decided March 26, 2025
A provision of the federal Bankruptcy Code, 11 U.S.C. §106(a)(1), waives the federal government’s “sovereign immunity” from lawsuits that can be brought against it under the Bankruptcy Code, including lawsuits brought against the government under 11 U.S.C. §544. A subsection of Section 544 reads as follows:
[T]he trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law . . ..
11 U.S.C. Section 544(b)(1),
The “applicable law” referenced in that subsection of the Code includes state laws that authorize the creditors of an insolvent debtor to sue a third party who has received a “fraudulent transfer” of money from the debtor, in order to recover the debts owed to the creditors. In this case a trustee-in-bankruptcy, representing the unsecured creditors of a bankrupt corporation, sued the federal government to recover a “fraudulent transfer” the bankrupt corporation had made to the United States Treasury, to pay off tax liabilities that were personally owed by some of the corporation’s shareholders. The Court ruled that the waiver of “sovereign immunity” in 11 U.S.C. §106(a)(1) did not apply to lawsuits brought under state “fraudulent transfer” laws pursuant to the “applicable law” provision of 11 U.S.C. §544(b)(1).The Court explained that Congress did not really intend to waive the federal government’s “sovereign immunity” from lawsuits based upon state insolvency laws, despite their implicit incorporation as “applicable law” into 11 U.S.C. §544(b)(1). Only Justice Gorsuch dissented from the Court’s ruling. He contended that Congress did intend to waive sovereign immunity from all lawsuits that could be brought under Section 544(b)(1), including those brought under “applicable law.”
Comment: The actual intent of the Congress regarding “sovereign immunity” in enacting two distinct subsections of the federal Bankruptcy Code cannot, in reality, be determined. However, the eight-Justice majority of the Court seems to have the best guess of that intent, based upon the text, and the context, of the two subsections. Section 544(b)(1) seems to incorporate only that “applicable law” that renders a bankrupt debtor’s payment to a third party “voidable.” As the Court has previously held, the federal government’s sovereignty over the states inherently immunizes it from liability to a state pursuant to that state’s own laws. The “sovereign immunity” waiver of Section 106(a)(1) does not say otherwise with any unmistakable language.
RECENT RULINGS 