Available at: Cardozo Law — LARC

Abstract:

The article argues that the Supreme Court's decision in United States v. Miller was wrongly decided because it failed to recognize that sovereign immunity is waivable and does not protect the government when it trespasses upon preexisting property rights. The analysis contends that fraudulent transfer claims are quasi in rem actions, meaning the sovereign is subject to the incidental procedures of bankruptcy once enmeshed in such proceedings.

Summary:  Fraudulent Transfers and Sovereign Immunity: Miller Was Right for the Wrong Reasons—and Maybe Wrong About the Part That Matters

Professor David Gray Carlson's Fraudulent Transfers and Sovereign Immunity takes a fairly remarkable position regarding the Supreme Court's 2025 decision in United States v. Miller, 604 U.S. 518 (2025): the IRS should have won the case, but the Supreme Court's sovereign-immunity reasoning was wrong.

Or, as Carlson rather memorably puts it, "Miller proves that three wrongs make a right."

What Miller Held

Miller involved a corporation whose shareholders caused it to pay approximately $145,000 of their personal tax liabilities to the IRS. Three years later, the corporation filed bankruptcy, and the trustee sought to recover those payments under § 544(b), using Utah fraudulent-transfer law.

The Supreme Court held that § 106(a)'s waiver of sovereign immunity for § 544 does not eliminate the requirement that the trustee identify an actual unsecured creditor who could itself avoid the transfer under applicable nonbankruptcy law. Since an ordinary creditor could not sue the United States because of sovereign immunity, the trustee could not use that creditor as the necessary § 544(b) "triggering creditor."

Carlson thinks that analysis is fundamentally backwards.

First: The IRS Probably Did Give "Reasonably Equivalent Value"

Carlson starts in an unexpected place: there may never have been a fraudulent transfer in Miller at all.

When the corporation paid the shareholders' tax debts, Carlson argues, the corporation became subrogated to the IRS's claims against those shareholders. If the shareholders were solvent, that subrogation claim was potentially worth dollar-for-dollar what the corporation paid.

In other words, $145,000 went out the door, but a $145,000 claim against the shareholders came back in. If so, the corporation received reasonably equivalent value and there was no constructive fraudulent transfer.

Carlson is rather unsparing toward the IRS attorneys for conceding otherwise, concluding that "[l]awyers for the IRS should not have conceded liability for receipt of a fraudulent transfer."

That alone makes Miller an odd vehicle for the Supreme Court's sovereign-immunity ruling.

Second: Sovereign Immunity Is a Defense, Not a Time Machine

Carlson's more important attack concerns § 544(b).

The Supreme Court essentially asked whether the triggering creditor could successfully sue the IRS outside bankruptcy. Because sovereign immunity would prevent that suit, the Court concluded that the trustee inherited no usable avoidance right.

Carlson says that skips an important procedural step.

The creditor has a prima facie fraudulent-transfer claim. Sovereign immunity is a defense the government must assert, and it can be waived. When bankruptcy intervenes before that defense has been asserted, § 544(b) transfers the creditor's avoidance rights to the trustee. The trustee then brings the claim inside the bankruptcy case, where Congress has expressly abrogated sovereign immunity for § 544 through § 106(a).

That is substantially the position Justice Gorsuch advanced in dissent: the creditor's claim exists under applicable law, while sovereign immunity is an affirmative defense that § 106(a) prevents the government from asserting against the bankruptcy trustee.

Put more simply: the Supreme Court treated the IRS's hypothetical defense outside bankruptcy as though it had already killed the claim before bankruptcy ever occurred. Carlson argues that it had not.

Fraudulent Transfers Are About Property, Not Just Money

Carlson's second route around Miller is even more interesting.

He argues that fraudulent-transfer actions are properly understood as quasi in rem proceedings. The creditor is not merely seeking damages from the transferee. The creditor is asserting an existing equitable interest in property that the debtor improperly placed beyond the creditor's reach.

As Carlson describes it, avoidance essentially declares that the transferee's property remains subject to the debtor's creditors. The creditor's interest arises with the fraudulent transfer, before the creditor actually files the avoidance action.

That characterization matters enormously for sovereign immunity.

Section 702 of the Administrative Procedure Act waives federal sovereign immunity for actions seeking equitable relief rather than "money damages." Carlson therefore argues that a properly pleaded fraudulent-transfer action seeking recovery of the transferred property can fit within that waiver.

And Carlson points out what he calls a "pleading blunder" in Miller: the trustee skipped an equitable accounting and instead requested a money judgment equal to the value of the transfers.

That distinction gives bankruptcy attorneys something practical to think about: after Miller, the remedy requested and how an avoidance complaint is pleaded may matter much more than previously assumed.

Don't Sue Uncle Sam—Sue the Guy Holding Uncle Sam's Money?

Carlson offers yet another route.

If the government possesses property that rightfully belongs to someone else, Supreme Court precedent allows certain suits against the government officer possessing or controlling that property without treating the action as a prohibited suit against the sovereign.

Drawing from Ex parte Young and related cases, Carlson argues that the creditor could therefore sue the Secretary of the Treasury for return of fraudulently transferred property. If the triggering creditor possesses that remedy, the bankruptcy trustee can succeed to it under § 544(b).

That is an aggressive theory, certainly, but Carlson's larger point is persuasive: Miller should not necessarily be read as the end of every effort to recover a fraudulent transfer received by the federal government.

And Then There Is § 544(a)

Perhaps the most practically provocative part of the article comes near the end.

Miller addressed § 544(b), which requires an actual creditor whose avoidance rights the trustee can invoke. Section 544(a), by contrast, gives the trustee the rights of a hypothetical judicial lien creditor and contains no actual-creditor requirement.

Carlson argues that state fraudulent-transfer law can, in appropriate circumstances, be invoked through that strong-arm power. If the trustee proceeds under § 544(a), § 106(a) expressly waives sovereign immunity, and Miller's triggering-creditor problem disappears.

There is an important catch. The hypothetical § 544(a) creditor arises on the petition date and therefore is a future creditor with respect to an earlier fraudulent transfer. That creditor consequently may not have all of the avoidance rights available to a creditor whose claim existed when the transfer occurred.

Still, that is a limitation on the theory—not necessarily its destruction.

Commentary

Carlson's article is important because it reinforces something that should not be lost in the understandably broad reaction to Miller: the Supreme Court decided a particular § 544(b) theory. It did not declare the federal government permanently immune from every bankruptcy avoidance theory involving payments to the IRS.

There remain potentially significant distinctions involving § 548, § 544(a), equitable rather than monetary relief, the APA, suits against federal officers, and the characterization of fraudulent-transfer actions as quasi in rem proceedings.

And Carlson adds the delicious irony that the Supreme Court may have reached the correct result only because everybody—including the IRS—started with the wrong premise. In his view, the IRS should have won because it gave reasonably equivalent value through subrogation, not because sovereign immunity protected it. His conclusion is wonderfully concise: "The only thing commendable about the Miller case is the result."

For consumer bankruptcy attorneys and trustees, however, the lesson is broader. Do not read Miller as saying "you can't sue the IRS." Read it as saying that the particular actual-creditor route employed under § 544(b) failed. Before abandoning an avoidance claim involving the federal government, counsel should examine the underlying transfer, the precise state-law property rights involved, § 548, § 544(a), the nature of the relief requested, and whether another waiver or officer-action theory exists.

Miller closed a door. Carlson makes a strong case that bankruptcy lawyers should check the windows before concluding that the IRS gets to keep the money.

To read a copy of the transcript, please see: