Sovereign immunity, generally, prohibits suit against a sovereign without the sovereign’s consent. The defense of sovereign immunity may not be asserted by any state, or arm of the state, in any bankruptcy proceeding. The prohibition of asserting sovereign immunity in a bankruptcy case has been common practice, almost continuously, since the states agreed to such a waiver in the Constitutional Convention. Moreover, this waiver of sovereign immunity, has since been codified in Section 106 of title 11 of the United States Code (the “Bankruptcy Code”). As a result, a state involved in a bankruptcy case will typically be treated like any other creditor, that is, unless legislation is passed by Congress which exempts the state from that particular proceeding.
No sovereign immunity for states in bankruptcy cases has been the rule for over two-hundred years following the Constitutional Convention. However, the Supreme Court’s 1997 ruling in Seminole Tribe of Florida v Florida, reversed this longstanding rule and was thought to insulate “state[s] from bankruptcy court jurisdiction.” Almost ten years later, in Central Va. Cmty. Coll. v Katz, in yet another pivotal decision, the Supreme Court disregarded the bankruptcy element of the Seminole decision as dicta, and made clear that sovereign immunity was not a defense that could be asserted by a state in bankruptcy proceedings. More recently, in In re Bulk Petroleum (“Bulk Petroleum”), the Seventh Circuit reaffirmed that sovereign immunity was not a defense for the Kentucky Department of Revenue (“Kentucky”) in a chapter 11 bankruptcy case.
Part I of this article describes the history of the prohibition of the sovereign immunity defense in bankruptcy proceedings. Part II discusses the Seminole Tribe and Katz cases and the dichotomous effect that the two had on sovereign immunity in bankruptcy proceedings. Part III explores the Seventh Circuit’s Bulk Petroleum decision and the prohibition of sovereign immunity by the court in that case. This article concludes with a summation of how sovereign immunity in bankruptcy cases will continue to be an invalid defense for states into the foreseeable future.