Tennessee Student Assistance Corporation v. Hood - Oral Argument

Argument of Daryl J. Brand

Chief Justice Rehnquist: We'll hear argument now in No. 82... rather, 02-1606, Tennessee Student Assistance Corporation v. Pamela Hood.

Mr. Brand.

Mr. Brand: Mr. Chief Justice, and may it please the Court:

This Court's decisions recognize that even in subject areas where Article I grants Congress complete and exclusive authority to make laws, unconsenting States are still immune from suits by private parties.

Justice O'Connor: Well, let's talk a little bit about the notion that's raised in one or more of the amicus briefs, that a bankruptcy proceeding is akin to an in rem proceeding or is an in rem proceeding, such as might be the case in an admiralty suit where we would think the State would be bound.

Now, would you address that argument, which I found possibly persuasive?

Mr. Brand: Certainly, Your Honor.

We would submit that there... there is no authority from this Court supporting the view that there is an in rem exception from sovereign immunity in the bankruptcy context.

The argument instead is made by analogy, as Your Honor referred, to the... the admiralty case of Deep Sea Research, but the Deep Sea Research case is limited to the admiralty context.

It's limited to the special aspects of admiralty law that had developed over hundreds of years, certainly 200 years of... of our Nation's experience.

Justice O'Connor: Well, why doesn't it fit in the bankruptcy context too where the debtor's assets are assembled in kind of an in rem proceeding and the creditors share in it?

It could have very unfortunate consequences certainly if... if your position were upheld.

Mr. Brand: Well, Your Honor, although there certainly are in rem aspects to bankruptcy jurisdiction in the context of dealing with the property of the estate that is before the court and that is in the custody of the court, bankruptcy jurisdiction also embraces other... other aspects of in personam jurisdiction involving the parties and... and personal relationships.

Justice Kennedy: Well, could we just stick with the in rem for a moment?

Suppose there's a $100,000 on the usual free-for-all because there are more... the... the debts exceed that amount.

The State gets notice.

It decides it's not going to appear.

The bankrupt is... is discharged.

At the very least, if the State then later sues on the debt, is the... can the discharge be set up as a defense?

Mr. Brand: Well, Your Honor, there... there is authority from... from the lower courts that... that it could in fact, and that in... in that situation, the... the State might be bound by a general discharge order.

Chief Justice Rehnquist: Well, what... what happened here was something where... where a summons was issued to the State, wasn't it?

It was... the State didn't just remain outside and do nothing.

Mr. Brand: Well, that's... that's exactly right, Your Honor, and it also is a situation in which the State was not making a claim against the... the property of the bankrupt estate.

Justice Kennedy: Yes.

It's hard to think of a debt as part of a res.

I... I can't quite--

Mr. Brand: And that--

Justice Kennedy: --get that.

And I understand, but just on the basic point of whether or not just for a discharge of a debt, the State can be bound, you say you think it might be plausible, but the State would be bound by the judgment if it later sues on the debt.

Mr. Brand: --I don't want to concede that point, Your Honor.

I think there is authority certainly that would... that could support that, and there are decisions from the... from the circuit courts, particularly the Fourth, the Fifth, and the Ninth, which have held that a discharge order under those circumstances would be binding against the State.

But each of those courts has also upheld sovereign immunity as a bar to a suit against a State as the State asserts in this case.

Justice Stevens: But this is not a normal suit against the State.

This is a suit in which the debtor seeks authority to get a discharge, isn't it?

Mr. Brand: That's right, Your Honor, except that--

Justice Stevens: So the proceeding itself is to determine whether or not she's entitled to a discharge on the debt at issue.

Mr. Brand: --Yes.

She is... she has already received a bankruptcy discharge, a blanket discharge from debt.

This is a proceeding to determine if this particular debt qualifies under that.

And the way the statute is written, the way... the way Congress has set this up is that the debt is presumptively nondischargeable.

It is an exception from discharge until such point as the debtor establishes undue hardship, at which point the debt would be absolved and she would... she would, in effect, have a discharge.

But again, the... by... by the nature of the way the--

Justice Stevens: If she... if she prevails in that disputed factual matter, then it will be just like any other discharge case.

If... if the hearing goes forward and she prevails as a matter of fact, then it would be just like any other discharge case, wouldn't it?

Mr. Brand: --No, it wouldn't, Your Honor.

A normal discharge case would essentially not involve at all the adjudication of individual debts.

The discharge is--

Justice Stevens: No.

I'm saying if she prevails on the disputed issues of fact, thereafter it would be just like a normal discharge case.

Mr. Brand: --It... it... yes, if I'm understanding, Your Honor.

Yes, she would have, in effect, a discharge from that debt.

Yes.

Justice Scalia: Moreover, the... the fact that this proceeding had to be brought against the State was purely a result of congressional disposition.

Congress could have treated these debts to the State like all other debts, in which case they would have been automatically discharged.

Mr. Brand: That's exactly right, Your Honor.

Justice Scalia: So... so that the... the argument that the bankruptcy... the in rem nature of the bankruptcy procedure gives... gives her all the protection that the Constitution at least requires, vis-a-vis the State, it seems to me is a strong one.

