The Scope of The Sovereign immuniTy DefenSe in AvoiDAnce AcTionS following The Supreme courT ’S DeciSion in United StateS v. Miller (2025)
creATing vAlue in cAliforniA Through DiSAllowAnce AnD SuborDinATion of clAimS AnD AvoiDAnce AnD preServATion of lienS: recenT DevelopmenTS re fineS, penAlTieS, forfeiTureS AnD DefAulT feeS, AnD uSury
DiSpuTing TAxeS oweD To The irS or cAliforniA TAxing AuThoriTieS, inSiDe AnD ouTSiDe of bAnkrupTcy
~ Bradford n. Barnhardt
~ eric P. iSrael
~ Steven l . Walker
Cite as: Cal. Bankr. J.
Volume 37 Number 1
Copyright 2026 by the California Bankruptcy Journal Corporation
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THE SCOPE OF THE SOVEREIGN IMMUNITY DEFENSE IN AVOIDANCE ACTIONS FOLLOWING THE SUPREME COURT’S DECISION IN UNITED STATES V. MILLER (2025)
CREATING VALUE IN CALIFORNIA THROUGH DISALLOWANCE AND SUBORDINATION OF CLAIMS AND AVOIDANCE AND PRESERVATION OF LIENS: RECENT DEVELOPMENTS RE FINES, PENALTIES, FORFEITURES AND DEFAULT FEES, AND USURY
DISPUTING TAXES OWED TO THE IRS OR CALIFORNIA TAXING AUTHORITIES, INSIDE AND OUTSIDE OF BANKRUPTCY
~ Eric P. Israel
~ Steven L. Walker
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VOLUME 37
Leslie A. Cohen
Jeffrey I. Golden
Jorian Heal
Eric P. Israel
Lance N. Jurich
Editors in Chief
Jeffrey I. Golden
Eric P. Israel
Editors
Tinho Mang
Ashley Marie McDow
Hutchison B. Meltzer
Aram Ordubegian
David M. Reeder
Zev Shechtman
Leonard M. Shulman
John N. Tedford, IV
J’aime K. Williams Kerper
Editors Emeritus
Vincent M. Coscino
George W. Kuney
Peter J. Gurfein
Janet Shapiro Levitt
Elmer Dean Martin III
Forum Liaison Representatives
David Goodrich (San Diego County)
Uzzi O. Raanan (Los Angeles)
Wayne Silver (Bay Area)
Kailey Wright (Orange County)
The California Bankruptcy Journal (ISSN 1047-0743) is published by the California Bankruptcy Journal Corporation, which is wholly owned by the California Bankruptcy Forum. The opinions of the authors are not attributable to the Journal, its editors, advisors, or related entities.
Correspondence should be addressed to either Eric P. Israel, Levene, Neale, Bender, Yoo & Golubchik L.L.P., 2818 La Cienega Avenue, Los Angeles, CA 90034; E-mail: epi@lnbyg.com, or Jeffrey I. Golden, Golden Goodrich LLP, 3070 Bristol Street, Suite 640, Costa Mesa, California 92626-3067; E-mail: jgolden@go2.law. Guidelines for Manuscripts appear at the back of this issue.
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The Scope of the Sovereign Immunity Defense in Avoidance Actions Following the Supreme Court’s Decision in United States v. Miller (2025)
Creating Value in California Through Disallowance and Subordination of Claims and Avoidance and Preservation of Liens: Recent Developments re Fines, Penalties, Forfeitures and Default Fees, and Usury
Disputing Taxes Owed to the IRS or California Taxing Authorities, Inside and Outside of Bankruptcy
Bradford N. Barnhardt 1
Eric P. Israel 25
Steven L. Walker 39
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By Bradford N. Barnhardt1
Following the Supreme Court’s recent decision in United States v. Miller, 2 the sovereign-immunity defense will become an issue in many avoidance actions brought against governmental units. Federal sovereign immunity deprives courts of jurisdiction to hear suits against the United States absent express Congressional consent.3 In Miller, the Supreme Court held that 11 U.S.C. § 106(a)’s4 sovereignimmunity waiver applies only to an 11 U.S.C. § 544(b)5 claim itself and not to statelaw claims nested within that federal claim. As such, sovereign immunity bars any action brought against the United States under a state-law avoidance statute and § 544(b). This holding is significant because state-law avoidance statutes, such as California’s, often have longer lookback periods than the two-year lookback period of 11 U.S.C. § 548.6 And, where the debtor has made significant pre-petition
1 Bradford N. Barnhardt is a senior associate at Marshack Hays Wood LLP. Editorial contributions provided by Aaron E. de Leest, a partner at Marshack Hays Wood LLP.
2 United States v. Miller, 604 U.S. 518 (2025).
3 Id. at 527.
4 Unless otherwise indicated, all statutory citations are to Title 11 of the United States Code, i.e., the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
5 11 U.S.C. § 544(b)(1) provides, with a narrow exception set forth in § 544(b)(2) for charitable contributions, as follows:
T]he trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.
6 Compare 11 U.S.C. § 548(a)(1) (“The trustee may avoid any transfer . . . that was made . . . within 2 years before the date of the filing of the petition . . .”), with AFI Holding, Inc. v. Mackenzie, 525 F.3d 700, 707 (9th Cir. 2008) (noting that CAL CIV CODE § 3439.04(a)(1) is “the equivalent of” 11 U.S.C. § 548(a)(1)(A), and CAL. CIV. CODE § 3439.04(a)(2) is “the equivalent of” § 548(a)(1)(B)), and Donell v. Kowell, 533 F.3d 762, 773 (9th Cir. 2008) (noting that an action under CAL CIV CODE § 3439.04(a)(1) or § 3439.04(a)(2) must be brought within four years after the transfer was made);
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avoidable transfers, the Government often offers the best prospect of recovery for the bankruptcy estate in avoidance litigation.
Post-Miller, governmental units being sued by trustees in avoidance actions will of course seek to invoke sovereign-immunity protections. But, how extensive are these protections? Do they, for instance, deprive bankruptcy courts of jurisdiction over all avoidance actions against governmental units, or only those arising under § 544(b) and a state-law claim? And, what about state and local governments? Can they also invoke the sovereign-immunity protections outlined in Miller?
The exact scope of the Miller decision will likely be litigated extensively in the coming years. This article endeavors to explore that scope to guide any judge or practitioner who finds himself or herself in such a dispute.
Sovereign immunity is “jurisdictional in nature” and “deprives courts of the power to hear suits against the United States absent Congress’s express consent.”7 Congressional consent must be “unequivocally expressed in the text of a relevant statute.”8 The clear textual waiver rule ensures that Congress has specifically considered sovereign immunity and has intentionally legislated on the matter.9 The party suing the federal government has the “high” burden of showing an unequivocally expressed congressional waiver of sovereign immunity.10
Federal sovereign immunity is a judge-made doctrine originating from English law.11 The Supreme Court’s reasons for embracing the doctrine of sovereign
see generally Miller v. United States, 71 F.4th 1247, 1254 (10th Cir. 2023), rev’d on other grounds., 604 U.S. 518 (2025) (noting that the lookback period under state avoidance statutes is typically four years).
7 Miller, 604 U.S. at 527.
8 Daniel v. Nat’l Park Serv., 891 F.3d 762, 768 (9th Cir. 2018) (internal quotation marks omitted).
9 Id. at 768-69.
10 Hajro v. U.S. Citizenship & Immigration Servs., 811 F.3d 1086, 1101 (9th Cir. 2016); Eiselin v. USCIS San Diego, No. 23-CV-1961 JLS (AHG), 2024 U.S. Dist. LEXIS 30785, at *4 (S.D. Cal. Feb. 22, 2024).
11 See Sarah L. Brinton, Three-Dimensional Sovereign Immunity, 54 SANTA CLARA L. REV 237, 242 (2014). Ironically, English law did not protect its sovereign from suit “in the ways traditionally
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immunity “have never been entirely clear.”12 Originally, the only reason given for sovereign immunity was tradition; namely, that sovereign immunity had “always been treated as an established doctrine.”13 The Supreme Court later elaborated as follows:
The reasons for this immunity are imbedded in our legal philosophy. They partake somewhat of dignity and decorum, somewhat of practical administration, somewhat of the political desirability of an impregnable legal citadel where government as distinct from its functionaries may operate undisturbed by the demands of litigants. A sense of justice has brought a progressive relaxation by legislative enactments of the rigor of the immunity rule. As representative governments attempt to ameliorate inequalities as necessities will permit, prerogatives of the government yield to the needs of the citizen.14
Relevant to the question of sovereign-immunity waiver for bankruptcy purposes is § 106(a), which abrogates the sovereign immunity of governmental units regarding certain sections of the Bankruptcy Code.15 Specifically, § 106(a) provides, in relevant part, as follows:
Notwithstanding 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 the following:
(1) Sections . . . 544, 545, 546, 547, 548, 549, 550, 551, . . . 553, . . . [and] 724 . . . of this title.
thought.” Id. at 242 n.12 (collecting authority). In the United States, meanwhile, the people are the sovereign, yet the federal government invokes sovereign immunity against its citizens. Id. at 238.
12 John Paul Stevens, Is Justice Relevant?, 114 NW. U. L. REV. 1837, 1839 (2020).
13 Id. (citing Cohens v. Virginia, 19 U.S. 264 (1821)).
14 United States v. Shaw, 309 U.S. 495, 500-01 (1940) (citations omitted).
15 2 COLLIER ON BANKRUPTCY ¶ 106.04 (Richard Levin & Henry J. Sommer eds., 16th ed.).
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At first glance, § 106(a) looks like an unequivocal waiver of federal sovereign immunity regarding § 544(b) claims in their entirety. In fact, multiple courts had so held.16 But, in Miller, the Supreme Court held:
Section 106(a) of the Bankruptcy Code abrogates sovereign immunity for the federal cause of action created by § 544(b). It does not take the additional step of abrogating sovereign immunity for whatever state-law claim supplies the “applicable law” for a trustee’s § 544(b) claim.17
Miller arose from fraudulent-transfer actions prosecuted against the United States by a chapter 7 bankruptcy trustee. There, two shareholders of All Resort Group transferred approximately $145,000 in company funds in June 2014 to pay their personal income-tax liability.18 All Resort Group filed bankruptcy in April 2017,19 and the United States Trustee appointed David L. Miller as the chapter 7 trustee20 upon conversion of the case from chapter 11 to chapter 7.21 The Trustee filed an action against the United States under § 544(b) to avoid the 2014 tax payments, invoking the Utah Uniform Fraudulent Transfer Act22 as the source of
16 See United States v. Miller, 604 U.S. 518, 526 (2025) (noting that the bankruptcy court, district court, and Tenth Circuit Court of Appeals had all found § 106(a) to constitute an unequivocal waiver of sovereign immunity regarding § 544 claims). The Ninth Circuit and Fourth Circuit had also previously determined that § 106(a)(1)’s waiver applied to the underlying “applicable law.” Zazzali v. United States (In re DBSI, Inc.), 869 F.3d 1004, 1013 (9th Cir. 2017) (holding that § 106(a)’s waiver extended to an Idaho state-law cause of action under § 544(b)(1); In re Yahweh Ctr., Inc., 27 F.4th 960 (4th Cir. 2022) (holding in the alternative that § 106(a)’s waiver extended to a North Carolina state-law cause of action under § 544(b)(1)). The Seventh Circuit, by contrast, held that it did not. In re Equip. Acquisition Res., Inc., 742 F.3d 743 (7th Cir. 2014) (holding that § 106(a)’s waiver did not extend to an Illinois state-law cause of action under § 544(b)(1)).
17 Miller, 604 U.S. at 539.
18 Id. at 525.
19 Because the transfer was made more than two years prior to the petition date, § 548 was inapplicable.
20 Chapter 7 trustee David L. Miller shall hereafter be referred to as the “Trustee.”
21 Miller v. United States (In re All Resort Grp., Inc.), 617 B.R. 375, 379 (Bankr. D. Utah 2020), rev’d, 604 U.S. 518 (2025).
22 The Utah Uniform Fraudulent Transfer Act, Utah Code § 25-6-6 et seq., shall hereafter be referred to as the “UUFTA.”
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“applicable law.”23 The parties cross-moved for summary-judgment regarding whether sovereign immunity precluded the Trustee from using § 544(b) to recover payments made to the Internal Revenue Service.24
The United States conceded that the Trustee had proved all the elements of his § 544(b) and UUFTA claim, except for the element that there be an actual creditor who could avoid the transfers at issue.25 According to the United States, there was no actual creditor because the sovereign-immunity defense would bar any suit by a creditor against the United States under the UUFTA to recover the tax payments.26 On the other hand, the Trustee contended that § 106(a)(1) abrogated sovereign immunity in the bankruptcy-claims context.27
The bankruptcy court began with the “language of the statue itself,” noting the Supreme Court’s directive, that where “the statute’s language is plain, the sole function of the courts is to enforce it according to its terms.”28 And, according to the bankruptcy court, “the plain text of § 106(a)(1) unequivocally abrogates sovereign immunity as to the underlying state law cause of action.”29 The bankruptcy court highlighted, for instance, that § 106(a)(1) does not distinguish between § 544(a) and (b), and that § 106(a)(1) contains “no exceptions, qualifiers, or carve-outs in its language.”30 And, the bankruptcy court found that the waiver of sovereign immunity in § 106(a) “remove[d] the ability of a governmental unit to interpose immunity as a defense to the underlying state law cause of action when a bankruptcy trustee
23 In re All Resort Grp., Inc., 617 B.R. at 379-80. The Trustee also brought a § 548(a) fraudulent transfer claim, but the transfers fell outside of the two-year lookback period for § 548 claims. Id.; see also 11 U.S.C. § 548(a)(1) (providing a two-year lookback period). The UUFTA, by contrast, provides that a fraudulent transfer claim must be brought “no later than four years after the transfer was made or the obligation was incurred.” Utah Code § 25-6-305.
24 In re All Resort Grp., Inc., 617 B.R. at 379.
25 Id. at 382.
26 Id. at 382-83.
27 Id.
28 Id. at 384 (quoting United States v. Ron Pair Enters., Inc., 489 U.S. 235 (1989)) (internal quotation marks omitted).
29 Id. at 386.
30 Id. at 386-88.
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The United States appealed, and the U.S. District Court for the District of Utah affirmed “[f]or the reasons set forth in the bankruptcy court’s memorandum decision and order.”33
The United States appealed again, and the Tenth Circuit affirmed.34 The Tenth Circuit reasoned that “§ 106(a)(1) clearly expresses Congress’s intent to abolish the Government’s sovereign immunity in an avoidance proceeding arising under § 544(b)(1), regardless of the context in which the defense arises.”35 The Tenth Circuit further highlighted that § 106(a)(2) allows a court to “hear and determine any issue arising with respect to the application of” § 544.36 According to the Tenth Circuit, § 106(a)(2) authority would be “substantially curtailed” if sovereign immunity precluded a bankruptcy court from considering whether a trustee had satisfied the substantive elements of an underlying state-law cause of action invoked pursuant to § 544(b)(1).37 The Tenth Circuit further addressed the Seventh Circuit’s holding in In re Equipment Acquisition Resources, Inc., 38 that banned actions under § 544(b)(1) to set aside avoidable transfers against a “governmental entity” absent a second waiver of sovereign immunity by way of Congress or a state legislature as to the underlying state-law cause of action.39 The Tenth Circuit explained this holding by the Seventh Circuit’s “hypothesi[s],” that an
31 Id. at 389.
32 Id. at 393-94.
33 United States v. Miller, No. 2:20-CV-00248-BSJ, 2021 U.S. Dist. LEXIS 171247 (D. Utah Sept. 8, 2021), rev’d, 604 U.S. 518 (2025).
