Amicus Curiae Brief — Tennessee Student Assistance Corporation v. Hood

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No. 02-1606 | MOY 2 2 OF

IN THE

Supreme Court of the Anited States

TENNESSEE STUDENT ASSISTANCE CORPORATION,

Petitioner,

Vv.

PAMELA L. Hoop,

Respondent.

On Writ of Certiorari to the

United States Court of Appeals

for the Sixth Circuit

BRIEF OF THE COUNCIL OF STATE

GOVERNMENTS, NATIONAL CONFERENCE OF

STATE LEGISLATURES, NATIONAL ASSOCIATION

OF COUNTIES, U.S. CONFERENCE OF MAYORS,

AND INTERNATIONAL CITY/COUNTY

MANAGEMENT ASSOCIATION AS AMICI CURIAE

SUPPORTING PETITIONER

D. BRUCE LA PIERRE RICHARD RUDA*

WASHINGTON UNIVERSITY Chief Counsel

SCHOOL OF LAW STATE AND LOCAL LEGAL CENTER

APPELLATE CLINIC 444 North Capitol Street, N.W.

One Brookings Drive Suite 345

St. Louis, MO 63130 Washington, D.C. 20001

(314) 935-6477 (202) 434-4850

* Counsel of Record for the

Amici Curiae

WILSON-EPES PRINTING Co., INC. — (202) 789-0096 — WASHINGTON, D.C. 20001

4! @

QUESTION PRESENTED

Whether Congress has power to abrogate state sovereign

immunity when legislating under the Bankruptcy Clause of

Article I of the Constitution.

(i)

or = oe some

——— ee _— =.

TABLE OF CONTENTS

QUESTION PRESENTED..............ccssccssccsercssrcsovesseseees

TABLE OF AUTHORITIES ...........:ccccccccccceeeereeeeeneeeees

CONGRESS HAS NO POWER UNDER THE

BANKRUPTCY CLAUSE OF ARTICLE |

TO ABROGATE THE STATES’ SOV-

EREIGN IMMUNITY..............ccsscccsssessserssreeseees

A. The States Are Immune From Private Suit

Unless There Is “Compelling Evidence”

That They Surrendered Their Sovereign

Immunity As Part Of The Constitutional

i laieadiieietndanmeiaddenpnancndeesessesecsssccescccesccessce

B. The States Did Not Surrender Their Im-

munity From Private Suits In Bankruptcy...

SECTION 106(a) OF THE BANKRUPTCY

CODE CANNOT ABROGATE~ THE

STATES’ SOVEREIGN IMMUNITY FROM

AN ADVERSARY PROCEEDING TO DIS-

CHARGE A DEBT OWED TO A STATE........

A. Congress Asserted Broad Authority In

The Bankruptcy Code To Abrogate The

States’ Sovereign Immunity ...............:000000

B. An Adversary Proceeding To Discharge

An Educational Loan Under Section

523(a)(8) Is Barred By The States’ Sov-

TIT sccntsnipsssenssussessuscnssccscscscccees

TABLE OF CONTENTS—Continued

1. Many Educational Loans Are Guar-

anteed By The States ................c0-seseeees

Sovereign Immunity Bars Adversary

Proceedings Against States To Dis-

charge Educational Loans...............:++++

Ill. ABROGATION OF STATE SOVEREIGN

IMMUNITY IS UNNECESSARY IN THIS

A. Discharge Of Educational Loans For

Undue Hardship Does Not Require Abro-

gation Of State Sovereign Immunity From

Adversary Proceedings ........::ccssssseeeeneeeeeees

B. Federal And State Law Provide for

Deferment, Forbearance, And Forgiveness

ee I sccccntsncisntiniicinaiiiiiinnime

COIN LIUISIOON nccccccccccccccescecoccsccesesscsssosossssssssossssossscesoes

Page

TABLE OF AUTHORITIES

Cases Page

Alden v. Maine, 527 U.S. 706 (1999) ..........ccccceeees passim

Blatchford v. Native Village of Noatak, 501 U.S.

PR ee Picnansersatinintcinintanieianmintasnnnnanteneaeies 7

Board of Trustees of Univ. of Ala. v. Garrett, 531

oaks SE ITED ccsrcctenennnscnsanmtgninaninenianiaiapecdenus 1,2

College Savings Bank v. Florida Prepaid Post-

secondary Education Expense Bd., 527 U.S.

Connecticut Higher Educ. Supplemental Loan

Auth. v. McBride, No. 105162, 1992 Conn.

Super. LEXIS 25GB (1992).......ccccccrccscscccccccccesees 28

Federal Maritime Comm'n vy. South Carolina

State Ports Auth., 535 U.S. 743 (2002) ............. passim

Matter of Estate of Fernandez, 123 F.3d 241 (Sth

SpeEL Tipe einierissccnntitverenenntenentocinnmetavanminnmensnsieis 20

Gardner v. New Jersey, 329 U.S. 565 (1947)........ 3,17

Goldberg v. Ellett (In re Ellett), 254 F.3d 1135

(9th Cir. 2001), cert. denied, 534 U.S. 1127

(iiisial haeesiererentsneusenninnnntanneantnnepmmaseniadeuminsaaies 20, 21

Guarantee Title & Trust Co. v. Title Guaranty &

ae ee OL en 15

Hoffman v. Connecticut Dep't of Income Maint.,

Ee as SEE ciciabtenitsnnmmeandntnntumeinianaionse 3, 17, 19

In Re Ayers, 123 U.S. 443 (1887)............cccecceeeeeees 7

Indiana University v. Canganelli, 501 N.E.2d

ee GA, Tae cussenetnenenstiniencesmenin 28

Mitchell v. Franchise Tax Bd. (In re Mitchell),

209 F.3d 1111 (9th Cir. 2000) 0... eeeeeeeees 20, 26

Murphy v. Michigan Guar. Agency (In re Mur-

phy), 271 F.3d 629 (Sth Cir. 2001) .............eeeee 20

Nelson v. La Crosse County Dist. Atty. (In re

Nelson), 301 F.3d 820 (7th Cir. 2002)............... 20

TABLE OF AUTHORITIES—Continued

Page

New York vy. Irving Trust Co., 288 U.S. 329

(FE assnicrenenbesmiunmnnaniteniensmenenmnnniemenenmente 16

New York v. United States, 505 U.S. 144 (1992) ...7, 7-8, 8

Northern Pipeline Constr. Co. v. Marathon Pipe

Line Co., 458 U.S. 50 (1982)............ccccsccseseeeees 18

Perez v. Campbell, 402 U.S. 637 (1971) ..........0000 16

Printz v. United States, 521 U.S. 898 (1997) ........ 8, 14

Railway Labor Executives’ Ass'n v. Gibbons, 455

es Ge CORED ccrcnpsncsmtnssennnemenmecemenes 10, 10-11, 11

Reno v. Condon, 528 U.S. 141 (2000)...............00. 8

Sacred Heart Hosp. of Norristown v. Pa. (in re

Sacred Heart Hosp. of Norristown), 133 F.3d

Be GR Gs COE ceentencerennesnsssesmmnennens 20

Schlossberg v. Maryland Comptroller of Treas.,

(In re Creative Goldsmiths of Washington,

D.C., Inc), 119 F.3d 1140 (4th Cir. 1997);

cert. denied, 523 U.S. 1075 (1998).........ceeeees 20

Seminole Tribe of Florida v. Florida, 517 U.S.

SO Cee crninsennrcinnnensneenenmnnnmmmgeenmenemnanes passim

Standifer v. State, 3 P.3d 925 (Alaska 2000)......... 28

State v. Shelton, 47 Conn. 400 (1879) ..............eeee 14

Student Loan Marketing Ass'n v. Riley, 104 F.3d

397 (D.C. Cir.), cert. denied, 522 U.S. 913

Sache dainlnnitaarnaiecacnsitaiaieniiietiatalaieniaiailaaidaslbisieaiaiasl 23, 23-24

