Available at: https://ssrn.com/abstract=5265839
Abstract:
In the recent Supreme Court case United States v. Miller, the Court resolved a nuanced but technical dispute in bankruptcy law: whether a trustee can use § 544(b)’s avoidance power against the government a separate, state-law waiver of sovereign immunity. In holding that a trustee does need a second waiver—apart from § 106(a)’s general waiver of sovereign immunity—the Court not only resolved a circuit split, but issued a holding with several noteworthy parts. First, the Court affirmed that § 544(b) requires a true “actual creditor,” meaning a trustee can only act if an actual creditor could have recovered outside bankruptcy. While the Court referenced legislative history and bankruptcy treatises to support this interpretation, the plain text of the Code does not as clearly support that proposition. The better argument lies in history and structure—but the Court had previously rejected such tools in last term’s Perdue Pharma decision. Second, the decision appears to cut back on the principle that Justice Holmes outlined in Moore v. Bay: that a trustee’s powers exceed those of any individual creditor. In Miller, dismissed Moore as limited to recovery, not avoidance, a distinction seen as novel and unsupported by precedent. Third, the Court failed to address whether sovereign immunity even applies to in rem proceedings like bankruptcy, where prior rulings (e.g., Katz) suggest immunity concerns are diminished. By interpreting § 544(b) as requiring a creditor who could sue independently—and thus requiring another sovereign immunity waiver—the Court has curtailed the effectiveness of bankruptcy trustees in recovering assets and protecting creditor interests. Finally, the Court’s opinion reflects a curious reading of the bankruptcy code. By imposing a second, sovereign immunity hurdle, the Court created inconsistencies with other Code sections like § 548 and § 549, which do not require a separate waiver and allow broader trustee recovery. Finally, at bottom, although a § 544(b) avoidance action borrows its content from state law, the trustee’s suit is still a federal law claim. And in Miller, the Court confronted just such a federal action: a trustee, operating under a federal waiver of sovereign immunity, borrowed a state law cause of action to bring his federal suit and met all the requirements for that claim. In holding that the trustee needed a second waiver of sovereign immunity, the court derived a requirement that can follow from the Code’s text but has several broader implications.
Commentary:
Declan Kunkel’s review of United States v. Miller astutely highlights how the Supreme Court, under the guise of statutory interpretation, narrowed trustees’ avoidance powers by requiring a second sovereign immunity waiver for § 544(b) claims that rely on state law. Despite § 106(a)’s broad waiver, the Court held that the trustee couldn’t avoid a fraudulent transfer to the IRS unless a real-world creditor could have sued the government outside bankruptcy—a reading unsupported by the Code’s text or precedent like Moore v. Bay.
Kunkel rightly critiques this move as doctrinally inconsistent and practically damaging. It ignores the in rem nature of avoidance actions and undermines the estate’s ability to recover fraudulent transfers. The result? A potent shift in favor of federal creditors, at the expense of bankruptcy's core goal: equitable distribution to all.
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