Can IRS Be Sued For A Fraudulent Transfer Under § 544(b)? (U.S. V. Miller)

Before the U.S. Supreme Court on a Petition for writ of certiorari is United States v. Miller, Case No. 23-824 (“Distributed for Conference of 6/13/2024”).

In United States v. Miller, a Chapter 7 Trustee obtains a fraudulent transfer judgment under 11 U.S.C. § 544(b) against the Internal Revenue Service to recover two tax payments totaling $145,138.78.

The Issue

11 U.S.C. § 544(b)(1) authorizes the pursuit of state law fraudulent transfer actions like this:

“the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim” (emphasis added).

11 U.S.C. § 106(a) waives sovereign immunity for § 544 claims like this:

“sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to the following: (1) Sections . . . 544 . . . of this title.”

The Internal Revenue Service contends that § 106(a)’s waiver of sovereign immunity as to § 544(b) claims is only partial—that sovereign immunity:

may be waived as to state law claims brought under § 544(b); but
the § 544(b) requirement that “a creditor” must exist who can bring such a state law claim outside bankruptcy is not waived:
- sovereign immunity prevents all such creditors from bringing a fraudulent transfer claim under state law against the IRS outside bankruptcy; and
- therefore, the § 106(a) waiver is ineffective as to § 544(b) claims.

First Ruling by a Circuit Court

The initial circuit court of appeals to address the IRS’s waiver argument as to § 544(b) claims is the Seventh Circuit—in Equipment Acquisition Resources, Inc., 742 F.3d 743 (7th Cir. 2014).

The Seventh Circuit explains the § 544(b) issue like this:

“its terms require the actual existence of an unsecured creditor that could have brought the state-law action itself”; and
if there is no such creditor, “the trustee is powerless to act under section 544(b)” (id. at 746).

And the Sevent Circuit reaches this conclusion:

“nothing in § 106(a)(1) gives the trustee greater rights to avoid transfers than the unsecured creditor would have under state law”; and
“By concluding that § 106(a)(1) did just that, the courts below erred” (id. at 748).

Next Rulings by Three Circuit Courts

The next three circuit courts of appeals to address the same issue reach a contrary result.

–Ninth Circuit

In Zazzali v. United States (In re DBSI, Inc.), 869 F.3d 1004 (9th Cir. 2017), the Court holds:

“Section 106(a)(1)’s abrogation of sovereign immunity ‘with respect to’ Section 544(b)(1) extends to the derivative ‘applicable law’”—namely, Idaho’s Uniform Fraudulent Transfer Act;
“an additional waiver of sovereign immunity was not necessary”; and
“the government could not rely on sovereign immunity to prevent the avoidance of the tax payments at issue” (id. at 1007).

–Fourth Circuit

In Cook v. United States (In re Yahweh Center), 27 F.4th 960 (4th Cir. 2022), the Court concludes:

“Section 106(a) . . . provides that ‘sovereign immunity is abrogated’” as to claims under § 544 of the Bankruptcy Code; and
such abrogation “forecloses the government’s position” under § 544(b) that “sovereign immunity bars any action by an unsecured creditor” under North Carolina’s Uniform Voidable Transactions Act (id. at 966).

–Tenth Circuit

In United States v. Miller, Case No. 21-4135 (10th Cir., 6/27/2023), the Court declares:

“We hold that Code § 106(a) waives the Government’s sovereign immunity both as to”:
- “the Trustee’s proceeding under Code § 544(b)(1)”; and
- “the underlying Utah state law cause of action” that the Trustee must rely on “to avoid the debtor’s tax transfers made on behalf of its principals in this case” (id. at 13-14).

Petition for Certiorari

It is the Tenth Circuit’s ruling in United States v. Miller that is pending before the U.S. Supreme Court on a Petition for writ of certiorari.

Conclusion

It will be interesting to see what the U.S. Supreme Court does with the United States v. Miller Petition.

If it grants the Petition, it must then resolve the circuit split.

But if it denies the Petition:

could an inference be drawn that the United States v. Miller opinion is persuasive; or
should no significance be drawn ?

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