Central Virginia Community College v. Katz (04-885)


Appealed from: United States Court of Appeals, Sixth Circuit

Oral argument: October 31, 2005

After filing for chapter 11 bankruptcy, Wallace's Bookstores, Inc., formerly a national, private supplier of college books, filed complaints against four public higher education institutions in Virginia. As Wallace's court appointed liquidator, Mr. Katz sought to recover money owed by the Virginia Institutions. The Virginia Institutions argue that as a private party, Mr. Katz cannot sue the state or "arms of the state" without abrogating the states' sovereign immunity guaranteed under the Eleventh Amendment. They maintain that without consent, states cannot be sued by private parties. Mr. Katz denies being classified as a private party and argues that Article I's provisions and purpose of uniform bankruptcy laws across states are an exception. This case raises numerous public policy issues relating to funding of public, higher education institutions and debtor/creditor relationships.

[Question(s) presented] | [Issue(s)] | [Facts] | [Discussion] | [Analysis]

Questions Presented

May Congress use the Article I Bankruptcy Clause, U.S. Const. art. I, ? 8, cl. 4, to abrogate the States' sovereign immunity?

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Issues

In accordance with the Constitution's Bankruptcy Clause, must states and state government units surrender the sovereign immunity granted to them under the Eleventh Amendment for the purpose of establishing and maintaining uniform Bankruptcy laws?

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Facts

The petitioners, Central Virginia Community College, Virginia Military Institute ("VMI"), New River Community College, and Blue Ridge Community College ("the Virginia Institutions") are public, higher education institutions partially funded by the Commonwealth of Virginia. Brief of Respondent at 1. Wallace's Bookstores, Inc. ("Wallace's") was a private supplier of college books to colleges nationwide, including the Virginia Institutions. See Brief of Respondent at 1. Wallace's filed for chapter 11 protection under the Bankruptcy Code, 11 U.S.C. ?? 101, et seq. Once the bankruptcy proceeding began, the bankruptcy court began the process of ascertaining Wallace's estate and property interests. See 11 U.S.C. ? 541.

To conduct a full assessment of Wallace's estate, the Bankruptcy Court must determine whether Wallace's has any financial obligations to third parties. See 11 U.S.C. ? 502(a), (b), (d). Any such obligations would reduce the valuation of Wallace's estate. After approving Wallace's liquidation plan, the Bankruptcy Court appointed Mr. Katz as the supervisor of the liquidation. Brief of Respondent at 5. As Wallace's trustee in bankruptcy, Mr. Katz's role was to settle any claims or obligations on behalf of Wallace's estate in order to successfully complete the bankruptcy filing. See Brief of Respondent at 5. Mr. Katz was also responsible for collecting any money owed to Wallace's in order to accurately value its estate. This is what Mr. Katz hoped to achieve when he filed four complaints against the Virginia Institutions for money owed. Brief of Petitioner at 8. The Virginia Institutions do not characterize these complaints as an effort to collect money owed to Wallace's, but rather an attempt to block payments owed by Wallace's to the Virginia Institutions. Brief of Petitioner at 8. In response to Mr. Katz's suit, the Virginia Institutions filed a proof of claim contending that they had valid interests in Wallace's estate. See Brief of Petitioner at 6. However, the Bankruptcy Court dismissed Mr. Katz's four claims. Brief of Petitioner at 9. This decision was affirmed by both the District Court as well as the Court of Appeals for the 6th Circuit.

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Discussion

A primary public policy concern in this case is the classification of state funded higher education institutions. The amicus brief filed by the American Association of State Colleges and Universities, the American Association of Community Colleges, the American Council on Education, and the National Association of State Universities and Land Grant Colleges addresses this matter. Constitution more than 1,700 public, higher education institutions in the nation, it is clear that they are an important voice and source of education for many Americans. Brief Amicus Curiae of the American Association of State Colleges and Universities, and others ("AASCU Brief"). Public institutions outnumber private higher education institutions six to one. Community College Fact Sheet, Accessed at aacc.nche.edu (October 3, 2005). Public higher education is threatened by decreases in state funding and stark competition for scarce state resources. AASCU Brief at 2. Due to these difficulties, public higher education institutions are increasingly driven to seek funding from the private sector to provide school services including food, books, and computing. See Id. at 5. Outsourcing to the private sector affords these institutions greater financial flexibility, which enables them to attempt to provide affordable public education to deserving students. See Id. at 20, 29. A ruling against the Virginia institutions in this case would expose state colleges and universities to additional contract and tort liability for which they would otherwise be immune - an additional financial burden.

