HOFFMAN v. CONNECTICUT INCOME MAINT. DEPT.
Legal provision: Bankruptcy Code, Bankruptcy Act or Rules, or Bankruptcy Reform Act of 1978
ORAL ARGUMENT OF MARTIN W. HOFFMAN ON BEHALF OF THE PETITIONER
Chief Justice William H. Rehnquist: We will hear argument now in Number 88-412, Martin Hoffman versus Connecticut Department of Income Maintenance.
Mr. Hoffman: Mr. Chief Justice, and may it please the Court:
At issue before the Court this afternoon is whether or not the unmistakably clear language in 106(c) of the Bankruptcy Code waives Eleventh Amendment immunity from suit in the federal court when a trustee in bankruptcy has brought a cause of action under Title 11 of the Bankruptcy Code, 542(b), 547(b) of the Bankruptcy Code, seeking to collect retroactive monetary damages from the State of Connecticut, and whether or not Article I, Section 8, Clause 4 and 18 of the Constitution would abrogate Eleventh Amendment immunity.
I was appointed trustee in both of these cases, Your Honors, and in both of these cases as Trustee, I analyzed the cases to see what assets were available or that should be liquidated by the Trustee in these proceedings.
In the case of In re Willington, since this was two unrelated bankruptcy cases that were combined as one case in the Second Circuit Court of Appeals, there was a cause of action against the State of Connecticut which had filed a chapter... which for $64,000 for unpaid monies due and owing to the estate as a result of services performed by Willington, a debtor in possession in a Chapter 11 proceedings.
That case was voluntarily... it was voluntarily changed to a Chapter 7 proceedings by the debtor in possession.
And as Trustee, I brought a cause of action under 542(b), 11 U.S.C. 542(b) of the Bankruptcy Code seeking to recover from an entity that had received... received services, the payment of money from that entity to the trustee.
In the case of Zera, In re Zera, Mr. Zera was running a small lawn maintenance business and just a few days prior to his filing a bankruptcy proceedings, the state recovered $2,000 by means of a preferential transfer.
In that case I made demand upon the state to collect the preference payment.
Again, I was refused, and as Trustee I brought a cause of action in accordance with 11 U.S.C. 547(b) and 558.
Unidentified Justice: Where did you bring it?
Mr. Hoffman: I brought both of these actions, Your Honor, in the Bankruptcy Court.
Unidentified Justice: Before whom?
Mr. Hoffman: Before The Honorable Judge Krechevsky.
Unidentified Justice: The bankruptcy judge?
Mr. Hoffman: The bankruptcy judge.
And in both of these cases, these suits were brought under the authority of 28 U.S.C. 1334(b) and 28 U.S.C. 157, which would allow the Bankruptcy Court as an adjunct of the District Court to hear both of these cases, Your Honor.
In both of these cases the court... the State of Connecticut filed a motion to dismiss which was denied by the Bank... raising a defense of sovereign immunity, and in both of these cases, the Court found... denied the state's motion.
The proceedings were appealed by the State of Connecticut in both cases to the District Court in Connecticut, which found against the Trustee.
I took an appeal to the Second Circuit of Appeals... Sixth... Second Circuit Court of Appeals... which sustained the District Court and basically... since this case is in conflict with a Seventh Circuit case, In Re: McVey, we are here today arguing these motions.
The clear language of 106 is basically the starting point, I believe, for the argument.
When Congress enacted the Bankruptcy Code in 1978 by means of a... passing the Bankruptcy Reform Act, what it basically did was overhaul, change, codify the Bankruptcy Act of 1898, which had been in existence up until that time.
The Bankruptcy... I mean the... Congress in 1965 basically started working on changing the Bankruptcy Act.
It took them approximately... I mentioned 1968 because it took them approximately 10 years to enact the Bankruptcy Reform Act of 1978.
One of the sections that they dealt with was 106 of the Bankruptcy Code.
It seemed that they worked on 106 over a long period of time because at the beginning they were only dealing with 106(a) and (b).
That was a situation where they knew that... they had 106(a) and 106(b), and they came up with a conclusion that the state by filing a proof of claim in the Bankruptcy Court asking for something from the court, acknowledging the jurisdiction of the court by filing a proof of claim, therefore, they would waive their sovereign immunity claim, and they would give the court the jurisdiction to, in 106(a), utilize the... by means of a compulsory counterclaim the ability of a debtor or a trustee to recover retrospective monetary damages from the state.
That is, if the state filed a proof claim alleging there was $100 owed to it under a contract and the trustee under that same contract or debtor in possession or debtor had a claim for $1,000, that by means of a compulsory counterclaim the estate or the debtor would collect $900.
Unidentified Justice: What about some claim against the state unrelated to their claim?
Mr. Hoffman: No, they couldn't... they could not do anything unless they filed a voluntary... voluntary proof of claim in accordance with 106(a) and (b).
They couldn't do it.
Unidentified Justice: But why would you need 106(a) after you have you 106(c)?
What does 106(a) cover that 106(c) wouldn't?
Mr. Hoffman: 106(a)--
Unidentified Justice: Assuming you read 106(c) the way you read it?
Mr. Hoffman: --The way I read it.
Unidentified Justice: Um-hum.
