The Supreme Court recently held in United States v. Miller, 23-824 (Sup. Ct. March 26, 2025), that the waiver of sovereign immunity under 11 U.S.C. § 106(a) is jurisdictional, thereby limiting potential causes of action against governmental units.
The case involves a failing Utah-based company that transferred roughly $145,000 to the IRS in 2014 to pay the income tax liability of its owners. The corporation filed for bankruptcy three years later, causing those funds transferred in 2014 to be beyond the reach of a typical avoidable transfer action. The Chapter 7 trustee sued the IRS under §544(b)(1), which permits a trustee to avoid a transfer by a debtor that would be avoidable under applicable law by an actual creditor holding an allowed unsecured claim. In bringing his suit, the trustee cited Utah’s fraudulent transfer act.
The IRS conceded that the company was insolvent at the time and received no value in return, satisfying the elements of a constructive fraudulent transfer. However, it argued that the claim would be barred by sovereign immunity if brought outside the bankruptcy context. Both the bankruptcy court and the Tenth Circuit sided with the trustee, holding that § 106(a)’s waiver of sovereign immunity was broad enough to encompass the trustee’s claim under § 544(b)(1).
The Supreme Court reversed, finding that although § 106(a) waives the government’s immunity for federal causes of action under certain Bankruptcy Code provisions—including § 544(b)—it does not extend that waiver to the state-law claims upon which such avoidance actions are based. Where an actual unsecured creditor could not sue the IRS under Utah law due to sovereign immunity, the trustee, stepping into that creditor’s shoes, likewise could not prevail.
United States v. Miller underscores the narrow interpretation of sovereign immunity waivers in bankruptcy proceedings, particularly where avoidance powers are constrained by the rights of actual creditors under applicable non-bankruptcy law. This decision is significant for debtors, creditors, trustees and practitioners considering the impact of potential claims against government entities in bankruptcy matters.
Wolfson Bolton Kochis attorneys have significant experience in complex bankruptcy and commercial litigation cases. Contact us to discuss how we can help you navigate your toughest legal challenges.
