United States v. Miller

LII note: The U.S Supreme Court has now decided United States v. Miller

Issues

Does 11 U.S.C. § 544(b) allow a trustee to avoid a transfer to the government, even when the government could not have been directly sued under nonbankruptcy law?

Oral argument:
December 02, 2024
Court below:
United States Court of Appeals for the Tenth Circuit

This case asks the Supreme Court to decide whether § 544(b) of the Bankruptcy Code allows a trustee to avoid a transfer to the government when the government could not have been directly sued under nonbankruptcy law. Section 106 abrogates sovereign immunity in certain bankruptcy claims, including § 544(b). Section 544 states that a trustee “may avoid any transfer of an interest of the debtor… that is voidable under applicable law,” which typically invokes state laws that fall outside of the purview of bankruptcy law. The Government argues that § 106 should be read narrowly, and that sovereign immunity is not waived when the actual creditor could not pursue an avoidance claim under the applicable state law due to sovereign immunity. Miller counters that the waiver of sovereign immunity in § 106 extends to the applicable law referenced in § 544. The outcome of this case has serious implications for the powers of trustees in bankruptcy cases and the power of the United States to waive sovereign immunity.

Questions as Framed for the Court by the Parties

Whether a bankruptcy trustee may avoid a debtor’s tax payment to the United States under 11 U.S.C. § 544(b) when no actual creditor could have obtained relief under the applicable state fraudulent-transfer law outside of bankruptcy.

Facts

Chapter 7 bankruptcy proceedings allow for the liquidation of assets to pay off a debtor’s creditors . 11 U.S.C. §§ 701–784. In Chapter 7 proceedings, a trustee is appointed with the purpose of overseeing the liquidation while maximizing the assets paid out and ensuring the equality of those payments. This includes the power to avoid, or return, transfers of property outside of the estate.

Section 544(b)(1) of the Bankruptcy Code provides for the avoidance of transfers that are voidable under applicable law and allows the trustee to take the place of the creditor using the applicable state law. However, § 106 of the Bankruptcy Code abrogates sovereign immunity in regards to a governmental unit with respect to § 544.

All Resort Group, a Utah-based travel company filed for Chapter 11 , later converted to Chapter 7, bankruptcy in 2017. Prior to filing for bankruptcy in 2014, the company paid personal tax debts of two of its principals totaling nearly $150,000 to the Internal Revenue Service.

David Miller, respondent and bankruptcy trustee of All Resort Group, sought to avoid these transfers during the bankruptcy proceeding. Miller sought to avoid the fraudulent transfers to the IRS under Utah’s Uniform Fraudulent Transfer Act as the “applicable law” required by § 544 of the Bankruptcy Code.

The Government did not contest the fact that the transfers were voidable under the statute, nor did the Government deny the claim for the actual creditor. The Government also acknowledged that sovereign immunity under § 106 was applicable under § 544. However, under § 544, only a suit that could be brought by an actual creditor is allowed against the government, and the Government contested Miller’s actions on these grounds.

Miller believed the abrogation of sovereign immunity under § 106 included claims under both the Bankruptcy Code and the Utah fraudulent transfer laws. The Bankruptcy Court ruled in favor of Miller and avoided the transfers, agreeing that § 106 waives sovereign immunity with respect to state laws under § 544. Nearly $150,000 was awarded to Miller as the trustee, which was later affirmed by the District Court of Utah .

The Government then appealed to the Tenth Circuit, which also found in favor of Miller. The Tenth Circuit determined that the statutes clearly indicated an intent by Congress to abrogate the United States’ sovereign immunity under § 544 regardless of the context in which it arises. The Tenth Circuit also found that claiming that sovereign immunity was not waived would render the statutes meaningless, as a trustee would always have to prove sovereign immunity according to the applicable law and separate from the Bankruptcy Code. On June 24, 2024, the United States Supreme Court granted certiorari .

Analysis

SOVEREIGN IMMUNITY

While the Government acknowledges that § 106(a) waives sovereign immunity so that a trustee may invoke § 544 against the federal government within a bankruptcy case, the Government claims § 106(a) does not change the substantive requirements of § 544(b). The waiver, the Government asserts, does not eliminate the need for an actual creditor who could have avoided the transfer under nonbankruptcy law. The Government argues that the trustee's claim fails because no creditor could have challenged the Internal Revenue Service (“IRS”) payments under nonbankruptcy law because, outside bankruptcy, sovereign immunity would bar the creditor’s suit against the United States. Further, the Government points out that § 106(a)(5) should be read in context with its surrounding language, such as the preceding phrase which states that waives sovereign immunity only “to the extent set forth in this section.” The Government asserts that waivers of sovereign immunity must be strictly construed and should not extend to alter underlying legal requirements of the Bankruptcy Code. To waive sovereign immunity, the Government emphasizes that Congress must make its intent unmistakably clear, which was not the case under § 106(a).

