INTERACTION OF BANKRUPTCY CODE WITH STATE SOVEREIGN IMMUNITY - Michael D. Sabbath Interim Dean and Walter Homer Drake Professor of Law Mercer ...
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INTERACTION OF BANKRUPTCY CODE
WITH STATE SOVEREIGN IMMUNITY
Michael D. Sabbath
Interim Dean and Walter Homer Drake Professor of Law
Mercer University School of Law
Macon, Georgia
342035.1INTERACTION OF BANKRUPTCY CODE
WITH STATE SOVEREIGN IMMUNITY
Michael D. Sabbath
Interim Dean and Walter Homer Drake Professor of Law
Mercer University School of Law
Macon, Georgia
TABLE OF CONTENTS
Page
Introduction ............................................................................................................................ 1
Congress’ Ability to Abrogate Immunity ............................................................................ 3
Judicial Response to Seminole Tribe ................................................................................... 10
Abrogation Post-Seminole Tribe ............................................................................. 12
The “Not a Suit” Theory .......................................................................................... 19
State Waiver of Sovereign Immunity .................................................................................. 26
Constructive Waiver ................................................................................................. 26
Waiver by Litigation Conduct ................................................................................. 28
Scope of Waiver ......................................................................................................... 31
Proof of Claim and Dischargeability Immunity ..................................................... 33
342035.1I. INTRODUCTION
The doctrine of sovereign immunity derives from the ancient maxim “the King can do no
wrong.” See Seminole Tribe v. Florida, 517 U.S. 44, 103, n.2 (1996) (Souter, J., dissenting). In
its basic form, this principle holds that “the sovereign cannot be sued in his own courts without
his consent,” and it has historically been justified on two grounds: (1) to avoid the indignity of
subjecting a state to the coercive process of federal judicial tribunals at the instance of private
parties, and (2) to prevent a federal court from entering a private judgment that a state must pay
from its treasury. See generally Sender, The Constitutionality of Section 106: A Historical
Solution to a Modern Debate, 18 BANKR. DEV. J.131, 136 (2001).
The issue of state sovereign immunity predated the Constitution; it arose during debates
over the Constitution’s ratification. Opponents of ratification expressed concern that the
provision in Article III for federal jurisdiction over suits between a State and the Citizens of
another State would apply just as much to suits where a state is a defendant as to suits where a
state is the plaintiff. In particular, it appeared to permit suits against states upon their debts.
Those favoring ratification assured these opponents that the Constitution was not intended to
permit suits against states for the payment of debts. See, e.g., The Federalist No, 81, at 487-488
(Alexander Hamilton) (“It is inherent in the nature of sovereignty not to be amenable to the suit
of an individual without its consent . . . . [t]here is no color to pretend that the State governments
would . . . be divested of the privilege of paying their own debts in their own way, free from any
restraint but that which flows from the obligations of good faith.”).
1Nevertheless, shortly after the Constitution’s adoption, the Supreme Court, relying in part
on the plain language in Article III, concluded that a citizen of South Carolina could bring suit
against the state of Georgia in federal court to recover money owed for military goods that he
had provided to the State. See Chisholm v. Georgia, 2 U.S. (2 Dall.) 419 (1793). The Chisholm
decision created such significant public and political opposition that Congress proposed and the
states quickly ratified 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.
The text of the Eleventh Amendment would appear to restrict only Article III diversity
jurisdiction of federal courts. But in 1890, the Supreme Court expanded the scope of the
Eleventh Amendment by holding that a state’s sovereign immunity applies to suits based on
federal question jurisdiction filed by one of the state’s own citizens. See Hans v. Louisiana, 134
U.S. 1 (1890). While recognizing that the express terms of the Eleventh Amendment only
explicitly address suits against a state by citizens of another sovereign, the Court concluded that,
because sovereign immunity is central to federalism, forcing a state to answer to citizens in court
against its will would contravene the “established order of things.” See 134 U.S. at 14. The
Court also reasoned that it would be illogical to preclude suits by nonresidents while allowing
such action by a state’s own citizens. See 134 U.S. at 14-15.
2Since its decision in Hans v. Louisiana, the Court has ignored the limiting language of
the Eleventh Amendment and has concluded that it bars private suits against states regardless of
whether the cause of action is based on state or federal law and regardless of whether the
plaintiff is a citizen of the defendant state. See, e.g., Edelman v. Jordan, 415 U.S. 651, 662-63
(1974); Duhne v. New Jersey, 251 U.S. 311, 314 (1920). The Court has stated that the Eleventh
Amendment is but an exemplification of a larger principle of state sovereign immunity; because
this principle does not derive from the Eleventh Amendment, it is not limited by its text. See Ex
parte New York, 256 U.S. 490, 497 (1921). As Justice Kennedy explained in Alden v. Maine,
527 U.S. 706, 713 (1999)
We have . . . sometimes referred to the States’ immunity from suit as ‘Eleventh
Amendment’ immunity. The phrase is convenient shorthand but something of a
misnomer, for the sovereign immunity of the States neither derives from, nor is
limited by, the terms of the Eleventh Amendment.
II. CONGRESS’ ABILITY TO ABROGATE THE STATES’ SOVEREIGN IMMUNITY
Prior to 1996, it appeared that Congress had two potential ways to abrogate state
sovereign immunity. One way involved Congress passing legislation pursuant to the Fourteenth
Amendment. Section 1 of the Fourteenth Amendment provides:
All persons born or naturalized in the United States and subject to the jurisdiction
3thereof, are citizens of the United States and of the State wherein they reside. No
State shall make or enforce any law which shall abridge the privileges or
immunities of citizens of the United States, nor shall any State deprive any person
of life, liberty, or property, without due process of law; nor deny to any person
within its jurisdiction the equal protection of the laws.
Section 5 of the Fourteenth Amendment provides: “The Congress shall have the power to
enforce by appropriate legislation, the provisions of this article.” The Supreme Court has
recognized that Section 5 “is a positive grant of legislative power authorizing Congress to
exercise its discretion in determining whether and what legislation is needed to secure the
guarantees of the Fourteenth Amendment.” See Katzenbach v. Morgan, 384 U.S. 641, 651
(1966).
