SCOTUS refines trustee’s power to claw back tax payments

In a case involving a bankruptcy trustee’s §544(b) action to claw back $145,000 shareholders in a failed Utah company misappropriated to pay their personal tax liabilities, Bankruptcy Code §106(a)’s sovereign-immunity waiver applies only to the §544(b) claim and not to state-law claims “nested” within that federal claim, the U.S. Supreme Court ruled 8-1 in reversing a decision from the 10th Circuit. Click here to read the full text of United States v. Miller.

BULLET POINTS:  “Waivers of sovereign immunity are jurisdictional provisions that empower courts to hear claims against the Government but do not themselves typically create any new substantive rights against the Government. Here, statutory text, context, and structure all demonstrate that §106(a) fits squarely within that mold.”

— Justice Ketanji Brown Jackson, majority opinion

“Three statutory provisions are relevant here. First is 11 U.S.C. §106(a)(1), which waives the government’s sovereign immunity ‘with respect to’ §544 of the Bankruptcy Code. Second is §544(b)(1), which empowers a bankruptcy trustee to invoke the rights of ‘a creditor holding an unsecured claim’ to set aside any transfer ‘that is voidable under applicable law.’ And third is Utah’s fraudulent-transfer statute, which here supplies the ‘applicable law’ for purposes of §544(b)(1).

“As I see it, those three provisions play out this way. Under the Utah statute, a transfer is ‘voidable’ if, after a creditor’s claim arose against the debtor, the debtor (1) ‘made the transfer’ (2) ‘without receiving a reasonably equivalent value in exchange,’ and (3) ‘was insolvent at the time.’ Notably, no one before us disputes that these conditions are satisfied here and a good fraudulent-transfer claim exists. Thus, under ‘applicable law,’ the relevant transfers are ‘voidable,’ and the bankruptcy trustee can use §544(b)(1) to set them aside. That remains true even though the trustee must sue the United States to void the relevant transfers, because §106(a)(1) bars the government from raising a sovereign-immunity defense in the trustee’s action.”

— Justice Neil M. Gorsuch, dissenting