FOR PUBLICATION



### UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

I N R E DBSI, I N C ., Debtor
,

JAME S R. Z AZ ZAL I , as Trustee for the DBSI Estate Litigation Trust,

Plaintiff-Appellee
,

v

.

U NI T E D S TA T E S O F A ME R I C A , Defendant-Appellant. No. 16-35597

D.C. No. 1:13-cv-00086- MJP

OPINION

Appeal from

the United States District Court for the District of Idaho Marsha J. Pechm an, District Judge, Presiding

Argued and Subm itted May 17, 2017 Seattle, W ashington

F iled August 31, 2017

Before: Michael Daly Hawkins, Ronald M. Gould, and Richard A. Paez, Circuit Judges.

Opinion by Judge PaezI N R E DBSI, I N C

. 2

SUMMARY *

Bankruptcy

The p anel affirm ed the district court’s decision affirm ing the bankruptcy court’s o rder denying in part the m otion of the United S tates to dism iss an adversary proceedi n g filed by a
c hapter 11 bankruptcy trustee, seeking avoidance of th e debtor’s federal tax paym ent.

The trustee sought to avoid the ta x p aym ent as a fraudulent trans fe r under 11 U.S.C. § 544(b)(1) and Idaho’s Uniform Fraudulent Transfer Act. Disa greeing with the Seventh C ircuit, the panel held that the abrogation of sovereign imm

unity in 1 1 U. S.C. § 106(a)(1) “with respect to” § 544(b)(1) extended to the derivative Idaho law, and no additional waiver o f sovereign imm unity wa s necessary. Accordingly, the g overnm ent could not rely o n sovereign imm unity to prevent the avoidance of the tax paym ents.

The panel addressed the trustee’s cr o ss-appeal in a concurrently filed m em o randum disposition.

* This summ ary constitutes no part of the opinion of the court. It h as been prepared by court staff for the convenience of the reader.I N R E DBSI, I N C

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C OUNSEL

Ivan Clay D ale (argued), Thom as J. Clark, and Gilbert S. Rothenberg, Attorneys; Diana L. Erbsen, Deputy Assistant At torney General; Caroline D. Ciraolo, Principal Deputy Assistant Attorney General; Tax Division, United States Departm ent of Just i ce, W ashington, D.C.; for DefendantAppellant.

Jennifer A

. Hradil (argued), Mark B. C onlan, Mic hael F. Quinn, and B rett S

. T heisen, Gibbon s P. C.
, Newark, New Jersey, for Plaintiff-Appellee.

Carolyn W ade, Senior Assistant Attorney General; Benjam in Gutm an, Solicitor General; Ellen F. Rosenbl um , Attorney Ge n e ral; Oregon Departm ent of Justice, Salem
, Oregon; Karen Cordry, Bankruptcy Counsel, National Association o f Attorneys General, W ashington, D.C.; fo r Am ici Curiae States of Idaho, I l linois, Montana, Nebraska, New Mexico, New York, and Oregon.

Professor Stephen J. Lubben, Seton Hall University School o f La w, N ewark, New Jersey, for Am icus Curiae Nati o n al Association of Bankruptcy Trustees.I N R E DBSI, I N C

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OPINION
PAEZ, Circuit Judge:

W e m ust decide whether a bankruptcy trust ee can, through an adversary proceeding, avoid a debtor’s federal tax paym ent, or whether the Internal Revenue Service’s (“IRS”

o r “governm ent”) sovereign imm unity prevents such rel i e f. To resolve this qu estion, we m ust consider the interplay between two Bankruptcy Code statutes: 11 U.S.C. §§ 1 0 6(a)(1) (“Section 1 06(a)(1)”) and 544(b)(1) (“Section 544(b)(1)”). In Section 106(a)(1), Congress unam biguously abrogated sovereign imm unity “with respect to” Section 544(b)(1). Under Section 544(b)(1), a trustee may avoid fraudulent transfers when the trustee can dem onstrate that an actual unsecured creditor could avoid the sam e transfer under “applicable law” outside o f bankruptcy. This is known as the “actual creditor” or “triggering creditor” r equirem ent as it requires the existence o f an actual creditor in whose shoes a trustee can stand. See 5 Co l l ier on Bankruptcy ¶ 544.01 (Alan N. Resnick & Henry J. Somm er eds., 16th ed. 2017).

Here, Jam es R. Zazzali (“Zazzali” or “Trustee”) invoked Idaho’s Uniform Fraudul e nt Transfer Act (“UFTA”), Idaho Code Ann. § § 55-901 1 et seq ., as the “applicable law” to bring

a Section 544(b)(1) adversary action to avoid $17 m illion in tax paym ents that the debtor, DBSI, Inc., fraudulently transferred to the IRS. An un se c ured creditor who seeks to

1 In 2015, I daho am ended and renum bered certain sections of Title 5 5 of the Idaho Code by adopting the Uniform Voidable Transactions Act. See H.R. 92, 63d Leg., 1st Reg. Sess. ( Idaho 2015). A ll references in t h is opinion to the Idaho Code Annotated are t o those statutes in effect during the period in question.I N R E DBSI, I N C

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avoid such tax paym ents under Idah o l aw outside o f bankruptcy w ould be precluded from doing so because of the governm ent’s sovereign imm unity. T he question, then, is whether, in the bankruptcy context, Congress’s abrogation o f

so v ereign im

m un ity w i th respect to Section 544(b)(1) ext e n d s to the underlying state cause of action, or wh e th e r a trustee

m ust also establish that Congress h as waived sovereign imm unity with respect to Idaho’s UFTA.