Mr. Hoffman: Well, 106(a) and (b) cover those situations where... one of the two ways that the state can obviously be brought before the court is one is to waive their jurisdiction and file a proof of claim, which they would do under (a) and (b).
Unidentified Justice: Right.
Mr. Hoffman: But, as I'm here today, they didn't do it under (a) and (b).
That's why (c) was put in, to put in those situations where they don't do it.
Unidentified Justice: But you wouldn't need a waiver if you have a mandatory elimination of state sovereign immunity.
You wouldn't need a waiver.
I mean, why have a waiver provision when you then go on to say and by the way, whether the state waives or not, the state is liable.
And that's what you tell us (c) means.
Mr. Hoffman: I think that what happened was because the way the code section was codified and the way Congress worked at it, they had (a) and (b) and they had worked on it, and then they came to the situation where in the... except where they file a proof of claim, where they don't file a proof of claim and not assuming their... not withstanding their... their... their... they're assuming that they... they have sovereign immunity... not over... I'm sorry... not withstanding any assertion of sovereign immunity that they're... they would still... the trustee would have the opportunity to sue the state as long as it's under those certain situations that they give it to them because--
Unidentified Justice: Well, I understand what you're saying, but... and... and maybe you give me an explanation for why it's such a strange statute, but it still is a very strange statute that you're... that... the way you're asking us to interpret it.
You're asking us to interpret this as saying first, if the state... if the state files a claim, it can be subject to liability and then, second, even if a state doesn't file a claim, it can be subject to liability.
Mr. Hoffman: --Only under certain circumstances, though, Justice Scalia.
Unidentified Justice: Well, what circumstance is covered by the first part that isn't covered by the second part?
Is there any case that's covered by (a) and (b) that is not covered by (c)?
Mr. Hoffman: Well, as I have stated in my brief, I've said that there are certain circumstances where there's lien avoidance, post-petition claims that in those particular circumstances that the state would not be bound unless they filed proof of claim.
They would have to file a proof claim.
Unidentified Justice: But that... your interpretation of section... of (c) isn't the only interpretation that (c) is subject... is that is not the only way it might be interpreted.
After all, there are a lot of... your obligation as the Trustee was to file a list of creditors, right?
Mr. Hoffman: Yes, that is correct.
Unidentified Justice: And whether or not they filed claims, if you know from the books that you owe them, you list them, don't you?
Mr. Hoffman: If the--
Unidentified Justice: Don't you?
Mr. Hoffman: --No, Your Honor.
Unidentified Justice: Don't you anymore file a list of claims against the estate?
Mr. Hoffman: No.
What the... what the procedure that in Willington, as an example, and that was a Chapter 11 proceedings... it was a business.
They carried on a business.
Unidentified Justice: Yes, yes.
Mr. Hoffman: And they provided services.
Unidentified Justice: Yes.
Mr. Hoffman: They went out and they gave services to the state, and people--
Unidentified Justice: In an ordinary liquidation bankruptcy, do you... do you ever allow a claim that... that some creditor hasn't filed for?
Mr. Hoffman: --No, they have to file a proof of claim.
Unidentified Justice: You don't... you don't... you never allow... you never allow a claim that... that there hasn't been a proof of claim filed on?
Mr. Hoffman: Unless it's... no.
Unidentified Justice: When you know... when you know that the estate owes something, you don't say we should pay them?
Mr. Hoffman: If the state... if the estate owes an administrative claim, yes, we do pay them.
If the... if a creditor does not file a proof of claim it does... in a bankruptcy proceeding... it does not share in the distribution.
Unidentified Justice: What about a creditor in possession of a secured in... a secured property?
Do you not pay them something?
Mr. Hoffman: A creditor... a creditor that has secured property, Your Honor, if his property is liquidated by the Trustee, liquidated by the Trustee, then the lien... a lien as to the assets will attach, and he will get that money if he's entitled to it.
But if the property is taken back... taken back by the secured party, he must file a claim as any other creditor, or else he won't share in the estate.
The clear language in my reading of 106(c) is that first of all that you have to read the whole bankruptcy... the Bankruptcy Code as a whole.
If you just read 106(c), it's difficult to interpret it the way the Seventh Circuit in the McVey case read it, and the way that I have proposed it.
The wording in (c) is
"Except as provided in subsection (a) and (b) of the section, of this section, and notwithstanding any assertion of sovereign immunity. "
Now, I know that the wording goes on further to say, one,
"A provision of this title that contains creditor, entity or governmental unit applies to governmental units. "
"A determination by the court of an issue arising under such a provision binds the governmental unit... units. "
Each word in analysis, when one takes into consideration the Bankruptcy Code as a whole, does show the clear, unmistakably clear intent of Cong... of Congress to show its intent to waive sovereign immunity.
Unidentified Justice: It can't be unmistakably clear, if only because of the first phrase with which the... with which (c) is introduced which, as far as I can ascertain, is utterly meaningless.
Can you possibly tell me what notwithstanding... notwithstanding (a) and (b)--
Mr. Hoffman: No matter what they... oh, I'm sorry.
But my reading is that no matter what their claim is, they can't claim sovereign immunity under (c) when there are three... when there... when you go to the trigger words which identify--
Unidentified Justice: --Well--
Mr. Hoffman: --the code sections.
