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This case concerns the powers given a bankruptcy trustee under Section 544(b) of the Bankruptcy Code to set aside, or “avoid,” certain fraudulent transfers of a debtor’s assets. Respondent is the bankruptcy trustee of a failed Utah-based business whose shareholders misappropriated $145,000 in company funds to satisfy their personal federal tax liabilities.
Respondent filed an “avoidance” suit against the U.S. seeking to regain the misappropriated funds for the benefit of the bankruptcy estate. He filed the action pursuant to Section 544(b), which allows a trustee to “avoid any transfer of an interest of the debtor . . . that is voidable under applicable law by a creditor holding an unsecured claim.” But to prevail under Section 544(b), a trustee must identify an “actual creditor” who could have voided the transaction under applicable law outside of bankruptcy proceedings.
In this case, respondent invoked Utah’s fraudulent-transfer statute — which gives creditors a cause of action to invalidate certain transfers by a debtor — as the “applicable law” underlying his Section 544(b) claim. The government argued that respondent’s Section 544(b) claim failed because respondent could not identify an “actual creditor” that could have voided the fraudulent transfer because sovereign immunity would bar any such Utah cause of action against the government. The Bankruptcy Court disagreed, concluding that Section 106(a) of the Bankruptcy Code — which waives the government’s sovereign immunity “with respect to” some 59 Bankruptcy Code provisions including Section 544 — also waives immunity for the Utah cause of action nested within the Section 544(b) claim.
The district court adopted the Bankruptcy Court’s decision and the 10th Circuit Court of Appeals affirmed.
The U.S. Supreme Court held that Section 106(a)’s sovereign-immunity waiver applies only to a Section 544(b) claim itself and not to state-law claims nested within that federal claim.
The court asserted Section 106(a)’s text, context and structure make clear that it does not operate to modify Section 544(b)’s substantive requirements. It noted that even if the language and logic of Sections 544 and 106(a) permitted respondent’s broad reading of the sovereign-immunity waiver, the court’s precedents would still foreclose that reading. The court’s precedents require construing sovereign-immunity waivers narrowly, with any ambiguities resolved in favor of the sovereign, according to the opinion.
First, the court noted that its interpretation does not render Section 106(a)’s waiver meaningless with respect to Section 544. Section 106(a) enables trustees to prevail against the government under Section 544(a), which has no actual-creditor requirement. Because federal tax law separately provides that tax liens held by the federal government may be invalidated under particular circumstances, Section 106(a) allows trustees to avoid transfers of these tax liens. Section 106(a) also grants federal courts jurisdiction to hear Section 544(b) claims against state governments that have consented to being sued under their fraudulent-transfer statutes.
Second, the court said it rejected respondent’s argument that because Section 106(a)(1) refers to Section 544 as a whole (rather than by subsection), the waiver must be construed to give substantive effect to all of Section 544’s subsections. It reasoned that many of the other 58 Bankruptcy Code provisions listed “as a whole” in Section 106(a)(1) include subsections that plainly do not implicate sovereign immunity at all.
Third, the court determined that respondent’s reliance on Department of Agriculture Rural Development Rural Housing Service v. Kirtz to support his argument that Congress sometimes waives sovereign immunity while simultaneously establishing a new substantive right is unavailing. It clarified that Kirtz involved a statute that bears little resemblance — in text, structure or operation — to Section 106(a), and explicitly authorized claims against the government. The high court found that nothing in Kirtz suggests that courts should presume, in the absence of explicit statutory language, that Congress has waived the government’s sovereign immunity.
Finally, the court said it declined respondent’s invitation to affirm on alternative grounds, leaving it to the lower courts to decide whether respondent may pursue these arguments on remand.
The Supreme Court reversed the judgement of the 10th Circuit.
Justice Ketanji Brown Jackson delivered the opinion of the court, in which Chief Justice John Roberts Jr. and Justices Clarence Thomas, Samuel Alito Jr., Sonia Sotomayor, Elena Kagan, Brett Kavanaugh and Amy Coney Barrett joined. Justice Neil Gorsuch filed a dissenting opinion.
Gorsuch in his dissenting opinion asserted that the court has confused the doctrine of sovereign immunity with the requirement that a plaintiff state a cause of action.
