Bankruptcy trustees and chapter 11 debtors-in-possession ("DIPs") frequently seek to avoid fraudulent transfers and obligations under section 544(b) of the Bankruptcy Code and state fraudulent transfer or other applicable non-bankruptcy laws because the statutory "look-back" period for avoidance under many non-bankruptcy laws exceeds the two-year period governing avoidance actions under section 548. "Governmental units" (defined below) sometimes argue that avoidance actions against them under non-bankruptcy law are precluded by the doctrine of sovereign immunity, even though section 106(a) of the Bankruptcy Code explicitly provides that sovereign immunity is abrogated "with respect to ... [section] 544."
The federal circuit courts of appeals (and many lower courts) were split regarding whether the abrogation of sovereign immunity by governmental units with respect to avoidance actions commenced under section 544(b) also extends to the causes of action arising under applicable non-bankruptcy law that a "triggering" or "predicate" creditor would be precluded from asserting outside of bankruptcy due to sovereign immunity. In 2023, the U.S. Court of Appeals for the Eleventh Circuit aligned itself with the majority position among the circuits when it ruled in U.S. v. Miller, 71 F.4th 1247 (10th Cir. 2023), rev'd, No. 23-824, 2025 WL 906502 (U.S. Mar. 26, 2025), that the abrogation of sovereign immunity in section 106(a) permitted a chapter 7 trustee to sue the Internal Revenue Service ("IRS") to avoid and recover a fraudulent transfer under section 544(b)(1), even though an eligible existing creditor could not have sued the IRS outside of bankruptcy.
On March 26, 2025, the U.S. Supreme Court reversed the Eleventh Circuit's decision. The Court ruled that the abrogation of sovereign immunity in section 106(a) applies to avoidance claims under section 544(b), but not to state law claims that could otherwise be invoked by triggering creditors under applicable non-bankruptcy law. According to the 8-1 majority, section 106(a)'s text, context, and structure clearly indicate that the provision does not modify section 544(b)'s substantive requirements, which tie a bankruptcy trustee's rights to the rights of an actual creditor under "applicable law." In short, the Court concluded, if no creditor could assert a cause of action against the IRS under applicable non-bankruptcy law due to the government's sovereign immunity, a bankruptcy trustee is similarly constrained by that defense.
Abrogation of Sovereign Immunity in the Bankruptcy Code
Pursuant to the federal system created by the U.S. Constitution, each state is a sovereign entity. In addition, both federal and state governmental bodies have sovereign immunity from suit unless that immunity has been abrogated by Congress, waived by the governmental body, or eliminated by a specific provision of the Constitution itself. See generally Collier on Bankruptcy ("Collier") ' 1.06.01 (6th ed. 2025).
Abrogation of sovereign immunity by Congress requires that: (i) Congress has "unequivocally expressed its intent to abrogate the immunity"; and (ii) lawmakers have acted "pursuant to a valid exercise of power." Id. (quoting Seminole Tribe v. Florida, 517 U.S. 44, 56 (1996); In re LTV Steel Co., Inc., 264 B.R. 455, 464 (Bankr. N.D. Ohio 2001); accord LAC du Flambeau Bank of Lake Superior Chippewa Indians v. Coughlin, 143 S. Ct. 1689, 1695 (2023). The sovereign immunity of a litigant deprives a court of subject matter jurisdiction to adjudicate a dispute. See FDIC v. Meyer, 510 U.S. 471, 475 (1995) ("Sovereign immunity is jurisdictional in nature."). A waiver or abrogation of sovereign immunity acts as a "prerequisite for jurisdiction'[it does] not create any new substantive rights or alter any pre-existing ones." U.S. v. Mitchell, 463 U.S. 206, 212 (1983). Such a waiver of immunity must be strictly construed in favor of the sovereign, with any ambiguities resolved in favor of sovereign immunity. See Orff v. U.S., 545 U.S. 596, 601-602 (2005).