Unidentified Justice: --But, boy, people don't talk that way.
When you say notwithstanding, you... you would think that what... that what (a) and (b) would be saying is there is state sovereign immunity and then when you would say notwithstanding the apparent sovereign immunity under (a) and (b), there is no sovereign immunity under (c).
But, in fact, (a) and (b) do not provide for sovereign immunity.
They eliminate sovereign immunity.
So, it makes no sense to say notwithstanding the elimination of sovereign immunity in (a) and (b).
There is no sovereign immunity under (c).
That is really, truly gobbledygook.
Mr. Hoffman: Well, except that it took... it took Congress 10 years to write 106(c).
And it took them five years to come up with 106(a) and (b) and another five years to come up with (c).
Unidentified Justice: Do you think it would have been better if they had done it in a shorter time?
It wouldn't have been so weird then.
Mr. Hoffman: Your Honor, it's true, though, but Congress is still changing and correcting the Bankruptcy Code and making it more clear.
Obviously, it's going along.
But I think this clearly meets the test, the clear test to show their intent, their clear intent to do this under those specific code sections that involve their intention.
Unidentified Justice: Well, why isn't the Second Circuit's reading and the District Court of Connecticut's reading just as plausible as yours, that (a) and (b) waive sovereign immunity when the state files a claim.
But if the state doesn't file a claim, then sovereign immunity is not waived.
It's just... the state is simply bound by certain kinds of adjudication.
What is wrong with that reading?
Mr. Hoffman: Well, the reason it is wrong... I mean, not... the reason that I take... I object... I say that it's different the way that I interpret it, the way the Seventh Circuit interprets it is because I look at creditor, entity and governmental unit as the words... I read the Bankruptcy Code as a whole, and they tell me to go to 542(b) to 547(b) and 550(a), which tell me that I can recover a monetary judgment against the state.
And I can do it if Article I of the Constitution, the bankruptcy clause abrogates the Eleventh Amendment.
Unidentified Justice: So, you don't rely on the specific language, then, of section 106?
Mr. Hoffman: I do as it encompasses the code as a whole.
Unidentified Justice: Well, what does that mean?
Mr. Hoffman: What it means, Your Honor, is that if there is a word in this statute 542(b) which has that word in there, and I can utilize that because all this says is that sovereign immunity is waived in those code sections such as 542(b) which has the word entity and says that I can collect a monetary debt.
The reading of these three statutes here that... the reading of the three statutes that deal with preferences, that deal with collection or recovery of a debt for money owed to the estate would also... and if the clear language of that... of the statutes unmistakably shows congressional intent to waive sovereign immunity, the question, then, is whether or not the Court will find that the plenary powers under Article I, section 8, clause 18 do abrogate or does abrogate the Eleventh Amendment under the... when one is utilizing the Bankruptcy Court and... but only under those specific code sections that apply.
Unidentified Justice: May I just ask one other question.
You say only under the specific code sections, those that contain any one of the three triggering words, "creditor", "entity", or "governmental unit".
But just to follow up on Justice Scalia's point... I'm not sure you've completely answered it... are there sections of the code which do not contain any of the three triggering words, pursuant to which a state might file some kind of a claim and an issue might arise where they would be no waiver of sovereign immunity?
Mr. Hoffman: --Yes.
As I said, there's 545 and there's 549 that I've quoted in my brief.
Unidentified Justice: So, your point is that (a) and (b) apply to 545 and 549, but do not apply to 542 or some of the others that have these triggering words in them?
Mr. Hoffman: 540... 545, 549, unless they file a proof of claim, it wouldn't apply.
Unidentified Justice: So that the... your answer, then, to Justice Scalia is that... is just that it depends on what the particular section... whether the particular section contains the triggering word or not?
Mr. Hoffman: I think that what Congress... yes, Justice Stevens.
I think that what the Congress in the legislative history was trying to show was that they have, probably, difficulty as we can see with the waiver of sovereign immunity under the bankruptcy clause.
But in order to come about and recognize that in 1988 or 1989... last year there were 600,000 bankruptcy cases filed in the United States, and of those approximately 68,000 were business bankruptcies.
You're going to have the state and you're going to have the federal government, you're going to have them involved in a great majority, a great majority if not in excess of 90, 95 percent or more in the business bankruptcies, and there's no question in my mind about that.
Unidentified Justice: Well, the Court of Appeals didn't think that (c) was surplussage either, did they?
Mr. Hoffman: It did not.
Unidentified Justice: It ruled against you, even though... even though... even... even in... in footnote 5 they thought that (c) had its own meaning.
Mr. Hoffman: Yes.
The Court of Appeals basically... that' correct, Your Honor.
But the Court of Appeals basically said yes, it's partially... partially... under certain circumstances where you're looking for injunctive or declaratory relief, but the... they sort of limit it.
They gave me a quarter of a loaf maybe, I would say.
Unidentified Justice: Yes.
Mr. Hoffman: But--
Unidentified Justice: You were still hungry.
Mr. Hoffman: --Well, as it... well, I'm looking at the aspect of the Chapter 11.
I'm looking at Willington, I'm looking at the people that provided the electricity, the purveyors.
