The application of sovereign immunity principles in bankruptcy cases has vexed the courts for decades. The U.S. Supreme Court’s opinions on the matter have not helped much. Although they have addressed the issue in specific contexts, they have not established clear guidelines that the lower courts may apply more generally. The Third Circuit took a crack at clarifying this muddy but important area of the law in the case of Venoco LLC (with its affiliated debtors, the “Debtors”).

Background

The published judgment in Abbey Forwarding[1] will not make for comfortable reading for HMRC. Having instigated the winding up of a profitable business, which led to the dismissal of 23 employees, and accused  innocent directors of fraud, HMRC then withdrew all assessments made against the company and attempted to avoid undertakings it had given to the court when seeking the original winding up order.