U.S. Supreme Court Rules that Bankruptcy Code Provides Only Limited Abrogation of Sovereign Immunity to Avoidance Actions
Bankruptcy trustees and chapter 11 debtors-in-possession ("DIPs") frequently seek to avoid fraudulent transfers and obligations under section 544(b) of the Bankruptcy Code and state fraudulent transfer or other applicable non-bankruptcy laws because the statutory "look-back" period for avoidance under many non-bankruptcy laws exceeds the two-year period governing avoidance actions under section 548. "Governmental units" (defined below) sometimes argue that avoidance actions against them under non-bankruptcy law are precluded by the doctrine of sovereign immunity, even though section 106(a) of the Bankruptcy Code explicitly provides that sovereign immunity is abrogated "with respect to … [section] 544."
The federal circuit courts of appeals (and many lower courts) were split regarding whether the abrogation of sovereign immunity by governmental units with respect to avoidance actions commenced under section 544(b) also extends to the causes of action arising under applicable non-bankruptcy law that a "triggering" or "predicate" creditor would be precluded from asserting outside of bankruptcy due to sovereign immunity. In 2023, the U.S. Court of Appeals for the Eleventh Circuit aligned itself with the majority position among the circuits when it ruled in U.S. v. Miller, 71 F.4th 1247 (10th Cir. 2023), rev'd, No. 23-824, 2025 WL 906502 (U.S. Mar. 26, 2025), that the abrogation of sovereign immunity in section 106(a) permitted a chapter 7 trustee to sue the Internal Revenue Service ("IRS") to avoid and recover a fraudulent transfer under section 544(b)(1), even though an eligible existing creditor could not have sued the IRS outside of bankruptcy.
On March 26, 2025, the U.S. Supreme Court reversed the Eleventh Circuit's decision. The Court ruled that the abrogation of sovereign immunity in section 106(a) applies to avoidance claims under section 544(b), but not to state law claims that could otherwise be invoked by triggering creditors under applicable non-bankruptcy law. According to the 8–1 majority, section 106(a)'s text, context, and structure clearly indicate that the provision does not modify section 544(b)'s substantive requirements, which tie a bankruptcy trustee's rights to the rights of an actual creditor under "applicable law." In short, the Court concluded, if no creditor could assert a cause of action against the IRS under applicable non-bankruptcy law due to the government's sovereign immunity, a bankruptcy trustee is similarly constrained by that defense.
Abrogation of Sovereign Immunity in the Bankruptcy Code
Pursuant to the federal system created by the U.S. Constitution, each state is a sovereign entity. In addition, both federal and state governmental bodies have sovereign immunity from suit unless that immunity has been abrogated by Congress, waived by the governmental body, or eliminated by a specific provision of the Constitution itself. See generally Collier on Bankruptcy ("Collier") ¶ 1.06.01 (6th ed. 2025).
Abrogation of sovereign immunity by Congress requires that: (i) Congress has "unequivocally expressed its intent to abrogate the immunity"; and (ii) lawmakers have acted "pursuant to a valid exercise of power." Id. (quoting Seminole Tribe v. Florida, 517 U.S. 44, 56 (1996); In re LTV Steel Co., Inc., 264 B.R. 455, 464 (Bankr. N.D. Ohio 2001); accord LAC du Flambeau Bank of Lake Superior Chippewa Indians v. Coughlin, 143 S. Ct. 1689, 1695 (2023). The sovereign immunity of a litigant deprives a court of subject matter jurisdiction to adjudicate a dispute. See FDIC v. Meyer, 510 U.S. 471, 475 (1995) ("Sovereign immunity is jurisdictional in nature."). A waiver or abrogation of sovereign immunity acts as a "prerequisite for jurisdiction—[it does] not create any new substantive rights or alter any pre-existing ones." U.S. v. Mitchell, 463 U.S. 206, 212 (1983). Such a waiver of immunity must be strictly construed in favor of the sovereign, with any ambiguities resolved in favor of sovereign immunity. See Orff v. U.S., 545 U.S. 596, 601–602 (2005).
Sovereign immunity has been applied in bankruptcy cases to shield state and federal governments from claims asserted against them by bankruptcy trustees or DIPs. However, the Bankruptcy Code provides for a broad-ranging abrogation of sovereign immunity. In particular, section 106(a) of the Bankruptcy Code provides that, "[n]otwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to" 59 provisions of the Bankruptcy Code specified in section 106(a)(1), including actions to enforce the automatic stay, preference, and fraudulent transfer avoidance actions and proceedings seeking to establish the dischargeability of a debt.