Everybody went out there and they said okay, look.
Come to work with us.
We're providing services to these Title 19 Medicaid patients.
We're going to get paid from the State of Connecticut.
You don't have to worry.
Even if this is converted to a Chapter 7, it doesn't matter because the $65,000 or $4,000 that the state owes, they'll pay it to us and, therefore, you'll get your share as an administrative expense.
And, therefore... and... and... and if... and that is... that is the congressional scheme, I think.
Unidentified Justice: Well, the state knows that if they just stay out of the... at least they thought if they just stay out of the proceeding, they won't have to pay the money.
Mr. Hoffman: That's correct.
Unidentified Justice: Unless they're sued... unless you sue them in their own court.
Mr. Hoffman: That's correct.
I could have done that, too, that's correct.
But the congressional scheme... I... the congressional scheme in my... and what I would say would be uniform decisions, expediency, waste of judicial time, waste of having... they could also have 50 different bankruptcy codes in the state, too.
You don't have to have federal bankruptcy court.
You could have 50 separate little bankruptcy courts throughout the state.
When they conflict with the federal court, that's a different question.
Unidentified Justice: As you read this provision, it would apply even if you couldn't bring suit in state court.
You're attributing to Congress the intent of saying that even if a businessman has entered into a contract with the state that he knows he's not going to be able to recover on because the state has not waived its sovereign immunity, he's taking his chances.
Maybe he gets, you know, an added premium for taking chances like that or whatever.
But if he's lucky enough to go bankrupt, then his creditors are going to be able to sue on that contract even though the... the individual himself wouldn't have been able to.
Mr. Hoffman: Well, the--
Unidentified Justice: That's a strange intent to attribute to Congress.
Mr. Hoffman: --Well, Justice Scalia, I think the... the nature of the Bankruptcy Code is to... to give an even distribution of assets to the creditors, not to the debtor, but to the creditors, those people that are owed money by the bankrupt estate.
The State of Connecticut's a creditor in this case, too.
They're a creditor.
The federal government's a creditor in this case, too.
They're both owed taxes.
They could have received money if... they could have received money in order of priority if they're owed these proper taxes.
But when they have an unsecured debt here, a debt which is owed to the Chapter 11 debtor in possession and then when it's converted to a 7, the trustee comes in and tries to collect.
Unidentified Justice: Well, if they try... if they file a claim, you have them under section (a) and (b), don't you?
Mr. Hoffman: That is correct.
Unidentified Justice: So, how do they get their tax claim paid without filing a claim?
Mr. Hoffman: They don't.
Unidentified Justice: Well, then, aren't you out... you're actually going to be able to get your... what you regard as your just deserts... just deserts?
Mr. Hoffman: It's not me, Justice Rehnquist.
I'm doing this on accordance to enforce the code section.
Unidentified Justice: It's bigger than both of us.
Mr. Hoffman: My name's on it.
That's all there is.
Unidentified Justice: Of course, the state may owe $4,000 and you may owe it only a thousand.
Mr. Hoffman: That's correct.
Unidentified Justice: So, they'd just as soon as keep the three.
Mr. Hoffman: It does defeat the bankruptcy scheme.
It does... I mean, if you've got 250 judges out there that are administering 600,000 cases or maybe a few more or less... I'm not sure about the number... and it seems to me that... that when one looks at the picture xx a whole that it would be that the clear intent has been shown.
And... and I'd like to discuss Article I, the constitutional issue, because I feel that the constitutional issue should be raised if the Court finds the unmistakable language is clear, is that when the states ratified the Constitution, they did give up certain power, they did give certain powers to Congress, and they did give the power to Congress under Article I, section 8, clause 4, to establish bankruptcy laws, to establish it.
And, under 18 they said you make the laws to pass those... to make those laws be enforceable.
And so, Title XI is the bankruptcy law and 28 U.S.C. 1334 and 157 give the jurisdiction to the Bankruptcy Court, not only to take this matter but to hear it and to decide it.
I'd like to reserve whatever time I have left.
Unidentified Justice: Is it your position that the bankruptcy clause gives Congress any more extensive authority to subject states to liability than the commerce clause?
Mr. Hoffman: No.
Unidentified Justice: Thank you, Mr. Hoffman.
ORAL ARGUMENT OF THOMAS W. MERRILL ON BEHALF OF THE FEDERAL RESPONDENT
Mr. Merrill: Mr. Chief Justice, and may it please the Court:
Petitioner contends that section 106(c) of the Bankruptcy Code authorizes bankruptcy courts to adjudicate claims for retroactive monetary relief against non-consenting governmental units.
If Petitioner is right, then a significant question of constitutional law would be presented, whether the Congress has the power under the bankruptcy clause of Article I to abrogate a state's Eleventh Amendment Immunity in this particular fashion.
It's the position of the United States that the court need not reach this constitutional question.
In our view, section 106(c) waives governmental... sovereign immunity only to the extent of allowing government units to be bound by judgments in rem concerning the preservation or distribution of assets of an estate in bankruptcy.
But that section does not authorize suits of an offensive character seeking to augment the assets of the estate by recovering money from governmental units.
Since we do not take a position on the constitutional question presented, I will focus my portion of the argument on the issues of statutory construction.