Both the bankruptcy court and the d istrict court ruled that Section 106(a)(1)’s abrogation of sovereign imm unity “with respect to” Se ct i on 544(b)(1) extends to the derivative “applicable law”—here, Idaho’s UFTA. In o ther words, an additional waiver of sovereign imm unity was not necessary. As a result, the governm ent could not rely on sovereign immun i ty to prevent the avoidance of the tax paym ents at issue. W e agree, and affirm

. 2

I.

DBSI, Inc. and its affiliated entities, including FOR 1031, DDRS, and DBSI I nvestm ents (collectively, “DBSI”), engaged in the acquisition, d evelopm ent, m anagem ent, and sale of com

m ercial real estate properties throughou t the United States. They did so, h owever, through an illegal Ponzi schem e—during their l ast two years in operation they purportedly lost $3 m illion per m onth and used new investor funds to m eet existing o bliga t io n s

. This schem e eventually caught up with them
, and in May 2013, the United States indicted several of the com pany i n s id ers, who were later

2 W e have jurisdiction p ursuant t o 28 U.S.C. § 158(d) and review de

novo issues of statutory interpretation. S ee, e

. g

. , In re Acequia, I n c. , 34 F.3d 800, 809 (9th Cir. 1994).I N R E DBSI, I N C

. 6

convicted of various f

raud crim es. Their convictions were affirm ed by our court.

DBSI was set up as an S corporation, and, while still in operation, m ade tax paym ents on behalf of its shar e ho l d ers. Tax paym ents were h andled in this mann er because S

c orporations do not them selves pay taxes on corpor a te incom e, but rathe r the tax liability is p assed through to the corporation’s shareholders. I.R.C. §§ 1363, 1366. Between 2 00 5 and 2008, D BSI paid the IRS a total of approxim ately $17 m illion in tax paym ents on beha l f o f its shareholders. The v ast m ajority of these paym ents were m ade on behalf o f Doug Swenson (“Swe ns o n”) and Thom as Var Reeve (“Reeve”), two o f the largest shareholders. T he IRS ultim ately r efunded approxim ately $ 3.6 m illion to Swenson

an d Reeve in claim ed overpaym ents of their individual incom e tax liabilities.

In Novem ber 2008, DBSI filed for bankruptcy. A p lan o f liquidation was co n fi rm ed in October 2 010, and, as p art o f that p lan, Zazzali wa s appointed as trustee to adm inister the DBSI Estate Liquidation Trust. Shortly thereafter, Z azzali

comm enced an adversary proceeding in bankruptcy court to

recover DBSI’s allegedly fraudulent transfers to (1) com pany insiders, and (2) the IRS and taxing authorities of twenty-five states on behalf of com pany s h ar e h olders. This appeal concerns only those transfers that were m ade to the IRS. 3

In bringing his claim s against the IRS, Zazzali relied on two different sections of the Ba nkruptcy Code: 1 1 U.S.C.

3 The states settled with Zazzali, although several of them
, along with

a few other interested states, f iled an amicus brief (“State Am ici”) urging reversal in support of the United States.I N R E DBSI, I N C

. 7

§ 548 (“Section 548”) and, as discussed above, Section 544(b)(1). Section 548 and Section 544(b)(1) both perm it a trustee to avoid transfers, however they impose different statutes of lim itations. Section 548 has a two-year statute o f lim itations, while Section 544(b)(1) incorporates the statu te of lim itations of the applicable law. Here, Idaho’s UFTA has

a four-year statute of lim itations. Idaho Code Ann. § 5 5-918. Accordingly, pursuant to Section 548, Zazzali sought to

reco v er transfers in the am ount of approxim ately $56,000 that

were m ade in the two years prior to the bankruptcy petition date. T he governm ent did not c o n t est this claim

. Under Section 5 44(b)(1), Zazzali sought t o recover the rem aining portion of the $17 m illion b y av o iding transfers that were
m ade within four years of the petition date.

The g o v ernm ent m oved to dism iss Zazzali’s Section 544(b)(1) counts for failure to state a claim under Federal Rule of Civil Pr o c edure 12(b)(6). See Fed. R. Bankr. P. 7 012(b). The governm ent argued that Congress had not abrogated sovereign imm unity with respect to the Section 544(b)(1) underlying state law cause of action, and therefore, there was n o un s e cured creditor who could sue the governme n t under Idaho’s UFTA. The bankruptcy court rejected this argum ent and concluded th at S ection 106(a)(1)’s waiver of sovereign imm

unity p erm itted the Trustee’s suit to proceed

. T he governm ent appealed the bankruptcy court’s ruling to the d i strict court. While the governm ent’s appeal

was p ending, the Se v e nth Circuit d ecided In re Equipment Acquisition Resources, Inc. (“EAR ”), 742 F.3d 743 (7th Cir. 2014), which an a ly z e d the identical issue before the district court, and which is at issue in the c urr ent appeal. The Seven th Circuit cam e to the opposite conclusion as the bankruptcy court, and held that Section 106(a)(1)’s w aiver o f sovereign imm

unity does not extend to Section 54 4 (b )(1)’sI N R E DBSI, I N C

. 8

derivative state law claim

. Nonetheless, the district court was unpersuaded by the Seventh C ircuit’s r easo n ing, and affirm ed th e bankruptcy court’s ruling. F urther, the district court declined to certify for interlocutory appeal its o rder affirm ing the denial of the governm ent’s m otion to dism iss.

