Central VA Comm. College v. Katz - Oral Argument
Transcript:
Argument of William E. Thro
Chief Justice Roberts: We'll hear argument next in Central Virginia Community College versus Katz.
Mr. Thro.
Mr. Thro: Mr. Chief Justice, and may it please the Court--
This case involves a conflict between two constitutional values.
On the one hand, Congress has the sovereign power to make laws which apply to everyone, including the States.
On the other hand, the States have sovereign immunity from all aspects of suit.
In the past, this Court has reconciled this conflict by drawing a line between sovereign power and sovereign immunity.
States are bound by Federal law, but the States are immune from monetary damages for violations of those laws.
In the bankruptcy context, this line means the States are bound by the discharge decisions, but that the States are immune from the trustee's attempts to augment the estate through monetary judgment.
Justice O'Connor: Can you tell us how often States are creditors in bankruptcies around the country?
Do you have any idea?
Mr. Thro: There is some information to that effect in the amicus brief of Ohio and every other State of the Union, Justice O'Connor, but my recollection is that the States are creditors in probably the majority of bankruptcies around the country.
Justice O'Connor: So, if you're correct, how would the result you want affect all the other creditors in these bankruptcies?
Mr. Thro: It would have some impact on the other creditors, in that you would not be able to augment the estate by collecting a monetary judgment from the State.
Justice O'Connor: And probably, on your theory, States can disregard the automatic stay that issues--
Mr. Thro: No, not at all--
Justice O'Connor: --when a bankruptcy--
Mr. Thro: --Your Honor.
Justice O'Connor: --commences?
Mr. Thro: No.
Under our... under our theory, the... theory, the States are bound by the automatic stay.
The States are also bound by--
Justice O'Connor: How is that, on your theory?
Mr. Thro: --Well, because--
Justice O'Connor: Why wouldn't the sovereign immunity extend to that?
Mr. Thro: --The automatic stay is an exercise of sovereign... of the sovereign power of Congress, just as the discharge decisions of a bankruptcy court are an exercise of the sovereign power of Congress.
The States are bound by the discharge decisions.
States are also bound by the automatic stay.
Where we draw the line is where the trustee attempts to get a monetary judgment as a means of augmenting the estate, which is what is happening with this case.
Justice Kennedy: Well, why don't we say that that's the exercise of the sovereign power of commerce, just... of Congress, just like you said?
That--
Mr. Thro: The automatic--
Justice Kennedy: --I mean, it seems that that answer is just conclusory, that it's an exercise of the sovereign power of Congress, okay.
That's just... that's just a conclusion.
That's not a reason.
Mr. Thro: --Yes, Your Honor.
The... this Court's decisions have struck a balance between respecting the need for the States to obey Federal law and, at the same time, respecting the constitutional value of the States' sovereign immunity.
What we have here in... with respect to the automatic stay and with respect to the discharge decisions, is States being bound by Federal law, no different than the States being bound by the minimum wage law, for example.
But what we have with respect to the trustee's attempts to augment the estate by collecting a monetary judgment against the States is an attempt to invade the State treasury, which this Court's decisions clearly state is barred by sovereign immunity.
Justice Breyer: Tell me, if you're... if you're right... let's suppose you're right.
I'm over here.
That's--
[Laughter]
Mr. Thro: Sorry, Justice Breyer.
Justice Breyer: That's all right.
So, it's hard to figure out, because the direction... you can't tell by the sound.
I don't know if there's a modern system that would help with that, but... you're right.
Suppose that the State... suppose you're right.
What I'd worry about... and I'd like your response to this... is that in bankruptcies, or weak firms... a lot of firms are weak, and they owe a lot of money to the States.
So, the States figure this out after a while.
It takes a few years to seep through, but once they see what they can do, they say,
"Here's what we'll do. "
"Settle your claims against the State, which happen to be pretty good, for 50 cents on the dollar. "
"Give us the money. "
"And you're... we're out of it. "
So, they settle it.
A month later, phhht, bankrupt.
Now, two things have happened.
The States got 50 cents on the dollar, every other creditor gets 5 cents on the dollar, because they were a month ahead of it.
The second thing that happened is, the creditor... the firm lost the chance to come in and be rehabilitated.
So, the result of this is two bad things, bankruptcy's law's basic purpose, to treat creditors fairly, bankruptcy law's basic purpose, to give firms a chance to rehabilitate, are both seriously undermined.
So, given the Bankruptcy Clause in the Constitution, how is it possible to say that Congress does not have the power to prevent those two very, very seriously harmful results... harmful in terms of the basic purpose of the Bankruptcy Clause?
Mr. Thro: Your Honor, the Constitution... specifically, the Eleventh Amendment... confirms that the States are not to be treated like private parties.
Private parties are not immune from contract actions; States are.
Private parties are not immune from torts... from tort actions.
Justice Breyer: But there is not a Tort Clause of the United States Constitution.
There is not a Contract Clause.
And there is a Bankruptcy Clause.
Mr. Thro: There is a Bankruptcy Clause, Your Honor, and that clause empowers Congress to make bankruptcy laws which apply throughout the entire Nation and which apply to the States.
However, the Bankruptcy Clause does not authorize Congress to abrogate the State's sovereign immunity from suit.
When... while abrogation can be accomplished using other provisions, it cannot be accomplished using the bankruptcy provision.
Justice Scalia: Bankruptcy Clause presumably does not allow Congress to set up the bankruptcy law in such a way that it would amount to a taking of property without just compensation, right?
Wouldn't allow another constitution to be violated.
So the only question here is whether the constitutional protection of States' sovereign immunity can be taken away by the Bankruptcy Clause; whereas, other provisions clearly can, right?
Mr. Thro: Yes, Your Honor.
And this Court said, in Seminole Tribe, that the Article 1 powers could not be used to take away, or to abrogate, the States' sovereign immunity.
Now, obviously, section 5 of the Fourteenth Amendment can be used to do it, but there is no suggestion that Congress used section 5 of the Fourteenth Amendment in enacting its attempt to abrogate sovereign immunity.
Justice Stevens: But, may I ask, how do you... how do you reach the conclusion that you're bound by the automatic stay and the discharge?
Why aren't those also an infringement of State sovereignty?
Mr. Thro: I think there is a strong argument which can be made that both the automatic stay and the discharge decisions infringe upon State sovereignty.