The abrogation in section 106(a) expressly includes litigation brought against a "governmental unit" under section 544 of the Bankruptcy Code. Section 544(b)(1) empowers a bankruptcy trustee to step into the shoes of an actual creditor with an unsecured claim that could have sued to avoid a transfer outside of bankruptcy under applicable non-bankruptcy law (e.g., the Uniform Voidable Transfer Act (the "UVTA") enacted in many states or the Internal Revenue Code (the "IRC")). See generally Collier at ¶ 544.06.
Section 101(27) of the Bankruptcy Code defines the term "governmental unit" as:
United States; State; Commonwealth; District; Territory; municipality; foreign state; department, agency, or instrumentality of the United States (but not a United States trustee while serving as a trustee in a case under this title), a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state; or other foreign or domestic government.
11 U.S.C. § 101(27).
Section 106(a)(2) provides that "[t]he court may hear and determine any issue arising with respect to the application of the [the specified Bankruptcy Code provisions] to governmental units."
Other subsections of section 106 address a bankruptcy court's power to issue process, orders, or judgments against governmental units (sections 106(a)(3) and (a)(4)). Subsection 106(a)(5) provides that "[n]othing in [section 106] shall create any substantive claim for relief or cause of action not otherwise existing under this title, the Federal Rules of Bankruptcy Procedure, or nonbankruptcy law." In addition, other subsections address a governmental unit's deemed waiver of sovereign immunity with respect to certain counterclaims by filing a proof of claim (subsection 106(b)), and permitted setoffs, despite any assertion of sovereign immunity, of claims owned by the bankruptcy estate against claims asserted by governmental units (subsection 106(c)).
Enacted as part of the Bankruptcy Code in 1978, section 106 was amended in 1994 to clarify lawmakers' intent to abrogate sovereign immunity of governmental units with respect to actions for damages as well as declaratory and injunctive relief under the specified provisions of the Bankruptcy Code. The change was designed to overrule two U.S. Supreme Court decisions—Hoffman v. Connecticut Department of Income Maintenance, 492 U.S. 96 (1989), and U.S. v. Nordic Village, Inc., 503 U.S. 30 (1992)—holding that section 106 did not state with sufficient clarity lawmakers' intent to abrogate the sovereign immunity of the states and the federal government in bankruptcy cases.
Controversy in the Courts
Even though section 106(a)(1) expressly abrogates sovereign immunity with respect to section 544, courts have disagreed as to whether the abrogation of immunity extends to both an action brought by the trustee or DIP under section 544(b)(1) and the avoidance causes of action that, but for sovereign immunity, the triggering creditor could have brought under applicable non-bankruptcy law. Four federal circuit courts of appeals have addressed this question (three prior to Miller), with three of them (including the Tenth Circuit in Miller) concluding that section 106(a)'s abrogation of sovereign immunity extended to causes of action under state law that could be asserted by a trustee or DIP under section 544(b)(1).
In In re Equip. Acquisition Res., Inc., 742 F.3d 743 (7th Cir. 2014) ("EAR"), the U.S. Court of Appeals for the Seventh Circuit ruled that section 106(a)(1) does not modify the triggering creditor requirement in section 544(b)(1). The court acknowledged that section 106(a)(1) abrogates a governmental unit's sovereign immunity with respect to avoidance litigation commenced by a DIP under section 544(b)(1) and Illinois fraudulent transfer law. However, applying a two-tiered approach, the Seventh Circuit concluded that because the governmental unit's sovereign immunity was not abrogated as to the underlying state law cause of action, the litigation under section 544(b) was barred.
The Ninth and Fourth Circuits staked out a different approach. In In re DBSI, Inc., 869 F.3d 1004 (9th Cir. 2017), the Ninth Circuit held that "[s]ection 106(a)(1)'s abrogation of sovereign immunity is absolute with respect to Section 544(b)(1) and thus necessarily includes the derivative state law claim on which a Section 544(b)(1) claim is based." Id. at 1010. Examining the language of section 106(a) in the framework of the Bankruptcy Code as a whole, the Ninth Circuit concluded that "we cannot read the plain text of Section 544(b)(1)—i.e., the triggering creditor requirement—devoid of the declaration in Section 106(a)(1) that 'sovereign immunity is abrogated as to a governmental unit … with respect to [Section 544].'" Id.
