Justices Parse Bankruptcy Code and State Law in IRS Clawback Case

US v. Miller allowed the US Supreme Court to clarify grounds for recovery in bankruptcy cases while highlighting the tricky interplay between the federal bankruptcy code and Utah law.

A key question in the case became whether a trustee could bring a claim in US bankruptcy court under Utah law that a creditor wouldn’t be allowed to bring. In other words, could a trustee bootstrap the US Bankruptcy Code’s limited waiver of sovereign immunity to a state law claim to proceed against the government?

The justices answered with a resounding no, with only Justice Neil Gorsuch dissenting.

The bankruptcy trustee in Miller discovered that in 2014, that two company shareholders had misappropriated $145,000 to pay their personal federal tax liabilities. The trustee wanted the US government to return those funds to the estate, but the government successfully asserted its sovereign immunity.

A trustee can claw back a transfer made by a debtor under certain circumstances. Section 106 of the Bankruptcy Code waives a limited amount of the government’s sovereign immunity for certain bankruptcy trustee actions. Gorsuch pointed out the purpose of this limited waiver was to put the government on the “same footing” as a bankruptcy debtor’s other creditors.

The transfer of company funds in question took place more than two years prior to the company declaring bankruptcy, so the bankruptcy trustee couldn’t recoup the funds under the Bankruptcy Code’s fraudulent transfer statute.

However, Utah’s version of the fraudulent transfer statute allowed creditors to claw back funds improperly up to four years prior, and the Bankruptcy Code also allows a bankruptcy trustee to use any applicable state law remedies that would be available to a creditor.

The purpose of Section 544(b) of the Bankruptcy Code is to ensure creditors don’t have fewer remedies available in a federal bankruptcy proceeding than they would have in a state court proceeding.

To use this remedy, a bankruptcy trustee must identify an actual creditor who could avoid the transfer at issue under the underlying state law. The bankruptcy trustee in Miller identified a former employee who couldn’t satisfy a judgment against the company because its funds had been improperly paid to the government for a debt that the company didn’t owe, furthering the company’s insolvency.

Under Utah’s fraudulent transfer statute, a person’s creditor can recover funds transferred by that person to a third party, if the transferor was insolvent at the time of the transfer and didn’t receive adequate consideration in return.

This cause of action doesn’t explicitly authorize suits against the government. So even if all the grounds to set aside a transfer were met, a creditor would be unable to successfully prosecute a claim against the government under Utah’s fraudulent transfer laws outside of bankruptcy court because of the government’s absolute defense of sovereign immunity.

Likewise, because the company in Miller couldn’t have sued the IRS under Utah law outside of bankruptcy proceedings due to the government’s immunity from suit, the bankruptcy trustee is unable to sue inside bankruptcy proceedings.

The justices anchored their reasoning on the grounds that because a waiver of sovereign immunity is merely jurisdictional, it doesn’t create additional substantive grounds for recovery. This result appears to directly conflict with the purpose of the powers conveyed to the bankruptcy trustee in Sections 106(a) and 544(b).

But is it? Because the creditors couldn’t proceed against the government under state law, they aren’t being afforded fewer remedies due to the federal bankruptcy proceeding.

The Supreme Court’s decision doesn’t leave the bankruptcy trustee without recourse. The IRS wasn’t a creditor of the debtor. The taxes paid were those of certain shareholders of the company, not the company itself. Said another way, the transfers from the company to the IRS were on behalf of the shareholders, not the company.

Despite the form of the transfers, the substance was no different than if the company had made a distribution to the shareholders directly, and they had in turn paid their tax bills (or bought a car, paid off a credit card, or gambled away the funds at a casino).

The bankruptcy trustee can still attempt to recover the misappropriated funds directly from the persons who misappropriated them—the most appropriate parties from whom to seek redress—although those individuals may be less solvent than the government.

The case is United States v. Miller, U.S., No. 23-824, decided 3/26/25.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Laura Walker Plunkett is a shareholder at Baker Donelson and concentrates her practice in tax-exempt organizations and charitable giving, estate and business succession planning, administration of trusts and estates, and fiduciary litigation.

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