In Fitzpatrick v. Bitzer, 427 U.S. 445 (1976), the Court reasoned that the Fourteenth
Amendment fundamentally alters the federalist constitutional scheme by expanding federal
power at the expense of state autonomy. See 427 U.S. at 455. It held that a state’s employees
may sue the state under Title VII of the Civil Rights Act of 1964. The Court concluded that
Congress’ power under Section 5 of the Fourteenth Amendment to enforce the provisions of the
amendment by appropriate legislation permits Congress to override the states’ sovereign
immunity. See 427 U.S. at 456. Thus Congress, in exercising its Fourteenth Amendment
powers, could provide for suits against states that would be constitutionally impermissible in
other contexts.
4Fitzpatrick did not consider whether Congress could abrogate the states’ sovereign
immunity through legislation passed pursuant to its Article 1 powers. A deeply fractured
plurality in Pennsylvania v. Union Gas Co., 491 U.S. 1 (1989) concluded that Congress could
abrogate state sovereign immunity when legislating pursuant to the Interstate Commerce Clause
power found within Article I of the Constitution. Justice Brennan’s opinion (joined by Justices
Marshall, Blackmun and Stevens), deemed the Court’s reasoning in Fitzpatrick to be equally
applicable to abrogation of state sovereign immunity under the Interstate Commerce Clause. See
491 U.S. at 16-17. Justice Brennan reasoned that the Interstate Commerce Clause withheld
power from the states while conferring it upon Congress, and that the commerce power would be
incomplete without the authority to render states liable. See 491 U.S. at 19-20. He also stated
that states had given their prospective approval to abrogation of their sovereign immunity when
they adopted the Constitution. See 491 U.S. at 20.
In a strong dissent, Justice Scalia (joined in part by Chief Justice Rehnquist, and Justices
O’Connor and Kennedy), argued that the Eleventh Amendment precludes abrogating state
sovereign immunity when legislating pursuant to the Interstate Commerce Clause. Criticizing
the plurality, Justice Scalia reasoned:
[I]f the Article I commerce power enables abrogation of state sovereign
immunity, so do all the other Article I powers. An interpretation of the original
Constitution which permits Congress to eliminate sovereign immunity only if it
wants to renders the doctrine a practical nullity and is therefore unreasonable.
5The Fourteenth Amendment, on the other hand, was avowedly directed against
the power of the States, and permits abrogation of sovereign immunity only for a
limited purpose. 491 U.S. at 42.
While recognizing that Section 5 of the Fourteenth Amendment was clearly directed at the states,
Justice Scalia found nothing to suggest that a similar purpose lay behind any of the Article I
powers. See 491 U.S. at 42. He also rejected that plurality’s assertion that states had waived
their immunity and consented to suit simply by adopting the Constitution and, thus, the Interstate
Commerce Clause. See 491 U.S. at 39-40.
After Fitzpatrick and Union Gas, Congress enacted a number of statutes that contained
provisions abrogating state sovereign immunity within their statutory schemes. These included
intellectual property laws such as the Patent and Plant Variety Protection Remedy Clarification
Act , 35 U.S.C. §§ 271(h), 296(a) (1972), civil rights laws such as the Age Discrimination Act,
71 U.S.C. § 623(a)(1) (1967), and the Americans with Disabilities Act, 42 U.S.C.§§ 12, 111-
12,117 (1990), and bankruptcy laws such as Section 106(a) of the Bankruptcy Code, 11 U.S.C. §
106(a) (1994).
In fact, Congress had attempted to abrogate state sovereign immunity as part of the
sweeping reform of the Bankruptcy Code of 1978, as Section 106 provided that governmental
units be treated like other private parties in a variety of bankruptcy contexts. In Hoffman v.
Connecticut Department of Income Maintenance, 492 U.S. 96 (1989), though, the Court found
6that Section 106 of the 1978 Code which attempted to abrogate state sovereign immunity was
invalid as Congress had not made its intention to abrogate state sovereign immunity
“unmistakably clear in the language of the statute.” 492 U.S. at 101. Justices Scalia and
O’Connor, in separate concurring opinions, expressed their doubts that Congress even had the
power under the Bankruptcy Clause to abrogate state sovereign immunity in the first place. See
492 U.S. at 105.
In 1994, Congress amended Section 106 to make very clear its intent to abrogate state
sovereign immunity. Section 106 currently provides:
(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 [numerous sections of the
Bankruptcy Code].
(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.
With the authority granted to Congress “[t]o establish . . . uniform Laws on the subject of
7Bankruptcies throughout the United States” pursuant to the Bankruptcy Clause contained in
Article I of the Constitution, and the clear language of Section 106, it was assumed that state
sovereign immunity had been properly abrogated by Congress in the Bankruptcy Code.
This all changed, though, with the Supreme Court’s decision in Seminole Tribe v.
Florida, 517 U.S. 44 (1996). In that case, the Court held that Congress’ attempt to abrogate
states’ Eleventh Amendment immunity while acting pursuant to the Indian Commerce Clause, an
Article I power, was unconstitutional. It concluded that both the result and plurality’s rationale
in Union Gas departed from our established understanding of the Eleventh Amendment and
undermine the accepted function of Article III. See 517 U.S. at 66. The Court stated that “[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.” 517 U.S. at 72-73.
The Court acknowledged, as Justice Stevens noted in his dissent, that its decision would apply to
Congressional attempts to abrogate state sovereign immunity pursuant to bankruptcy, copyright
and antitrust laws, but believed that this was not significant as “there is no established tradition
in the lower federal courts of allowing enforcement of those federal statutes against the States.”
517 U.S. at 72-73, n16. The Court did reaffirm Fitzpatrick’s holding that Congress could
abrogate state sovereign immunity through legislation to enforce the provisions of the Fourteenth
Amendment, but it found Fitzpatrick inapplicable because the Indian Gaming Regulatory Act
had been passed solely based on Congress’ Article I power to regulate relationships with the
tribes. See 517 U.S. at 60.
8The next year, the Supreme Court limited the scope of Fourteenth Amendment
abrogation in City of Boerne v. Flores, 521 U.S. 507 (1997). In that case, the Archbishop of San
Antonio filled a suit against the city of Boerne, Texas under the Religious Freedom Restoration
Act of 1993 for failure to issue a building permit. In finding that the Act was unconstitutional,
the Court set out certain conditions that must be met in order for any legislation under the
Fourteenth Amendment to be constitutional. Congressional acts must be designed to enforce
rather than to define Fourteenth Amendment rights. The legislation must be a remedial response
to a pattern of constitutional violations by the states, which pattern should ideally be clearly laid
out in the legislative record. See 521 U.S. at 526, 530. In addition, the Court must consider the
evil presented, and there must be a congruence and proportionality between the injury to be
prevented or remedied and the means adopted to that end. See 521 U.S. at 520, 530. The Court
emphasized that the legislation must be responding to an actual or potential injury rather than
creating new substantive rights, finding that “]a]ny suggestion that Congress has a substantive,
non-remedial power under the Fourteenth Amendment is not supported by our case law.” 521
U.S. at 527. The Court in City of Boerne found that the solution proposed by Congress was “so
out of proportion to a supposed remedial or preventive object” that it could not stand.