34 Miller v. United States, 71 F.4th 1247, 1252 (10th Cir. 2023), rev’d, 604 U.S. 518 (2025).
35 Id. at 1253.
36 Id. at 1253-54.
37 Id. at 1254.
38 In re Equip. Acquisition Res., Inc., 742 F.3d 743 (7th Cir. 2014).
39 Miller, 71 F.4th at 1254.
Vol. 37 Cal. Bankr. J. No. 1 (2026) 6 asserts that cause of action standing in the actual creditor’s shoes.”31 Because it was undisputed that the Trustee could fulfill the actual creditor requirement, but for a sovereign-immunity defense which the bankruptcy court found § 106(a) abrogated, the bankruptcy court granted the Trustee’s motion for summary judgment and denied the United States’s motion for summary judgment.32
abrogation of sovereign immunity as to § 544(b) and the underlying state-law claims could render “federal tax revenue . . . more vulnerable to unexpected recovery actions” by extending the applicable statute of limitations (typically four years) or relaxing criteria for what constitutes an avoidable transfer under state law.40 But, the Tenth Circuit dismissed such policy rationales that are “not based in the text of the statute.”41 Based on the conclusion, that § 106(a) waives the United States’s sovereign immunity as to both a § 544(b)(1) claim and the underlying state-law cause of action, the Tenth Circuit affirmed the decisions of the bankruptcy and district courts.42
The United States filed a petition for writ of certiorari, which the Supreme Court granted to resolve the conflict regarding whether § 106(a) abrogates sovereign immunity with respect to a state-law claim that supplies the “applicable law” for a trustee’s § 544(b) claim.43
The Supreme Court highlighted § 544(b)(1)’s requirement, that the transfer be “voidable under applicable law.”44 The Trustee and the United States did not dispute that, outside of bankruptcy, the United States could invoke a sovereign immunity defense to bar any lawsuit seeking to invalidate a federal tax payment under a state’s fraudulent-transfer law.45 The Court indicated that § 106(a) is a “jurisdiction-creating provision” rather than a “liability-creating provision” and thus did not find that § 106(a)’s grant of jurisdiction by waiving immunity expanded the Trustee’s § 544(b) avoidance powers.46 The Court noted that § 106(a)’s language does not “create any substantive claim for relief or cause of action not otherwise existing” under some other source of law.47 And, the Court noted that § 544(b)’s actual-creditor requirement “restricts the universe of transactions a trustee can
40 Id. at 1254.
41 Id. at 1254-55.
42 Id. at 1256.
43 United States v. Miller, 604 U.S. 518, 527 (2025).
44 Id. at 522.
45 Id. at 528.
46 Id. at 529.
47 Id. (citing 11 U.S.C. § 106(a)(5)).
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invalidate” and “is unique to § 544(b).”48 According to the Court, the actual-creditor requirement “reflects a deliberate congressional choice to tie the trustee’s rights under subsection (b) to the rights of an actual creditor under ‘applicable law.’”49
The Court did not find the Trustee’s argument, that § 106(a)(1)’s use of the phrase “with respect to” requires a broad reading of sovereign-immunity waiver, persuasive.50 Rather, the Court read these words in their context, which it found “cuts decidedly against” the Trustee’s broad reading because sovereign-immunity waivers must be construed narrowly.51 The Court did not agree with the Trustee, that § 106(a)’s amendment in 1994 to add 59 specific provisions, including § 544, waived sovereign immunity, because “no amount of legislative history can supply a waiver that is not clearly evident from the language of the statute.”52
The Court found the argument unavailing that a sovereign-immunity bar to state avoidance claims would “blunt the impact of Congress’s decision to include § 544” on § 106(a)’s list.53 According to the Court, trustees might still prevail against the government under § 544(a).54 The Court did not agree that § 106(a) should give substantive effect to all § 544’s subsections, because many of the other 58 provisions listed in § 106(a) “plainly do not implicate sovereign immunity at all.”55 And, the Court flagged that if a state had subjected itself to potential liability under its own fraudulent-transfer statutes, § 106(a) would grant federal courts jurisdiction to hear § 544(b) suits against that state.56 As such, the Court reversed the decision of the Tenth Circuit and held that § 106(a) does not abrogate sovereign immunity for the state-law claim that supplies the “applicable law” for a trustee’s § 544(b) claim.57
48 Id. at 531.
49 Id.
50 Id. at 532-33.
51 Id. at 533-34.
52 Id. at 534 (citation and internal quotation marks omitted).
53 Id. at 535.
54 Id. at 536.
55 Id. at 536-37.
56 Id. at 537.
57 Id. at 539. Justice Gorsuch issued a lone dissenting opinion, expressing his reasoning as follows:
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Following the Supreme Court’s decision in Miller, it now appears that trustees may not bring actions under § 544(b)(1) to set aside avoidable transfers against a governmental unit absent a second waiver of sovereign immunity by Congress or a state legislature as to the underlying state-law cause of action. And, because Congress has not waived federal sovereign immunity regarding state-law fraudulent transfer claims, bankruptcy courts lack jurisdiction over any actions against the United States under § 544(b) and where the applicable nonbankruptcy law relied upon is underlying state avoidance statute. This article will first argue that the Supreme Court reached the conclusion it did with an eye towards practical administration at a time when the specter of DOGE cuts was haunting the federal workforce. It will then explore the further ramifications of Miller beyond the parameters of state-law fraudulent transfer actions against the United States pursuant to § 544(b).
As always, any analysis of the meaning of a statute must begin “with the language of the statute itself.”58 Where “the statute’s language is plain, the sole function of the courts is to enforce it according to its terms.”59 As the lower courts in Miller and the Ninth Circuit in DBSI all correctly held, the language of § 106(a) is plain and abrogates sovereign immunity regarding § 544(b) claims. The Supreme
As I see it, those three provisions [11 U.S.C. § 106(a)(1), 11 U.S.C. § 544(b)(1), and Utah’s fraudulent transfer statute] play out this way. Under the Utah statute, a transfer is “voidable” if, after a creditor’s claim arose against the debtor, the debtor (1) “made the transfer” (2) “without receiving a reasonably equivalent value in exchange,” and (3) “was insolvent at the time.” Notably, no one before us disputes that these conditions are satisfied here and a good fraudulent-transfer claim exists. [Citation.] Thus, under “applicable law,” the relevant transfers are “voidable,” and the bankruptcy trustee can use §544(b)(1) to set them aside. That remains true even though the trustee must sue the United States to void the relevant transfers, because §106(a)(1) bars the government from raising a sovereignimmunity defense in the trustee’s action.
Id. at 540 (Gorsuch, J., dissenting).
58 United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989).
59 Id. (internal quotation marks omitted).
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Court even acknowledged that the Trustee’s argument to this effect had “traction.”60 But, the Supreme Court dismissed this argument based on its observations that:
(1) Even if § 106(a) does not enable trustees to prevail against the Government under § 544(b), they might still prevail against the Government under § 544(a); and
(2) Many of the other Bankruptcy Code sections listed in § 106(a) “plainly do not implicate sovereign immunity at all.”61
The problem with the Supreme Court’s logic is that § 544(b) plainly does implicate sovereign immunity, and Congress enacted § 544(b)(1) before it enacted § 106(a)(1),62 yet Congress did not exclude § 544(b) from its list in § 106(a)(1). As the Tenth Circuit highlighted, it is “always appropriate to assume our elected representatives . . . know the law.”63 Further, as the bankruptcy court in Miller found, the inclusion of certain subsections in § 106(a) to which sovereign immunity cannot apply evinces Congress’s intent that the waiver be as broad as possible.64
The Supreme Court also flagged that Congress amended § 106(a) in 1994 with the “narrow aim” of overturning two decisions that did not involve § 544(b): United States v. Nordic Village, Inc.65 and Hoffman v. Conn. Dep't of Income Maint.66 The Court construed this “narrow aim” to mean that Congress merely sought to “make section 106 conform to the Congressional intent of the Bankruptcy Reform Act of 1978;” namely, to provide a “limited waiver of sovereign immunity in bankruptcy cases.”67 But, the Court did not clearly explain why, if the aim of § 106(a)’s amendment was as “narrow” as it suggests, Congress added a
60 Miller, 604 U.S. at 535.
61 Id. at 535-37.
62 Miller v. United States, 71 F.4th 1247, 1255 (10th Cir. 2023).
63 Id. (citation omitted).
64 Miller v. United States (In re All Resort Grp., Inc.), 617 B.R. 375, 387 (Bankr. D. Utah 2020).
65 United States v. Nordic Village, Inc., 503 U.S. 30 (1992).
66 Hoffman v. Conn. Dep't of Income Maint., 492 U.S. 96 (1989).
67 United States v. Miller, 604 U.S. 518, 535 (2025).
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sovereign-immunity waiver to § 106(a) for 59 specific provisions of the Bankruptcy Code (including § 544) in its 1994 amendment to § 106(a).68
So why, then, did the Supreme Court find that § 106(a)(1) does not abrogate sovereign immunity regarding § 544(b) and the underlying state-law claims when it plainly does? The answer likely lies in a theory proffered by the Tenth Circuit in its Miller decision. The Tenth Circuit explained the Seventh Circuit’s earlier holding, that § 106(a) did not abrogate federal sovereign immunity regarding an underlying state-law claim, as a policy decision to conserve tax funds.69 Such an application of sovereign immunity would be consistent with the doctrine’s accepted purpose of practical administration.70
Although not mentioned in the Supreme Court’s analysis, practical administration may have been an important consideration when the Court issued its decision on March 26, 2025. This timing came in the midst of “mass firings and dramatic disruptions to federal programs” prompted by the U.S. Department of Government Efficiency71 in early 2025.72 DOGE sought, inter alia, “mass headcount reductions across the federal bureaucracy.”73 The Miller decision, which limits the statute of limitations for fraudulent transfer claims against the United States to two years rather than four, will no doubt reduce the volume of litigation against the United States and the required payouts on fraudulent-transfer claims. The expansion of sovereign immunity came at an opportune time when the federal government was undergoing an historic reduction to its workforce.
Ultimately, whether the Supreme Court was right or wrong on the law, its decision is now final and binding on all lower courts.74 It is not unthinkable that
68 See id. at 534.
69 Miller v. United States, 71 F.4th 1247, 1254 (10th Cir. 2023).
70 United States v. Shaw, 309 U.S. 495, 500-01 (1940).
71 The United States Department of Government Efficiency, i.e., DOGE, shall hereafter be referred to as “DOGE.”
72 See generally Citizens for Resp. & Ethics in Wash. v. United States DOGE Serv., 769 F. Supp. 3d 8, 11 (D.D.C. 2025) (discussing the DOGE cuts). DOGE’s stated purpose was “to dismantle Government Bureaucracy, slash excess regulations, cut wasteful expenditures, and restructure Federal Agencies.” Id.
73 Id. at 12 (citation omitted).
74 See generally Brown v. Allen, 344 U.S. 443, 540 (1953) (Jackson, J., concurring) (“We are not
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Congress will amend § 106(a) to clearly waive federal sovereign immunity as to state avoidance statutes nested within § 544(b); as noted above, the 1994 amendments to § 106, in fact, were enacted to overturn two Supreme Court’s decisions. But, unless and until Congress intervenes,75 bankruptcy professionals will have to understand the implications of Miller. Exactly what these implications are will be discussed in the following sections.
Post-Miller, sovereign immunity deprives bankruptcy courts of jurisdiction over actions by trustees or debtors-in-possession to avoid transfers against federal governmental units pursuant to § 544(b) and an underlying state avoidance statute. But, § 544(b) is not the only basis for avoidance of a transfer by a trustee. Rather, there are at least seven other provisions in the Bankruptcy Code that allow for avoidance of a transfer against governmental units:
• § 544(a) (transfers invalid against the trustee as judicial lien creditor, creditor with an unsatisfied writ of execution, bona fide purchaser of real property) and § 544(b) (as successor to rights of an actual, unsecured creditor under applicable nonbankruptcy);
• § 545 (invalid statutory liens);
• § 547 (preferences);
• § 548 (fraudulent transfers and obligations);
• § 549 (postpetition transfers);
• § 553(b) (setoffs within 90-day prepetition period); and
final because we are infallible, but we are infallible only because we are final.”).
75 Any state avoidance statute purporting to waive federal sovereign immunity would be ineffective, given the well-established requirement of clear Congressional waiver of sovereign immunity. See, e.g., United States v. Miller, 604 U.S. 518, 527 (2025) (noting that sovereign immunity is “jurisdictional in nature” and “deprives courts of the power to hear suits against the United States absent Congress’s express consent”); see also Zazzali v. Swenson (In re DBSI, Inc.), No. 1054649(PJW), 2011 Bankr. LEXIS 791, at *12 (Bankr. D. Del. Feb. 11, 2011) (noting that neither the California legislature nor any state would have the authority to abrogate the sovereign immunity of the United States as a defense to a creditor claim under the state’s version of the Uniform Fraudulent Transfer Act or otherwise) (citation omitted).
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• § 724(a) (penalties secured by lien).76
This article will address the impact of Miller on each of these provisions.
In Miller, the Supreme Court noted that “even if § 106(a) does not enable trustees to prevail against the [federal government] under § 544(b), they might still prevail against the [federal government] under § 544’s other subprovision—subsection (a).”77 This is because unlike § 544(b), § 544(a) has no actual-creditor requirement.78
In addition, even under § 544(b), § 106(a) grants federal courts jurisdiction to hear § 544(b) claims brought against state governments if the state has subjected itself to potential liability under its fraudulent transfer statute.79 The implications of Miller regarding state and local governments will be discussed in more detail below.
Section 545 of the Bankruptcy Code is the “only provision pursuant to which a trustee may avoid certain statutory liens,” including tax liens.80 Fortunately for bankruptcy trustees, then, there should be no argument that the Supreme Court’s Miller decision affects § 545 actions.
Like § 544(a), 11 U.S.C. § 545 imposes no actual-creditor requirement.81 Further, § 106(a)(1) expressly lists § 545 and thus abrogates sovereign immunity regarding § 545 claims. Collier, in fact, recognizes that § 106(a) permits § 545 suits
76 See 5 COLLIER ON BANKRUPTCY ¶ 550.02 (Richard Levin & Henry J. Sommer eds., 16th ed.) (listing provisions under which a transfer might be avoided).
77 Miller, 604 U.S. at 536.
78 Id.
79 Miller, 604 U.S. at 537.
80 5 COLLIER ON BANKRUPTCY ¶ 545.01 (Richard Levin & Henry J. Sommer eds., 16th ed.).
81 See Miller, 604 U.S. 531 (noting that § 544(b)’s actual-creditor requirement “is unique to § 544(b)”).
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against governmental units.82 Accordingly, any attempt by a governmental unit to invoke sovereign immunity in defense to a § 545 claim should fail.
iii. Sections 547, 548, and 549
Although the Trustee in Miller brought § 548(a) claims against the defendants in addition to his § 544(b)/UUFTA claims, the § 548(a) claims were not at issue because the transfers fell outside of § 548(a)(1)’s two-year lookback period. But, what if the transfers had occurred within two years before the petition date?
The Supreme Court’s decision in Miller hinges on § 544(b)’s requirement that the transfer be “voidable under applicable law by a creditor holding an unsecured claim.” Under the Supreme Court’s ruling, a party cannot maintain a § 544(b) fraudulent transfer claim against the United States because Congress has not waived sovereign immunity regarding the state-law claims nested within § 544(b)’s “applicable law” clause.83 Sections 547, 548, and 549, in contrast, contain no such requirement.84 Further, § 106(a)(1) contains an express waiver of sovereign immunity regarding §§ 548, 550, and 551, which are federal claims.85 As such, Miller does not disturb a trustee’s §§ 547, 548, and 549 claims to avoid preference, two-year, and postpetition transfers against the United States.
iv. Section 553(b)
Section 553(b) is a “direct avoidance provision” that provides that a trustee may recover from any creditor the amount of a prepetition setoff to the extent that the setoff permitted the creditor to recover more than the creditor would have
82 2 COLLIER ON BANKRUPTCY ¶ 106.04[1] (Richard Levin & Henry J. Sommer eds., 16th ed.) (noting that § 106(a) permits suits against governmental units to, inter alia, avoid liens).
83 Miller, 604 U.S. at 532 .
84 Compare 11 U.S.C. § 544(b)(1), with 11 U.S.C. §§ 547(b), 548(a)(1) and 549(a); see also Miller, 604 U.S. at 531 (noting that § 544(b)’s actual creditor requirement “is unique to § 544(b)”).
85 See also 2 COLLIER ON BANKRUPTCY ¶ 106.04[1] (Richard Levin & Henry J. Sommer eds., 16th ed.) (recognizing that § 106(a) permits suits against governmental units to, inter alia, recover preferences and fraudulent transfers); cf. Miller, 604 U.S. at 532 (noting that § 106(a) abrogates sovereign immunity for the federal cause of action created by § 544(b) but not for whatever state-law claim supplies the “applicable law” for the § 544(b) claim); Miller v. United States (In re All Resort Grp., Inc.), 617 B.R. 375, 385-86 (Bankr. D. Utah 2020) (distinguishing §§ 547, 548, and 549 claims, which are entirely federal law claims, from § 544(b) claims based on state avoidance statutes).
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recovered if the setoff had occurred at certain benchmark points in time.86 Specifically, pursuant to § 553(b):
(1) Except with respect to a setoff of a kind described in section 362(b)(6), 362(b)(7), 362(b)(17), 362(b)(27), 555, 556, 559, 560, 561, 365(h), 546(h), or 365(i)(2) of this title, if a creditor offsets a mutual debt owing to the debtor against a claim against the debtor on or within 90 days before the date of the filing of the petition, then the trustee may recover from such creditor the amount so offset to the extent that any insufficiency on the date of such setoff is less than the insufficiency on the later of—
(A) 90 days before the date of the filing of the petition; and (B) the first date during the 90 days immediately preceding the date of the filing of the petition on which there is an insufficiency.
(2) In this subsection, “insufficiency” means amount, if any, by which a claim against the debtor exceeds a mutual debt owing to the debtor by the holder of such claim.87
Nothing in § 553(b) requires that a transfer be “voidable under applicable law by a creditor holding an unsecured claim,” and Miller’s reasoning does not apply to § 553(b) claims.88 v. Section 724(a)
Section 724(a) “empowers the trustee to avoid liens that secure claims listed in section 726(a)(4) related to claims for fines, penalties or forfeitures, or other noncompensatory relief.”89 It provides: “The trustee may avoid a lien that secures a claim of a kind specified in section 726(a)(4) of this title.”90 Section 726(a)(4) claims are:
86 5 COLLIER ON BANKRUPTCY ¶ 553.09[2] (Richard Levin & Henry J. Sommer eds., 16th ed.).
87 11 U.S.C. § 553(b).
88 See Miller, 604 U.S. at 531 (noting that § 544(b)’s actual-creditor requirement “is unique to § 544(b)”).
89 6 COLLIER ON BANKRUPTCY ¶ 724.02 (Richard Levin & Henry J. Sommer eds., 16th ed.).
90 11 U.S.C. § 724(a).
