To resolve a split of circuits, the Supreme Court has granted certiorari to decide whether the waiver of sovereign immunity in Section 106(a) permits a bankruptcy trustee to sue the federal government for receipt of a fraudulent transfer under Section 544(b)(1), when an actual creditor could not sue the government outside of bankruptcy.

One year ago in U.S. v. Miller, 71 F.4th 1247 (10th Cir. June 27, 2023), the Tenth Circuit sided with the Ninth and Fourth Circuits, which both had held that the waiver of immunity in Section 106(a) allows claims against the government under state law. See In re DBSI, Inc., 869 F.3d 1004 (9th Cir. 2017); and Cook v. U.S. (In re Yahweh Center Inc.), 27 F.4th 960 (4th Cir. 2022). To read ABI’s reports, click here and here. To read ABI’s report on Miller in the Tenth Circuit, click here.

There is a circuit split because the Seventh Circuit held to the contrary in 2014 by ruling that the immunity waiver in Section 106(a) did not allow suit, reasoning that Section 106(a) did not modify the actual creditor requirement in Section 544(b). See In re Equip. Acquisition Res. Inc., 742 F.3d 743 (7th Cir. 2014).

Fraudulent Transfer to the IRS

The Internal Revenue Service is often the recipient of constructive fraudulent transfers, for example, when a corporation pays federal income taxes owing by one of the owners. And so it was in the case before the Tenth Circuit last year.

The corporation’s chapter 7 trustee brought suit in bankruptcy court against the IRS under Section 544(b)(1) for receipt of a constructively fraudulent transfer under Utah law. The section allows a trustee to “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.” [Emphasis added.]

The government conceded that there was an actual creditor and did not contest the elements of a constructively fraudulent transfer. However, the government contended that sovereign immunity would have prevented an actual creditor from suing the IRS outside of bankruptcy. Without an actual creditor to raise the fraudulent transfer claim, the government contended that the bankruptcy trustee was precluded from suing under Section 544(b)(1).

On cross motions for summary judgment, Bankruptcy Judge R. Kimball Mosier of Salt Lake City ruled in favor of the trustee and entered judgment for about $145,000. The IRS appealed, but the district court affirmed. See U.S. v. Miller, 20-00248, 2021 BL 340200 (D. Utah Sept. 8, 2021). To read ABI’s report on the district court affirmance, click here.

On the government’s second appeal, the Tenth Circuit agreed with the trustee’s theory that the broad waiver of sovereign immunity applicable to Section 544 by virtue of Section 106(a) allowed suit based on a state-law claim. The Tenth Circuit affirmed the two lower courts and parted company with the Seventh Circuit. U.S. v. Miller, supra.

After two extensions of time, the U.S. Solicitor General filed a petition for certiorari on January 29. The Court considered the petition in conference on June 17 and granted the petition on June 24. The grant was not surprising because there is a circuit split, and the Court grants review about half the time when the federal government files a petition for certiorari.

The Government’s Theory

The Solicitor General urged the high court to resolve the circuit split because “bankruptcy courts have frequently addressed this question over the last two decades” and reached decisions that the government believes were wrong.

If the allegedly fraudulent transfer to the IRS had occurred within two years of bankruptcy, the trustee could have maintained suit under Section 548 because that section is one of those listed in Section 106(a) as to which sovereign immunity is “abrogated.” Since the transfer occurred more than two years before bankruptcy and less than the four years permitted by Utah law, the trustee was compelled to sue under Section 544(b)(1) with its “actual creditor” requirement.

The government believes that the Tenth Circuit was wrong because “no actual creditor could obtain relief outside of bankruptcy,” given the government’s sovereign immunity. “Because no actual unsecured creditor could have avoided the federal tax payments at issue here under Utah fraudulent-transfer law,” the government argues that “the Chapter 7 trustee had nobody’s shoes to step into when seeking to avoid those tax payments under Section 544(b) by invoking that state law.”

Indeed, the government believes that Section 106(a) has “no bearing” on the outcome because the waiver of sovereign immunity does not alter the substantive requirement in Section 544(b) that there must be an “actual creditor” entitled to sue.

The date for oral argument had not been set. If the parties do not request a lengthy extension of time to file their briefs, argument could be held before the end of the year.