United States v. Miller: SCOTUS Holds the Sovereign Immunity Waiver Does Not Apply to State Law Claims Brought Under 11 U.S.C. 544(b)
04.02.25
This week, the United States Supreme Court ruled that while 11 U.S.C. § 106(a)(1) abrogated federal sovereign immunity for avoidance actions under section 544 of the Bankruptcy Code, this abrogation did not extend to the underlying state law causes of action that a trustee must prove to prevail on a section 544(b)(1) claim.
In United States v. Miller, a Utah-based transportation company, All Resort Group, Inc., became insolvent in 2013 because of poor management and financial malfeasance. Amidst the company’s financial struggles, two of its shareholders began misappropriating company funds to pay off personal debts. In 2014, they transferred approximately $145,000 to the IRS to satisfy their personal income tax obligations.
Three years later, the company filed a Chapter 11 proceeding, which was subsequently converted to Chapter 7. The Chapter 7 trustee filed an adversary proceeding against the U.S. under section 544(b), seeking to avoid the $145,000 tax payment made by the shareholders.
In his claim, the trustee invoked Utah’s fraudulent transfer statute as the source of “applicable law” required under section 544(b). Utah’s statute, like most fraudulent transfer laws, permits a creditor to void a debtor’s transfer of assets if the debtor was insolvent at the time of the transfer and received less than equal value in return.
In opposing the trustee’s motion for summary judgment, the U.S. argued, among other things, that the section 544(b) claim failed because the trustee could not satisfy the provision’s “actual creditor” requirement. In other words, the trustee could not identify an “actual creditor” that would prevail in a fraudulent transfer suit against the U.S. under Utah law outside of bankruptcy, because any such suit would be barred by sovereign immunity.
In response, the trustee argued that section 106(a) of the Bankruptcy Code abrogated the federal government’s sovereign immunity, both with respect to the section 544(b) claim itself but also with respect to the underlying “applicable” state law statute—here, the Utah fraudulent transfer statute. The U.S. Bankruptcy Court for the District of Utah agreed, and its decision was affirmed first by the U.S. District Court for the District of Utah and then the Tenth Circuit Court of Appeals.
The Supreme Court, however, reversed. Writing for the eight-member majority, Justice Ketanji Brown Jackson observed that under the Court’s precedents, waivers of sovereign immunity were simply prerequisites for jurisdiction and did not create any new substantive rights or alter any preexisting ones. The Court found that the trustee’s attempt to use section 106(a) as an affirmative expansion of a trustee’s avoidance powers under 544(b) conflicted with prior decisions concerning the scope and nature of sovereign immunity.
The Court further observed that section 106(a) contains language expressly prohibiting what the trustee was attempting to do, noting that section 106(a)(5) provides that “[n]othing in this section shall create any substantive claim for relief or cause of action not otherwise existing” under some other source of law.
The Court also reasoned that the text and structure of section 544 further supported its conclusion, pointing out that while section 544(b) requires the trustee to identify an actual creditor who could avoid the claim under applicable non-bankruptcy law, section 544(a) contains no such actual-creditor requirement. The Court found that this contrast reflected Congress’s deliberate choice to tie the trustee’s rights under subsection (b) to the rights of an actual creditor under applicable law—i.e., to step into the shoes of a specific creditor subject to the same limitations and defenses that would apply to the creditor outside bankruptcy.
Moreover, as the Court’s precedents required any waiver of sovereign immunity to be construed narrowly, the Court concluded that any ambiguity in the interplay between sections 106(a) and 544(b) must be resolved in favor of the federal government.
Miller resolves a circuit split that had existed for nearly ten years between the Seventh Circuit Court of Appeals, which had ruled that the government had not waived sovereign immunity for such actions, and the Fourth, Ninth and Tenth Circuit Courts of Appeals, which had ruled that the government had expressly waived immunity with respect to such claims.
Co-authors Cori Brennan, partner, and Christopher Leavell, associate, are members of the Bankruptcy & Restructuring and Litigation Departments at Klehr Harrison.