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any allowed claim, whether secured or unsecured, for any fine, penalty, or forfeiture, or for multiple, exemplary, or punitive damages, arising before the earlier of the order for relief or the appointment of a trustee, to the extent that such fine, penalty, forfeiture, or damages are not compensation for actual pecuniary loss suffered by the holder of such claim.91
Section 724(a) is intended to protect innocent creditors from the consequences of a debtor’s wrongdoing.92
Section 724(a) is particularly germane to the issue of sovereign immunity because taxing authorities may impose penalties subject to § 724(a) avoidance. As the Supreme Court has noted:
Tax penalties are imposed at least in part as punitive measures against persons who have been guilty of some default or wrong. Enforcement of penalties against the estates of bankrupts, however, would serve not to punish the delinquent taxpayers, but rather their entirely innocent creditors.93
Fortunately for chapter 7 trustees and creditors, then, § 724(a) does not impose any requirement that a lien be “voidable under applicable law,” and Miller should not provide a sovereign-immunity defense to governmental units against § 724(a) actions.94
The Supreme Court, in Miller, identified a potential workaround to its decision:
91 11 U.S.C. § 726(a)(4).
92 6 COLLIER ON BANKRUPTCY ¶ 724.02[7] (Richard Levin & Henry J. Sommer eds., 16th ed.).
93 Simonson v. Granquist, 369 U.S. 38, 40-41 (1962); see also Burden v. United States, 917 F.2d 115, 117 (3d Cir. 1990) (noting that Simonson has been superseded by statute); In re Brentwood Outpatient, Ltd., 134 B.R. 267, 271 (Bankr. M.D. Tenn. 1991) (same).
94 See United States v. Miller, 604 U.S. 518, 531 (2025) (noting that § 544(b)’s actual-creditor requirement “is unique to § 544(b)”).
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Finally, we decline respondent’s invitation to affirm on other grounds. As an alternative basis for ruling in his favor, respondent proposes a novel reading of § 544(b) that would purportedly allow a trustee to set aside a federal tax payment without ever triggering the Federal Government’s sovereign immunity. Per that reading, the trustee could satisfy the actual-creditor requirement by showing that “applicable” state law would permit a creditor to void the tax payment by suing someone other than the United States. Respondent claims that he can do that here because Utah law would (in theory) permit an All Resort Group creditor to void the 2014 tax payments by suing the two shareholders who orchestrated those payments, neither of whom is protected by sovereign immunity.95
The Court “express[ed] no view on the merits of this argument” because it “turn[ed] on readings of both Utah law and § 544(b) that no other court has ever considered,” because the Trustee had not raised the issue below, and because the issue had not been adequately briefed and argued.96 As of the time of publication of this article, it remains to be seen whether this argument, in fact, offers a workaround to Miller
The analysis of Miller’s effect on state sovereign immunity is slightly different than the analysis regarding federal sovereign immunity. The Eleventh Amendment erects a general bar against federal lawsuits brought against a state.97 It provides: “The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.”98 The Eleventh Amendment bars suits which seek either damages or injunctive relief against “a state, an ‘arm of the state,’ its instrumentalities, or its agencies.”99
95 Id. at 538.
96 Id. at 538 & n.7.
97 Steshenko v. Gayrard, 70 F. Supp. 3d 979, 988 (N.D. Cal. 2014).
98 U.S. CONST. amend. XI.
99 Franceschi v. Schwartz, 57 F.3d 828, 831 (9th Cir. 1995); accord Kohn v. State Bar, 119 F.4th 693, 696 (9th Cir. 2024) (noting that the Eleventh Amendment immunizes states from suit in federal
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State sovereign immunity under the Eleventh Amendment is “not absolute.”100 Rather, there are three exceptions to the rule:
(1) Congress can abrogate this immunity if it (i) makes its intention to abrogate unmistakably clear in the language of the statute” and (ii) “acts pursuant to a valid exercise of its power under § 5 of the Fourteenth Amendment;”101
(2) A state may waive its Eleventh Amendment immunity by consenting to suit;102 and
(3) Under the Ex parte Young doctrine,103 immunity does not apply when the plaintiff chooses to sue a state official in his or her official capacity for prospective injunctive relief.104
Because a suit to avoid and recover transfers does not seek prospective injunctive relief, the third exception to state sovereign immunity, based on the Ex parte Young doctrine, does not apply. This article will thus discuss the waiver of state sovereign immunity under the first two exceptions noted above. It will then discuss special applications regarding arms, instrumentalities, and agencies of the state.
In Miller, the Supreme Court highlighted that § 106(a) abrogates sovereign immunity not just for the federal government, but for any “governmental unit,” which 11 U.S.C. § 101(27) defines to include any “State.”105 The Court elaborated that at the time Congress enacted § 106(a), some states had chosen to subject themselves to potential liability under their own fraudulent-transfer statutes.106 court by citizens and noncitizens alike).
100 Steshenko, 70 F. Supp. 3d at 988.
101 Kohn, 119 F.4th at 696; Steshenko, 70 F. Supp. 3d at 988.
102 Steshenko, 70 F. Supp. 3d at 988.
103 Derived from Ex parte Young, 209 U.S. 123 (1908).
104 Id. (citing Seminole Tribe of Fla. v. Florida, 517 U.S. 44, 73 (1996)).
105 United States v. Miller, 604 U.S. 518, 537 (2025).
106 Id. (citing Ill. Comp. Stat. ch. 705, § 505/8(a); N.Y. Ct. Clms. Act Law Ann. § 8; Ohio Rev. Code
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According to the Supreme Court, § 106(a) grants federal courts jurisdiction to hear § 544(b) suits against any such states.107 Implicit in this discussion is a finding that if a state has not expressly waived sovereign immunity regarding its own avoidance statutes, § 106(a) does not constitute such a waiver.
If, however, Congress abrogated a governmental unit’s sovereign immunity in § 106(a), that abrogation applies to the federal government and to states equally.108 Thus, for all avoidance statutes other than § 544(b), the analysis will be the same as set forth above regarding federal sovereign immunity. In other words, if Congress waived sovereign immunity regarding a particular provision of the Bankruptcy Code in § 106(a), that waiver will apply to the federal government and to states alike.
States may waive their own sovereign immunity in two ways. The first and most straightforward is an express legislative waiver. The second is a waiver by conduct that is incompatible with preservation of the immunity. Each possibility will be discussed in detail as follows.
As discussed above, in Miller, the Supreme Court noted that § 106(a) grants federal courts jurisdiction to hear § 544(b) suits against any states that had chosen to subject themselves to potential liability under their own fraudulent-transfer statutes.109 A plaintiff suing a state under § 544(b) and the state’s fraudulent-transfer act should therefore consult state law to determine whether there has been a legislative waiver of Eleventh Amendment protections.
The California Uniform Voidable Transactions Act, for instance, does not purport to establish a cause of action against a governmental taxing authority for the Ann. § 2743.02(A)).
107 Id.
108 See id. (noting that § 106(a) abrogates sovereign immunity not just for the federal government, but for any “governmental unit,” which 11 U.S.C. § 101(27) defines to include any “State”).
109 Id.
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refund of taxes.110 And, the California Constitution expressly requires that actions for tax refunds be brought in a matter prescribed by the state legislature.111 Accordingly, California may not have consented to potential liability under the California Uniform Voidable Transactions Act.112
In the Ninth Circuit, legislation is not the only way for a state to waive its Eleventh Amendment immunity. Rather, the Ninth Circuit has held that a state may waive its Eleventh Amendment immunity “by conduct that is incompatible with an intent to preserve that immunity.”113 The court reasoned that a party knows whether it purports to be an “arm of the state” and can disclose early in the proceedings whether it objects to having the matter heard in federal court.114 Timely disclosure prevents waste of resources and the “improper manipulation of the judicial process.”115 In Hill, the Blind Industries & Services of Maryland116 “knew that [the] action had been filed in federal court, the identity of the plaintiff, the particular matters at issue, and the relief sought,” yet it did not assert its Eleventh Amendment sovereign immunity defense until trial.117 To prevent a “virtual fraud on the federal court and opposing litigants,” the Ninth Circuit found that the BISM had waived its
110 See CAL. CIV. CODE §§ 3439–3439.13.
111 CAL. CONST. art. XIII, § 32; see also Woosley v. California, 838 P.2d 758, 792 (Cal. 1992) (holding that the California Constitution precludes the court from expanding the methods for seeking tax refunds expressly provided by the legislature).
112 The foregoing analysis is based on argument of the IRS in a motion to dismiss filed in Sharp v. United States (In re SK Foods, LP), Case No. 10-02117-D, ECF No. 9 (Bankr. E.D. Cal. May 5, 2010).
113 Hill v. Blind Indus. & Servs., 179 F.3d 754, 758 (9th Cir. 1999). There is no implied waiver of federal sovereign immunity. Daniel v. Nat’l Park Serv , 891 F.3d 762, 768 (9th Cir. 2018). Rather, as noted above, federal sovereign immunity is “jurisdictional in nature” and “deprives courts of the power to hear suits against the United States absent Congress’s express consent.” Miller, 604 U.S. at 527.
114 Hill, 179 F.3d at 758.
115 Id.
116 The Blind Indus. & Services of Maryland shall hereafter be referred to as the “BISM.”
117 Hill, 179 F.3d at 758.
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sovereign immunity defense.118 In 2025, the Ninth Circuit reaffirmed its holding in Hill on the basis that a state’s sovereign immunity is a “personal privilege which it may waive at [its] pleasure.”119
Under Hill, a state governmental unit in the Ninth Circuit must timely raise a sovereign immunity defense to avoid an argument by the trustee that the state waived this protection. Any state sued in an avoidance action should therefore promptly assert sovereign immunity in a responsive pleading. If a state fails to do so, it risks finding itself in a dispute regarding whether it has waived its Eleventh Amendment protections.120 And, while trustees should not count on a state waiving its Eleventh Amendment protections, in the event trustees find themselves in the midst of avoidance litigation against a state that has not yet raised sovereign immunity as a defense,121 this argument may provide a path to recovery.
118 Id. at 758, 763.
119 California ex rel. Bonta v. Del Rosa, 158 F.4th 1066, 1075 (9th Cir. 2025) (quoting Clark v. Barnard, 108 U.S. 436, 447 (1883)) (brackets in original).
120 In McHugh v. Illinois DOT, the Seventh Circuit held that when it applies, the Eleventh Amendment deprives federal courts of jurisdiction over claims against immune defendants. Thus, according to the Seventh Circuit, Eleventh Amendment immunity “can be raised at any stage of the proceedings,” and “failure to raise the immunity as a defense in the district court does not constitute waiver.” McHugh v. Ill. DOT, 55 F.4th 529, 532 (7th Cir. 2022). States within the Ninth Circuit may therefore have an argument that Hill should be overturned as a matter of law. Given that the Ninth Circuit reaffirmed Hill as recently as 2025, however, such an argument will likely entail extensive briefing and potentially a Supreme Court decision. Further, although outside the purview of this article, which is written for the California Bankruptcy Journal, practitioners in circuits other than the Ninth Circuit should review their circuit’s precedent regarding waiver of Eleventh Amendment immunity by conduct.
121 It is conceivable that a state will not have raised sovereign immunity as a defense in avoidance litigation. As discussed above, Ninth Circuit precedent had previously held that § 106(a) waived sovereign immunity regarding both § 544(b) claims and the state avoidance statutes nested within § 544(b) claims. Zazzali v. United States (In re DBSI, Inc.), 869 F.3d 1004 (9th Cir. 2017). Under this holding, states lacked a sovereign immunity defense to § 544(b) avoidance claims in the Ninth Circuit and thus may not have asserted such a defense early in the litigation. Post-Miller, an Eleventh Amendment sovereign immunity defense may be available to § 544(b) claims based on state avoidance statutes, but at least in the Ninth Circuit, states will still need to affirmatively raise this defense to avoid waiver.
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As noted above, the Eleventh Amendment bars suits which seek either damages or injunctive relief against “a state, an ‘arm of the state,’ its instrumentalities, or its agencies.”122
It is well-established that certain governmental units may invoke Eleventh Amendment protections. For instance, there are several cases holding that the California Franchise Tax Board is an arm of the State of California that enjoys Eleventh Amendment immunity.123
For many other governmental units, however, there is no authority regarding whether Eleventh Amendment protections to avoidance claims exist. State sovereign immunity, for example, does not extend to county and municipal governments, unless state law treats them as arms of the state.124 To determine whether a governmental unit is an arm of the state, courts examine the five factors set forth in Mitchell v. Los Angeles Community College District:125
(1) whether a money judgment would be satisfied out of state funds;
(2) whether the entity performs central government functions;
122 Franceschi v. Schwartz, 57 F.3d 828, 831 (9th Cir. 1995).
123 See Mitchell v. Franchise Tax Bd. (In re Mitchell), 209 F.3d 1111, 1114 (9th Cir. 2000) (affirming dismissal of an adversary complaint against the California Franchise Tax Board for lack of jurisdiction based on state sovereign immunity under the Eleventh Amendment); Torres v. McDonnell, No. 23-cv-04276-SI, 2023 U.S. Dist. LEXIS 159381, at *15 (N.D. Cal. Sept. 8, 2023) (“The State Franchise Tax Board is a state agency, and thus it is entitled to Eleventh Amendment immunity from suit.”); Abergel v. SSA, Nos. 1:19-CV-6340 (LLS) & 1:19-CV-6413 (LLS), 2019 U.S. Dist. LEXIS 123455, at *4 (S.D.N.Y. July 24, 2019) (“The California Franchise Tax Board is an arm of the State and as such enjoys Eleventh Amendment immunity.”); Gouch v. Cal. Franchise Tax Bd , 2009 U.S. Dist. LEXIS 84023, at *7 (N.D. Ga. Sept. 15, 2009) (“The California Franchise Tax Board is part of the State of California. [Citation.] Therefore, plaintiff’s claim for damages is barred by the Eleventh Amendment.”); accord CAL GOV CODE § 15700 (“There is in the state government . . . a Franchise Tax Board[.]”).
124 Sato v. Orange Cty. Dep’t of Educ., 861 F.3d 923, 928 (9th Cir. 2017); accord Hess v. Port Auth. Trans-Hudson Corp., 513 U.S. 30, 47 (1994) (“Political subdivisions exist solely at the whim and behest of their state, yet cities and counties do not enjoy Eleventh Amendment immunity.”) (internal quotation marks and citations omitted).
125 Mitchell v. Los Angeles Cmty. Coll. Dist., 861 F.2d 198 (9th Cir. 1988).
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(3) whether the entity may sue or be sued;
(4) whether the entity has the power to take property in its own name or only the name of the state; and
(5) The corporate status of the entity.126
The party asserting Eleventh Amendment immunity from suit has the initial burden of establishing its status as an arm of the state.127
Should a governmental unit raise an Eleventh Amendment defense, there will likely need to be discovery regarding the arm-of-the-state factors (barring onpoint precedent making an arm-of-the-state finding for the governmental unit at issue). Litigation of the arm-of-the-state factors may prove complex and expensive, and both trustees suing county and municipal entities and the entities themselves should be aware of the expense and uncertainty involved in such a defense.
Sovereign immunity is an unpopular doctrine to begin with,128 and the Supreme Court’s holding in Miller is not likely to endear the doctrine to any bankruptcy trustees or the creditor bodies they represent. In effect, Miller provides a safe harbor to governmental units that have received fraudulent transfers. Whereas § 544(b) and the underlying state avoidance statutes often provide a lookback period of four years, Miller limits fraudulent transfer actions against immune governmental units to § 548 with its two-year look back period. Miller thus provides governmental units with protections from avoidance claims that are not available to other fraudulent-transfer recipients. In so doing, Miller also provides a safe harbor to any parties who paid personal tax liabilities with fraudulently transferred funds. Specifically, a governmental unit may seek to impose liability against the taxpayer for any amounts that are avoided and recovered by a bankruptcy trustee. If the lookback period is limited to two years, the taxpayer who fraudulently transferred
126 Sato, 861 F.3d at 928-29.
127 Wright v. Madison Cty. Reg’l Water Dist., No. 5:22-CV-5060, 2022 U.S. Dist. LEXIS 214765, at *2-3 (W.D. Ark. Nov. 29, 2022).
128 See generally Sarah L. Brinton, Three-Dimensional Sovereign Immunity, 54 SANTA CLARA L. REV. 237 (2014) (discussing the “considerable public disfavor” regarding the doctrine of sovereign immunity).
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assets to satisfy personal tax liability indirectly benefits from the sovereign immunity defense. It is left to Congress and the state legislatures to decide whether they wish to provide governmental units with a sovereign-immunity defense to avoidance actions under § 544(b) and state avoidance statutes, notwithstanding the foregoing consequences of such a defense.
In the meantime, bankruptcy trustees and government defendants to avoidance actions need to understand the implications of Miller. In short, the holding of Miller is fairly limited. It provides a sovereign immunity defense to the federal government against all actions by bankruptcy trustees under a state avoidance statute nested within a § 544(b) claim. And, it provides the same protections to a state, unless the state has consented to suit under its avoidance laws. In other words, Miller limits the lookback period of fraudulent transfer actions to two years against the United States and to two years against states, unless the particular state has consented to a longer lookback period. This holding will certainly preclude avoidance and recovery of certain fraudulent transfers by bankruptcy trustees. And, undoubtedly, the exact parameters of Miller will be litigated in the coming years. In the meantime, this article will serve as a reference regarding Miller’s scope.
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By Eric P. Israel1
Various sections of the Bankruptcy Code2 provide a basis for the avoidance, disallowance or subordination of claims for penalties, default fees and other charges that are punitive in nature.3 Liens securing such claims can be subject to avoidance and preservation.4 The result can create significant value from an asset the trustee might otherwise not be able to administer for the benefit of a debtor’s estate and its creditor body. At a minimum, it can reduce the creditor body so as to increase distributions to other creditors.