Because the adversary proceeding had been transferred to the d istrict court pursuant to a m otion b y Swe n s o n and his fellow defendants, procee d i n gs continued in that court with respect to the m erits of Zazzali’s frau du l e n t transfer claim s. The parties ultim ately filed cross- mo t i ons for summ ary judgm ent. In i t s motion for summ ary judgm ent, the governm ent conceded that the paym ents m ade to the IRS

were fraudulent and that, p ursuant to Section 548(a)(1 ) ( A), Section 54 4 ( b ) (1), and Idaho Code Ann. § 55-913(1)(a), 4 Zazzali could avoid any tr ansfer m ade within four years o f filing his bankruptcy p etition. However, relying on Idaho Code Ann. § 5 5 -917(1), 5 the governm ent asserted an affirm ative defense—th a t it received the paym ents o r transfers in good faith an d for value. The d istrict court’s resolution of th e summ ary judgm ent m otions turned on whether the governm ent coul d p r o v e the elem ents of its affirm ative defense. T h e district court first concluded that the

4 Idaho Code Ann. § 5 5-913(1)(a) states, “A transfer m ade o r obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before o r after the transfer wa s m ad e or the obligation was incurred, if the debtor m ade the transfer or incurred the obligation with actual intent to hinder, delay, or d efraud any creditor of the debtor.”

5 Idaho Code Ann. § 55-917(1) states, “A transfer or o bligation is not voidable under section 55-913(1)(a), Idaho Code, again st a person who took in g ood faith and for a reasonably equivalent value or against any subsequent transferee or obligee.”I N R E DBSI, I N C

. 9

governm ent did not receive the paym ents for value, stat i n g that “[e]very legal theory offered by the [g]overnm ent to defend its right to retain this transfer seem s to ignore the fact tha t the m oney at issue h ere is the proceeds of a widespread and devastating fraudulent schem e, stolen from sc or es o f inv estors.” The court likewise concluded that th e g o v ernm ent did not receive the transfers in good faith. In sum , the district court concluded that the governm ent failed to establish its affirm ative defense, and thus Zazzali, as a m atter of law, was entitled to avoid th e fraudulent transfers. The governm ent does not challenge this ruling.

The court, however, still had to determ in e the extent to which Zazzali could recover the transfers. In its m oti o n for

summ ary ju d gment, the governm ent argued that, even if the court were to reject its affi rmative defense, Zazzali was not entitled to recove r approxim ately $3.6 m illion of the fraudulent transfers because it already refunded that am ount

as tax overpaym ents to the shareholder- t a xp ayers. The district court agree d
, c oncluding that the IRS was not an “initial tran sfe r e e” w ithin the m eaning of 11 U.S.C. § 550(a)(1) (“Section 550(a)(1)”), and therefore the

ap p r o xim ately $3.6 m illion that the IRS already paid out as tax overpaym ents was not subject to recovery. 6

Having resolved all issues, th e district court entered judgm ent dire c t ing the IRS to return approxim ately $13.4

m illion of the total $ 17 m illion in f raudulent tax transfers. The governm ent asks us t o r everse this part of the district

6 In a cross-appeal, Zazzali challenges the district court’s conclusion th a t the $3.6 m illion in r efunded tax paym ents is not subject to recovery from t he IRS. W e address Zazzali’s cross-appeal, No. 16-35598, in a concurrently filed m em orandum disposition.I N R E DBSI, I N C

. 10

court’s judgm ent and hold that sovereign imm unity precludes th e return of the $13.4 m illion. W e decline to do so , an d affirm the district court’s ruling.

II.

A

.
Sectio n 5 4 4 (b )(1 ), i n relev ant p art, p rovides that a “trustee

m ay a void any transfer of an interest of the debtor in property

or any obligation incurred by the debtor that is voidable u nder applicable la w b y a creditor holding an unsecured claim

. . . .” (em

phasis added). B y its term s, Section 544(b)(1) requires the existence o f an actual creditor who could avoid the transfer. 5 Collier on Ba n kr uptcy ¶ 544.01. In other words, the effect of this section is “to clothe the trustee with

no new or additional right in the prem ises over that possessed by a creditor, but sim

p ly puts him in the shoes of the latter.” Id. ¶ 544.06[3] (quot in g Da vis v. Wiley
, 263 F. 588, 589 (N.D. Cal. 1920), aff’d
, 273 F. 397 (9th Cir. 1921)); see also Sherwood Partners, Inc. v. Lycos, Inc. , 394 F.3d 1 198, 1201 (9th Cir. 2005). “[I]f the actual creditor could not succeed for any reason—whether du e to the statute of lim itations, estoppel, res judicata, waiver, or any other defense—then the trustee is sim ilarly barred and cannot avoid th e transfer.” EAR
, 742 F.3d at 746; accord In r e Acequia, Inc. , 34 F.3d 8 00
, 8 09 (9th Cir. 1994) (“[l]ike P rom etheus bound, th e trustee is chained to the rights of [such] creditors”).

