The National Pulse
Debts and Taxes
Student Loan Case Will Determine Whether Debtors May Discharge State Obligations
Posted Feb 1, 2004 7:51 AM CDT
By William C. Smith
Ordinarily, a debtor in Tennessee might not count on a busy New York City lawyer for help in avoiding repayment of her student loan. For the past several months, though, Pamela Hood’s petition to discharge a $4,169 loan has consumed the attention of Manhattan bankruptcy lawyer Leonard H. Gerson.
Hood’s bankruptcy proceeding is hardly an ordinary case, and Gerson isn’t your typical New York bankruptcy lawyer.
The U.S. Supreme Court has agreed to decide whether Tennessee is immune under the 11th Amendment from federal bankruptcy court litigation over Hood’s state-guaranteed student loan. Tennessee Student Assistance Corp. v. Hood, No. 02-1606.
And Gerson--who has made it his professional mission to keep state creditors subject to federal bankruptcy law--will argue Hood’s case before the high court March 1. The stakes in this case far exceed the amount of Hood’s unpaid loan. According to bankruptcy practitioners, the case will likely resolve conflicting lower court rulings on whether states may be hauled into bankruptcy court litigation over billions of dollars of unpaid taxes, loans, fees and other claims against bankrupt debtors.
The case also marks another step in the Supreme Court’s evolving interpretation of the 11th Amendment, which shields states from suit by citizens in federal courts. In challenging Hood, Tennessee relied on Seminole Tribe of Florida v. Florida, 517 U.S. 44 (1996), in which the Supreme Court ruled that Congress’ power to regulate Indian commerce, enshrined in Article 1 of the Constitution, was limited by the 11th Amendment. The state argued that state sovereign immunity also applied to bankruptcy cases.
Specifically, Tennessee--and other states involved in similar cases--cited a footnote in Seminole Tribe stating that “it has not been widely thought” that the Bankruptcy Code abrogated the states’ sovereign immunity. Five circuits have taken the hint, ruling that debtors cannot force unconsenting states to defend their claims in bankruptcy court.
But in a 2000 law review article, Gerson argued that in giving Congress the Article I power to enact “uniform laws on the subject of bankruptcies,” the states surrendered sovereignty in this area to the federal government.
He found fertile ground in the 6th Circuit, which concluded in Hood that Congress constitutionally abrogated state sovereignty in a key section of the 1994 Bankruptcy Reform Act. In re Hood, 319 F.3d 755 (2003).
In his first Supreme Court argument, Gerson believes that he has history and sound policy--if not lower court case law--on his side. “The framers recognized that the collective nature of the bankruptcy process distinguishes it from other areas,” he says.
States Back Supreme Court Appeal
Meanwhile, Tennessee’s appeal is supported by an amicus brief signed by 48 other attorneys general. The states realize they have a huge stake in Hood’s outcome, says Ohio assistant solicitor Elise W. Porter, the principal author. More than 440,000 bankruptcy cases were filed in the second quarter of 2003, Porter says. Like Hood, most cases are individual Chapter 7 bankruptcies, with no distribution to creditors and thus no incentive for states to file claims.
Stuart J. Glick of Newark, N.J., co-chair of the ABA Business Law Section’s Bankruptcy and Insolvency Litigation Committee, is intrigued by the 6th Circuit’s analysis. However, he believes the Supreme Court will ratify the other circuits’ interpretation of Seminole Tribe.
“My gut is that, given the present justices, the five circuits are not going to have to worry about following a new law,” Glick says.
Meanwhile, New York University law professor Sylvia Law says she thinks the court’s decision last year upholding state employees’ right to sue under the Family Medical Leave Act may signal a less dogmatically pro-state approach to 11th Amendment cases. “However, I wouldn’t want to bet my student loan on it,” she says.
"Debts and Taxes," February (2004), page 16, incorrectly places the Bankruptcy and Insolvency Litigation Committee that Newark, N.J., lawyer Stuart J. Glick co-chairs in the ABA Business Law Section. The committee is part of the Litigation Section.
The Journal regrets the error.