Sturges v. Crowninshield, \7 U.S. (4 Wheat.) 122

SEES eee ener veer aera ne 10, 12, 16

Texas v. Walker, 142 F.3d 813 (Sth Cir. 1998),

cert. denied, 525 U.S. 1102 (1999).................04 21

United States v. Herron, 87 U.S. (20 Wall.) 251

RESIN sereeowensemccires ene En an ne we ee 14

United States v. Lopez, 514 U.S. 549 (1995)......... 7

- —_ ae oe ere _ °

Vil

TABLE OF AUTHORITIES—Continued

Constitutional Provisions, Statutes, and Rules Page

Act of April 4, 1800, ch. 19, § 62, 2 Stat. 19, 36.. 13-14

Act of August 19, 1841, ch. 9, 5 Stat. 440 (re-

pealed by Act of March 3, 1843, ch. 82, 5

BI, Gia icsenannenasansopnesennenenaniensmmeasanedemmnnamnenenn 14

Act of March 2, 1867, ch. 176, 14 Stat. 517

(repealed by Act of June 7, 1878, ch. 160, 20

Bs Se ictiiniiiadeirrrimrnraiinirteniennnieniiaianatatiaiiaetates 14

| ee a 22

es I iiiciiccacntnintesicammeadiatiniaataaitaties 28

es I itssinintsisniianssntsidininaatataitunamaaitiiaatadaataatie 28-29

EL ee ae 29

Is CO alte 23

| Scene 29

ee 23

34 C.F.R. § 682.402(k)( 1 (i)... eecceeeeseceeeseeeeeees 23

ee ariaceetitereineainiaiintiaiiniditieniietiais 23

Education Amendments of 1976, Pub. L. No. 94-

482, § 439A, 90 Stat. 2081, 2141 (codified at

20 U.S.C. 1087-3 (1976) (repealed 1978))........ 24

Fed. R. Bankr. P. 4007(a) .............csccssccseseesseeseeenees 25

Pe De GERI Oe. Sede eiccnsnasnnsssessssecesnnsmenepennnsnen 20, 25

Fe Gk. SUNT, U7. CRO cccccnenssnscscenssmsenecensessseeees 25

Tenn. Comp. R. & Regs. ch. 1640-1-2 ................. 29

Tenn. Comp. R. & Regs. 1640-1-2-.01(3)............. 22-23

Tenn. Comp. R. & Regs. 1640-1-2-.03 ................. 23

Tenn. Comp. R. & Regs. 1640-1-2-.03(8)(g)........ 29

Tenn. Comp. R. & Regs. 1640-1-2-.03(11)........... 29

Tenn. Comp. R. & Regs. 1640-1-2-.04(1)(a) ........ 23

Tenn. Comp. R. & Regs. 1640-1-2-.04(6)............. 23

Tenn. Comp. R. & Regs. 1640-1-7-.05(1)(a) ........ 23

Tenn. Comp. R. & Regs. 1640-1-13-.05(3)(e) ...... 29

Tenn. Comp. R. & Regs. 1640-1-13-.05(3)(f)....... 29

Tenn. Comp. R. & Regs. 1640-1-13-.05(4)(a) ...... 29

vill

TABLE OF AUTHORITIES—Continued

Page

Tenn. Comp. R. & Regs. 1640-1-17-.05(4)(f)....... 29

Tenn. Comp. R. & Regs. 1640-1-17-.05(4)(g)...... 29

Tenn. Comp. R. & Regs. 1640-1-17-.05(5)(a) ...... 29

Tex. Admin. Code tit. 19, § 21.62(a)(3) 0.0 30

Tex. Admin, Code tit. 19, § 21.62(a)(5) .........cceeee 30

Tex. Admin. Code tit. 19, § 21.62(€).......cccceseeees 29-30

Tex. Admin. Code tit. 19, § 21.63(a).......cccccceeeees 29-30

Th Oe | 18

TEE Co | |) ee 19

PRS Co: ee 19

02 UBC. § SBCA MS) wcccecccvceccccccececccscssccvccvcsssccseees 19

80 US. § IGG GaE) qccccccvceeescoccccesescceveccccsesess reson 19

BO USB. © DEED ccececsncncccssccvssescnesescsesesszensvcsssecee 18

Oy passim

en 23

BO UB. § UG TSIOI TA) ccccccccccsccccccescvccsevevescss2c00 22

UB. Gamat. Ast. € & &, 6. © ccvresecescercccncessscssssssssense 1]

Other Authorities

Laura B. Bartell, Getting to Waiver—A Legis-

lative Solution To State Sovereign Immunity In

Bankruptcy After Seminole Tribe, 17 Bankr.

NG 13

Ralph Brubaker, Of State Sovereign Immunity

and Prospective Remedies: The Bankruptcy

Discharge As Statutory Ex Parte Young Relief,

76 Am. Bankr. L. J. 461 (2002)... ccceeeeeeeees 12-13

Peter J. Coleman, Debtors and Creditors in

PT | 9

Collier On Bankruptcy (15th rev. Cd.) ......c0ceeeeeeee 19, 24

Collier On Bankruptcy (14th ed. 1978).........06. 14, 15, 16

Common Manual: Unified Student Loan Policy

ee 22, 29

TRE ETS

TABLE OF AUTHORITIES—Continued

Darrell Dunham & Ronald A. Buch, Educational

Debts under the Bankruptcy Code, 22 Mem.

David G. Epstein et al., Bankruptcy (1992) ..........

Elizabeth Gibson, Congressional Response to

Hoffman and Nordic Village: Amended Sec-

tion 106 and Sovereign Immunity, 69 Am.

eS Oe

Henry M. Hart, Jr.. The Power of Congress to

Limit the Jurisdiction of Federal Court: An

Exercise in Dialectic, 66 Harv. L. Rev. 1362

[Pare prennenssnnsnemenuninpnsniinenuiannniailiataidddtutaniibiniaiis

Vicki C. Jackson, One Hundred Years of Folly:

The Eleventh Amendment and the 1988 Term,

64 S. Cal. L. Rev. 51 (1990)... eeceecceeeeeeeeees

Robin Leonard, Take Control of Your Student

00d Bent Gee eeennmennnn 22

James Madison, The Federalist No. 39 (C.

PETITE GE, We Pecnecesnssssersssesenmmeenmmneeemetn

James Madison, The Federalist No. 42 (C.

Bruce H. Mann, Republic of Debtors (2002).........

F. Regis Noel, A History of the Bankruptcy Clause

of the United States of America (1918)...

John Silas, Adversary Proceedings in Bank-

ruptcy, 39 Prac. Law. 55 (1993) .....ccceseseeeeeees

David A. Skeel, Jr., Debt's Dominion, A History

of Bankruptcy Law in America 25 (2001) .........

Joseph Story, Commentaries on the Consti-

Charles Jordan Tabb, The Law of Bankruptcy

Page

16, 18

,» 23, 27

TABLE OF AUTHORITIES—Continued

Page

Charles Jordan Tabb, The Historical Evolution of

the Bankruptcy Discharge, 65 Am. Bankr. L.

J, SES CADIA ) cnceccccccccsccecsescccccssssssonecescossossnssenscoes 14

Charles Jordan Tabb, The History of the

Bankruptcy Laws In The United States, 3 Am.

Bankr. Inst. L. Rev. 5 (1995) ......cccceeseeeseereeeeeees 12

U.S. Department of Education, The Student

Guide, Financial Aid from the U.S. Depart-

ment Of Education (2003) ...cccccccceeereeeeeeereeereeeees 21,22

Charles Warren, Bankruptcy in United States

History (1935)....cccrccccccsccceceseccsscccessosccossessnooeess 9,10, 11

INTEREST OF THE AMICI CURIAE

Amici are organizations whose members include state,

county and municipal governments and officials throughout

the United States.' Amici have a compelling interest in pro-

tecting state sovereignty from federal judicial encroachments.

The Eleventh Amendment is one of the principal constitu-

tional protections of state sovereignty. The Amendment

recognizes that “each State is a sovereign entity in our federal

system” and that “[i]t is inherent in the nature of sovereignty

not to be amenable to the suit of an individual without its

consent.” Seminole Tribe of Florida v. Florida, 517 U.S. 44,

54 (1996) (quotations and citations omitted). The Court has

recently re-affirmed that “Congress may not, of course, base

its abrogation of the States’ Eleventh Amendment immunity

upon the powers enumerated in Article I.” Board of Trustees

of the Univ. of Ala. v. Garrett, 531 U.S. 356, 364 (2001).

The court of appeals blatantly disregarded settled authority

in holding that Congress could validly abrogate the States’

Eleventh Amendment immunity under its Article I Bank-

ruptcy Clause powers. Contrary to the understanding of the

court of appeals, the framers no more contemplated that the

need for federal uniformity in bankruptcy law justifies

overriding the States’ sovereign immunity than does the need

for uniformity under the Commerce Clause or any other

Article I power. Because “Article I cannot be used to

circumvent the constitutional limitations placed upon federal

jurisdiction,” id., amici submit this brief to assist the Court in

its resolution of this case.

' The parties have consented to the filing of this amicus brief and their

letters of consent have been filed with the Clerk. This brief was not

authored in whole or in part by counsel for a party, and no person or entity

other than amici or their members made a monetary contribution toward

its preparation or submission.

