IN RE: EQUIPMENT ACQUISITION RESOURCES, INC., Debtor. APPEAL OF: UNITED STATES OF AMERICA
Argued: December 2, 2013.
Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 11 C 05045 -- Edmond E. Chang, Judge.
For In the Matter of: EQUIPMENT ACQUISITION RESOURCES, INCORPORATED, Debtor - Appellee: George P. Apostolides, Attorney, ARNSTEIN & LEHR LLP, Chicago, IL.
For UNITED STATES OF AMERICA, Appellant: Thomas J. Clark, Attorney, John A. Dudeck, Jr., Attorney, DEPARTMENT OF JUSTICE, Tax Division, Appellate Section, Washington, DC, Gilbert S. Rothenberg, Deputy Assistant Attorney General, DEPARTMENT OF JUSTICE, Office of the Attorney General, Washington, DC.
For STATE OF ILLINOIS, Amicus Curiae: James D. Newbold, Attorney, Jane E. Notz, Attorney, OFFICE OF THE ATTORNEY GENERAL, Chicago, IL.
Before BAUER and FLAUM, Circuit Judges, and VAN BOKKELEN, District Judge.[*]
Flaum, Circuit Judge.
This case concerns whether a bankruptcy trustee can
bring an action under § 544(b)(1) of the Bankruptcy Code to recoup a debtor's
federal tax payment. Section 544(b)(1) allows a trustee to step into the shoes
of an actual creditor who could have avoided the transfer outside bankruptcy
using a state-law cause of action. The federal government's sovereign immunity
prevents creditors from suing the IRS using state law. However, another section
of the Bankruptcy Code, § 106(a)(1), abrogates the government's sovereign
immunity " with respect to" § 544.
The trustee's ability to recover federal tax payments thus hinges on the interplay between § 544 and § 106. The courts below, relying on § 106(a)(1), concluded that a debtor in possession could use § 544(b)(1) to bring an Illinois fraudulent-transfer action against the IRS. But we find that § 106(a)(1) does not displace the actual-creditor requirement in § 544(b)(1). Ordinarily, a creditor cannot bring an Illinois fraudulent-transfer claim against the IRS; therefore, under § 544(b)(1), neither can the debtor in possession. We reverse in favor of the United States.
Equipment Acquisition Resources, Inc. (" EAR" ), an
Illinois subchapter S corporation,
filed for Chapter 11 bankruptcy in October 2009. In the years
before its petition, EAR made nine federal income tax payments to the IRS on
behalf of its shareholders. (Subchapter S corporations do not pay taxes on
corporate income; instead, the tax liability is passed through to the
corporation's shareholders.) EAR made eight of these payments in the two years
preceding its petition. The ninth payment was just outside this period.
Once in Chapter 11, EAR, acting as debtor in possession, filed an adversary complaint against the United States seeking to recover all nine payments as fraudulent transfers. EAR sought to recover the eight most recent payments under 11 U.S.C. § 548(a)(1), which provides a cause of action for the recovery of transfers made within two years of the filing. It sought to recover the ninth under 11 U.S.C. § 544(b), the provision (described above) that enables a trustee to bring a state-law fraudulent-transfer action. Illinois, like most states, has adopted the Uniform Fraudulent Transfer Act, which has a four-year statute of limitations. 740 Ill. Comp. Stat. Ann. 160/5(a)(2), 160/10. EAR asserted that the Bankruptcy Code's abrogation of the government's sovereign immunity " with respect to" both § 548 and § 544 precluded the IRS from claiming immunity as a defense to either theory of recovery. See 11 U.S.C. § 106(a)(1).
The parties reached a settlement. The United States agreed to disgorge the eight payments that EAR could recover using § 548, but contested EAR's ability to recover the ninth payment under § 544(b). Because the federal government's sovereign immunity ordinarily prevents a creditor from bringing an Illinois fraudulent-transfer action against the IRS, the government argued, the ninth tax payment was not " voidable under applicable law by a creditor holding an unsecured claim." Id. § 544(b)(1). The parties thus agreed that the United ...