jurisdiction did not here constitute such an affront to State sovereign immunity because Section 523(a)(8) does not require a summons. Absent Bankruptcy Rule 7001(6), a debtor could proceed by motion under Rule 9014, which procedure would raise no constitutional concern. The service of a summons, because it was indistinguishable here from a motion, was therefore not to be given "dispositive weight."⁹ While many of us who practice in a strict statutory-construction environment may be somewhat surprised by the evaluation of the impact of actual issuance of the summons, our Jones Day Bankruptcy Tax Team¹⁰ members point out that the federal Bankruptcy Court is a court of equity.

Although there are clearly still "true believers" on the Court, Hood suggests that at least some 9 124 S.Ct. at 1914. 10 For more information on our Bankruptcy Tax Team, look for the BNA Tax Management Portfolio, Corporate Bankruptcy, which should be released soon. 11 535 U.S. 743 (2002). members of the Court are reluctant to extend State sovereign immunity under the Eleventh Amendment all the way to the horizon. Justice Thomas, joined by Justice Scalia, bitterly dissented from the Court’s opinion, insisting that the Court’s modern sovereign immunity jurisprudence, including Federal Maritime Comm’n v. South Carolina Ports Authority,¹¹ compels the conclusion that the Bankruptcy Clause does not empower Congress to abrogate State sovereign immunity under the Eleventh Amendment. But the other seven members of the Court, including the Chief Justice, seemed to step back from such an expansive view of the Eleventh Amendment. At least in the case of the Bankruptcy Clause, State sovereign immunity does not yet appear to be a constitutional "manifest destiny."

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