Bankruptcy Trustee Allowed to Claw Back Tax Payments for Debtor’s Principals While Insolvent as Fraudulent Conveyence

2023-06-29

The Court of Appeals for the 10th Circuit affirmed the district court’s decision, and held a Chapter 7 bankruptcy trustee may avoid corporate Debtor’s transfers to the IRS made while insolvent for personal tax debts of two of its principals three years before it filed for bankruptcy. Miller v. United States, No. 21-4135, 2023 BL 218070 (10th Cir. June 27, 2023), appealing In re All Resorts Group, Inc., 617 B.R. 375 , 394 (Bankr. D. Utah 2020).

Debtor, All Resorts Group, Inc., appealed the ruling in a converted Chapter 7 bankruptcy filed in 2017. In 2014, Debtor paid personal tax debts ti the IRS of two of its principals totaling $145,138.78. The United States Trustee, brought an adversary proceeding in the bankruptcy court against the United States pursuant to Code § 544(b)(1) to avoid these transfers.

Trustee relied on then-former § 25-6-6(1) of Utah’s Uniform Fraudulent Transfer Act (amended 2017), presently codified at Utah Code Ann. § 25-6-203(1) as part of Utah’s Uniform Voidable Transactions Act. The Government acknowledged that: (1) debtor made the transfers, (2) an actual creditor had an unsecured claim against debtor arising before the transfers, (3) debtor did not receive a reasonably equivalent value in exchange for the transfers, and (4) debtor was insolvent at the time of the transfers, and also that the Code §106(a) sovereign immunity waiver made the Government amenable to the Trustee’s §544(b)(1) action.

The Government contested §544(b)(1) ‘s “actual creditor requirement.” The Bankruptcy Court held Trustee had satisfied Code § 544(b)(1) ‘s actual creditor requirement because §106(a)(1) unequivocally waives the federal government’s sovereign immunity with respect to the underlying state law cause of action incorporated through § 544(b), and awarded Trustee a judgment against the Government pursuant to 11 U.S.C. §§106(a)(3) and 550(a) in the amount of $145,138.78. The District Court had adopted the bankruptcy court’s decision and affirmed its judgment.