SUMMARY OF ARGUMENT

|. The States’ sovereign immunity from suit is “[a]n inte-

gral component of [their] residuary and inviolable sover-

eignty,” Federal Maritime Commission v. South Carolina

State Ports Authority, 535 U.S. 743, 751-52 (2002) (citation

and internal quotation marks omitted), and is retained by the

States “except as altered by the plan of the Convention or

certain constitutional Amendments.” Alden vy. Maine, 527

U.S. 706, 713 (1999). This Court has repeatedly and

categorically held that “Congress may not . . . base its abro-

gation of the States’ Eleventh Amendment immunity upon the

powers enumerated in Article I” of the Constitution. Board

of Trustees of the Univ. of Ala. v. Garrett, 531 U.S. 356, 364

(2001). In addition to the Court’s recent indication that this

categorical rule applies as much to the Article I bankruptcy

power as to any other Article I power, see Seminole Tribe of

Florida v. Florida, 517 U.S. 44, 72 n.16 (1996), there is

no basis in history, practice, or precedent to support a

contrary conclusion.

|. History. There is no evidence—much less the requisite

compelling evidence—that the Framers of the Constitution

intended to apply bankruptcy laws to the States. Evidence of

the ratification period shows only that Congress was deemed

to have power under the Bankruptcy Clause to regulate

private creditors and debtors and the power, under the

Supremacy Clause, to preempt duplicative state regulation.

The Framers’ principal concern in adopting the Bankruptcy

Clause was to prevent varying state laws on the subject from

impeding interstate commerce. See James Madison, The

Federalist No. 42, at 271 (C. Rossiter, ed. 1961).

2. Practice. The first century of federal bankruptcy legis-

lation provides irrefutable evidence that the Framers did not

intend the bankruptcy power to apply to the States. The

first federal bankruptcy statute, the Act of 1800, expressly

exempted debts owed to the United States or to the States.

Two subsequent nineteenth-century bankruptcy schemes—

those of 1841 and 1867—were construed to provide the same

exemption. During the 110 years between 1789 and 1898,

these three federal bankruptcy schemes were in effect for a

total of only 16 years, and regulation of bankruptcy was

otherwise left to state law. Congress’ practice throughout this

long period thus reinforces the conclusion that neither the

Framers nor Congress intended to subject nonconsenting

States to suit in bankruptcy prior to the twentieth century.

3. Precedent. This Court’s precedents lend no support to

proposition that Congress can subject nonconsenting States to

suit under the Bankruptcy Clause of Article I. Congress has

the power to regulate private creditors and debtors and to

limit the States’ powers to do the same. And a State may, of

course, waive its sovereign immunity by voluntarily invoking

federal bankruptcy jurisdiction. See Gardner v. New Jersey,

329 U.S. 565 (1947). This Court’s precedents do not,

however, provide any basis for the proposition, essential to

the holding below, that Congress, when legislating pursuant

to its Article | bankruptcy power, can abrogate the States’

Eleventh Amendment immunity. On the contrary, the Court

has made clear that Congress cannot abrogate the States’

sovereign immunity when legislating pursuant to any of its

Article I powers.

Il. While the Bankruptcy Reform Act of 1978 revolu-

tionized federal bankruptcy jurisdiction and section 106 of

that Act expressly sought to override state sovereign

immunity in bankruptcy, that attempt to abrogate is invalid.

Initially a plurality of this Court held that section 106 did not

contain a sufficiently clear statement of Congress’ intent to

abrogate state sovereign immunity. See Hoffman v. Connec-

ticut Dep't of Income Maint., 492 U.S. 96 (1989). Five years

later Congress amended section 106(a) to make its intent to

abrogate sufficiently clear and set forth 60 sections of the

Bankruptcy Code as to which governmental immunity was

purportedly abrogated.

The lower courts have since divided these 60 sections into

two groups: (1) those involving matters that must be litigated

in adversary proceedings against a State or other gov-

ernmental unit, and (2) issues that do not require an adversary

proceeding. Except for the decision of the court of appeals in

this case, every other court of appeals to have considered the

issue has held that the abrogation of state sovereign immunity

from adversary proceedings purportedly effectuated by

section 106(a) is unconstitutional. The subjects of these

adversary proceedings range from discharge of educational

loans (as in this case) to the discharge of state tax obligations

to the contesting of title to state-held property.

Many educational loans are guaranteed by the States under

a variety of programs. An adversary proceeding to dis-

charge a student loan pursuant to the “undue hardship”

exception of section 523(a)(8) of the Bankruptcy Code is

barred by the States’ sovereign immunity unless the State

consents to such a suit.

As a general matter, section 523(a)(8) exempts from

bankruptcy discharge student loans, including loans that are

guaranteed by the States and the Federal Government.

Section 523(a)(8) also provides, however, that a student loan

may be discharged in cases of “undue _hard-

ship on the debtor and the debtor’s dependents.” 11 U.S.C.

§ 523(a)(8).

Under the Bankruptcy Rules, “a proceeding to determine

the dischargeability of a debt” is an adversary proceeding and

is subject to procedural rules similar to those that govern

litigation in federal district courts. There is no constitution-

ally significant difference between an adversary proceeding

seeking the discharge of a student loan on grounds of undue

hardship and a suit that seeks to recover funds from the

State’s treasury. Both are barred by the States’ sover-

eign immunity.

III. The fact that an adversary proceeding seeking an

undue hardship discharge is barred by Tennessee’s sovereign

immunity does not leave debtors without remedies. There are

ways other than adversary proceedings against the State for

debtors to obtain temporary or permanent relief from student

loan obligations in circumstances of undue hardship.

First, the State’s sovereign immunity does not prevent a

debtor from raising undue hardship as a defense in a state-

initiated action to collect an unpaid student loan. Several

state courts have allowed student debtors to invoke the

standard of “undue hardship” set forth in section 523(a)(8) as

a defense in such state-initiated actions. The application of a

federal law standard for discharge in such cases would appear

unobjectionable when the Federal Government is an active

participant in the student loan program at issue.

Second, under appropriate circumstances both the States

and the Federal Government relieve borrowers from the

burden of repaying student loans in documented cases of

undue hardship. For example, federal regulations, applicable

to federally guaranteed student loan programs administered

by the States, provide for postponement of repayment of

student loans in circumstances such as economic hardship and

temporary total disability or poor health, and cancellation of

loans in the event of the borrower’s total disability.

Tennessee has promulgated regulations that provide for

deferred repayment of educational loans when the borrower is

conscientiously seeking but unable to find full-time employ-

ment or if poor health or other personal problems affect the

ability of the borrower to make scheduled payments. In

addition, in non-federally guaranteed student loan programs,

Tennessee provides for the cancellation of indebtedness in the

case of death or permanent disability of the borrower.

Given the States’ political accountability to their citizens, it

is not surprising that state laws allow for circumstances

in which student loans are to be rescheduled or forgiven

administratively rather than through litigation. The precise

balance to be drawn, however, is committed by the

Constitution to the State’s political branches rather than to

federal bankruptcy law.

ARGUMENT

I. CONGRESS HAS NO POWER UNDER THE

BANKRUPTCY CLAUSE OF ARTICLE I TO

ABROGATE THE STATES’ SOVEREIGN

IMMUNITY

A. The States Are Immune From Private Suit

Unless There Is “Compelling Evidence” That

They Surrendered Their Sovereign Immunity

As Part Of The Constitutional Plan

The Constitution specifically recognizes that the States are

“sovereign entities.” Alden v. Maine, 527 U.S. 706, 713

(1999) (internal citation omitted). It reserves substantial

powers for the States, and it rejects “the concept of a central

government that would act upon and through the States in

favor of a system in which the State and Federal Govern-

ments would exercise concurrent authority over the people.”

Id. at 714 (internal quotations and citations omitted). This

system of “[d]ual sovereignty is a defining feature of our

Nation’s constitutional blueprint.” Federal Maritime Com-

mission v. South Carolina State Ports Authority, 535 U.S.

743, 751 (2002).

The States’ “immunity from private suits” is “[a]n integral

component of [their] ‘residuary and inviolable sovereignty.’

Federal Maritime Commission, 535 U.S. at 751-52 (quoting

James Madison, The Federalist No. 39, at 245 (C. Rossiter

ed. 1961)). This immunity is “a fundamental aspect of the

sovereignty which the States enjoyed before the ratification of

the Constitution.” Alden, 527 U.S. at 713. The States’

immunity from private suits is also inherent “in the system of

federalism established by the Constitution.” /d. at 730.

The States retain their sovereign immunity “except as

altered by the plan of the Convention or certain constitutional

Amendments.” Alden, 527 U.S. at 713. Although this Court

has recognized that the “States, in ratifying the Constitution,

did surrender a portion of their inherent immunity by

consenting to suits brought by sister States or by the Federal

Government,” it has also held that “the Convention did not

disturb States’ immunity from private suits.” Federal

Maritime Commission, 535 U.S. at 752. Sovereign immunity

protects the States from “the indignity” of being subjected “to

the coercive process of judicial tribunals at the instance of

private parties.” /n Re Ayers, 123 U.S. 443, 505 (1887). It

also protects their fiscal integrity. See Alden, 527 U.S. at 750-

51. Congress does not have “authority under Article I to

abrogate a State’s immunity from suit” unless “there is

‘compelling evidence’ that this derogation of the States’

sovereignty is ‘inherent in the constitutional compact.’” /d. at

741 (quoting Blatchford v. Native Village of Noatak, 50\ U.S.

