This issue was recently addressed in Texas v. Soileau (In re Soileau), 2007 U.S. App. LEXIS 12015 (5th Cir. 2007).

Geraldine Soileau (“Soileau”), a licensed bail bondsman, was sued by the State of Texas for her failure to pay fifty-five bonds on the criminal defendants that she was acting as a surety for, after they absconded. The State obtained state-court money judgments against Soileau to the amount of $650,897.71. Soon thereafter, Soileau sought to discharge these judgments under Chapter 7 of the Bankruptcy Code. The State moved to dismiss Soileau’s Chapter 7 proceedings on the grounds of the Eleventh Amendment, sovereign immunity. The Eleventh Amendment provides, “The Judicial powers of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.” In addition, the Supreme Court has interpreted the Eleventh Amendment to include immunity for suits by its own citizens. The State argued that the Bankruptcy Court’s action in allowing Soileau’s Chapter 7 discharge would violate the State’s right to be immune from suits brought by its own citizens through federal judicial powers. The Bankruptcy Court denied the State’s motion and, after subsequent Appeals brought by the State, both the District Court and the Fifth Circuit Court of Appeals affirmed the Bankruptcy Court’s ruling.

The Fifth Circuit Court of Appeals relied heavily on two U.S. Supreme Court cases, Central Virginia Community College v. Katz and Tennessee Student Assistance Corp. v. Hood. In its application of Hood and Katz, the Appellate Court found that because the Bankruptcy Court focused only on Soileau’s estate, it was an in rem proceeding. Stating that, “Katz and Hood, at the very least establish beyond cavil that an in rem bankruptcy proceeding brought merely to obtain the discharge of a debt or debts by determining the rights of various creditors in a debtor’s estate – such as it brought here – in no way infringes the sovereignty of a state as a creditor.” In applying Katz, the court found that there are three facets in an in rem jurisdiction that prevent it from infringing on state sovereign immunity: (1) exercise of jurisdiction over the estate of the debtor, (2) equitable distribution over the estate’s property among creditors, and (3) granting a debtor’s discharge from his debts.

The Fifth Circuit Court of Appeals found that Soileau was merely asking a bankruptcy court to exercise its in rem jurisdiction over her estate by adjudicating the rights of the State as her creditor, and because Soileau was not seeking the return of any funds already in the state’s possession and was not bringing an adversary proceeding against the state, the Appellate Court affirmed both the Bankruptcy Court’s and the District Court’s determination that the State’s sovereign immunity rights were not infringed by the Bankruptcy Court’s ruling. Mr. Soileau’s discharge may be granted.

Hunter