Here, because the substantiv e law for Zazzali’s Section 544(b)(1) claim is Idaho’s UFTA, it is undisputed that there is no actual unsecured creditor who could pursue such a claim aga i n s t the IRS outside of bankruptcy; the governm ent’s sovereign imm

unity w ould preclude any such claim

. TheI N R E DBSI, I N C

. 11

governm ent argues that b ecause there is no actual unsecured creditor who could bring such a claim
, Zazzali is lik ewise precluded from bringing a Section 5 4 4(b)(1) claim in bankruptcy court. W e disagree. The governm ent ignores that Section 544(b)(1) does not exist in a vacuum ; rather, it m ust b e r ead in concert with other sections of the Bankruptc y Code. And, here, as the governm ent readily acknowl e d g e s , Section 106(a)(1) unam biguously abrogates the federal governm ent’s sove re ign imm unity “with respect to Section 544.” In other words, Se ct ion 106(a)(1)’s abrogation o f sovereign imm

unity is absolute with r e s p ect to Section 544(b)(1) and thus n ecessarily includes the derivative state law claimon which a Section 544(b)(1) claim is based. 7

In the following discussion, we begin with well-settled

canons o f statutory interpretatio n that inform our understanding of the interplay b etween Section 106(a)(1) and Section 544(b)(1); n e x t w e address o ur divergence from the Seventh Circuit’s reasoning in EAR ; and finally, we observe that our holding conform s with the B ankrupt cy Code’s overall purpose.

7 W e note that on appeal o n e o f Zazzali’s prim ary argum ents is t hat b e c ause S ection 544(b)(1) addresses t he “avoidance” of transfers, as opposed to the “recovery” of the actual paym ents, a waiver of sovereign im m unity with respect to Section 544(b)(1) i s unnecessary. S e e, e

. g

. , 5 Collier on Bankruptcy ¶ 550.0 1 (discussing the difference between avoiding a transfe r and recovering from the transferee). Although w e acknowledge that the concepts of “avoidance” and “recovery” are distinct,

w e se e n o need to address Zazzali’s argum ent as t he text of Section 106(a)(1) is clear—sovereign im m unity has been waived with respect to Section 544(b)(1).I N R E DBSI, I N C

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B.

1.

To a s c e rtain the m eaning of Sections 106(a)(1) and 544(b)(1), we m

ust look not only to the “particular statutory language at issue” but also to “the language and design of the statute as a whole.” K Ma r t Co rp v. Cartier, Inc. , 486 U.S. 2 81
, 2 91 (1988); see also C arpenters Health & Welfare Tr

. Fu n d s v. Robertson (In re Rufener Constr.)
, 53 F.3d 1064, 1067 (9th Cir. 1995). S tatutory construction is a “h ol i stic ende av or,” United S

av. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., Ltd.
, 484 U.S. 365, 3 71 (1988), that relies on context to be “a p r e li m inary determ inant of m eaning,” Ant on i n Scalia & B ryan A. Garner, Reading L aw: The Interpretation ofLegal Texts 168 (2012). Here, read in light of Section 106(a)(1)’s clear ab rogation of sovereign imm unity, Section 544(b)( 1 ) c an only m ean one thing: a trustee need only identify an unsecured creditor, who, but for sovereign imm

unity, could bring an avoidance action against the IRS.

Section 544(b)(1) p lainly states that the “ tru stee m ay avoid any transfer

. . . that is voidable under applicable law.” But, we cannot read the p lain text o f Section 544(b)(1)—i.e., th e trig g erin g credito r req

u irem e nt

— d ev o id o f th e d eclaration in Section 1 06(a)(1) that “sovereign imm unity is abrogated as to a governm ental unit

. . . with respect to Section[]

. . . 5 44.” See also In re Equip. Ac quisition Res., Inc. , 485 B.R. 586, 593 (Bankr. N.D. Ill. 2013), judgment rev’d by EAR
, 742 F.3d 743 (“[S]overeign imm

unity is com

plete l y abolished with respect to S ection[]

. . . 544.” (internal quotatio n m arks

om itted)). “It simp l y does not m atter how a sovereign imm unity defense is invoked against [Trustee]’s claim sI N R E DBSI, I N C

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[because] Section 1 06(a)(1)

. . . elim i nates the obstacle wherever it appears ‘with respect to’ § 544

. . . .” Id. In other

wo r d s , Congress’s waiver of sovereign imm unity is unequivocal under Section 106(a)(1). 8

2.

Our interpreta t ion of the interplay between Section 106 (a)(1) and Section 5 4 4(b)(1) is bolstered by the fact that Section 1 06(a)(1) wa s e n a cted after Section 544(b)(1). See Food & Drug Admin. v. Brown & Williamson Tobacco Corp.
, 529 U.S. 120, 133 (2000). “The cla s s i c judicial task o f reconciling m any laws enacted over tim e, and getting them to

m ake sense in com

bination, necess arily assum es that the im plications of a statute m ay b e altered by the im plications o f

a later statute.” Id. at 143 (internal qu o t a t ion m arks and citation o mi tt ed). Here, when Congress waived sovereign imm unity w ith respect to Section 544, Congress understood that Section 544(b)(1) codified a trustee’s powers to invoke state law. See S. Rep. 95-989, at 85 ( 1978), as reprinted in U.S.C.C.A.N. 5 7 87, 5871. Even m ore im portantly, those powers we r e deep rooted, and had existed since at least the