It would seem that Congress’ ability to abrogate state sovereign immunity has been
significantly curtailed since 1997. As one writer has stated:
Seminole Tribe and City of Boerne have become the Scylla and Charybdis of
Congressional abrogation. If legislation is passed under Article I, Congress’
9abrogation of state sovereign immunity is absolutely unconstitutional; if it is
passed under the Fourteenth Amendment, the abrogation of immunity is
unconstitutional unless the stringent requirements of City of Boerne are met. Fuhr,
Sovereign Immunity: The ‘Uniform Laws’ Theory Tries (And Fails) To Takes A
Bankruptcy-Sized Bite Out Of The Eleventh Amendment, 77 WASH. L. REV. 511,
521 (2002).
III. Judicial Response to Seminole Tribe
Our federal bankruptcy system seeks to achieve several basic objectives. Congress
wished to provide debtors with a “fresh start” in life after paying whatever they could to their
creditors. See, e.g., Williams v. U.S. Fidelity & Guaranty Co., 236 U.S. 549, 554-55 (1915) (the
purpose of federal bankruptcy law is to “relieve the honest debtor from the weight of oppressive
indebtedness and permit him to start afresh free from the obligations and responsibilities
consequent upon business misfortunes’). See generally Jackson, The Fresh Start in Bankruptcy
Law, 98 HARV. L. REV. 1393 (1985). In addition, the Bankruptcy Code was intended “to
enforce a distribution of the debtor’s assets in an orderly manner in which the claims of all
creditors are considered fairly, in accordance with established principles rather than on the basis
of the inside influence or economic leverage of a particular creditor.” H.R. Rep. No. 103-835, at
33 (1994). Similarly situated creditors should be treated equally, without preference of one over
the other. See, e.g., In re McMahon, 129 F.3d 93, 97 (2nd Cir. 1997); Newberry Corp. v.
Fireman’s Fund Ins. Co., 95 F.3d 1392, 1399 (9th Cir. 1996). It is believed that this collective
10mechanism for the satisfaction of creditors has the benefit of maximizing value for all creditors
over that obtainable by the piecemeal dismemberment of the debtor when individual creditors
pursue their own interests in separate proceedings. See Jackson, THE LOGIC AND LIMITS OF
BANKRUPTCY LAW 7-19 (1986); Baird, A World Without Bankruptcy, 50 LAW &
CONTEMP. PROBS., 173, 183-84 (1987); Warren, Bankruptcy Policymaking in an Imperfect
World, 92 MICH. L. REV. 336, 344 (1993).
Most bankruptcy scholars who have written on the subject tend to agree that state
sovereign immunity threatens the integrity of the federal bankruptcy system. One writer warns
that the purposes of bankruptcy law will be “forever frustrated” by state sovereign immunity.
See Timko, Section 525 of the Bankruptcy Code and Sovereign Immunity: The Supreme Court’s
Creation of a Super Creditor, 17 BANKR. DEV. J. 605, 634 (2001). Others have suggested that
“[t]he bankruptcy system threatens to shake apart at its core.” See Klee et al, State Defiance of
Bankruptcy Law, 52 VAND L. REV. 1527, 1528 (1999).
Certainly, a total inability to discharge any state debt could cause substantial difficulties
for a debtor’s “fresh start.” In addition, full payment of all debts to the state may leave very little
of the debtor’s estate available to other creditors, preventing a fully equitable settlement of the
estate. See BFP v. Resolution Trust Corp., 511 U.S. 531, 563 (1994). There also is a concern
that a state’s decision to opt out of the bankruptcy process might delay the expeditious resolution
of competing claims, frustrating one of the primary advantages of the bankruptcy process, See
Bartell, Getting to Waiver: A Legislative Solution to State Sovereign Immunity in Bankruptcy
11After Seminole Tribe, 17 BANKR. DEV. J. 17, 55-56 (2000).
Recognizing that affording states as creditors immutable immunity from the effects of
federal bankruptcy proceedings could seriously undermine the efficacy of bankruptcy relief, the
courts have taken various approaches in trying to strike an appropriate balance between state
sovereign immunity and the equitable administration of the bankruptcy laws.
1. Abrogation Post-Seminole Tribe
While the Seminole Tribe holding did not directly involve bankruptcy law, most courts
faced with the issue since that case (including the Third, Fourth, Fifth, Seventh and Ninth
Circuits) have concluded that Section 106(a) of the Bankruptcy Code was enacted pursuant to
the Bankruptcy Clause of the Constitution, an Article I power, and that under Seminole Tribe,
Section 106(a) cannot abrogate a state’s sovereign immunity. See, e.g., In re Sacred Heart
Hospital, 133 F.3d 237, 243-44 (3d Cir. 1998); In re Creative Goldsmiths, 119 F.3d 1140, 1145-
47 (4th Cir. 1997), cert. denied, 523 U.S. 1075 (1998); In re Fernandez., 123 F.3d 241, 243-45
(5th Cir.), amended by 130 F.3d 1138 (5th Cir. 1997); Nelson v. La Crosse County Dist. Atty.,
301 F.3d 820, 826-34 (7th Cir. 2002); In re Mitchell, 209 F.3d 1111, 1118-21 (9th Cir. 2000).
These courts found that there was no reason to treat the Bankruptcy Clause any differently than
the Indian Commerce Clause.
A few recent bankruptcy court cases have tried to distinguish the Bankruptcy Power from
12Congress’ other Article I powers by pointing to the uniformity requirement of the Bankruptcy
Clause. See, e.g, Nelson v. La Crosse County Dist. Atty., 254 B.R. 436, 444, n.10 (Bankr. W.D.
Wis. 2001), rev’d, 258 B.R. 374 (W.D. Wis. 2001), aff’d, 301 F.3d 820 (7th Cir. 2002); H.J.
Wilson Co. v. Comm’r of Revenue, 262 B.R. 738, 741-42 (Bankr. M.D. Tenn.), rev’d, 265 B.R.
