11 USC 106: Waiver of Sovereign Immunity in Bankruptcy

The legal principle of sovereign immunity generally protects federal and state governments from being sued without their explicit consent. This doctrine means that a person or business cannot bring a lawsuit against a governmental body to recover money or force a certain action. In the context of bankruptcy, however, this immunity is not absolute. The U.S. Bankruptcy Code, specifically in section 106, carves out exceptions to this rule.

This provision allows individuals and business entities in bankruptcy, as well as the bankruptcy trustee managing the case, to pursue specific claims against governmental units. It ensures that the government, when it acts as a creditor or is otherwise involved in a bankruptcy case, is subject to the authority of the bankruptcy court in certain situations.

Waiver Triggered by a Government Claim

The most direct way sovereign immunity is waived in bankruptcy is when a governmental unit actively participates in the case by filing a proof of claim. This document details the amount the government asserts is owed by the person or business in bankruptcy. By submitting this claim, the government voluntarily subjects itself to the jurisdiction of the bankruptcy court. This action is considered a waiver of immunity for specific counterclaims.

This waiver allows the debtor or the bankruptcy trustee to file a claim back against that same governmental unit. A requirement is that this counterclaim must arise from the “same transaction or occurrence” as the government’s original claim. The intent is to resolve all aspects of a single dispute in one forum, preventing the government from seeking payment while being shielded from related liabilities.

For instance, if the Internal Revenue Service (IRS) files a proof of claim for $50,000 in unpaid income taxes from a specific tax year, the debtor can respond with a counterclaim. The debtor might assert they are owed a $15,000 tax refund from that same year due to an overpayment or overlooked deductions. Because both claims relate to the same tax year, the bankruptcy court has the authority to hear the debtor’s counterclaim and, if successful, enter a monetary judgment against the IRS.

This waiver is comprehensive, allowing for a full monetary recovery against the government, not just a reduction of its claim. The legislative history of the 1994 Bankruptcy Reform Act, which amended section 106, shows a clear intent to permit monetary judgments, not just declaratory or injunctive relief in these situations.

Using Government Obligations for Setoff

A separate provision within the Bankruptcy Code allows for a waiver of sovereign immunity through the principle of setoff. This mechanism permits a bankruptcy estate to offset a debt it owes to a governmental unit with a claim it has against that same unit. Unlike the waiver triggered by a government-filed claim, the two obligations do not need to arise from the same transaction or occurrence. This provides a different path for debtors to reduce their liabilities to the government.

For example, a small business in Chapter 11 bankruptcy might owe $100,000 on a loan from the Small Business Administration (SBA). Simultaneously, the business might be owed $30,000 by the General Services Administration (GSA) for a completed contract. The law allows the bankruptcy estate to use the $30,000 owed by the GSA to reduce, or “set off,” the amount it owes to the SBA, thereby lowering the SBA’s claim to $70,000.

The existence of a valid claim by the estate against the government is sufficient to trigger this right. It is important to understand that this type of waiver has a specific financial limitation. The monetary recovery against the governmental unit under the setoff provision is capped. The estate can only recover an amount up to the value of the government’s claim against the estate.

Using the previous example, if the GSA owed the business $120,000 instead of $30,000, the estate could only use $100,000 of that amount to completely offset the SBA loan. It could not obtain a cash payment for the remaining $20,000 through this specific mechanism.

Authorizing Court Determinations and Orders

Beyond monetary claims, the Bankruptcy Code provides a broad waiver of sovereign immunity that empowers the court to issue binding determinations and orders against governmental units. This waiver applies to numerous sections of the code, regardless of whether the government has filed a proof of claim. This provision allows the bankruptcy court to make decisions that directly affect the rights of a governmental unit.

For example, the court can issue an order determining the exact amount, and dischargeability, of a debtor’s tax liability. The court’s determination is binding on the IRS or the relevant state taxing authority.

Other examples of the court’s power include authorizing the sale of property free and clear of a government tax lien. The court can also confirm a Chapter 11 or Chapter 13 reorganization plan that modifies a debt owed to a governmental unit, such as by altering the payment terms or interest rate. These orders are enforceable against the government, preventing it from taking collection actions that violate the terms of the confirmed plan.

The legislative changes in the Bankruptcy Reform Act of 1994 were specifically designed to make clear that courts could issue not only declaratory relief (a statement of rights) and injunctive relief (an order to stop an action) but also monetary judgments where authorized by other sections of the code. However, this broad authority has its limits. A 2025 Supreme Court decision clarified that the waiver of sovereign immunity does not allow a bankruptcy trustee to pursue certain state-law claims against a governmental unit. If the government is immune from a specific type of lawsuit under state law, such as a fraudulent transfer claim, that immunity remains intact even within a bankruptcy case.

Limitations on Monetary Awards

When the government’s immunity is waived because it filed a proof of claim, the potential for recovery is at its greatest. In this scenario, where the estate’s counterclaim arises from the same transaction as the government’s claim, a full monetary judgment is possible. This can include not only the principal amount of the claim but also court costs and attorney’s fees if they are permitted under other applicable non-bankruptcy laws.

In contrast, when the waiver is based on the principle of setoff, the financial recovery is strictly limited. The debtor or trustee can only offset their claim against the government’s claim. The monetary benefit is capped at the total amount of the government’s claim against the estate. No cash recovery beyond that amount is permitted through setoff.