On March 26th, the Supreme Court issued its opinion in United States v. Miller, a bankruptcy case resolving a circuit split about how § 106(a)’s sovereign immunity waiver relates to § 544(b)’s avoidance power. It’s the kind of opinion that generates few headlines, even within the bankruptcy bar. But there’s more to the opinion than the (lack of) coverage suggests.
First, a bit of background. At issue were three tiers of law. Section 106(a)(1) waives the government’s sovereign immunity “with respect to” fifty-nine Code provisions, including § 544. And a subsection of § 544, § 544(b), allows a bankruptcy trustee to invoke the rights of a “creditor holding an unsecured claim” to set aside any transfer “that is voidable under applicable law.” And the “applicable law” is (usually) a state fraudulent-transfer statute. In plain English, the Bankruptcy Code says that there’s a general waiver of sovereign immunity that applies to a trustee’s avoidance actions for transactions conducted according to state laws governing fraudulent transfers.
In Miller, two of a firm’s shareholders used company money to pay off tax debt without giving the company anything in return. So when the firm declared bankruptcy, the trustee tried to avoid the payments to the IRS under § 544(b), which in turn relied on Utah’s fraudulent transfer law. Under that provision, a creditor can avoid a debtor’s transfer of assets if the debtor was insolvent when the transfer occurred and the now-bankrupt debtor received less than the equal value in return. But the government disagreed, saying that it had sovereign immunity and couldn’t be forced to give up the funds. Why didn’t § 106(a)’s sovereign immunity waiver resolve that? The government said that there needed to be a separate immunity waiver for the state-law claim that § 544(b) relied on.
The Supreme Court agreed with the government. The Court explained that to prevail under § 544(b), the trustee must identify an “actual creditor” who could have voided the transaction outside of bankruptcy proceeding, which would require a second, separate waiver of sovereign immunity in addition to the one outlined in § 106(a). And because sovereign immunity would have prevented any actual creditor from recovering outside of bankruptcy, the trustee couldn’t recover, either—even though § 106(a) provided a sovereign immunity waiver within bankruptcy.
Several things about that conclusion are notable. First, and most significantly, is that while that conclusion has textual hooks, the textual basis for an actual creditor requirement is not perfect. Indeed, nowhere does the text of the Code require that the trustee identify an “actual creditor” who can recover. The closest the Code gets to that requirement is noting that the trustee can avoid a transfer that is “voidable under applicable law by a creditor holding an unsecured claim.” To be fair to the Court, that’s a distinction from § 544(a), which allows recovery “whether or not a creditor exists.” The Court’s better point comes in both an appeal to legislative history and Collier’s treatise—both of which provide a gloss on the textual language suggesting that § 544 and its prior provision have “long been understood” as requiring an actual creditor. The basic logic is that bankruptcy seeks to allow a creditor in a bankruptcy proceeding to have only those rights that state law creditors would have outside of bankruptcy. Even so, in different contexts, such as in last year’s Purdue Pharma case, an appeal to prior practices allowing third party release fell short.
What’s more, even if the Court is right that the plain text of § 544 imposes the actual creditor requirement that it derives from Collier, it’s not clear why sovereign immunity would pose an issue. For nearly one hundred years, the Court has explained that the precursors to § 544(b) expand the substantive dimensions of the rights the trustee assumes. In Moore v. Bay, Justice Oliver Wendell Holmes wrote for the Court to explain that the trustee’s avoidance powers aren’t restricted to the amount that a creditor would recover if a creditor began the action himself. So if an actual creditor had a valid avoidance action but could recover only a nominal sum—$1—a trustee can avoid a transfer of hundreds of thousands of dollars. Why? The idea, as outlined in Moore, is that a trustee’s recovery isn’t solely for the benefit of the creditor whose rights he assumed, but inures to the estate. And the estate, the logic goes, thus has powers that extend beyond any individual creditor’s. Thus, the trustee has substantive powers in the avoidance context that meaningfully differ from an actual creditor at state law. That logic easily captures the facts at issue in Miller.
