States Rights and the Bankruptcy Code
Brown v. Allen, 344 U.S. 443, 540 (1953) (Jackson, concurring).
The fallibility of the U.S. Supreme Court, which was so candidly acknowledged by one of its most prominent members half a century ago, is evident today in a line of its federalism cases. Beginning in 1996, the U.S. Supreme Court's Eleventh Amendment jurisprudence has essentially closed the courthouse door to persons who may have a cause of action against a state under a variety of federal laws, unless the state specifically consents to be sued. The Court has held that Congress lacks the general power to make the states accountable in court for violating federal laws under some of its Article I powers, even while recognizing that Congress may, in some cases, abrogate this immunity under §5 of the Fourteenth Amendment. The Rehnquist Court is essentially breathing new life into "state rights" doctrines that were rejected long ago.
Five U.S. Courts of Appeals first broadly applied Seminole Tribe and its progeny in a bankruptcy context and held that Congress is powerless to eliminate state sovereign immunity in bankruptcy.2 The sixth court to do so, the U.S. Court of Appeals for the Sixth Circuit applied a more detailed analysis and held that the founding fathers fully intended to grant Congress the authority to create a uniform system of bankruptcy laws applicable to the states. This article argues that the reasoning of the Sixth Circuit is legally and historically sound, and should be adopted as the rule of law by other federal courts.
The U.S. Supreme Court's 1996 decision in Seminole Tribe of Florida v. Florida held "for the first time since the founding of the Republic that Congress has no authority to subject a state to the jurisdiction of a federal court at the behest of an individual asserting a federal right." The Seminole Tribe case involved a controversy over the Indian Gaming Regulatory Act, passed by Congress pursuant to the Indian Commerce Clause of Article I. The Gaming Act allowed an Indian tribe to conduct specific gaming activities only if it had a valid compact with the state in which the gaming activities were located. Under the Gaming Act, each state had a duty to engage in good-faith negotiations with tribes residing within its borders to form a compact. If a state failed to do so, tribes were allowed to sue the state in federal court to compel performance of the duty to negotiate.
The state of Florida was sued in federal court by the Seminole tribe for violating the good-faith negotiation clause. Florida and its governor moved to dismiss the complaint on the ground that the suit violated Florida's sovereign immunity from suit in federal courts. The district court denied the motion, but the appeals court reversed, holding that Congress did not have the power under the Article I Indian Commerce Clause to abrogate the states' Eleventh Amendment immunity. By a 5-4 vote, the U.S. Supreme Court affirmed.
In dissent, Justice Stevens warned that the "majority's opinion does not simply preclude Congress from establishing the rather curious statutory scheme under which Indian tribes may seek the aid of a federal court to secure a state's good-faith negotiations over gaming regulations. Rather, it prevents Congress from providing a federal forum for a broad range of actions against states from those sounding in copyright and patent law to those concerning bankruptcy, environmental law and the regulation of our vast national economy." The concerns raised by Justice Stevens were well-founded, as noted above, as a lower court applied Seminole Tribe to prevent the state from being forced to participate in the bankruptcy process against its will.
Chief Justice Rehnquist's response, set forth in footnote 16 to the majority decision, essentially agreed with the conclusion that the decision would adversely affect the ability of debtors to bring a state into bankruptcy court. Without discussing the language of §106 of the Bankruptcy Code and a number of decisions from the lower courts, Chief Justice Rehnquist advised that "it has not been widely thought that the federal antitrust, bankruptcy or copyright statutes abrogated the states' sovereign immunity." The Chief Justice was simply wrong, given the text of §106 of the Bankruptcy Code, which specifically abrogates the very sovereign immunity he says was not abrogated by the bankruptcy laws.
The Bankruptcy Clause and º106
Article I of the Constitution gives Congress the power to pass laws to "establish...uniform laws on the subject of bankruptcies throughout the United States." Thus, the text of the bankruptcy clause contains a uniformity requirement generally not found elsewhere in the litany of powers given to the legislative branch. Beginning in 1800, Congress has exercised its bankruptcy power to create five successive systems of bankruptcy laws—the Bankruptcy Act of 1800,3 the Bankruptcy Act of 1841,4 the Bankruptcy Act of 1867,5 the Bankruptcy Act of 18986 and the Bankruptcy Reform Act of 1978, which created the current Bankruptcy Code.
