Judges debate IRS demand for pre-bankruptcy tax payments

ARGUMENT ANALYSIS

Typically, in a bankruptcy proceeding, a creditor must repay payments made shortly before the debtor filed for bankruptcy. At Monday’s argument i United States v. Millerthe justices were asked to decide whether the same rule applies to the Internal Revenue Service.

Although Section 106 of the Bankruptcy Code contains an explicit and comprehensive waiver of the federal government’s sovereign immunity in bankruptcy, the IRS argues that the specific language of the waiver does not impose on the agency the obligation private creditors face to repay funds paid to them by insolvents debtors shortly before a bankruptcy petition. The case concerns the language of section 544(b) of the Bankruptcy Code, which allows the trustee in bankruptcy to “avoid”—that is, void and recover—“any transfer … void under applicable law of a creditor’s stock” a valid claim against the debtor.” The section usually allows the trustee to recover “fraudulent transfers,” transfers made by a debtor shortly before bankruptcy.

All Resort Group, Inc., made a payment to the IRS to pay its owner’s income taxes about three years before filing for bankruptcy. The issue before the Supreme Court is whether All Resort Group’s bankruptcy trustee, David Miller, can seek to recover the funds paid to the IRS under Section 544(b), even though the IRS’s sovereign immunity would have barred suit against the IRS under to the “Governing Law,” Utah’s Uniform Fraudulent Transfers Act.

For the most part, the judges seemed unsure which way to turn. In questioning Yaira Dubin, representing the IRS, Judge Amy Coney Barrett emphasized the concern that the IRS’s reading would leave Section 106 completely futile as applied to Section 544, even though the former lists Section 544 as one of the sections that its waiver sovereign immunity should apply. When Dubin responded that section 106 would validate actions against the IRS under section 544(a), Judge Neil Gorsuch responded that section “106 waives sovereign immunity with respect to all 544. It does not highlight (a). And I think the crux of your argument is that the way you read 544(b) effectively renders 106 a nullity.”

To Gorsuch (who appeared to be the strongest supporter of the trustee seeking to recover the funds), it appeared to run counter to the court’s past practice, which included, he noted, “a very old case written by Oliver Wendell Holmes No. less .

Judge Brett Kavanaugh also appeared skeptical of the government, asking Dubin to explain why the government’s position would not “create a handbook for fraud that you pay your personal tax debt with corporate funds and then let the IRS … hide behind sovereign immunity that would short-term creditors.”

But the issue didn’t get any easier when Lisa Blatt took to the podium to defend the administrator’s efforts to recover from the IRS. Judge Ketanji Brown Jackson was probably the most skeptical there, characterizing Blatt as both “accepting that Congress … allows the trustee to stand in the shoes of the actual creditor [and] to say that the trustee can essentially do more… than the actual creditor.” “I feel like those two things are inconsistent,” Jackson said.

There was a high point during Blatt’s argument when Gorsuch, who repeated his argument back to her, appeared to signal his support. As he put it, she believes the government is wrong to say that “you have to look at who the transfer was made to,” because “the statute doesn’t say that. It says you’re asking whether the transfer is invalidated by the creditor.And that transfer is void [here] because it was done illegally, fraudulently.” He went on to emphasize that elsewhere in the bankruptcy code, “when Congress wants [protect] the acquirer and make a difference there, it does,” points to “protect[ions for] loyal buyers.”

Again, however, Jackson took issue with this argument, telling Blatt, “that the upshot of your view is that the trustee can recover money from the estate in this particular circumstance in a way that no actual creditor could, because you concede that all actual creditors , bringing a lawsuit against the United States … would be barred by sovereign immunity.”

This sounds to me like a case where the justices had read the briefs, but formed so few strong predispositions that they were largely unsettled by the time they got into argument. I wouldn’t be surprised if they come to a unanimous or near-unanimous consensus when they go back to their chambers and study the matter further. We should know about the timing of spring showers in March and April.