Sovereign Immunity and the Bankruptcy Code
What does sovereign immunity have to do with the US Bankruptcy Code and bankruptcy filings in South Florida? In most bankruptcy cases, the issue of sovereign immunity does not arise. In some instances, however, a sovereign immunity waiver in the Bankruptcy Code has bearing on the ability for a bankruptcy trustee to claw back misappropriate funds in certain situations. The US Supreme Court recently heard and decided a case concerning the sovereign immunity waiver and its application to state law and federal claims. The case, United States v. Miller (2025), was decided this spring in a 8-1 decision. Our West Palm Beach bankruptcy lawyers can tell you more about the case and its implications for future bankruptcy filings.
Details of United States v. Miller (2025)
Section 544(b) of the Bankruptcy Code, which allows a trustee “to set aside, or ‘avoid,’ certain transfers of a debtor’s assets in order to recover those assets for the benefit of the bankruptcy estate,” according to the case. That section of the Bankruptcy Code specifically enables a trustee to avoid certain kinds of transfers that would be “voidable under applicable law,” which means voidable in other cases outside a bankruptcy case. In general, the term “applicable law” when it is used by a trustee to avoid a transfer is a state law. In other words, the trustee will usually invoke state law in order to avoid a transfer of the debtor’s assets so that they can be recovered by the bankruptcy estate.
In Miller, a trustee in a Chapter 7 bankruptcy case filed a lawsuit under Section 544(b), invoking a state law in Utah, in order to recover the debtor’s federal tax payment for the bankruptcy estate. In most situations, the sovereign immunity enjoyed by the federal government would prevent this type of lawsuit under state law in Utah or elsewhere. However, the Bankruptcy Code also has a sovereign immunity “waiver” under Section 106(a) “that abrogates the Government’s sovereign immunity with respect to Section 544,” according to the case.
The Supreme Court in Miller had to determine whether the sovereign immunity waiver in Section 106(a) “abrogates sovereign immunity only with respect to the federal cause of action created under Section 544(b) or whether it also abrogates sovereign immunity with respect to the underlying state-law claims that supply the ‘applicable law’ for that federal cause of action.”
Narrower Application of Sovereign Immunity Waiver, Supreme Court Rules
In this case, the Supreme Court essentially had to determine how broad the sovereign immunity waiver is, and the scope of its application in lawsuits like the one filed in Miller. The issue concerned what the Supreme Court described as the “interplay between Section 106(a) and Section 544(b) of the Bankruptcy Code.
The Court ultimately ruled that the sovereign immunity waiver is not applicable to state law claims (like the claim under Utah law filed by the trustee) that are “nested within that federal claim.” Accordingly, a trustee cannot avoid the transfer of a federal tax payment under Section 544(b) and cannot claw that payment back by filing a lawsuit with a state law as the applicable law.
Contact Our West Palm Beach Bankruptcy Attorneys Today
If any aspect of your bankruptcy case could involve the issue of sovereign immunity and certain creditor claims, it is important to seek advice from an attorney who can assist you. Whether you have specific questions about the recent Supreme Court decision or you need assistance with your individual or business bankruptcy case, an experienced West Palm Beach bankruptcy lawyer at Kelley, Fulton, Kaplan & Eller can help you. Contact our firm today for more information.
Source:
supremecourt.gov/opinions/24pdf/23-824_2d93.pdf
