Typically, a state governmental entity is immune from suit unless the state explicitly waives its own sovereign immunity with respect to a particular claim or issue. Moreover, our federal government can only act to limit or override a state’s sovereign immunity in certain limited circumstances. The interplay between a state’s sovereign immunity and the rights granted to a Chapter 7 trustee pursuant to the Federal Bankruptcy Code was addressed in the recent case of Rescia v. Eastern Connecticut State University (In re Harnett), 558 B.R. 655 (Bankr. D. Conn. 2016). In Rescia, the U.S. Bankruptcy Court for the District of Connecticut addressed whether a state-owned university could assert a sovereign immunity defense to an avoidance action brought by a Chapter 7 bankruptcy trustee. In ruling that the state had waived its own sovereign immunity with respect to the claim at issue, the court addressed the specific provisions of the Bankruptcy Code, as well as the state’s actions in ratifying the Bankruptcy Clause of the U.S. Constitution at the Constitutional Convention more than 200 years ago.
After being appointed Chapter 7 trustee for the bankruptcy estate of Kara S. Rescia, Elizabeth Harnett (as trustee) filed a complaint against Eastern Connecticut State University (ECSU). Through the complaint, the trustee sought to avoid and recover, as fraudulent transfers, certain tuition payments made by the debtor to ECSU related to the undergraduate education of the debtor’s son. ECSU filed a motion to dismiss the count of the complaint that was brought under applicable Connecticut law and 11 U.S.C. 544(b)(1), which allows a trustee to step into the shoes of an unsecured creditor of a debtor for purposes of asserting avoidance actions. In the motion to dismiss, ECSU asserted that the doctrine of sovereign immunity prevented the trustee from using section 544(b)(1) of the Bankruptcy Code to recover transfers from a state entity.
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