Unidentified Justice: I thought you just did take a position on it?
Mr. Merrill: How so?
Unidentified Justice: I thought you said that they were right on that point.
On the constitutional question.
I must have misheard you.
Mr. Merrill: No, no.
Our position is that the--
Unidentified Justice: Oh.
Mr. Merrill: --the court can avoid reaching the constitutional question because the statute, properly construed, does not waive state sovereign immunity for actions for monetary relief.
There's no question but that section 106(c) does waive sovereign immunity.
Both subsection (a) and subsection (c) specifically refer to waivers of sovereign immunity.
But the issue before the Court is not whether there has... whether or not there has been a waiver of sovereign immunity, but rather what the scope of that waiver is.
Now, though we think that cumulatively the waiver in Section 106 is a broad one, it's far from unlimited.
I think it's useful to begin by looking briefly at all three subsections of section 106(c).
Subsections (a) and (b) both concern the situation where a governmental unit has filed a claim against a... a... the debtor in bankruptcy.
Subsection (a) provides that when a governmental unit files such a claim, it loses its sovereign immunity with respect to any claim for monetary relief that rises... arises out of the same transaction or occurrence underlying the government's claim.
In this compulsory counterclaim situation, the waiver is unlimited.
There's no cap on the size of the affirmative relief that can be obtained against a sovereign entity.
Subsection (b) provides that when a governmental unit files a claim, there may be offset against that claim any type of claim that the debtor in possession or the trustee may have against the government.
In this permissive counterclaim situation, there's no limit on the source of the cause of action.
It doesn't have to rise out of the same transactional occurrence, but the offset is capped by the amount of the government's recovery.
It cannot exceed the amount that the government is eventually held to be entitled to... to get from the bankrupt estate.
Subsection (c), which is in issue here, was added to the 1978 Bankruptcy Code at the last minute by the Conference Committee.
We freely concede that it's not a model of clarity.
But, in our view, it was not designed to deal with the problem that subsections (a) and (b) are designed to deal with, which is monetary recovery from the government.
Rather, it was simply intended to make clear that the government is bound by a judgment, a declaratory-type judgment, in the nature of an in rem proceeding involving the rights of the entire world to the assets of the bankrupt.
Unidentified Justice: I don't understand that.
Give me an example.
Mr. Merrill: Well, a good example would be your typical discharge situation, which can occur under a variety of sections of the code.
If the government has not filed a claim but is listed as a creditor, and you get to the end of the proceedings and the discharge order is issued, the government is bound by that.
They cannot deny it and proceed to recover.
Unidentified Justice: Your opponent says that... says that that's just a figment of the imagination because of the... you never unless... he says he never lists a creditor unless there's a claim filed.
I don't think I agree with him, but... I take it you think that--
Mr. Merrill: Well, I--
Unidentified Justice: --you... especially in a Chapter 11, the trustee files a list of creditors, doesn't he?
Mr. Merrill: --That's my understanding, Justice White, yes.
And if a listed creditor receives notice and does nothing to try to assert that claim--
Unidentified Justice: Well, then it may be allowed.
It may still be allowed.
Mr. Merrill: --But if it's disallowed, then the creditor has not asserted any rights--
Unidentified Justice: Exactly.
Then he's bound.
Mr. Merrill: --at the end of the proceeding the discharge order is entered and that creditor is bound.
Unidentified Justice: Right.
Mr. Merrill: What 106(c) is saying, in effect, is that when the government's in that situation, it's bound.
Another example would be a determination of tax liability under section 505.
Bankruptcy courts are allowed to... are authorized by that section to determine to what extent a tax claim that may exist is valid or invalid.
If the government doesn't file a claim, but nevertheless an issue arises about tax liability, then the bankruptcy court is authorized to determine that issue and the government would be bound by it.
That was the situation in the Gwilliam case and the Dolard cases out of the Ninth Circuit, which the legislative history suggests were the precise reason or the primary motivation that Congress had.
Unidentified Justice: You cite those in your brief?
Mr. Merrill: Yes, they're cited in our brief.
Unidentified Justice: Okay.
If you intended to limit it to that situation, why would he use that language of one, just... to cover just those situations where the states would be bound by... by judgments, although you couldn't affirmatively get any money from them.
Why would he use the phrase
"a provision of this title which contains creditor, entity or governmental unit. "
to refer to all of those provisions wholesale.
I can't understand why one would do that.
Mr. Merrill: I have no explanation for that, Justice Scalia.
Unidentified Justice: Well, if you have no explanation for that, then... then... then the suggested reading you're proposing is not a very plausible suggested reading.
It gives a nice result, but I don't see how it bears any relationship to the language.
Mr. Merrill: I don't think so, Justice Scalia.
I think if you look at subsection (c) it contains two subparts, (1) and (2), and they're joined by the word "and" which ordinarily is thought to be conjunctive rather than disjunctive.
The petitioner's argument essentially in this case is that the two stand alone and that subsection (1) of subsection (c) authorizes actions against governmental units anytime one of those three words happens to appear in a provision of the Bankruptcy Code.
Our... our position is that you have to read the two of them together and that subsection (1) is quite sweeping.
It sweeps within its compass a very large number of code provisions.