8 In United States v. Nordic Village, I n c. , 503 U.S. 3 0, 39 (1992), the Suprem e Court m ade it un m i stakably clear that for Congress to waive

s ov e reign im

m unity it m

ust do so “unequivocal[ly].” As a result, C o ng re s s am ended Section 106(a)(1) i n 1994, at least in part, as a response to Nordic Village

. H. R. R e p. 103-835, at 42 (1994); see also Norton B a nkr. L. & Prac. 3d § 14:4. After acknowledging the S uprem e Court’s holding in Nordic Village
, Congress stated that “[t]his am endm ent expressly provides for a waiver of sovereign imm unity by governm ental units with respec t to m onetary recoveries as well as declaratory and injunctive relief. I t i s the Comm ittee’s intent to m ake section 106 conform to t he Congressional intent of the Bankruptcy Reform Ac t o f 1 9 7 8 waiving the sovereign im

m unity of the States and the Federal Governm ent in this regard.” Id.I N R E DBSI, I N C

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Bankruptcy Act of 1898. Ba nkrupt cy Act o f 1 898 § 70(e), ch. 541, 30 S tat. 544 (1898); see also No r to n Ba n kr. L. & Prac. 2d § 63:7 (1997); accord Stellwagen v. Clum
, 245 U.S. 605, 614 (1918); Moore v. Bay , 2 84 U.S. 4 (1931). Since we presum e that “Congress understands the state of existing law when it legislates,” Bowen v. Massachusetts
, 4 8 7 U.S. 879, 896 (1988), it is clear that “[b]y including [Section] 5 44 in the list of Bankruptcy Code sect i o n s set forth in [Section] 106(a)(1), Congress knowingly included state law causes o f action within the categ o ry o f suits to which a sovereign imm unity defense could no longer be asserted.” Liebersohn

v. IRS (In re C.F. Foods, L.P.)
, 265 B.R. 71, 85 (Bankr. E.D. Pa. 2001).

3.
Finally, the inter

p r etation offered by the governm ent would essentially nu ll ify Section 106(a)(1)’s effect on Section 544(b)(1), an in terpretation we should avoid. See, e.g. , U nited States v. Powell
, 6 F.3d 611, 614 (9th Cir. 1 993) (“It is a basic rule of statutory construction that one provision should not be interpreted i n a way which is internally contradicto ry o r that renders other provisions of the sam e statute inconsistent or m ean ingless.” (internal quotation

m arks and citation o m itted)). Adopting the governm ent’s posit i o n would m ean that S ection 1 06(a)(1)’s abrogation o f sovereign imm

unity w ould have n o effect on Section 544 (b)(1) because a trustee would always need to dem onstrate that Congress p rovided for a separate waiver o f sovereign imm

unity with respect to any “applicable law.” A s one bankruptcy court deftly put it,

Why would C ongress explicitly waive sovereign imm

unity for all other avoidan ceI N R E DBSI, I N C

. 15

actions under the Bankruptcy Co de, and include a waiver of sovereign imm unity for actions under section 544 knowing th at section 544 encom

passes s tate law theories, but then require a separate wai v er o f sovereign imm

unity for the necessary state law com p onent in actions under section 544?

Furr v. U.S. Dep’t of Treasury (In re Ph a rma c y Distrib. Servs.
, Inc.)
, 455 B.R. 817, 821 (Bankr. S.D. Fla. 2011). The governm ent insists that Section 106(a)(1)’s w aiver o f sovereign imm

unity would not be rendered m eaningless if we adopted its approach. However, w e f ind th e g overnm ent’s argum ents unavailing.

Fir s t , th e governm ent notes that the waiver of sovereign imm unity would still apply to Section 544(a) because Section 544(a) contains no triggering creditor requirem ent. Although this is true, it is besi d e th e point. Surely, had Congress intended to lim it Secti on 1 06(a)(1)’s application to Section 544(a), as o p posed to all of Section 544, it knew how to do

so. In f act, elsewhere in the Bankruptcy Code, Congress has dem onstrated that it knows how to m ake a specific provision only applicable to a subsection o f Section 544. S ee, e

. g

. , 11 U.S. C. § 546(c)(1), (d), (h); id. § 541(b)(4); see also Keene Corp. v. United S tates , 5 0 8 U.S. 200, 208 (1993) (“Where Congress in clu d es p articular language in one section of a statute but om its it in another

. . . , it is g enerally p resum ed that Congress acts intentionally and purposely i n the disparate inclusion or exclusion.” (internal quotat i o n
m arks and citation om itted)).

Second, the governme n t explains that Section 106(a)(1) applie s n o t only to the federal governm ent but to allI N R E DBSI, I N C

. 16

governm ental entities. This is true: Section 106(a)(1) abrogates sovereign imm unity for all “governm ental un its,” which the Bankruptcy Code defines to include, am ong other entities, states and m

unicipalities. 11 U.S.C. § 101(27). The governme n t then asserts that as long as state or local

m unicipa l ities have waived sovereign imm unity to p erm it fraudulent transfer actions again st their governm ents, Section 106(a)(1)’s w aiver with respect to Sectio n 5 4 4(b)(1) would

serv e a purpose. 9 But this assertion suffers from the sam e fundam ental flaw as the governm ent’s underlying argum ent. If a state or local m

unicipality has already waived sovereign imm unity, Sectio n 1 06(a)(1)’s waiver of imm unity is unnecessary and adds nothing. 1 0 W e agree with the bankruptcy court that the governm ent’s interpretation would render Section 106(a)(1)’s application to Sectio n 544(b)(1) practically m eaningless, and therefore it is an interpr etation to which we cannot subscribe.