In addition to providing competitively priced higher education for students, this case implicates labor and employment concerns. According to a recent survey, public higher education institutions make up 45% of the 50 states' total workforce. Accessed at http://ftp2.census.gov/govs/apes/03stus.txt. A ruling in favor of Mr. Katz, the trustee of Wallace's Bookstores, could have a crippling effect on the budgets of public higher education institutions and, by implication, the states as employers. Additionally, the additional litigation expense itself will likely result in decreased funds available to provide students with an affordable education and less money to employ sufficient staff to run these institutions. Private parties like Mr. Katz could be permitted to execute non-consensual suits against state-funded bodies like the Virginia Institutions, subjecting them to monetary judgments both locally and in other states. See Id. at 2. These federal bankruptcy proceedings can take place in any number of venues, creating forum non conveniens concerns for public institutions. For example, state institutions would find it neither financially nor geographically justifiable to defend a suit brought against them in another state for the sole purpose of maintaining uniform bankruptcy laws across states. Moreover, an unfavorable ruling for the Virginia Institutions allowing suits against them would be a powerful precedent in other litigation brought by private parties against other partially funded public institutions.

This case also raises concerns about how traditionally public institutions should resolve their funding crises. Despite striving to provide a public good at an affordable price, public higher education institutions could be jeopardizing their state immunity by outsourcing to the private sector. The Supreme Court must resolve whether this kind of frequent interaction with the private sector is sufficient to completely diminish their status as "arms of the state." Brief of Respondent at 13.

In addition to the concerns of public education institutions, creditors also have a stake in the outcome of this case. Federal bankruptcy laws are created to preserve the delicate balance of debtor / creditor relationships. See Id. at 40. Prohibiting private creditors from suing public entities will discourage lenders from providing financial assistance to public, higher education institutions or, at a minimum, will raise the lending costs of capital and credit terms. There are also uniformity concerns relating to applying bankruptcy laws across states to ensure that creditors receive the property interests owed to them. Id. at 41. Although the Virginia institutions claim that they stand to lose money in litigation and counsel expenses where their immunity has been eliminated, uniform bankruptcy laws could decrease the litigation expenses for many businesses, individuals and institutions across the board. Does this particular segment of the economy, publicly funded institutions, deserve special bankruptcy treatment at the expense of non-uniform bankruptcy rules and, ultimately, higher prices for consumers across the board? The Supreme Court will decide.

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Analysis

The Virginia Institutions' argument is based on the Eleventh Amendment doctrine of sovereign immunity, which stipulates that states are immune to suit by private citizens of other states. U.S. Const. amend. XI. Because Mr. Katz represents the bankrupt estate of a Kentucky corporation and the Virginia Institutions, since they are mostly funded by the state, are public arms of the State of Virginia, the Virginia Institutions will argue that Mr. Katz's suit is barred by Virginia's sovereign immunity. Brief of Petitioner at 7; Brief of Respondent at 9. However, the Bankruptcy Court, the District Court, and the Sixth Circuit all held that, under the Bankruptcy Clause of Article I, Congress is empowered to enact legislation abrogating state sovereign immunity. Accordingly, they held that the statute at issue in this case, 11 U.S.C. ? 106(a), does, in fact, abrogate sovereign immunity. See Brief of Petitioner at 9-10. These decisions cited the Sixth Circuit's decision in In re Hood, 319 F.3d 755 (6th Cir. 2003) ("Hood I"), which remains valid precedent because the case was affirmed by the Supreme Court on other grounds.? See Tenn. Student Assistance Corp. v. Hood, 541 U.S. 440 (U.S. 2004).The Virginia Institutions argue that Hood I, which stands for the proposition that the Bankruptcy Clause does give Congress the power to abrogate state sovereign immunity, should now be overturned to bring the Sixth Circuit in line with six other circuits which have rejected this view. See Brief of Petitioner at 10. Given the fact that the three courts deciding on this issue were all in accord with each other, this could be the reason that the Supreme Court decided to hear the case.