It's only because of the statute that... that this action had to be brought.

If Congress really wants to discharge her from debts to the State, it could have done so by simply treating the State like all other debtors.

Mr. Brand: I think that's exactly right, Your Honor.

The debt could be treated as a discharged debt, in which case the State would certainly be bound by the operation of that law, but that is not--

Justice Ginsburg: Isn't it... isn't it odd that you are objecting to this proceeding where, if Congress then said, okay, we'll make it dischargeable, you will be worse off?

In other words, Congress is trying to ameliorate the ordinary effect of the bankruptcy law to give the State an advantage.

And your argument is to the effect of, Congress, you can treat us just like all the others, and we'll be worse off than we are now, but once you give us this favor, then you... the... the law is unconstitutional.

You can't give us a favor.

That seems to be the essence of your argument.

Mr. Brand: --No, Your Honor.

I... I would submit our argument... our argument is not that the State is immune from the effect of the statute that would allow discharge upon showing of undue hardship.

We would recognize that that is... that is an appropriate part of the... of the exercise of Congress' bankruptcy power.

Our issue is with the provisions which are there by virtue of the nature of the way that... that exception is written and also by virtue of the bankruptcy rules that require that it be raised in the form of an adversary proceeding in which the State could be summoned into court, in bankruptcy court, anywhere in the country.

Well, could it be adjudicated without an adversary proceeding, just say the debtor comes in and says, I'm giving notice to the State?

If they want to come in, they can, but it's not... it's... I'm not going to call it or the statute doesn't call it a summons and complaint, doesn't call it an adversary proceeding, just a proceeding to establish the status of this obligation.

Your Honor, I think as Justice Scalia suggested, Congress could write a statute that would make a student loan dischargeable, more or less by operation of law, but we would submit that the way this statute is written... and again, if we look--

Justice Ginsburg: I'm not asking about making it totally dischargeable, but Congress wants to achieve this result and sensitive to your concern.

So it says, fine, we're going to make it nondischargeable unless the student shows undue hardship, but because the State doesn't want to receive a summons and complaint, we're going to do it in a nonadversary proceeding.

The student will establish it to the satisfaction of the bankruptcy court or not, and the State will be given notice but not a summons and complaint.

Would that be satisfactory?

Mr. Brand: --Your Honor, I don't believe it would.

I think that in substance that would be essentially the same as the adversary complaint that... that we're talking about here.

And... and under... under Coeur d'Alene and... and the discussion in other similar cases, the question here can't turn on the mechanics of the pleading or on the... the style of the caption.

Justice Scalia: So you... you would have no problem with Congress' amending this statute so that it reads if the State chooses to waive its sovereign immunity, the debtor has to proceed in this manner.

However, if the State refuses to waive its sovereign immunity by appearing in the proceeding, the debt will be automatically discharged.

You... you would have no problem with that, I take it.

Mr. Brand: I'm not... I'm not certain that that would not be the same type of statute that I... I objected to a moment ago.

Justice Scalia: No. I thought you accepted that a moment ago.

I thought you accepted a moment ago that Congress didn't have to provide this special treatment of the States at all.

If Congress didn't have to provide it at all, certainly Congress could say if the State chooses not to... not to take it, not to appear in the proceeding, we'll dispense with it.

I... it seems to me the greater includes the lesser.

Mr. Brand: Well, I... I agreed, Your Honor, and I still agree that... that Congress could fashion a statute that would make student loans dischargeable in the same manner as... as any other debt.

And in... in that case, it... it would take place the same as any other debt.

And of course, if... if the State were to waive its sovereign immunity and enter into a bankruptcy proceeding and... and voluntarily participate, then... then it could do and... and the court could act accordingly without any special enabling legislation by Congress.

Justice Breyer: I... I don't understand what the statute has... how the statute is involved in this.

I mean, the statute just sets a standard for discharging a... a student who has an educational loan.

It says it has to be undue hardship.

What's wrong with that?

I mean, why can't... there are dozens of statutes... dozens of statutes that say... I guess dozens.

I'm not a bankruptcy expert, but statutes that say you get this kind of a discharge if there hasn't been a fraudulent conveyance, but if there has been, you don't get it, and if it's this, you don't get it, and if it's that, you do get it.

All these may involve debts owed to or... the State.

Are... are you saying... what has the statute to do with this?

The statute just sets a standard for getting a discharge.

Mr. Brand: Well, Your Honor, I... I believe that this statute... this particular subsection affecting student loan discharge is really unique within the exceptions to discharge.

Justice Breyer: All right. Let's assume it's unique.

Mr. Brand: There--

Justice Breyer: What is it in the Constitution or the Eleventh Amendment that says Congress cannot set a special standard for discharging a bankrupt from a certain kind of debt?

Mr. Brand: --Congress--

Justice Breyer: What... what in... what in the Constitution says that if that kind of debt happens to be one that is owed to the State, Congress is forbidden to do that?

I don't... I just don't understand it.

Mr. Brand: --Your Honor, we... we do not dispute that Congress has the power to set a separate standard for this type of debt--

Justice Breyer: I know and so why is the State, if it happens to be owed that kind of money, in any sort of a different position?