The Ninth Circuit also explained that Congress enacted section 106(a)(1) (in its current form) after section 544(b)(1) and that lawmakers understood that the latter provision codified a trustee's power to invoke state law when they "waived sovereign immunity with respect to Section 544." Id. at 1011. Finally, the Ninth Circuit emphasized that the Seventh Circuit's approach would preclude any action against a governmental unit under section 544(b)(1) to avoid a transfer without an additional waiver or abrogation of sovereign immunity by Congress or a state legislature with respect to the underlying state law cause of action. Id. at 1011–12 (stating that "the interpretation offered by the government would essentially nullify Section 106(a)(1)'s effect on Section 544(b)(1), an interpretation we should avoid").
The Fourth Circuit agreed with this approach in In re Yahweh Ctr., Inc., 27 F.4th 960 (4th Cir. 2022), where it held that sovereign immunity did not bar litigation against the IRS by a chapter 11 plan trustee seeking, under section 544(b)(1) and the North Carolina UVTA, to avoid tax penalty payments made by the debtor. According to the Fourth Circuit, even if the IRS had not waived sovereign immunity by filing a proof of claim in the chapter 11 case (triggering a waiver under section 106(b)), section 106(a) expressly abrogated sovereign immunity with respect to the avoidance provision invoked by the trustee and as to "any issue arising with respect to" applying that provision against the IRS, which encompassed the North Carolina UVTA. Id. at 966.
Lower courts have also disagreed on the impact of section 106(a) on state fraudulent transfer claims asserted by a trustee or DIP under section 544(b). Compare In re Affiliated Physicians & Emps. Master Tr., 2022 WL 16953555 (Bankr. D.N.J. Nov. 15, 2022) (ruling that avoidance litigation commenced by a DIP against the IRS under section 544(b) and New Jersey law was barred because the IRS had sovereign immunity from suit under New Jersey law, which is not abrogated under section 106(a)(1)), with In re Lewiston, 528 B.R. 387, 395 (Bankr. E.D. Mich. 2015) (agreeing with DBSI that "§ 106(a)(1) accomplishes the elimination of sovereign immunity for all purposes with respect to § 544, and requires no additional waiver as to any specific non-bankruptcy law causes of action that a trustee may bring under § 544(b)(1)").
Miller
Utah-based transportation company All Resort Group. Inc. (the "debtor") filed for chapter 11 protection in 2017 in the District of Utah. After the case was converted to chapter 7, the bankruptcy trustee commenced an adversary proceeding against the IRS under section 544(b) and the Utah UVTA, to avoid approximately $145,000 in payments made by the debtor to the IRS in 2014 to satisfy its principals' personal tax debts.
The IRS did not dispute that all of the elements for avoidance were satisfied. Instead, it argued that, because any suit by the triggering creditor under the Utah UVTA was barred by sovereign immunity, the trustee could not satisfy section 544(b)(1)'s triggering creditor requirement. The trustee countered that the abrogation of sovereign immunity in section 106(a) extended to both the trustee's adversary proceeding under section 544(b)(1) and the underlying state law cause of action. Both parties moved for summary judgment.
The bankruptcy court ruled in favor of the trustee, concluding that "§ 106(a)(1) unequivocally waives the federal government's sovereign immunity with respect to the underlying state law cause of action incorporated through § 544(b)." In re All Resort Group, 617 B.R. 375, 394 (Bankr. D. Utah 2020), aff'd, 2021 WL 5194698 (D. Utah. Sept. 8, 2021), aff'd, 71 F.4th 1247 (10th Cir. 2023), rev'd, 2025 WL 906502 (U.S. Mar. 26, 2025). It accordingly avoided the transfers and entered a judgment against the IRS in the amount of approximately $145,000. The district court affirmed the ruling on appeal, and the IRS appealed to the Tenth Circuit.
A three-judge panel of the Tenth Circuit also affirmed.
The Tenth Circuit explained that the crux of the dispute was whether the abrogation of sovereign immunity in section 106(a) "reaches the underlying state law cause of action that § 544(b)(1) authorizes the Trustee to rely on in seeking to avoid the transfers at issue." Miller, 71 F.4th at 1252. The Tenth Circuit panel held that it does.
According to the court, in accordance with Supreme Court precedent, the phrase "with respect to" in section 106(a) must be construed broadly and "clearly expresses Congress's intent to abolish the [IRS's] sovereign immunity in an avoidance proceeding arising under § 544(b)(1), regardless of the context in which the defense arises." Id. at 1253. It also noted that the broad language of section 106(a)(2) authorizing a bankruptcy court "to hear and determine any issue with respect to the application of § 544" bolsters this interpretation because it presumes that the court has subject matter jurisdiction, which would not be the case if the government were immune from suit. "The authority which [section 106(a)(2)] plainly confers," the Tenth Circuit wrote, "would be substantially curtailed if Congress had intended an assertion of sovereign immunity to preclude a bankruptcy court from considering whether a trustee has satisfied the substantive elements of an underlying state law cause of action invoked pursuant to § 544(b)(1)." Id. at 1254.
