Central Virginia Community College v. Katz

546 U.S. 356

Case Year: 2006

Case Ruling: 5-4, Affirmed

Opinion Justice: Stevens

FACTS

The petitioners in this case are four state-run Virginia colleges (Central Virginia Community College, Virginia Military Institute, New River Community College, and Blue Ridge Community College) all of which did business with Wallace Bookstores. In February 2001 Wallace filed for bankruptcy under Chapter 11 of the bankruptcy code, and the bankruptcy court appointed Bernard Katz (the respondent in the case) the liquidating supervisor.

Katz eventually commenced proceedings on behalf of Wallace to recover rent that the bookstores had paid to the schools, as well money for books. On behalf of its four state schools, Virginia attempted to stop the proceedings. Attorneys for the state claimed that the 11th Amendment provides states sovereign immunity against such actions. The bankruptcy court denied Virginia's motions, and a U.S. district court and the Court of Appeals for the Sixth Circuit affirmed its decision on the authority of the Sixth Circuit's prior decision that Congress had abrogated the states' sovereign immunity in bankruptcy proceedings.

 

JUSTICE STEVENS DELIVERED THE OPINION OF THE COURT.

Article I, §8, cl. 4, of the Constitution provides that Congress shall have the power to establish "uniform Laws on the subject of Bankruptcies throughout the United States." In Tennessee Student Assistance Corporation v. Hood (2004), we granted certiorari to determine whether this Clause gives Congress the authority to abrogate States' immunity from private suits. Without reaching that question, we upheld the application of the Bankruptcy Code to proceedings initiated by a debtor against a state agency to determine the dischargeability of a student loan debt. . . .

. . . We granted certiorari to consider the question left open by our opinion in Hood: whether Congress' attempt to abrogate state sovereign immunity in the [Bankruptcy Code], 11 U. S. C. §106(a) is valid. As we shall explain, however, we are persuaded that the enactment of that provision was not necessary to authorize the Bankruptcy Court's jurisdiction over these . . . proceedings. . . .

It is appropriate to presume that the Framers of the Constitution were familiar with the contemporary legal context when they adopted the Bankruptcy Clause--a provision which . . . reflects the States' acquiescence in a grant of congressional power to subordinate to the pressing goal of harmonizing bankruptcy law sovereign immunity defenses that might have been asserted in bankruptcy proceedings. The history of the Bankruptcy Clause, the reasons it was inserted in the Constitution, and the legislation both proposed and enacted under its auspices immediately following ratification of the Constitution demonstrate that it was intended not just as a grant of legislative authority to Congress, but also to authorize limited subordination of state sovereign immunity in the bankruptcy arena. Foremost on the minds of those who adopted the Clause were the intractable problems, not to mention the injustice, created by one State's imprisoning of debtors who had been discharged (from prison and of their debts) in and by another State. To remedy this problem, the very first Congresses considered, and the Sixth Congress enacted, bankruptcy legislation authorizing federal courts to, among other things, issue writs of habeas corpus directed at state officials ordering the release of debtors from state prisons.

We acknowledge that statements in both the majority and the dissenting opinions in Seminole Tribe of Fla. v. Florida (1996), reflected an assumption that the holding in that case would apply to the Bankruptcy Clause. Careful study and reflection have convinced us, however, that that assumption was erroneous. For the reasons stated by Chief Justice Marshall in Cohens v. Virginia (1821), we are not bound to follow our dicta in a prior case in which the point now at issue was not fully debated. . . .

Well into the 18th century, imprisonment for debt was . . . ubiquitous in England and the American Colonies. Bankruptcy and insolvency laws remained as much concerned with ensuring full satisfaction of creditors (and, relatedly, preventing debtors' flight to parts unknown) as with securing new beginnings for debtors. Illustrative of bankruptcy laws' harsh treatment of debtors during this period was that debtors often fared worse than common criminals in prison; unfortunate insolvents, unlike criminals, were forced to provide their own food, fuel, and clothing while behind bars. . . .

Common as imprisonment itself was, the American Colonies, and later the several States, had wildly divergent schemes for discharging debtors and their debts. . . .

The difficulties posed by this patchwork of insolvency and bankruptcy laws were peculiar to the American experience. In England, where there was only one sovereign, a single discharge could protect the debtor from his jailer and his creditors. As two cases--one litigated before the Constitutional Convention in Philadelphia and one litigated after it--demonstrate, however, the uncoordinated actions of multiple sovereigns, each laying claim to the debtor's body and effects according to different rules, rendered impossible so neat a solution on this side of the Atlantic.