Mr. Brand: --Well, the... the question is not the effectiveness of the congressional determination regarding how to handle that debt, but rather the constitutionality of the means by which Congress--

Justice Breyer: Now, then what you're quarreling with is, of course, not the statute.

You are quarreling, as Justice Ginsburg pointed out, with a bankruptcy rule that happen to use the word adversary proceeding.

But suppose the rulemakers had simply said, this need not be done in an adversary proceeding.

It can be done in exactly the same kind of proceeding as discharging any other kind of debt.

I, the bankruptcy judge, will follow the congressional mandate as to when it is discharged.

You will notify all debtors, Mr. Bankrupt, including the State, and if they want to come in and protest it, they can.

Now, why... what would be unconstitutional about such a provision that never uses the word adversary proceeding?

Mr. Brand: --Well, Your Honor, our objection is not merely to the bankruptcy rules.

I would... I would repeat that... that--

Justice O'Connor: I read your position to be that the State isn't bound at all, for instance, that the bankruptcy court cannot discharge property liens held by the State.

I mean, I... I read your position as being that the State cannot be forced into any aspect of the bankruptcy proceeding.

Justice Breyer: And so did I.

Justice O'Connor: I guess... I guess the... you would say the State doesn't have to abide by the automatic stay.

Mr. Brand: --Oh, certainly not, Your Honor.

Certainly not.

And I thought that we were clear in our briefing that we... we recognize that the... the State would be bound by the automatic stay because it's automatic.

It is by operation of law and by operation of the Supremacy Clause--

Justice Breyer: I'd rather like to get the answer to the question which is I understand what position you took in the brief.

I want to know why.

I want to know what the logic is.

I can't find anything in the Constitution that says that Congress cannot impose the same standard in respect to discharging a debt owed to the State as it applies to a debt owed to anybody else.

Now, either you agree with that proposition or you don't.

And if you don't... and I think you don't... I'd like to know what the theory is.

Mr. Brand: --Your Honor, I agree that Congress can make those distinctions.

I--

Justice Breyer: Fine.

Once you agree with the proposition, then all your objecting to is the word adversary in the word adversary proceeding, and it takes 3 minutes or less for a good expert simply to get rid of that adversary proceeding and have the same thing done in an ordinary proceeding.

Now, I want to know the answer to what I say, not that you disagree with it.

I know you disagree with it.

I want to know why you disagree with it.

Mr. Brand: --I disagree with it because the... the legislative reports as to that subsection, section 5239(a)(8), strongly point out that the statute... that that subsection is intended to be self-executing and that the creditor, the lender, the guaranteer, the... the guarantee institution, are not required to initiate action but instead can rely on the nondischarge, on the exception from discharge.

So by... by structuring the... the exception that way, we would submit that Congress, as this Court has recognized in other situations, has given elevated status to that creditor's position, has recognized that creditors of those kinds of debts have interests in the payment of those debts that outweigh the normal fresh-start policy that... that underlies bankruptcy.

So our position is that it does turn on the nature of the statute and not merely those bankruptcy rules that require--

Justice Scalia: The statute... the statute doesn't... doesn't require, does it, that that preferred position be established in an adversary proceeding?

Mr. Brand: --Certainly not by express terms, Your Honor, but... but again, the rules... rules made consistent with that statute, together with that legislative purpose, would certainly indicate that... that--

Justice Scalia: And I suppose you're saying this is an adversary proceeding.

Regardless of whether--

Mr. Brand: --Oh--

Justice Scalia: --regardless of how... how it got to be so, whether it got to be so through rule or through anything else, it's an adversary proceeding and the State cannot be hailed in in this fashion.

Mr. Brand: --That's exactly right, Your Honor.

There's no dispute about that.

I mean, this--

Justice Breyer: No, but there is a dispute about whether you could, in fact, call this kind of adversary proceeding, given the underlying standard that all it is is a way of getting to the same result, really not an adversary proceeding for purposes of the Eleventh Amendment, since it has no functional difference whatsoever from a proceeding that isn't labeled adversary but simply gives the State notice of what's going on and permits the State to come in, just as if it worked, which is ordinary proceedings.

Mr. Brand: --Except that ordinary proceedings in bankruptcy, as I mentioned earlier, do not involve the individualized adjudication of debts.

They involve other issues.

They involve martialing the assets.

They involve assessing the--

Justice Breyer: That's a good answer.

Justice Stevens: Mr. Brand, can I ask you--

Justice Breyer: --Now, what about--

Justice Stevens: --May I ask one question?

Did I understand you correctly to say that you did not contest the fact that if... if... that if they had a blanket rule that all student loans are automatically dischargeable, that would be true even if the creditor was a State?

Mr. Brand: --Certainly, Your Honor, and the--

Justice Stevens: And does that mean you also would agree that any ordinary commercial obligation to the State such as paying rent for an... an office suite or something like that could also be dischargeable and there would be no sovereign immunity problem there?

Mr. Brand: --Yes, Your Honor, and the reason... the reason I agree to that is because that does not require an adjudication.

It... it would occur by operation of law by which--

Justice Stevens: Well, but there has to be... there has to be a final order in the bankruptcy proceeding discharging... you know, giving the... the debtor a discharge.