917 (M.D. Tenn. 2001); Bliemeister v. Indus. Comm’n, 251 B.R. 383, 387-92 (Bankr. D. Ariz.
2000), aff’d on other grounds, 296 F.3d 858 (9th Cir. 2002). These cases suggest that ratification
of the Constitution, which includes a grant of the power to enact uniform bankruptcy laws, itself
constitutes a surrender of state sovereignty effective when Congress chooses to enact such laws.
Under this “uniform laws” theory, Congress did not need to abrogate states’ sovereign immunity
in the Bankruptcy Code because their immunity in the area ceased to exist when the Constitution
was ratified. See generally Gerson, A Bankruptcy Exception to Eleventh Amendment Immunity:
Limiting the Seminole Tribe Doctrine, 74 AM. BANKR. L.J. 1 (2000); Note, The
Constitutionality of Section 106: A Historical Solution to a Modern Debate, 18 BANKR. DEV.
J. 131 (2001). Several Circuit Courts have summarily rejected the argument that the uniformity
requirement in the Bankruptcy Clause requires that bankruptcy be accorded different treatment
under the Eleventh Amendment. See, e.g., In re Sacred Heart Hospital, 133 F.3d 237, 243 (3d
Cir. 1997); In re Fernandez, 123 F.3d 241, 244 (5th Cir. 1997), amended by 130 F.3d 1138 (5th
Cir. 1998). The “uniform laws” theory also has received some scholarly criticism. See, e.g.,
Fuhr, Sovereign Immunity: The ‘Uniform Laws’ Theory Tries (and Fails) to Take a Bankruptcy-
Sized Bite Out of the Eleventh Amendment, 77 WASH. L. REV. 511 (2002). As one writer has
observed:
13Although there is no doubt the states surrendered some of their sovereignty when
they agreed to confer on Congress the power to enact uniform bankruptcy laws, it
seems unlikely that the scope of that surrender extended beyond relinquishment of
their sovereign power to enact bankruptcy laws themselves. Bartell, Getting to
WaiverBA Legislative Solution to State Sovereign Immunity in Bankruptcy after
Seminole Tribe, 17 BANKR. DEV. J. 17, 27 (2000).
Significantly, though, the court in Hood v.Tenn. Student Assistance Corp., 262 B.R. 412,
417-19 (B.A.P. 6th Cir. 2001) interpreted The Federalist No. 81 and No. 32 to distinguish
bankruptcy, along with naturalization, from the rest of the Article I powers. In that case, a
Chapter 7 debtor brought an adversary proceeding seeking an “undue hardship” discharge of a
student loan, and the state entity moved to dismiss on sovereign immunity grounds. The panel
noted that Article I of the Constitution granted Congress the power to establish uniform laws
with respect to bankruptcy, not mere laws, and that this required states to surrender their own
power to make such laws and thus an important degree of sovereign immunity. The panel
concluded that Congress’ power to make laws on bankruptcy carries with it the power to
abrogate states’ sovereign immunity, and that Congress clearly exercised that power in Section
106(a). The panel therefore affirmed the bankruptcy court’s refusal to dismiss the action.
The Sixth Circuit in In re Hood, 319 F.3d 755 (6th Cir. 2003), cert. granted, 156 L.Ed.2d
703 (2003), agreed with the panel. The court first noted that at oral argument Hood for the first
time argued that the filing of a proof of claim may have waived the state’s sovereign immunity in
14the adversary action. The Sixth Circuit decided not to rule on this issue (though Judge Kennedy,
in a concurring opinion, concluded that sovereign immunity had been waived when a proof of
claim was filed). In discussing the abrogation issue, the Sixth Circuit conceded that “it is
possible that in ceding some sovereign immunity with the Bankruptcy Clause, the states ceded
their legislative powers but not their immunity from suit.” 319 F.3d at 764. And after reviewing
the Federalist and the debates over ratification of the Constitution, the court also admitted that
“[m]uch of the evidence regarding the plan of the Constitution is ambiguous.” 319 F.3d at 767.
But the court concluded that:
[t]he Supreme Court has made clear that the best evidence of the Framers’
intentions on state sovereignty comes from the text of the Constitution and The
Federalist. . . . Indeed, Seminole Tribe itself relies heavily on The Federalist No.
81. . . Here, the Constitution’s text and Hamilton’s reference in The Federalist
No. 32 suggest that, with the Bankruptcy Clause, the states granted Congress the
power to abrogate state sovereign immunity. The states’ immunity was thus
“altered by the plan of the Convention.”. . . Congress clearly exercised that power
in 11 U.S.C. § 106(a). Accordingly, TSAC is not immune from suit under 11
U.S.C. § 523(a)(8). 319 F.3d at 767 (citations omitted).
The court reasoned that its conclusion did not undermine the dignity of the state as a separate
sovereign, explaining:
15Unlike a traditional lawsuit, in which a state is forced to defend itself against an
accusation of wrongdoing, the bankruptcy process “is, shortly speaking, an
adjudication of interests claimed in a res.” . . . If the state wishes to assert its
interest in the res, it may do so. If it prefers not to, it may decline, and the debtor
will still need to convince the bankruptcy court that repayment will constitute an
“undue hardship.” 319 F.3d at 768 (citations omitted).
Arguments in Hood case are scheduled to be heard by the Supreme Court on March 1, 2004, and
we all anxiously await the Court’s decision.
A few bankruptcy courts have sought to uphold the constitutionality of Section 106 by
finding that it was enacted pursuant to Section 5 of the Fourteenth Amendment. See, e.g., In re
Straight, 209 B.R. 540 (D. Wyo.) ; In re Arnold, 255 B.R. 845 (Bankr. W.D. Tenn. 2000); In re
Wilson, 258 B.R. 303 (Bankr. S.D. Ga. 2001); In re Burke, 203 B.R. 493 (Bankr. S.D. Ga. 1996)
; In re Headrick, 200 B.R. 963 (Bankr. S.D. Ga. 1996). These courts reason that the Bankruptcy
Clause of Article I grants Congress the power to enact the Bankruptcy Code from which debtors
derive certain protections, and these protections are privileges and immunities of federal
citizenship. Congress is granted power by the Fourteenth Amendment to protect these privileges
and immunities from being abridged by creating private rights of action against the states, and
Congress exercised this power by enacting Section 106. These courts concluded that the
Supreme Court never addressed the issue of whether Congress could abrogate states’ sovereign
immunity through a federal statute that is enacted pursuant to an Article I power and is
16enforceable through section 5 of the Fourteenth Amendment.
