Supreme Court Deciding Whether Pre-Bankruptcy Payment to IRS Can Be Considered a Fraudulent Conveyance

Significant payments that are made before a bankruptcy filing frequently raise suspicion and often must be returned. Funds that are sent to one creditor prior to a bankruptcy petition could present an unfair disadvantage to others. For this reason, the trustee typically voids these transactions. Recently, the U.S. Supreme Court heard arguments about whether a pre-filing payment could be rescinded when it went to the Internal Revenue Service, rather than a private creditor. 

In United States v. Miller, the justices are deciding whether sovereign immunity protects the IRS against having to return payments made by insolvent debtors before filing for bankruptcy. Under the Bankruptcy Code, Section 544(b)(1) allows a bankruptcy trustee to “avoid” or invalidate certain pre-filing transfers made by a debtor. These transfers, often referred to as “fraudulent conveyances,” can then be recovered by the trustee to distribute fairly among creditors. 

The case arose when a debtor company, All Resort Group, Inc. sent funds to the IRS in order to pay the tax balance owed by its owners. As the business was insolvent at the time, this seemed to violate Utah’s law against fraudulent transfers. Georgia and other states have similar provisions. When All Resort filed for bankruptcy, Trustee David L. Miller attempted to void the transaction, but the IRS claimed that it is immune from such claims because of its status as a government entity. 

Miller’s argument is based on the fact that another part of the Bankruptcy Code, Section 106(a), waives sovereign immunity in bankruptcy matters. Though the government has argued that the waiver does not apply to state fraudulent conveyance matters, both the District Court and Tenth Circuit sided with the trustee. 

For many individuals and businesses, tax problems go hand-in-hand with debts owed to private creditors. The Supreme Court’s decision in Miller will determine if payments to the IRS can evade reversal under state fraudulent conveyance statutes or if they will be treated in the same manner as transactions involving private creditors. 

From offices in Douglasville, Gainesville, Bogart, Lawrenceville, Marietta and Scottdale, Jeff Field & Associates provides knowledgeable bankruptcy counsel to Georgia individuals and businesses. Please call 404-381-1278 or contact us online to discuss your debt relief issue.