775, 781 (1991)).

B. The States Did Not Surrender Their Immunity

From Private Suits In Bankruptcy

Inquiry into the plan of the Convention requires consid-

eration of “history, practice, [and] precedent.” See Alden,

527 U.S. at 741. It also requires attention to the distinctions

that the Court makes in addressing “the proper division of

authority between the Federal Government and the States.”

New York v. United States, 505 U.S. 144, 149 (1992).

In recent years this Court has considered three distinct

categories of federal statutes that have significant effects on

the States. The first is congressional enactments that regulate

private activity. /d. at 157-60 (discussing growth of national

authority Over private activity such as the generation and

disposal of low-level radioactive waste); see also United

States v. Lopez, 514 U.S. 549 (1995). A second category is

federal statutes that “subject state governments to generally

applicable laws”—statutes that regulate the States by

subjecting them “to the same legislation applicable to private

parties.” New York v. United States, 505 U.S. at 160; see

Reno v. Condon, 528 U.S. 141 (2000). A third category of

federal statutes “use{s] the States as implements of

regulation.” New York v. United States, 505 U.S. at 161; see

Printz v. United States, 521 U.S. 898 (1997); see also Alden,

527 U.S. at 752 (“Congress may not require the legislative or

executive branches of the States to enact or administer federal

regulatory programs.”). In addition to statutes raising issues

of regulatory federalism under the Tenth Amendment, federal

statutes that authorize private suits against nonconsenting

States raise fundamental constitutional issues of state sov-

ereign immunity. See Seminole Tribe of Florida v. Florida,

517 U.S. 44 (1996); Alden, 527 U.S. at 757 (“sovereign im-

munity . . . strikes the proper balance between the supremacy

of federal law and the separate sovereignty of the States”).

Federal bankruptcy legislation thus poses important dis-

tinctions between: (1) federal regulation of private debtors

and creditors; (2) the application to the States of federal

regulations that govern private creditors and debtors;

(3) statutes that use the States to enforce national law; and

(4) federal laws that purport to authorize private suits against

nonconsenting States. When these distinctions are observed,

it is clear that the sovereign immunity “embedded in our

constitutional structure and retained by the States when they

joined the Union,” Federal Maritime Commission, 535 U.S.

at 754, extends to private suits against States in bankruptcy.

For the first 110 years of our constitutional history—from

1789 until at least 1898, the national bankruptcy power,

which Congress exercised only sporadically, did not go

beyond regulation of private debtors and creditors. Bank-

ruptcy legislation did not apply to debts owed to government,

federal or state. History, practice, and precedent each estab-

lish that the notion of subjecting the States to suit at the

* ne el

behest of private creditors and debtors would have been

completely foreign to the Framers.

1. History. The “contours of sovereign immunity are

determined by the Founders’ understanding.” A/den, 527 U.S.

at 734. At the time the Constitution was adopted, bankruptcy

was primarily a creditors’ remedy against traders and

merchants, and the purpose of bankruptcy was to promote

commerce. See Peter J. Coleman, Debtors and Creditors in

America 12-13 (1974). Outside the commercial context,

debtors did not garner much sympathy. Bruce H. Mann,

Republic of Debtors 59, 82-83 (2002) (explaining that the

growing acceptance of debt as part of life applied principally

to entrepreneurs).

There is no evidence—much less the requisite “compelling

evidence”—that the Framers intended to apply bankruptcy

laws to the States. There is no evidence that the Framers

intended to force a State as a creditor to use federal bank-

ruptcy proceedings to collect a debt owed to a State, or that

they intended to permit debtors to maintain an action against

a State to discharge a debt owed to a State. The evidence,

instead, shows only an understanding that Congress would

have the power under the Bankruptcy Clause to regulate

private creditors and debtors, as well as the power, under the

Supremacy Clause, to preempt duplicative state regulation.

Regulation of the States under the Bankruptcy Clause did not

begin until the 1898 Bankruptcy Act at the earliest, more than

a century after the ratification of the Constitution.

In the period before the adoption of the Constitution, the

colonies and many States enacted insolvency and bankruptcy

laws. See Charles Warren, Bankruptcy in United States

History 6 (1935); F. Regis Noel, A History of the Bankruptcy

Clause of the United States of America 33-66 (1918) (dis-

cussing bankruptcy legislation in the colonies and States prior

to the Constitutional Convention); Mann, Republic of Debt-

ors, at 177-82 (same). Many of these laws were the product

of the hard economic times that followed the revolutionary

boom. See id. at 170-82. When prominent citizens were

imprisoned for debt, the notion that debt was an economic

failure, not a moral failure, took hold. /d. at 59, 102, 180-81.

Some States enacted simple gaol-delivery statutes, which

released individuals who owed very small sums both from

their debt and from debtors’ prison; other States enacted

insolvency laws, which released debtors from prison but not

from their debts; and a few States enacted more compre-

hensive bankruptcy laws. See Sturges v. Crowninshield, 17

U.S. (4 Wheat.) 122, 194 (1819) (discussing distinctions

between insolvency and bankruptcy laws); Joseph Story, Il

Commentaries on the Constitution §§& 1106-1113 (1833)

(same); Mann, Republic of Debtors, at 179-80 (discussing the

pre-convention bankruptcy laws of Pennsylvania and New

York). These early laws did not apply to the States; they

applied to private debt. The States enjoyed sovereign

immunity from bankruptcy and insolvency legislation before

ratification of the Constitution. See generally Alden, 527

U.S. at 713 (addressing state immunity from suit before

ratification).

The Framers paid little attention to the Bankruptcy Clause

at the Constitutional Convention. See Railway Labor Exec-

utives’ Ass'n v. Gibbons, 455 U.S. 457, 471 (1982); Charles

Jordan Tabb, The Law of Bankruptcy 44 (1997); Noel, A

History of the Bankruptcy Clause, at 76; Warren, Bankruptcy,

at 4-5. The Framers’ primary concern was the relation of

bankruptcy to commerce. See Sturges, 17 U.S. at 195 (“[t}he

bankrupt law is said to grow out of the exigencies of

commerce”); see also Warren, Bankruptcy, at 7; Tabb, Law of

Bankruptcy, at 44; Mann, Republic of Debtors, at 186-87.

State insolvency and bankruptcy laws were thought to create

impediments to interstate commerce. As this Court has

noted, “[g]iven the sovereign status of the States, questions

were raised as to whether one State had to recognize the relief

given to a debtor by another State.” Railway Labor

Ss aeealalll

Executives’ Ass'n, 455 U.S. at 472. If a State’s insolvency

and bankruptcy laws applied only to property, or to debtors

and creditors, in that State, non-resident creditors might have

“difficulty in reaching property of the debtor located in or

removed to another state.” Tabb, Law of Bankruptcy, at 44.

Variations in state insolvency and bankruptcy laws, coupled

with the risk of discrimination against nonresident creditors,

also impeded interstate commerce. /d. at 32.

The Framers initially considered addressing these problems

under the Full Faith and Credit Clause. See Railway Labor

Executives’ Ass'n, 455 U.S. at 471-72. They decided instead

to give Congress the power “[t]o establish ... uniform laws

on the subject of bankruptcies throughout the United States.”

U.S. Const. Art. 1, § 8, cl. 4. As James Madison explained:

The power of establishing uniform laws of bankruptcy is

so intimately connected with the regulation of com-

merce, and will prevent so many frauds where the parties

or their property may lie or be removed in different

States that the expediency of it seems not likely to be

drawn into question.

James Madison, The Federalist No. 42, at 271 (C. Rossiter

ed. 1961).

Given this concern with the impact of bankruptcy on

interstate commerce, the Framers “probably had English

bankruptcy in mind” as the “subject” of Congress’s legisla-

tive power. Tabb, Law of Bankruptcy, at 44; see Warren,

Bankruptcy, at 7 (“It is highly probable that the attention of

the framers was chiefly centred on bankruptcy in its relation

to commerce, and that the exercise of the power was

conceived as primarily for the benefit of the commercial class

of creditors and debtors, as in England.”). The English model

was “a collective collections remedy that creditors could

invoke involuntarily against a merchant trader who had

committed an ‘act of bankruptcy.’” Tabb, Law of Bank-

ruptcy, at 44. The Framers’ understanding of the limited

purpose of bankruptcy law is confirmed by the first federal

bankruptcy statute, the Act of 1800, which “copied the Eng-

lish bankruptcy laws of that time” and “was limited to cred-

itor-initiated petitions against merchants.” David G. Epstein

et al., | Bankruptcy § 1-1, at 1 (1992); see Tabb, The History

of the Bankruptcy Laws In The United States, 3 Am. Bankr.

Inst. L. Rev. 5, 6-7, 14 (1995).