The majority of courts that have considered the issue, though, have rejected this
Fourteenth Amendment argument. See. e.g., In re Sacred Heart Hosp., 133 F.3d at 244 (the
court found it illogical that Congress would enact Section 106 “under a general Fourteenth
Amendment power to remedy an unspecified violation of rights when a specific, substantive
Article I power clearly enabled the law”); In re Fernandez, 123 F.3d at 245; In re Pitts, 241 B.R.
862, 876 (Bankr. N.D. Ohio 1999). The Supreme Court has never suggested that the rights
created by the Bankruptcy Code are privileges or immunities of citizenship. In fact, the Supreme
Court has concluded that no debtor has a constitutional right to a discharge of his debts in
bankruptcy or, indeed, even access to the bankruptcy process if he cannot prepay filing fees. See
United States v. Kras, 409 U.S. 434 (1973). The Court in Kras considered bankruptcy as “in the
area of economics and social welfare,” and the bankruptcy discharge as “a legislatively created
benefit, not a constitutional one, and . . . a benefit withheld, save for three short periods, during
the first 110 years of the Nation’s life.” 409 U.S. at 446-47.
There are other problems with the argument that Section 106 was enacted pursuant to the
Fourteenth Amendment. The Supreme Court has stated that Congress need not recite the power
under which it is acting in order to render a statute constitutional, and that Congress need not
expressly state that it is legislating pursuant to Section 5 of the Fourteenth Amendment. See
Woods v. Cloyd W. Miller Co. 333 U.S. 138, 144 (1948); EEOC v. Wyoming, 460 U.S. 226,
243, n.18 (1983). But that Court has also has cautioned that because legislation “often intrudes
17on traditional state authority, [courts] should not quickly attribute to Congress an unstated intent
to act under its authority to enforce the Fourteenth Amendment.” Pennhurst State Sch. & Hosp.
v. Halderman, 451 U.S. 1, 16 (1981). The bankruptcy court in In re NVR L.P., 206 B.R. 831,
840 (Bankr. E.D. Va. 1997) stated that it had done an extensive search of both the Bankruptcy
Code and its legislative history, and that it was “unable to discern some legislative purpose or
factual predicate that supports, particularly in the context of § 106, an exercise of power granted
Congress by § 5 of the Fourteenth Amendment.” Judge Tice stated that he could “find no
meaningful reference to the [Fourteenth] Amendment in the legislative comments accompanying
any significant piece of bankruptcy legislation since 1978. In contrast, the Bankruptcy Clause
often has been cited as the authority by which Congress enacted some revision to the bankruptcy
laws.” 206 B.R. at 840. See also Kish v. Verniero, 212 B.R. 808, 815-17 (D.N.J. 1997); In re
York-Hannover Dev., Inc., 201 B.R. 137, 141 (Bankr. E.D.N.C. 1996).
In addition, even if Section 106 were considered to be legislation passed pursuant to the
Fourteenth Amendment, it would need to satisfy the conditions set out in City of Boerne. Under
that case, Congress must be acting in a remedial capacity in response to a clear and well-
documented pattern of constitutional violations by the states. See 521 U.S. at 519. There is no
evidence that Congress identified such a pattern when it enacted Section 106. See In re Creative
Goldsmiths, 119 F.3d 1140, 1146 (4th Cir. 1997). Nor is there evidence that Congress enacted
section 106 as a proportional remedy to such violations. See In re Fernandez, 123 F.3d 241, 245
(5th Cir. 1997). As the court stated in In re Mitchell, 209 F.3d 1111, 1120 (9th Cir. 2000):
18Until Congress makes findings of a pattern of state violations and passes
legislation that is proportional to its remedial aims, § 106(a) must be viewed as an
unconstitutional assertion of Congress’ power, because it fails the congruence
requirement of City of Boerne.
2. The “Not A Suit Theory”
With most courts finding that Congress cannot through legislation abrogate state’s
immunity from bankruptcy actions, courts have looked for other ways to ensure that a federal
bankruptcy discharge would somehow be binding on the states. The Fourth, Fifth, Seventh and
Ninth Circuits (and numerous lower courts) have all concluded that the order by which a federal
bankruptcy court discharges a debtor from indebtedness is not entered in a “suit” and so does not
even implicate a state’s sovereign immunity from “suit.” See Virginia v. Collins, 173 F.3d 930
(4th Cir. 1999); Texas v. Walker, 142 F.3d 813 (5th Cir. 1998); Nelson v. La Crosse County Dist.
Atty., 301 F.3d 820 (7th Cir. 2002); Goldberg v. Ellet, 254 F.3d 1135 (9th Cir. 2001), cert. denied,
534 U.S. 1127 (2002). These courts examine the text of the Eleventh Amendment which
restricts federal judicial power in “any suit in law or equity, commenced or prosecuted against
any one of the United States.” They reason that a request for a bankruptcy discharge is not a suit
against a state implicating the state’s sovereign immunity, because the bankruptcy court does not
purport to exercise jurisdiction over the state or any creditors in entering a discharge order. For
example, the Fourth Circuit explained:
19The discharge order clears all dischargeable debts, including those owed to a
state. Although this alters the state’s legal rights, the discharge order is not
entered in a suit against the state. The order does not depend on bankruptcy court
jurisdiction over the state; as we have indicated, it is based on the court’s
jurisdiction over the debtor and his estate. 173 F.3d at 930.
Similarly, the Ninth Circuit has stated that “the bankruptcy court exercised jurisdiction over the
res of the bankruptcy estate when it issues its discharge order, not in personam jurisdiction over
the debtor’s creditors.” 254 F.3d at 1141. Thus, where the bankruptcy court’s power derives
from its jurisdiction over debtors and their estates, and not jurisdiction over the state creditors,
sovereign immunity is not implicated.
This same reasoning has caused courts to find that other types of proceedings are not
“suits” against states barred by the Eleventh Amendment. See, e.g., Maryland v. Antonelli
Creditors’ Liquidating Trust, 123 F.3d 777 (4th Cir. 1997) (Eleventh Amendment did not
preclude the bankruptcy court from construing the effect of a confirmed plan of reorganization);
In re Midway Airlines Corp., 283 B.R. 846 (E.D. NC 2002) (proceeding brought by Chapter 11
debtor to determine the applicability and scope of automatic stay was not a “suit” against state
that would be barred by Eleventh Amendment).