9 The governm ent note s , for exam ple, that states like Illinois, Connecticut, New York, and Ohio have such general w ai v er s o f im m unity. 705 Ill. Com

p. Stat. § 505/8(a) (allowing claim s under Illinois state law to be brought against the State in its court of claim s); Conn. Gen. Stat. § 4- 142 (allowing claim s against the state to be b rought through an Office o f the Claim s Com

m issioner); N.Y. Ct. Cl. Act § 8 (authorizi n g suits if brought in court of claim s); Ohio Rev. Code Ann. § 2743.02(A)(1) (sam e).

10 State Am ici argue that interpreting Section 106(a)(1)’s w aiv e r of sovereign im

m unity t o apply to the underlying state l aw causes of action raises constitutional concerns by subjecting states to non-uniform bankruptcy laws. State Am ici acknowledge that Congress has t h e ability to waive state sovereign i m m unity under t

he Bankruptcy Clause of the Constitution
, b u t th ey nonetheless argue that this right derives from the fact that states have agreed to subordinate their sovereign im m unity to

u n i f o rm laws. While there m ay be o uter lim its to Congress’s power to waive state sovereign im

m unity under the Bankruptcy Code, see Cent. Va. Cmty. Coll. v. Katz , 546 U.S. 356, 378 n.15 (2006), we need not, and do not, address that issue here as it is not before us.I N R E DBSI, I N C

. 17

In sum , we conclude that the text of Section 106(a)(1) is

unam biguous and clearly abrogates sovereign imm unity as to Section 544(b)(1), including the underlying state law cause o f action. In interpreting these statutes in this m anner, we are mi n dful of the Suprem e Court’s instruction that where a plausible interpretation of a provision tha t wo u ld preserve imm unity is available, we should ad o p t that interpretation and preserve the governm ent’s sovereign imm unity. See United Sta t es v

. Nordic Village, Inc. , 503 U.S. 30, 3 7 (1992). But, her e , we d o not believe there is an alternative construction that is plausible: Congress unam biguously and unequivocally waived sovereign imm

unity for causes of action br o ught under Section 544(b)(1). To construe the statutes in the

m anner in which the governm ent p roposes would be to ignore the p lain tex t o f Section 106(a)(1), som ething we are not at liberty to due. See, e.g. , United States v. Butler , 297 U.S. 1, 65 (1936) ( “ These w ords cannot be m eaningless, else they would not have been used.”); see also Conn. 47Nat’l Bank v. Germain
, 503 U .S. 2 4 9
, 253–54 (1992) (“W e have stated tim e and again that courts m

ust presum e that a legislature says in

a statute wh a t i t m eans and m eans in a statute what it says there.”).

C

.

1.

W e recognize that our o pinion conflicts with the Seventh Circuit’s opinion in EAR
, the only other case to have addressed the interplay between Section 106(a)(1) andI N R E DBSI, I N C

. 18

Section 544(b)(1). 1 1 W e turn briefly to the Seventh Circuit’s opinion and the reasons why we disagree with its analysis.

In EAR , the Seventh Circuit addressed a nearly identical situation, but reached the opposite result. The Se venth Circuit, drawing from FDIC v. Meyer , 510 U.S. 471 (1994),

em ployed a two-step f

ram ework to determ ine the IRS’s liability. I n doing so, the Seventh Circuit explained that to determ ine the IRS’s liability, a court mu s t “undertake two analytically distinct inquiries

. . . [t]he first inquiry is whether there h as b een a waiver of sovereign imm unity

. . . the second inqu i ry

. . . is [] whether the source of substantive law upon which th e claim ant relies provides an avenue for relief.” EAR
, 742 F.3d at 747 (quoting Meyer , 510 U.S. at 484) (internal quotation m arks and citations om itted)

. Applying this fram ework, the S eventh Circuit first acknowledged that there is no issue as to the first inquiry—everyone agrees that with the adoption of Section 106(a)(1) C ongress has waived sovereign imm

unity with respect to Section 544(b)(1). Id. at 7 46 –47. Proceeding to the second inquiry, the Seventh Circuit looked at the applicable law for the trustee’s Section

11 Although the Seventh Circuit i s the o nl y o th e r circuit to have addressed the issue in a published opinion, b ankruptcy courts and district courts throughout the nation have n early uniformly adopted a statutory construction in line with our holding today. See, e.g. , VMI Liquidating Tr. Dated December 16, 2011 v. United S tates ( In re Valley Mortg., Inc.)
, No. 10-19101-SBB, 2013 W L 5314369 (Bankr. D

. Colo. Sept. 18, 2013); Furr

v. U.S. Dep’t o

f Treasury (

In re Pharmacy Distrib. Servs., Inc.)
, 4 55 B.R. 817 (Bankr. S .D. F la. 2011); Menotte v. U n ited States (