There is no evidence that the Framers thought that the

“subject of bankruptcies” included the States. As this Court

observed recently, “[mJjany of the States were heavily

indebted as a result of the Revolutionary War” and “were

vitally interested in the question whether the creation of a

new federal sovereign, with courts of its own, would

automatically subject them, like lower English lords, to suits

in the courts of the ‘higher’ sovereign.” Alden, 527 U.S. at

716 (internal quotations and citations omitted). Any applica-

tion of the bankruptcy power against the States would have

been irreconcilable with the Framers’ concerns about the

States’ perilous financial conditions: “many of the States

could have been forced into insolvency but for their immunity

from private suits for money damages.” /d. at 750.

The court of appeals erred in holding that the “constitu-

tional uniformity requirement” contained in the Bankruptcy

Clause, “itself authorizes Congress to abrogate state

sovereign immunity.” Pet App. 14a. Congress undoubtedly

had, from the time of ratification, broad power to enact

“uniform” bankruptcy laws regulating private creditors and

debtors. See Sturges, 17 U.S. at 196-200 (discussing

Congress’s power to enact bankruptcy laws that preempt state

insolvency and bankruptcy laws). This broad power to

regulate private activity, however, does not mean that

Congress also had power to subject the States to private suit

under federal bankruptcy laws. As commentators have

concluded, “[t}he states’ undeniable surrender of their legis-

lative sovereignty with respect to ‘the subject of bank-

ruptcies’ did not perforce cede their sovereign immunity with

respect to federal bankruptcy proceedings.” Ralph Brubaker,

Of State Sovereign Immunity and Prospective Remedies: The

Bankruptcy Discharge As Statutory Ex Parte Young Relief, 76

Am. Bankr. L. J. 461, 482 (2002); see, e.g., Laura B. Bartell,

Getting To Waiver—A Legislative Solution To State Sov-

ereign Immunity In Bankruptcy After Seminole Tribe, 17

Bankr. Dev. J. 17, 27 (2000).

The “evidence regarding the plan of the Constitution”

relied upon by the court of appeals fails to support its holding.

See Pet. App. 21a. Although the court placed great weight on

a few passages in The Federalist (No. 81 and No, 32), see Pet.

App. 17a-19a, these passages, as the court of appeals

recognized, only “suggest that the states ceded their immunity

by granting Congress the power to make uniform laws.” /d.

at 19a; see Vicki C. Jackson, One Hundred Years of Folly:

The Eleventh Amendment and the 1988 Term, 64 S. Cal. L.

Rev. 51, 68 n.81 (1990) (the passages quoted by the court of

appeals do not support abrogation of state sovereign immu-

nity). There is, in short, no “compelling evidence” in the plan

of the Convention that the States surrendered their immunity

to private suits in bankruptcy. Alden, 527 U.S. at 741.

2. Practice. The first century of federal bankruptcy

legislation provides irrefutable evidence that the Framers did

not intend the bankruptcy power to apply to the States. Debts

owed to States were exempt from regulation under the

bankruptcy power; thus, there was no occasion for Congress

even to consider whether suits in bankruptcy could be

brought against nonconsenting States.

The first federal bankruptcy statute, the Bankruptcy Act of

1800, expressly exempted debts owed to the United States or

to the States. Act of April 4, 1800, ch. 19, § 62, 2 Stat. 19, 36

(“[NJothing contained in this law shall, in any manner, effect

the right of preference to prior satisfaction of debts due to the

United States as secured or provided by any law heretofore

passed, nor shall be construed to lessen or impair any right to,

or security for, money due to the United States or to any of

them.”); see Tabb, The Historical Evolution of the Bank-

ruptcy Discharge, 65 Am. Bankr. L. J. 325, 352 (1991). It is

well settled that “early congressional enactments provid[e]

contemporaneous and weighty evidence of the Constitution’s

meaning.” Printz, 521 U.S. at 905 (internal quotations and

citations omitted). The Bankruptcy Act of 1800 is strong

proof of the original understanding that the bankruptcy power

did not apply to the States.”

After ihe Bankruptcy Act of 1800 was repealed in 1803,

Congress enacted two other bankruptcy statutes in the 19"

century, the Bankruptcy Act of 1841 and the Bankruptcy Act

of 1867, each in force only briefly. See Act of August 19,

1841, ch. 9, 5 Stat. 440 (repealed Act of March 3, 1843, ch.

82, 5 Stat. 614); Act of March 2, 1867, ch. 176, 14 Stat. $17

(repealed Act of June 7, 1878, ch. 160, 20 Stat. 99).

Although the 1841 Act and the 1867 Act did not expressly

exempt debts owed to the Federal Government and the States,

they were construed to provide the same exemption as the

1800 Act. See, e.g., United States v. Herron, 87 U.S. (20

Wall.) 251, 263 (1873) (debt owed to the United States not

affected by debtor’s discharge under 1867 Bankruptcy

Act); State v. Shelton, 47 Conn. 400 (1879) (federal bank-

ruptcy statutes did not apply to a debt owed to the States);

Collier On Bankruptcy 9§ 17.01, 17.13, at 1575, 1611 n.11

(14th ed. 1978).

> The 1800 Act “was principally designed to assist creditors” who

could initiate proceedings against “merchants.” See Tabb, Bankruptcy

Discharge, at 345-46. There were no provisions for “voluntary” bank-

ruptcy—for a “financially troubled debtor [to] file for bankruptcy and

receive a discharge”—until the Bankruptcy Act of 1841. See Tabb, The

Law Of Bankruptcy, at 33. Thus, even absent the express exemption of

debts owed to the State and Federal Governments, the “plan of the Con-

vention” could not have included a surrender of the States’ immunity from

suit by insolvent debtors because there were no such proceedings until

1841 at the earliest.

During the 110 years between 1789 to 1898, the three

federal bankruptcy acts—the 1800 Act, the 1841 Act, and the

1867 Act—were in effect for a total of only sixteen years.

David A. Skeel, Jr., Debt’s Dominion, A History of Bank-

ruptcy Law in America 25 (2001). Regulation of bankrupty

was otherwise left to state law. /d. Debates about federal

bankruptcy law during this period focused on the scope of

federal authority over private activity. For example, in the

debates over the 1841 and 1867 Acts, proponents of debtors’

interests argued that bankruptcy laws should be voluntary

(debtor-initiated) and advocates of creditors’ interests argued

that bankruptcy should be involuntary (creditor-initiated). /d.

at 28-32. From 1789 to 1898, debts owed to the United States

and to the States were not subject to discharge in bankruptcy.

See Collier On Bankruptcy § 17.13, at 1611 (14th ed. 1978).

Throughout the 19th century, Congress does not appear to

have given any consideration to making nonconsenting States

subject to bankruptcy proceedings.

Indeed, even when Congress enacted the comprehensive

1898 Bankruptcy Act, it did not provide in express terms for

regulation of debts owed to the States. The application of the

1898 Act to the States was rather a product of judicial

inference. The courts noted that section 17(a)(1) expressly

exempted from discharge “a tax levied by the United States,

the State, county, district, or municipality” in which the

debtor resided. Collier On Bankruptcy § 17.01 at 1575 (14th

ed. 1978). Courts then concluded, in light of the purpose of

the 1898 Act to give debtors a “fresh start,” that the express

exemption of taxes from discharge signaled Congress’s

affirmative intention to subject to discharge other debts due to

federal, state, and municipal governments. /d. at ¥ 17.13, at

1611-12 n.12; see Guarantee Title & Trust Co. v. Title

Guaranty & Sur. Co., 224 U.S. 152, 160 (1912) (“The act

takes into consideration, we think, the whole range of indebt-

edness of the bankrupt—national, state, and individual—and

assigns the order of payment.”). Thus, government debts,

other than taxes, were subject to discharge in bankruptcy

under the 1898 Act. The application of this Act to the States

and the Federal Government was, however, quite limited. See

Elizabeth Gibson, Congressional Response to Hoffman and

Nordic Village: Amended Section 106 and Sovereign

Immunity, 69 Am. Bankr. L.J. 311, 311 1.2 (1995).

Federal bankruptcy laws expressly subjecting the States to

bankruptcy proceedings are a late 20th century phenomenon.

In 1966, Congress provided for the first time that state taxes

were, to a limited extent, subject to discharge. Collier On

Bankruptcy 4 17.13 (14th ed. 1978) (“[UJntil the 1966

amendment to § 17(a), taxes due any governmental unit were

expressly exempted from the operation of discharge.”);

See id. § 17.14, at 1612-13. In 1978, as discussed below,

Congress expressly sought to abrogate the States’ sovereign

immunity.

