## Facts

- Wallace’s Bookstores, Inc., while insolvent, made payments and other transfers to several Virginia public colleges and universities to satisfy preexisting commercial debts.
- Wallace’s filed a Chapter 11 petition in the U.S. Bankruptcy Court for the Eastern District of Kentucky.
- Bernard Katz, acting as liquidating supervisor for the bankruptcy estate, filed adversary proceedings seeking to avoid and recover the transfers as preferential under 11 U.S.C. §§ 547(b) and 550(a).
- The Virginia institutions, treated as arms of the Commonwealth, moved to dismiss on the ground of state sovereign immunity from suit in federal court.
- The Bankruptcy Court denied dismissal; the District Court and the Sixth Circuit affirmed; the Supreme Court granted certiorari to resolve whether sovereign immunity bars such bankruptcy proceedings.

## Issues

1. Whether state sovereign immunity bars a bankruptcy trustee’s adversary proceeding to avoid and recover preferential transfers from state agencies under 11 U.S.C. §§ 547(b) and 550(a).
2. Whether, by ratifying the Bankruptcy Clause, States accepted a limited surrender of immunity as to proceedings necessary to effectuate a uniform federal bankruptcy system.
3. Whether the result depends on Congress’s statutory abrogation of immunity in 11 U.S.C. § 106(a) or instead on a constitutional, structural waiver in bankruptcy.

## Decision

- The Supreme Court affirmed, holding that the trustee’s preference-avoidance and recovery proceedings against the state institutions were not barred by sovereign immunity.
- The Court concluded that the Bankruptcy Clause reflects the States’ agreement to a limited subordination of sovereign immunity in bankruptcy matters.
- The Court grounded its holding in the Constitution’s structure and history, not in a general Article I power to abrogate immunity by statute.
- The dissent would have held the proceedings barred absent a valid abrogation or clear textual waiver of immunity.

## Legal Principles

- In bankruptcy, States are subject to certain proceedings that are necessary to administer the estate and implement a uniform federal bankruptcy system, including actions to avoid and recover preferential transfers.
- The Bankruptcy Clause was understood to authorize federal bankruptcy law to bind States in core bankruptcy functions (including discharge and creditor priority adjustments) without state consent in the specific bankruptcy context.
- Statements treating Article I powers as categorically insufficient to subject States to suit do not control where the constitutional design and historical practice show a limited surrender of immunity in bankruptcy.
- The immunity surrender recognized is confined to the bankruptcy context and to proceedings central to the exercise of the federal bankruptcy power.

## Conclusion

The Court held that state sovereign immunity does not bar a bankruptcy trustee’s preference-recovery action against state agencies because the States, in adopting the Bankruptcy Clause, accepted a limited surrender of immunity for core proceedings needed to administer bankruptcy estates and ensure uniform bankruptcy law.


Cent. Va. Cmty. Coll. v. Katz, 546 U.S. 356 (2006)