However, this Court's decisions, dating back to at least New York versus Irving Trust in 1933, have made it clear that the States are bound by the provisions of the discharge orders.
I think, also, the automatic stay is something similar to the Ex Parte Young doctrine, in terms of the States being enjoined from doing something else.
However--
Justice Scalia: To say... to say that the State can't be sued is not the same thing as saying that the State can sue, is it?
You--
Mr. Thro: --No, it's not, Your Honor.
Justice Scalia: --you can prevent the State from suing, even though you can't sue the State.
There's no incompatibility, is there?
Mr. Thro: No, there's not, Your Honor.
What we have--
Justice O'Connor: Now, do you... do you agree that there are situations where, notwithstanding the sovereign immunity of States, there can be in rem jurisdiction in a court to resolve claims against property--
Mr. Thro: --Certain--
Justice O'Connor: --and bind the State, as well?
Mr. Thro: --Certainly, this Court's decisions indicate that, in some instances, there can be in rem decisions which--
Justice O'Connor: Well, maybe bankruptcy estates are one such instance.
Mr. Thro: --As this Court noted in Hood, the bankruptcy decisions regarding the discharge are in rem and, of course, are binding upon the State.
But what we have here is not an in rem proceeding.
As this Court noted in Nordic Village, an action to recover a preferential transfer claim is not an in rem proceeding.
Rather, as this Court noted in Schoenthal versus Irving Trust in 1932, and Granfinanciera versus Nordberg in 1989, actions to recover preferential transfer are much like actions to recover a contract claim.
That is, like a contract claim, they do not involve the core bankruptcy proceedings, but, rather, involve matters that are... or controversies that are tangential to the core bankruptcy proceedings.
They're nothing more than an attempt to augment the State.
And where we would draw the line, and where we propose that this Court draws... draw the line... and a line that we believe is consistent with this Court's previous decisions... is that the States are bound by discharge, the States are subject to the automatic stay, but the trustees' attempts to obtain monetary judgments, and thereby augment the value of the estate, are barred by sovereign immunity.
Justice Stevens: Wouldn't it at least be theoretically possible to differentiate between setting aside a preference, on the one hand, and just bringing a suit for a tort or a breach of contact, on the other?
One could treat the assets that are... were transferred prematurely... or hastily, whatever you call it... as part of the estate.
At least it's conceptually possible.
Mr. Thro: Right.
Conceptually, it's possible.
And certainly there is an argument that the bankruptcy code says that preferential transfer is, in fact, property of the State.
With respect, however, to a preference to a State, we would say that that particular reading, as applied to the State, is unconstitutional.
I don't believe Congress can make a law which would require the State to divest money or something to which the State has in its possession in which the State has a colorable claim of ownership.
Here, there is no dispute that the money is in the State treasury.
What they are trying to do is to recover a monetary judgment from the State.
As this Court said in Schoenfeld [sic] and in Granfinanciera, this is very much like a contracts claim.
Justice Scalia: I suppose you could say that a... the intangible of a contract claim is part of the estate, too, right?
It's--
Mr. Thro: The current bankruptcy code does not say that.
In theory, I--
Justice Scalia: --But, I mean, you could be... there's no less reason to say that that's part of the res than there is to say that the preferential transfer is.
Mr. Thro: --That's correct, Your Honor.
And just as the contract claims are barred, so are the preferential--
Justice Stevens: Except Congress--
Mr. Thro: --transfer claims.
Justice Stevens: --has drawn that very distinction hadn't it?
Mr. Thro: I'm sorry, Your Honor?
Justice Stevens: I said Congress has drawn the distinction that... between the preferential claim and the contract claim.
Mr. Thro: Congress has drawn a distinction between preferential transfer claims and contracts claims.
However, this Court has noted that the difference between an action to recover a contract claim in order to augment the estate and an action to recover a preferential transfer in order to augment the estate, that there really is no difference.
Both are--
Justice Stevens: But the theory of the second is that you're not augmenting the estate, you're merely preserving the estate, isn't it?
Mr. Thro: --I think... Congress has certainly defined the estate so that a preferential transfer is considered property.
I'm not sure that Congress can do that when the preferential transfer involves the estate.
That strikes me as the effect of Congress, in effect, saying that property which clearly belongs to the State no longer does.
I think that's probably an affront to Tenth Amendment federalism concerns.
But what we do have here is a situation where, like in a breach of contract claim, they are trying to recovery a monetary judgment in order to augment the estate.
It's our position that that is barred by sovereign immunity.
Justice O'Connor: Well, now--
Justice Souter: What if the--
Justice O'Connor: --Mr. Thro, doesn't the Respondent want to dismiss the contract claims here?
Mr. Thro: The Respondent had asked the bankruptcy court... after reading our brief, the Respondent asked the bankruptcy court to dismiss--
Justice O'Connor: Yes.
So, why do you insist that they be adjudicated?
Mr. Thro: --Well, Your Honor, I think this is an attempt by the Respondent to rewrite the question presented.
Neither--
Justice O'Connor: Yes, but why--
Mr. Thro: --our petition--
Justice O'Connor: --why should we force a plaintiff below to pursue claims they want to give up?
That just seems so odd to me.
Mr. Thro: --It is rather odd, Your Honor, but my read of this Court's rules are that there is no mechanism for a Respondent, the party that won below, to, in effect, give up its victory once they get in this Court.
I'm not quite sure why they wish to drop the breach of contract claims.
Perhaps they feel that by dropping the breach of contract claim, they somehow obtain a tactical advantage.
And, if that's the case, certainly this Court should not allow them to rewrite the question presented in order to obtain a tactical advantage.
But, in any event, both the breach of contract claim and the preferential transfer claims are attempts to augment the estate and are barred by sovereign immunity.
Justice Kennedy: Well, do you think the waiver argument that's made is properly before us?
Mr. Thro: No.
The waiver argument is not properly before you.
It was not passed upon by the Court of Appeals below.
Moreover, it was, for the most part, not preserved in the Court of Appeals below.
While they did argue that Virginia Military Institute waived sovereign immunity for all claims involving Virginia Military Institute in the Sixth Circuit, they made no such argument that filing proof of claim constituted a waiver of sovereign immunity for the transactions involving the other institutions.
Justice Kennedy: You may be right about that, but, while I've got you here, let's assume just one State entity, not multiple State entities.
