Supreme Court: No ‘Strong-Arming’ the Federal Government With State-Law Fraudulent Transfer Claims

Introduction

On March 26, 2025, the United States Supreme Court resolved a circuit split concerning whether the federal government had waived its sovereign immunity in the context of fraudulent transfer claims brought in bankruptcy court but arising under state law. United States v. Miller, No. 23-824, 2025 WL 906502 (U.S. Mar. 26, 2025). The answer was a resounding no. In an 8-1 decision, the Court held that the Bankruptcy Code’s sovereign immunity abrogation provision stopped at the federal claim and did not waive the federal government’s sovereign immunity claim as to state law fraudulent transfer claims. 

Background

On June 23, 2014, All Resort Group, Inc. (the Debtor) made two payments totaling approximately $145,000 to the Internal Revenue Service (IRS) for obligations owed by two individuals who were each an officer and a director of the Debtor. A few years later, on April 28, 2017, the Debtor filed a voluntary chapter 11 petition. After the Debtor filed to obtain debtor-in-possession financing, it moved to convert its case to one under chapter 7. The bankruptcy court converted the case in September 2017 and the United States Trustee appointed David Miller as the chapter 7 trustee (the Trustee). The Trustee initiated an adversary proceeding against the IRS to avoid the two pre-bankruptcy (aka pre-petition) transfers for the benefit of the Debtor’s officers. At issue was whether the Trustee could recover the payments made to the IRS three years before the bankruptcy filing.

Statutory Framework

Generally, the United States government cannot be sued unless it waives its sovereign immunity. The Bankruptcy Code [11 U.S.C. et seq.] contains a statute—Section 106—which abrogates sovereign immunity as it relates to specified sections in the Bankruptcy Code. One of those statutes is Section 544.

Section 544 of the Bankruptcy Code—the so-called “strong arm” provision—empowers a bankruptcy trustee or a debtor to avoid certain pre-petition transfers. Section 544(b) applies specifically to transfers made under “applicable law by a creditor holding an unsecured claim.” One such example of an “applicable law” is a state’s fraudulent transfer statute, which a trustee may use in addition to the Bankruptcy Code’s standalone fraudulent transfer statute – Section 548.¹ While Section 548 limits fraudulent transfer actions to transfers made within two years of a bankruptcy filing, Section 544(b)(1) allows a trustee to utilize state law fraudulent transfer statutes that have longer lookback periods (e.g., four years). However, Section 544(b)(1) limits the avoidance powers to transfers that are “voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.” 

The Dispute

In United States v. Miller, the transfer at issue was made three years before the bankruptcy filing, well outside of the scope of the two-year look back period of the Section 548 fraudulent transfer action. Consequently, the Trustee invoked Utah’s fraudulent transfer law under Section 544, which contained a longer four-year lookback period that would have allowed the Trustee to avoid the IRS transfer. The IRS invoked its sovereign immunity, arguing that no actual creditor could avoid the transfer under Utah law because the IRS’s sovereign immunity was not abrogated under Section 106(a) of the Bankruptcy Code. In a sense, the IRS argued that for the Trustee to be able to avoid the transfer under Section 544(b), there must be a creditor who could do the same under state law if no bankruptcy had been filed. Under Utah law, the lawsuit against the IRS would be barred and no creditor could avoid the transfer, and therefore there were no shoes into which the Trustee could step to avoid the transfer. The bankruptcy court rejected the IRS’s argument and avoided the transfer. The district court and Tenth Circuit affirmed and the United States appealed to the Supreme Court.

The Decision

On appeal, the Supreme Court considered whether Section 106(a) abrogated sovereign immunity as to claims created by Section 544(b) or whether it reached further and abrogated the underlying state law claim. The Court held that the “sovereign-immunity waiver applies only to the § 544(b) claim itself and not to any state-law claims nested within that federal claim.” For any party to bring a claim against the government based on “applicable” law, whether state or federal, the underlying claim must provide the basis for suing the government. If the government can claim sovereign immunity, then a party cannot bring that claim against the government in bankruptcy court.

The Court was concerned that the application of the sovereign immunity waiver to the underlying state law claim would transform the waiver into a liability-creating provision. Citing to Collier on Bankruptcy, the Court explained that to avoid a transfer under Section 544, the trustee must identify the actual creditor who could have set aside the transfer under applicable law. In effect, the trustee must stand in the shoes of an existing creditor and if there are no shoes to fill, then the trustee cannot use Section 544(b) to avoid that specific transfer. The Supreme Court went on to explain that “Section 106(a) is properly understood as a jurisdictional provision that empowers courts to hear § 544(b) claims against the Government to the extent such claims are otherwise available under state law; it does not alter the substantive meaning of § 544(b)’s ‘applicable law’ clause.”

The Trustee in this case contended that limiting the sovereign immunity waiver to only Section 544(b) and not the underlying federal or state law claim would remove the statute’s teeth. The Court disagreed, pointing to the fact that the actual creditor requirement is not required to bring actions under subsection (a) of Section 544, as subsection (a) specifies that a trustee may bring an avoidance action “whether or not such a creditor exists.” The Court surmised that there is a possibility that a trustee would be able to use Sections 106(a) and 544(a) together to prevail against the government and avoid certain transfers, such as liens, without identifying a specific creditor. 

The Dissent

Justice Gorsuch was the lone dissenter, who, siding with the Fourth and Ninth Circuits, concluded that Congress intended to waive the government’s sovereign immunity defense to all actions arising under Section 544, including claims based on state law. Justice Gorsuch determined the three relevant statutes were: (i) Utah’s fraudulent transfer provision, (ii) Section 544(b), and (iii) Section 106(a). Analyzing each statute in turn, Justice Gorsuch noted that—on its face—all elements of Utah’s fraudulent transfer statute were satisfied and therefore the payment to the IRS could be avoided. Next, Justice Gorsuch concluded that Section 544(b) authorized the Trustee to invoke Utah law to bring an avoidance claim against the IRS. Further, while a private creditor could not bring an avoidance claim against the IRS, the Trustee could do so because of the sovereign immunity waiver in Section 106(a). 

Conclusion

As a result of the decision in United States v. Miller, transfers against the federal government cannot be avoided utilizing state-law fraudulent transfer statutes incorporated by Section 544(b). Instead, bankruptcy trustees and debtors will be limited to fraudulent transfer claims under Section 548 of the Bankruptcy Code, which has a shorter two-year lookback period, and there may be less money available to certain bankruptcy estates as a result (i.e., where large payments were made to the IRS more than two years prior to the bankruptcy filing). This has a potential downstream effect on creditors, as there would then be less money available in the “pot” to pay unsecured creditors. Moreover, there may be implications for claims against the federal government in other contexts, as Section 106(a)—the sovereign immunity waiver statute—applies to numerous other sections of the Bankruptcy Code. If the sovereign immunity waiver is construed narrowly in the context of Section 544(b), it may be similarly construed with respect to the 58 other Bankruptcy Code sections referenced in Section 106, many of which, per the Court, “include subsections that plainly do not implicate sovereign immunity at all.”