We did a computer check preparing for this argument and discovered that over 100 provisions of the code use the word "creditor".
So, subsection (1) is very sweeping, but then it's also limited by subsection (2) which says that a determination by a court of an issue arising under such provision binds governmental units.
We think both subsections have to be satisfied, and the language of the second subsection quite clearly suggests declaratory relief, determinations of... of the rights of the world with respect to the assets that are before the Bankruptcy Court, whether or not they have filed a claim.
Unidentified Justice: Would your interpretation be any less plausible than it now is if subsection (1) were simply totally eliminated?
What is... what does subsection (1) add that you would need to arrive at your interpretation?
Could you just read subsection (2) and get your interpretation?
Mr. Merrill: Well, there are some subsections that do not contain one of the triggering words.
There are some provisions of the Bankruptcy Codes.
One of the problems is understanding exactly what the word provision means.
But there are sections of the code--
Unidentified Justice: I see.
Mr. Merrill: --and subsections of the code that do not contain these three words.
Unidentified Justice: And with respect to those, you would not be able to... your theory is you would not be able to bind--
Mr. Merrill: That's correct.
Unidentified Justice: --governmental.
Mr. Merrill: That's correct.
To give you one example which--
Unidentified Justice: Do those provisions make any sense from a policy standpoint?
Excluding those particular provisions?
Mr. Merrill: --I'm not sure whether it makes sense to... I mean, the list of ones that are included or the ones that are excluded, I'm not sure it make a lot of sense.
Unidentified Justice: Yeah.
Mr. Merrill: We have not gone through and read every single section of the code that contains one of these triggering words.
There are like 65 that contain the work "entity", and it goes on and on.
I can give you one example, though.
It's... it's not an issue presented in this particular case, but the automatic stay provision of section 362 contains a triggering word, and we concede that that is a provision that... that affects and binds... binds the government because the automatic stay is essentially preserving the assets of the bankrupt estate in an in rem sort of fashion.
But, in 1984 I believe it was Congress amended that by adding a new provision, subsection (h), which authorizes money damages for violating automatic stay.
Well, subsection (h) does not contain a triggering word.
So, it might be our position in a case, for example, that that's a separate provision, doesn't contain a triggering word and, therefore, you don't even have to get to the question of subpart (2) because subpart (1) is not satisfied.
I think one of the most significant things about the language of 106(c) and in coming to a determination of its meaning is what it does not say.
Subsection (c) uses none of the words that we generally associate with monetary relief.
There's no reference to the word "money".
There's no reference to "monetary"--
Unidentified Justice: Yes, but, Mr. Merrill, may I interrupt you right on that point?
Mr. Merrill: --Sure.
Unidentified Justice: If you incorporate by reference the sections that contain those words, you do incorporate 547(c), which talks about transfers that are avoidable as preferences.
There's no reference to money in there, but if you just read it literally, it would seem to me that termination order that section is binding on the entity, which is the governmental entity, and the determination is you've got to give the money back or the property back, whatever it is.
It doesn't list it in dollars.
Why doesn't it just literally just read on that case?
Mr. Merrill: I think you're right, Justice Stevens.
If all you had was subpart (1) and you just incorporated--
Unidentified Justice: On subpart (2) it gives you the consequence of it, namely the determination pursuant to this section is binding.
This tells you what it means to have it.
Mr. Merrill: --That's right.
If... if you... if you go through the process of incorporation by reference, you can find references to monetary relief.
But when Congress was thinking about sovereign immunity, I mean, section 106 was where it was thinking about sovereign immunity.
I don't think there's any suggestion that... that there was a careful review of all the subsections that would be triggered here and in the subsection where they're speaking about sovereign immunity under subsection (c), they don't say anything about money damages as contrasted with--
Unidentified Justice: They don't in (a) or (b) either.
They don't in--
Mr. Merrill: --Well, (a) and (b) use the word "claim".
Unidentified Justice: --Well, I understand that.
Mr. Merrill: And the word "claim" is defined by the Bankruptcy Code as a right to payment.
And the significant language in both (a) and (b) refers to a claim against a governmental unit that is the property of the estate.
In other words, a right to demand the payment of money from the government.
So, (a) and (b) are clearly talking about that situation.
The word (c), and we think that that, at least as a matter of statutory construction, lends some credence to the... to our petition.
Unidentified Justice: I don't know how you would introduce the word claim in it the way they've done it.
If there is some sense... and I don't know whether there is or not... they're saying some sections... you... you treat the entity as a governmental entity and some you don't and they have a formula for doing it.
You just say we don't follow the formula.
Mr. Merrill: But not only is the word claim difficult to introduce, but any language that suggests an in personam type action is difficult to introduce in subsection (c).
Unidentified Justice: Is setting aside a voidable preference an in personam or an in rem transaction?
Mr. Merrill: We think it can be both.
Unidentified Justice: Well, then haven't you given your distinction away?
Mr. Merrill: Well, no.
We think the basic distinction is a sound one and is fully supported by the language of section 106(c).
We think that perhaps in the application of the distinction there would be situations where there could be disputes.