This article discusses two recent cases of interest. The first case, Honchariw v. FJM Private Mortg. Fund, LLC, 5 expands the ability under California law to challenge default interest and late charges. Honchariw provides a basis to challenge such interest and charges as penalties that are unenforceable under California law.6
The second case, G Companies Mgmt., LLC v. LREP Arizona, LLC, 7 deals with another important limitation on claims of lenders—state usury laws. Until recently, lenders could fairly easily evade California usury laws by providing in their contracts that a different state’s law applies. G Companies creates as split in the
1 Eric P. Israel is a partner in the law firm of Levene, Neale, Bender, Yoo & Golubchik L.L.P. Mr. Israel specializes in all aspects of bankruptcy and commercial law, and regularly represents debtors, trustees, creditors, equity holders and other parties involved in bankruptcy cases.
2 Bankruptcy Code refers to 11 U.S.C. §§ 101 – 1532.
3 See infra section 1.A. Hereinafter in this article, such claims are referred to collectively as “penalties.” For a discussion of earlier law, see Eric P. Israel, Hints on Making the Most of Your Estate’s Assets: Often Overlooked Methods to Maximize Equity, 26 CAL BANKER J. 199 (2002).
4 See 11 U.S.C. § 724(a).
5 83 Cal. App. 5th 893, 299 Cal. Rptr. 3d 819 (2022).
6 See infra section 1.
7 88 Cal. App. 5th 342, 304 Cal. Rptr. 3d 651 (2023).
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appellate courts by providing that California usury laws are a fundamental state policy, and by refusing to enforce a provision in a contract providing that another state’s laws applied. Hence, in California, such provisions may no longer insulate lenders from usury challenges.8
Time will tell if these changes are the start of a trend further expanding the number of arrows in the quiver of debtors and trustees to challenge secured claims.
A. Bankruptcy Bases for Disallowance of Claims for Fines, Penalties, Forfeitures, and Multiple Damages
The general, broadest claim9 allowance statute of the Bankruptcy Code is found at section 502(b)(1). Section 502 applies in all chapters of the Bankruptcy Code.10 Subsection 502(b) provides that the Court shall disallow any claim that is “unenforceable against the debtor and property of the debtor under any agreement or applicable law.”11 As a result, any claim that is disallowable under state law against the debtor or her property is subject to challenge under this statute. With respect to penalties, such claims are disallowable under section 502(b)(1) if state law provides that they are unenforceable.
8 See infra section 2
9 Section 101(5) provides:
The term “claim” means—
(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or
(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.
10 See 11 U.S.C. § 103(a).
11 11 U.S.C. § 502(b)(1).
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In addition, the Bankruptcy Code provides in chapter 7 its own statute for challenging penalties. Section 726(a)(4) provides that certain claims for fines, penalties, forfeitures and similar claims are subject to subordination. That statute provides, in relevant part, as follows:
[P]roperty of the estate shall be distributed . . . (4) fourth, in payment of any allowed claim, whether secured or unsecured, for any fine, penalty, or forfeiture, or for multiple, exemplary, or punitive damages, arising before the earlier of the order for relief or the appointment of a trustee, to the extent that such fine, penalty, forfeiture or damages are not compensation for actual pecuniary loss suffered by the holder of such claim.12
Section 726(a)(4), while specifically applying to chapter 7 cases, also has been held to apply to chapter 11 cases as well via the “best interest of creditors” test found in section 1129(a)(7)(A)(ii).13
With respect to liens, section 506(d) provides as follows:
To the extent a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void, unless—
(1) such claim was disallowed only under section 502(b)(5) or 502(e) of this title; or
12 11 U.S.C. § 726(a)(4).
13 See, e.g., In re Dow Corning Corp., 244 B.R. 721, 728-29 (Bankr. E. D. Mich. 2000) (based on “factual finding... that punitive damages would not be paid by a trustee in a chapter 7 case,” a “Plan which provides for no punitive damages does not violate the individual rights of any rejecting tort claimant and so satisfies § 1129(a)(7)”), aff’d in part and rev’d in part on other grounds, 255 B.R. 445 (E.D. Mich. 2022).
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(2) such claim is not an allowable secured claim due only to the failure of the entity to file a proof of such claim under section 501 of this title.14
As a result, liens securing disallowed penalties are void. Per section 550(a), to the extent a transfer is avoidable under section 724(a), the trustee may recover from various transferees and parties who benefited, subject to certain defenses.15 Similarly, liens avoided are automatically preserved for the benefit of the estate under section 551, as are liens voided under section 506(d).16
In various contexts, bankruptcy courts have provided for the subordination of penalty claims under bankruptcy law as provided in section 726(a)(4). For instance, in In re Gill, 17 the trustee could avoid, subordinate and preserve for the benefit of the estate, the penalty portion of an IRS tax lien on the debtor’s residence, thereby creating value in the residence that could be administered for the benefit of estate. In In re Bolden, 18 penalties on a tax lien were avoided and preserved for the benefit of the estate. In addition, in In re Matheson Flight Extenders, Inc., 19 the court subordinated an obligation arising under a settlement agreement because the underlying debt arose from a punitive damage award. Otherwise, the enforcement of tax penalties originally imposed to punish a delinquent taxpayer or other debtor wrongful conduct, would instead serve to punish the debtor’s creditors.20 However, in other circumstances, with respect to secured claims, courts have instead cited to section 506(b) but deferred to state law and allowed penalty claims of over-secured
14 11 U.S.C. § 506(d).
15 See 11 U.S.C. § 550(a).
16 See 11 U.S.C. § 551.
17 574 B.R. 709 (B.A.P. 9th Cir. 2017).
18 327 B.R. 657 (Bankr. C.D. Cal. 2005).
19 673 B.R. 436 (Bankr. E.D. Cal. 2025).
20 See In re Cassis Bistro, Inc., 188 B.R. 472, 475 (S.D. Fla. 1995) (“It would be inequitable for [the payment to the unsecured creditors] to be further diluted by having the wrongdoer's estate pay the penalty claims to the detriment of innocent creditors.”); In re Airlift Int'l, Inc., 120 B.R. 597, 601–02 (S.D. Fla. 1990) (a penalty is inequitable when the purpose is deterrence, but that deterrence is not present and is at the sole detriment of the innocent creditors).
Vol. 37 Cal. Bankr. J. No. 1 (2026) 28
creditors that would seem to fall within section 726(a)(4) because they seem to coerce payment rather than compensate for actual pecuniary loss.21
These statutes uphold the policy of allowing a party to share pari pasu with other creditors in the amount of its actual damages and not dilute recoveries for punitive damages and similar claims as against actual, out-of-pocket damages. Other statutes in the Bankruptcy Code similarly restrict claims of certain types in order not to dilute other creditor claims.22
California Civil Code section 1671(b) states the general rule that a liquidated damages provision is valid unless it is established that the provision was unreasonable under the circumstances existing at the time the contract was made.23
21 See, e.g., Great W. Bank & Trust v. Entz-White Lumber & Supply, Inc. (In re Entz-White Lumber & Supply, Inc.), 850 F.2d 1338 (9th Cir. 1988).
22 See, e.g., 11 U.S.C. §§ 502(b)(6) (cap on breach of lease claims), 502(b)(7) (cap on claims for breach of employment contracts), 510(b) (subordination of claims related to purchase or sale of a security of debtor or affiliate).
23 Specifically, California Civil Code section 1671 provides:
(a) This section does not apply in any case where another statute expressly applicable to the contract prescribes the rules or standard for determining the validity of a provision in the contract liquidating the damages for the breach of the contract.
(b) Except as provided in subdivision (c), a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.
(c) The validity of a liquidated damages provision shall be determined under subdivision (d) and not under subdivision (b) where the liquidated damages are sought to be recovered from either:
(1) A party to a contract for the retail purchase, or rental, by such party of personal property or services, primarily for the party's personal, family, or household purposes; or
(2) A party to a lease of real property for use as a dwelling by the party or those dependent upon the party for support.
(d) In the cases described in subdivision (c), a provision in a contract liquidating damages for the breach of the contract is void except that the parties to such a contract may agree therein upon an amount which shall be presumed to be the
However, section 1671(d) provides a different test for liquidated damages provisions in connection with a contract for the retail purchase, or rental of personal property or services which are primarily for the party’s “personal, family or household purposes.” In that event, the liquidated damages provision is void except where the parties to such contract agree therein upon an amount which shall be presumed to be the amount of damages sustained by a breach thereof, “when, from the nature of the case, it would be impractical or extremely difficult to fix the actual damage.” In other words, in a consumer situation, liquidated damages are void unless contained in a contract, and even then there is only a rebuttable presumption of validity that it would be impractical or extremely difficult to fix the actual damages.
California Civil Code section 1670.5 [formerly section 1670] voids a contract that a court later finds to have been unconscionable at the time it was made. If found to be unconscionable, the court “may refuse to enforce the [entire] contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.”24
The more recent evolution of case law began with Garrett v. Coast & S. Fed. Sav. and Loan Ass’n. 25 Garrett involved a class action complaint where a demurrer had been granted without leave to amend.26 The Garrett court assessed the reasonableness of a late payment provision in a loan agreement. The relevant provision provided that in the event of default on either the principal or an interest installment, additional interest of 2% on the entire unpaid principal balance of the note would be charged from the date of unpaid interest until payment was received curing the default.27 amount of damage sustained by a breach thereof, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.
24 CAL. CIV. CODE § 1670.5(a).
25 9 Cal. 3d 731, 511 P.2d 1197 (1973), superseded by statute as stated in Weber, Lipshie & Co. v. Christian, 52 Cal. App. 4th 645, 654, 60 Cal. Rptr. 2d 677, 681 (1997) (replaced by CAL. CIV. CODE § 1671).
26 See id. at 734.
27 See id.
Vol. 37 Cal. Bankr. J. No. 1 (2026) 30
The Garrett court ruled that whether late charges bear a reasonable relationship to a lender’s estimate of damages depends upon the motivation, purpose, and effect of the charges.28 The court noted that where late charges are designed to greatly exceed a lender's damages, their primary purpose is to compel prompt payment by the threat of charges that bear little or no relationship to the lender's actual loss.29 The court found that the late payment fee, calculated based on the entire unpaid principal loan balance, was an attempt to coerce timely payment by means not reasonably calculated to merely compensate the injured lender, therefore rendering the charges void under Civil Code section 1671.30 The court went on to explain that a borrower should be liable for the actual damages resulting from his default, and the “lender’s charges could be fairly measured by the period of time the money was wrongfully withheld plus the administrative costs reasonably related to collecting and accounting for a late payment.”31 The court concluded that “a charge for the late payment of a loan installment which is measured against the unpaid balance of the loan must be deemed to be punitive in character. It is an attempt to coerce timely payment by a forfeiture which is not reasonably calculated to merely compensate the injured lender.”32 In doing so, Garrett vacated the earlier case of Finger v. McCaughey, 33 which had allowed the parties to contract for different rates of interest upon a default, and disapproved of two other cases.34
More recently, a California Appellate Court in Honchariw v. FJM Priv. Mortg. Fund, LLC,35 expanded on Garrett. In Honchariw, borrowers had taken out a residential loan secured by their home. They fell behind in payments, and litigation was referred to arbitration. The lender in that case was asserting a one-time late payment fee calculated based upon 10% of the entire principal amount of the loan
28 See id.
29 See id.
30 See id. at 741.
31 Id.
32 Id. at 740.
33 114 Cal. 64, 45 P. 1004 (1896).
34 See Garrett, 9 Cal. 3d at 737. The California Supreme Court also disapproved of two intervening cases: Walsh v. Glendale Fed. Sav. & Loan Ass’n, 1 Cal. App. 3d 578, 81 Cal. Rptr. 804 (1969); and O’Connor v. Richmond Sav. & Loan Ass’n, 262 Cal. App. 2d 523, 68 Cal. Rptr. 882 (1968).
35 83 Cal. App. 5th 893 (2022).
31 Vol. 37 Cal. Bankr. J. No. 1 (2026)
plus 9.99% default interest. The arbitrator ruled that the late fee and default interest did not violate California’s public policy evidenced by Civil Code § 1671 and issued an arbitration award in favor of the secured lender.36 The debtors filed a petition to vacate the arbitration award with the Superior Court, which denied their claims, and they then took an appeal. The Court of Appeal reversed, holding that default interest and late payment fees must bear a reasonable relationship to the anticipated injury the lender might actually suffer from default or late payment. In the absence of such relationship, a contractual clause purporting to predetermine damages will be construed as a “penalty” and will be unenforceable as a matter of California law. “Put another way, by its very existence, the Honchariws have met their burden of showing an unlawful penalty.”37 Penalties have been found in other contexts too, including settlement agreements that provide for stipulated judgments in the event of a default.38
Historically, California case law distinguished between late payment provisions that impose default interest on fully matured obligations versus partially matured obligations. When a loan is not paid at maturity, a late payment provision could validly impose default interest on the fully matured obligation, the unpaid principal and accrued interest upon maturity.39 It is unclear if California courts will expand penalty challenges to cover post-maturity defaults. One could certainly argue that where default interest is imposed post-maturity and is not reasonably calculated to estimate actual damages, it is a penalty and should be void just as
36 See id. at 898.
37 Id. at 906.
38 See Red & White Distrib., LLC v. Osteroid Enters., LLC, 38 Cal. App. 5th 582, 251 Cal. Rptr. 3d 400 (2019) (settlement agreement providing for extra $700,000 owing upon default unenforceable as a penalty); but see Mitsuwa Corp. v. Wehba, 2019 WL 3561928 (Cal. App. Aug. 6, 2019) (settlement agreement agreeing for larger sum, to be satisfied in full for smaller sum, passed muster and was not a penalty). Note the need to document the agreement properly. See Dean T. Kirby, Two Recent Cases Show How to, and How Not to, Structure Settlement Agreements Calling for Future Payments, available at https://calawyers.org/business-law/two-recent-cases-show-how-to-and-how-not-tostructure-settlement-agreements-calling-for-future-payments/.
39 See Thompson v. Gorner, 104 Cal. 168, 37 P. 900 (1894) (California Supreme Court upheld a default interest provision under a note which was triggered by non-payment upon maturity); East West Bank v. Altadena Lincoln Crossing, LLC, 598 B.R. 633 (C.D. Cal. 2019); In re 3MB, LLC, 609 B.R. 841 (Bankr. E.D. Cal. 2019) (“default interest following note maturity has long been allowed in California without resort to a liquidated damages analysis”).
Vol. 37 Cal. Bankr. J. No. 1 (2026) 32
default interest on a pre-maturity default. Since most loans provide for recovery of all attorneys’ fees and costs, it may be difficult for lenders to argue that other actual damages have been incurred.
As previously mentioned, penalties under state law in California are void –not merely voidable. The Bankruptcy Code provisions for penalties provide for subordination (section 726(b)(4)), avoidance of liens securing penalty claims (section 724(a)), recovery of transfers (section 550) and preservation of liens securing such claims (section 551). The trustee may also avoid transfers or obligations avoidable under state law (section 544(b)). Note that avoided liens, which include liens that may be void under section 506(d), are automatically preserved for the benefit of the estate (section 551). Thus, the end result should be the same regardless of whether liens secure a claim that is void, voidable or subject to subordination40—liens securing such claims should be subject to preservation.
For some time now, the Ninth Circuit has held that a chapter 11 debtor cannot cure a default and avoid paying default interest through a plan. In Pacifica L 51, LLC v. New Invs., Inc. (In re New Invs., Inc.),41 the U.S. Court of Appeals for the Ninth Circuit held that a chapter 11 debtor could not avoid paying default interest to an over-secured creditor by retroactively curing the default under a plan of reorganization. This overturned prior law that for 28 years had allowed debtors to cure under a plan and avoid paying default interest.42 In some circumstances, with default interest being void under California law now, debtors may be able again to avoid paying default interest in a plan to over-secured creditors.
40 See Kurtin v. Ehrenberg (In re Elieff), 637 B.R. 612 (B.A.P. 9th Cir. 2022) (when a claim is subordinated under section 510(b), any judgment and other liens and encumbrances securing that claim are subordinated as well).
41 840 F.3d 1137 (9th Cir. 2016).
42 See Great W. Bank & Trust v. Entz-White Lumber & Supply, Inc. (In re Entz-White Lumber & Supply, Inc.), 850 F.2d 1338 (9th Cir. 1988).
33
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California’s “usury law is based upon article XV, section 1 of the California Constitution, as well as an initiative measure adopted in 1918” and that is published in Civil Code sections 1916-1 through 1916-5.43
The California Constitution states that no “person, association, copartnership or corporation shall by charging any fee, bonus, commission, discount, or other compensation receive from a borrower more than the interest authorized by this section upon any loan or forbearance of any money, goods, or things in action.”44 Generally, the maximum interest rate in California is 10% for consumers, and 5% plus the Federal Reserve rate for non-consumers.45 In March 2026, the Federal Reserve rate was 3.64%,46 resulting in a maximum rate of 8.64% for non-consumers. Each state has its own usury laws. Those rates can start as low as 6%, and some states have no usury limit.47
California Civil Code § 1916-2 provides that any agreement or contract containing an excessive interest rate “shall be null and void as to any agreement or stipulation therein contained to pay interest and no action at law to recover interest in any sum shall be maintained…” Civil Code § 1916-3(a) authorizes anyone who has paid usurious interest to recover against the lender “treble the amount of the money so paid or value delivered….” Further, violation of these usury provisions constitutes felony loan-sharking under California law, subject to imprisonment in the state prison for up to five years or the county jail for up to one year.48
The purpose of these anti-usury laws is “to protect the necessitous, impecunious borrower who is unable to acqui re credit from the usual sources and is
43 Bisno v. Kahn, 225 Cal. App. 4th 1087, 1098, 170 Cal. Rptr. 3d 709, 716 (2014).
44 CAL. CONST., art. XV, § 1.
45 See Usury Laws State-by-State, https://www.paidnice.com/usury-laws-by-state (Mar. 29, 2026) (hereinafter “Usury Laws”).
