United States v. Equip. Acquisition Res., Inc.

by
EAR, a subchapter S corporation, filed for Chapter 11 bankruptcy. In the years before its petition, EAR made federal income tax payments on behalf of its shareholders; eight of the payments in the two years preceding its petition. Once in Chapter 11, EAR, acting as debtor in possession, filed an adversary complaint against the government seeking to recover all nine payments as fraudulent transfers: the eight most recent payments under 11 U.S.C. 548(a)(1), which provides for recovery of transfers made within two years of the filing, and the ninth under 11 U.S.C. 544(b), which enables a trustee to bring a state‐law fraudulent‐transfer action. EAR asserted that the IRS was precluded from raising sovereign immunity as a defense. The U.S. agreed to disgorge the eight payments, but contested EAR’s ability to recover the ninth payment under 544(b). The bankruptcy court rejected the government’s theory, finding that 11 U.S.C. 106(a)(1) abolished federal immunity from suit under listed bankruptcy causes of action, including section 544. The district court affirmed. The Seventh Circuit reversed, holding that 106(a)(1) does not displace the actual‐creditor requirement in section 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.View "United States v. Equip. Acquisition Res., Inc." on Justia Law