And the State has received a preferential transfer of $2,000.
It still has an outstanding claim... a different claim against the same bankrupt for $1,000.
And it goes in to enforce its claim for $1,000.
Could we hold, consistently with the Eleventh Amendment, that that is a waiver?
Mr. Thro: I believe that this Court's decisions indicate the following position.
When a State files a proof of claim, it exposes itself to the trustee's defenses to that claim.
So, in other words, if the... if the... if the preferential transfer was part of the same transaction or occurrence--
Justice Kennedy: No, different claim.
The--
Mr. Thro: --Different claim.
Justice Kennedy: --One, the State received $2,000 worth of taxes, but it... still have its $1,000 contract claim.
Mr. Thro: Then I believe that this Court's opinions indicate that that would not be a waiver with respect to the different transaction or occurrence.
Certainly, by filing the proof of claim you would expose yourself to the trustee's defenses with respect to the same transaction or occurrence.
Justice Souter: --Go--
Justice Ginsburg: So was... there's a section in the back of... I think it's 160(c)... that says if it's an unrelated transaction, then... so, it would be a permissive counterclaim if we had ordinary civil proceedings.
Then there can be a setoff to the extent of the claim that's being made against the bankrupt estate.
There can't be any affirmative recovery, as there could be with a permissive... with a compulsory counterclaim.
But you're saying that that section is unconstitutional... 160(c)?
Mr. Thro: To the extent that 106(c) goes beyond the rule announced in Gardner, then, yes, it has constitutional problems.
But you need not reach the constitutionality of 106(c).
What we were talking about here is basically a straightforward application of this Court's precedence in a line that you have drawn in other contexts.
Justice Ginsburg: But if we're talking just about VMI, not about the other schools, then you... if this claim is unrelated, so that it would be a permissive counterclaim, then you would say not even against VMI could you have the setoff.
Mr. Thro: That's correct, Your Honor.
In... this Court's decisions dealing with what effect happens when a sovereign entity initiates litigation indicate that the sovereign, by initiating litigation, certainly exposes itself to defenses, but does not expose itself to affirmative recoveries.
Justice Ginsburg: But why shouldn't a setoff be a defense, even if it's unrelated?
I mean, there were such things in... at common law, were there not, that you could set off an unrelated debt?
Mr. Thro: Yes, Your Honor.
And to the extent that a setoff is a defense, it would be permitted.
But I may have misunderstood your hypothetical that you were talking about, a setoff which involved an affirmative recovery against the State.
Justice Ginsburg: No, I meant a setoff--
Mr. Thro: Okay.
Justice Ginsburg: --only--
Mr. Thro: Then I misunderstood your hypothetical.
I'm sorry, Your Honor.
Justice Souter: --Mr. Thro, I... am I correct in assuming that if the... if the preference in a case like this, that had been given to the State, were not a bank transfer, a check, but were some tangible object, like a gold bar, that there would be in rem jurisdiction on the part of the court to get the gold bar back as a... even though its function is that of a preferential transfer?
Mr. Thro: I don't think so, Your Honor.
I... although this Court has recognized certain in rem exceptions to sovereign immunity, particularly in the admiralty context, this Court has never recognized... said that sovereign immunity allows a Federal court to order the State to return something where, number one, it's in the State's possession, as it would be in your hypothetical, and, number two, the State has at least a colorable claim of ownership, which, if I understood your hypothetical correctly, the State does have a colorable claim of ownership.
But you need not reach... deal with the intangible or personal property issues.
The only thing that is at issue here is a demand for a monetary judgment.
Justice Souter: Well, that's... with respect to... I mean, you can say that of any claim that is valued in dollars.
But, I mean, your... you know, what I'm getting at is your position that there is no distinction to be drawn between the contract action and the preferential transfer.
And my point was, some transfers might be satisfied... might be sought in what, at least in the traditional classification, would be an in rem, rather than an in personam, action.
Would your answer be any different if the... if the gold bar were simply sitting on the... on the desk of some State purchasing agent, as opposed to deposited in the... in the State treasury or sold by the State for the monetary value?
Mr. Thro: As I understand this Court's decisions on this, if the... if the property is in the possession of the State, and if the State has a colorable claim to ownership, then sovereign immunity will bar the... a court--
Justice Souter: Okay, so--
Mr. Thro: --a Federal court order to--
Justice Souter: --in effect, you're saying there are some in rem exceptions, but not all in rem actions are exceptions.
And this would not--
Mr. Thro: --This Court has certainly recognized certain in rem exceptions, notably in the Treasure Salvors case, where the State did not have a colorable claim to title, and also in Deep Sea Research, where the State did not have possession of the object.
Also, in the Whiting Pools case, the Federal Government had possession of a intangible asset, but it was clear that the debtor still had the ownership interest, and this Court said that, in that circumstance, the Federal court would... could order the return.
Justice Scalia: Well, I suppose you could have a contract action that... in which the State promises to turn over a particular parcel of land that it owns, or even, for that matter, a gold bar that is on somebody's... some State functionary's desk.
And I guess you could have a suit for that gold bar or for the piece of property.
And I guess you could call that an in rem action, if you wanted to.
But it wouldn't be.
Mr. Thro: Right.
It would be a gross in... a radical in... expansion of in rem jurisdiction.
Traditionally--
Justice Souter: --Well, because--
Mr. Thro: --in rem--
Justice Souter: --because we normally deal with that as specific performance of the contract, and what... you know it's in rem, in the sense that we're talking about an object, but that's not what we mean, traditionally, by "in rem jurisdiction", is it?
Mr. Thro: --Traditionally, in rem jurisdiction has a couple of characteristics.
One is, it is... it is everyone against the world.
It binds--
Justice Souter: Yes, you sue... in effect, you sue the race, rather than--
Mr. Thro: --Right.
Justice Souter: --than the person.
Mr. Thro: And--
Justice Souter: And in the... in a... in a specific performance contract action, you sue the person.
Mr. Thro: --Right.
And a specific performance contract action, while barred in Federal court, would, of course, be allowed in State court, to the extent that Virginia has--
Justice Scalia: What about a rescission action in which the private party has conveyed property to the State, and the State doesn't pay, and the private party seeks to rescind the action and to receive back the property that it turned over, which is real estate or a gold bar?
Could that not--
Mr. Thro: --Right.
Justice Scalia: --not be a... characterized as an in rem action?
