Supreme Court: states can be sued under bankruptcy law

WASHINGTON (Reuters) - States can be sued in certain bankruptcy proceedings, a divided U.S. Supreme Court ruled on Monday in a case that pitted state powers against those of the federal government.

By a 5-4 vote, the high court rejected arguments that states could not be sued because of state sovereign immunity. The court said Congress, in adopting the bankruptcy law, has the power to treat states the same way as other creditors.

The decision departed from the series of rulings in recent years by the court's conservative majority that generally have expanded the immunity of states from lawsuits while cutting back on the power of Congress.

The case involved four state-run colleges in Virginia -- Central Virginia Community College, Virginia Military Institute, New River Community College and Blue Ridge Community College.

Wallace Bookstores, which operated a chain of college bookstores, filed for bankruptcy in 2001. The liquidating supervisor of the bankruptcy estate sued the four colleges in an attempt to recover money owed to Wallace.

The colleges moved to dismiss on the grounds that state sovereign immunity barred the lawsuit. But a federal bankruptcy court, a federal judge and a U.S. appeals court all rejected the request and said Congress acted within its power in revoking state immunity in bankruptcy proceedings.

The high court, in an opinion written by Justice John Paul Stevens, agreed. He was joined by Justices Sandra Day O'Connor, David Souter, Ruth Bader Ginsburg and Stephen Breyer.

Stevens said the ruling involved proceedings initiated by a bankruptcy trustee to set aside preferential transfers by the debtor to state agencies.

Chief Justice John Roberts and Justices Clarence Thomas, Antonin Scalia and Antonin Kennedy dissented. Thomas wrote that the majority opinion cannot be justified by the U.S. Constitution and that it conflicted with the court's precedents on state sovereign immunity.