Mr. Brand: --But we would submit in a... in a very real sense that would be surplusage.

Justice Stevens: But the... but the net result is I thought your position in your brief was somewhat different from that.

That's why I wanted to be sure about it.

You do agree that... that the sovereign immunity is not a valid objection to a discharge of a bankrupt estate.

Mr. Brand: That's... that's right when the discharge is by operation of law.

And again, I would analogize to the... the situation of the automatic stay provision that... that Justice O'Connor raised.

Again, that operates automatically when the--

Justice Stevens: So, but the difference in the automatic stay if the... if the debtor had to go in and prove his name, serial number, and rank or something first, so it wasn't completely automatic, then you would say you have a sovereign immunity objection.

Mr. Brand: --Possibly, possibly not.

Again, I would submit that there's authority from lower courts that would... would possibly--

Justice Stevens: Well, I'm really not so much interested in the authority from the lower courts as I am curious about your position.

What exactly does the sovereign immunity defense protect for you?

Mr. Brand: --In this case the sovereign immunity defense protects the State from being made a defendant and from having compulsory process issued against it to appear in a bankruptcy court that could be in any State of the union in this case.

Now, the... the reason I was referring to authority from other courts is to... is to remind the Court that all of the courts that have... that have made the type of holding that Your Honor is referring to have also recognized the applicability of Eleventh Amendment immunity in adversary settings.

Justice Stevens: I know, but it seems to me somewhat anomalous to say that if you want to do it without giving us a hearing, you can go ahead and do it, but if you give us notice and a hearing and an opportunity to respond, then you're protected by the Eleventh Amendment.

Mr. Brand: Well, again--

Justice Stevens: A rather strange position.

Mr. Brand: --again, Your Honor, I think... I think we're talking about very different things there.

There is... there is quite a difference between the general discharge, which again occurs without individualized adjudication of... of debts... that is... that is a distinct thing under the bankruptcy laws from a situation in... in which there's a proceeding involving the dischargeability of a particular debt--

Justice Stevens: Well, you say--

Mr. Brand: --such as we have here.

Justice Stevens: --it could well be that the State filed a claim and proved up its claim and then there's not enough money to pay it, the claim, but there would be some kind of proceeding to establish the claim.

Would that be different then?

Mr. Brand: Well, in... in a case where the State had filed a claim, the State would have voluntarily appeared in the... in the proceeding as relates to the subject matter of that claim.

So there would not be any sovereign immunity situation there at all.

Justice Stevens: So that if the State voluntarily appears, it would automatically waive its sovereign immunity defense.

Mr. Brand: As to that claim, yes.

Chief Justice Rehnquist: Well, that's the Gardner case, isn't it?

The--

Mr. Brand: Yes, I believe so.

Yes, Gardner v. New Jersey.

Justice Kennedy: --Tell me how bankruptcy works.

Is the United States trustee potentially part of any proceeding that the trustee wants to be involved in?

Can the trustee have come into this proceeding voluntarily if... if he or she chose?

Mr. Brand: I... I believe so, Your Honor, but I'm not certain if that is applicable in every... in every district.

And I'm not... I apologize.

I'm not certain as to that.

I know the U.S. trustees have... have those powers and responsibilities in at least... at least a good number of bankruptcy--

Justice Kennedy: Because it does seem that if an action is brought by a U.S. trustee, that's an officer... that's the Federal Government.

Mr. Brand: --Well, certainly that would be a different situation and certainly the State--

Justice Kennedy: Which is another way of solving this problem.

Mr. Brand: --That's right, Your Honor.

That's... that's conceivable.

Certainly the State would have no sovereign immunity from... from an action by the United States.

Justice Ginsburg: In... in a world of limited resources, especially for the U.S. trustee... this is a no-asset bankruptcy.

If the U.S. trustee is going to come into each one of these proceedings, it might be rather impractical.

I was curious about the credit... the creditor class for these student loans.

It's not just States that are creditors when a student tries to get out from under the student's debts.

What... what other entities would be in this situation, not with respect to sovereign immunity, but as someone who has loaned money to a student?

Mr. Brand: Well, certainly any lending institution could... could be involved as a... as a creditor in a student loan.

The... the Federal and... and I guess there are State programs as well, but involve fairly complicated relationships between lending institutions and secondary holders and guarantors at... at various levels.

Justice Ginsburg: Do you know what part of the business the States have, to what extent, compared to other creditors, other lenders?

Mr. Brand: Well, the... I... I can speak for the State of Tennessee.

The State of Tennessee is involved as a guarantor, not as a lender, but merely as a guarantor in conjunction mainly with these... these Federal loan programs.

And the... the State of Tennessee is participating not as a... a business actor, but as a means of... of pursuing the public policy of making it simpler and easier for Tennessee residents to obtain a college education.

So the... the State as a guarantor is... is not in this... in the position at all of an ordinary creditor, really, as far as its... as far as its purpose and... and even as far as its... probably its financial calculations in... in how to deal with that.

Again, it's... it's a matter of pursuing the public policy of making it easier for... for the students, for these debtors to obtain their college education.