He's seeking back the property he gave over.
Mr. Thro: I don't believe it could be characterized as an in rem action, given the traditional understandings of "in rem".
But, regardless of whether you call it "in rem" or "in personam", sovereign immunity would still bar such a thing in Federal court.
This Court has never said that there is an in rem exception to sovereign immunity.
To the contrary, you explicitly rejected an in rem exception to sovereign immunity in Nordic Village, at least where money was concerned.
You have allowed recovery in certain limited circumstances, such as the admiralty cases.
Those do not exist here.
This is not an in rem proceeding.
Preferential transfer is not an in rem proceeding under Nordic Village.
Moreover, as this Court's opinions in Schoenthal and Granfinanciera make clear, it's more... it's a traditional sort of common law, similar to a contract action.
Justice Kennedy: I'd like to get away from in rem and back to the waiver aspect that's being argued here.
Let's assume that there is an offset obligation that the State has to comply with, that there's been a preference and it has another claim, and with just one entity.
If that's true, it seems to me somewhat unfair to say that the State can proceed on multiple fronts with different entities and fractionate its immunity so that if there are more than three entities... or if there are three or four entities, each one is judged separately as to the offset obligation.
It seems to me that if one State entity is subject to offset, then all of them are.
Mr. Thro: I believe--
Justice Kennedy: Otherwise, the State immunity, it seems to me, can be... can be fractionated.
Mr. Thro: --Well, I believe that this Court's decisions in the bankruptcy context draw the line with respect to the same transaction or occurrence.
So, to the extent that it arises out of the same transaction or occurrence, then you've got that, sort of, partial or limited waiver.
Where--
Justice Kennedy: But I--
Mr. Thro: --however, with--
Justice Kennedy: --I thought, with respect to Justice Ginsburg's colloquy... and my own, earlier... that we said that there is an offset obligation, even if they're different claims.
Mr. Thro: --There is an offset.
I--
Justice Kennedy: And now... and now I want to extrapolate from that to multiple entities, each of which asserts its own immunity.
Mr. Thro: --Right.
I think the offset obligation... my understanding of Justice Ginsburg's hypothetical was that the... was that we were talking about an offset that would not be an affirmative recovery, but would merely be using as... an offset as one of the trustee's defenses to the claim.
Justice Scalia: Against the entire State--
Mr. Thro: Against the entire State.
Justice Scalia: --including any money owed to the other... to the other State institutions.
You acknowledged that that--
Mr. Thro: Yes.
Justice Scalia: --offset could be--
Mr. Thro: Yes.
Justice Scalia: --applied not just against the college here, but against the--
Mr. Thro: No.
Justice Scalia: --other entities.
Mr. Thro: The offset with respect to that particular... with respect to that particular transaction or occurrence, not to the other transactions or occurrences.
Justice Ginsburg: --So, you're not... I thought your position was, VMI, okay.
If they filed a claim, then they're open to affirmative recovery if it's a compulsory counterclaim; offset, if it's a permissive counterclaim.
But I thought you said, as to the three other schools, no waiver.
There's not... no way you can lump them in.
I thought that was--
Mr. Thro: Yes.
Justice Ginsburg: --your position.
Mr. Thro: There is no way that you can lump in the other three schools.
With respect to VMI, by filing a proof of claim, VMI exposed itself to the trustee's defenses.
To the extent that the setoff is a defense for the trustee, then, of course, that setoff would apply to VMI.
Before I sit down, I'd like to make three points.
First, Seminole Tribe controls.
Congress may not use its Article 1 Bankruptcy Clause to abrogate sovereign immunity.
Second, to rule in favor of Virginia does not require any alterations in this Court's jurisprudence; however, to rule for Mr. Katz on any theory requires certain fundamental changes in this Court's jurisprudence.
Finally, regardless of context, sovereign immunity bars monetary judgment claims.
States are immune from contract actions; private parties are not.
States are immune from court actions; private parties are not.
States are immune from actions by the trustee to augment the estate; private parties are not.
Thank you.
Argument of Kim Martin Lewis
Chief Justice Roberts: Thank you, Counsel.
Ms. Lewis.
Mr. Lewis: Mr. Chief Justice, and may it please the Court--
The... if the States are permitted to opt out of the collective bankruptcy process, and they're permitted to disregard Federal preference statutes with impunity, it will have a negative effect on the bankruptcy process.
States are large creditors.
Chief Justice Roberts: Well, it's the same problem in the patent area, isn't it?
And yet, in the Florida Prepaid cases, we've enforced the sovereign immunity with respect to patent proceedings.
Mr. Lewis: Your Honor, in the Florida Prepaid case, there was an alternative State remedy.
In that case the plaintiff could sue the State of Florida... I'm sorry... yes, could sue the State of Florida in that particular case.
In this case, they can't do that.
There is a... an estate representative, who has one option, and that option, to preserve the collective benefit of the estate, is to sue the estate... or to sue the State in the bankruptcy court.
Justice Souter: Assuming that's so, for sovereign immunity purposes, why should it make a difference?
Mr. Lewis: For... well--
Justice Souter: Yes, I mean, this is a tougher case, but if sovereign immunity is the issue, why does it make any difference?
Mr. Lewis: --I do believe that it makes a difference that there is no alternative remedy.
However, in this case, I don't think--
Justice Souter: Why?
What does that have to do with the theory of sovereign immunity?
Mr. Lewis: --I'm not sure that it has anything to do, directly, with the theory of sovereign immunity, but--
Justice Souter: Believe me, I... I mean, I... as you know, I'm not a big fan of sovereign immunity in these circumstances, but I'm not quite sure how to get around it, based on the fact that there is no alternative remedy here.
Mr. Lewis: --Well, Justice Souter, the thing that I think is very troubling in this case is that there's a very basic bankruptcy policy, and that basic bankruptcy policy on preferences is equality of distribution and to prevent of abusive debt collection practices on the eve of bankruptcy.
Justice Souter: Then, basically, you're making the argument from the uniformity phrase... uniform bankruptcy laws.
That's essentially your argument.
And you're saying, in the... in this case, that that trumps the sovereign immunity, and that gets you out of Seminole Tribe.
Mr. Lewis: I believe that it... I believe that it does, Your Honor.
But I... I'm not sure the Court even has to reach the uniformity argument in this case, because the fact that Virginia Military Institute, on behalf of the Commonwealth of Virginia, waived its sovereign immunity.