But with respect of preference avoidance, we think that, for example, the situation in the Whiting Pools case where you had tangible property, trucks and vehicles and sort... and so forth, as to which title belonged to the debtor, but possession had been taken over by the federal government, the IRS, in anticipation of satisfying a tax lien, that that would be a type of situation where the property is still within the custody, so to speak, of the Bankruptcy Court and you could avoid that as a preferential transfer in that situation, but we don't think that the language can be extended so far as to include recovery of money damages or cash.
Unidentified Justice: Or recovery of monetary preferences?
What if it's a preference in paying a bill or something?
Mr. Merrill: Well, we think that that would fall under the... the retroactive monetary relief side of the line rather than the in rem side of the line.
Unidentified Justice: Mr. Merrill, I don't suppose you have any more explanation than anybody else of the magic words,
"except as provided in subsections (a) and (b)? "
Mr. Merrill: I don't have a great explanation for that, Justice Scalia.
It does seem to me, though, that if you start with (c)... and this would not be the natural way to read through the whole section... but if you start with (c) and realize that Congress was thinking about a limited waiver with respect only to declaratory relief to rights and the assets of the estate, when it would make sense to say that except as provided in subparts (a) and (b) which authorize recovery of money damages in the situation where there's been a proof of claim.
So, I think if that's what was going on in the minds of the draftsmen, perhaps it makes a certain amount... amount of sense.
The big point here, though, I think is that the interpretation of the statute that we advance I think is supported by the language.
It's supported by the legislative history.
It's supported by the canons of construction that waivers of sovereign immunity are supposed to be construed narrowly if possible.
And the mere fact that there is, as the Second Circuit, I think demonstrated, a credible interpretation that does not support petitioner's contention, suggests that Congress does not clearly waive the sovereign immunity of either the states or the federal government under this particular statute.
Unidentified Justice: Thank you, Mr. Merrill.
ORAL ARGUMENT OF CLARINE NARDI KIDDLE ON BEHALF OF THE STATE RESPONDENT
Mr. Riddle: Mr. Chief Justice, and may it please the Court:
The State of Connecticut supports the United States in its interpretation that Congress did not intend to award money damages against unconsenting states in federal court under the Bankruptcy Code.
We also believe with the opposite conclusion that if Congress did intend to abrogate the states' Eleventh Amendment immunity pursuant to the bankruptcy clause, that that would not pass constitutional muster.
It is because it is our contention that the Eleventh Amendment prevents Congress from abrogating the state's Eleventh Amendment immunity with respect to money damages in federal courts.
And that's for two reasons.
The bankruptcy clause, in both its language and its history, is not directed at states, nor is it directed at limitations at state... of state activity.
And, number two, the bankruptcy clause was enacted prior to the Eleventh Amendment and is, therefore, subject to it.
In stark contrast to the 10 amendments before the Eleventh Amendment, the Eleventh Amendment is, in essence, a protection of states.
The core under the modern case law of the Eleventh Amendment is the protection of unconsenting states from jurisdiction by federal courts in money damages claims.
Unidentified Justice: May I ask at that point you think the Eleventh Amendment applies both to the exercise of Article III jurisdiction by courts and also the Article I jurisdiction by courts that are created pursuant to Article I?
Mr. Riddle: Yes.
Unidentified Justice: You do.
The words "judicial power" in the Eleventh Amendment you think apply to both of those situations?
Mr. Riddle: Absolutely.
The... the core of the Eleventh Amendment is the protection of states and the federal system and the recognition of the appropriate spheres of sovereignty of the two.
In the 191-year history of the Eleventh Amendment, this Court has allowed Congress to override the Eleventh Amendment with only one other constitutional provision, and that is the Fourteenth Amendment.
In the 1976 case of Fitzpatrick versus Bitzer, this court noted that the Fourteenth Amendment represented a shift in the federal-state balance under the Constitution.
The Court said that through the enforcement provision of section 5 of the Fourteenth Amendment, that Congress could abrogate the states' Eleventh Amendment immunity.
The question is, how far does that holding go?
Does any grant of power to Congress have the effect of possibly overriding the Eleventh Amendment and thereby making it a nullity?
Does it extend to the possibility that Congress by a majority vote could override what Article V sets out, which is a procedure for amending the Constitution?
I would posit that Fitzpatrick does not go that far and that that the opinion of Fitzpatrick is the limiting principle.
Fitzpatrick says that the Fourteenth Amendment is by its express terms directed at the states and by its own terms is a limitation on state authority.
If you look to the Fourteenth Amendment language, it says,
"Nor shall any state deprive any person of life, liberty or property without due process of law, nor deny to any person within its jurisdiction the equal protections of the law. "
Section 5 of that amendment says that
"Congress shall by appropriate legislation enforce the provisions of this article. "
So, the Fourteenth Amendment, enacted after the Eleventh Amendment, makes the Eleventh Amendment subject to the Fourteenth Amendment.
The bankruptcy clause, on the other hand, is of a different sort.
The bankruptcy clause addresses economic issues.
The concern of the drafters of the bankruptcy clause was a uniform law of bankruptcy to deal with the discharge of debtors across the United States.
The language of the clause says that Congress shall establish a uniform law on the subject of bankruptcy throughout the United States.
It is not by its language directed at states, nor does it affect state activity.
