The Supreme Court has ruled that a bankruptcy trustee cannot use a federal waiver to sue the government for a fraudulent transfer under state law. In United States v. Miller, the Court held that Section 106(a) of the Bankruptcy Code waives sovereign immunity for the claim itself, but it does not extend to the underlying state law cause of action. This decision limits the ability of trustees to claw back funds transferred to the government before bankruptcy.
A Utah case sets the precedent. The matter involved a failed Utah-based business whose shareholders misappropriated $145,000 in company funds to pay off personal federal tax liabilities before the business entered bankruptcy. The trustee brought a fraudulent transfer action against the United States to recover those funds. He relied on Section 544(b) of the Bankruptcy Code, which allows a trustee to avoid transfers that are voidable under applicable law by a creditor holding an unsecured claim.
The trustee argued that Utah’s fraudulent transfer statute should apply because it allows creditors to invalidate certain transfers. The lower courts agreed, ruling that the bankruptcy court had jurisdiction because Section 106(a) waived sovereign immunity for claims under Section 544(b). The United States appealed, arguing that no actual creditor could have sued the government under state law because of sovereign immunity.
The Supreme Court reversed the Tenth Circuit, with Justice Jackson writing the majority opinion. The Court concluded that the waiver in Section 106(a) is a prerequisite for jurisdiction, not a grant of new substantive rights. The Court pointed to the plain language of Section 106(a)(5), which states that nothing in the section shall create any substantive claim for relief or cause of action not otherwise existing under the Bankruptcy Code or nonbankruptcy law.
The Court also looked at the history of Section 544(b), noting that it was derived from an older bankruptcy statute that gave trustees the same rights as creditors under state law. Since a private creditor could not sue the government under Utah law outside of bankruptcy, a trustee cannot do so inside bankruptcy simply by invoking Section 106(a). The government remains immune to state-law claims unless Congress explicitly removes that immunity.
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Before this ruling, courts were divided on the issue. The Fourth, Ninth, and Tenth Circuits had ruled that Section 106(a) waived sovereign immunity for claims under Section 544(b), including those based on state law. The Seventh Circuit disagreed, holding that the waiver does not extend to derivative claims based on state law.
Justice Jackson wrote the majority opinion. The Court reasoned that precedent and “statutory text, context, and structure” all demonstrate that waivers of sovereign immunity (whether under § 106(a) or otherwise) are prerequisites for jurisdiction.
With respect to precedent, the Court previously held that waiver of sovereign immunity empowers courts to hear claims against the government. But that waiver does not create any new substantive rights against the government.
Even the plain language of § 106(a)(5) provides that “[n]othing in this section shall create any substantive claim for relief or cause of action not otherwise existing under this title, the Federal Rules of Bankruptcy Procedure, or nonbankruptcy law.”
Likewise, the history of § 544(b) supports the same outcome. Section 544
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