46 See Federal Funds Rate History 1990 to 2026, https://www.forbes.com/advisor/investing/fedfunds-rate-history/ (last checked Mar. 29, 2026).
47 See Usury Laws, supra note 46.
48 See CAL. CIV. CODE § 1916-3(b).
Vol. 37 Cal. Bankr. J. No. 1 (2026) 34
forced by his economic circumstances to resort to excessively costly funds to meet his financial needs.”49 Of course, borrowers of this sort are more likely to end up in bankruptcy, where the foregoing usury laws are enforced.50
Nevertheless, California has adopted a long list of parties and transactions that are exempt from usury restrictions. Among other things, banks, credit unions and credit card issuers are exempt,51 as are transactions where a real estate broker is involved.52 Nevertheless, many loan transactions remain subject to usury restrictions.
In contractual situations in general, choice of law rules provide that “The law of the state chosen by the parties to govern their contractual rights and duties will be applied” unless the choice is unreasonable or violates a fundamental public policy of a more interested state.53 “[A]n agreement designating a [foreign] law will not be given effect if it would violate a strong California public policy… [or] result in an evasion of… a statute of the forum protecting its citizens.”54 These usury provisions cannot be waived by contract or otherwise.55
Until recently, however, courts would refrain from engaging in a choice-oflaw review of usury provisions based upon cases that provided that the usury laws did not reflect such a strong public policy. Thus, a savvy creditor could evade California’s usury provisions by including a choice of law provision providing that a contract be governed by laws of a states with a more creditor-friendly usury law.
49 Ghirardo v. Antonioli, 8 Cal. 4th 791, 804-05, 883 P.2d 960, 969 (1994).
50 See, e.g., Milestone Fin., LLC v. Moon (In re Moon), 648 B.R. 73, 82-84 (B.A.P. 9th Cir. 2023) (borrowers’ default under the settlement agreement was a forbearance subject to usury restrictions, even though original loan was exempt from usury under the broker exemption).
51 See CAL. CONST., art. XV, § 1.
52 See CAL. CIV. CODE § 1916.1.
53 RESTATEMENT (SECOND) of CONFLICT OF LAWS § 187 (1971).
54 Hall v. Sup. Ct., 150 Cal. App. 3d 411, 416-17, 197 Cal. Rptr. 757, 762 (1983).
55 See WRI Opportunity Loans II, LLC v. Cooper, 154 Cal. App. 4th 525, 542-43 (2007).
35 Vol. 37 Cal. Bankr. J. No. 1 (2026)
In Ury v. Jewelers Acceptance Corp.,56 the plaintiff jewelry retailer sought declaratory relief and rescission or reformation of a contract (for accounts receivables) on the ground that it was usurious, while the defendants counterclaimed for the amount due on the contract.57 The California trial court found, in part, that the agreement provided that the laws of the State of New York governed, that the agreement was valid and enforceable in New York, and hence the agreement did not violate any public policy of California.58 The First District Court of Appeal affirmed, holding that California’s usury law does not reflect a strong public policy, citing to the fact that the constitutional provisions exempt various classes of lenders and allow the Legislature to set different interest limits for the exempted lenders.59
In Gamer v. duPont Glore Forgan, Inc.,60 a case where a plaintiff alleged that a stockbroker charged fluctuating usurious interest, California’s Fourth District Court of Appeal similarly affirmed a trial court’s ruling on a motion for summary judgment. While California has a strong public policy against usury, the court held, it has no strong public policy against a particular rate of interest as long as the charging of that rate is permitted by law to the specific lender. The court then held that the choice of law provision, permitting a charge of interest legal in New York although in excess of the legal rate then permitted in California, did not offend the California policy against usury.
California courts routinely refused to overrule a consensual provision with a choice of law provision. As late as 2015, California’s Second Appellate District, in Hyundai Sec. Co., Ltd. v. Lee , 61 held that a post judgment usury rate does not fit the description of a law repugnant to the public policy of California, under the provisions of the Uniform Foreign-Country Money Judgment Recognition Act which states that a court is not required to recognize a foreign judgment that is “repugnant to the public policy of this state or of the United States.” The court further held that as the California Constitution exempts certain institutions from usury laws and grants the Legislature the right to set limits for exempted lenders,
56 227 Cal. App. 2d 11, 38 Cal. Rptr. 376 (1964).
57 See id. at 13.
58 See id. at 15.
59 See id. at 20.
60 65 Cal. App. 3d 280, 135 Cal. Rptr. 230 (1976).
61 232 Cal. App. 4th 1379, 182 Cal. Rptr. 3d 264 (2015).
Vol. 37 Cal. Bankr. J. No. 1 (2026) 36
“the concept of a higher rate presented by a foreign law does not fit within the stringent test set forth by the uniform law for a public policy violation.”62
In Mencor Enters., Inc. v. HETS Equities Corp.,63 the Fourth District Court of Appeal held that the parties’ choice of Colorado law would be permitted in California, even if it meant that a rate was acceptable under Colorado but not under California law, but only if there is a reasonable relationship in that contract to the State of Colorado.
However, in G Cos. Mgmt., LLC v. LREP Ariz., LLC, 64 for the first time an appellate court took a much broader approach. In G Companies, a California borrower approached a Texas lender which conducted its business in Arizona, seeking to borrow $4 million. The interest rate was 36 percent per annum, plus an additional 10 percent per annum in the event of a default.65 The trial court stayed a cross-complaint that alleged various state causes of action challenging the loan, ruling that prohibition of usury “is not a fundamental policy” in California.66 The Fourth District Court of Appeal reversed.67 For the first time, a California appellate court found that California’s usury laws, embedded as they are in the California Constitution and the fact that they cannot be waived, were a significant and indeed fundamental policy of the State of California.68 “The complexity of the law does not imply a lack of commitment to the policy. To the contrary, such a fine-tuned approach suggests that significant effort has gone into determining the circumstances under which interest rate limitations are necessary for the protection of Californians.”69 The court therefore reversed and remanded with instructions to
62 Id. at 1391.
63 190 Cal. App. 3d 432, 235 Cal. Rptr. 464 (1987).
64 88 Cal. App. 5th 342 (2023).
65 See id. at 347.
66 See id. at 346.
67 See id. at 357.
68 See id. at 352-54.
69 Id. at 347.
proceed to litigate the cross-claims.70 To date, no subsequent published cases have held otherwise.
Oftentimes, lenders include in their loan documentation contractual provisions stating that the law of another state applies, even in situations where the transaction has few or no contacts with that other state. Important factors triggering G Companies might be the location of the borrower, the location of the collateral, the magnitude of the difference between the interest rate of the alternative state and California and the alternative state’s general relationship to the transaction. Practitioners should be aware of the G Companies case when drafting documentation for secured and even unsecured transactions. Bankruptcy trustees may be able to use G Companies to challenge the underlying debts on usury grounds and preserve such liens.
The Uniform Foreign-Country Money Judgment Recognition Act71 provides that a court is not required to recognize a foreign judgment that is “repugnant to the public policy of this state or of the United States.”72 To date, the author has not seen any published decisions applying that provision in the usury context.
3. Conclusion
The appellate courts in the State of California recently have expanded protections for borrowers. The expansion includes upholding stronger challenges for default interest and late fees. There is also now authority supporting stronger usury protections by ruling that usury is an important public policy that cannot be contracted away via a contractual incorporation of a foreign state’s laws. Will this trend continue? Only time will tell.
70 See id. at 357.
71 Codified in California at CAL. CIV. PROC. CODE §§ 1713–1725.
72 CAL. CIV. PROC. CODE § 1716(c)(1)(C).
Vol. 37 Cal. Bankr. J. No. 1 (2026) 38
By Steven L. Walker1
This article outlines strategies for handling clients who dispute the amount owed to the Internal Revenue Service (“IRS”) or a California taxing agency, such as the California Franchise Tax Board (“Franchise Tax Board”). Procedural options outside bankruptcy may allow a client to reduce debt and should be considered as part of a larger strategy, including filing bankruptcy to discharge debts and challenging the merits of a tax claim in bankruptcy court.
Using the hypothetical scenario described below, this article begins by discussing the statute of limitations for the collection of federal and state tax liability. The article then discusses administrative options outside bankruptcy available to a client. Finally, the article discusses tax merits litigation and the steps involved to investigate a disputed claim and options to resolve these issues within bankruptcy.
As always, understanding your client's individual circumstances is of primary importance. What works for one taxpayer may not work for another taxpayer. In any specific situation, the reader should seek legal advice specific to that situation and not rely on this outline.
Suppose your clients, Jack and Samantha, owe federal income taxes for the tax years 2023 and 2024. The clients timely filed a 2023 tax return but never paid the balance due. In 2024, the client failed to file, so the IRS prepared a substitute return based on third-party payor information, issued a notice of deficiency, and assessed the taxes because the client did not respond during the audit. The Franchise Tax Board followed the federal determination and assessed taxes for the years 2023 and 2024.
1 Steven L. Walker is a tax attorney in San Jose, California and a former IRS attorney. He is also an Adjunct Professor of Law at the University of San Francisco, where he teaches Bankruptcy Tax. For further information, see www.walk-law.com.
Jack and Samantha are also shareholders of Rix, Inc., a corporation that the IRS audited several years ago. The IRS assessed additional taxes, interest, and penalties and filed a Notice of Federal Tax Lien for the tax years 2021, 2022, and 2023. Jack was too busy to participate in the audit at the time and now claims that the IRS’s income determination is overstated because the company was not profitable at the time.
A. Understanding the Big Picture: Who is owed, What?
Often, a taxpayer believes there is a balance due to the IRS, but the compliance issue may be more complex and involve other taxing agencies, such as unpaid income taxes owed to the Franchise Tax Board, payroll taxes owed to the California Employment Development Department, or unpaid sales taxes owed to the California Department of Tax and Fee Administration.
In the hypothetical, Jack and Samantha may be unaware that they owe state income. The IRS discloses federal “tax return and return information” to state tax agencies for state tax administration purposes.2 Taxpayers are also required to notify the Franchise Tax Board of changes to their federal income tax return after an audit.3
The California Franchise Tax Board piggybacks off the federal determination, meaning that after an IRS examination or audit, the Franchise Tax Board may issue the taxpayers a notice of proposed adjustment before assessing the taxes.4 Consequently, even if Jack and Samantha have not received any notices, the Franchise Tax Board may be lurking in the background and surface later, to taxpayers’ surprise.
Below is a quick reference guide for tax debts commonly encountered when working with individuals and business entities. The guide is helpful when interviewing a client to obtain an overall picture of the case and to identify the list of creditors and potential tax claims.
2 26 U.S.C. § 6103(d)(2); IRS Announcement 77-37, I.R.B. 1977-12, 24, Jan. 1, 1977 (IRS announced agreement with California Franchise Tax Board and other state tax agencies).
3 CAL. REV. & TAX CODE § 18622; FTB Publication 1008, Federal Tax Adjustments and Your Notification Responsibilities to California.
4 CAL REV & TAX CODE § 19041.
Vol. 37 Cal. Bankr. J. No. 1 (2026) 40
Creditor
Internal Revenue Service
CA Franchise Tax Board (Franchise Tax Board)
California Employment Development Department (EDD)
California Department of Tax and Fee Administration (CDTFA)
Type of Tax
• Federal income taxes
• Federal Employment (or Payroll) Taxes,
• Including 26 U.S.C. § 6672 Trust Fund Recovery Penalty
• State Income Taxes
• State Employment Taxes,
• Including Responsible Person Liability for Payroll Taxes under Cal. Unemp. Ins. Code § 1735
• Sales Taxes,
• Including Responsible Person Liability under Cal. Rev. & Tax Code § 6829
B. The Collection Statute of Limitation: How Much Time Does the Government Have to Collect the Debt?
Taxpayers often ask how long the Government has to collect a tax debt, and the answer depends on calculating the Collection Statute Expiration Date (“CSED”) for the specific tax type and tax period at issue. The IRS generally has 10 years from the date of assessment to collect the balance due, but exceptions can toll or suspend the limitation period.5
For example, the period of limitations to collect an outstanding tax liability can be tolled is where a debtor files multiple Chapter 13 cases. The debtor can remain in bankruptcy for as long as they want, but there is a consequence: the
5 26 U.S.C. § 6502.
automatic stay affects the CSED date.6 The period of limitations for IRS collection is tolled during the bankruptcy court's automatic stay, which prevents the IRS from collecting a tax liability, and for six months thereafter. When debtors have filed multiple Chapter 13 cases, the CSED may be extended for many years.
In our hypothetical, since Jack and Samantha’s income taxes for 2023 and 2024, the case involves two CSED dates: one for 2023 and one for 2024. Each CSED date begins on the assessment date.7 It is not uncommon for a case to have multiple CSED dates or clocks running. Practitioners are always watching the clock, and a good practice tip is to keep the clock running whenever possible.
An indicator that the case involves an IRS collection statute-of-limitations issue is when the tax year is within 10 years. This suggests the case may have an imminent CSED date. Nevertheless, a taxpayer could have taken administrative action to suspend or toll the limitation period, such as filing a request for an installment agreement, a request for a collection due process hearing, or an offer in compromise.8 Consequently, the best course of action is to determine the CSED date.
The Franchise Tax Board has a much longer CSED date, 20 years, and so waiting out the collection statute may not be an option unless the assessment date is close to 20 years old, which presently is near 2006 (2006 + 20 years = 2026).9
Calculating the CSED is beyond the scope of this paper, as there is a default rule of ten years for the IRS and 20 years for California, and numerous exceptions toll the period. A quick and easy way to obtain the CSED date is to contact the IRS or a state taxing agency by telephone. Alternatively, a practitioner may obtain the IRS Account Transcripts, which sometimes show the CSED dates. That said, the IRS sometimes makes computational errors, so in large-dollar cases or those close to the CSED date, the practitioner may want to perform the calendar math and manually compute the CSED date using an Excel worksheet.
6 26 U.S.C. § 6503(h)(2).
7 Id.
8 26 U.S.C. § 6331(i) (installment agreement), 26 U.S.C. § 6331(k) (offer in compromise); and 26 U.S.C. § 6330(e) (collection due process hearing).
9 CAL REV & TAX CODE § 19255.
Vol. 37 Cal. Bankr. J. No. 1 (2026) 42
One final point about the CSED date is that the system provides a strong incentive to file a return. As stated above, the CSED starts on the date of assessment, which marks the start of the limitation period.10 Filing a return also commences the Assessment Statute of Limitations (ASED), which limits the government’s ability to assess additional taxes (e.g., the time the government has to audit the return). The general rule is that the IRS has three years from the filing of the return to assess taxes, but exceptions apply (e.g., non-filers and fraud).11 An important rule of thumb: if there is no return, there is no assessment and no running of the statute of limitations. A similar concept applies in bankruptcy: there is no discharge for an unfiled return.12 In short, a consistent principle across the tax and bankruptcy codes is that if a client fails to file a return, the CSED clock does not start, and the debtor will not receive a discharge. It’s that simple.
Outside of bankruptcy, a taxpayer generally has the following administrative options to handle a tax debt:
1. Currently Not Collectible (CNC) Status (IRS Only - Temporary Status);
2. Installment Agreement (Payment Plan);
3. Penalty Relief;
4. Innocent Spouse Relief;
5. Offer in Compromise (OIC); and
6. Audit Reconsideration (IRS Publication 3598).
In the hypothetical, these are the options a practitioner may want to consider discussing with Jack and Samantha and their corporation, Rix, Inc. The selected option depends on the particular facts and circumstances of the case, and there may not be one right answer. Only the last two options, offer in compromise and audit reconsideration, can potentially reduce the tax debt owed to the IRS or the State of California, but the other options are worth knowing and may fit the case.
10 26 U.S.C. § 6502.
11 26 U.S.C. § 6501(a).
12 11 U.S.C. § 523(a)(1)(B).
The IRS is authorized to determine that some accounts are currently not collectible (“CNC”).13 There, the IRS suspends collection action on the account, but interest continues to accrue on the account.14 It’s akin to plugging a small hole in a leaking bucket, which temporarily stops the water from flowing but doesn’t reduce the debt. The IRS generally requires that the taxpayer submit a financial statement (Form 433-A) and prove inability to pay based upon strict financial standards.15 CNC status is a good option for senior citizens or an individual who cannot work due to a health issue. The IRS may also place a corporation in CNS status, where it can pay current taxes but cannot pay its back taxes, and enforcement cannot be taken because the business has no distrainable accounts receivable, other receivables, or equity in assets.16 The advantage of the CNC status is that the 10-year collection statute of limitations continues to run (the amount of time the IRS has to collect the tax liability), and so it’s theoretically possible to run out the clock in older cases. Id
In old and cold cases, the IRS may have already placed the account in CNC status, and so it’s worthwhile to check the IRS Account Transcript, which will show whether the account is placed in CNC status (look for Transaction Code 530).17
The IRS's Internal Revenue Manual, available online, explains Currently Not Collectable.18
In the hypothetical, if the corporation, Rix, Inc. was no longer an operating entity, this could be an option worth pursuing. A practitioner could complete a financial statement and submit it to the IRS and request CNC status. A caveat is that the IRS may request unfiled returns.
The California Franchise Tax Board offers financial hardship status, which is like currently not collectable status. The taxpayer is required to submit a financial statement and prove inability to pay based upon strict financial standards.
