United States v. Miller

The following is a case update analyzing a recent case of interest:

Summary

Section 544(b) of the Bankruptcy Code provides that a trustee may avoid a transfer of a debtor’s property interest that is voidable under applicable law by a creditor holding an allowed unsecured claim against the estate.  Trustees typically rely on state statutes – such as California’s Uniform Voidable Transactions Act – to supply the “applicable law.”  The federal government’s sovereign immunity ordinarily would bar a creditor from seeking to use such state law to avoid transfers made to the United States, but section 106(a) of the Bankruptcy Code abrogates governmental units’ sovereign immunity with respect to section 544.  In United States v. Miller, 604 U.S. ___, No. 23-824 (Mar. 26, 2025), the U.S. Supreme Court held that section 106(a) waives a governmental unit’s sovereign immunity with respect to a trustee’s 544(b) claim, but not with respect to the underlying non-bankruptcy claim(s) “nested within” the section 544(b) claim.

To read the full opinion, click here.

Facts

In 2014, All Resort Group, Inc. (the “Debtor”) paid about $145,000 of the Debtor’s funds to the IRS to satisfy its principals’ personal income-tax obligations.  Three years later, the Debtor filed for bankruptcy.

The bankruptcy trustee (the “Trustee”) sued the United States to avoid and recover the transfers.  Since the transfers could not be avoided under section 548 of the Bankruptcy Code (which limits recovery to transfers made within two years prior to the bankruptcy filing), the Trustee’s claim was brought only under section 544(b).  The “applicable law” was Utah’s fraudulent-transfer statute.

The United States moved for summary judgment.  According to the United States, the Trustee could not identify any creditor capable of prevailing against the United States in a fraudulent-transfer suit brought under Utah law because, outside of bankruptcy, any such suit would be barred by sovereign immunity.

Based on the sovereign-immunity waiver in section 106(a) of the Bankruptcy Code, the bankruptcy court rejected the United States’ argument and entered judgment for the Trustee.  The district court and the Tenth Circuit Court of Appeals affirmed.  To resolve a split among the circuits, the Supreme Court granted certiorari to address whether section 106(a) abrogates sovereign immunity with respect to a state-law claim that supplies the “applicable law” for a trustee’s claim under section 544(b).

Relevant Bankruptcy Code Provisions

Bankruptcy Code section 106(a)(1) provides that “sovereign immunity is abrogated as to a governmental unit to the extent set forth in [section 106] with respect to . . . [section] 544 . . . of this title.” 11 U.S.C. § 106(a)(1).

A court “may hear and determine any issue arising with respect to the application of such sections to governmental units.”  11 U.S.C. § 106(a)(2).  The court also “may issue against a governmental unit an order, process, or judgment under such sections . . . including an order or judgment awarding a money recovery, but not including an award of punitive damages.”  11 U.S.C. § 106(a)(3).  However, “[n]othing in [section 106] shall create any substantive claim for relief or cause of action not otherwise existing under this title, the Federal Rules of Bankruptcy Procedure, or nonbankruptcy law.”  11 U.S.C. § 106(a)(5).

Section 544(b)(1) provides that, with a limited exception, “the trustee may avoid any transfer of an interest of the debtor in property . . . that is voidable under applicable law by a creditor holding an [allowable] unsecured claim” against the estate.  11 U.S.C. § 544(b)(1).

Split Among the Circuits

The Fourth, Ninth and Tenth Circuits have held that section 106(a) waives sovereign immunity with respect to a claim brought by a trustee under section 544(b), even if no creditor of the estate would be able to avoid the transfer because of sovereign immunity.  See Cook v. United States (In re Yahweh Ctr., Inc.), 27 F.4th 960 (4th Cir. 2022); Zazzali v. United States (In re DBSI, Inc.), 869 F.3d 1004 (9th Cir. 2017); Miller v. United States, 71 F.4th 1247 (10th Cir. 2023).  In DBSI, the Ninth Circuit held that a trustee could use section 544(b) to avoid transfers made to the IRS where there was an actual creditor of the estate who could avoid the transfers under applicable non-bankruptcy law (in that case, Idaho’s Uniform Fraudulent Transfer Act).  A creditor seeking to avoid the transfers outside of bankruptcy would have been precluded from doing so because of the government’s sovereign immunity.  However, according to the Ninth Circuit, the trustee could avoid the transfers pursuant to section 544(b) because the government’s sovereign immunity was waived by section 106(a).

The Seventh Circuit reached the opposite conclusion in In re Equip. Acquisition Res., Inc., 742 F.3d 743 (7th Cir. 2014).  According to the Seventh Circuit, because no unsecured creditor could obtain relief against the United States using the Illinois Uniform Fraudulent Transfer Act, the debtor’s tax payments to the IRS were not “voidable under applicable law” within the meaning of section 544(b).  The Seventh Circuit held that section 106(a) did not alter section 544(b)’s substantive requirement that there be an unsecured creditor capable of avoiding the transfer under applicable non-bankruptcy law.

The Supreme Court’s Holding and Reasoning

In an 8-1 decision authored by Justice Jackson, the Supreme Court held that while section 106 abrogates sovereign immunity with respect to the “federal cause of action” created by section 544(b), it does not abrogate sovereign immunity with respect to the “underlying state-law claims that supply the ‘applicable law’ for that federal cause of action.”  Therefore, the Court held “that § 106(a)’s sovereign-immunity waiver applies only to the § 544(b) claim itself and not to any state-law claims nested within that federal claim.”

