The Supreme Court held that the discharge of a student loan debt, as an exercise of the bankruptcy court’s in rem jurisdiction, does not infringe the state’s sovereign immunity. The court did not address the underlying issue as to abrogation of the state's sovereign immunity from private suits under §106(a) of the Bankruptcy Code.
The underlying case involved an adversary proceeding by the debtor, Pamela Hood, seeking the discharge of her student loans as constituting an “undue hardship” under §523(a)(8). A proof of claim was originally filed by Sallie Mae and later assigned to the Tennessee Student Assistance Corporation (TSAC). Because this was a no-asset case, there was no active participation in the underlying bankruptcy case by TSAC, other than its acceptance of the assigned claim. Because the filing of a proof of claim has been held in previous cases to constitute submission to the bankruptcy court’s jurisdiction, the debtor never advanced the argument that TSAC, as an agency of the state, waived its sovereig immunity. The Supreme Court, therefore, declined to address this specific constitutional issue.
The 7-2 decision, written by Chief Justice Rehnquist, focused on the nature of the bankruptcy court’s jurisdiction with respect to the discharge of debts when it held that “a bankruptcy court’s in rem jurisdiction permits it to ‘determin(e) all claims that anyone, whether named in the action or not, has to the property or thing in question. The proceeding is ‘one against the world.'" In other words, a state, regardless of its participation in the bankruptcy case, is bound by the bankruptcy court’s discharge order and is no different than any other creditor whose debt is subject to that discharge.
Despite the acceptance of this basic concept, TSAC argued that the state’s sovereign immunity was infringed upon by reason of the commencement of the adversary proceeding against TSAC and was therefore an unauthorized lawsuit within meaning of the 11th Amendment. The Supreme Court dismissed this argument, again focusing on the exercise of the bankruptcy court's jurisdiction over the res – not the persona of the state in this case. "...the bankruptcy court's jurisdiction is premised on the res, not on the persona," the court said. A bankruptcy debtor does not seek damages or any affirmative relief from a state by seeking a discharge, nor does the debtor "subject an unwilling state to a coercive judicial process" by seeking only a discharge.
While this case upholds the bankruptcy court’s jurisdiction to determine the legal effect of a discharge in a bankruptcy case, there still remains for another day the all important issue of the application of §106(a) to issues involving sovereign immunity in proceedings where the state is seeking an affirmative recovery pursuant to a provision such as a preference action.
Dissenting Justices Thomas and Scalia would have reached this issue and held that "Congress lacks authority to abrogate state sovereign immunity."
(Summary by Hon. Roger Whelan, ABI Resident Scholar)