In the Bankruptcy Reform Act of 1978 and subsequent amendments, Congress promulgated §106 of the Code, which unequivocally attempted to eliminate, in many contexts, the sovereign immunity to which the federal and state governments might otherwise be entitled. 11 U.S.C. §106. In full, §106 reads as follows:
(a) Notwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to the following:While the text of §106 leaves no doubt that Congress intended to abrogate the sovereign immunity of government units in a variety of contexts, the Seminole Tribe line of authorities calls into question the legitimacy of Congress's power to do so. However, a careful review of constitutional history, such as that recently employed by the Sixth Circuit in In re Hood (Hood v. Tennessee Student Assistance Corp.),7 clearly establishes that Congress had full authority under its bankruptcy power to eliminate state sovereign immunity in bankruptcy cases.(1) Sections 105, 106, 107, 108, 303, 346, 362, 363, 364, 365, 366, 502, 503, 505, 506, 510, 522, 523, 524, 525, 542, 543, 544, 545, 546, 547, 548, 549, 550, 551, 552, 553, 722, 724, 726, 728, 744, 749, 764, 901, 922, 926, 928, 929, 944, 1107, 1141, 1142, 1143, 1146, 1201, 1203, 1205, 1206, 1227, 1231, 1301, 1303, 1305 and 1327 of this title.
(2) The court may hear and determine any issue arising with respect to the application of such sections to governmental units.
(3) The court may issue against a governmental unit an order, process or judgment under such sections or the Federal Rules of Bankruptcy Procedure, including an order or judgment awarding a money recovery, but not including an award of punitive damages. Such an order or judgment for costs or fees under this title or the Federal Rules of Bankruptcy procedure against any governmental unit shall be consistent with the provisions and limitations of §2412(d)(2)(A) of Title 28.
(4) The enforcement of any such order, process or judgment against any governmental unit shall be consistent with appropriate non-bankruptcy law applicable to such governmental unit and, in the case of a money judgment against the United States, shall be paid as if it is a judgment rendered by a district court of the United States.
(5) Nothing in this section shall create any substantive claim for relief or cause of action not otherwise existing under this title, the Federal Rules of Bankruptcy Procedure or non-bankruptcy law.
(b) A governmental unit 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.
(c) Notwithstanding any assertion of sovereign immunity by a governmental unit, there shall be offset against a claim or interest of a governmental unit any claim against such governmental unit that is property of the estate.
In re Hood
In In re Hood, the Tennessee Student Assistance Corporation (TSAC) appealed from a Bankruptcy Appellate Panel's decision denying its motion to dismiss a debtor's petition for a hardship discharge of her student loan for lack of jurisdiction. On appeal, TSAC argued that the Constitution's Bankruptcy Clause, Art. I, §8, did not give Congress the power to abrogate states' sovereign immunity pursuant to 11 U.S.C. §106(a). Rather than rejecting or distinguishing the Supreme Court's Seminole Tribe reasoning, the Sixth Circuit embraced it. Applying Seminole Tribe, the Hood Court nevertheless concluded that the bankruptcy clause of the Constitution bestowed upon Congress the power to abrogate states' sovereign immunity.
The Hood Court began its analysis by recounting the parameters of the Eleventh Amendment, which provides:
The judicial 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.U.S. Const. Amend. XI. The text of the Eleventh Amendment, and the manner in which it has been interpreted, extend its scope to preclude not only suits against a state by a citizen of another, but also bars federal jurisdiction to suits against a state by its own citizens.8 As a result, a private lawsuit against a state may be heard in federal court "only if the state waives its sovereign immunity or if Congress, acting pursuant to a valid constitutional authority, abrogates the state's sovereign immunity."
The Sixth Circuit noted that the question of whether Congress may validly abrogate state sovereign immunity requires a two-step analysis, as set forth in a series of cases that began with Seminole Tribe and extended to Alden v. Maine,9 wherein the Supreme Court extended Seminole Tribe to limit Congress's powers with respect to suits in state court as well. The first step in the Seminole Tribe analysis is to examine whether Congress adequately expressed its intent to abrogate the states' immunity from suit. Section 106 of the Bankruptcy Code specifically abrogates the states' immunity. Thus, the Sixth Circuit focused largely on the second step in the Seminole Tribe analysis, namely a historical inquiry into whether the framers of the Constitution intended to bestow upon Congress the power to bring the states into federal court, by looking at The Federalist Papers and other statements of the framers. Rather than simply basing its decision on Seminole Tribe's broad language prohibiting Congress from abrogating state sovereign immunity pursuant to its Article I powers, the Hood Court examined Congress's bankruptcy clause power as understood in the Constitutional Convention.
