S.Ct.: US. V. Miller

Summary:

The Supreme Court held that while §106(a) of the Bankruptcy Code waives sovereign immunity “with respect to” §544 of the Code, that waiver does not extend to the state-law claims that a trustee uses as the basis for a §544(b) fraudulent transfer action. The case arose when a Chapter 7 trustee attempted to claw back $145,000 in misappropriated debtor funds that had been used to pay the shareholders' personal IRS liabilities. Since sovereign immunity would normally preclude a creditor suit under Utah’s fraudulent transfer laws against the United States, the Government argued no “actual creditor” could exist to satisfy §544(b)’s threshold requirement.

The Tenth Circuit had held that §106(a)’s waiver extended to the state-law claims nested within §544(b), thus abrogating sovereign immunity in full. The Supreme Court reversed, concluding that §106(a) only provides jurisdiction to hear §544(b) actions—it does not waive immunity for the underlying state-law causes of action that the trustee must borrow to prevail.

Justice Jackson, writing for the majority, emphasized that sovereign immunity waivers must be narrowly construed, and cannot be read to create new substantive rights. She rejected the idea that §106(a)’s waiver of immunity should be read to eliminate the “actual creditor” requirement in §544(b), stating that doing so would untether the trustee from the very creditors whose rights §544(b) is meant to emulate. Although the trustee argued that the phrase “with respect to” in §106(a)(1) was broad enough to cover state law, the Court found that context—and precedent—cut sharply against that reading.

Justice Gorsuch dissented, arguing the trustee wasn’t trying to alter §544(b)’s elements but merely invoking a statutorily waived affirmative defense (sovereign immunity) that would otherwise block an otherwise valid state-law claim.

Commentary:

This could  limit  trustees in coupling  §544(b) with state fraudulent transfer statutes,  with their longer (usually 4 year)  Statutes of Limitations,  to pull back prepetition tax payments to the IRS, the SBA or on federal student loans.  Particularly as to student loans,  this could provide opportunities for consumer debtors (at least those with the ability to wait on filing) for pre-bankruptcy planning.

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