United States v. Miller

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

The United States Supreme Court has held that the sovereign immunity waiver in Section 106(a) of the Bankruptcy Code does not extend to state law claims “nested” within a Section 544(b) claim for relief, depriving bankruptcy trustees of the right to sue the United States under state law to avoid prepetition fraudulent transfers of debtor funds.  United States v. Miller, 604 U.S. ___, 145 S.Ct. 839 (2025).  Read the full decision here.

Facts

In 2013, All Resort Group (the “Debtor”), a Utah-based transportation company, became insolvent.  A year later, two of its shareholders used $145,000 in company funds to pay their personal income tax obligations (the “Subject Transfers”).  The Debtor received no value for the transfers.

In 2017, the Debtor filed for bankruptcy and David L. Miller (the “Trustee”) was appointed as its trustee.  He sued the Internal Revenue Service (“IRS”) to avoid the Subject Transfers, relying on 11 U.S.C. section 544(b)^[1] and Utah’s fraudulent transfer statute as the “applicable law.”  The parties filed competing motions for summary judgment. 

While the Government conceded that the Debtor was insolvent at the time of the Subject Transfers and received no value for the transfers, it argued that the Trustee could not satisfy Section 544(b)’s actual creditor requirement.^[2]  Specifically, it asserted that the Trustee must identify a creditor who could prevail in a fraudulent transfer action against the IRS in a Utah court.  As fraudulent transfer state court actions against the United States are barred by the sovereign immunity doctrine, the Government argued that the Trustee could identify no such creditor.

The bankruptcy court rejected the Government’s argument and granted the Trustee summary judgment.  It held that Congress waived its right to assert sovereign immunity “with respect to” claims brought under Section 544, including the Trustee’s fraudulent transfer claims.  In re All Resort Group, Inc., 617 B.R. 375, 379 (Bankr. Utah 2020).

The United States District Court and Tenth Circuit Court of Appeals affirmed.  The Tenth Circuit concluded that Section 106(a) “expresses Congress’s intent to abolish the Government’s sovereign immunity in an avoidance proceeding arising under §544(b)(1), regardless of the context in which the defense arises.”^[3]

Noting a conflict among the circuits as to “whether §106(a) abrogates sovereign immunity with respect to a state-law claim that supplies the ‘applicable law’ for a trustee’s §544(b) claim,” the Supreme Court granted certiorari.

Reasoning

Majority Opinion

Acknowledging Section 106(a)’s waiver of sovereign immunity “with respect to” Section 544, Justice Jackson, writing for an eight-justice majority, distinguished between a federal claim for relief asserted under Section 544(b) and a state law cause of action invoked by a trustee under the “applicable law” provision of Section 544(b). 

The opinion accepted that Section 106(a) gives bankruptcy courts the jurisdiction to consider federal law claims alleged under Section 544(b).  The issue in this case, though, is whether Section 106(a) also affects a waiver of sovereign immunity as to state law claims incorporated into Section 544(b) as “applicable law,” even if they were not available to an actual creditor in state court.  Holding that allowing the Trustee to proceed with such claims in bankruptcy court would affect a substantive change in the Trustee’s rights against the Government, the Court held that Section 106(a) does not alter the substantive meaning of state law “by providing a waiver of immunity that would not otherwise exist under” such law.

The Court noted that sovereign immunity is “jurisdictional in nature.”  It deprives courts of the power to hear lawsuits against the United States unless Congress expressly waived the immunity.  To affect waiver Congress must use unmistakable language expressing intent to waive immunity.  Any ambiguities in the alleged waiver language are construed in favor of the Government.  Moreover, while Congress may agree to waive immunity, the waiver only establishes court jurisdiction to hear disputes involving the Government.  It does not create new or alter existing substantive legal rights.  See 11 U.S.C. section 106(a)(5) (“Nothing in this section 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.”)

The Court noted that Section 544(b) allows a trustee to avoid any prepetition transfer of a debtor’s asset if it could have been avoided by an actual creditor.  If creditors would be precluded in state court from avoiding transfers to the IRS due to the sovereign immunity doctrine, the Trustee would similarly be precluded from asserting such claims.  According to the Court, Section 106(a) does not change this substantive element of Section 544(b).  This is because Congress intended to tie a trustee’s rights under Section 544(b) to the rights of an actual creditor in state court.

The Court held that Section 106(a) does not unmistakably say that waiver of the Government’s immunity applies as to state law claims “nested within” Section 544(b)’s “applicable law” clause.  Relying on the statutory construction canon, “the words of a statute must be read in their context and with a view to their place in the overall statutory scheme,” the Court found that context militates against the Trustee’s broad reading of Section 106(a).  It stated that legislative history could never support waiver of immunity that is not “evident from the language of the statute.”  Regardless, Section 106(a) has always been understood as a “limited” waiver of sovereign immunity in bankruptcy cases.