Justice Ginsburg: So for... for the primary lender, this procedure would be fine.

The... so the debt wouldn't be dischargeable to the initial creditor, the one who loans--

Mr. Brand: I... I believe... I believe, Your Honor, certainly the... the initial creditor could certainly be involved, would have no sovereign immunity defense.

There would still be the requirement of the undue hardship showing.

Justice Ginsburg: --But if you... if you... Congress was to say, well, too bad, we tried to give them a break, we can't do it, so we're going to make them dischargeable just like any other debt, that would have a very adverse effect on all the other creditors in the picture who are not State actors.

Mr. Brand: It certainly would, Your Honor, but it also could create complications as far as... as far as whether States would choose to participate in... in student loan programs.

Again, it's a policy determination made State by State.

There's no requirement that the States participate in... in such programs.

It... it's part of the balancing of those interests I think that has resulted in this statute and in this statute being written the way it is.

At one point in time not too long ago, student loans were discharged in an ordinary bankruptcy, and then it was... it was cut back to only loans that had been in... in payment more than... more than 5... more than 7 years and more than 5 years, and now, of course, it's cut back all the way to where it's only subject to discharge upon a showing of undue hardship.

So there's... there's definitely a policy of wanting to make student loan repayment more certain and make that a... a different relationship from other debtor/creditor relationships.

If there are no further questions from the Court at this time, I would like to reserve the remainder of our time.

I would ask that the judgment of the Sixth Circuit be reversed.

Argument of Leonard H. Gerson

Chief Justice Rehnquist: Very well, Mr. Brand.

Mr. Gerson, we'll hear from you.

Mr. Gerson: Mr. Chief Justice, and may it please the Court:

The questioning of the petitioner reflected the fact that there is an inherent conflict between the requirements of the operation of the bankruptcy system and the State's sovereign immunity.

This conflict has been recognized in this Court's past opinions.

For example, in Van Huffel v. Harkelrode, a 1931 decision of this Court, it was claimed that the sale of a debtor's property free and clear of... of the State's tax lien was not effective but the State lacked jurisdiction.

This--

Justice Breyer: The State lacked?

Mr. Gerson: --Jurisdiction over the--

Justice Breyer: The State lacked?

Unknown Speaker: The Supreme Court.

Mr. Gerson: --I'm... I'm sorry, Your Honor.

The Court lacked jurisdiction over the State.

And this Court denied that... the State's position.

Subsequent to that in Gardner/New Jersey, which is a case that... that which is noted for waiver, the State also took the position that not... that the property that was a part of the debtor's estate was limited to the debtor's equity and did not include that portion of the property of the debtor that was subject to the State's tax lien.

Again, this Court said, no, all property of the debtor is part of the estate, including that part that's subject to a State's tax lien.

Chief Justice Rehnquist: Of course, in that case the State had come into bankruptcy... the bankruptcy court voluntarily.

Mr. Gerson: That's correct, Your Honor.

But the opinion... that portion of the opinion in Gardner that addresses that issue does not rely upon the fact that the State filed a proof of claim.

Justice O'Connor: If... if we were to analogize bankruptcy proceedings to in rem proceedings in general, nevertheless this dischargeability proceeding is set up under the rules as an adversary one where a notice and a summons is filed on the State.

That's a product of how the rules are constructed.

Now, presumably in time they could be changed, but what about this case?

Mr. Gerson: To allow this case to be determined on the basis that an adversary proceeding had been filed would be elevating form over substance because the jurisdiction of the court with respect to the claim arises from the court's jurisdiction over the property of the estate and claims made against it and the... and the debtor.

They're all part of the res.

So the filing of an adversary proceeding was merely a manner... merely allowing the State to... to be provided with an elevated form of notice rather than being jurisdictional.

In addition, 28 U.S.C. 2075 states that the rules, bankruptcy rules, should not in any way abridge or modify the substantive rights that are granted under the code, and I believe in these circumstances to allow this decision to be based upon the fact that an adversary proceeding had been filed would have the effect of abridging Ms. Hood's rights--

Justice Scalia: Well--

Mr. Gerson: --by denying here an opportunity for hardship.

Justice Scalia: --What happens when you don't show up in an adversary proceeding?

Mr. Gerson: A default judgment is entered.

Justice Scalia: A default judgment.

Mr. Gerson: Yes.

Justice Scalia: So how can you say... I mean, had it not been set up this way, I would assume that the bankruptcy judge would have to make his or her own determination about whether the condition of the statute had been met, but once you have this adversary system set up, I assume the bankruptcy judge is entirely within his or her rights by just saying, hey, the State hasn't shown up, the State loses.

Mr. Gerson: I would... I'd like--

Justice Scalia: Now, that... that doesn't seem to me to be elevating form over substance.

That... that's a big difference.

Mr. Gerson: --Yes, and I... I believe I incorrectly stated what would happen, Your Honor.

It's... even... even in an adversary proceeding, the court would still have to find that Ms. Hood had demonstrated a right to a... to an undue hardship discharge.

Chief Justice Rehnquist: So it wouldn't just go by default then if the State didn't show up?

Mr. Gerson: That's correct, Your Honor.

