Supreme Court Addresses Ability to Sue States
July 2002
A primary purpose of our nation’s bankruptcy system is to provide financially distressed parties with the opportunity for a new beginning. This "fresh start" philosophy, however, is not universally applied. In certain instances, states are deemed to be outside of the umbrella of the bankruptcy arena and are thus "immune" to the dictates of the bankruptcy court. Given the wide range of state agencies that may play a role in bankruptcy cases — particularly as creditors in the ever-increasing number of chapter 11 corporate reorganizations — it is important to understand the scope of federal bankruptcy law with respect to states. A recent decision of the United States Supreme Court, Lapides v. Board of Regents of the University System of Georgia, provides some potentially significant insights on the intersection of bankruptcy law and the doctrine of government, or "sovereign," immunity.
The Doctrine of Sovereign Immunity
The breadth of a bankruptcy court’s personal jurisdiction generally extends to any person or entity residing in, or having sufficient "minimum contacts" with, the United States. However, there are certain exceptions. For instance, the Eleventh Amendment of the United States Constitution provides that "[j]udicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State." Sovereign immunity also bars suits in federal court against a state by its own citizens. This language has been interpreted as a grant of sovereign immunity to the states against suit in federal court, including the bankruptcy courts.
Under limited circumstances, however, a state’s sovereign immunity may be circumvented. One way to provide judicial power over suits against states despite the prohibition created by the Eleventh Amendment is for Congress to expressly abrogate such immunity by federal statute. In section 106 of the Bankruptcy Code, Congress set forth certain limitations on the sovereign immunity of governmental units in bankruptcy cases. The constitutionality of the limitations contained in section 106 has been the subject of considerable judicial scrutiny and scholarly debate. So much so, in fact, that many courts have found that Congress overstepped its constitutional mandate when it purported to abrogate state sovereign immunity in Bankruptcy Code section 106(a), which provides that a state is not immune from suit in actions involving certain specifically identified sections of the Bankruptcy Code (e.g., avoidance actions and proceedings involving the dischargeability of debts).
Waiver of Sovereign Immunity
Although Eleventh Amendment immunity is in the nature of a jurisdictional bar, "it does not implicate a federal court’s jurisdiction in any ordinary sense, and thus may be forfeited by a state’s failure to assert it, or may be waived." A "waiver" of sovereign immunity may result from affirmative activity by the state. States and their agencies or other instrumentalities commonly become involved in bankruptcy cases by reason of their status as creditors, such as state taxing authorities and state agencies entrusted with administering student loan programs. In a key pre-Bankruptcy Code decision from the 1940s, Gardner v. New Jersey, the Supreme Court held that when a state "becomes the actor and files a claim against the [estate] it waives any immunity which it otherwise might have had respecting the adjudication of the claim."
However, the court’s ruling is not particularly instructive as to the precise extent of a state’s waiver when it files a proof of claim. Congress attempted to clarify that issue in Bankruptcy Code section 106(b), which provides that any "governmental unit," which includes any state, as well as most state agencies and instrumentalities, "that has filed a proof of claim in the case is deemed to have waived sovereign immunity with respect to a claim against such governmental unit that is property of the estate and that arose out of the same transaction or occurrence out of which the claim of such governmental unit arose." Thus, the filing of a proof of claim does not constitute a "general waiver" of a state’s sovereign immunity under the Eleventh Amendment, but only as to claims belonging to the debtor that arose out of the same transaction or occurrence as those upon which the state’s claim is based. Whether a counterclaim meets that criterion has been the subject of considerable litigation.
Some courts and commentators have questioned the constitutionality of section 106(b) and the validity of Gardner in light of the Supreme Court’s landmark 1996 decision, Seminole Tribe of Florida v. Florida, in which the Court held that Congress may not abrogate a state’s Eleventh Amendment immunity by enacting legislation pursuant to an exercise of powers enumerated in Article I of the Constitution, the article that created the legislative branch and preceded the enactment of the Eleventh Amendment. The Court in Seminole found that the so-called "commerce clause" of Article I did not grant Congress the power to abrogate a states’ sovereign immunity. Although Seminole did not involve bankruptcy law, a number of judges and other scholars have construed the High Court’s decision as effectively overruling Gardner. Their rationale generally is that the Article I grant of authority to Congress to create bankruptcy law, like the commerce clause at play in Seminole, is not sufficient to empower Congress to effectively negate the protections of the Eleventh Amendment, either as held by a court in Gardner or as enacted by Congress in section 106(b).
The Lapides decision is significant for a number of reasons, including the fact that the Supreme Court is quite clear that the holding in Gardner remains good law, but the Court’s ruling falls short of resolving the controversy.