Justice O'Connor: Well, but, of course, that doesn't hold true for the other agencies, necessarily, unless you think VMI can waive it for all of them.
That seems to me to be only a partial argument.
Mr. Lewis: Justice O'Connor, the... VMI waived the only sovereign immunity that existed, which was the Commonwealth of Virginia's sovereign immunity.
And, as a result... all of the agencies of the Commonwealth of Virginia served as unitary creditors... and so, when VMI waived the only sovereign immunity that existed, there was nothing left to waive.
And, at that point, the recoveries of the estate... which were recoveries against other agencies, not only VMI... were... the Respondent was permitted to bring those actions.
Chief Justice Roberts: Your waiver argument is... is it under 106(b) or 106(c)?
It's beyond both of those, isn't it?
Mr. Lewis: Chief Justice, it's not under 106(b) or 106(c), because the waiver of sovereign immunity... 106(a) provides that, with respect to preference claims--
Chief Justice Roberts: That's an abrogation, that's not--
Mr. Lewis: --That--
Chief Justice Roberts: --a waiver.
Mr. Lewis: --that's correct, Your Honor.
Chief Justice Roberts: Well, my question would be, How can you argue in favor of waiver when you have a statute with a much more limited waiver, the limits in 106(b) and 106(c), and you're saying,
"Well, they waived it much more broadly? "
It would seem to me that the most you can argue is that there was a waiver under 106(b) or 106(c), but that doesn't get rid of the whole case.
Mr. Lewis: Your Honor, I don't believe that 106(b) or 106(c) limits the waiver in this case, because, again, the sovereign immunity that was waived was the sovereign immunity of the Commonwealth of Virginia.
And so, the claims that were asserted in that action, the preference actions that are served against VMI and the other institutions, are preserved, because we can--
Justice Scalia: Well, you're saying that much of the language of (b) is ineffective and superfluous?
(b) certainly tries to limit it.
It says
"has waived sovereign immunity with respect to a claim against such governmental unit that is property of the estate and that arose out of the same transaction. "
You're just saying all of that is ineffective, then?
Mr. Lewis: --I'm saying that, in this context, it isn't... it isn't effective, Your Honor.
Justice Scalia: In what context would it be effective?
Mr. Lewis: The... 106(b) was intended for claims that didn't... that did not arise under the bankruptcy code.
106(a) claims, which was the abrogation of sovereign immunity, are claims that arise under the code.
106(b) and 106(c), there is no sovereign immunity to waive.
So, 106(b) and 106(c) were designed for the contract claims that Justice Scalia referred to earlier in the Petitioner's argument.
And then we looked to the Federal... this Court's jurisprudence with respect to what constitutes a waiver of sovereign immunity.
And we would most naturally look at the Lapides case, in which... in which a State came into this... removed a case from State to Federal court, and the court said it didn't matter the type of claim that was being asserted, or that there was affirmative recovery that was being asserted, but, in fact, they constituted a waiver of sovereign immunity.
And the State certainly can't say, here, that they didn't know the filing of a proof of claim would constitute a waiver of sovereign immunity, because back in 1947, in the Gardner versus New Jersey case, this Court acknowledged that filing a proof of claim constituted a waiver.
And there are ways that a State could avoid this.
They could have a process by which they had to go through... whether it be the Attorney General's office, or whomever... that in order to file a proof of claim, they had to first go somewhere to get authority to do that.
And that most naturally happens with corporations, because, as this Court is aware in the Granfinanciera case, if you... if you assert a proof of claim, you waive your jury trial right.
And that is a large issue for corporations--
Chief Justice Roberts: How do we interpret the statute to establish that Congress intended the States to waive their immunity with the filing of the claim?
I don't see that anywhere in the statute.
Mr. Lewis: --I'm sorry, can you--
Chief Justice Roberts: You're arguing that by filing the claim, the State has waived all of its immunity, but I don't see where in the statute it imposes that kind of waiver upon States.
I see where they abrogate the immunity, but that's different than saying that there's a waiver.
Is your argument that just because they abrogated immunity, and it turned out they didn't... may or may not have that authority, they necessarily imposed a waiver?
Mr. Lewis: --I don't think 106(b) applies with respect to the preference claims, Your Honor.
Chief Justice Roberts: Okay.
Well, then where is the waiver of sovereign immunity in this statute?
Mr. Lewis: The... in... 106(b) and 106(c) specifies the conduct by which a sovereign must... must engage in, in order to waive sovereign immunity in a noncore matter, in those matters not set forth in section 106--
Chief Justice Roberts: But I thought... you're not relying on 106(b) and 106(c).
Mr. Lewis: --That's correct, Your Honor.
Chief Justice Roberts: So, where is the waiver of immunity on which you're relying?
Mr. Lewis: The waiver of sovereign immunity is the jurisprudence of this Court, that Eleventh Amendment sovereign immunity is not absolute, that a sovereign can waive that sovereign immunity.
And it did, in Gardner versus New Jersey.
And, again, this Court looked at that in the Lapides case.
Chief Justice Roberts: But you have no argument that Congress imposed a waiver.
Mr. Lewis: That's correct, Your Honor.
Chief Justice Roberts: Okay.
Justice Scalia: And, again, I still don't see how you distinguish (b) when you say
"(b) doesn't apply here, it may apply in other cases. "
If it doesn't apply here, why would it apply in other cases?
Mr. Lewis: Your Honor--
Justice Scalia: I mean, if you are appealing to this broader principle, that you either waive all of sovereign immunity or you waive none of it at all, and you can't just restrict it to the particular claim, which is what (b) says, I don't know why, in any case, that wouldn't be true.
Mr. Lewis: --Justice Scalia, again, it's because we do not believe 106(b) governs here, because it deals with claims that are not abrogated under 106(a) of the bankruptcy code.
Justice Stevens: Of course, if Congress had thought it had successfully abrogated, there would be no reason to provide for a waiver, I don't suppose.
Mr. Lewis: That's correct, Justice Stevens.
And I think this Court has recognized that bankruptcy is different in other contexts.
And I think that it's very important to talk about bankruptcy differently.
This Court has looked at, in... just last term, in the Hood case, which was the debtor's discharge.
And the Court said that that constituted in rem authority.
This Court, in Perez versus Campbell, said that somebody cannot be denied a driver's license simply because they failed to play a discharged obligation.
