The U.S. Supreme Court ruled Wednesday that bankruptcy trustees cannot reclaim federal tax payments made more than two years before a company files for bankruptcy.
In an 8-1 decision, the court overturned a ruling by the 10th U.S. Circuit Court of Appeals. That lower court had allowed a trustee to recover $145,000 in tax payments that executives of Utah-based All Resort Group allegedly misused to cover personal tax debts before the company went bankrupt.
Writing for the majority, Justice Ketanji Brown Jackson stated that the federal government’s sovereign immunity barred the trustee from suing to recover those funds.
Under U.S. bankruptcy law, courts can order the return of fraudulent transfers to prevent debtors from favoring certain creditors over others. Trustees use these provisions to recover funds for other creditors, such as a former All Resort Group employee owed $55,000 from an employment discrimination settlement.
However, while the law allows clawbacks within a two-year window, many states, including Utah, extend that period through their own fraudulent transfer laws. The bankruptcy code permits trustees to pursue clawbacks either under federal rules or through state laws.
The U.S. Solicitor General had warned that allowing clawbacks of older tax payments could have significant financial consequences for the government. The 10th Circuit’s decision, they argued, would encourage more efforts to reclaim federal tax payments.
Trustee David Miller, representing All Resort Group, countered that the government was unfairly keeping money that should have been used to pay other creditors.
The Supreme Court ruled that sovereign immunity is not waived when trustees attempt clawbacks under state laws with longer lookback periods. Justice Jackson stated that Utah law should not apply in this case because the government’s immunity would prevent any attempt to reclaim tax payments outside of bankruptcy proceedings.
The decision resolves a split among U.S. appeals courts. The 10th Circuit had ruled that sovereign immunity was waived for state-based clawback claims. Meanwhile, the 4th and 9th Circuits had agreed that older tax payments could be recovered in bankruptcy, while the 7th Circuit had ruled they could not.
Justice Neil Gorsuch dissented, arguing that the trustee should have been allowed to pursue the claim. He wrote that Congress had already chosen to waive the government’s immunity in bankruptcy cases, regardless of its usual protections outside bankruptcy.
The case is United States v. Miller, No. 23-824.
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