The Tenth Circuit Court of Appeals recently held that the United States’ sovereign immunity is waived with respect to a bankruptcy trustee’s avoidance of fraudulent transfers under the Bankruptcy Code. The ruling further shifted the balance in a circuit split on the issue, where a 2014 ruling of the Seventh Circuit is now pitted against a 2017 ruling of the Ninth Circuit, a 2022 ruling of the Fourth Circuit, and the new 2023 ruling of the Tenth Circuit.
The case, Miller v. United States, arose out of facts typical of shady business dealings. The debtor, All Resorts Group, Inc., paid nearly $150,000 worth of taxes on behalf of two of its principals. The Chapter 7 bankruptcy trustee moved to avoid this transfer under Utah state law as a fraudulent transfer under Utah’s Uniform Fraudulent Transfer Act (now the Uniform Voidable Transactions Act). In the adversary proceeding against the government, the government asserted as a defense the fact that an actual creditor with such a claim would not be able to void the transfer, due to the government’s sovereign immunity.
Section 544(b)(1) of the Bankruptcy Code allows a bankruptcy trustee to avoid a transfer “that is voidable under applicable law by a creditor holding an unsecured claim that is allowable” under the Bankruptcy Code. In this case, the “applicable law” is Utah’s Uniform Fraudulent Transfer Act. Under this provision of the Code, the bankruptcy trustee may avoid a state law fraudulent transfer if an actual creditor could do so under the same circumstances.
Because an actual creditor with a fraudulent transfer claim against the government could not void the transfer due to the government’s sovereign immunity, the government contended in Miller that neither could the bankruptcy trustee. However, § 106(a) of the Bankruptcy Code provides that “sovereign immunity is abrogated as to a governmental unit,” which abrogation extends to § 544 of the Code. The government relied on the Seventh Circuit’s holding in In re Equip. Acquisition Res., Inc. to contend that the abrogation of sovereign immunity did not extend § 544(b)(1). The trustee, on the other hand, contended that the abrogation of sovereign immunity extended to his Utah state law claim.
Both the bankruptcy court and the district court held for the trustee, and the Tenth Circuit heard the case on appeal. In a unanimous decision, the court sided with the Ninth and Fourth Circuits and affirmed.
The court began by noting the undisputable ability of Congress to waive the sovereign immunity of the United States. However, the court noted that that ability has been qualified by the Supreme Court, which recently reiterated in LAC du Flambeau Band of Lake Superior Chippewa Indians v. Coughlin that “Congress must make its intent unmistakably clear in the language of the statute.” This analysis of Congress’ intent must look only at the language of the statute; legislative history may not assist a court in its determination. The Court clarified in Coughlin, however, that no “magic words” are required, and Congress’ intent may be indicated in many ways, so long as it is unequivocal.
Examining the statutory language, the Tenth Circuit considered the dictionary definition of “abrogate”—”to do away with”—and the common judicial construction of the phrase “with respect to”—“ensuring that the scope of a [statutory] provision covers not only its subject but also matters relating to that subject.” Relying on these methods of interpretation, the court found that Congress intended to have § 106(a) abrogate the sovereign immunity of the government for the state law claims that are envisioned by § 544(b)(1). In addressing the circuit split, the court noted that the Seventh Circuit had not “meaningfully addressed” the congressional intent behind § 106(a). On the contrary, the Ninth Circuit had, so the Tenth Circuit joined its sister circuits in its holding.
Read the full ABI Article: IRS Has No Sovereign Immunity to Bar a Fraudulent Transfer Suit Under Section 544(b)