Federal Bankruptcy Law and State Sovereign Immunity

Abstract

Under current legal doctrine, states have successfully asserted sovereign immunity from a variety of important bankruptcy provisions. Numerous commentators have argued that states undermine fundamental objectives of bankruptcy law by asserting immunity from bankruptcy actions. This article argues that, for the most part, sovereign immunity is consistent with basic bankruptcy policies. Bankruptcy law already reflects the fact that governmental units are not like private creditors by granting governmental units various priorities and regulatory exceptions. Because current bankruptcy law generally enforces non-bankruptcy property rights and entitlements, states can also largely determine their own priorities and privileges in bankruptcy by defining their entitlements under state law. Finally, to the extent that bankruptcy law should advance redistributive policies or protect non-ownership interests, it should defer to governmental entities, which are uniquely positioned to redistribute wealth and to protect the public good. It is true that state governments may undermine the goals of bankruptcy law if they impose unnecessary administrative costs on debtors' estates or if they refuse to follow important procedural bankruptcy rules. However, state governments will suffer political and/or economic costs of engaging in such behavior. Congress, in contrast, does not suffer the full cost of exposing state governmental units to bankruptcy actions. If states can assert or waive immunity from bankruptcy actions, they should strike a better balance between bankruptcy law and states' regulatory responsibilities than the current balance of these interests under the Bankruptcy Code.