Source: https://mediatbankry.com/2017/09/28/recovering-tax-payments-from-irs-as-fraudulent-transfers-%C2%A7-544b-the-actual-creditor-issue/
Timestamp: 2019-04-19 00:38:14+00:00

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(ii) Under § 544(b)(1), for payments beyond two years but within the statutes of limitations established by state law—typically, four years (this subsection incorporates state fraudulent transfer laws into the Bankruptcy Code).
The case is new: Zazzali v. USA (In re DBSI, Inc.), Case No. 16-35597 (9th Cir., Decided August 31, 2017), and the basic facts are as noted above. The trial court rules, on summary judgment, in favor of the Trustee on all counts, and the IRS appeals.
The appeal, however, is limited. As to payments received within two years before bankruptcy, the IRS acknowledges, under § 548, (i) that such payments qualify as fraudulent transfers, and (ii) the absence of substantive defenses. Accordingly, the IRS voluntarily pays back all tax payments received from the debtor within two years before bankruptcy.
But as to § 544(b)(1) claims for payments beyond two years, the IRS continues to contest the Trustee’s claims. The contest, however, is limited to a single issue: whether the “actual creditor” requirement of § 544(b)(1) is satisfied.
Here are some facts the Ninth Circuit identifies as critical in this case.
Sovereign immunity provides that a government cannot be sued, unless such immunity is explicitly waived. The Bankruptcy Code, in § 106(a)(1), explicitly waives sovereign immunity for claims under both § 548 and § 544.
The IRS insists that, while § 106(a)(1) may waive sovereign immunity for the trustee to pursue § 544(b)(1) claims, it does not eliminate the “actual creditor” requirement. And there is no “actual” unsecured creditor who could avoid the transfer outside of bankruptcy: every unsecured creditor who might try to do so would be barred, outside of bankruptcy, by sovereign immunity.
Then the Seventh Circuit rules in the negative. It declares that the § 106(a)(1) waiver of sovereign immunity does not affect the § 544(b)(1) “actual creditor” requirement. Accordingly, the Trustee cannot pursue a claim against the IRS under § 544(b)(1).
–“there is no question that no creditor exists in this case” who could bring a fraudulent transfer against the IRS outside of bankruptcy.
The Seventh Circuit describes this “actual creditor” issue as one “of first impression for any circuit court of appeals.” And its opinion acknowledges that “we diverge from all of the bankruptcy and district courts” who have considered the issue “in the context of the federal government.” For such diverging rulings, the Seventh Circuit cites, in footnote 3, opinions from U.S. bankruptcy and district courts in Southern Florida, Middle Florida, Eastern Pennsylvania, and Maryland.
The Seventh Circuit’s ruling on this point is now the law of the land in a wide swath of districts across the Midwest: covering all of Illinois, Indiana and Wisconsin.
–§ 106(a)(1) “unambiguously abrogates” sovereign immunity, which abrogation is “absolute with respect to” § 544(b)(1) and “necessarily includes the derivative state law claim” on which it is based.
Will the IRS file a Petition for a Writ of Certiorari in the Zazzali v. U.S.A. case? Here’s hoping that it does. If so, it will be interesting to see whether the U.S. Supreme Court grants the Writ. Here’s hoping they do.
A circuit court split exists that needs to be resolved. And the U.S. Supreme Court is the only one who can resolve it.

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