In the first case, James v. Allen (1786), Jared Ingersoll, an attorney who a year later would become a delegate to the Philadelphia Convention, represented a Pennsylvania creditor seeking recovery from a debtor who had been released from prison in New Jersey. Shortly after his release, the debtor traveled to Pennsylvania, where he was arrested for nonpayment of the Pennsylvania debt. In seeking release from the Pennsylvania prison, he argued that his debt had been discharged by the New Jersey court. Ingersoll responded that the order granting relief under New Jersey's insolvency laws "only discharged the person of the debtor from arrest within the State of New Jersey." The court agreed: Whatever effect the order might have had in New Jersey, the court said, it "goes no further than to discharge [the debtor] from his imprisonment in the Gaol of Essex County in the State of New Jersey; which, if the fullest obedience were paid to it, could not authorize a subsequent discharge from imprisonment in another Gaol, in another State." The court further observed that "[i]nsolvent laws subsist in every State in the Union, and are probably all different from each other. . . . Even the Bankrupt Laws of England, while we were the subjects of that country, were never supposed to extend here, so as to exempt the persons of the Bankrupts from being arrested." .

In the second case, Millar v. Hall (1788), which was decided the year after the Philadelphia Convention, Ingersoll found himself arguing against the principle announced in James. His client, a debtor named Hall, had been "discharged under an insolvent law of the state of Maryland, which is in the nature of a general bankrupt[cy] law." Prior to his discharge, Hall had incurred a debt to a Pennsylvanian named Millar. Hall neglected to mention that debt in his schedule of creditors presented to the Maryland court, or to personally notify Millar of the looming discharge. Following the Maryland court's order, Hall traveled to Pennsylvania and was promptly arrested for the unpaid debt to Millar.

Responding to Millar's counsel's argument that the holding of James controlled, Ingersoll urged adoption of a rule that "the discharge of the Defendant in one state ought to be sufficient to discharge [a debtor] in every state." Absent such a rule, Ingersoll continued, "perpetual imprisonment must be the lot of every man who fails; and all hope of retrieving his losses by honest and industrious pursuits, will be cut off from the unfortunate bankrupt." The court accepted this argument. Allowing a creditor to execute "upon [a debtor's] person out of the state in which he has been discharged," the court explained, "would be giving a superiority to some creditors, and affording them a double satisfaction--to wit, a proportionable dividend of his property there, and the imprisonment of his person here." Indeed, the debtor having already been obliged to surrender all of his effects, "to permit the taking [of] his person here, would be to attempt to compel him to perform an impossibility, that is, to pay a debt after he has been deprived of every means of payment,--an attempt which would, at least, amount to perpetual imprisonment, unless the benevolence of his friends should interfere to discharge [his] account."

These two cases illustrate the backdrop against which the Bankruptcy Clause was adopted. In both James and Millar, the debtors argued that the earlier discharge should be given preclusive effect pursuant to the Full Faith and Credit Clause of the Articles of Confederation. That possibility was the subject of discussion at the Constitutional Convention when a proposal to encompass legislative Acts, and insolvency laws in particular, within the coverage of the Full Faith and Credit Clause of the Constitution was committed to the Committee of Detail together with a proposal " '[t]o establish uniform laws upon the subject of bankruptcies, and respecting the damages arising on the protest of foreign bills of exchange.' "A few days after this proposal was taken under advisement, the Committee of Detail reported that it had recommended adding the power " '[t]o establish uniform laws upon the subject of bankruptcies' " to the Naturalization Clause of what later became Article I.

The Convention adopted the Committee's recommendation with very little debate two days later. Roger Sherman of Connecticut alone voted against it, apparently because he was concerned that it would authorize Congress to impose upon American citizens the ultimate penalty for debt then in effect in England: death. The absence of extensive debate over the text of the Bankruptcy Clause or its insertion indicates that there was general agreement on the importance of authorizing a uniform federal response to the problems presented in cases like James and Millar.

Bankruptcy jurisdiction, as understood today and at the time of the framing, is principally in rem jurisdiction. In bankruptcy, “the court’s jurisdiction is premised on the debtor and his estate, and not on the creditors.” Hood. As such, its exercise does not, in the usual case, interfere with state sovereignty even when States' interests are affected.

The text of Article I, §8, cl. 4, of the Constitution, however, provides that Congress shall have the power to establish "uniform Laws on the subject of Bankruptcies throughout the United States." Although the interest in avoiding unjust imprisonment for debt and making federal discharges in bankruptcy enforceable in every State was a primary motivation for the adoption of that provision, its coverage encompasses the entire "subject of Bankruptcies." The power granted to Congress by that Clause is a unitary concept rather than an amalgam of discrete segments. . . .