13 IRM 5.16.1.1.1 (Sept. 18, 2018).
14 Id
15 IRM 5.16.1.2.9 (Mar. 3, 2025).
16 IRM 5.16.1.2.6 (Mar. 3, 2025).
17 IRM 5.16.1.2 (Mar. 3, 2025).
18 IRM 5.16.1 (Mar. 03, 2025).
Information about this program can be found on the Franchise Tax Board’s website.19
Installment Agreements are just what they sound like: a payment plan. The advantage of an installment agreement is that it stops collection activity, such as levies, but the disadvantage is that penalties and interest continue to accrue.20 The myth behind an installment agreement, however, is that the IRS is not in the lending business; therefore, if sufficient equity or cash is available to fully pay the taxes or make a significant partial payment, the installment agreement may be recommended for rejection.21 Consequently, a taxpayer with a large brokerage account or equity in a home may not qualify. The IRS will want the taxpayer to address the assets.22
In our hypothetical, if Jack and Samantha have sufficient money in the bank to pay at the tax debt, the IRS may recommend rejection of a payment plan. For example, if the couple owns a home, the IRS will want the taxpayers to address the asset, meaning prove up that they cannot access the equity to pay the Government.23 One way to do this is by obtaining a letter from the bank.
It is also important to remember that the California Franchise Tax Board has a much longer, 20-year collection statute of limitations.24 The state agency has the advantage of playing the long game. Consequently, it's best to pay by borrowing funds from family or friends or by reducing the debt, rather than entering a longterm payment plan. Interest continues to accrue on the debt, and a small tax debt today can grow into a very large debt over time. The interest rate on personal income tax underpayments is seven percent, and interest is rarely abatable.25
19 Franchise Tax Board, https://www.ftb.ca.gov.
20 IRM 5.14.1.1.1 (Sept. 22, 2021).
21 IRM 5.14.1.4(6) (July 2, 2024).
22 IRM 5.14.1.4 (July 2, 2024).
23 Id.
24 CAL. REV. & TAX CODE § 19255.
25 CAL. REV. & TAX CODE §§ 19101, 19521; www.Franchise Tax Board.ca.gov/pay/penalties-andinterest/interest-and-estimate-penalty-rates.html.
Penalty abatement is an another option worth considering, but due to procedural complexity, is beyond the scope of this paper. Nevertheless, it is important to know that some penalties, such as failure to timely file or failure to timely pay, may be abated if there is a showing that the failure to file is due to reasonable cause and not willful neglect.26 Obtaining penalty abatement can save a taxpayer a substantial amount of money, as some penalties are computed based on the amount of tax owed. So, if the tax debt drops, the penalty drops too.27 The IRS has a penalty handbook, which provides helpful information and criteria for relief.28
Sometimes, civil fraud penalties can be abated in audit reconsideration where the government cannot meet its burden of proving fraud by clear and convincing evidence, based upon new information provided by the taxpayer and the evidence contained in the administrative file. This also can be a significant dollar savings because the civil fraud penalty is computed based upon 75 percent of the tax due.29
If a client, such as Samantha, files a joint federal income tax return with her husband, Jack, she is jointly and severally liable for the tax debt.30 One option is to claim innocent spouse relief with either the IRS or Franchise Tax Board.31 This could be an option for Samantha in the hypothetical if she was unaware of the nonrequesting spouse’s unreported income or false deductions.32
26 26 U.S.C. § 6651(a)(1) (failure to timely file); and 26 U.S.C. § 6651(a)(2) (failure to timely pay).
27 26 U.S.C. § 6662(a) (20 percent of the portion of the underpayment); 26 U.S.C. § 6664 (reasonable cause exception for underpayments).
28 IRM 20.1.1 (Nov. 24, 2025).
29 26 U.S.C. § 6663, § 7454(a); Richardson v. Comm’r, 509 F.3d 736 (6th Cir. 2007) ("The . . . [Service] bears the burden of proving fraudulent intent by clear and convincing evidence."); Kohan v. Comm'r, T.C. Memo. 2019-85 (2019), (The Service "has the burden of proving fraud, and . . . [the Service] must prove it by clear and convincing evidence").
30 26 U.S.C. § 6013(d)(3).
31 26 U.S.C. § 6015; IRM 25.15.18, Innocent Spouse Relief Processing Procedures (Jan. 15, 2020); IRS Form 8857, Request for Innocent Spouse Relief.
32 Price v. Comm’r, 887 F.2d 959, 965 (9th Cir. 1989) (“A spouse has "reason to know" of the substantial understatement if a reasonably prudent taxpayer in her position at the time she signed the return could be expected to know that the return contained the substantial understatement.”).
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That being said, under California law, both spouses are liable for debts incurred during marriage, so innocent spouse relief may not prevent an IRS Revenue Officer from taking enforcement action against the community to satisfy the tax debt.33 There is no free lunch.
Nevertheless, innocent spouse relief generally is worth pursuing and is a nice advantage to have in your back pocket when dealing with IRS or Franchise Tax Board. If Samantha is concerned about future tax issues with her husband, an option would be for her to start filing married filing separate, and that way, she is not jointly and severally liable for a joint income tax return.34
If the taxpayer disagrees with the amount owed to the IRS or the Franchise Tax Board, they can file a request for an audit reconsideration to reduce the debt. The taxpayer must satisfy the criteria for audit reconsideration, which includes having filed a return, identifying which adjustments they are disputing, and providing new information for the audited issues not considered during the examination.35 IRS Publication 3598 (Rev. 11-2023) explains the audit reconsideration process, and the Internal Revenue Manual has a section detailing the examination audit reconsideration process. Both are worth reading and reviewing.36
In our hypothetical, Rix, Inc. could file a request for an audit reconsideration for its corporate income tax returns for the tax years 2021, 2022 and 2023. The process involves working with an accountant to prepare complete and accurate returns, which are backed up by the corporation’s QuickBooks files and books and records. The package then can be mailed to the IRS as part of audit reconsideration. The process is similar to litigating tax merits in bankruptcy, as discussed below.
A disadvantage with audit reconsideration is the time involved to obtain relief. Unfortunately, the IRS has limited resources, and it may take up to a year or
33 IRM 25.15.5.7 (July 24, 2017) (“It does not affect the ability of the Service to pursue collection remedies against the nonliable spouse’s interest in community property. See United States v. Stolle, 2000-1 U.S.T.C. ¶ 50,329, 86 A.F.T.R.2d ¶ 2000-5043 (C.D. Cal. 2000). This is true even if this has an adverse impact on the non-liable spouse who has received the innocent spouse relief.”).
34 26 U.S.C. § 6013(d)(3).
35 IRM 4.13.1.2.1 (Dec. 10, 2025).
36 IRM 4.13.1, Examination Audit Reconsideration Process (Dec. 10, 2025).
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longer before the IRS assigns a revenue agent to review an audit reconsideration request. Consequently, it is important to submit the audit reconsideration request via certified mail, return receipt, and track the status. Sometimes, a taxpayer must follow up by filing Form 911, Request for Taxpayer Advocate Service Assistance, to check the status or even resubmit the request. It can be a slow-moving process, but it can lead to successful results, especially if the IRS assigns a local revenue agent to the case, who can meet in person at the representative’s place of business with the accountant to review the records face-to-face. It’s an option to consider for individual and corporate tax taxpayers with tax debts.
Another administrative path to lower an outstanding tax liability is to file an offer in compromise based upon doubt as to liability.37 Doubt as to liability exists where there is a genuine dispute as to the existence or amount of the correct tax liability under the law.38
In our hypothetical, the corporation, Rix, Inc. could submit Form 656-L, Offer in Compromise (Doubt as to Liability), along with a corrected return and supporting books and records to prove one or more disputed items. The package is then mailed to the IRS. The government has an easy-to-follow booklet that explains the process: Form 656 Booklet, Offer in Compromise.
A caveat is that “doubt as to liability” does not exist where the liability has been established by a final court decision or judgment concerning the existence or amount of the liability.39 Consequently, if the taxpayer filed a petition in U.S. Tax Court and the Tax Court entered a decision, the taxpayer is precluded from filing an offer based upon doubt as to liability.40 A similar rule exists for litigating tax debts in bankruptcy.41
37 26 U.S.C. § 7122(f).
38 Treas. Reg. § 301.7122-1(b)(1).
39 Id.
40 Eberhart v. Comm’r, 2004 Tax Ct. Summ., LEXIS 111, at *12-13 (2004) (“A taxpayer, however, is precluded from relitigating issues raised and considered in any previous Appeals hearing or any other administrative or judicial proceeding in which the taxpayer meaningfully participated. Sec. 6330(c)(4); Katz v. Comm’r, 115 T.C. 329, 339 (2000).”).
41 11 U.S.C. § 505(a)(1).
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Practice Tip: IRS Offer specialists working the case file are quick to deny an offer in compromise if the taxpayer is not current on making estimated tax payments for the current year or failed to make all required federal tax deposits for the current quarter and the two preceding quarters.42 Even if the taxpayer claims there is sufficient withholding, it’s best to make estimated tax payments to avoid a dispute with the OIC specialist and face possible filing rejection.
The Franchise Tax Board typically follows the federal determination, so if a taxpayer obtains a successful result with the IRS through an offer in compromise or audit reconsideration, a similar package can be submitted to the Franchise Tax Board. This can be a more streamlined and cost-effective way to handle the Franchise Tax Board.
The Franchise Tax Board has an offer-in-compromise program, but, in practice, offers based upon doubt as to collectability (not doubt as to liability) can be more difficult to obtain, given the Franchise Tax Board’s much longer collection statute of limitations—20 years, as opposed to 10 for the IRS.43 So, if the taxpayer is younger or able to work, the Franchise Tax Board may be reluctant to compromise the debt because it has more time to collect. In addition, circumstances may change, such as a job promotion or an inheritance. This is especially true if the Franchise Tax Board has filed a state tax lien and is a secured creditor. Nevertheless, the Franchise Tax Board will still consider the offer and it may be worth pursuing.
The bankruptcy court has the authority to determine the amount or legality of any tax imposed on the debtor, whether the tax was previously assessed or paid. Thus, even if the taxpayer never filed a return, the bankruptcy court has jurisdiction to determine the balance due.44 11 U.S.C. § 505(a)(1) grants the Bankruptcy Court jurisdiction to determine tax claims:
42 IRS Form 656 Booklet, Offer in Compromise.
43 CAL REV & TAX CODE § 19255.
44 IRS Publication 908, Bankruptcy Tax Guide, p. 15 (Dec. 2024).
Except as provided in paragraph (2) of this subsection, the court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction. (Emphasis added.)
While the statute uses the word “any” and may appear extremely broad, there are limitations on the bankruptcy court's ability to hear federal and state tax claims, as discussed below. In the author’s experience, the Government generally prefers to litigate tax cases in the U.S. Tax Court, a specialized tribunal.
There are two ways in which section 505 comes into play. First, the debtor files an objection to the IRS's proof of claim, which initiates a contested matter.45 Second, the debtor seeks a determination of liability by initiating an adversary proceeding under section 505(a).46 Filing a claim objection can be useful if the dispute is purely a legal issue or if there are a few disputed facts.47 However, if there is a factual dispute, an objection or motion may not be as procedurally effective as an adversary proceeding because of the very nature of tax information (detailed, factual information).
1. What kind of tax is owed and for what tax periods?
2. What is the date of assessment, because that starts the collection statute of limitations?
3. Does the debtor have any unfiled returns, and if so, for what tax periods?
4. Has the IRS filed a Notice of Federal Tax Lien or the Franchise Tax Board filed a Notice of State Tax Lien?
5. What is the claim classification? Secured, priority unsecured, or general unsecured?
45 L. Determination of Disputed Claims and Interests, Cal. Prac. Guide Bankr. ch. 17, citing Fed. R. Bankr. P. 9014; and Lundell v. Anchor Const. Specialists, Inc., 223 F.3d 1035, 1039 (9th Cir. 2000); KATHLEEN P. MARCH & JANET A. SHAPIRO, CALIFORNIA PRACTICE GUIDE: BANKRUPTCY ¶ 17:1331 (The Rutter Group 2025).
46 Fed. R. Bankr. P. 7001.
47 Fed. R. Bankr. P. 9014.
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Answers to these questions can help formulate a strategy and determine which tax types and periods are worth challenging.
In our hypothetical, the IRS’ proof of claim for the corporation, Rix, Inc. should list Form 1120 for the tax periods 2021, 2022, and 2023, and show the date of assessment of the taxes and the fact that the IRS has filed a Notice of Federal Tax Lien and is a secured creditor.
A close inspection of the proof of cla im may also reveal missing tax periods or periods with a balance due to the IRS or the Franchise Tax Board that were inadvertently omitted from the proof of claim. One strategy is to ask IRS Field Insolvency to amend the proof of claim to include the taxes as part of a larger settlement.
In addition, if there is no proof of claim, a strategy may be to file a proof of claim on behalf of the IRS or state taxing agency and force a Chapter 7 trustee to use the estate money to pay section 507(a)(8) priority tax claims, which are not dischargeable under 11 USC 523(a)(1). The taxing authorities do not always file a proof of claim and may take post-discharge collection action on unsecured priority debts.
Practice Tip: If a debtor’s counsel has a question, contact IRS Field Insolvency, who drafted the claim. Most questions can be answered over the telephone, and there is no need to file an objection if debtor’s counsel gets the question answered. The bankruptcy specialist's contact information is listed in Part 3 of the proof of claim.
A practitioner may also obtain a copy of the IRS administrative file, the official record of documents related to an IRS assessment for a particular tax type and period.
In the hypothetical, the IRS examined the corporation, Rix, Inc., for the tax years 2021, 2022, and 2023. Obtaining a copy of the administrative file can reveal what happened during the audit and, importantly, how the IRS determined the income adjustments. The administrative file can be used to prepare amended returns, which could be presented as part of a settlement offer. For example, the file may contain several important documents:
IRS Notice of Deficiency, which is the notice that the IRS issued to Rix. Inc. at the conclusion of the audit and sets forth the IRS’ determinations (e.g., the increase in tax and penalties);
IRS Form 866-A, Income Tax Examination Changes, which is included as part of the Notice of Deficiency and explains the adjustments that the IRS made to the corporate tax returns.
Revenue Agent’s case activity log, which contains the agent’s notes during the audit
IRS correspondence issued to the taxpayer during the audit, such as Information Document Requests (e.g., informal discovery requests).
A copy of the administrative file may be obtained by making a Freedom of Information Act (FOIA) request, and this is normally done by submitting a request with the FOIA Public Access Portal or via fax. The IRS has a website that explains the process in simple terms.48 Obtaining the administrative file is basic blocking and tackling and can help piece together the case.
A final piece to the puzzle is to obtain and review the tax account transcripts from the IRS Transcript Delivery System (TDS). 49 Like a report card, the transcript contains detailed information, including the balance due, whether a tax return was filed, whether the IRS examined the return, payment history, and a record of IRS notices. Together with the IRS correspondence and administrative file, a practitioner can build a procedural history of the case and figure out what happened and when.50
The IRS website explains how to obtain tax account transcripts. Once debtor’s counsel has a valid power of attorney on file, the transcripts can be conveniently downloaded electronically from the IRS without having to telephone the IRS.
The Franchise Tax Board does not have a website where users can download transcripts, so the debtor’s counsel often must telephone the Franchise Tax Board to
48 www.irs.gov/privacy-disclosure/freedom-of-information-act-foia-guidelines.
49 IRM 21.2.3.1.6 (Oct. 15, 2024).
50 IRM 21.2.3.2.2 (Oct. 4, 2024).
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request the information. Some limited information is available electronically on the Franchise Tax Board website after a valid power of attorney (Franchise Tax Board Form 3520) is on file.
The IRS correspondence and notices also provide a roadmap of what has transpired in the case, and it’s important to request copies from the client and review them. Often, the client has incomplete records, but the notices are worth reviewing and can help piece together the case and bring the IRS transcript and administrative file to life. You must be like Sherlock Holmes, look for the clues, and solve the case.
Once the information is reviewed and analyzed, a worksheet can be prepared to summarize it. A worksheet is a helpful tool for analyzing and sifting through data, especially when multiple tax types and tax years are involved. The proof of claim and IRS Account transcripts may be voluminous in a large case, and a summary worksheet can be provided to the client as a handout to discuss case strategy and next steps.
Importantly, a worksheet may identify discrepancies between the IRS Account Transcript and the IRS proof of claim. If the debtor makes an offer to settle the parties’ dispute in the bankruptcy case, the Government’s settlement letter normally requires payment of the tax periods listed in the IRS’ proof of claim. If a tax period is inadvertently left off the IRS proof of claim, it may not be part of the terms of the settlement, which can lead to post-discharge collection. IRS Field Insolvency prepares the proof of claim based on information in the IRS computer system, and there may be human error.
In addition, a settlement with the IRS or the Department of Justice typically requires the debtor to file all unfiled returns within 30 days of the agreement and to remain current with all tax filings and deposits. The worksheet can help identify unfiled returns and assess whether the taxpayer is filing and paying on time.
In our hypothetical, the corporation, Rix, Inc., has significant tax debt owed to the IRS and the Franchise Tax Board for tax years 2021, 2022, and 2023. A possible solution is to gather the corporations’ books and records and work with an accountant to prepare amended returns for the relevant tax years. The returns may reduce the tax owed for each tax year, especially if there are unclaimed deductions
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or losses. The process for each case depends on the facts and circumstances and can lead to successful outcomes.
Finally, once the evidence is assembled, a taxpayer can initiate settlement discussions with either the Internal Revenue Service or the Department of Justice, depending on who has jurisdiction to settle the case. The IRS has jurisdiction to settle, compromise, or reduce a proof of claim in limited circumstances.51 The IRS has jurisdiction to settle a claim before an objection to a proof of claim is filed, but once an objection is filed, settlement authority resides with the Tax Division.52
In the hypothetical, the settlement offer may request that the IRS accept the debtor's amended corporate tax returns, thereby reducing the balance due on the account. The IRS probably would assign a revenue agent to review the return for accuracy.