The Hood Court was careful to note that its analysis was not based in any way on the text of the Eleventh Amendment, because "immunity from suit is a fundamental aspect of the sovereignty which the states enjoyed before the ratification of the Constitution, and which they retain today...except as altered by the plan of the Convention or certain constitutional amendments."10 The Eleventh Amendment "sought only to restore, not change, the structure established at the Convention that was apparently distorted by the Supreme Court's decision in Chisholm v. Georgia"11 in 1793.
Turning to the text of the Bankruptcy Clause, the Hood Court observed that the states' grant to the federal government of power to make uniform laws on the subject of bankruptcy is, "at least to some extent, inconsistent with states retaining the power to make laws over that issue." The difference between the bankruptcy clause and other powers bestowed on the federal government is the uniformity language:
The peculiar terms of the grant certainly deserve notice. Congress is not authorized merely to pass laws, the operation of which shall be uniform, but to establish uniform laws on the subject throughout the United States. This establishment of uniformity is, perhaps, incompatible with state legislation, on that part of the subject to which the acts of Congress may extend.12
While the Supreme Court has limited the ability of Congress to abrogate state sovereign immunity as part of a legislative preference for uniformity,13 the Hood Court observed that the question before it was "whether a constitutional uniformity requirement itself authorizes Congress to abrogate state sovereign immunity." The answer to that inquiry could only be found by examining the views of the framers of the Constitution.
Alexander Hamilton, a delegate to the Constitutional Convention from New York and, with John Jay and James Madison, one of the authors of the Federalist Papers, which advocated for the ratification of the proposed constitution, stated that the federal government had "exclusive jurisdiction" where the Constitution granted Congress the power to make uniform laws. "This must necessarily be exclusive, because if each state had power to prescribe a DISTINCT RULE, there could be no UNIFORM RULE." The Federalist No. 32 at 155 (Alexander Hamilton) (George W. Carey & James McClellan, eds., 2001). The earliest federal cases similarly interpreted the grant of power as exclusive, noting that laws could be uniform only if a single agent were issuing them.14 The authority had to be exclusive, because any lesser grant would have defeated the bankruptcy clause's original purpose.
Prior to 1789, debtor-creditor relations in the new nation were chaotic. Each state had different bankruptcy laws, and no state had to give effect to the consequence of a bankruptcy in another jurisdiction. This systemic failure did not allow debtors a fresh start that bankruptcy policies seek. The justification for the grant of exclusivity was to create a system that "rose above individual states' interests."
The Hood Court next examined whether, "in ceding some sovereignty with the bankruptcy clause, the states ceded their legislative powers, but not their immunity, from suit." Turning again to The Federalist, the Hood Court concluded that the states discarded their immunity from suit along with their power to legislate when they consented to the bankruptcy clause's uniformity provision.
The Sixth Circuit based its conclusion in part on Federalist No. 81, in which Hamilton discussed sovereign immunity as follows:
It is inherent in the nature of sovereignty not to be amenable to the suit of an individual without its consent. This is the general sense, and the general practice of mankind, and the exemption, as one of the attributes of sovereignty, is now enjoyed by the government of every state in the union. Unless, therefore, there is a surrender of this immunity in the plan of the convention, it will remain with the states, and the danger intimated must be merely ideal. The circumstances which are necessary to produce an alienation of state sovereignty were discussed in considering the article of taxation, and need not be repeated here.The Federalist No. 81, at 422 (Alexander Hamilton).
The article on taxation, to which Hamilton refers as identifying the situations in which states can be said to "alienat[e]" their sovereignty, is Federalist No. 32, which states:
[A]s the plan of the convention aims only at a partial union or consolidation, the state governments would clearly retain all the rights of sovereignty which they before had, and which were not, by that act, exclusively delegated to the United States. This exclusive delegation, or rather this alienation of state sovereignty, would only exist in three cases: where the constitution in express terms granted an exclusive authority to the union; where it granted, in one instance, an authority to the union, and in another, prohibited the states from exercising the like authority; and where it granted an authority to the union, to which a similar authority in the states would be absolutely and totally contradictory and repugnant.15The Hood Court determined that "Hamilton's identification of the uniform powers as examples of categories in which states have ceded sovereignty includes the ceding of immunity from suit." When read together, Federalist No. 81 and No. 32 suggest that the states ceded their immunity by granting Congress the power to make uniform laws. The Hood Court could find no conclusive evidence in the ratification debates to contradict its conclusion.