“No one disputes that a fraudulent transfer took place. The question before us is a distinct one: Can the federal government defeat the claim by raising the affirmative defense of sovereign immunity? With respect to a private creditor pursuing relief in state court, the answer is yes,” Gorsuch wrote in the dissenting opinion. “With respect to a trustee pursuing relief in a federal bankruptcy proceeding, the answer — thanks to [Section] 106(a)(1) — is no.”
“For these reasons, I agree with the majority of circuits to have considered the question that bankruptcy trustees may avoid fraudulent transfers to the United States under [Section] 544(b),” Gorsuch wrote.
The Gun Control Act of 1968 requires those engaged in importing, manufacturing or dealing in firearms to obtain federal licenses, keep sales records, conduct background checks and mark their products with serial numbers. The act defines “firearm” to include “(A) any weapon . . . which will or is designed to or may readily be converted to expel a projectile by the action of an explosive; [and] (B) the frame or receiver of any such weapon.”
Recent years have witnessed profound changes in how guns are made and sold, with companies now able to sell weapon parts kits that individuals can assemble into functional firearms at home. These kits vary widely in how complete they come and in how much work is required to finish them. Sales have grown exponentially, with law enforcement agencies reporting a dramatic increase in untraceable “ghost guns” used in crimes — from 1,600 in 2017 to more than 19,000 in 2021.
In 2022, the Bureau of Alcohol, Tobacco, Firearms and Explosives adopted a rule interpreting the act to cover weapon parts kits that are “designed to or may readily be converted to expel a projectile,” and “partially complete, disassembled, or nonfunctional” frames or receivers. Before ATF could enforce its rule, gun manufacturers and others filed what they described as a facial challenge under the Administrative Procedure Act, arguing that the GCA cannot be read to reach weapon parts kits or unfinished frames or receivers. The district court agreed and vacated the rule.
The 5th Circuit Court of Appeals affirmed, holding that Section 921(a)(3)(A) categorically does not reach weapon parts kits regardless of completeness or ease of assembly, and that Section 921(a)(3)(B) reaches only finished frames and receivers.
The U.S. Supreme Court held that the ATF’s rule is not facially inconsistent with the GCA. It asserted that Section 478.11’s provisions addressing weapon parts kits are not facially invalid under Section 921(a)(3)(A). The high court noted that the subsection contains two requirements: a “weapon” must be present, and that weapon must be able to expel a projectile by the action of an explosive, designed to do so or susceptible of ready conversion to operate that way.
The court determined that Section 478.12(c)’s treatment of partially complete frames and receivers is also not facially invalid under Section 921(a)(3)(B). Like “weapon,” the artifact nouns “frame” and “receiver” may describe not-yet-complete objects.
The plaintiffs’ arguments about the linguistic differences between subsections (A) and (B) and potential unintended consequences under the National Firearms Act were unpersuasive to the nation’s high court. The government represents that AR–15 receivers do not qualify as machine gun receivers, and the Supreme Court’s analysis of the GCA does not suggest ATF has authority to regulate them as such under the NFA, according to the opinion.
The court found that neither the rule of lenity nor constitutional avoidance applied where, as here, the statute’s text, context and structure make clear it reaches some weapon parts kits and unfinished frames or receivers.
The Supreme Court reversed the appeals decision and remanded the case.
Justice Neil Gorsuch delivered the opinion of the court, in which Chief Justice John Roberts Jr. and Justices Sonia Sotomayor, Elena Kagan, Brett Kavanaugh and Ketanji Brown Jackson joined. Sotomayor, Kavanaugh and Jackson each filed concurring opinions. Justices Clarence Thomas and Sameul Alito Jr. each filed dissenting opinions.
“The Government asked this Court just last Term to ‘re-write’ statutory text so that it could regulate semiautomatic weapons as machineguns,” Thomas wrote in his dissenting opinion. “We declined to do so. The Government now asks us to rewrite statutory text so that it can regulate weapon-parts kits. This time, the Court obliges. I would not.”
Alito wrote that he wasn’t certain a test established in the court’s 1987 decision in United States v. Salerno should govern in this case.
“The Court points to a gun kit that is all-but-assembled [and] a frame that is as close to completion as possible,” Alito wrote in the dissent. “As applied to those extreme situations, the [court] holds — and I agree — the rule does not deviate from the statute. But I am not certain that the Salerno test should govern.”