Below are hypothetical examples of cases where the IRS might settle a case on litigating hazards:
Unfiled Returns: The taxpayer has unfiled returns, and the returns have been prepared and signed with the backup documentation substantiating any unreported income and deductions; this work typically involves performing a bank deposit analysis and using QuickBooks to reconstruct the taxpayer’s books and records; the returns show a reduced tax liability.
Unsubstantiated Basis: The IRS audited the taxpayer and found unreported income from the sale of a capital asset, such as real estate or securities, and the taxpayer has documentation to substantiate the basis in the assets, which reduces the capital gains and overall tax liability.
Cryptocurrency Transactions: IRS determined unreported income based on trading in cryptocurrency, and the reconstructed records
51 U.S. Dep’t of Justice, Tax Div., Settlement Reference Manual (rev. Sept. 2012).
52 Id.; see also Internal Revenue Manual 34.3.1.1.7 (Jan. 20, 2015).
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show a smaller amount of unreported income through the use of an expert witness's report.
Sale of Asset: Debtor agrees to sell a major capital asset, such as real estate, and apply the proceeds to the tax liabilities listed in the proof of claim in exchange for full satisfaction of the listed tax liabilities.
Finally, the IRS will not consider an administrative offer in compromise from a taxpayer in bankruptcy.53 Consequently, a settlement is reached with the Service based upon the hazards of litigation, and the Service obtains a closing agreement binding on the debtor and the trustee.54
i. Overview
In tax merits litigation, it’s important to understand who has the burden of proof with respect to a tax claim. A timely proof of claim is deemed allowed unless a party in interest objects.55 A properly executed and filed proof of claim constitutes prima facie evidence of the validity and amount of the claim.56 In non-tax claim matters, if a party objecting to a claim has met the burden of going forward, the burden then shifts back to claimant, which must prove its claim by a preponderance of the evidence.57
However, the rules governing tax claims in bankruptcy differ.58 In general, the burden of proof with respect to proving the merits of a tax claim is governed by the Supreme Court’s decision in Raleigh v. Ill. Dep’t of Revenue, 530 U.S. 15 (2000) and 26 U.S.C. § 7491, a provision of the Internal Revenue Code that shifts the burden of proof to the IRS if the taxpayer provides credible evidence.
In Raleigh, the debtor was the president of an Illinois company that had purchased an airplane and moved it to Illinois. Under state law, the company was
53 IRM 34.3.1.1.9 (Jan. 20, 2015).
54 IRM 34.3.1.1.9(6) (Jan. 20, 2015).
55 11 U.S.C. § 502(a).
56 Fed. R. Bankr. P. 3001(f).
57 In re USA Sales, Inc., 580 B.R. 852 (Bankr. C.D. Cal. 2018).
58 Id
55 Vol. 37 Cal. Bankr. J. No. 1 (2026)
required to pay use tax on the transaction, but failed to pay.59 Later, the corporation became defunct, and the Illinois Department of Revenue assessed a civil penalty against the former president as a responsible person.60 The president, who filed for bankruptcy, argued that he was not liable for the civil penalty and that the burden of proof should be on the state to show that he willfully failed to pay the use tax. The administrative file contained minimal evidence of the president’s responsibility for the company's failure to pay the use tax, so the burden of proof was critical.61
The Court of Appeals for the Seventh Circuit ruled in favor of the Department of Revenue, holding that the burden remained on the trustee, just as it would have been on the taxpayer had the proceedings occurred outside bankruptcy.62 The Supreme Court agreed, holding that that “when the substantive law creating a tax obligation puts the burden of proof on a taxpayer, the burden of proof on the tax claim in bankruptcy court remains where the substantive law put it (in this case, on the trustee in bankruptcy).”63 The Court reasoned that the “basic federal rule” in bankruptcy is that state law governs the substance of claims; and that the bankruptcy estate's obligation to the Illinois Department of Revenue was established by that State's tax code, which puts the burden of proof on the responsible officer of the taxpayer.64 Accordingly, the Court assigned the burden of proof by a preponderance of the evidence to the debtor.65
Raleigh illustrates just how important the burden of proof can be in tax cases, especially in trust fund recovery penalty cases under 26 U.S.C. § 6672, where the IRS administrative file sometimes can be thin as to whether the person is a “responsible person”, and quite a lot of money is at stake.
ii. Burden-shifting framework in 26 U.S.C. § 7491
Unbeknownst to some, there is the ability to shift the burden of proof as to factual matters on the IRS if the debtor satisfies the conditions of 26 U.S.C. § 7491.
59 Raleigh v. Ill. Dep’t of Revenue, 530 U.S. 15, 17-19 (2000).
60 Id. at 18.
61 Id
62 Id
63 Id
64 Id. at 20.
65 Id. at 26.
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Generally, in litigation before the U.S. Tax Court, the IRS Commissioner's determinations set forth in a Notice of Deficiency (the final report issued after an audit) are presumed correct, and the taxpayer bears the burden of showing that the determinations are erroneous.66 However, section 7491(a) provides an exception that shifts the burden of proof to the Commissioner as to any factual issue relevant to the taxpayer's tax liability if the taxpayer introduces credible evidence with respect to the issue and meets certain other conditions. Those conditions include: (1) maintained required records; and (2) cooperated with reasonable requests by the IRS for witnesses, information, documents, meetings, and interviews.67 The taxpayer also bears the burden of proving that they have met these conditions.68
A strategy in tax litigation is to get in early in an IRS examination (audit), produce books and records, and attempt to satisfy the conditions of section 7491; that way, if the case later proceeds to an administrative appeal or U.S. Tax Court, there is an opportunity to shift the burden of proof, and possibly force a favorable settlement.
The burden-shifting regime of 26 U.S.C. § 7491 applies in bankruptcy court litigation. There can be a dispute over who bears the burden of substantiating the IRS's proof of claim, and if the IRS loses that battle, it may be required to prove the amount of the tax claim, plus penalties and interest, which can force a settlement. For example, in In re Indus. Commer. Elec., 69 the corporate debtors filed a voluntary petition for relief under Chapter 11. The bankruptcy court appointed a CPA as an examiner, who determined that the debtor had sustained a loss, and amended returns were prepared and filed, claiming a refund. The debtor argued that, under section 7491(a), the burden shifted to the IRS to prove entitlement to the refund.70 The bankruptcy court ultimately held that the debtor had produced sufficient credible
66 Tax Court Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933); see also Bruno v. Comm'r, T.C. Memo. 2020-156, 13 (Nov. 16, 2020).
67 Bruno v. Comm'r, T.C. Memo. 2020-156, at 14.
68 Id
69 304 B.R. 24 (D. Mass. 2004).
70 Id. at 29.
57
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evidence to shift the burden of proof to the IRS and the IRS failed to meet its burden.71
The burden-shifting regime is a powerful procedural option in tax litigation, both inside and outside of bankruptcy court.
The California Franchise Tax Board is not in conformity with 26 U.S.C. § 7491, meaning that there is no burden-shifting framework found in the California Revenue and Tax Code. Instead, under California law, the burden of proof is on the taxpayer.72 The taxpayer bears the burden of proving that the tax assessment is incorrect and must also produce evidence to establish the correct tax amount.73 A similar rule applies with respect to proof of claims filed by the California Department of Tax and Fee Administration for unpaid sales or uses taxes, or excise taxes.74
A final point to remember is that bankruptcy courts have limited jurisdiction over tax claims. Practitioners should keep these limitations in mind when challenging the merits of a tax claim in bankruptcy. The limitations are briefly reviewed below.
i. No redetermination of tax claims: 11 U.S.C. § 505(a)(2)(A)
A bankruptcy court may not determine the amount or legality of a tax, fine, penalty, or addition to tax if “such amount or legality was contested before and
71 Id. at 33; see also In re Berg, 407 B.R. 167 (E.D. Pa. 2009) (debtor failed to shift burden of proof to IRS under 26 U.S.C. § 7491 because he did not provide credible evidence to support his deductions and he did not maintain the required records).
72 In re Smith, No. 22-3418 2024 Bankr. LEXIS 711, at *8 (Bankr. D. Mont. May 22, 2024), citing Dicon Fiberoptics, Inc. v. Franchise Tax Bd., 53 Cal. 4th 1227, 139 Cal. Rptr. 3d 825, 274 P.3d 446, 450-51 (2012).
73 Id
74 In re USA Sales, Inc., 580 B.R. 852, 855 (Bankr. C.D. Cal. 2018).
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adjudicated by a judicial or administrative tribunal of competent jurisdiction before the commencement of the case under this title . . . .”75
Consequently, if a debtor filed a petition in U.S. Tax Court, the Government filed an answer and the case proceeded to trial, where the Tax Court entered a decision, the bankruptcy court lacks jurisdiction. In some cases, the parties reach a basis of settlement prior to trial in Tax Court and execute a “stipulated” decision document, which the Tax Court then enters as the final decision in the case. There, too, the bankruptcy court lacks jurisdiction, even though there was no actual trial on the merits.76
If, however, a settlement is reached at the IRS Office of Appeals prior to filing a petition in Tax Court, Appeals’ determination should not be given conclusive effect for purposes of section 505(a)(2) because Appeals is not a formal tribunal. In that situation, the parties execute an Appeals agreement form (Form 870-AD), and there is no entered Tax Court decision because it’s a non-docketed U.S. Tax Court case.77
The jurisdictional limitation also applies to determinations by the California Office of Tax Appeals, which has jurisdiction to hear appeals from an action by the California Franchise Tax Board and the California Department of Tax and Fee Administration. These are cases involving, for example, California income taxes and sales and use taxes.78 Consequently, if the taxpayer or debtor litigated the case before the Office of Tax Appeals and obtained a decision, the taxpayer could not then relitigate the case in bankruptcy court.
In short, section 505(a)(2)(A) makes clear that a debtor cannot contest the merits of a tax claim in bankruptcy where the specific type of tax and tax year has already been adjudicated. On the other hand, if the tax year at issue was never
75 11 U.S.C. § 505(a)(2)(A) (emphasis added).
76 U.S.A, Internal Revenue Service v. Teal (In re Teal), 16 F.3d 619, 621 (5th Cir. 1994) (stipulated Tax Court decision).
77 IRM 8.6.4.4 (June 16, 2020); IRS Publication 5 (“Your Appeal Rights and How to Prepare a Protest if You Disagree”).
78 Cal. Code Regs. tit. 18, § 30103(a), (b); see also Mantz v. Cal. State Bd. of Equalization (In re Mantz), 343 F.3d 1207 (9th Cir. 2003) (adjudication of state tax liability was rendered before the bankruptcy filing, the bankruptcy court lacked subject matter jurisdiction under 11 U.S.C. § 505).
59
Vol. 37 Cal. Bankr. J. No. 1 (2026)
contested, the bankruptcy court would have jurisdiction. The answer turns on reviewing the pleadings of the Tax Court or the California Office of Tax Appeals.
ii.
The bankruptcy court’s jurisdiction to determine a tax liability does not extend to parties other than the debtor.79 Only two entities generally fall within the “related to” language of 28 U.S.C. § 1334 and 11 U.S.C. § 505: (1) the tax liability of the debtor in a Chapter 13 case; and (2) the tax liability of the bankruptcy estate in an individual Chapter 7 or individual Chapter 11.80
This issue can arise, for example, when the IRS assesses a trust fund recovery penalty against a corporate officer. For example, in Quattrone Accountants, Inc. v. IRS, 895 F.2d 921 (3d Cir. 1989), the IRS assessed a trust fund recovery penalty against the debtor corporation, which filed Chapter 11, and against a corporate officer, Philip Quattrone. The bankruptcy court held that the corporate debtor was liable under 26 U.S.C. § 6672 as a responsible person who willfully failed to pay over UDF's withholding taxes.81 However, the court further held that it lacked jurisdiction to determine Philip Quattrone's tax liability.82 The Court of Appeals for the Third Circuit agreed, holding that there was no “related to” jurisdiction under 28 U.S.C. section 1334 because the section 6672 liability suit between Philip Quattrone and the IRS in no way affected the debtor's liability to the IRS under section 6672.83
79 Am. Principals Leasing Corp. v. United States, 904 F.2d 477, 480-81 (1990) (“The district court, therefore, correctly concluded that it lacked bankruptcy jurisdiction to determine the tax liability of the non-debtor partners for the activities of the debtor partnerships or to determine the tax consequences of the partnerships' activities.”); see also L. Determination of Disputed Claims and Interests, Cal. Prac. Guide Bankruptcy Ch. 17-L [17:1441] (Bankruptcy courts have no jurisdiction to determine a tax claim against someone other than the debtor (e.g., debtor's spouse or partner)).
80 Quattrone Accountants, Inc. v. IRS, 895 F.2d 921, 923 (“The court examined 11 U.S.C. § 505(a)(1) and concluded that section 505 permitted it to determine only the tax liabilities of a debtor or the estate, not of non-debtor third-parties.”); see also 28 U.S.C. § 1398(a); chapter 13 plans do not have tax consequences separate and apart from the debtor because there is no separate taxable entity; just the tax liability of the debtor. Id
81 Id. at 923.
82 Id
83 Id. at 926.
Vol. 37 Cal. Bankr. J. No. 1 (2026) 60
iii. Abstention: 28 U.S.C. § 1334(c)(1)
Another reason the bankruptcy court will abstain from the dispute and not determine a tax liability is abstention.84 Abstention can come up in at least two ways in a bankruptcy case. The bankruptcy courts have dismissed a debtor's complaint to determine tax liability and granted the defendant's motion for abstention where the debtors contested a nondischargeable tax debt in a no-asset Chapter 7 bankruptcy case.85 The Internal Revenue Manual explains:
In cases where there is no need to determine the tax liability for purposes of administering the estate, such as in a no-asset Chapter 7 case, the Service should argue that the bankruptcy court does not have jurisdiction to determine a chapter 7 debtor's taxes and, in the alternative, that the bankruptcy court should abstain from making a merits determination. A motion for abstention may be made pursuant to Federal Rule of Bankruptcy Procedure 5011 and 28 U.S.C. § 1334(c).86
Secondly, if litigation is pending in the U.S. Tax Court and the debtor files for bankruptcy, the court will likely abstain. Remember, the automatic stay bars the commencement or continuation of a proceeding before the United States Tax Court concerning the tax liability of the debtor.87 The parties must seek relief from the automatic stay under 11 U.S.C. § 362(d). In deciding whether to adjudicate a debtor’s tax liability under 11 U.S.C. § 505, the bankruptcy court may consider a number of factors, and prejudice to the parties from inconsistent judgments, a whipsaw effect, often ends up being the most determinative factor.88 The reasoning is that the Bankruptcy Code § 505 empowers the bankruptcy court to determine the tax liabilities of debtors and estates, not the tax liabilities of separate taxpayers who are not debtors under the Bankruptcy Code. In contrast, the Tax Court has the authority to consolidate multi-party cases and avoid inconsistent assessments.
84 28 U.S.C. § 1334 (c)(1).
85 See Starnes v. United States (In re Starnes), 159 B.R. 748, 750, (Bankr. W.D.N.C. 1993) (discretionary abstention appropriate under 28 U.S.C. § 1334(c) where plaintiff filed a non-asset Chapter 7 case).
86 IRM 34.3.1.1.7(6)(e) (Jan. 20, 2015).
87 11 U.S.C. § 362(a)(8).
88 In re Hunt, 95 B.R. 442, 445, 448 (Bankr. N.D. Tex. 1989) (court modified automatic stay to facilitate the Tax Court in proceeding to avoid whipsaw effect).
61
Vol. 37 Cal. Bankr. J. No. 1 (2026)
Consequently, where other parties are potentially liable for the tax liability, the bankruptcy court is likely to abstain.89
A final note is whether the bankruptcy court has “related to” jurisdiction to determine the debtor’s tax or penalties under 11 U.S.C. § 1332(b). The answer turns on whether determining the amount of the tax liability or civil penalties “could conceivably have any effect on the estate being administered in bankruptcy.” 90 In other words, will the amount be paid? Will it take a bite out of any other creditor’s recovery? If the answer is no, the bankruptcy court probably lacks jurisdiction.91
If an individual debtor or a corporation has an outstanding tax liability owed to the IRS or a California tax agency, there are procedural options outside bankruptcy to reduce the debt. The best course of action may be to retain competent tax counsel, who can review the facts of the case and formulate a defendable strategy.
89 Id.
90Bush v. United States, 939 F.3d 898 (7th Cir. 2019) (tax dispute over nondischargeable civil fraud penalty under 26 U.S.C. § 6663 was not related to this bankruptcy where the disposition would not affect other creditors' entitlements); In re Wolverine Radio Co., 930 F.2d 1132 (6th Cir. 1991) (“The usual articulation of the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.”).
91Id.
Vol. 37 Cal. Bankr. J. No. 1 (2026) 62
In re 3MB, LLC
609 B.R. 841 (Bankr. E.D. Cal. 2019) .......................................................................................
Abergel v. SSA
Nos. 1:19-CV-6340 (LLS) & 1:19-CV-6413 (LLS)
2019 U.S. Dist. LEXIS 123455, at *4 (S.D.N.Y. July 24, 2019) ...............................................
AFI Holding, Inc. v. Mackenzie
525 F.3d 700 (9th Cir. 2008) ........................................................................................................
In re Airlift Int'l, Inc.
120 B.R. 597 (S.D. Fla. 1990)....................................................................................................
Am. Principals Leasing Corp. v. United States
904 F.2d 477 (1990) ...................................................................................................................
In re Berg
407 B.R. 167 (E.D. Pa. 2009) ....................................................................................................
Bisno v. Kahn 225 Cal. App. 4th 1087, 170
In re Bolden
327 B.R. 657 (Bankr. C.D. Cal. 2005) .......................................................................................
