The sovereign immunity of the states, or the freedom of a state from suit by its citizens, became constitutionally protected in the late eighteenth century through the passage and ratification of the Eleventh Amendment. In particular, the Eleventh Amendment protected states from suits “commenced or prosecuted…by Citizens of another State, or by Citizens or Subjects of any Foreign State.” Notwithstanding the plain language, the Supreme Court has held that the Eleventh Amendment also bars suits against a state that are commenced by citizens of its own state. Moreover, the Eleventh Amendment also bars suits by municipalities brought against the state.
Until recently, the general view was that sovereign immunity barred actions against states in bankruptcy proceedings because such immunity “restricts the judicial power under Article III, and Article I cannot be used to circumvent the constitutional limitations placed upon federal jurisdiction.” However, in 2004, the Supreme Court held that states could not assert sovereign immunity under the Eleventh Amendment as a defense in a bankruptcy proceeding to determine the dischargeability of a student loan debt because such proceeding was not a proceeding against the state for the purpose of the Eleventh Amendment. Two years later in Central Virginia Community College v. Katz, the Supreme Court overruled its prior decisions and held that under the powers granted to it by the Bankruptcy Clause of the Constitution, Congress may at its option, treat states in the same way as other creditors in bankruptcy proceedings or exempt them from such proceedings. In particular, in Katz, the Supreme Court held that state sovereign immunity did not bar a preference action against a state under the Eleventh Amendment or otherwise. Following Hood and Katz, lower courts held that sovereign immunity in the Eleventh Amendment was not an absolute defense in bankruptcy proceedings.
Recently, however, in In re City of San Bernardino, a district court held that the Eleventh Amendment barred a chapter 9 debtor’s claim against certain state agencies, thereby carving out an exception that permits states to use the Eleventh Amendment to defend themselves in proceedings bought in connection with chapter 9 bankruptcy cases. In so holding, the San Bernardino Court reversed the bankruptcy court, which initially held that the Eleventh Amendment was not a defense for California’s State Agencies.
This Article discusses the applicability of the Eleventh Amendment to chapter 9 bankruptcy cases. Part I of this article discusses the State’s rights under the Eleventh Amendment and the case law reexamining the Amendment generally. Part II examines the applicability of the Eleventh Amendment in bankruptcy cases. In particular, Part II discusses two landmark Supreme Court cases on the issues (i.e. Hood and Katz). Part III considers the applicability of the Eleventh Amendment in chapter 9 bankruptcy cases. In particular, Part III discusses the exception created by the San Bernardino Court, which held that the Eleventh Amendment barred a municipal debtor commencing an adversary proceeding against a state agency in chapter 9 bankruptcy case. Part IV examines the future ramifications and applicability of the San Bernardino decision.