Vol 3 (2006) - Issue 4

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Limitations on States’ Sovereign Immunity in Bankruptcy: Impact of the Supreme Court’s Katz Decision

Introduction
Since the founding of the United States there has been an enduring tension between the powers vested in the federal government and the rights of the individual States. Courts often have had difficulty delineating between the respective jurisdictions of these sovereigns.
This difficulty is exemplified by a recent series of cases decided by the Supreme Court of the United States (the ‘Court’) involving the question of whether the Bankruptcy Clause of the United States Constitution gave the United States Congress the power to abrogate States’ sovereign immunity. Although the Court attempted to clarify the issue of sovereign immunity
in bankruptcy in its recent decision in Central Virginia Community College v Katz,1 the Court has left significant questions unanswered. As discussed in this article, lower courts’ subsequent interpretations of the issues left open in Katz will help to illuminate the impact of the Court’s decision.
Background: constitutional context and laying the groundwork for Katz
Article I of the Constitution grants certain powers to the federal government, including, through the Bankruptcy
Clause of Article I, the power to enact ‘uniform Laws on the subject of Bankruptcies’.2 Pursuant to this power, Congress has promulgated the Bankruptcy Code,3 a federal bankruptcy law that applies equally across all States. Federal courts have exclusive jurisdiction
to interpret and enforce the Bankruptcy Code. In section 106(a) of the Bankruptcy Code, Congress expressly provided that States’ sovereign immunity was abrogated with respect to many sections of the Bankruptcy Code, including those relating to the recovery of preferential transfers.4