As a matter of fact, the history of the... of the bankruptcy clause does not either prohibit state activity.
In the 19th century there were many years when we did not have a federal bankruptcy code.
In those instances states enacted their own bankruptcy codes.
And, on many occasions, this Court affirmed the authority of those state to have those codes.
In the 1819 case of Sturges versus Crowninshield, Chief Justice John Marshall said,
"It is not the mere existence of the bankruptcy power, but its exercise by Congress that contravenes that exercise by states. "
So, we have both the language and the history of the bankruptcy clause not prohibiting state activity in the area.
Significantly with section 106 of the bankruptcy clause that is at issue in this case today, Congress specifically said that it did not feel it had the authority to abrogate or to waive the state's sovereign immunity completely.
Additionally, the bankruptcy clause, as prior enacted to the Eleventh Amendment, is subject to it.
In conclusion, when we're attempting to harmonize both the Eleventh Amendment with the other provisions in the Constitution, the Fitzpatrick versus Bitzer holding makes good sense, where those situations where other constitutional provisions have language that are directed at states, that limit state authority and that have specific enforcement provisions directed at Congress, those provisions, those provisions can then have the vindication of federal rights through money damages actions against states.
But if you have a provision in the Constitution that is like the bankruptcy clause, which is not directed at state activity, then you have to accommodate different competing interests and that those federal rights, those federal issues can be vindicated through declaratory or injunctive relief, suits by the United States government, inducements of waiver as you see with the federal regulatory scheme, all of these things are available to harmonize the public policy of those constitutional provisions.
So, in conclusion I'd like to say that Congress did strike the right balance when it enacted the Section 106, and we believe that our interpretation of the bankruptcy clause in the Eleventh Amendment is the proper interpretation of section 106(c), and I would today respectfully request you to affirm the decision of the Second Circuit.
Unidentified Justice: Thank you, Mrs. Riddle.
Mr. Hoffman, do you have rebuttal?
You have four minutes remaining.
Mr. Hoffman: Yes, I do.
I think if we... I think the... that the court... this is still 1989, that there are many large Chapter 11s that are in existence throughout the United States.
If you follow... this is more than just collecting a debt and collecting a preference.
It's whether or not the congressional scheme to have a bankruptcy code that's effective throughout the United States and it is carried on in the federal court, the District Court, the Bankruptcy Court is an adjunct of the... of the Bankrupt... of the District Court that one must expand.
This is a special situation.
This is a situation where if you're going to have a super-creditor, if you're going to have a state, if you're going to have a federal government that can do whatever it wants and then say well, the court can determine what we owe--
REBUTTAL ARGUMENT OF MARTIN W. HOFFMAN
Unidentified Justice: That was the situation in the Chandler Act, wasn't it?
Mr. Hoffman: --The Chandler Act was in 1938.
Unidentified Justice: Well, I know, I know, I know.
Mr. Hoffman: And that was--
Unidentified Justice: So, in this respect you say the new law changed things?
Mr. Hoffman: --That's right... correct, Your Honor.
It took... that is absolutely correct.
That was the way it was, and it took 10 years for them to decide it and, in fact, 106(a) and (b) was five years before (c), so it took them another five years to come up with that.
And to answer your questions about creditors, Your Honor, a trustee does list creditors in a Chapter 11.
They don't have to file a proof of claim.
Only in a Chapter 7.
Unidentified Justice: Yes, and they are allowed for that.
Mr. Hoffman: They are allowed in a Chapter 11.
Unidentified Justice: Yes.
And if they... and if you allow them a certain amount and the state hasn't come in, it's nevertheless stuck.
It's bound by the... by the court's determination.
Mr. Hoffman: Unless the trustee objects to it.
Unidentified Justice: Yes, exactly.
Mr. Hoffman, before you leave, could... could you tell me... you... you said that your brief contained those sections that you think would be covered by (c) but are not covered by 1(b).
What pages in your brief are they?
Mr. Hoffman: It's a footnote, Your Honor, which... it's a little footnote that says 545 and 545(a).
But there's an amicus brief by In re Inslaw which goes into it in much greater detail.
I might say that.
In addition to the... the specific language of the statute, Senator DiConcini in his remarks when 106(c) was eventually enacted clearly said you could look... you can go after preferences.
I mean, there can't be any clearer words in the legislative history.
He takes the situation and says here's a special... here's a situation where I'm telling you you can go after it.
Not... and he also has words in it that it says there's other situations, too.
Now, the... the case of Fitzpatrick versus Bitzer does deal with the Fourteenth Amendment, and certainly there is nothing that has dealt with the Article I, section... with the bankruptcy clause.
But then, again, this code section has only been in existence for 10 years, and prior to that it would not have come up.
But I say this, with the vast scheme that Congress is looking to... after all, we have our senators, representatives.
They can decide whether or not they want a bankruptcy code, whether or not they should have all the creditors be involved, whether or not one creditor can stand aside and say yes, you can determine what we owe, but there's no way you can ever collect it.
As an example, in the Eastern case, if the state is owed money, there's nothing to stop them from going after it.
Chief Justice William H. Rehnquist: Thank you, Mr. Hoffman.
The case is submitted.
Unidentified Justice: The honorable court is now adjourned until monday next at ten o'clock.