Justice Scalia: Do you know any other adversary proceedings that work that way?

I mean, I suppose that depends on what the... what the rule means, but when the rule describes it as an adversary proceeding, I... I would take it to mean that if the other side doesn't show up, it loses.

Chief Justice Rehnquist: Well, in a... in a... in an ordinary suit for money judgment, if the defendant fails to show up, he can be defaulted as to liability, but he still has to show the money damages.

He just doesn't get the amount that he says in his complaint.

Mr. Gerson: That's correct, Mr. Chief Justice.

Justice Scalia: Well, is... is the amount at issue here?

Mr. Gerson: The amount is at issue only to the extent that in order to show undue hardship, Ms. Hood has to demonstrate that she can't repay it.

Justice Scalia: Yes, but the... but the... the amount, how much it is, is not... is not in controversy, is it?

Mr. Gerson: No, it's not.

Justice Ginsburg: I thought--

Justice Breyer: --So what is the situation there?

I mean, I don't want you just to drop this.

That is, is an adversary proceeding under the Bankruptcy Code... and there are quite a few.

You've said two opposite things now.

Your first time you said, well, if the other party doesn't show up, the bankruptcy judge can just say, debtor, you win.

Okay?

Without looking at the merits.

And the second time you said, no, that's not really so.

The bankruptcy judge has to satisfy himself that the statutory standard is met.

Now, I guess this isn't the only place where there's a adversary proceeding in the code.

So which is it?

Is it like an... and how do I find out?

If you're uncertain, what do I look up to try to find out the answer to that question?

Mr. Gerson: Well, Justice Breyer, very often adversary proceedings are commenced in bankruptcy court and they're necessary when the kind of action that dispute... in dispute is the equivalent of an action that could have been commenced prior to the establishment of the bankruptcy.

It's just--

Justice Breyer: Yes, I see--

Mr. Gerson: --prior, you know, action now brought into the bankruptcy court.

And then the bankruptcy court could issue a default judgment because--

Justice Breyer: --No, I got that.

Mr. Gerson: --it would be a traditional action.

Justice Breyer: So maybe there are no others.

Are there... are there any adversary proceedings, other than this, one which isn't like what you just described?

Chief Justice Rehnquist: Well, certainly an action by a trustee for... of voidable preference would be quite different, would it not?

Mr. Gerson: With respect to a voidable preference, if... if the defendant did not demonstrate it had any defense, a judgment would be issued in favor of the... the State because there is a presumption for a voidable preference once certain factors are met.

Chief Justice Rehnquist: And there you're getting money from outside the estate too.

You're getting a money judgment against somebody that would increase the assets of the estate.

Mr. Gerson: That's correct, Your Honor, but it is not Ms. Hood's position in this case that a preference action would fall within the traditional in rem jurisdiction of a bankruptcy court and thus the State sovereign immunity would be abrogated.

Chief Justice Rehnquist: So you would... you would say that if the... if there were a suit for a voidable preference against the State, the 11th Amendment rule would prevail?

Mr. Gerson: I... that issue is unclear, Your Honor.

It's certainly not Ms. Hood's position that the Eleventh Amendment would not prevail.

And there's actually a case pending before this Court right now, Massachusetts v. H.J. Wilson, where at issue is the debtor's demand for an income tax refund.

So the opportunity to visit the issue of affirmative money relief against a State and its... and the ramifications of the Eleventh Amendment can be addressed in that case.

It's--

Justice Breyer: We're trying to get... I'm trying to get the answer still to Justice Scalia's question.

Take the question the Chief Justice asked.

It's a preference action.

It's a kind of bankruptcy action.

It's in an adversary proceeding.

Is that right?

Mr. Gerson: --Yes.

Justice Breyer: Okay.

Now, the other side doesn't show up.

Okay, forget this Eleventh Amendment business.

I just want to know the normal thing in bankruptcy.

What's the answer?

If he doesn't show up, is he defaulted like a regular case outside the court, or does the trustee... I mean, does the judge, the bankruptcy judge, look at the matter and make up his own mind independently about whether it was a preference or not?

How does it work in bankruptcy?

Mr. Gerson: It would... it would not be a default judgment, Your Honor.

It would be a judgment on the merits.

Justice Breyer: I have one other technical question.

Suppose we were to say--

Justice Scalia: --Excuse me.

I didn't understand that answer.

It would not be a default judgment.

It would be a judgment on the merits.

Is there a distinction?

Mr. Gerson: It would be a judgment--

Justice Scalia: I thought default judgments are, for all purposes, considered judgments on the merits.

For what purpose is a default judgment not a judgment on the merits?

Mr. Gerson: --Oh, to... to the extent it is... there's greater flexibility of a defendant to come back and ask for reconsideration, I believe, under normal procedures.

Justice Ginsburg: That doesn't make it not a decision on the merits.

It may be subject to reopening, but a default judgment is a judgment.

Mr. Gerson: That's correct.

Justice Ginsburg: I thought that the question we... we were talking about before... that there was a clear and certain answer to the question, that... that if the claim is made that there's undue hardship, even if the State doesn't show up... well, let's take the... because this is written for all creditors and not particularly with States in mind.