As a consequence of its statutory, constitutional and historical analysis, the Hood Court concluded that §106 is constitutional, and allowed the debtor to proceed with her hardship discharge action. Its impact, however, is more far-reaching. Hood stands for the proposition that constitutional questions call for a careful historical analysis, not simplistic application of prior precedent. Its analysis of the original intent of the bankruptcy clause is illuminating and well-reasoned, and should be adopted as a method of analysis by other courts.
Other Historical Support for the Hood Decision
States' rights advocates may, however, critique the Hood decision as not delving deep enough into constitutional history. Further analysis of this type does not contradict the conclusion reached by the Hood Court, but rather strongly supports its holding.
The subject of bankruptcy law was only briefly discussed during the Constitutional Convention of 1787. Neither the "Virginia Plan" for a new constitution offered by Edmund Randolph16 nor the "South Carolina Plan" submitted by Charles Pinkney,17 which were both shared with the Convention on May 29, 1787, contain any recommendations to the effect that the federal government should be given the power to legislate in the area of bankruptcy. As the delegates discussed the various problems facing the American people in the aftermath of the costly War for Independence, it soon became clear that debt-relief laws of a national character were needed to ensure that domestic and foreign creditors, whose funds were sorely needed to bolster interstate commerce, would be able to obtain a fair repayment from insolvent debtors free from the difficulties associated with having to attempt collection under the diverse laws of 13 different states.
On Aug. 29, 1787, Pinkney suggested that a proposition "to establish uniform laws upon the subject of bankruptcies, and respecting the damages arising on the protest of foreign bills of exchange" be added to the new Constitution.18 The suggestion was sent to a subcommittee,19 which issued a favorable report on the recommendation just three days later.20 The proposed bankruptcy clause was briefly debated by the Convention on Monday, Sept. 3, 1878.21
Few delegates opposed the idea of granting Congress the power to enact bankruptcy laws. Those who were critical of the idea were concerned with the nature of the power involved and not necessarily of making bankruptcy a federal concern. For example, Roger Sherman of Connecticut "observed that bankruptcies were in some cases punishable with death by the laws of England [and] he did not [choose] to grant a power by which that might be done in the United States."22 In reply, Governor Morris of Pennsylvania agreed that bankruptcy "was an extensive [and] delicate subject. [However, he said he would agree to the proposal] because he saw no danger of abuse of the power by the Legislature of the [United States]."23 With no more debate, the Convention approved the bankruptcy clause by an overwhelming majority.24
No one at the Convention mentioned the idea that states holding claims against the estate of a bankrupt would not be subject to any uniform system of bankruptcy created by Congress.
James Madison, the father of the U.S. Constitution and a great champion of states' rights, did not see the need to discuss the subject of state sovereign immunity when defending the propriety of the bankruptcy clause during the ratification debates. In Federalist No. 41, Madison argued that uniform laws on the subject of bankruptcies was among those laws "which provide for the harmony and proper intercourse among the states." The Federalist, No. 41 at 282 (Madison) (Wesleyan University Press, 1961) (Jacob E. Cooke, ed.). Madison added that the "power of establishing uniform laws of bankruptcy is so intimately connected with the regulation of commerce, and will prevent so many frauds where the parties of their property may lie or be removed into different states, that the expedient of it seems not likely to be drawn into question."25
Few voices were raised in opposition to the bankruptcy clause. The only widely read Anti-Federalist who discussed the subject at length, "the Federal Farmer," could not seem to make up his mind as to whether he was for or against allowing Congress to exercise the bankruptcy power.
