The US Supreme Court’s decision to hear arguments United States v. Miller pits the IRS’s sovereign immunity against the authority of a bankruptcy trustee. The government may find it’s facing an uphill battle.
The government wants the justices to reverse two lower-court rulings allowing a Chapter 7 liquidating trustee to recover a $145,000 payment made 10 years ago to the IRS. The trustee, representing a Utah transportation firm in bankruptcy, brought a fraudulent transfer action to void the 2014 payment that was made to cover the personal tax debts of two officers of the company.
Miller asks whether a trustee may claw back a debtor’s federal tax payment under Section 544(b) of the Bankruptcy Code when no actual creditor could have obtained relief under a state law governing fraudulent transfers. Section 544(b) permits trustees to avoid a fraudulent transfer if it would be invalid “under applicable law” outside bankruptcy by one of the debtor’s actual creditors.
Here, the trustee pointed to a debt owed to a former employee, who had sued the company for discrimination and won. The US Court of Appeals for the Tenth Circuit sided with the trustee, finding that bankruptcy law waived the IRS’s sovereign immunity in this case.
The government claims that sovereign immunity would have barred the former employee from suing to recover the tax payments that the company had made to the IRS. A bankruptcy trustee could retroactively undo a tax payment made to the IRS when no creditor could under applicable state law, it argued in its petition.
This specific concern appears to be overstated. As the trustee noted in his brief opposing review, the question presented in Miller arises only when the transfer occurs more than two years before bankruptcy, but within the look-back period allowed under state law—four years or less in 46 states and Washington, D.C.
The government identified only six reported cases in the last decade presenting this issue. In those cases, the median amount involved was approximately $200,000—a mere 0.000003% of the federal budget.
Section 544 won’t be the only part of the Bankruptcy Code that will be considered in Miller. The Supreme Court will once again address Section 106(a), which says “sovereign immunity is abrogated as to a governmental unit to the extent set forth” in several sections of the code, including Section 544.
Just last year, the high court held in Lac du Flambeau Band of Lake Superior Chippewa Indians v. Coughlin that Section 106(a) waives sovereign immunity as to Native American tribes. The court based its holding on principles of strict statutory construction as well as underlying policy concerns that undergird the Bankruptcy Code.
Each of these could present significant hurdles for the government in Miller.
The court in Lac du Flambeau noted that, if the argument advanced by the petitioner was accepted, it would result in a situation where certain government entities are treated as special citizens under the Bankruptcy Code, which is contrary to its purpose.
On the strict statutory construction front, Section 106(a) provides that sovereign immunity is repealed for Section 544, and nothing in Section 106(a) provides a carve out for Section 544(b).
As the Tenth Circuit noted in Miller, Section 106(a)(2) provides that a court “may hear and determine any issue arising with respect to the application of” Section 544. That Congress would authorize a court to ‘hear and determine any issue arising with respect to’ section 544’s application as part of a statute waiving the Government’s sovereign immunity surely presumes subject-matter jurisdiction.”
What’s more, as the Supreme Court explained in Lac du Flambeau, when Congress wanted to give the government a “limited exception” from ordinary bankruptcy rules, it said so expressly. Congress exempted government fines from discharge and permitted the government to assess taxes notwithstanding bankruptcy’s usual automatic stay.
Implying an additional, unwritten exception for fraudulent transfers would seem to undermine principles of statutory construction that the Supreme Court has relied on for decades.
As to the policy implications at play in Miller, under the government’s interpretation, it alone could keep fraudulent transfers received two to four years before bankruptcy, a result specifically rejected by the Lac du Flambeau court—equal application of the Bankruptcy Code to all creditors regardless of status.
If the IRS prevails in Miller, the policy implications espoused by the Supreme Court in Lac du Flambeau would be upended.
The government in its Supreme Court petition said the rule embraced by the lower courts “threatens substantial consequences for the federal fisc.” Convincing most of the justices to agree may prove to be a daunting task.
The case is United States v. Miller, U.S., 23-824, conference 6/24/24.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Shane G. Ramsey is partner at Nelson Mullins and co-chair of the bankruptcy and financial restructuring practice group.…Read more by Shane Ramsey