The Tenth Circuit distinguished EAR, noting that the Seventh Circuit "never meaningfully addressed the scope of § 106(a) as reflected in its text" and its ruling was likely motivated by federal tax policy considerations that were not based on the text of the provision, including concerns regarding the proliferation of actions seeking to recover tax payments. Id.
The Tenth Circuit found the decision in DBSI to be "more faithful to the text of § 106(a)" because the Ninth Circuit relied on established principles of statutory construction. The Tenth Circuit also agreed with the Ninth Circuit's reasoning that: (i) Congress was aware that section 544(b)(1) codified a trustee's power to invoke state law when it enacted section 106(a)(1); and (ii) adopting the government's position would render section 106(a)(1) "largely meaningless" with respect to section 544(b)(1) because a trustee would always be required to show that a governmental unit provided for a separate waiver of sovereign immunity with respect to the underlying non-bankruptcy law.
The Supreme Court agreed to hear the IRS's petition for review of the Tenth Circuit's decision.
The Supreme Court's Ruling
The Supreme Court, resolving the circuit split in favor of what had been the minority approach on the interaction between sections 544(b) and 106(a) of the Bankruptcy Code.
Writing for the 8–1 majority, Justice Ketanji Brown Jackson initially explained that the "actual creditor" requirement in section 544(b) acts as an important limitation on a bankruptcy trustee's avoidance powers. Without this check, she noted, a trustee could use the provision to avoid transactions that could never have been invalidated outside of bankruptcy. Thus, Justice Jackson wrote, the actual creditor requirement "mitigates the disruptive potential of a trustee's avoidance power by ensuring that the trustee has 'no greater rights of avoidance than the actual creditor would have if that creditor were asserting invalidity on its own behalf.'" Miller, 2025 WL 906502, at *4 (quoting Collier at ¶ 544.06[3]).
According to the Court, an expansive construction of section 106(a) to provide for abrogation of immunity from underlying state law causes of action "does not simply give courts jurisdiction to hear § 544(b) claims against the Government; it also alters the substantive requirements of the claim itself." By permitting a bankruptcy trustee to assert claims against a governmental unit that no creditor could prosecute because of sovereign immunity, Justice Jackson explained, such a broad interpretation of section 106(a) would transform the provision "from a jurisdiction-creating provision into a liability-creating provision"—a transformation that the Court has rejected in the past. Id. (citing Meyer, 510 U.S. at 484; U.S. v. Navajo Nation, 556 U.S. 287, 290 (2009)).
In addition, the Court concluded that the text and structure of sections 106 and 544 make clear that the abrogation of sovereign immunity in section 106 does not operate to alter section 544(b)'s substantive requirements. In particular, the Court noted:
- The express language of section 106(a)(5) "plainly refutes" the idea.
- Section 106(a) "does not meaningfully alter the substantive obligations of trustees" under any of the 58 other provisions listed together with section 544, such that "it would be odd to read" section 106(a) as modifying the elements of section 544(b). Id. at *6.
- Because section 544(b) includes an actual-creditor requirement, whereas section 544(a) permits a trustee to invalidate certain transfers that "could have" been avoided by a lien creditor, "whether or not such a creditor exists," the former "reflects a deliberate congressional choice to tie the trustee's rights … to the rights of an actual creditor under 'applicable law.'" Id. at *8.
- Eliminating the actual-creditor requirement in section 544(b) "would upend decades of practice and precedent" under both the Bankruptcy Code and section 70e of the former Bankruptcy Act of 1898, "which had long been understood to give trustees the same rights as creditors under state law. Id. (citing S. Rep. No. 95-989, p. 85 (1978); H.R. Rep. No. 95-595, p. 370 (1978)).
- The trustee's restricted power in section 544(b) avoidance litigation is reinforced by the fact that defendants in such litigation are entitled to assert the same defenses against the trustee that they could have raised against the triggering creditor under state law.
For all of these reasons, the Court concluded that lawmakers did not use "unmistakable language" to abrogate sovereign immunity in actions brought by a trustee under section 544(b). Id.