Miller argues that § 106(a) waives the federal government’s sovereign immunity broadly and “with respect to” § 544(b). Miller emphasizes that the phrase “with respect to” conveys breadth, covering all aspects of § 544(b) claims and including any underlying nonbankruptcy law that forms the trustee's basis for action. Miller contends that the Government’s view would effectively render § 544(b) useless in all cases involving government entities. The Government’s interpretation, Miller asserts, would always require an additional waiver of sovereign immunity for the nonbankruptcy law that a trustee uses to support a § 544(b) claim. Miller argues that a narrow reading of § 106(a) would affect the statutory interpretation of every other section of the Bankruptcy Code referenced in § 106(a) which incorporates nonbankruptcy law. Miller points out that Congress should not require magic words to convey their intent, rather that the Court should apply traditional tools of statutory interpretation. Miller emphasizes that Congress’s waiver of sovereign immunity under § 106(a) should logically extend to both the main cause of action under § 544 and the nonbankruptcy law elements that help define it. Since both parts are integral to § 544, Miller points out, it would be unreasonable for Congress to waive sovereign immunity for the cause of action itself but still allow sovereign immunity to block the claim based on its elements.

PREEMPTION AND THE APPROPRIATIONS CLAUSE

The Government argues that under the Supremacy Clause, federal tax collection is exclusively governed by federal law, meaning that state laws cannot be used to recover tax payments made to the federal government. The Government claims that any state-law fraudulent transfer action attempting to recover third-party tax payments paid to the IRS would be preempted by federal law. This includes, the Government asserts, attempts by a trustee using § 544(b) to “mirror” a creditor’s action: if the original creditor could not sue under state law to recover tax payments because of federal preemption, neither can the trustee. The Government, wary of exposing the federal fisc to wide-ranging and indeterminate liability, emphasizes that the ultimate goal of any avoidance action would be to recover funds from the federal treasury. Such actions, the Government points out, would conflict with the Appropriations Clause , which restricts unauthorized payments from the Treasury.

Miller acknowledges that Utah state law is used to define what constitutes a "voidable" transaction under § 544(b) but argues that because this definition is used to establish a federal cause of action , it does not invoke preemption. Miller asserts that it would be illogical for Congress to incorporate state law into a federal cause of action, waive sovereign immunity for its use in bankruptcy, and then implicitly preempt its application. Miller further argues that field preemption does not apply to the Internal Revenue Code, as the Code lacks a field-preemption clause, and the Supreme Court has never applied such preemption to the Internal Revenue Code. Miller also disputes the Government’s argument that a creditor must show they could directly recover funds from the IRS. According to Miller, § 544(b) only asks whether the transfer is "voidable" by a creditor, independent of any recovery from the federal government, which does not conflict with the Appropriations Clause.

PROCEDURAL ISSUES

The Government argues that Miller’s alternative theory—that the trustee could recover funds by demonstrating avoidance against another party (such as a shareholder) under § 544(b)—was not raised or considered in lower courts and should not be addressed by the Supreme Court for the first time in this case. Moreover, the Government points out that the trustee expressly declined to rely on this argument in the district court. The Government contends that this theory relies on a novel interpretation of § 544(b) and § 550 of the Bankruptcy Code, diverging from the primary question regarding § 106(a)’s waiver of sovereign immunity, which is the main issue on appeal. The Government maintains that resolving this new argument would require the Court to engage in complex statutory analysis and address unresolved questions of state law—tasks typically reserved for lower courts. Furthermore, the Government asserts that under Utah law, all parties with an interest in a declaratory judgment (such as the United States, in this case) must be joined in the action, meaning the trustee cannot avoid the transfer solely as it pertains to shareholders without involving the United States. The Government contends that such an action would invoke sovereign immunity. Even if the Government was not made a party, the Government asserts that recovery would still be preempted by federal law because state-law actions to avoid collected federal taxes are at odds with the federal scheme for recovery.