The Court, in the Irving Trust case, said that a State is required to satisfy the procedure of bankruptcy if they want to participate in the claims process.
In Van Huffel and Straton, this Court said that a bankruptcy estate is permitted to sell property free and clear of the State's tax liens.
In Whiting Pools, this Court said the IRS, who seized property on the eve of bankruptcy on behalf of a... of a lien, had to return that in its in rem jurisdiction.
And I believe it was Justice O'Connor who asked the question of Petitioner with respect to, How would this affect the automatic stay?
And how I've thought of that is, sometimes the automatic stay, there may be an effect with respect to monetary relief, and there may be an effect as far as an injunctive relief.
For example, if there was a judgment that a State had, prior to bankruptcy, against the estate, and then sought to enforce the judgment, executed on the debtor's bank accounts post petition, debtor didn't know about it, because, in a... in a debtor's reorganization, the first month of the debtor's bankruptcy, you can't... you're not following everything that's happening in the case.
There is an execution on the bank account, the money is taken into the State's coffers.
Does that mean that the State is bound by the automatic stay, or is the State not bound by the automatic stay?
It was money that was transferred from one... from the estate to the State.
Justice Breyer: I thought (b) and (c)... tell if I'm right about this... but suppose an individual bankruptcy, and sometime prior to the bankruptcy the individual got into an automobile accident and ran into a State building and wrecked it.
All right?
Now, I take it that, in a State that hasn't waived sovereign immunity, that individual, were he not bankrupt, might not be able to bring a lawsuit for his damages caused by a claim that the wall was too high or something.
Each is claiming the other is negligent.
I guess the person wouldn't be able to file.
And the fact that he's bankrupt, he couldn't, either.
Okay.
Now, in (b), I guess it's saying that if the State happens to come in, after he's gone bankrupt, and brought his negligent suit against him, he can respond.
Mr. Lewis: That's correct, Your Honor.
That--
Justice Breyer: So, if, in fact, you were to lose on (a), I guess the whole section would fall, because it wouldn't make any sense anymore, and we'd just wipe out the whole thing, (a), (b), and (c).
Mr. Lewis: --That's correct, Your Honor.
It was... it was a--
Justice Breyer: All right.
So, then the case really turns on the extent to which the Government can... sorry, the extent to which Congress can waive sovereign immunity, as they seem to have waived it in (a), whether the Constitution permits them to do what they did in (a).
Mr. Lewis: --Right, to abrogate sovereign immunity.
Justice Breyer: And if you win on that, you win.
And if you lose on that, the whole section 106 would probably fall.
Mr. Lewis: I believe 106 would fall, but, if 106 falls, doesn't mean that Respondent would lose, as far as the waiver argument, because--
Justice Breyer: I'm not sure, because if you lose on the whole thing... suppose you were to say Congress doesn't have the power to do anything there.
I just wonder if (b) and (c) would survive, because they may have had something else in mind.
But maybe that's too complicated to go into now.
Mr. Lewis: --Well, Justice Breyer, I think that (b) and (c), as pointed out by another one of the Justices, may be a limitation on the general concept of common law waiver.
So, to the extent that 106 would be... this Court were to rule (b) that would... unconstitutional, you would look to the general common law waiver of sovereign immunity, which would be the Gardner versus New Jersey case and the Lapides case.
The--
Chief Justice Roberts: Well, how do you... how do you have an informed waiver if the argument is over the authority to abrogate?
In other words, the Federal Government is saying, under your theory, that we're abrogating your immunity.
And the State's saying, "You don't have that authority".
And how do you get an informed waiver, simply because the State participates in a bankruptcy proceeding, on the basis of the legal theory that they're asserting here today, that Congress doesn't have the authority to abrogate the immunity?
Mr. Lewis: --We believe, obviously, Congress had the right to abrogate sovereign immunity--
Chief Justice Roberts: I understand that.
But your theory, as I read in your brief, as an alternative argument, is that there was a--
Mr. Lewis: --That's correct.
Chief Justice Roberts: --waiver.
The State waived its immunity by participating through... in the--
Mr. Lewis: That's correct.
Chief Justice Roberts: --bankruptcy proceeding.
How is there an informed waiver if the argument is over the authority to abrogate?
Mr. Lewis: Well, Your Honor, I believe, because this Court has recognized, in Gardner versus New Jersey, that if a State files a proof of claim, it constitutes a waiver, that the State had to have to been informed, it had to know that the actual conduct of filing a proof of claim would have a consequence of a waiver.
Chief Justice Roberts: Yes, but all the... all the statute does is abrogate.
Mr. Lewis: All--
Chief Justice Roberts: In 106(a).
It's--
Mr. Lewis: --That's correct--
Chief Justice Roberts: --an attempt to--
Mr. Lewis: --Your Honor.
Chief Justice Roberts: --abrogate.
Mr. Lewis: That's correct.
Chief Justice Roberts: And if it turns out that Congress doesn't have that authority, I don't see how you can say the State has made an informed waiver, when their theory is,
"Guess what? "
"You don't have that authority to abrogate. "
Mr. Lewis: Well, Your Honor, 106(a) certainly didn't exist back in Gardner versus New Jersey in 1947 either.
And I think that the... the fact that... if sovereign immunity exists, sovereign immunity can be waived.
I'm not sure--
Justice Breyer: No, no, no, he's... so, I'm wrong.
What I said is wrong.
The answer has to be that... we're only talking about (a) at the moment.
And what Congress tried to do in (a) is abrogate sovereign immunity insofar as it is constitutional to do so.
So, then, you say, if you lose on it, it's unconstitutional for it to do so here, but it could... it is constitutional for it to do so insofar as there is this situation that the State brings a case against the estate, and you can do an offset, et cetera.
But it would have nothing to do with (b) and (c).
It would have to do with reading that into (a), I guess.
Mr. Lewis: --I believe that's correct--
Justice Breyer: All right.
Mr. Lewis: --Justice Breyer.
Justice Ginsburg: In... I don't follow that, because I thought the theory of the cases were that you can waive something by conduct.
And so, when you ask a court for relief against a party, then it's reasonable to say,
"If you're coming in and asking the court to give you something, then it's only fair that your adversary should be able to-- "
Justice O'Connor: A light bulb exploded.
A light bulb exploded.