Federalism

The chief criticism of Hood I is that it is directly in conflict with the principles of federalism upon which the U.S. government is structured. See id. at 16. The federalist structure instills sovereignty in both the states and the national government and a component of that state sovereignty is immunity from suits by individuals of other states.? See id. at 19-20. The Supreme Court has recognized an exception to sovereign immunity where Congress passes legislation abrogating state sovereignty under section five of the Fourteenth Amendment.? See Fitzpatrick v. Bitzer, 427 U.S. 445 (1976); Kimel v. Florida Bd. Of Regents, 528 U.S. 62 (2000). However, the Court has also held that no such exception applies to lawmaking power granted to Congress under Article I. Seminole Tribe v. Florida, 517 U.S. 44, 73 (1996); Kimel, 528 U.S. at 79. This case may hinge on whether the court decides to treat the enactment of bankruptcy legislation as an ordinary Article I lawmaking power or to recognize bankruptcy laws as being an exceptional area of law where state sovereign immunity does not apply.?

The Uniformity Requirement

The court in Hood I reasoned that the Bankruptcy Clause differs from all other powers (except naturalization) granted to Congress under Article I in that it authorizes Congress to pass "uniform laws" and that such a federal power indicates an exception to general state sovereign immunity." Hood I, 319 F.3d at 762-67. The Virginia Institutions assert that uniformity does not require that states be subject to suit in the same manner as private parties involved in bankruptcy proceedings but rather that similarly situated debtors be treated alike by the bankruptcy courts within a particular state. Brief of Petitioner at 35. In this case, the Supreme Court will decide if the holding of the Seminole Tribe line of cases extends to all of Congress' Article I lawmaking functions or instead, if the phrase "uniform laws," which relates to bankruptcies and possibly naturalization, may allow abrogation of state sovereignty.?

Waiver and Inapplicability of Sovereign Immunity

Katz however, urges that the Supreme Court may dispose of this case without reaching the question of whether or not the Bankruptcy Clause allows Congress to abrogate the states' sovereign immunity. Brief of Respondent at 11. Specifically, Katz asserts that VMI filed a proof of claim with the bankruptcy court, thereby waiving the state's sovereign immunity and that such a waiver applies to all arms of the State. Id. at 12, 14. The disposition of this issue depends on whether the Supreme Court agrees with Katz or with the Virginia Institutions' view that any waiver is limited to compulsory counterclaims stemming from the state's proof of claim and that the waiver does not extend to other arms of the state.? See Reply Brief of Petitioner at 11-14.

Katz also contends that he is not a private party under the Eleventh Amendment but rather a court-appointed representative of a bankruptcy estate. If he is correct, he would be akin to an official of the United States and, therefore, he would not be barred from bringing suit against a state. Brief of Respondent at 23. The Virginia Institutions, however, reject the proposition that the U.S. can delegate its ability to sue the states and find no explicit delegation by the federal government in this case.? See Reply Brief of Petitioner at 6-7. Finally, Katz claims that the bankruptcy court can retain jurisdiction over a dispute between a private party and a state through in rem jurisdiction. Brief of Respondent at 27-33. For Katz to succeed on this point, the Court must first determine that the money in controversy can be considered a res subject to in rem jurisdiction so that sovereign immunity does not apply.? See Reply Brief of Petitioner at 15-17.

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Conclusion

The central issue in this case is whether the U.S. Constitution's Bankruptcy Clause uniformly controls bankruptcy proceedings across states. To resolve this issue, the U.S. Supreme Court must decide whether all states that ratified the Constitution waived their Eleventh Amendment sovereign immunity guarantee with respect to creating bankruptcy laws. The decision will have important ramifications for public, higher education institutions across the country, students attending these institutions, as well as lenders and creditors.

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Authors

Prepared by: Arnab K. Chaudhuri and Nina H. Jenkins-Johnston

Additional Sources

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