Justices validates the IRS’s right to preserve false prepayments before displacement

Opinion analysis

United States v. Miller Presents the kind of simple facts that populate law school hypothetics. A business is in financial distress. Shareholders (who control the company) use some of their funds to pay their own debts, including taxes due to the federal government. When the company concludes bankruptcy, the creditors of the company rightly complain that shareholders should not have used Businesses money to pay shareholders’ Personal tax obligations. Can Internal Revenue Service keep the money? The Supreme Court found last week that the answer is yes.

Justice Ketanji Brown Jackson’s statement (along with all the judges except for Justice Neil Gorsuch) presents this as a straightforward text exercise that turns on the “interaction” between two sections in the bankruptcy code. The first is section 544, which creates a federal case for action that allows the bankruptcy to recover funds, the paid before bankruptcy, each time the transfer “can be canceled in accordance with applicable law.” The second is section 106, which deprives the federal government’s sovereign immunity for a long list of specific sections in the bankruptcy code, including section 544.

For Jackson, the key to the case is the reality that under the Utah Act (the current fraudulent transport statute), the creditors of the failed business could not recover from the IRS because IRS’s sovereign immunity would protect it from a case under the Utah Statute. Thus, she concludes that the transfer to the IRS is not “invalid under applicable law” for the purpose of section 544. Jackson explains that the text in section 106, “Read as a whole, makes it clear that it … does not establish any material rights against the government.” All that section 106 does is “give court jurisdiction to hear [Section 544] claim against the government. “It does not change” the material requirements of the claim itself. “

Working from these premises, Jackson can easily reject the efforts to “transform [Section 106] from a jurisdictional provision to a responsible provision. “Jackson continues to point out that her reading does not make useless involvement of section 544 in the listed sections that are waived sovereign immunity because it would still allow creditors to invalidate incorrectly perfected tax loans under section 544 (A).

Context is all here. Congress included a waiver of sovereign immunity in the bankruptcy code in 1978. As I have written elsewhere, the Supreme Court maintained in several cases nonetheless allegations of sovereign immunity of state and federal governments, which concluded that the statutory exception was inadequate specific. Congress responded in 1994 by adding to section 106 a list of virtually all sections of the bankruptcy code that gives an important power to sue and recover funds from third parties.

IN MillerThe court essentially tells the congress again that it has to make its homework better. If it actually wants to impose responsibility on the federal government, it will have to try even harder than it has done before. Time shows if the third time will be a charm.