In some letters, The Federal Farmer seemed to say that he saw no problem in letting the federal government have the power to enact bankruptcy laws.26 The Federal Farmer explained:
I am not sufficiently acquainted with the laws and internal police of all the states to discern fully how general bankrupt laws, made by the union, would affect them, or promote the public good. I believe the property of debtors, in the several states, is held responsible for their debts in modes and forms very different. If uniform bankrupt laws can be made without producing real and substantial inconveniences, I wish them to be made by Congress.27
In a letter written on Jan. 25, 1788, some three months later, the Farmer took direct aim at the bankruptcy clause and let both barrels fly:
[I]t does not appear to me, on further reflection, that the union ought to have the power, it does not appear to me to be a power properly incidental to a federal head, and, I believe, no one ever possessed it; it is a power that will immediately and extensively interfere with the internal police of the separate states, especially with their administering justice among their citizens. By giving this power to the union, we greatly expend the jurisdiction of the federal judiciary, as all questions arising on bankrupt laws, being laws of the union, even between citizens of the same state, may be tried in the federal courts; and I think it may be shown that by the help of these laws, actions between citizens of different states, and the laws of the federal city, aided by no overstrained judicial fictions, almost all civil causes may be drawn into those courts.28
The arguments made by the Federal Farmer illustrate that even opponents of the proposed U.S. Constitution realized that the bankruptcy clause would give the federal government the power to interfere with "internal police of the separate states," such as by subjecting them to the bankruptcy laws.
While many (including the author) believe that Seminole Tribe and the precedent applying it were wrongly-decided, they remain the law of the land. The Sixth Circuit's decision In re Hood, however, demonstrates that Seminole Tribe is not the end of the inquiry into whether Congress has the power to abrogate a state's sovereign immunity, but merely provides a framework to analyze such questions from a statutory and historical perspective. The Hood Court's conclusion that §106 and the bankruptcy clause provide Congress with sufficient power to abrogate state sovereign immunity stands as a landmark decision, built on a firm historical foundation, and should, itself, be adopted as the law of the land.
1 Assistant U.S. Attorney, Southern District of Iowa; J.D. (1989) Washington University; M.A. (1986 - Sociology) and B.A. (1984 - Journalism) Eastern Illinois University; former law clerk (1989-91) to the late Hon. Frank W. Koger, U.S. Bankruptcy Judge, W.D. Mo. The views expressed in this article are solely those of the author and should not be attributed to the U.S. Department of Justice, the U.S. Attorney for the Southern District of Iowa or any other person or entity associated with him. This article is written with thanks to SPO and AHK for their help with my "attention" project. Return to article
2 See Nelson v. La Crosse County Dist. Attorney (In re Nelson), 301 F.3d 820, 832 (7th Cir. 2002); Mitchell v. Franchise Tax Bd. (In re Mitchell), 209 F.3d 1111, 1121 (9th Cir. 2000); Sacred Heart Hosp. of Norristown v. Pennsylvania (In re Sacred Heart Hosp. of Norristown), 133 F.3d 237, 243 (3d Cir. 1998); Fernandez v. PNL Asset Mgmt. Co. LLC (In re Fernandez), 123 F.3d 241, 243 (5th Cir.), amended by 130 F.3d 1138, 1139 (5th Cir. 1997); Schlossberg v. Maryland (In re Creative Goldsmiths of Washington, D.C.), 119 F.3d 1140, 1145-46 (4th Cir. 1997). Return to article
14 "That the exercise of the power to pass bankrupt and naturalization laws by the state governments is incompatible with the grant of a power to congress to pass uniform laws on the same subjects, is obvious, from the consideration that the former would be dissimilar and frequently contradictory; whereas the systems are directed to be uniform, which can only be rendered so by the exclusive power in one body to form them." Golden v. Prince, 10 F. Cas. 542, 545 (C. C.D. Pa. 1814) (B. Washington, Circuit Justice). Return to article
16 I Madison, The Journal of the Debates in the Convention Which Framed the Constitution of the United States, May-September 1787 at 13-19 ((Hunt, ed.) (1908). The Virginia Plan, which was primarily written by James Madison, is often referred to as the "Large States' Plan." Return to article
17 I Madison at 19-31. The South Carolina Plan is also known as the "Small States Plan." The proposal for a new constitution offered by Alexander Hamilton would have implicitly given Congress the power to enact bankruptcy laws if it deemed them necessary. Article VII of the Hamilton Plan suggested that "[t]he Legislature of the United States shall have power to pass all laws which they shall judge necessary to the common defence and general welfare of the Union." Id. at 172. Return to article
24 Nine states voted for the clause (New Hampshire, Massachusetts, New Jersey, Pennsylvania, Maryland, Virginia, North Carolina, South Carolina and Georgia). Only Connecticut voted against it. Id. at 294. Return to article