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*Much of this article appears in Chapter 157 in Norton Bankruptcy Law and Practice 2d
published by the West Group and appears with their permission.
the discharge. The Court disagreed and focused on the bankruptcy court's jurisdiction over the res, not the persona, in a discharge proceeding and the type of relief being granted. The Court placed significance on the fact that the debtor was not seeking monetary damages or affirmative relief from the state. The Court also pointed to its prior opinion approving the sale of property free and clear of the liens of state taxing authorities, as supporting the bankruptcy court's in rem jurisdiction over matters affecting the states.
In Katz, the Supreme Court considered whether the debtor can sue parties entitled to sovereign immunity to recover preferential transfers pursuant to 11 U.S.C. sections 547(b) and 550(a). As in Hood, the Court emphasizes that "[b]ankruptcy jurisdiction, at its core, is in rem." As such, "it does not implicate States' sovereignty to nearly the same degree as other kinds of jurisdiction." Most importantly, the Court finds that
[t]he history of the Bankruptcy Clause, the reasons it was inserted in the Constitution, and the legislation both proposed and enacted under its auspices immediately following ratification of the Constitution demonstrate that it was intended not just as a grant of legislative authority to Congress, but also to authorize limited subordination of state sovereign immunity in the bankruptcy arena.
Through a lengthy and interesting historical discussion of (i) insolvency laws in England and the colonies; (ii) the injustices created when a debtor received a discharge in one colony or state only to be arrested and imprisoned in another colony or state because the second sovereign did not give effect to the discharge by the first sovereign; (iii) the apparent discussion of two particular such cases in connection with the drafting of the Constitution and the proposal from the Convention that uniform laws be established on the subject of bankruptcy; and (iv) the passage by Congress of the Bankruptcy Act of 1800, which granted federal courts the authority to issue writs of habeas corpus directed at state officials ordering them to release debtors from state prisons, without significant opposition during a period in which the states' amenability to suit was a subject of significant discussion, the Court explains the basis for its conclusion that the
States agreed in the plan of the Convention not to assert any sovereign immunity defense they might have had in proceedings brought pursuant to 'Laws on the subject of Bankruptcies.'ÉIn ratifying the Bankruptcy Clause, the States acquiesced in a subordination of whatever sovereign immunity they might otherwise have asserted in proceedings necessary to effectuate the in rem jurisdiction of the Bankruptcy Courts.
Suits against the states to recover preferential transfers fall within the scope of actions ancillary to and necessary to effectuate the Bankruptcy Court's in rem jurisdiction.
Expect debtors to characterize all future actions against a state as an action to recover the res of the estate.
Although the Seminole Tribe decision and its progeny have limited a debtor's ability to bring bankruptcy court actions against state governmental entities, §106 remains a basis for asserting bankruptcy actions against federal governmental agencies.
When CMS finds it has overpaid a provider, the agency typically withholds all or a portion of current payments to repay the overpayment. However, the provider may request an extended repayment plan of up to 48 months upon a showing of undue hardship. Frequently, the provider will sign an agreement specifying the amount to be withheld from each interim payment. After a provider files bankruptcy, the provider would like to prevent the Secretary from continuing this practice. Since the Medicare repayment obligation is a pre-petition claim, debtor providers have repeatedly argued that the government's post-petition offset of current payments against prior overpayments is a