The “not a suit” theory has its critics. For example, Professor Brubaker states::
20Of all the post-Seminole machinations and imaginations conjured in an effort to
sidestep that decision in the bankruptcy context, the most ill-conceived and
insidious of these, and of particular relevance to the federal bankruptcy discharge,
is the not-a-suit theory. Indeed, mere explanation of the not-a-suit theory should
evoke the kind of open-mouthed disbelief that will lead to its ultimate rejection.
Brubaker, Of State Sovereign Immunity and Prospective Remedies: The
Bankruptcy Discharge as Statutory Ex Parte Young Relief, 76 AM. BANKR. L.J.
461, 534 (2002).
Professor Brubaker reasons that:
Grant or denial of a federal bankruptcy discharge . . . has all the essential
attributes of an exercise of “judicial power” by “suit” in a federal court. This suit
is “against” all of the debtor’s prebankruptcy creditors who hold interests adverse
to that of the debtor, and thus, to the extent that a debtor’s filed bankruptcy
schedules list a state eo nominee as creditor, the debtor’s suit is “against one of
the United States.” The reasoning that the courts have employed in an attempt to
sidestep this inescapable conclusion is utterly unconvincing. . . . Brubaker at
541-42.
He also rejects the argument that the bankruptcy court’s order does not depend on the court’s
jurisdiction over the state, pointing out that the efficacy of a bankruptcy court order as to a
21particular creditor depends upon whether that creditor has received proper notice. Quoting from
Bankruptcy Rule 7004, Professor Brubaker notes that such notice is essential to the exercise of
jurisdiction consistent with the Constitution, and that it is effective to establish personal
jurisdiction over the person of creditors sought to be enjoined. He concludes that “whether in
personam or in rem, a bankruptcy-court discharge order binding on the state itself requires an
exercise of jurisdiction over the state.” Brubaker at 545. Professor Brubaker argues, therefore,
that the “not a suit theory” should be rejected. He contends, instead, that a discharge order is a
prospective declaratory and injunctive decree that directly restrains state officials from any
future collection efforts on behalf of a state that would violate federal bankruptcy law.
Therefore, a state official that knowingly violates a debtor’s bankruptcy discharge has violated a
valid Ex parte Young injunction and is subject to the contempt sanctions of the federal
bankruptcy court from which the discharge was issued. See Brubaker at 563. But see Cordy, Of
State Sovereign Immunity and Prospective Remedies: The Bankruptcy Discharge As Statutory
Ex Parte Young Relief: A Response, 77 AM. BANKR. L.J. 23 (2003).
As Professor Brubaker concedes, though, the Fourth, Fifth, Seventh and Ninth Circuits,
as well as “countless lower courts,” have adopted the “not a suit theory.” See Brubaker at 537.
The “not a suit theory,” however, has some significant limitations.
Courts applying this theory are, at least, able to conclude that a bankruptcy court’s
discharge order fully binds the state. The discharge can be raised as a defense in any collection
suit that the state might bring (which, unfortunately, debtors often cannot afford to defend, or do
22not defend in the belief that the debt has been discharged). In addition, a number of courts have
found that the Ex parte Young doctrine is a means of ensuring compliance by state officials with
certain of the Bankruptcy Code’s provisions. This doctrine permits federal courts to compel a
state official’s compliance with federal law through prospective declaratory and injunctive
remedies, notwithstanding the sovereign immunity of the state. See Ex parte Young, 209 U.S.
123 (1908).
For example, the Ninth Circuit in In re Ellet, 254 F.3d 1135 (9th Cir. 2001) found that a
bankruptcy court could enjoin a state official from collecting a tax debt that had been discharged
in a debtor’s bankruptcy. The debtor has listed the tax debt among his dischargeable claims, and
it was discharged by the bankruptcy court. After the conclusion of the bankruptcy case, the state
issued a demand letter for the tax debt and threatened to garnish the debtor’s wages. When the
state attempted to collect its obligation, the debtor returned to the bankruptcy court seeking
injunctive and declaratory relief against the director of the state tax board. The court found that
the debtor was properly seeking prospective relief from the state’s violation of section 524(a) of
the Bankruptcy Code, which prohibits the collection of discharged debts. See also In re
Rainwater, 233 B.R. 126 (Bankr. N.D. Ala. 1999) (violation of automatic stay); In re Kish, 238
B.R. 271 (Bankr. D.N.J. 1999) (violation of § 524). Cf. In re Muir, 239 B.R. 213 (Bankr. D.
Mont. 1999) (suggesting that Ex parte Young relief may be available against any state officer
who seeks to collect a discharged student loan).
23The Ex parte Young doctrine, though, has some severe limitations. In order to sustain
such an action, the complainant must demonstrate an “ongoing violation of federal law.” See
Seminole Tribe v. Florida, 517 U.S. 44, 72 n.16 (1996). See also Idaho v. Coer d’Alene Tribe,
521 U.S. 261, 281 (1997) (“an on-going violation of federal law where the requested relief is
prospective”); Green v. Mansour, 474 U.S. 64, 68 (1985) (an Ex parte Young suit may be
brought to enjoin “a continuing violation of federal law”). Thus, there must be some violation of
federal law; Ex parte Young is not available to compel state officials to comply with state law.
See Pennhurst State Sch. & Hosp. v. Halderman, 465 U.S. 89, 106 (1983). In addition, the
violation of federal law must be ongoing, not merely some past action that was unlawful. See,
e.g., In re Lapin, 226 B.R. 637, 646 (B.A.P. 9th Cir. 1998); In re Tri-City Turf Club, Inc., 203
B.R. 617, 620 (Bankr. E.D. Ky. 1996). See generally Bartell at 53 (“Ex parte Young does not
provide any basis for remedying an act that, however flagrant and intentional a violation of the
Code, is completed prior to the time suit was brought”). Finally, the Ex parte Young doctrine
provides only for injunctive or declaratory relief; an award of damages is not available. See,
e.g., In re ABEPP Acquisition Corp., 215 B.R. 513, 519 (B.A.P. 6th Cir. 1997) (finding that Ex
parte Young is not applicable to what is essentially a case to recover money from the state); In re
PHP NJ MSO, Inc, 1999 WL 360199, at *7-*8 (D. Del. May 7, 1999) (finding that Ex parte
Young did not apply in part because party was seeking more than declaratory and injunctive
relief). If a state received funds from a debtor as a result of the state’s violation of the Code, Ex
parte Young cannot be used to obtain restitution. See In re DeAngelis, 239 B.R. 426, 432
(Bankr. D. Mass. 1999) (“insofar as Debtor’s complaint seeks declaratory [relief] and a
prospective injunction against collection of a debt, the matter falls within the scope of Young”
24but “ jurisdiction to obtain . . . retroactive relief in the form of . . . an equitable order to return
funds collected in violation of the discharge” is lacking because “Young does not permit
judgments against officials declaring that they violated law in the past”). See also In re Lapin,
226 B.R. 637, 646 (B.A.P. 9th Cir. 1998) (in a civil contempt action for violation of a discharge
injunction, court concluded that where “the state has already seized funds, the Ex Parte Young
solution is hardly satisfactory from the debtor’s standpointBthe doctrine allows only for
prospective relief, precluding recovery of seized funds. There is another alternative, however:
suing the state in state court”).