First, the Court discussed the nature of sovereign-immunity waivers.  The Court wrote that such waivers “are jurisdictional provisions that empower courts to hear claims against the Government but do not themselves create any new substantive rights against the Government.”  The Court stated that reading section 106(a)’s sovereign-immunity waiver to allow a trustee to assert a claim that could not be successfully asserted by a creditor would improperly “transform [section 106(a)] from a jurisdiction-creating provision into a liability-creating provision.”

It is noteworthy that the Court did not hold that the bankruptcy court lacked jurisdiction over the Trustee’s claim asserted under section 544(b).  The Court viewed the issue as being whether section 106(a) barred the United States from raising a defense to the merits of that claim.  It stated, “the question here is not whether the Government can invoke sovereign immunity to prevent a court from hearing a trustee’s § 544(b) claim.  Rather, the question is whether § 106(a) prevents the Government from relying on sovereign immunity to demonstrate that the trustee cannot establish a core substantive requirement of the underlying § 544(b) claim—namely, that the challenged transfer is ‘voidable under applicable law’ by an actual creditor.”

Second, the Court stated that the text and structure of sections 106 and 544 “make clear that § 106’s waiver of sovereign immunity does not operate to modify § 544(b)’s substantive requirements.”  Among other things, the Court noted that section 106(a)(5) expressly provides that nothing in section 106 creates any substantive claim for relief or cause of action against a governmental unit.  According to the Court, section 106(a)(5) “plainly refutes” the argument that section 106(a)’s sovereign-immunity waiver extends to both the cause of action that § 544(b) establishes and its elements.  The Court also found support in the fact that some of the trustee’s rights under section 544(a) arise regardless of whether a lien creditor exists, whereas the trustee’s rights under section 544(b) are limited to the rights of an actual creditor under applicable law, placing the trustee squarely in the shoes of that creditor.

Third, the Court stated that sovereign-immunity waivers must be construed narrowly and that Congress must use unmistakable language to abrogate sovereign immunity.  The Court opined that section 106(a) unmistakably waived sovereign immunity for the federal cause of action created by section 544(b), but did not unmistakably waive sovereign immunity with respect to “the state-law claims nested within § 544(b)’s ‘applicable law’ clause.”

Fourth, the Court examined the legislative history of section 106, which was originally enacted in 1978 and amended in 1994.  The Court concluded that the 1994 amendments were intended to overrule certain court decisions and make section 106 conform to what Congress envisioned in 1978.  The Court also concluded that in 1978, with respect to section 544(b), Congress was trying to achieve approximately the same result that would prevail outside of bankruptcy.

Finally, the Court rejected the argument that its ruling would effectively extinguish section 106(a)’s effect with respect to section 544.  Among other things, the Court noted that section 544(a) does not contain an actual-creditor requirement and therefore a trustee can use section 544(a) to avoid certain transfers without having to identify an actual creditor capable of avoiding the transfers under applicable non-bankruptcy law.  The Court also noted that section 106(a) may grant bankruptcy courts “jurisdiction to hear § 544(b) claims brought against state governments” (emphasis in original).

Justice Gorsuch’s Dissent

Justice Gorsuch filed a brief dissent, expressing his view that the majority opinion confuses the doctrine of sovereign immunity with the requirement that a plaintiff state a cause of action.  Justice Gorsuch’s first step was to examine whether the Trustee established the elements of Utah’s fraudulent transfer statute.  The United States did not dispute that the elements were satisfied and a good fraudulent-transfer claim existed.  Thus, under “applicable law” the relevant transfers were “voidable” and the Trustee could use section 544(b)(1) to set them aside because section 106(a)(1) precludes the United States from raising a sovereign-immunity defense in the Trustee’s action.

According to Justice Gorsuch, a good substantive claim for relief existed regardless of whether it was pursued by a private creditor or a bankruptcy trustee.  The question was whether the United States could defeat the Trustee’s valid claim “by raising the affirmative defense of sovereign immunity[.]  With respect to a private creditor pursuing relief in the state court, the answer is yes.  With respect to a trustee pursuing relief in a federal bankruptcy proceeding, the answer—thanks to § 106(a)(1)—is no. . . . [I]n one setting, but not another, Congress has chosen to waive an affirmative defense to an otherwise valid claim.”

Author’s Commentary

I struggle to identify a “federal cause of action” in section 544(b) distinct from the non-bankruptcy claim supplied by “applicable law.”  They seem inextricably linked, and the Court did not provide an example of such a claim in its opinion.  To have effect on claims brought under section 544(b), section 106(a)’s broad sovereign-immunity waiver presumably should apply to the entirety of the trustee’s claim, not just the narrow component allocable to section 544(b).

Notably, in its opening brief, the United States argued that adopting its position would not render section 106(a) a nullity as to section 544 because section 106(a) “indisputably serves a function as to Section 544(a), under which a trustee may exercise the powers of a hypothetical judgment lien creditor, without relying on otherwise ‘applicable law.’”  Based on Professor Ronald Mann’s report on SCOTUSblog, it appears that the United States reiterated at oral argument that section 106(a) would still validate actions against the IRS under section 544(a).  But is that necessarily the case?  Section 544(a) simply grants trustees rights and powers of, and allows trustees to avoid transfers that are voidable by, hypothetical lien creditors and bona fide purchasers of real property.  After Miller, in order to exercise the hypothetical lien creditors’ and bona fide purchasers’ non-bankruptcy rights and powers against a governmental unit, must the trustee establish that sovereign immunity has been expressly waived as to those non-bankruptcy claims?

These materials were written by former ILC Co-Chair John N. Tedford, IV, of Levene, Neale, Bender, Yoo & Golubchik L.L.P., in Los Angeles, California.  Editorial contributions were provided by ILC member Gary M. Kaplan, a partner at Farella Braun + Martel LLP in San Francisco, California.