In re Brentwood Outpatient, Ltd. 134 B.R. 267 (Bankr. M.D. Tenn. 1991) ...................................................................................
Brown v. Allen 344 U.S. 443 (1953) ...................................................................................................................
Burden v. United States 917 F.2d 115 (3d Cir. 1990) .......................................................................................................
Bush v. United States 939 F.3d 898 (7th Cir. 2019) ......................................................................................................
California ex rel. Bonta v. Del Rosa 158 F.4th 1066 (9th Cir. 2025)...................................................................................................
In re Cassis Bistro, Inc. 188 B.R. 472 (S.D. Fla. 1995)....................................................................................................
Citizens for Resp. & Ethics in Wash. v. United States DOGE Serv. 769 F. Supp. 3d 8 (D.D.C. 2025) ............................................................................................... 11
Clark v. Barnard
108 U.S. 436 (1883) ................................................................................................................... 21
Cohens v. Virginia 19 U.S. 264 (1821) ....................................................................................................................... 3
Daniel v. Nat’l Park Serv.
891 F.3d 762 (9th Cir. 2018) .................................................................................................. 2, 20
Dicon Fiberoptics, Inc. v. Franchise Tax Bd.
53 Cal. 4th 1227, 139 Cal. Rptr. 3d 825, 274 P.3d 446 (2012) .................................................. 58
Donell v. Kowell
533 F.3d 762 (9th Cir. 2008) ........................................................................................................ 1
In re Dow Corning Corp.
244 B.R. 721 (Bankr. E. D. Mich. 2000) ...................................................................................
In re Dow Corning Corp.
255 B.R. 445 (E.D. Mich. 2022) ................................................................................................
East West Bank v. Altadena Lincoln Crossing, LLC
598 B.R. 633 (C.D. Cal. 2019) ...................................................................................................
Eberhart v. Comm’r, 2004 Tax Ct. Summ., LEXIS 111, at *12-13 (2004) .................................................................
Eiselin v. USCIS San Diego No. 23-CV-1961 JLS (AHG)
2024 U.S. Dist. LEXIS 30785, at *4 (S.D. Cal. Feb. 22, 2024) ................................................... 2
In re Equip. Acquisition Res., Inc.
742 F.3d 743 (7th Cir. 2014) .................................................................................................... 4, 6
Ex parte Young
209 U.S. 123 (1908) ................................................................................................................... 18
Finger v. McCaughey
114 Cal. 64, 45 P. 1004 (1896) ..................................................................................................
Franceschi v. Schwartz
57 F.3d 828 (9th Cir. 1995) .................................................................................................. 17, 22
G Cos. Mgmt., LLC v. LREP Arizona, LLC
88 Cal. App. 5th 342, 304 Cal. Rptr. 3d 651 (2023) ...................................................... 25, 37, 38
Gamer v. duPont Glore Forgan, Inc.
65 Cal. App. 3d 280, 135 Cal. Rptr. 230 (1976) ........................................................................ 36
Garrett v. Coast & S. Fed. Sav. and Loan Ass’n.
9 Cal. 3d 731, 511 P.2d 1197 (1973) ................................................................................... 30, 31
Ghirardo v. Antonioli
8 Cal. 4th 791, 883 P.2d 960 (1994) .......................................................................................... 35
In re Gill
574 B.R. 709 (B.A.P. 9th Cir. 2017) .......................................................................................... 28
Gouch v. Cal. Franchise Tax Bd
2009 U.S. Dist. LEXIS 84023, at *7 (N.D. Ga. Sept. 15, 2009) ................................................ 22
Great W. Bank & Trust v. Entz-White Lumber & Supply, Inc. (In re Entz-White Lumber & Supply, Inc.)
850 F.2d 1338 (9th Cir. 1988) .............................................................................................. 29, 33
Hajro v. U.S. Citizenship & Immigration Servs.
811 F.3d 1086 (9th Cir. 2016) ...................................................................................................... 2
Hall v. Sup. Ct.
150 Cal. App. 3d 411, 197 Cal. Rptr. 757 (1983) ...................................................................... 35
Hess v. Port Auth. Trans-Hudson Corp.
513 U.S. 30 (1994) ..................................................................................................................... 22
Hill v. Blind Indus. & Servs.
179 F.3d 754 (9th Cir. 1999) ................................................................................................ 20, 21
Hoffman v. Conn. Dep't of Income Maint.
492 U.S. 96 (1989) ..................................................................................................................... 10
Vol. 37 Cal. Bankr. J. No. 1 (2026) 64
Honchariw v. FJM Private Mortg. Fund, LLC
83 Cal. App. 5th 893, 299 Cal. Rptr. 3d 819 (2022) ...................................................... 25, 31, 32
In re Hunt
95 B.R. 442 (Bankr. N.D. Tex. 1989) .................................................................................. 61, 62
Hyundai Sec. Co., Ltd. v. Lee
232 Cal. App. 4th 1379, 182 Cal. Rptr. 3d 264 (2015) ........................................................ 36, 37
In re Indus. Commer. Elec.
304 B.R. 24 (D. Mass. 2004) ............................................................................................... 57, 58
Kohan v. Comm'r
T.C. Memo. 2019-85 (2019) ...................................................................................................... 46
Kohn v. State Bar
119 F.4th 693 (9th Cir. 2024)............................................................................................... 17, 18
Kurtin v. Ehrenberg (In re Elieff)
637 B.R. 612 (B.A.P. 9th Cir. 2022) .......................................................................................... 33
Lundell v. Anchor Const. Specialists, Inc.
223 F.3d 1035 (9th Cir. 2000) .................................................................................................... 50
Mantz v. Cal. State Bd. of Equalization (In re Mantz)
343 F.3d 1207 (9th Cir. 2003) .................................................................................................... 59
In re Matheson Flight Extenders, Inc.
673 B.R. 436 (Bankr. E.D. Cal. 2025) ....................................................................................... 28
McHugh v. Ill. DOT
55 F.4th 529 (7th Cir. 2022)....................................................................................................... 21
Mencor Enters., Inc. v. HETS Equities Corp.
190 Cal. App. 3d 432, 235 Cal. Rptr. 464 (1987) ...................................................................... 37
Milestone Fin., LLC v. Moon (In re Moon)
648 B.R. 73 (B.A.P. 9th Cir. 2023) ............................................................................................
Miller v. United States (In re All Resort Grp. Inc.)
617 B.R. 375 (Bankr. D. Utah 2020), rev’d,
604 U.S. 518 (2025) ............................................................................................................ passim
Miller v. United States
71 F.4th 1247 (10th Cir. 2023), rev’d, 604 U.S. 518 (2025) ............................................................................................................ passim
Mitchell v. Franchise Tax Bd. (In re Mitchell)
209 F.3d 1111 (9th Cir. 2000) .................................................................................................... 22
Mitsuwa Corp. v. Wehba
2019 WL 3561928 (Cal. App. Aug. 6, 2019) .............................................................................
O’Connor v. Richmond Sav. & Loan Ass’n
262 Cal. App. 2d 523, 68 Cal. Rptr. 882 (1968) ........................................................................ 31
Pacifica L 51, LLC v. New Invs., Inc. (In re New Invs., Inc.)
840 F.3d 1137 (9th Cir. 2016) .................................................................................................... 33
Price v. Comm’r
887 F.2d 959 (9th Cir. 1989) ......................................................................................................
Quattrone Accountants, Inc. v. IRS
895 F.2d 921 (3d Cir. 1989) ....................................................................................................... 60
Raleigh v. Ill. Dep’t of Revenue
530 U.S. 15 (2000) ............................................................................................................... 55, 56
Red & White Distrib., LLC v. Osteroid Enters., LLC
38 Cal. App. 5th 582, 251 Cal. Rptr. 3d 400 (2019) ................................................................. 32
Richardson v. Comm’r
509 F.3d 736 (6th Cir. 2007) ...................................................................................................... 46
Sato v. Orange Cty. Dep’t of Educ. 861 F.3d 923 (9th Cir. 2017) ................................................................................................ 22, 23
Seminole Tribe of Fla. v. Florida
517 U.S. 44 (1996) ..................................................................................................................... 18
Sharp v. United States (In re SK Foods, LP)
Case No. 10-02117-D, ECF No. 9 (Bankr. E.D. Cal. May 5, 2010) ................................................................................................. 20
Simonson v. Granquist
369 U.S. 38 (1962) ..................................................................................................................... 16
In re Smith No. 22-3418
2024 Bankr. LEXIS 711, at *8 (Bankr. D. Mont. 2024) ............................................................ 58
Starnes v. United States (In re Starnes)
159 B.R. 748 (Bankr. W.D.N.C. 1993) ...................................................................................... 61
Steshenko v. Gayrard
70 F. Supp. 3d 979 (N.D. Cal. 2014) ................................................................................... 17, 18
Thompson v. Gorner
104 Cal. 168, 37 P. 900 (1894) .................................................................................................. 32
Torres v. McDonnell No. 23-cv-04276-SI, 2023
U.S. Dist. LEXIS 159381, at *15 (N.D. Cal. Sept. 8, 2023) ...................................................... 22
U.S.A, Internal Revenue Service v. Teal (In re Teal), 16 F.3d 619 (5th Cir. 1994) ........................................................................................................ 59
United States v. Miller
604 U.S. 518 (2025) ............................................................................................................ passim
United States v. Miller No. 2:20-CV-00248-BSJ
2021 U.S. Dist. LEXIS 171247 (D. Utah Sept. 8, 2021), rev’d, 604 U.S. 518 (2025) ..................................................................................................................... 6
United States v. Nordic Village, Inc.
503 U.S. 30 (1992) ..................................................................................................................... 10
United States v. Ron Pair Enters., Inc.
489 U.S. 235 (1989) ................................................................................................................. 5, 9
United States v. Shaw
309 U.S. 495 (1940) ............................................................................................................... 3, 11
United States v. Stolle 2000-1 U.S.T.C. ¶ 50,329, 86 A.F.T.R.2d ¶ 2000-5043 (C.D. Cal. 2000) ................................. 47
Vol. 37 Cal. Bankr. J. No. 1 (2026) 66
Ury v. Jewelers Acceptance Corp.
227 Cal. App. 2d 11, 38 Cal. Rptr. 376 (1964) .......................................................................... 36
In re USA Sales, Inc.
580 B.R. 852 (Bankr. C.D. Cal. 2018) ................................................................................. 55, 58
Walsh v. Glendale Fed. Sav. & Loan Ass’n
1 Cal. App. 3d 578, 81 Cal. Rptr. 804 (1969) ............................................................................ 31
Weber, Lipshie & Co. v. Christian 52 Cal. App. 4th 645, 60 Cal. Rptr. 2d 677 (1997) .................................................................... 30
Welch v. Helvering
290 U.S. 111, 115 (1933) ........................................................................................................... 57
In re Wolverine Radio Co. 930 F.2d 1132 (6th Cir. 1991) .................................................................................................... 62
Woosley v. California 838 P.2d 758 (Cal. 1992) ........................................................................................................... 20
Wright v. Madison Cty. Reg’l Water Dist. No. 5:22-CV-5060
2022 U.S. Dist. LEXIS 214765, at *2-3 (W.D. Ark. Nov. 29, 2022) ........................................ 23
In re Yahweh Ctr., Inc.
27 F.4th 960 (4th Cir. 2022)......................................................................................................... 4
Zazzali v. United States (In re DBSI, Inc.)
869 F.3d 1004 (9th Cir. 2017) .......................................................................................... 4, 12,
11 U.S.C. § 506(b) .......................................................................................................................... 28
11 U.S.C. § 506(d) .............................................................................................................. 27, 28, 33
11 U.S.C. § 510(b) .......................................................................................................................... 29
11 U.S.C. § 523(a)(1)(B) ................................................................................................................ 43
11 U.S.C. § 544 ........................................................................................................................ passim
11 U.S.C. § 544(a) ................................................................................................................... passim
11 U.S.C. § 544(b) ................................................................................................................... passim
11 U.S.C. § 544(b)(1) .............................................................................................................. passim
11 U.S.C. § 544(b)(2) ....................................................................................................................... 1
11 U.S.C. § 545 .... 12, 13, 14
11 U.S.C. § 547 .......... 12, 14
11 U.S.C. § 548 ......... passim
11 U.S.C. § 548(a) ...................................................................................................................... 5, 14
11 U.S.C. § 548(a)(1) .............................................................................................................. 1, 5, 14
11 U.S.C. § 548(a)(1)(A) .................................................................................................................. 1
11 U.S.C. § 549 ......................................................................................................................... 12, 14
11 U.S.C. § 549(a) .......................................................................................................................... 14
11 U.S.C. § 550 ......................................................................................................................... 14, 33
11 U.S.C. § 550(a) .......................................................................................................................... 28
11 U.S.C. § 551 ................................................................................................................... 14, 28, 33
11 U.S.C.
26
26
Vol. 37 Cal. Bankr. J. No. 1 (2026) 68
6
6 COLLIER ON BANKRUPTCY ¶ 724.02[7] (Richard Levin & Henry J. Sommer eds., 16th ed.)....... 16
Ahart, Alan M., Cal. Prac. Guide: Bankruptcy ch. 17, ¶ 17:1441 (The Rutter Group 2025). .................................................................................... 50, 60
Brinton, Sharah L., Three-Dimensional Sovereign Immunity, 54 SANTA CLARA L. REV. 237 (2014)................................................................................. 2, 3, 23
Bruno v. Comm'r T.C. Memo. 2020-156 (Nov. 16, 2020) ..................................................................................... 57 Federal Funds Rate History 1990 to 2026, https://www.forbes.com/advisor/investing/fed-fundsrate-history/ (last checked Mar. 29, 2026) ................................................................................. 34
FRANCHISE TAX BOARD, https://www.ftb.ca.gov ...........................................................................
FTB Pub. 1008, Federal Tax Adjustments and Your Notification Responsibilities to California ...
IRM 4.13.1 (Dec. 10, 2025) ............................................................................................................
IRM 4.13.1.2.1 (Dec. 10, 2025) ......................................................................................................
IRM 5.14.1.1.1 (Sept. 22, 2021) .....................................................................................................
IRM 5.14.1.4 (July 2, 2024) ............................................................................................................
IRM 5.14.1.4(6) (July 2, 2024) .......................................................................................................
(Mar. 03, 2025)
(Sept. 18, 2018)
5.16.1.2 (Mar. 3, 2025) ...........................................................................................................
5.16.1.2.6 (Mar. 3, 2025) ........................................................................................................
5.16.1.2.9 (Mar. 3, 2025) ........................................................................................................
8.6.4.4 (June 16, 2020) ...........................................................................................................
(Nov. 24, 2025)
21.2.3.1.6 (Oct. 15, 2024) .......................................................................................................
21.2.3.2.2 (Oct. 4, 2024)
(Jan. 15, 2020)
25.15.5.7 (July 24, 2017) ........................................................................................................
IRM 34.3.1.1.7 (Jan. 20, 2015) .......................................................................................................
IRM 34.3.1.1.7(6)(e) (Jan. 20, 2015) ..............................................................................................
IRM 34.3.1.1.9 (Jan. 20, 2015) .......................................................................................................
IRM 34.3.1.1.9(6) (Jan. 20, 2015) ..................................................................................................
IRS Announcement 77-37, I.R.B. 1977-12, 24, (Jan. 1, 1977) ....................................................... 40
IRS Form 656 Booklet, Offer in Compromise ................................................................................
IRS Form 8857, Request for Innocent Spouse Relief ..................................................................... 46
IRS Publication 908, Bankruptcy Tax Guide, p. 15 (Dec. 2024) .................................................... 49
IRS Publication, Your Appeal Rights and How to Prepare a Protest if You Disagree ................... 59 Israel, Eric P., Hints on Making the Most of Your Estate’s Assets: Often Overlooked Methods to Maximize Equity, 26 CAL BANKER J. 199 (2002)..................................................................... 25 Kirby, Dean T., Two Recent Cases Show How to, and How Not to, Structure Settlement Agreements Calling for Future Payments, available at https://calawyers.org/business-law/two-recent-casesshow-how-to-and-how-not-to-structure-settlement-agreements-calling-for-future-payments/. . 32
MARCH, KATHLEEN P. & JANET A. SHAPIRO, CALIFORNIA PRACTICE GUIDE: BANKRUPTCY
¶ 17:1331 (The Rutter Group 2025) ........................................................................................... 50 RESTATEMENT (SECOND) of CONFLICT OF LAWS § 187 (1971) ...................................................... 35
Vol. 37 Cal. Bankr. J. No. 1 (2026) 70
Stevens, John Paul, Is Justice Relevant?, 114 NW. U. L. REV. 1837 (2020) ..................................... 3
U.S. Dep’t of Justice, Tax Div., Settlement Reference Manual (rev. Sept. 2012)........................... 54
Usury Laws State-by-State, https://www.paidnice.com/usury-laws-by-state (Mar. 29, 2026)........ 34
www.Franchise Tax Board.ca.gov/pay/penalties-and-interest/interest-and-estimate-penaltyrates.html....................................................................................................................................
www.irs.gov/privacy-disclosure/freedom-of-information-act-foia-guidelines ...............................
R. Bankr. P. 3001(f) ................................................................................................................
R. Bankr. P. 7001
R. Bankr. P. 9014
Cal. Code Regs. tit. 18, § 30103(a) .................................................................................................
Cal. Code Regs. tit. 18, § 30103(b) .................................................................................................
Treas. Reg. § 301.7122-1(b)(1). ......................................................................................................
CAL CONST. art. XIII, § 32 .............................................................................................................
CONST., art. XV, § 1 .........................................................................................................
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