Sovereign immunity has been applied in bankruptcy cases to shield state and federal governments from claims asserted against them by bankruptcy trustees or DIPs. However, the Bankruptcy Code provides for a broad-ranging abrogation of sovereign immunity. In particular, section 106(a) of the Bankruptcy Code provides that, "[n]otwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to" 59 provisions of the Bankruptcy Code specified in section 106(a)(1), including actions to enforce the automatic stay, preference, and fraudulent transfer avoidance actions and proceedings seeking to establish the dischargeability of a debt.
The abrogation in section 106(a) expressly includes litigation brought against a "governmental unit" under section 544 of the Bankruptcy Code. Section 544(b)(1) empowers a bankruptcy trustee to step into the shoes of an actual creditor with an unsecured claim that could have sued to avoid a transfer outside of bankruptcy under applicable non-bankruptcy law (e.g., the Uniform Voidable Transfer Act (the "UVTA") enacted in many states or the Internal Revenue Code (the "IRC")). See generally Collier at ' 544.06.
Section 101(27) of the Bankruptcy Code defines the term "governmental unit" as:
United States; State; Commonwealth; District; Territory; municipality; foreign state; department, agency, or instrumentality of the United States (but not a United States trustee while serving as a trustee in a case under this title), a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state; or other foreign or domestic government.
11 U.S.C. ' 101(27).
Section 106(a)(2) provides that "[t]he court may hear and determine any issue arising with respect to the application of the [the specified Bankruptcy Code provisions] to governmental units."
Other subsections of section 106 address a bankruptcy court's power to issue process, orders, or judgments against governmental units (sections 106(a)(3) and (a)(4)). Subsection 106(a)(5) provides that "[n]othing in [section 106] shall create any substantive claim for relief or cause of action not otherwise existing under this title, the Federal Rules of Bankruptcy Procedure, or nonbankruptcy law." In addition, other subsections address a governmental unit's deemed waiver of sovereign immunity with respect to certain counterclaims by filing a proof of claim (subsection 106(b)), and permitted setoffs, despite any assertion of sovereign immunity, of claims owned by the bankruptcy estate against claims asserted by governmental units (subsection 106(c)).
Enacted as part of the Bankruptcy Code in 1978, section 106 was amended in 1994 to clarify lawmakers' intent to abrogate sovereign immunity of governmental units with respect to actions for damages as well as declaratory and injunctive relief under the specified provisions of the Bankruptcy Code. The change was designed to overrule two U.S. Supreme Court decisions'Hoffman v. Connecticut Department of Income Maintenance, 492 U.S. 96 (1989), and U.S. v. Nordic Village, Inc., 503 U.S. 30 (1992)'holding that section 106 did not state with sufficient clarity lawmakers' intent to abrogate the sovereign immunity of the states and the federal government in bankruptcy cases.
Controversy in the Courts
Even though section 106(a)(1) expressly abrogates sovereign immunity with respect to section 544, courts have disagreed as to whether the abrogation of immunity extends to both an action brought by the trustee or DIP under section 544(b)(1) and the avoidance causes of action that, but for sovereign immunity, the triggering creditor could have brought under applicable non-bankruptcy law. Four federal circuit courts of appeals have addressed this question (three prior to Miller), with three of them (including the Tenth Circuit in Miller) concluding that section 106(a)'s abrogation of sovereign immunity extended to causes of action under state law that could be asserted by a trustee or DIP under section 544(b)(1).
In In re Equip. Acquisition Res., Inc., 742 F.3d 743 (7th Cir. 2014) ("EAR"), the U.S. Court of Appeals for the Seventh Circuit ruled that section 106(a)(1) does not modify the triggering creditor requirement in section 544(b)(1). The court acknowledged that section 106(a)(1) abrogates a governmental unit's sovereign immunity with respect to avoidance litigation commenced by a DIP under section 544(b)(1) and Illinois fraudulent transfer law...