Chief Justice Roberts: I think we're... I think it's safe.
Justice Breyer: A light bulb went out.
Chief Justice Roberts: It's a trick they play on new Chief Justices all the time.
[Laughter]
Justice Scalia: Happy Halloween.
[Laughter]
Justice Ginsburg: --Let me ask this--
Justice Kennedy: Take your time.
We're interested--
Chief Justice Roberts: We're even... yeah, we're even more in the dark now than before.
[Laughter]
Justice Ginsburg: --If you lose on the abrogation notion, and the Court holds that there is no authority in Congress to abrogate sovereign immunity, still the bankruptcy code codifies what is, across the board, the law.
That is, if you come to a court and say, "Give me X against D", that D should be able to come back and say,
"Either I want full relief because it's a compulsory type counterclaim. "
"I have to bring it here. "
"I can't bring it separately. "
"Or at least a setoff. "
I mean, that was understood, that a party over whom the court would not have jurisdiction otherwise, is amendable to the court's jurisdiction to the extent of a counterclaim or a setoff.
So, I don't see why (b) and (c) are not discrete from (a).
(b) and (c) are implementing the idea of a setoff.
You come to court for a claim, you are deemed to have waived any jurisdictional objection to the counterclaim or the setoff.
Mr. Lewis: I understand that argument, Justice Ginsburg, but I believe when Congress enacted 106(a), (b), and (c), that they enacted it... (a), being those actions which were abrogated, (b) were those actions that remained.
And those actions that remained, there were limitations to that waiver.
Because this is not... there was nothing to waive on sovereign immunity on 106(b) as to preference actions, for example.
Contract claims are different.
Contract claims would have... are not abrogated under 106(a), so, therefore, the only way they can be waived is under 106(b).
Justice Kennedy: --Well, it's the same question.
But let's say that the court thinks there might be merit to the argument of waiver, that the State entity comes in asking to be treated as a creditor, and its preference is then before the bankruptcy court.
How is that issue preserved in the question you raise?
You say, maybe the Congress used Article 1 to abrogate the State's sovereign immunity.
Mr. Lewis: Did you ask how it's preserved?
We raised the--
Justice Kennedy: It just seems to... seem to me to be part of the question presented.
Mr. Lewis: --Your Honor, I think, to the extent that this Court can avoid addressing the Constitution about constitutionality of a statute... and, in the situation of waiver, we believe that it can... then we believe that's the appropriate jurisprudence.
Justice Kennedy: Well, you asked... you framed the question.
Justice Ginsburg: No.
No.
Justice Kennedy: Oh, no, you... you're right.
You're right.
You're exactly right.
Chief Justice Roberts: Well, to what extent was this argument raised below, I guess is a--
Mr. Lewis: Chief Justice, it was raised, to the extent of VMI's sovereign immunity.
And the reason that it was is, at the time that the motion to dismiss was filed, as recognized by the Petitioner in their brief, and as recognized by the court, at the bankruptcy court level, the Hood decision at the Sixth Circuit had been a decision.
And so, there was no necessity for the court to engage into any other proceedings, other than to deal with the Hood decision.
Justice Stevens: May I ask a question on another subject, just talking for a minute about your in rem theory of the case?
And I understand you would contend that assets have been subject to a fraudulent transfer or a preference should be deemed to be part of the estate.
But is it not true that this case also involves a claim on the accounts receivable?
And do you contend they also should be treated as part of the estate?
Mr. Lewis: Justice Stevens, we did seek to dismiss the causative action with respect to the accounts receivable and the causative action that we--
Justice Stevens: Is that because you concede, in effect, that they would not be part of the estate if we adopted an in rem theory that included the preferential transfers?
Mr. Lewis: --They would not be part of the estate--
Justice Stevens: Okay.
Mr. Lewis: --in a situation of... if this adopt... Court adopted an in rem theory, that's correct.
Justice Breyer: Which would not?
I'm sorry.
Mr. Lewis: Any recoveries on behalf of State contract claims, account receivable as collections.
Justice Breyer: And you have some of those.
Mr. Lewis: We do, Your... Justice Breyer.
Justice Breyer: Are you trying to get those in this case?
Mr. Lewis: No, we are not.
Justice Breyer: Oh, okay.
Mr. Lewis: We sought to dismiss them.
Justice Scalia: Well, you were, but you're not.
Mr. Lewis: That's correct, Justice--
Justice Scalia: I mean, you're--
Mr. Lewis: --Scalia.
Justice Scalia: --trying to get rid of that, right?
Mr. Lewis: That's correct, Justice Scalia.
Justice Stevens: Now, that doesn't fit into your in rem theory, but why wouldn't you have been able to recover that on a waiver theory?
If you... and I understand your waiver argument is, you can defend the judgment on the ground not... you know, any ground to uphold the judgment is okay for the Respondent.
But why wouldn't you have tried to defend that part of your case on the waiver theory?
Mr. Lewis: It would have been the waiver with respect to just VMI's contract claims.
And, I apologize, off the top of my head I don't recall what the value of just the VMI contract claims would have been.
But that's what we believe the waiver would have been limited to.
It would have not included the contract claims of Central Virginia Community College, Blue Ridge.
Justice Scalia: Would you explain to me again why it's okay that your waiver argument below was only directed to the claims against VMI?
Mr. Lewis: At the--
Justice Scalia: I'm not... I didn't understand your answer to that.
You made a much narrower argument there than you're making here.
Mr. Lewis: --I--
Justice Scalia: You didn't... you didn't assert that all the sovereign immunity for the entire State and all of its institutions had been waived simply because of the claim by VMI.
You didn't make that argument.
Mr. Lewis: --At the time of that decision, Justice--
Justice Scalia: Yes.
Mr. Lewis: --Scalia, the Sixth Circuit Hood decision had already been decided, and, just as it was acknowledged in the--
Justice Scalia: What... which said what?
Mr. Lewis: --Which said that sovereign immunity is waived, or abrogated, for preference actions in... it was actually across the board... an abrogation of State sovereign immunity.
And, at that point, there was notice--
Justice Scalia: Well, then why didn't you make the argument?
I mean, if Hood said, when you make a partial... or one institution... if I understand what you're saying, Hood said that a waiver by one institution waives for the whole State.
Is that... is that what Hood said?
Justice Ginsburg: No.
Hood said--
Mr. Lewis: --No.
