Article courtesy of Ariel Emmanuel (King & Spalding)
United States v. Miller, No. 23-824, 2025 (U.S. S. Ct. March 2025)
This decision stems from a bankruptcy case in which the shareholders of a failed Utah-based business misappropriated and transferred to the IRS $145,000 in company funds to satisfy their personal federal tax liabilities. The bankruptcy trustee filed an “avoidance” suit under Section 544(b) of the Bankruptcy code against the United States in order to claw back the misappropriated funds. The bankruptcy trustee invoked Utah’s fraudulent transfer statute as the applicable law for the underlying claim. The United States argued that sovereign immunity would bar any such Utah cause of action against the government. The Bankruptcy Court disagreed, concluding that Section 106(a) of the Bankruptcy Code, which waives the government’s sovereign immunity “with respect to” some of the Bankruptcy Code provisions, including Section 544(b), would also waive immunity for the Utah cause of action nested within the Section 544(b) claim. The District Court adopted the Bankruptcy Court’s decision and the Tenth Circuit affirmed.
The U.S. Supreme Court reversed the decision, holding that, in order to prevail under Section 544(b), a trustee must identify an “actual creditor” who could have voided the transaction under applicable law outside of bankruptcy proceedings. The Court held that the sovereign-immunity waiver under Section 106(a) applies only to the Section 544(b) claim itself and not to any state-law claims nested within that federal claim. In reaching that conclusion, the Supreme Court reasoned that Section 106(a) is properly understood as a jurisdictional provision (which typically empowers courts to hear claims against the government but does not create substantive rights against the government) and its text, context, and structure make plain that it does not operate to modify the substantive requirements under Section 544(b). The Court further noted that Section 106(a)(5) expressly states that it does not “create any substantive claim for relief or cause of action not otherwise existing” under some other source of law. The Court pointed out that Section 106(a)’s waiver did not work to alter the substantive obligations of trustees under any of the other provisions listed.