Another limitation of the “not a suit theory” is that the trustee or debtor will often be
required to bring an adversary proceeding to obtain the relief being sought. See Federal Rule of
Bankruptcy 7001 (defining an adversary proceedings). An adversary proceeding is commenced
by filing a complaint and serving a summons and complaint upon the defendant. See Federal
Rule of Bankruptcy Procedure 7004. Adversary proceedings have generally been considered to
be “suits” for the purposes of the Eleventh Amendment; an adversary proceeding against a non-
consenting state has been found barred by sovereign immunity in the aftermath of Seminole
Tribe.
As Professor Bartell explains:
Now suppose the trustee or the debtor . . . request the bankruptcy court to do any
of the following: to compel the state to turn over property of the estate; to enjoin
25the state’s violations of the automatic stay and obtain damages for any past
violation; to force the state to disgorge any preference or fraudulent conveyance
or preferential set-off it received prior to the filing of the petition and return any
post-petition transfers it received; to avoid the state’s lien or determine whether
the state has title to the property; to determine the dischargeabilty of tax debts or
student loans owed to a state agency; to enjoin violations of the permanent
injunction or seek a declaration that the state’s conduct violates the injunction,
and secure damages for such violations; to order the state to grant a license,
permit, charter, franchise, or other similar grant; or to order the state to offer
employment or a student loan to the debtor. . . . a cause of action seeking each
type of relief listed above must be brought as an adversary proceeding . . . . Each
of those types of adversary proceedings against a nonconsenting state has been
found barred by sovereign immunity. . . . See Bartell at 39 (and citations listed in
footnote 134).
Thus, Professor Bartell notes that “many of the tools provided to debtors and trustees to enforce
provisions of the Code against recalcitrant creditors are jurisdictionally unavailable when that
creditor is a nonconsenting state. Bartell at 42.
IV. State Waiver of Sovereign Immunity
1. Constructive Waiver
26States can waive their immunity from suit. The concept of “implied” or “constructive”
waiver grew out of the Supreme Court’s decision in Parden v. Terminal Railway of Alabama
State Docks Dept., 377 U.S. 184 (1964). In that case, Alabama asserted immunity from an
action filed under the Federal Employer’s Liability Act (FELA) by a plaintiff seeking to recover
for injuries he received working at a railway owned and operated by the state. A provision of the
Act submitted to suit in federal court “[e]very common carrier by railroad . . . engaging in
commerce between . . . the several states.” 45 U.S.C. § 51 (1940). The Court found that, by
choosing to operate a railroad in interstate commerce, Alabama had consented to be sued under
the act.
In College Savings Bank v. Florida Prepaid Postsecondary Education Expense Board,
527 U.S. 666 (1999), though, the Supreme Court overruled Parden and rejected the constructive
waiver doctrine. In that case, the Bank sued Florida Prepaid under the Lanham Act alleging that
Florida Prepaid had made certain misrepresentations concerning its financial products. Florida
Prepaid moved to dismiss, asserting immunity, and Bank argued that its immunity had been
waived when Florida Prepaid engaged in marketing and other behavior that would subject it to
suit under the Lanham Act. The Court disagreed and, overruling Parden, described Parden as
standing “at the nadir of our waiver (and, for that matter, sovereign immunity) jurisprudence.”
527 U.S. at 676. The Court found the doctrine of constructive waiver to be an “ill conceived . . .
anomaly” lacking any merit, and that constructive waiver and abrogation are essentially “the
same side of the same coin.” 527 U.S. at 680, 683. The Court decided that waiver will be found
27only if the state “either . . . voluntarily invokes our jurisdiction . . . or else. . . makes a ‘clear
declaration’ that it intends to submit itself to our jurisdiction.” 527 U.S. at 675-76 (quoting
Great Northern Life Ins. Co. v. Read, 322 U.S. 47, 54 (1944)). Thus it is clear that waiver
requires a clear indication of the state’s intent to waive its immunity. See Lapides v. Board of
Regents of University System of Georgia, 535 U.S. 613, 620 (2002).
2. Waiver by Litigation Conduct
The Supreme Court has found that a state’s litigation conduct can evince a clear
indication of intent to waive sovereign immunity. That Court long ago stated that “where a state
voluntarily becomes a party to a cause and submits its rights for judicial determination, it will be
bound thereby and cannot escape the result of its own voluntary act by invoking the protections
of the 11th Amendment.” Gunter v. Atlantic Coast Line R. Co., 200 U.S. 273, 284 (1906). In a
bankruptcy case, the state creditor is most likely to take affirmative action in the litigation when
the state or one of its agencies files a proof of claim pursuant to § 501(a) seeking distribution of
the estate assets. In Gardner v. New Jersey, 329 U.S. 565, 574 (1947), the Court found that
“[w]hen the State become the actor and files a claim against the fund it waives any immunity
which it otherwise might have had respecting the adjudication of the claim.” The Bankruptcy
Code provides for such a waiver in Section 106(b) which states that “[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.”
28Congress believed that a waiver under such circumstances was appropriate to prevent the
inequity of permitting a state to receive a distribution from the bankruptcy estate without
subjecting itself to liability within the scope of compulsory counterclaims. See Notes of
Committee on the Judiciary, S. Rep. No. 95-989, at 29 (1994) (“The governmental unit cannot
receive a distribution from the estate without subjecting itself to any liability it has to the estate
within the confines of a compulsory counterclaim rule. Any other result would be one-sided.”).