In re Custom Contractors, LLC)
, 439 B.R. 5 44 ( Bankr. S.D. Fla. 2010); Sharp v. United States ( In re SK Foods, L .P.)
, N o

. 0 9-229162-D-11, 2010 W L 6431702 (B ankr. E.D. Cal. July 14, 2010); Tolz v. United States ( I n re Brandon Overseas, Inc.)
, No. 0 8-11035-BKC-RBR, 2010 W L 2 812944 (Bankr. S.D. Fla. July 16, 2010); L i ebersohn v

. IRS ( I n re C.F. Foods, L .P.)
, 265 B.R. 71 (Bankr. E.D. Pa. 2001).I N R E DBSI, I N C

. 19
544(b)(1) cause of action—the Illinois Uniform F raudulent Transfer Act—and d e t e rm ined that it did not p rovide an
avenue for relief because any uns e c ur e d creditor who attem p ted to bring such a claim against the IRS in Illi n o is would be barred from d o ing so by the governm ent’s sovereig n i mm

unity. The Seventh Circuit concluded that Section 106(a)(1)’s abrogation of sovereign imm unity with respect to S ection 544(b)(1) did not “alter [Section] 544(b)’s substantive requirem ents m e r e ly by stating that the federal governm ent’s author i ty was abrogated ‘with respect to’ that provision.” Id.

2.

Meyer sets out a u seful fram ework f or analyzing whether sovereign imm

unity precludes an a ction against the governm ent. Our disagreem ent with the Seventh Circuit is at step two , a s all parties agree that Congress has

unam biguously waived sovereign imm unity. Therefore, we focus our discussio n o n whether Section 544(b)(1) and Idaho’s UFTA—the substantive law on which Zazzali relies for h is f r au d u lent transfer cause of action—provide an avenue for relief, or, in other w ords, envision the governm e nt a s a potential defendant.

First, the f

act that C ongress waived sovere ign imm unity with respect to Section 544(b)(1) l e av e s no doubt that both Se ct i on 544(b)(1), and the derivative state law, provide a substantive cause of action against the governm ent. It would defy logic to w aive sovereign imm unity as to a claimwhich could n ot b e brought against the governm ent. In general, a governm ent defendant does n ot need imm unity from a suit which cannot be brought.I N R E DBSI, I N C

. 20

Second, the statutory definition s o f the relevant parties—creditors and d ebtors—further dem onstrate that Section 544(b)(1), and the derivative law upon which it relies, contem plate suits against the governm ent. S ee U. S

. Po stal Serv. v. Flami ngo Indus.
, 540 U .S. 7 36, 744–56 (2004) (analyzing the Sherm an Act’s, 15 U.S.C. § 1 et s eq. , definition of “person” to conclude that th e statute contem plates a g overnm ent defendant). Under both the Bankruptcy Code and Idaho’s UFTA, debt o r s and creditors

ar e d efined to include the governm ent. See 11 U .S. C. §§ 101(10), ( 1 3 )
, (15), (41); Idaho Code §§ 55-910(4), (9). In turn, both Section 544(b)(1) and Idaho’s U FTA provide a substantive cause of action against the governm ent—i.e., an
avenue f or relief. See Meyer , 5 10 U.S. at 484. The Seventh Circuit’s conclusion to the contrary is not persuasive. Under the Seventh Circuit’s approach, a substantive cause of action against th e g o v ernm ent would exist o nly if Congress also waived sovereig n i mmunity with respect to the particular applicable law und e r Se c t ion 544(b)(1). To im pose such a requirem ent, as disc u ssed above, would be contrary to the plain text of Section 106(a)(1).

In sum , although Meyer ’s general fram ework i s h elpful, we reach an alternate conclusion to the Seventh Circuit.

3.

W e note one o the r area in which w e disagree with the Seventh Circuit’s reasoni n g in EAR

. Both the governm ent and the Seventh Circuit suggest that the result we reach today

runs afoul n ot o nly of sovereign imm unity, but also potentially of the Appropriations Clause and the Suprem acy Clause. EAR
, 7 42 F.3d at 747–48. According to the Seventh Ci r cuit: “Even if federal sovereign imm unity w ere not anI N R E DBSI, I N C

. 21

issue, a creditor who attem pts to wi e l d the Illinois Uniform Fraudulent Tr ans fer Act against the IRS outside o f bankruptcy w ould face significant constitutional obstacles.” Id. While it m ay be true that an unsecured creditor wh o seeks to b ring such claim s against the IRS in state court would face constitutional obstacles, that is irrelevant to our inquiry as our holding is lim ited only to the rights of a trustee to bring fraudulent transfer actions in bankruptcy.

As to the Appropriations Clause, the Seventh C ircuit, in dicta, n otes th a t i t precludes any creditor from recovering against the federal governm ent in a state court because m oney cannot be taken from the treasury without congressional

ap proval. Id. at 748. But this is of no m om en t b e c aus e Section 544(b)(1) says nothing about recovery; a trustee m ust only d em o nstrate that the transfer is “voidable under applicable law. ” 1 2 The recovery of fraudulent transfers is

auth o rized by

fed era l law

— S ectio n 5 5 0 (a)(1 )— an d C o n g ress has waived sovereign immun ity with respect to that provision. 11 U.S.C. § 106(a)(1). In o ther words, w e agree with the Seventh Circuit that Congress m ust appr ove the release o f funds from its coffers, see Office ofPers. Mgmt. v. Richmond
, 496 U.S. 4 14, 424 (1990), but here it has done so through Sections 106(a)(1) and 550(a)(1). T hus, we fa i l t o
s har e th e Seventh Circuit’s concern that there m ay be an Appropriations Clause issue here.

