NEW YORK (Reuters) – The U.S. Supreme Court on Wednesday ruled that bankruptcy trustees may not claw back allegedly fraudulent federal tax payments made more than two years before a company’s bankruptcy filing.
In an 8-1 ruling, the court reversed a decision from the 10th U.S. Circuit Court of Appeals, which had allowed a bankruptcy trustee to try to claw back $145,000 that executives of bankrupt Utah transportation company All Resort Group allegedly misappropriated from the company to pay their personal tax debts.
The federal government’s sovereign immunity should have stopped the trustee from suing it to recoup the disputed tax payments, Justice Ketanji Brown Jackson wrote for the Supreme Court.
U.S. bankruptcy law allows courts to order the return of “fraudulent transfers,” and the clawback provisions are meant to prevent debtors from unfairly favoring some creditors over others when making payments from a limited pool of assets. The bankruptcy trustee sought to use those funds to pay other creditors, including a former employee who is owed $55,000 for an employment discrimination settlement.
U.S. bankruptcy law provides that the federal government’s sovereign immunity is waived for certain clawback claims, but only for payments that were made up to two years before a bankruptcy filing. Most U.S. states, including Utah, have passed state fraudulent transfer laws allowing for a longer lookback period. The U.S. bankruptcy code allows trustees to pursue clawbacks under either its direct authority or through state law.
The U.S. Solicitor General had argued that the 10th Circuit decision opened the door to clawbacks of older tax claims, which threatened “substantial consequences” for the government’s finances and gave bankruptcy trustees “even more incentive to seek to recoup federal tax payments.”
The All Resort Group trustee, David Miller, countered that the government sought to keep money it “should have never gotten in the first place,” at the expense of creditors like All Resort Groups’ former employees.
In Wednesday’s ruling, the Supreme Court said sovereign immunity is not waived when the clawbacks are attempted using state laws with longer statutes of limitations. Utah law should not be applied to a tax payment, because the government’s sovereign immunity would protect it from any non-bankruptcy attempt to recoup the tax payment, Jackson wrote.
Representatives for Miller and the U.S. government did not immediately respond to requests for comment.
U.S. appeals courts were split over how to apply state fraudulent transfer laws to federal tax payments.
The 10th Circuit had ruled in this case that sovereign immunity was waived even when clawback claims were pursued under state laws with longer statutes of limitations. The 4th and 9th Circuits have agreed that older tax payments are subject to clawbacks in bankruptcy, while the 7th Circuit has ruled they are not.
Justice Neil Gorsuch dissented, writing that the bankruptcy trustee should have been allowed to pursue a clawback against the federal government. The fact that the government would have a sovereign immunity defense outside of bankruptcy did not change the fact that Congress “has chosen to waive” that defense in the bankruptcy context, according to the dissent.
The case is: United States v. Miller, U.S. Supreme Court, No. 23-824.
For ARG trustee David Miller: Lisa Blatt of Williams & Connolly
