We have previously blogged about the Tenth Circuit’s decision in United States v. Miller, a case that concerns the relationship between section 544(b)(1) and section 106(a)(1) of the Bankruptcy Code. As we explained in our prior post, section 544(b)(1) enables a trustee to step into the shoes of a creditor and avoid a transfer “of an interest of the debtor in property” that is voidable by an unsecured creditor under applicable law. For example, section 544 enables trustees to bring claims under state fraudulent transfer law against transferees of property from the debtor. Section 106(a)(1), in turn, abrogates sovereign immunity for any “governmental unit” as to an extensive list of Code sections, including section 544. The question in Miller is what happens when a trustee brings a claim under section 544(b)(1) that would be barred by sovereign immunity outside of bankruptcy. Does the claim fail because a trustee suing under section 544(b)(1) stands in the shoes of a creditor, and a creditor outside of bankruptcy could not bring the claim? Or does the waiver of sovereign immunity apply to allow the trustee to bring the claim? The Supreme Court recently resolved this issue, reversing the Tenth Circuit and holding that section 544 does not permit such a claim.
Miller arises from a suit by a chapter 7 trustee (the “Trustee”) to recover a debtor’s payment two of its principals’ personal tax debts to the United States (the “Government”). The Trustee sought to avoid these transfers under section 544(b), arguing that they were fraudulent transfers under Utah’s Uniform Fraudulent Transfer Act. The Government did not contest that the transfers qualified as fraudulent transfers under Utah law. However, the Government argued that, outside of bankruptcy, a creditor could not avoid the transfers because sovereign immunity would bar the suit. Thus, the Government argued, the action could not be brought under section 544(b)(1) either. The Trustee, in turn, did not contest that sovereign immunity would bar a creditor suit outside of bankruptcy, but argued that a section 544(b)(1) claim could nonetheless be brought based on the sovereign immunity waiver in section 106(a)(1). The bankruptcy court ruled for the Trustee, relying on section 106, and both the district court and the Tenth Circuit affirmed. The Government petitioned for Supreme Court review and the Supreme Court agreed to review the Tenth Circuit’s decision.
The Supreme Court reversed. In an opinion by Justice Jackson, the Court explained that sovereign immunity is jurisdictional in nature, depriving courts of the power to hear suits against the United States absent the express consent of Congress. As such, a waiver of sovereign immunity operates to create jurisdiction, not to alter substantive rights or create liability. Here, the Court reasoned, it would be incongruous to read the sovereign immunity waiver to expand the substantive scope of section 544(b)(1) and permit the trustee to avoid a transfer that (in virtue of sovereign immunity) is not “voidable under applicable law” by an unsecured creditor.
Text and structure, the Court held, also support barring the claim. The Court noted that section 106(a)(5) provides that section 106 does not “create any substantive claim for relief or cause of action not otherwise existing” under another source of law, but the trustee’s position effectively resulted in a new substantive claim against the government that does not exist under section 544(b) or applicable state law. The Court also emphasized that section 544(b) requires a trustee to identify an actual creditor who could avoid the transfer under “applicable law,” a longstanding requirement that the Trustee could not meet here given the sovereign immunity defense. The Court rejected the Trustee’s argument that the use of “with respect to” in section 106(a) to describe the waiver of sovereign immunity as to the listed Bankruptcy Code sections supports a broad reading of the waiver, explaining that the language must be understood in context, including the text and structure of section 106 and section 544(b) and the general principle that waivers of sovereign immunity are construed narrowly.
Justice Gorsuch dissented. In a short opinion, he argued that the presence of a sovereign immunity defense is a separate question from whether a transfer is voidable. Here, since the Government does not contest that the transfers met the requirements for avoidance under Utah’s fraudulent transfer law, the Trustee met the terms of section 544(b). And since the Government had waived sovereign immunity under section 106(a), the claim should proceed.