As to the Suprem acy C lause, the S eventh Ci rc ui t suggests, again in dicta, that the interpretation of the interplay

12 “[T]he Bankruptcy Code enunciate s th e separation between the concepts o f avoiding a transfer and recovering from the transferee.” In re Acequia
, 34 F .3d at 809 (internal quot a tion m arks and citation om itted); see also 5 Collier on Bankruptcy ¶ 550.01.I N R E DBSI, I N C

. 22

between Secti o n 106(a)(1) and Section 544(b)(1) that we reach today is err o n eous b ecause “the Suprem acy Clause prevents stat e s from enabling their residents to recover tax paym ents d irectly from the United States.” EAR
, 7 42 F.3d at 748. 1 3 But, again, this suggestion ignores the federal nature of a claim under Section 544(b)(1). Sectio n 544(b)(1) does not authorize a trustee to bring an avoidance action in state court, rather the statute perm its a trustee to pursue a federal

cause of action in bankruptcy court. VMI Liquidating Tr

. Dated December 16, 20 1 1 v

. United States (In re Valley Mor t g ., Inc.)
, No. 10-19101-SBB, 2013 W L 5314369, at *5 (Bankr. D. Colo. Sept. 18, 2013). Sim p ly p ut, we fail to see any Suprem acy Clause issue here. 1 4

13 Again, we note that t

he Seventh Circuit confl a t e s the concepts o f avoidance and recovery. S ection 544(b)(1), by its term s, says nothing o f recovery.

14 In its opening brief, th e go v ernm ent argues that the Internal Revenue Code (I.R.C.) preem pts Za z zali’s claim s. A side from t h e fact,

as explained supra , that Zazzali’s claim s are federal causes of action and there fore cannot be preem pted, the governm ent’s argum ent fails f o r
an other reason. The governm ent argues that Section 7422 of the I.R. C

. , which is “applicable when taxes have been im properly assessed o r are not otherwise p roperly due,” In re Valley Mortg., Inc. , 2013 W L 5314369, at *5, preem

pts Zazzali’s avoidan c e c l a i m s. But I.R.C. § 7422 is inapplicable here because “ the tru s t e e i s n o t standing in the shoes of the debtors, as taxpayers, seeking to r ecover tax refunds, bu t ra ther, in the shoes of a credi t o r s e eking to r ecover property fraudulently t ransferred . . . .” Id. (quoting In re SK F oods, L.P. , 2 010 WL 6431702, at *4). “In short, I.R.C. section 7422 sim ply has no bearing on [our] i nterpretation o f . . . [S]ections 544 and 106 . . . .” Id. at *6.I N R E DBSI, I N C

. 23

D

.

W e close by noting that althoug h not necessary to our disposition since we conclude the statutes are unam biguous,

our interpretation is supported by both equitable pri n c i ples

an d the “object and policy” of the Bankruptcy Code. Se e Kelly v. Robinson
, 479 U.S. 36, 43 (1986) (“In expounding a statute, we m

ust not be guided by a single sentence o r
m em ber o f a sentence, but look to the p rovisions of the whole l aw, and to its object and policy.” (quoting Offsho r e Logistics, Inc. v. Tallentire
, 4 77 U. S. 207, 222 (1986))). “Cri t ical features o f every bankruptcy proceeding are the

e xercise of exclusive jurisdiction over all of the debtor’s property, [ and] the equitable distribution of that pro p e rty

am ong the debtor’s creditors

. . . .” Cent. Va. Cmty. Coll. v. Katz , 5 4 6 U. S. 356, 364 (2006). In allowing for the avoidability of transfers m ade to the IRS, Congress ensured that the IRS is on equal footing w ith all other creditors. See S. Rep. No

. 9 5-989, at 90 (1978), as reprinted in 1978 U.S.C.C.A.N. 57 8 7 , 5876. As the Tenth Circuit explained in In re F

ranklin Savings Corp.
, 3 85 F.3d 1279, 129 0 (10th Cir. 2004), the waiver of sovereign imm unity contained in the Bankruptcy C ode “is based on equity[;] in

e s s e n ce, it would be unfair for a governm ental unit to participate in the distributions of a bankruptcy case while at the sam e tim e shielding itself fr om liability.” (internal quotation m arks and citation om itted).

Congress provided for a waiver of sovereign imm unity “with respect to” Section 544 b e c au se it aligns w ith the prim ary goal of federal bankruptcy law—collecting and preserving a debtor’s assets for equitable distribution am ong all creditors. See, e.g. , Sherwood Partners , 3 94 F .3d at 1204–05.I N R E DBSI, I N C

. 24

III.

W e affirm the district court’s j u dg ment that sovereign imm unity does not preclude Zazzali from avoiding the $17

m illion in tax p aym ents that were f raudulently transferred to the IRS. W e likewise affirm the district court’s judgm ent that the g overnm ent m

u st return the funds received as tax paym ents, except as to the am ount already paid out as refunds. W e rem and for further p roceedings consistent with this opinion. Each party shall bear its own costs on appeal.

AFFIRMED and REMANDED.