In a recent decision with significant implications for bankruptcy law, the U.S. Supreme Court ruled in United States v. Miller that a bankruptcy trustee cannot recover funds transferred to the federal government if an actual creditor could not have done so under state law due to sovereign immunity.
The case involved a Chapter 7 trustee who sought to avoid a $145,000 tax payment made by a debtor to the IRS, claiming it was a fraudulent transfer under Utah state law. However, the Court held that because a real creditor would not have been able to sue the federal government outside of bankruptcy (due to sovereign immunity), the trustee could not pursue the claim in bankruptcy either.
This decision reinforces that while trustees may "step into the shoes" of creditors under Section 544(b) of the Bankruptcy Code, they are still bound by the same legal limitations—especially when it comes to collecting from the federal government.
If you have questions about how this ruling may impact your bankruptcy case or options, our firm is here to help.