Bankr. W.D.N.C.: Hayes v. US- Avoidance of Transfer to IRS pursuant to § 548

Summary:

In this adversary proceeding, the Chapter 7 trustee, Cole Hayes, sought to avoid and recover a $1,052,682.67 tax payment made by the debtor’s principal, Garth McGillewie, to the IRS shortly after the debtor obtained a $1.5 million business loan. The IRS contended it was a subsequent transferee protected by § 550(b) and that sovereign immunity barred recovery under § 544(b). The trustee proceeded solely under §§ 548 and 550 following United States v. Miller, 145 S. Ct. 839 (2025), which held that § 106(a)’s sovereign immunity waiver does not apply to state law-based avoidance under § 544(b).

Judge Kahn granted partial summary judgment to the trustee, finding the IRS was the initial transferee of estate property and thus not entitled to the “good faith” defense of § 550(b). The loan proceeds, although deposited into McGillewie’s personal bank account, remained property of the debtor under South Carolina law due to McGillewie’s fiduciary obligations as manager of the LLC. The court held that McGillewie held the funds in trust for the LLC and that depositing them into his personal account did not divest the debtor of ownership.

Further, the IRS had received the funds directly and applied them to satisfy McGillewie’s personal tax debts. The court emphasized that payment of personal obligations using company funds is a classic badge of fraud and confirmed that the debtor was insolvent at the time of transfer. The IRS’s assertion that McGillewie was the initial transferee was rejected on the basis that he lacked legal dominion and control, as required under Bonded Financial Services and Southeast Hotel Properties. Thus, § 548(a)(1)(A) and (B) applied, and the transfer was both actually and constructively fraudulent.

Commentary:

This opinion is notable for two key reasons: (1) its application of United States v. Miller to confine sovereign immunity defenses under § 544(b), and (2) its detailed treatment of the "initial transferee" issue under § 550(a). Judge Kahn's ruling reinforces the principle that a bankruptcy trustee may recover fraudulent transfers made to the IRS even where the payment was indirect—here, from a business loan wired into a principal’s personal account. The ruling is particularly instructive for trustees and debtor attorneys dealing with misappropriated business loans used to pay personal liabilities.

From a consumer bankruptcy perspective, this case offers important lessons when clients are managing small business finances: blurring the lines between business and personal funds can have major consequences. The ruling also opens doors for trustees in both business and consumer cases to pierce personal transactions where insiders funnel estate assets through personal accounts and then to creditors.

Practitioners should further note that even with strong sovereign immunity arguments post-Miller, the IRS may still be exposed to recovery under § 548, as long as the trustee can show the property remained part of the estate and was transferred with intent to defraud or for less than reasonably equivalent value while insolvent. This significantly limits the IRS's insulation under § 550(b) and raises the stakes when insider principals improperly divert company funds.

Also  worth noting, for those attorneys that tend to be rather myopic in ignoring decisions from outside their immediate district, is that Judge Kahn, from the MDNC,  was sitting by special designation in this case in the WDNC.  

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