If the creditor doesn't show up, the bankruptcy judge still has to find that there's undue hardship in order to make this dischargeable.

Mr. Gerson: That's correct, Justice Ginsburg.

Justice Ginsburg: And where does that come from?

I... that was my understanding about the way it works, but is that a statute, a rule?

Where does... where does that come from?

Mr. Gerson: I think it comes from the natural reading of the statute that such a finding has to be made that there would be an undue hardship for the debtor to have to repay that... that loan.

Justice Ginsburg: You... you could say the same about any default judgment in a case... in a tort action where the tort statute, you know, only imposes liability where the defendant has been negligent.

The defendant doesn't show up.

The court doesn't... doesn't enter into its own independent inquiry as to whether the defendant was negligent.

It enters default judgment.

And the statute, just as clearly, requires negligence there as this statute requires undue hardship here.

Mr. Gerson: The difference... the difference is... Your Honor, is that all of the property of a debtor and claims against that property... they're... they're all under the bankruptcy court's jurisdiction.

So a bankruptcy court has a special obligation to... to protect the interests of all creditors and the estate, and I believe because of that, it would have a heightened responsibility to determine whether there was a basis for an undue hardship discharge because the decision is not solely... is... is affecting everyone.

Justice Kennedy: In the voidable preference case, it's... it's as if we're... the suggestion is is that the bankruptcy court has the authority to order the res brought before it, commanding the State to deliver the res, i.e., the voidable preference.

Mr. Gerson: I... there is a question that--

Justice Kennedy: And... please.

Mr. Gerson: --with... with regard to a voidable preference action whether the funds the debtor would be seeking would be part of the res because it's not in the possession of the estate.

Justice Kennedy: Right.

Mr. Gerson: And certainly that distinction can be made as made in California v.... v. Deep Sea Research, that if the property is in the possession of the... of the State, rather than the debtor, a different result is required with respect to the Eleventh Amendment.

Chief Justice Rehnquist: Well, before the Bankruptcy Act in 1978, bankruptcy courts couldn't try voidable preferences.

That had to be in the district court I believe.

Mr. Gerson: That's correct, Justice Rehnquist.

Justice Breyer: If in fact we assume... let's suppose when we look into this... suppose I was to come to the conclusion that an adversary proceeding in bankruptcy is identical to a case that has nothing to do with bankruptcy in a court.

You say isn't, and maybe that's so and we'll find out.

All right.

Now, if that were so and if that meant under the Court's case law that this particular adversary proceeding were invalid under the Eleventh Amendment, would the bankruptcy judge under section 105 or some other section or would the Rules Committee have the power without going back to Congress to devise a different procedure that would get to exactly the same place, say, a procedure that had the bankruptcy judge adjudicate this under the same standard while notifying the State, like any other creditor, that it could intervene at is choice.

Mr. Gerson: Yes, it could, Your Honor.

And... and the basis for that would be to reconciling the requirements of 28 U.S.C. 2075 and the requirement for the bankruptcy rules because under 105, a court could rule that it would be inappropriate to enforce the requirement of Bankruptcy Rule 7001, which requires an adversary proceeding.

So 105 would give a bankruptcy court that power and I believe it would be an appropriate exercise of that power.

Justice Breyer: And even without 105, could the Rules Committee then devise a different rule?

Mr. Gerson: Certainly, Your Honor.

Justice Ginsburg: Mr. Gerson, you... your position depends heavily on the characterization of bankruptcy proceedings as in rem, and one can understand that about the bankrupt estate, it collects whatever assets there are and distributes them.

But this is a no-asset bankruptcy.

So how does the in rem characterization fit a case where there are no assets?

Mr. Gerson: Because the debtor itself, at least the pre-petition debtor, is also considered part of the res, part of the bankruptcy court's in rem jurisdiction.

That was reflected in Hanover National Bank v. Moyses where the creditor complained that its debt had been discharged, but it had never received... no summons or complaint had ever been filed.

In fact, it complained it had never received notice.

And this Court's response was, no, bankruptcy is a form of in rem jurisdiction, and on that basis the... the claim of that creditor could be discharged even though no adversary... no summons and complaint was filed.

Notice as a motion was sufficient, and it based--

Justice Ginsburg: So what you're saying is the... is the debtor is not a thing, is not a res, but a debtor... this is an adjudication over a status which traditionally is also in rem.

Mr. Gerson: --That's correct, Your Honor.

I know it doesn't entirely fit our traditional notions of what a res is, but it's consistent with how this Court has traditionally understood the in rem jurisdiction of a bankruptcy court and the needs of a bankruptcy court to satisfy its essential functions.

The kinds of contradictions that are being raised in the questioning are reflective of what's happened in the circuit courts of appeal where the Fourth Circuit, the Fifth Circuit, the Ninth Circuit all have recognized and have stated in... in earlier opinions that the Seminole Tribe doctrine applied in bankruptcy but later recognized an in rem exception to allow for the discharge of debts with respect to the Fifth Circuit and the Ninth Circuit and... and the Fourth Circuit, and the Fourth Circuit also recognized that principle with respect to the confirmation of a plan and its binding effect upon a State.