3. Precedent. This Court has held that Congress has the

power to regulate private creditors and debtors and to limit, in

turn, the States’ power to regulate these private parties. See,

e.g.,, Perez v. Campbell, 402 U.S. 637 (1971) (holding that

state law which suspended a debtor’s driver’s license pending

satisfaction of an unpaid motor vehicle tort judgment

conflicted with federal bankruptcy discharge); see also

Sturges, 17 U. S. at 196-97 (holding that “until the power to

pass uniform laws on the subject of bankruptcies be exercised

by Congress, the states are not forbidden to pass a bankrupt

law”). The Court has also held that, notwithstanding adverse

effects on state treasuries, Congress has some power to

regulate States as creditors in the same fashion that it

regulates private creditors. See New York v. Irving Trust Co.,

288 U.S. 329, 333 (1933) (a State that “desires to participate

in the assets of a bankrupt . . . must submit to appropriate

requirements” of federal bankruptcy laws).

Although the Court has recognized that bankruptcy legis-

lation can have significant regulatory effects on the States, it

— a ee

has distinguished binding “a State that files no proof of claim

... like other creditors, by a discharge of debts in bankruptcy,

including unpaid taxes,” which is permissible, from sub-

jecting a nonconsenting State to “a monetary recovery,”

which is impermissible. See Hoffman v. Connecticut Dep't of

Income Maint., 492 U.S. 96, 102 (1989). Given this Court’s

reaffirmation that sovereign immunity is “immunity from

suit” regardless of the type of relief sought, see Federal

Maritime Commission, 535 U.S. at 766, the distinction, put

more completely, is between binding the States, like other

creditors, to determinations about the distribution of the

debtor’s estate, and subjecting a nonconsenting State to a suit

for any type of relief.

The Court has never held that Congress has power under

the Bankruptcy Clause of Article I to subject nonconsenting

States to suit for any kind of relief. A State may waive its

sovereign immunity to a bankruptcy proceeding. See College

Savings Bank v. Florida Prepaid Postsecondary Education

Expense Bd., 527 U.S. 666, 681 n.3 (1999) (reading Gardner

v. New Jersey, 329 U.S. 565 (1947) for “the unremarkable

proposition that a State waives its sovereign immunity by

voluntarily invoking the [bankruptcy] jurisdiction of federal

courts”). This Court, however, has never awarded relief

against a State under federal bankruptcy statutes. Seminole

Tribe, 517 U.S. at 72 n.16.

This Court has consistently held that Congress does not

have authority to abrogate the States’ sovereign immunity

under its Article | powers. See, e.g., Federal Maritime

Commission, 535 U.S. at 743, 767-69 (maritime commerce).

There is no basis in history, practice, or precedent for finding

any greater power in the Bankruptcy Clause.

Il. SECTION 106(a) OF THE BANKRUPTCY CODE

CANNOT ABROGATE THE STATES’ SOV-

EREIGN IMMUNITY FROM AN ADVERSARY

PROCEEDING TO DISCHARGE A_ DEBT

OWED TO A STATE

A debtor-initiated adversary proceeding against a State

under section 523(a)(8) to discharge a debt owed to the State

is the “type of proceeding from which the Framers would

have thought the States possessed immunity when they

agreed to enter the Union.” Federal Maritime Commission,

535 U.S. at 756. Section 106(a) of the Bankruptcy Code,

which Congress enacted under its Article I bankruptcy power

and which purports to abrogate the States’ sovereign

immunity to such proceedings, is unconstitutional.

A. Congress Asserted Broad Authority In The

Bankruptcy Code To Abrogate The States’

Sovereign Immunity

The Bankruptcy Reform Act of 1978 revolutionized federal

bankruptcy jurisdiction. See Northern Pipeline Constr. Co. v.

Marathon Pipe Line Co., 458 U.S. 50, 52-53 (1982). It gave

federal bankruptcy courts power to adjudicate all claims

related to a debtor’s estate. Moreover, Congress, for the first

time, expressly provided that the bankruptcy laws applied to

the States and the Federal government. See Gibson, Con-

gressional Response, 69 Am. Bankr. L. J. at 311-17. Section

106, titled “Waiver of Sovereign Immunity,” applied to

“governmental units,” which were defined to include both the

States and the United States. 11 U.S.C. §§ 106(c), 101(15)

(Supp. II 1978). Sections 106(a) and 106(b) of the 1978 Act

codified a waiver doctrine and authorized compulsory and

permissive counterclaims against a governmental unit that

filed a proof of claim in the debtor’s bankruptcy case.

Section 106(c), by its terms, sought to bind the States to

determinations made under any section of the Code that

referred to “creditors,” “entities,” or “governmental units,”

. ——— _-

whether or not a State had filed a proof of claim or asserted

sovereign immunity.

In 1989, this Court found that section 106(c) was invalid to

the extent that it authorized certain adversary proceedings

against the States. See Hoffman, 492 U.S. at 104. A plurality

found that Congress had not made its intention to abrogate

sovereign immunity “unmistakably clear . . . in the language

of the statute.” /d. at 102 (internal quotation and citation

omitted); see id. at 102-04. Two members of the Court found

that Congress had no power under the Article I Bankruptcy

Clause to abrogate the States’ sovereign immunity. /d. at 105

(O’Connor, J., concurring) (Scalia, J., concurring in the

judgment).

Congress amended section 106 in 1994 with the express

intent to “overrule” Hoffman. 2 Collier on Bankruptcy 4

106.01, at 106-5 (15th rev. ed.). Section 106(a)(1) is the

successor to section 106(c) of the 1978 Act. See id. Section

106(a)(1) expressly abrogates the sovereign immunity of

“governmental units’—the Federal Government and_ the

States—with respect to sixty sections of the bankruptcy code,

whether or not the governmental unit files a proof of claim.

11 U.S.C. § 106(a)(1) (“notwithstanding an assertion of

sovereign immunity, sovereign immunity is abrogated as to a

governmental unit to the extent set forth in this section with

respect to the following [sixty sections of the Bankruptcy

Code]”). Section 106(a)(2) provides that courts may hear and

determine any issue arising under the 60 enumerated sections

of the Code. 11 U.S.C. § 106(a)(2). Sections 106(a)(3) and

(4) permit courts to enter against a State any order provided

under the Bankruptcy Rules, including judgments for com-

pensatory damages, costs, and fees. /d. § 106(a)(3) & (4).

In analyzing the validity of Congress’s attempt to abrogate

the States’ sovereign immunity “with respect to” these 60

Code provisions, 11 U.S.C. § 106(a)(1), the lower courts have

distinguished between issues that must be litigated in

adversary proceedings against a State, and issues that do not

entail adversary proceedings against a State.

Certain issues arising under the 60 Code sections in section

106(a)(1) must be litigated in “adversary proceed-

ings.” See Fed. R. Bankr. P. 7001 (listing matters to be

litigated in “adversary proceedings”). Except for the decision

of the court of appeals in this case, every other court of

appeals that has decided the issue since Seminole Tribe has

held that the abrogation of the States’ sovereign immunity

from adversary proceedings under section 106(a)(1) is uncon-

stitutional. Murphy v. Michigan Guar. Agency (In re Mur-

phy), 271 F.3d 629 (Sth Cir. 2001) (adversary proceeding

under section 523(a)(8) to discharge educational loans);

Nelson v. La Crosse County Dist. Atty. (In re Nelson), 301

F.3d 820 (7th Cir. 2002) (adversary proceeding under section

524 to enjoin state criminal prosecution against debtor);

Mitchell v. Franchise Tax Bd. (In re Mitchell ), 209 F.3d

1111 (9th Cir. 2000) (adversary proceeding to discharge state

tax debt); Sacred Heart Hosp. of Norristown v. Pennsylvania

(In re Sacred Heart Hosp. of Norristown), 133 F.3d 237 (3d

Cir. 1998) (adversary proceeding to compel state reimburse-

ment for medical services); Schlossberg v. Maryland

Comptroller of the Treas., (In re Creative Goldsmiths of

Washington, D.C., Inc.), 119 F.3d 1140 (4th Cir. 1997), cert.

denied, 523 U.S. 1075 (1998) (adversary proceeding under

section 547 to avoid income tax payment); Matter of Estate

of Fernandez, 123 F.3d 241 (Sth Cir. 1997) (adversary

proceeding to contest title of state-held property).

Some issues arising under the 60 Code sections of

106(a)(1) do not require adversary proceedings, and the

courts of appeals have held that sovereign immunity does not

bar bankruptcy court determinations affecting state interests

in these circumstances. See, e.g., Goldberg v. Ellett (In re

Ellett), 254 F.3d 1135, 1139-41 (9th Cir. 2001), cert. denied,

534 U.S. 1127 (2002) (state bound by general discharge order

disposing of debt owed State); Texas v. Walker, 142 F.3d 813,

822-23 (Sth Cir. 1998), cert. denied, 525 U.S. 1102 (1999)

(same). The distinction that the courts of appeals have drawn

is illustrated by the application of section 106(a) to section

524 of the Code. On the one hand, the lower courts have held

that a State that has not filed a proof of claim is bound, like

private creditors, by a general discharge of debts in bank-

ruptcy under section 524(a)(2). Walker, 142 F.3d at 821-23.

