Facts of the Case
In 2014, All Resorts Group, Inc. paid $145,138.78 to the Internal Revenue Service to cover personal tax debts of two of its principals. The company filed for Chapter 7 bankruptcy in 2017. Subsequently, the United States Trustee initiated an adversary proceeding against the United States to avoid these transfers, relying on Section 544(b)(1) of the Bankruptcy Code and Utah's Uniform Fraudulent Transfer Act. The United States did not contest the substantive elements required to establish a voidable transfer but argued that sovereign immunity would bar an actual creditor from avoiding the tax payments outside of bankruptcy. This prevented the Trustee from satisfying the "actual creditor requirement" of Section 544(b)(1). The Trustee countered that the sovereign immunity waiver in Section 106(a) of the Bankruptcy Code applied not only to the adversary proceeding but also to the underlying state law cause of action. The bankruptcy court ruled in favor of the Trustee, and both the district court and the U.S. Court of Appeals for the Tenth Circuit affirmed.
Question
May a bankruptcy trustee avoid a debtor’s tax payment to the United States under 11 U.S.C. § 544(b) when no actual creditor could have obtained relief under the applicable state fraudulent-transfer law outside of bankruptcy?
Conclusion
Section 106(a) of the Bankruptcy Code abrogates the Government’s sovereign immunity with respect to a §544(b) claim but that waiver does not extend to state-law claims nested within that federal claim. Justice Ketanji Brown Jackson authored the 8-1 majority opinion of the Court.
The Bankruptcy Code allows trustees to “step into the shoes” of actual creditors to invalidate certain asset transfers, but only if the applicable law permits such action. Sovereign immunity blocks enforcement of state-law fraudulent-transfer claims against the federal government unless Congress has unambiguously waived that immunity. Section 106(a) grants courts jurisdiction to hear certain bankruptcy claims against the government, including §544(b) claims, but it explicitly states that it does not create any new substantive rights or causes of action. Because §544(b) requires that an identifiable unsecured creditor could have prevailed under applicable law outside bankruptcy, and because sovereign immunity would bar that creditor’s state-law suit against the federal government, the trustee cannot rely on §544(b) to void the transfer here.
The Court rejected the trustee’s arguments that the phrase “with respect to” in §106(a) broadened the waiver and that legislative history supported a more expansive reading. Instead, the Court emphasized that sovereign immunity waivers must be interpreted narrowly and that nothing in the statutory text clearly waived immunity for the necessary underlying state-law cause of action. Because no “actual creditor” could sue the federal government under Utah law, the trustee’s §544(b) claim fails.
Justice Neil Gorsuch authored a dissenting opinion.