Background
In Lapides, a professor employed by the Georgia state university system initiated a lawsuit in Georgia state court. He sued the Board of Regents of the University System of Georgia ("Georgia") and university officials acting in both their personal capacities and as agents of the state. The lawsuit alleged that university officials placed allegations of sexual harassment in his personnel files, in violation of Georgia and federal law.
All of the defendants joined in removing the case to federal district court, where they sought dismissal. Those individuals whom the professor had sued in their personal capacities argued that the doctrine of "qualified immunity" barred the professor’s federal law claims against them, and the district court agreed. Georgia, while conceding that under Georgia law it waived immunity in suits commenced in state court, contended that by virtue of the Eleventh Amendment, it remained immune from suit in federal court. The district court disagreed, finding that by removing the case from state to federal court, Georgia had waived its Eleventh Amendment immunity.
Georgia appealed the district court’s ruling to the Eleventh Circuit Court of Appeals, which reversed. The court concluded that state law was, at the least, unclear as to whether Georgia’s attorney general possessed the authority to waive the state’s Eleventh Amendment immunity. In light of this ambiguity, the court found, Georgia retained the legal right to assert its immunity, even after removal.
The Supreme Court’s Ruling
The Supreme Court agreed to decide the issue of whether "a state waive[s] its Eleventh Amendment immunity when it removes a case to federal court." In a unanimous decision, the Court reversed the judgment of the Court of Appeals, holding that Georgia’s joinder in removing the case to federal court waived its Eleventh Amendment immunity.
The Court first noted that there is considerable dissension among the lower courts regarding a state’s waiver of sovereign immunity by its litigation conduct. Addressing this inconsistency, the Court noted:
It would seem anomalous or inconsistent for a State both (1) to invoke federal jurisdiction, thereby contending that the "Judicial power of the United States" extends to the case at hand, and (2) to claim Eleventh Amendment immunity, thereby denying that the "Judicial power of the United States" extends to the case at hand. And a Constitution that permitted States to follow both claims in the same case could generate seriously unfair results.
The Court cited examples of judicial holdings in which a state’s voluntary appearance in federal court amounted to a waiver of its Eleventh Amendment immunity. Citing Gardner, the Court specifically noted that, in the context of a bankruptcy case, a state "waives any immunity . . . respecting the adjudication of a claim that it voluntarily files in federal court." The Court stated that it saw "no reason to abandon the general principle" embodied in cases such as Gardner.
The Court rejected Georgia’s contention that its benign motive for removal was of any significance, noting that "[m]otives are difficult to evaluate, while jurisdictional rules should be clear." The Court was also unpersuaded by Georgia’s argument that Georgia state law, while authorizing the attorney general to represent the state in civil actions, did not authorize the attorney general to waive the state’s Eleventh Amendment immunity. Citing Gardner, the Court noted that it "consistently has found a waiver when a State’s attorney general, authorized (as here) to bring a case in federal court, has voluntarily invoked the Court’s jurisdiction." The Court concluded that Gardner and similarly reasoned cases "avoid inconsistency and unfairness" by endorsing a rule of federal law that finds waiver through a state attorney general’s invocation of federal court jurisdiction.
Analysis
While Lapides is not a bankruptcy case, the decision is significant because it resolves at least one controversy. The Supreme Court’s express endorsement of Gardner would appear to put to rest the speculation that Gardner was invalidated by Seminole. Also, the decision thwarts the practice — increasingly common in the bankruptcy court — of having a state official initiate a federal proceeding and subsequently invoking immunity against counterclaims, arguing that the official was empowered only to commence the suit, not to waive sovereign immunity. Perhaps most significantly, the rationale of Lapides extends beyond the limited issue of whether the filing of a proof of claim waives a state’s immunity. The decision appears to address the broader issue of whether any litigation activity engaged in by a state in a bankruptcy proceeding waives sovereign immunity.
Still, Lapides leaves some important questions unanswered. It is still unclear, for example, whether the filing of a proof of claim by a state waives its Eleventh Amendment immunity for all purposes or only with respect to "compulsory" counterclaims, i.e. claims arising out of the same facts or transactions as the state’s proof of claim. As such, deprived of any clear guidance from Congress or the High Court, bankruptcy courts will continue to struggle with 11th Amendment immunity and Bankruptcy Code section 106.
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Lapides v. Board of Regents of the University System of Georgia, 122 S. Ct. 1640 (2002).
Gardner v. New Jersey, 329 U.S. 565 (1947).
Seminole Tribe of Florida v. Florida, 517 U.S. 44 (1996).