On the other hand, a debtor-initiated adversary proceeding

against a nonconsenting State to enforce a general discharge

order under section 524(a)(2) is barred by sovereign im-

munity. /n re Ellett, 254 F.3d at 1141.

The lower courts have thereby distinguished applications

of section 106 that raise issues of regulatory federalism from

applications of section 106 that raise issues of sovereign

immunity from suit. Where the issue is one of regulatory

federalism—Congress’s power to apply laws for the adjust-

ment of private debts to the States—courts have upheld the

application of section 106. This case, however, does not raise

such a regulatory question; it instead raises a question of

sovereign immunity from suit.

B. An Adversary Proceeding To Discharge An

Educational Loan Under Section 523(a)(8) Is

Barred By The States’ Sovereign Immunity

1. Many Educational Loans Are Guaranteed By

The States

The U.S. Department of Education (DOE) administers a

wide variety of student loan programs including the William

D. Ford Federal Direct Loan Program and Federal Family

Education Loan (FFEL) Program in which “private lenders

provide federally guaranteed funds” to students. U.S. DOE,

The Student Guide, Financial Aid from the U.S. Depart-

ment of Education | (2003). The FFEL Program includes

Stafford Loans, PLUS Loans, and Consolidation Loans.’ See

id. at 18-28.

The Stafford loan program is the largest student loan

program. Robin Leonard, Take Control of Your Student Loan

Debt, at 2/9 (2000); see U.S. DOE, The Student Guide, at 18-

24 (describing Stafford loans). This program provides

subsidized, as well as unsubsidized, loans for eligible students

at participating institutions. Common Manual: Unified

Student Loan Policy 4 2.1.B at 1 (Oct. 2003); see id. at 3

(Figure 2-1, The Life of a Stafford Loan).* Under the

Stafford loan program, students borrow money from a lender

and sign a promissory note. U.S. DOE, The Student Guide, at

18; see Common Manual, at § 2.2.A. While a student is in

school and during a subsequent grace period, “the federal

government pays the interest due the lender” on the student’s

loan. Common Manual, at 4 2.2.B.

State guaranty agencies, like petitioner Tennessee Student

Assistance Corporation (TSAC), play a critical role in these

loan programs. Leonard, Take Control, at 3/6; see 34 C.F.R.

§ 682.200(b) (defining a “[g]uaranty agency” as “[a] State or

private nonprofit organization that . . . administer[s] a loan

guarantee program”). These guarantors serve as interme-

diaries for the Federal Government and enter into guarantee

agreements with banks and secondary institutions. In the

event of default, they take over the loan and reimburse the

financial institution. See 20 U.S.C. § 1075(b)(1)(A); Tenn.

‘In addition to these loan programs, educational institutions also use

federal funds to make low interest loans under the Perkins Loan Program.

U.S. DOE, The Student Guide, at 1, 14.

* The Common Manual is available online at <http://www.usafunds.org/

policy_regulations/common_manual.html>. It is “{t}he product of a part-

nership among the nation’s education-loan guarantors,” and “offers finan-

cial-aid professionals and education lenders a single authoritative source for

guidance regarding Federal Family Education Loan Program (FFELP)

policies and regulations.” /d.

Comp. R. & Regs. 1640-1-2-.01(3) (TSAC insures 100% of

the unpaid principal balance plus accrued interest on

educational loans made by eligible lenders to students who

are Tennessee residents). State guarantors like TSAC are

subject to comprehensive regulation by DOE. See 34 C.F.R.

§§ 682.401(b); 682.410 (basic program agreement, and fiscal,

administrative, and enforcement requirements). TSAC, in

turn, regulates lenders. See Tenn. Comp. R. & Regs. 1640-1-

2-.04(1)(a); 1640-1-7-.05(1)(a) (lenders must use due dili-

gence in making, servicing, and collecting loans and “be

familiar with and abide by State and Federal law and regu-

lations governing the Guaranteed Student Loan Program”).

In addition to private lenders, state guarantors, and DOE,

other entities, commonly known as secondary market

companies, participate in student loan programs. See

Leonard, Take Control, at 3/5. Lenders frequently sell loans

that are not in default to secondary market companies like the

Student Loan Marketing Association (“Sallie Mae’). /d.; see

Tenn. Comp. R. & Regs. 1640-1-2-.04(6) (TSAC permits

sales or assignments of loans to approved secondary market

companies). Sallie Mae provides financing for lenders and is

“a major purchaser of student loans in the secondary market.”

Student Loan Marketing Ass'n v. Riley, 104 F.3d 397, 400

(D.C. Cir.), cert. denied, 522 U.S. 913 (1997).

If a borrower goes into default, the lender, after exercising

due diligence to collect the loan, may attempt to sell its claim

or collect insurance on the loan from a guarantor like TSAC.

See Tenn. Comp. R. & Regs. 1640-1-2-.03. If the borrower

files a petition for bankruptcy under Chapter 7, 11 U.S.C.

§ 727, or seeks a discharge of the student loan for undue

hardship, 11 U.S.C. § 523(a)(8), the lender must file an

insurance claim with the guaranty agency. See 34 C.F.R.

§ 682.402(f)(5). The guaranty agency can then seek insur-

ance on the claim from DOE. See 34 C.F.R. § 682.402

(k)(1)(i). A guaranteed Stafford loan may, “in the course of

its lifetime, make its way through three different institu-

tions—a bank, a secondary institution (such as Sallie Mae),

and a guaranty agency—before the federal government

finally intervenes and makes good on its guarantee.” Student

Loan Marketing Ass'n, 104 F.3d at 400.

2. Sovereign Immunity Bars Adversary Pro-

ceedings Against States To Discharge

Educational Loans

Before 1976, educational loans were generally considered

dischargeable in bankruptcy like other unsecured debts. See

4 Collier on Bankruptcy 4 523.LH{[1]-{[3] (15th rev. ed.)

(educational loans first excepted from discharge in 1976). In

response to concerns that recipients of student loans were

abusing the bankruptcy laws, Congress amended federal

education statutes in 1976 to provide that educational loans

were not subject to discharge in bankruptcy unless the

borrower could demonstrate that denial of the discharge

would cause “undue hardship.” Education Amendments of

1976, Pub. L. No. 94-482, § 439A, 90 Stat. 2081, 2141

(codified at 20 U.S.C. 1087-3 (1976) (repealed 1978)); see

Darrell Dunham and Ronald A. Buch, Educational Debts

under the Bankruptcy Code, 22 Mem. St. U. L. Rev. 679,

695-705 (1992) (examining development of “undue hardship”

standard). In 1978, Congress removed “[t]he exception of

educational loans from discharge . . . from the Higher Edu-

cational Act” and “moved” it to section 523 of the new

Bankruptcy Code, which contains the provisions gov-

erning exceptions to discharge. 4 Collier on Bankruptcy

q 523.LH[3] (15th rev. ed.).

Today, student loans that are guaranteed by the States and

the Federal Government are ordinarily exempted from dis-

charge under section 523(a)(8) of the Bankruptcy Code. 11

U.S.C. § 523(a)(8); see Tabb, Law of Bankruptcy, at 729-32

(§10.21 Educational Loans). Section 523(a)(8) provides, how-

ever, that a loan may be discharged if the exception from

discharge “will impose an undue hardship on the debtor and

the debtor’s dependents.” /d.; see Tabb, Law of Bankruptcy, at

731 (noting that “[t}he student loan exception .. . specifies a

standard of nondischargeability, rather than a rule”).

The procedures governing “the adjudication of a discharge

exception,” such as a student loan, are complex. See Tabb,

Law of Bankruptcy, at 739-40 (§10.28 Procedures for

Discharge Exceptions). The debtor, or a creditor like TSAC,

“may file a complaint to obtain a determination of .. .

dischargeability.” Fed R. Bankr. P. 4007(a); see Tabb, Law

of Bankruptcy, at 739-40. In this case respondent Pamela

Hood filed an adversary proceeding in federal bankruptcy

court requesting discharge of her educational loans on the

ground of undue hardship under 11 U.S.C. § 523(a)(8) four

months after she had obtained a general bankruptcy discharge

under Chapter 7. Pet. App. at 3a.

Under the Bankruptcy Rules, “a proceeding to determine

the dischargeability of a debt,” including a proceeding to

determine the dischargeability of a student loan under section

523(a)(8), is an adversary proceeding. Fed. R. Bankr. P.

7001(6). Adversary proceedings are governed by Part VII of

the Federal Rules of Bankruptcy Procedure. Fed. R. Bankr.

P. 7001. The rules governing adversary proceedings “are

based on the premise that to the extent possible practice

before the bankruptcy courts and the district courts should be

the same.” Fed. R. Bankr. P. 7001 (Notes of the Advisory

Committee on Rules, 1983). The rules of procedure govern-

ing adversary proceedings in bankruptcy “either incorporate

or are adaptations of most of the Federal Rules of Civil

Procedure.” /d; see John Silas, Adversary Proceedings in

Bankruptcy, 39 Prac. Law. (No. 6) 55 (1993) (discussing

application of Federal Rules of Civil Procedure and Federal

Rules of Evidence to adversary proceedings).