The Court rejected arguments that Section 106(a) would have no meaning under the Government’s interpretation.  After all, trustees can still sue the Government to avoid certain tax liens under Section 544(a), which does not contain an actual creditor requirement.  Justice Jackson further noted that a separate tax law already contains a waiver of sovereign immunity regarding efforts to set aside federal tax liens, 26 U.S.C. section 6323.  This comment raises doubt as to whether Section 106(a) could ever result in waiver of sovereign immunity under Section 544(b) unless Congress also expressed such waiver in a non-Bankruptcy Code statute.

The Court rejected the notion that Section 106(a) must be read to include claims under all of Section 544.  It noted that Section 106(a) is imprecise, referring to Sections in the Bankruptcy Code that don’t include claims for relief against the Government, such as Sections 106 and 303.

Dissenting Opinion

Justice Gorsuch was the sole dissenter.  According to him, the majority opinion confused the doctrine of sovereign immunity with the elements of a cause of action that trustees must prove.  The parties here agreed that the Trustee established the elements of a fraudulent transfer claim for relief under Utah law.  Justice Gorsuch would therefore hold that, while sovereign immunity would bar such a claim in state court, under Section 106(a) this affirmative defense is waived when asserted under Section 544(b). 

Disagreeing with the majority, Justice Gorsuch concluded that his interpretation of Section 106(a) would not modify the elements of any claim for relief.  It merely reflects Congressional intent to waive immunity in bankruptcy courts, while maintaining the right assert the defense in state courts.

Author’s Comments

It is difficult to disagree with a ruling signed by eight-justices.  Nevertheless, Justice Gorsuch’s dissenting opinion may express the better arguments.

Section 106(a) states, “[n]otwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to” Section 544.  Had Congress intended to limit the waiver to Section 544(a), it presumably would have done so.  A case in point is Section 544(b)(2), which states, “Paragraph (1) shall not apply to a transfer of a charitable contribution . . . that is not covered under section 548(a)(1)(B), by reason of section 548(a)(2),” demonstrating that Congress knows how to exempt specific avoidance claims when it wants to do so.

As Section 106(a) does not exempt Section 544(b), which is commonly used by trustees to avoid prepetition transfers using state laws, it is difficult to imagine that Congress intended Section 106(a) to mean that the Government waived its immunity as to claims brought under Section 544(b), but not when the claims rely on state law.  Such an interpretation largely nullifies Section 106(a) as to claims asserted under section 544(b).

The majority opinion disagrees that Section 544(b) is rendered meaningless because, before Section 106(a) was enacted, three states had agreed to waive sovereign immunity as to fraudulent transfer claims filed in their state courts.  However, as to these states, Section 106(a)’s abrogation of sovereign immunity was unnecessary because the states had already voluntarily waived their sovereign immunity defenses.  Also, in Central Virginia Community College v. Katz, 546 U.S. 356 (2006), the Supreme Court held that, to the extent actions to avoid and recover transfers to the States violate their Eleventh Amendment sovereign immunity rights, “the States agreed in the plan of the Convention not to assert that immunity.”  Katz, at 373.  This prior Supreme Court ruling diminishes the significance of the three states’ waivers of sovereign immunity as to fraudulent transfer claims.

The majority distinguishes between federal claims for relief brought under Section 544(b), as to which sovereign immunity has been abrogated, from claims brought using state law.  However, an argument can be made that all claims brought under Section 544(b) are federal in nature.  The fact that the claims incorporate “applicable law” does not mean that they morph into state law claims.

It therefore appears that Justice Gorsuch’s analysis is the better interpretation of Section 106(a).  If a trustee proves the elements of an avoidance action, the United States can assert any available affirmative defenses.  However, sovereign immunity is not one of these defenses, as Congress unequivocally waived the defense under Section 106(a).  Any other interpretation appears to overlook the clear language in Section 106(a), and it is difficult to imagine what language the majority would find acceptable based on its opinion.

These materials were written by Uzzi O. Raanan, a partner at Greenberg Glusker, LLP, located in Los Angeles, California, who is a past representative from the Business Law Section (BLS) to the CLA’s Board of Representatives.  Editorial contributions were made by the Honorable Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.).  This writeup was originally published in Westlaw’s Commercial Finance Newsletter and republished here by permission from Westlaw.  The opinions expressed herein are solely those of the author.

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[1] Unless stated otherwise, all statutory references are to the Bankruptcy Code, codified in 11 U.S.C. sections 101, et seq.

[2] Section 544(b) states,

“(b)(1) Except as provided in paragraph (2), the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.

(2) Paragraph (1) shall not apply to a transfer of a charitable contribution (as that term is defined in section 548(d)(3)) that is not covered under section 548(a)(1)(B), by reason of section 548(a)(2)….”  Emphasis added.

“(a) Notwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to the following:

[3] Section 106(a) states in relevant part,

“(a) Notwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to the following:

(1)Sections . . . 544 ….”