[T]he States agreed in the plan of the Convention not to assert that immunity. So much is evidenced not only by the history of the Bankruptcy Clause, which shows that the Framers' primary goal was to prevent competing sovereigns' interference with the debtor's discharge but also by legislation considered and enacted in the immediate wake of the Constitution's ratification.

Congress considered proposed legislation establishing uniform federal bankruptcy laws in the first and each succeeding Congress until 1800, when the first Bankruptcy Act was passed. The Bankruptcy Act of 1800 was in many respects a copy of the English bankruptcy statute then in force. It was, like the English law, chiefly a measure designed to benefit creditors. . . .

The American legislation differed slightly from the English, however. That difference reflects both the uniqueness of a system involving multiple sovereigns and the concerns that lay at the core of the Bankruptcy Clause itself. The English statute gave a judge sitting on a court where the debtor had obtained his discharge the power to order a sheriff, "Bailiff or Officer, Gaoler or Keeper of any Prison" to release the "Bankrupt out of Custody" if he were arrested subsequent to the discharge. The American version of this provision was worded differently; it specifically granted federal courts the authority to issue writs of habeas corpus effective to release debtors from state prisons.

This grant of habeas power is remarkable not least because it would be another 67 years, after ratification of the Fourteenth Amendment, before the writ would be made generally available to state prisoners. Moreover, the provision of the 1800 Act granting that power was considered and adopted during a period when state sovereign immunity could hardly have been more prominent among the Nation's concerns. Chisholm v. Georgia, the case that had so "shock[ed]" the country in its lack of regard for state sovereign immunity was decided in 1793. The ensuing five years that culminated in adoption of the Eleventh Amendment were rife with discussion of States' sovereignty and their amenability to suit. Yet there appears to be no record of any objection to the bankruptcy legislation or its grant of habeas power to federal courts based on an infringement of sovereign immunity.

This history strongly supports the view that the Bankruptcy Clause of Article I, the source of Congress' authority to effect this intrusion upon state sovereignty, simply did not contravene the norms this Court has understood the Eleventh Amendment to exemplify. Petitioners, ignoring this history, contend that nothing in the words of the Bankruptcy Clause evinces an intent on the part of the Framers to alter the "background principle" of state sovereign immunity. Seminole Tribe of Fla. Specifically, they deny that the word "uniform" in the Clause implies anything about pre-existing immunities or Congress' power to interfere with those immunities. Whatever the merits of petitioners' argument, it misses the point; text aside, the Framers, in adopting the Bankruptcy Clause, plainly intended to give Congress the power to redress the rampant injustice resulting from States' refusal to respect one another's discharge orders. As demonstrated by the First Congress' immediate consideration and the Sixth Congress' enactment of a provision granting federal courts the authority to release debtors from state prisons, the power to enact bankruptcy legislation was understood to carry with it the power to subordinate state sovereignty, albeit within a limited sphere.

The ineluctable conclusion, then, is that States agreed in the plan of the Convention not to assert any sovereign immunity defense they might have had in proceedings brought pursuant to "Laws on the subject of Bankruptcies." . . . In ratifying the Bankruptcy Clause, the States acquiesced in a subordination of whatever sovereign immunity they might otherwise have asserted in proceedings necessary to effectuate the in rem jurisdiction of the bankruptcy courts.

Neither our decision in Hood, which held that States could not assert sovereign immunity as a defense in adversary proceedings brought to adjudicate the dischargeability of student loans, nor the cases upon which it relied, rested on any statement Congress had made on the subject of state sovereign immunity. Nor does our decision today. The relevant question is not whether Congress has "abrogated" States' immunity in proceedings to recover preferential transfers. The question, rather, is whether Congress' determination that States should be amenable to such proceedings is within the scope of its power to enact "Laws on the subject of Bankruptcies." We think it beyond peradventure that it is.

Congress may, at its option, either treat States in the same way as other creditors insofar as concerns "Laws on the subject of Bankruptcies" or exempt them from operation of such laws. Its power to do so arises from the Bankruptcy Clause itself; the relevant "abrogation" is the one effected in the plan of the Convention, not by statute.

The judgment of the Court of Appeals for the Sixth Circuit is affirmed.

JUSTICE THOMAS, WITH WHOM 

THE CHIEF JUSTICE SCALIA, AND JUSTICE KENNEDY JOIN, DISSENTING.

Under our Constitution, the States are not subject to suit by private parties for monetary relief absent their consent or a valid congressional abrogation, and it is "settled doctrine" that nothing in Article I of the Constitution establishes those preconditions. Alden v. Maine (1999). Yet the majority today casts aside these long-established principles to hold that the States are subject to suit by a rather unlikely class of individuals--bankruptcy trustees seeking recovery of preferential transfers for a bankrupt debtor's estate. This conclusion cannot be justified by the text, structure, or history of our Constitution. In addition, today's ruling is . . . impossible to square with this Court's settled state sovereign immunity jurisprudence. . . .