An adversary proceeding against a State to discharge an

educational loan, like an adjudicative proceeding before the

Federal Maritime Commission, “walks, talks, and squawks

like a lawsuit.” Federal Maritime Commission, 535 U.S. at

757 (internal quotation and citation omitted). For purposes of

sovereign immunity analysis, there is no difference between

“prevent[ing] the State from collecting monies due to it” in a

§ 523(a)(8) undue hardship proceeding and recovering funds

from a State’s treasury. See In re Mitchell, 209 F.3d at 1117.

Hood’s adversary proceeding against TSAC is therefore

barred by Tennessee’s sovereign immunity. See Federal

Maritime Commission, 535 U.S. at 766 (“Sovereign immunity

does not merely constitute a defense to monetary liability or

even to all types of liability[,] . . . it provides an immunity

from suit.”’).

Ill. ABROGATION OF STATE SOVEREIGN IM-

MUNITY IS UNNECESSARY IN THIS CASE

The assertion of respondent and her amici that Tennessee's

sovereign immunity threatens the bankruptcy system ignores

critical points. First, the States’ constitutional immunity is

not merely another policy to be weighed against Congress’

ever-shifting bankruptcy policies. Convenient administration

of federal statutes cannot trump the States’ constitutional

immunity. See, e.g., Federal Maritime Commission, 535 U.S.

at 769. Second, the impediments posed by state sovereign

immunity to the functioning of the federal bankruptcy system

are easily overstated. Congress can implement its policies for

discharge of student loans without attempting to abrogate the

States’ sovereign immunity from adversary proceedings.

Finally, even though sovereign immunity is a bar to private

suits against nonconsenting States, it is not a bar to doing

justice. As the late Professor Henry Hart explained long ago,

“no democratic government can be immune to the claims of

justice and legal right.” Henry M. Hart, Jr., The Power of

Congress to Limit the Jurisdiction of Federal Court: An

Exercise in Dialectic, 66 Harv. L. Rev. 1362, 1371 (1953). It

is, then, not surprising that state and federal law both provide

for the rescheduling or forgiveness of student loans for rea-

sons of hardship without litigation. Borrowers who experi-

ence difficulty repaying their educational loans can seek relief

under these laws from their school, lenders, and loan service

companies. See <http://studentaid.ed.gov/students/publica-

tions/repaying_loans/index.html> (DOE explanation of re-

payment options); Leonard, Take Control, at 6/1-6/56 (in-

structions for postponing payments and canceling loans).

A. Discharge Of Educational Loans For Undue

Hardship Does Not Require Abrogation Of

State Sovereign Immunity From Adversary

Proceedings

As this Court has often noted, there are many ways of

enforcing federal law that stop short of subjecting a non-

consenting State to private suits. See Federal Maritime

Commission, 535 U.S. at 768; Alden, 527 U.S. at 754-57;

Seminole Tribe, 517 U.S. at 72 n.16. Here, there is no need to

abrogate the States’ sovereign immunity from adversary

proceedings because debtors can obtain a determination of

undue hardship in a state-initiated collection action.

As one leading bankruptcy scholar has explained, the

student loan discharge exception can be litigated in state

courts. Tabb, Law of Bankruptcy, at 740. If a state agency

brings a state court action to collect an unpaid student loan,

the debtor “might raise the bankruptcy discharge as a defense,

and the creditor would respond by asserting a § 523(a)

exception,” such as the section 523(a)(8) exception for

student loans. /d. “The state court would then try the §

523(a) issue;” i.e., whether the exception from discharge of

an educational loan would impose an “undue hardship” on the

debtor. ° Id.

* Some state courts have allowed debtors to invoke section 523(a)(8)

and their entitlement to a discharge under federal law for undue hardship

In the state court action, “[p]resumably the same burden

and standard of proof would apply to the § 523(a) issue as

when trial is in the bankruptcy court.” /d. Although the

debtor “may prefer to file a complaint to determine

dischargeability in the bankruptcy court instead of waiting for

later resolution in a non-bankruptcy forum, relying on the

possibly greater pro-debtor sympathies of the bankruptcy

judge,” id., such preferences cannot override the States’

constitutionally protected sovereign immunity from suit.

B. Federal And State Law Provide For Deferment,

Forbearance, And Forgiveness Of Educational

Loans

Although the States’ sovereign immunity bars adversary

proceedings, the States and the Federal Government have not

used sovereign immunity to shield themselves from the

claims of their citizens to justice in the administration of

student loan programs. On the contrary, under appropriate

circumstances, they relieve borrowers from the burdens of

repaying educational loans in cases of undue hardship.

Federal regulations provide for (1) postponement of

repayment of student loans in a variety of circumstances,

including economic hardship and temporary total disability,

34 C.F.R. § 682.210 (deferment), (2) temporary cessation or

reduction of payments and extension time for repayment for

borrowers who, for example, intend to repay their loans but

cannot make their payments because of “poor health,” id.

in response to state-initiated collection actions. See Standifer v. State, 3

P.3d 925, 928 (Alaska 2000) (holding that state court had jurisdiction to

determine whether student loan should be discharged for undue hardship);

Connecticut Higher Educ. Supplemental Loan Auth. v. McBride, No.

105162, 1992 Conn. Super. LEXIS 2568, *3 (state court may conduct a

§ 523(aX8) proceeding in response to state agency's action to recover

debt); Indiana University v. Canganelli, 501 N.E.2d 299, 302 (Ill. App.

1986) (debtor awarded an undue hardship discharge of student loan under

§ 523(a)(8)).

§ 682.211 (forbearance), (3) cancellation or release from all

obligation to repay an educational loan in the event of the

borrower’s total disability, id. § 682.402 , and (4) forgiveness

in exchange for certain types of public service, like teaching,

id. § 682.215.

In addition, Tennessee has promulgated a comprehensive

set of regulations governing the administration of educational

loan programs. See Tenn. Comp. R. & Regs. 1640-1-2

(Guaranteed Student Loan Program); see generally Common

Manual: Unified Student Loan Policy, Ch. 10 (guidelines for

implementing federal deferment and forbearance provisions),

Ch. 12 9§ 12.8 (“release of a borrower’s obligation to repay

[a] loan, either in whole or in part’), 12.9 (“release of a

borrower’s obligation to repay a loan, either in whole or in

part, as a result of public service provided by the borrower’).

The Tennessee regulations provide for deferred payments

when the borrower is, for example, “conscientiously seeking

but unable to find full-time employment.” Tenn. Comp. R. &

Regs. 1640-1-2-.03(8)(g). The state regulations also encour-

age lenders to grant forbearance if “poor health or other

personal problems affect the ability of the borrower to make

scheduled payments.” /d. 1640-1-2-.03(11).

Even when educational loan programs are not federally

guaranteed, the States prescribe standards for forgiveness or

forbearance in cases of undue hardship. Tennessee provides

in its Minority Teaching Fellows Program and its Teaching

Scholars Program for cancellation of unpaid portions of a

loan if the borrower dies or becomes permanently disabled.

Tenn. Comp. R. & Regs. 1640-1-13-.05(3)(e)(f); id. 1640-1-

17-.05(4)(f) & (g). If a borrower is unable to make the

minimum payments, the State authorizes reduced payments.

Id. 1640-1-13-.05(4)(a); 1640-1-17-.05(5)(a). To take

another example, Texas provides in its College Access Loan

(CAL) program that officials “may grant periods of

forbearance for unusual financial hardship” and that “[alll

loans . . . are discharged in the event of death or in the event

of permanent and total disability of the borrower.” Tex.

Admin. Code tit. 19, §§ 21.62(e), 21.63(a); see id.

§§ 21.62(a)(3) & (5) (applying these provisions to the CAL

program and other Texas student loan programs that are not

federally insured).

These laws are examples of the States’ political respons-

iveness to borrowers’ needs. See Alden, 527 U.S. at 751.

Nonetheless, “other important needs and worthwhile ends

compete for access to the public fisc,” and “the balance

between competing interests” is a prerogative of the

sovereign State. /d.

CONCLUSION

The judgment of the court of appeals should be reversed.

Respectfully submitted,

D. BRUCE LA PIERRE RICHARD RUDA*

WASHINGTON UNIVERSITY Chief Counsel

SCHOOL OF LAW STATE AND LOCAL LEGAL CENTER

APPELLATE CLINIC 444 North Capitol Street, N.W.

One Brookings Drive Suite 345

St. Louis, MO 63130 Washington, D.C. 20001

(314) 935-6477 (202) 434-4850

* Counsel of Record for the

Amici Curiae

November 14, 2003

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.