No Sovereign Immunity From Bankruptcy Trustee’s Preference Action Against State

In Central Virginia Community College v. Katz, No. 04-885 (U.S. Jan. 23, 2006), the U.S. Supreme Court considered the intersection between the federal law of bankruptcy and the doctrine of sovereign immunity.

In this case, a book-seller transacted business with a state university before filing for bankruptcy. The court-appointed liquidating trustee commenced proceedings in Bankruptcy Court to avoid and recover alleged preferential transfers made to state parties when the debtor was insolvent. The state parties moved to dismiss on the basis of sovereign immunity, but the motions were denied.

In a 5-4 ruling, the Court held that Congress properly abrogated the states’ sovereign immunity in the Bankruptcy Code (11 U.S.C. § 106(a)), although the majority also held that the enactment of that particular statute was not necessary in this case because the Bankruptcy Court already was authorized to conduct preference avoidance proceedings involving state creditors.