Justice Ginsburg: --that Congress could abrogate--
Mr. Lewis: That's correct.
Congress could--
Justice Ginsburg: --through the Bankruptcy Clause.
The... what... and then when the case came to this Court, we didn't--
Justice Scalia: Yes.
Justice Ginsburg: --address that issue.
Justice Scalia: But if you're making a separate waiver argument, apart from the abrogation argument, I don't see why you would not make that waiver argument as broadly as possible.
It's a separate argument from the abrogation argument.
Mr. Lewis: --We--
Justice Scalia: And you're making it as a separate argument here.
But here, you're making it as to all claims against all State institutions; whereas, below you made it only as to the claims against VMI.
I don't understand that.
Mr. Lewis: --At the time, 106(a), in the Sixth Circuit, it was determined that that was constitutional.
So, at the time, the only thing left for the States to waive was the contract actions.
And the contract actions of VMI were the only things that could be waived as part of the--
Justice Scalia: I see.
Mr. Lewis: --underlying--
Justice Scalia: I see.
Chief Justice Roberts: --So, the... so, the long and short of it is, for good and sufficient reasons you did not make the same waiver below that you're making here today.
Mr. Lewis: --That's correct, Chief--
Chief Justice Roberts: Okay.
Mr. Lewis: --Justice.
Justice Kennedy: And the proof of claim in VMI was $43,000, and the preference was $25,000.
Mr. Lewis: That's correct.
Justice O'Connor: Now, on your in rem argument, how do you distinguish Nordic Village's case?
Mr. Lewis: In the Nordic Village case, the trustee in that case focused on the money damages.
They didn't focus on the portion of the preference statute that says you can get the transfer back, you can get the property back.
And as this Court recognized in Bowen versus Massachusetts, just because it is monetary relief doesn't mean that it's money damages.
And that's how we distinguished the Nordic Village case, Your Honor.
The... this Court, I believe, would be extending the Article... its jurisprudence if it permitted the bankruptcy estate not to be able to sue the States.
This Court has recognized that a private citizen, Indian tribes, and foreign sovereigns cannot be sued.
But this Court's never recognized a Federal entity cannot pursue a State.
And this Court... this is a situation where there is no alternative remedy.
We aren't in a situation where we have the ADA, the ADEA, where the EEOC can bring an action on behalf of the Government and on behalf of the individuals to enforce a Federal law.
We have no other enforcement in bankruptcy, other than the collective bankruptcy process, the bankruptcy code.
And the bankruptcy code assigns to the debtor in possession, or to the trustee, the ability to collect on behalf of the estate.
Bankruptcy is unique in its very in rem application and its very narrow and specialized enforcement of the bankruptcy system.
The framers recognized the critical nature of binding the States in a uniform scheme.
The decision below ought to be affirmed on the basis of in rem, on the basis of the Constitution, and on the basis that Virginia, the Commonwealth of Virginia, waived its sovereign immunity.
Thank you.
Rebuttal of William E. Thro
Chief Justice Roberts: Thank you, Counsel.
Apologize for the fireworks.
[Laughter]
Mr. Thro, you have three and a half minutes left.
Mr. Thro: Thank you, Mr. Chief Justice.
The question presented is whether or not Congress may use the Article 1 Bankruptcy Clause to abrogate sovereign immunity.
In Alden versus Maine, this Court held that there was a presumption that the States had retained their immunity unless it could be shown by conclusive evidence that the States surrendered their immunity in the plan of convention.
If Congress can use the Article 1 bankruptcy power to abrogate sovereign immunity, then one would expect there to be discussions to that effect at the constitutional convention, in the federalist and antifederalist writings, and in the ratifying conventions.
Yet, as the Sixth Circuit conceded in its version of Hood, there is no compelling evidence.
There is, at best, silence.
Silence cannot equal the compelling evidence.
Therefore, the Article 1 bankruptcy power cannot be used to abrogate sovereign immunity.
Justice Ginsburg: That's the question you've presented, Mr. Thro, but it was the same question that was presented to us in Hood.
And in Hood, we decided that we were not going to answer the question presented, we were going to decide the case on a lesser ground.
So, the Court, certainly if our venture in Hood was proper, here, too, we could decide the case on some other ground than the one you presented in your question.
Mr. Thro: Yes, you could, Your Honor.
But you should not address any of the alternative arguments raised by Mr. Katz.
Justice Scalia: We couldn't decide it in your favor, on some alternative ground, though, could we?
[Laughter]
Mr. Thro: Well--
Justice Scalia: Well, I mean, that distinguishes it--
Mr. Thro: --Yes, absolutely, Your Honor--
Justice Scalia: --The difference between this and Hood.
Mr. Thro: --Your Honor, but I believe that the proper exercise of judicial restraint is to decide the question presented, and only the question presented, and do the other grounds for perhaps another day.
All of Katz's... all of Katz's novel arguments raise complex constitutional issues and, quite frankly, ask for radical alterations of this Court's jurisprudence.
Justice Stevens: May I ask if you think, within the text of the question presented, we could decide whether the sovereign immunity was abrogated by the convention itself, not by Congress?
There is that argument out there, you know.
Mr. Thro: Yes.
Within... I think, in effect, if you were to decide... if you decided that the convention itself had intended--
Justice Stevens: Abrogated.
Mr. Thro: --for the States not to have sovereign immunity in bankruptcy, then you would conclude that the Article 1 Bankruptcy Clause includes the abrogation power.
So, I think it's, sort of, two sides of the same question.
Returning to Justice Ginsburg's question, a second reason for not addressing Katz's arguments were, they were not passed on below.
As this Court noted in Granfinanciera, where--
Justice Ginsburg: Well, then that would be a ground to allow them to present it below.
They had a total winner--
Mr. Thro: --Yes.
Yes.
Justice Ginsburg: --on that hands below.
Mr. Thro: Yes, absolutely.
You... it... you can... you should decide the question presented.
And if you decide the question presented in our favor... that is, that Congress has... does not have the power to abrogate sovereign immunity... you would presumably remand to the Sixth Circuit for further proceedings, consistent with your opinion.
At that time, Katz could attempt to present these other defenses.
We would, of course, argue that some of those defenses had not been properly preserved.
But it has not been briefed below.
Chief Justice Roberts: Thank you, Counsel.
Mr. Thro: Thank you.
Chief Justice Roberts: The case is submitted.
