The United States Supreme Court recently issued a significant decision limiting a bankruptcy trustee’s ability to recover alleged fraudulent transfers from the federal government. In United States v. Miller, 145 S. Ct. 839 (2025), the Court held that a trustee may not use Section 544(b) of the Bankruptcy Code to pursue state law fraudulent transfer claims against the United States where sovereign immunity would bar those claims outside of bankruptcy.
For creditors, lenders, and stakeholders in bankruptcy cases, the decision narrows a once powerful avoidance tool and underscores the importance of early statutory analysis in recovery litigation.
Background of the Case
The case arose from a Chapter 7 bankruptcy involving a Utah company whose principals used approximately $145,000 in corporate funds to pay their personal federal income tax liabilities before filing for bankruptcy.
After the case commenced, the trustee sought to recover those payments as fraudulent transfers. Rather than relying solely on Section 548 of the Bankruptcy Code, which provides a federal fraudulent transfer cause of action, the trustee invoked Section 544(b).
Section 544(b) allows a trustee to step into the shoes of an actual unsecured creditor and assert any avoidance claim that creditor could bring under applicable nonbankruptcy law. Here, the trustee relied on Utah’s Uniform Fraudulent Transfer Act and argued that Section 106(a) of the Bankruptcy Code waived sovereign immunity, permitting the claim to proceed against the United States.
The federal government disagreed, arguing that because no individual creditor could sue the United States under state fraudulent transfer law outside of bankruptcy, the trustee likewise lacked that authority.
The Supreme Court’s Holding
The Supreme Court agreed with the government.
The Court emphasized that Section 544(b) is derivative in nature. It grants the trustee only the rights that an actual unsecured creditor possesses under applicable law. If sovereign immunity would prevent an individual creditor from bringing a state law claim outside bankruptcy, the trustee cannot obtain greater rights simply because a bankruptcy case has been filed.
The Court further held that Section 106(a) waives sovereign immunity only with respect to specific Bankruptcy Code provisions. It does not create new substantive causes of action or expand state law remedies incorporated through Section 544(b).
In short, if a creditor could not sue the United States outside of bankruptcy, neither can the trustee using Section 544(b).
A Broader Trend in Bankruptcy Jurisprudence
Miller continues a pattern in recent Supreme Court bankruptcy decisions emphasizing strict adherence to statutory text.
In Harrington v. Purdue Pharma L.P., 603 U.S. 204 (2024), the Court rejected expansive interpretations of the Bankruptcy Code that lacked clear congressional authorization. Similarly, in Lac du Flambeau Band of Lake Superior Chippewa Indians v. Coughlin, 599 U.S. 382 (2023), the Court closely examined statutory language before permitting an action against a sovereign entity.
The reasoning in Miller fits squarely within this framework. Bankruptcy court authority must be grounded in explicit statutory language, not inferred policy goals.
Practical Implications for Creditors and Trustees
From a practical standpoint, the decision narrows potential avoidance claims in cases involving prepetition payments to federal agencies.
Trustees may no longer rely on Section 544(b) to circumvent sovereign immunity defenses that would apply outside of bankruptcy. Recovery efforts against the federal government must instead fall squarely within causes of action expressly authorized by the Bankruptcy Code, such as Section 548 where applicable.
The ruling also serves as a reminder that Section 544(b) does not create independent avoidance rights. Its power depends entirely on the existence of an actual unsecured creditor with a viable claim under applicable law. If sovereign immunity would defeat that claim in a nonbankruptcy forum, the trustee’s derivative authority necessarily fails.
For unsecured creditors, the decision highlights the importance of evaluating:
- Whether recovery claims involve sovereign defendants
- Whether Section 548 provides an alternative federal cause of action
- Whether other defendants remain viable targets for avoidance litigation
- How sovereign immunity defenses may affect overall estate recoveries
In cases involving significant payments to federal entities, expected recoveries may now be more limited than previously assumed.
Strategic Considerations Going Forward
Miller reinforces the need for careful statutory analysis at the outset of avoidance litigation. Trustees and creditors must evaluate the legal basis for each claim before investing significant estate resources in litigation that may be barred.
The decision also underscores a broader reality: the Supreme Court continues to narrow expansive interpretations of bankruptcy powers in favor of textual precision. Creditors should expect continued scrutiny of trustee authority and more frequent challenges to avoidance actions grounded in derivative state law claims.If you are a creditor evaluating recovery prospects in a bankruptcy case involving potential fraudulent transfer claims, contact us today. Our bankruptcy and creditors’ rights attorneys can assess avoidance strategies, analyze sovereign immunity defenses, and help position you to maximize recovery within the limits of current law.