The phrase “has filed a proof of claim” was added by the 1994 amendments to the Code to
clarify existing case law which conflicted on the issue of whether a proof of claim had to be filed
for the governmental unit to waive its sovereign immunity. No waiver occurs under Section
106(b) if the state merely possesses a claim but chooses not to assert it. See Aer-Aerotron, Inc.
v. Texas Dept. Of Trans., 104 F.3d 677, 680 (4th Cir. 1997) (“[Section] 106(b) removes from
consideration the possibility that the mere existence of a claim against the debtor by the State
still constitutes a waiver of that of that State’s immunity.”). The “transaction or occurrence”
language used in Section 106(b) is the same language used in the Federal Rules of Civil
Procedure § 13(a) dealing with compulsory counterclaims.
Courts have disagreed over whether the waiver provision of Section 106(b) survives
constitutional challenge after Seminole Tribe. Compare In re Creative Goldsmiths, Inc., 119 F.3d
1140, 1147 (4th Cir. 1997) (“While [Section] 106(b) may correctly describe those actions that, as
a matter of constitutional law, constitute a state’s waiver of the Eleventh Amendment, it is
nevertheless not within Congress’ power to abrogate such immunity by ‘deeming’ a waiver.”),
and In re C.J. Rogers, Inc., 212 B.R. 265, 269-73 (E.D. Mich. 1997) (finding that Section 106(b),
29though couched in terms of a waiver, is really an impermissible abrogation of a state’s sovereign
immunity), with In re Straight, 143 F.3d 1387, 1392 (10th Cir. 1998) (Section 106(b) merely
codifies the Gardner doctrine), and Arecibo Cmty. Health Care, Inc.v. Puerto Rico, 270 F.3d 17,
24-27 (1st Cir, 2001) (finding that Section 106(b) is not a constructive waiver provision). Even
after Seminole Tribe, the Supreme Court has reaffirmed its adherence to the principles of
Gardner. See College Savings Bank v. Florida Prepaid Postsecondary Education Expense Board,
527 U.S. 666, 681, n.3 (1999) (the majority opinion found nothing troubling in Gardner, which
“stands for the unremarkable proposition that a State waives its sovereign immunity by
voluntarily invoking the jurisdiction of the federal courts.”). After Seminole Tribe, courts have
consistently continued to find that a state that files a proof of claim waives its sovereign
immunity. See, e.g., In re Rose, 187 F.3d 926, 929 ((8th Cir. 1999); In re Jackson, 184 F.3d
1046, 1050 (9th Cir. 1999); In re Burke, 146 F.3d 1313, 1319-1320 (11th Cir. 1998); In re Platter,
140 F.3d 676, 678-80 (7th Cir. 1998).
It should be noted that it is unclear what other types of affirmative acts by the state (other
than filing a proof of claim) might also constitute a waiver of sovereign immunity. Several
courts have found that merely raising the state’s sovereign immunity defense by a motion to
dismiss is not enough to find a waiver. See, e.g., Barfield v. Blackwood, 7 F.3d 1140, 1148, n6
(4th Cir. 1993); In re O’Brien, 216 B.R. 731, 734 (Bankr. D. Vt. 1998), appeal dismissed, 184
F.3d 140 (2d Cir. 1999). Another court found that a state did not waive sovereign immunity by
filing an answer to a complaint to determine the dischargeability of taxes. See In re May, 251
B.R. 714, 720 (B.A.P. 8th Cir. 2000). Waiver generally is found, though, when the state files its
30own adversary proceeding seeking to declare its debt nondischargeable. See, e.g., In re White,
139 F.3d 1268, 1271 (9th Cir. 1998); In re Chen, 227 B.R. 614, 623 (D.N.J. 1998). Professor
Bartell notes that “[s]ome courts tolerate a great deal of participation of the bankruptcy case
short of filing a proof of claim, while others find an active role sufficient to constitute a waiver.”
Bartell at 62. Compare In re PHP NJ MSO, Inc., 1999 WL 360199 at *4 (D. Del. May 7, 1999)
(state commissioner filed motion to transfer venue, motion requesting abstention by bankruptcy
court, motion for relief from automatic stay, objection to motion seeking extension of time to
assume or reject executory contracts, and entered into stipulation with debtor providing for
partial payment to state; no waiver found), with In re White, 139 F.3d 1268, 1271 (9th Cir. 1998)
(finding waiver because creditor “acknowledged that it had a claim, objected to confirmation of
[debtor’s] plan of reorganization . . . and it sought relief from the bankruptcy court in the form of
an order denying confirmation”). Professor Bartell cautions that “a state that becomes too
comfortable appearing in federal bankruptcy court may be found to have consented to being
there.” Bartell at 62-63.
3. Scope of Waiver
In Gardner v. New Jersey, 329 U.S. 565 (1947), the claims by the estate against the state
were all in the nature of objections to the state’s claim for unpaid taxes. Therefore, the Supreme
Court did not need to address the scope of the state’s waiver of sovereign immunity. It seems
clear that the assertion of a claim in bankruptcy court waives sovereign immunity with respect to
defensive counterclaims to the claim asserted by the state. But the issue of whether this waiver
31will permit recovery from the state in excess of any claim asserted by it has not been decided by
the Supreme Court.
Under Section 106(b), if a state files a proof of claim, it waives immunity from any
actions that are the equivalent of a compulsory counterclaim; it permits affirmative recoveries
exceeding the amount of the state’s claim and thus goes beyond recoupment. But, as discussed
above, it is unclear whether section 106(b) survives constitutional challenge after Seminole
Tribe. Currently, there is a split of authority, with some courts applying the compulsory
counterclaim test. See, e.g., In re Lazar, 237 F.3d 967, 977-79 (9th Cir. 2001), cert. denied 122 S.
Ct. 458 (2001); In re Straight, 143 F.3d 1387, 1390 (10th Cir. 1998); In re Creative Goldsmiths,
Inc., 119 F.3d 1140, 1148 (4th Cir. 1997); In re Davis Chevrolet, Inc., 282 B.R. 674, 678-83
(Bankr. D. Ariz. 2002). Other courts after Seminole Tribe have declined to go beyond the
holding of Gardner and limit the scope of the waiver to any recoupment claim that the debtor
may have. See, e.g., In re C.J. Rogers, Inc., 212 B.R. 265, 274 (E.D. Mich. 1997). Professor
Bartell believes that this narrower reading of Gardner may be justified, explaining:
Pre-Code (but post-Gardner) cases also took the position that “affirmative
recovery against the sovereign is not a corollary of the sovereign’s right to sue or
present a claim for bankruptcy adjudication,” and that the waiver created by filing
a claimBin the absence of a valid statutory waiverBdoes not extend to a
counterclaim for affirmative relief against the government. Bartell at 75, n.254
(citations omitted).
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