Miller argues that the Government’s interpretation of § 544(b) incorrectly assumes that the creditor in question must be able to sue the federal government directly to avoid a transfer. Instead, Miller contends that § 544(b) only requires a showing that a transfer “is voidable under applicable law by a creditor,” without specifying that the creditor must be capable of directly suing the federal government. The statute’s passive phrasing, Miller asserts, supports this broader reading. Miller suggests that the creditor could have avoided the transfers by suing the beneficiaries of the transfer for a money judgment or the debtor for an injunction —actions that would not require joining the federal government or implicate sovereign immunity. Miller points out that creditors routinely pursue recovery from beneficiaries without joining the initial transferee in these types of fraudulent transfer claims. Additionally, Miller maintains that federal preemption does not apply to state-law avoidance claims merely because the disputed transfers were related to federal tax payments as the Internal Revenue Code contains no field preemption clause. Miller also reasons that the relevant state law applies to all avoidance claims and is not directed at federal taxation, only having an incidental effect, and so does not trigger preemption. Responding to the Government’s procedural objections, Miller asserts that it is permissible to advance statutory-interpretation arguments on appeal even if they were not fully developed in lower courts, as long as the underlying claims were properly preserved. Furthermore, Miller highlights that the Government itself raised this issue in district court.

Discussion

TRUSTEE POWER WITHIN THE GOALS OF THE BANKRUPTCY CODE

In support of the Government, 23 States and the District of Columbia (“23 States”), argue that affirming the Tenth Circuit’s understanding of § 544(b)(1) could overreach the power to granted to trustees in bankruptcy proceedings. According to the 23 States, allowing trustees to force the state to return tax payments years after their collection due to the actions of taxpayers would be an intrusion on the government’s ability to collect and retain taxes. The Government believes that allowing trustees to recover from the treasury would remove consequences for the insiders that committed the actual wrongdoing by allowing the satisfaction to come from the government payment, while removing remedies for the government. The Government additionally asserts that this could open the federal fisc up to wide-ranging and indeterminate liability.

The National Association of Bankruptcy Trustees, in support of Miller, countered that trustees were intended to be able to use their avoiding powers on governmental units. The National Creditors Bar Association, in support of Miller, agrees that the role of trustees includes asserting claims created by federal law and avoiding transactions in order to complete their goal of maximizing the bankruptcy estate. The NCBA thus contends that the Government’s analysis of § 544 undermines or limits the role of those trustees which ultimately harms creditors. Additionally, the Chamber of Commerce, in support of Miller, argues that allowing trustees to recover government funds diminishes the purpose of the priorities in creditor recovery order indicated in the Bankruptcy Code by allowing the government to cut that order and ultimately receive the first payments. According to the Chamber of Commerce, instead of harming the government, these priorities assist business creditors who lack resources that the federal government has to accommodate a failure to pay debts. The Chamber of Commerce contends that to prevent harmful economic ripple effects and promote the purposes of bankruptcy distribution, the government cannot be afforded special treatment with the power of trustees.

GOVERNMENTAL AUTHORITY TO EXPAND SOVEREIGN IMMUNITY

The 23 States in support of the Government believe that adopting an understanding that § 106 waives sovereign immunity against state fraudulent transfer claims could create constitutional issues over Congress’s power to abrogate state sovereign immunity. The 23 States contend that just because the States agreed that a waiver of sovereign immunity existed in bankruptcy proceedings under uniform laws, it would be dangerous to expose the States to suits based on varying state laws. The 23 States add that this would also allow these claims to be raised against a state in state court. Because states have no ability to influence how other states might create their own fraudulent transfer laws, the 23 States argue that leaving any state open to suit under any one of these laws is not only impermissible but also contradictory to the goals of orderly and centralized bankruptcy proceedings. The 23 States warn that this interpretation raises a constitutional issue of whether the Bankruptcy Clause has the power to subject States to non-uniform laws, and therefore such a constitutional question should be avoided.

Judge Eugene Wedoff, with other law professors, in support of Miller, counters that the intention of § 106 clearly and unambiguously points to an abrogation of sovereign immunity in order to avoid rendering parts of the statute inoperative, as readings of statutes that render them useless are harmful to the government. Miller also warns that the government’s narrow reading and position restricts other areas of the Bankruptcy Code mentioned in § 106 because they rely similarly on nonbankruptcy law. Additionally, the Chamber of Commerce, in support of Miller, warns that failing to waive sovereign immunity under § 106 creates difficulty by providing a second waiver of immunity where consent to suit has already been announced. The Chamber of Commerce contends that the Government’ understanding creates an overreach of power by importing immunity into a statute designed to limit it.

Conclusion

Written by:

Sara Fischer

Sierra Berry

Edited by:

Eric Yang

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