The majority maintains that the States' consent to suit can be ascertained from the history of the Bankruptcy Clause. But history confirms that the adoption of the Constitution merely established federal power to legislate in the area of bankruptcy law, and did not manifest an additional intention to waive the States' sovereign immunity against suit. Accordingly, I respectfully dissent. . . .

The majority finds a surrender of the States' immunity from suit in Article I of the Constitution, which authorizes Congress "[t]o establish . . . uniform Laws on the subject of Bankruptcies throughout the United States." But nothing in the text of the Bankruptcy Clause suggests an abrogation or limitation of the States' sovereign immunity. Indeed, as this Court has noted on numerous occasions, "[t]he Eleventh Amendment restricts the judicial power under Article III, and Article I cannot be used to circumvent the constitutional limitations placed upon federal jurisdiction." Seminole Tribe. "[I]t is settled doctrine that neither substantive federal law nor attempted congressional abrogation under Article I bars a State from raising a constitutional defense of sovereign immunity in federal court." Alden. See also Kimel v. Florida Bd. of Regents, (2000); Board of Trustees of Univ. of Ala. v. Garrett (2001). And we have specifically applied this "settled doctrine" to bar abrogation of state sovereign immunity under various clauses within §8 of Article I.

It is difficult to discern an intention to abrogate state sovereign immunity through the Bankruptcy Clause when no such intention has been found in any of the other clauses in Article I. Indeed, our cases are replete with acknowledgments that there is nothing special about the Bankruptcy Clause in this regard. Today's decision thus cannot be reconciled with our established sovereign immunity jurisprudence, which the majority does not purport to overturn.

The majority supports its break from precedent by relying on historical evidence that purportedly reveals the Framers' intent to eliminate state sovereign immunity in bankruptcy proceedings. The Framers undoubtedly wanted to give Congress the authority to enact a national law of bankruptcy, as the text of the Bankruptcy Clause confirms. But the majority goes further, contending that the Framers found it intolerable that bankruptcy laws could vary from State to State, and demanded the enactment of a single, uniform national body of bankruptcy law. The majority then concludes that, to achieve a uniform national bankruptcy law, the Framers must have intended to waive the States' sovereign immunity against suit. Both claims are unwarranted.

. . . [T]he abrogation of state sovereign immunity from suit [is not] necessary to the enactment of nationally uniform bankruptcy laws. The sovereign immunity of the States against suit does not undermine the objective of a uniform national law of bankruptcy, any more than does any differential treatment between different categories of creditors.

The majority also greatly exaggerates the depth of the Framers' fervor to enact a national bankruptcy regime. The idea of authorizing Congress to enact a nationally uniform bankruptcy law did not arise until late in the Constitutional Convention, which began in earnest on May 25, 1787. The Convention charged the Committee of Detail with putting forth a comprehensive draft Constitution, which it did on August 6. Yet the Convention did not consider the language that eventually became the Bankruptcy Clause until September 1, and it adopted the provision with little debate two days later. Under the majority's analysis, which emphasizes the Framers' zeal to enact a national law of bankruptcy, this timing is difficult to explain.

The majority's premise fares even worse in explaining the postratification period. The majority correctly notes that the practice of the early Congresses can provide valuable insight into the Framers' understanding of the Constitution. But early practice undermines, rather than supports, the majority's theory. "For over a century after the Constitution, . . . the Bankruptcy Clause [authority] remained largely unexercised by Congress. . . . Thus, states were free to act in bankruptcy matters for all but 16 of the first 109 years after the Constitution was ratified." And when Congress did act, it did so only in response to a major financial disaster, and it repealed the legislation in each instance shortly thereafter. It was not until 1898, well over a century after the adoption of the Bankruptcy Clause, that Congress adopted the first permanent national bankruptcy law.

The historical record thus refutes, rather than supports, the majority's premise that the Framers placed paramount importance on the enactment of a nationally uniform bankruptcy law. In reality, for most of the first century of our Nation's history, the country survived without such a law, relying instead on the laws of the several States. . . .

It would be one thing if the majority simply wanted to overrule Seminole Tribe altogether. That would be wrong, but at least the terms of our disagreement would be transparent. The majority's action today, by contrast, is difficult to comprehend. Nothing in the text, structure, or history of the Constitution indicates that the Bankruptcy Clause, in contrast to all of the other provisions of Article I, manifests the States' consent to be sued by private citizens.

I respectfully dissent.