The Court rejected the argument that the language "with respect to" in section 106(a)(1) requires a broad reading of the provision's abrogation of sovereign immunity to encompass "all subjects that concern or regard" the listed Bankruptcy Code provisions, including the meaning of "applicable law" in section 544(b). According to Justice Jackson, "context cuts decidedly against" such a broad reading. Id. at *9. She explained that reading section 106(a) to "reach the elements of § 544(b) would not only run counter to our traditional understanding of sovereign immunity waivers as purely jurisdictional, but also contravene the text and structure of § 106(a) and § 544(b), and defy our established rule that sovereign-immunity waivers must be construed narrowly." Id. The use of "a malleable phrase like 'with respect to,'" Justice Jackson wrote, "cannot blunt the countervailing force of those contextual considerations and interpretive principles." Id. (citation omitted).
The Court also rejected the contention that, by expanding the scope of section 106(a)'s immunity abrogation in 1994 to add the 59 Bankruptcy Code provisions, Congress intended the scope of the immunity waiver in section 106(a) to be broad. Since it was enacted in 1978, Justice Jackson emphasized, "§ 106(a) has always been understood to provide only a 'limited waiver of sovereign immunity in bankruptcy cases.'" Id. at *10. Moreover, she noted, the legislative history of section 106 indicates that the policy underlying the provision was designed "'to achieve approximately the same result that would prevail outside of bankruptcy.'" Id. (quoting S. Rep. No. 95-989, at 29; H.R. Rep. No. 95-595, at 317). According to Justice Jackson, the 1994 amendments to section 106 did not "dislodge[] that original understanding," but were adopted merely to overturn the Supreme Court's decisions in Hoffmann and Nordic Village (briefly discussed above). Id.
The Court was more receptive to the argument that the IRS's interpretation of section 106(a) "effectively robs the immunity waiver of any meaningful purpose with respect to § 544" because it "grants federal courts jurisdiction over a set of inherently unwinnable claims." However, it rejected this contention as well, explaining that the trustee could prevail in certain kinds of avoidance litigation against a governmental unit under section 544(a), which has no triggering creditor requirement. It similarly rejected the argument that the immunity abrogation in section 106(a) must be interpreted to give substantive effect to all of section 544's subsections, not merely subsection 544(a). According to Justice Jackson, this "strained reading" of section 106(a) cannot bear up under scrutiny given the sheer number of provisions catalogued in section 106(a) that "cannot plausibly be the subject of an immunity waiver." Id. at *11.
The majority accordingly ruled that, although section 106(a) abrogates sovereign immunity for the "federal cause of action created by § 544(b)," section 106(a) "does not take the additional step of abrogating sovereign immunity for whatever state-law claim supplies the 'applicable law' for a trustee's § 544(b) claim." Id. at *12.
Justice Neil Gorsuch dissented, agreeing with the position staked out by the majority of federal circuits on this question—namely, that by operation of section 106(a), a bankruptcy trustee may sue a governmental unit to avoid a transfer under section 544(b) even though the triggering creditor could not due to sovereign immunity. Id. He reasoned that his interpretation of section 106(a) did not "modify the elements" of any fraudulent transfer claim or "create any substantive claim for relief" that did not "otherwise exist." Rather, according to Justice Gorsuch, "it merely acknowledges that … Congress has chosen to waive an affirmative defense to an otherwise valid claim." Id. at *13.
Outlook
The ability of a bankruptcy trustee or DIP to step into the shoes of a triggering creditor to seek avoidance of transfers or obligations under applicable non-bankruptcy law is an important component of the Bankruptcy Code's "strong-arm" powers designed to augment the bankruptcy estate for the benefit of all stakeholders. In many cases, litigation to avoid transfers or obligations under section 544(b) and applicable non-bankruptcy law can cast a far wider net than avoidance litigation under section 548 because the look-back period under state avoidance laws (and other non-bankruptcy laws, such as the IRC) can significantly exceed section 548's two-year look-back period.
Governmental units, including the IRS, have long combatted bankruptcy litigation seeking avoidance and recovery of transfers by arguing that the extended look-back periods under applicable non-bankruptcy law should not apply, that avoidance either conflicts with or is preempted by other federal law consistent with policy considerations (e.g., tax revenue enhancement), or that the governmental unit in question is immune to suit under the doctrine of sovereign immunity.
The Supreme Court's decision in Miller is welcome news for the IRS and other governmental units intent upon warding off avoidance liability, but a blow to trustees and DIPs seeking to maximize the value of the bankruptcy estate for the benefit of all stakeholders. The decision could spur Congress to amend sections 106 or 544 if it disagrees. The ruling also underscores the Supreme Court's apparent hesitancy to find a waiver of sovereign immunity in a statute or to interpret statutes as permitting lawsuits against the United States.