The Court’s response to Moore is unconvincing. It reads Moore—this time contrary to several treatises like the Norton treatise—as concerning only recovery of funds, not avoidance of the underlying transaction. In other words, it says that Moore only expands the trustee’s recovery power, not avoidance power. But that conclusion appears novel, and the Supreme Court offered no citations to support that proposition.
Outside of these two complications, Miller is also noteworthy because, while the Court treated the dispute as straightforward, there are significant doctrinal complications that the court doesn’t address. Indeed, much of the oral argument—and much of the opinion—concerned whether the Court’s holding meant there would need to be a sovereign immunity waiver for a hypothetical Utah fraudulent transfer action in addition to the waiver outlined in § 106(a).
That confusion reflects a curious view of how the provisions fit together. Section 544(b) creates a federal avoidance action that belongs to the bankruptcy estate. Thus, the trustee isn’t stepping into a creditor’s shoes at all—the trustee is simply bringing a federal claim, a federal avoidance action whose elements are set out in state law. Because that avoidance action belongs to the bankruptcy estate, the trustee only needs the waiver outlined in § 106(a)—no additional sovereign immunity waiver is required, as there’s no state cause of action in the first place. Thus, focusing on § 544(b)’s language of “voidable under applicable law by a creditor holding an unsecured claim” as establishing a state law requirement is a bit of a red herring. Here, the trustee was pursuing a federal law claim within bankruptcy with a sovereign immunity defense that could have been brought against a state-law claim outside of bankruptcy.
And there are more reasons to doubt that there’s a need for a second waiver of sovereign immunity for an underlying state law cause of action. Recall, all that § 544 does is establish that the property belongs to the debtor and thus the estate. As an avoidance action, it is an action at least ancillary to a bankruptcy court’s in rem jurisdiction. At common law, sovereigns often didn’t enjoy immunity from actions involving property at all. And the Supreme Court, dating back at least to Tennessee Student Assistance Corp. v. Hoodand Central Valley Community College v. Katz has suggested that in rem proceedings don’t offend sovereign immunity to the degree that other kinds of jurisdiction do, carving out an exception to the general principle that a sovereign can’t be sued without its own consent. As the Court explained in Katz, “the jurisdiction of courts adjudicating rights in the bankrupt estate included the power to issue compulsory orders to facilitate the administration and distribution of the res.” While it’s true that the Court’s view of sovereign immunity could vary in the context of a waiver of federal sovereign immunity, as is at issue in Miller, the Court gives no explanation for why that would be the case.
Finally, the Court’s reading of § 544 affects other parts of the Bankruptcy Code. Both § 544 and § 548 allow trustees to avoid transfers made before a firm enters bankruptcy. Section 544, as discussed above, relies on underlying state law, which used to vary widely but now is most often a Uniform Fraudulent Transfer Act with a four-year statute of limitations. Section 548, on the other hand, allows a trustee to avoid transfers made two years before bankruptcy. The idea behind these two provisions was to allow trustees the ability to recover assets via any possible mechanism in state or federal law, and for trustees to take advantage of variations in state law to ensure debtors can’t get away with fraudulent transfers. Under the court’s reading, such avoidance actions require a separate waiver of sovereign immunity outside of bankruptcy.
But § 544 isn’t the only provision that covers avoidance. Section 549, which is implicated when a company makes an improper transfer after declaring bankruptcy, also allows for avoidance, just under federal rather than state law. To the court, the presence sections like § 549 (and similar provisions, such as § 548) that create a distinctly federal claim suggest that different provisions relying on underlying state law, such as § 544(b), must run into the sovereign immunity that would affect a real creditor pursuing a state-law claim. That conclusion would yield the effect that a trustee pursuing a transfer made after bankruptcy can always recover when a creditor pursuing a transfer made before bankruptcy can only sometimes recover. And that sits uneasily with the Code’s touchstone: that every conceivable interest of the debtor, including a fraudulent transfer, is within the reach of the bankruptcy estate.
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. And that’s notable, even without a lack of headlines.
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Declan R. Kunkel is a Law Clerk to the Hon. Amul R. Thapar, United States Court of Appeals for the Sixth Circuit. He holds a J.D., Yale Law School; M.Phil, University of Cambridge; B.A., Yale University.
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