So right now bankruptcy law is in an inconsistent muddle with respect to the applicability of the Eleventh Amendment, and this case allows this Court an opportunity to reconcile that inconsistency as--

Justice Ginsburg: Only a small piece of it, according to what you told us earlier, because you said this doesn't involve the preference question.

Mr. Gerson: --That's... that's correct, Your Honor.

Of course, this Court could rule that given the traditional in rem nature of a bankruptcy and the fact that, particularly under the Bankruptcy Act a preference, as Chief Justice Rehnquist pointed out, was not part of the bankruptcy summary jurisdiction but required a plenary action, that in fact actions requiring any affirmative monetary relief against a State are not part of a debtor's... are not part of a bankruptcy court's in rem jurisdiction, if it chose.

If there are no more questions, thank you.

Rebuttal of Daryl J. Brand

Chief Justice Rehnquist: Thank you, Mr. Gerson.

Mr. Brand, you have 4 minutes remaining.

Mr. Brand: Thank you, Your Honor.

Mr. Chief Justice, and may it please the Court:

The State's position in this case is that a proceeding under the law which requires the State to make a choice between voluntarily entering the proceeding or sitting back and suffering a loss of its... of its rights is every bit as coercive whether it's styled as a motion or an adversary proceeding or... or anything else, is every bit as coercive as a lawsuit similar to the... the situation with the administrative proceedings in the Federal Maritime Commission case.

Justice Scalia: Is that loss of its right automatic?

What is your answer to the question of whether, if you don't show up, a default judgment is entered automatically against you, or does the bankruptcy judge have to make the assessment of whether there's an undue hardship?

Mr. Brand: I am not certain, Your Honor, but I believe that an undue hardship showing would still be necessary.

But in either... in either situation, the State would suffer the consequences of losing its rights subject to an adjudication, not subject to the mere operation of law as with the general discharge at the conclusion of a... of an ordinary bankruptcy proceeding.

As... as far as the preference actions go, this case... I'm sorry... this Court decided in Hoffman v. Connecticut which involved a preference action and even more than that, a turnover action where there actually was property of the estate that the... that the bankrupt trustee was... was entitled to recover, that in either of those types of situations, the Eleventh Amendment applied.

Now, of course, that case turned on whether Congress had... had made a clear statement in the statute, but in any event, the Court, having found that the... that the Congress did not make a clear statement of intent to override sovereign immunity, applied the Eleventh Amendment to that preference action, that turnover action in that case.

Now, in this case we have no property.

The... the debtor is not seeking to... to get property.

The... the creditor is not seeking to make a claim out of the property of the estate.

So we would submit that... that the Court can decide this case, which involves a simple adversary proceeding on its face, the issuance of compulsory process without even reaching the question of whether a similar effect would... would occur in... in a preference action or in any other type of bankruptcy action.

So I'd like to emphasize to the Court that this is an unusual statute, and the question in this case is, does the Eleventh Amendment apply in the bankruptcy context?

But the precise circumstances of this case can well limit a court's holding to the question of whether sovereign immunity protects the State in an adversary proceeding on this particular type of statute for a particular exception from discharge.

If there are no further questions--

Justice Stevens: I do have.

Would you tell me again, what... what's the cite to the case about the turnover that you just cited?

Mr. Brand: --It's--

Justice Stevens: What is the name of the case?

Mr. Brand: --It's Hoffman v. Connecticut.

Justice Stevens: Hoffman, thank you.

Mr. Brand: It's a 1989 case--

Justice Stevens: Right.

Mr. Brand: --in which... in which the... the plurality of the Court found that Congress had not made a clear statement of intent to override sovereign immunity, but in which two Justices found that in any event Congress had no constitutional authority to override Eleventh Amendment immunity in such a setting.

If there are no further questions, again we--

Justice Ginsburg: Yes, I had one.

And it was in... your brief said, well, it's not that the bankruptcy law doesn't find the States so that, for example, if the State as creditor would sue the student after she's been discharged in bankruptcy, she could then as a defense say, I'm not liable on this debt.

It's been discharged.

I got the undue hardship finding from the bankruptcy court.

That... you did say that in your brief that that would be... that... that she could have this as a defense.

Mr. Brand: --Well, we... we did not mean that she would have obtained the undue hardship finding from the... the bankruptcy court, but that she could raise the issue of undue hardship in whatever State proceeding was initiated by the State.

Justice Ginsburg: Why would the State ever initiate such a proceeding when it has much easier... it can garnish wages.

It can intercept tax refunds.

Mr. Brand: Your Honor, may I answer the question?

Chief Justice Rehnquist: Yes, briefly.

Mr. Brand: The answer is, as Your Honor suggests, the primary... the primary means under the student loan program would be through wage garnishments and through tax intercepts, but the Federal regulations and State law would afford the debtor opportunity for administrative proceedings to raise the undue hardship issue and prove that she should be absolved from the student loan debt.

So there are State remedies available in the context not of a State court--

Chief Justice Rehnquist: Thank... thank you, Mr. Brand.

Mr. Brand: --Thank you, Your Honor.

Chief Justice Rehnquist: The case is submitted.