College Columns December 2021 - Page 26

The Splits continued from page 9
that , absent the application of the sovereign immunity waiver of Section 106 ( b )( 1 ), the actual existing creditor could not have sued the government at the time of the transfer to have the transfer avoided . Accordingly , both Circuits addressed only a single , narrow issue : whether Section 106 ( b )( 1 ) applied to waive sovereign immunity when the trustee “ stood in the shoes of an actual creditor ” to recover transfers under Section 544 ( b )( 1 ).
Both courts noted the tortured history of the waiver of sovereign immunity under Section 106 . While Congress thought it had been clear in enacting a broad waiver in the 1978 Bankruptcy Code , the Supreme Court disagreed in Hoffman v . Conn . Dep ’ t of Income Maint ., 492 U . S . 96,101 ( 1989 ) ( explaining that Congress must make its intention to waive sovereign immunity “ unmistakably clear in the language of the statute ”) and United States v . Nordic Vill ., Inc ., 503 U . S . 30 , 39 ( 1992 ) ( requiring an “ unequivocal textual waiver of the Government ’ s immunity ”). To clarify what it tried to say in 1978 , Congress rewrote Section 106 in its entirely in the Bankruptcy Reform Act of 1994 . As explained by the Utah Bankruptcy Court in its recent decision on this question :
Importantly , Congress thought it had already achieved [ the standard set by the Supreme Court ] in 1978 , noting in floor statements that former § 106 ( c ) was “ included to comply with the requirement in case law that an express waiver of sovereign immunity is required in order to be effect .” In re All Resort Grp ., Inc ., 617 B . R . 375 , 384 ( Bankr . D . Utah 2020 ), aff ’ d U . S . v . Miller , 2:20-CV-00248-BSJ ( D . Utah Sep . 8 , 2021 ) ( footnote omitted ).
In rewriting Section 106 in 1994 , Congress added references to fifty-nine other Bankruptcy Code sections , including Section 544 . So , was this rewrite “ unmistakably clear ” and “ unequivocal ” when it comes to effecting a waiver of sovereign immunity under Section 544 ( b )( 1 )? Depending on the way the statute is analyzed , maybe or maybe not .
The Seventh Circuit in In re Equip . Acquisition Res . Inc . analyzed the question in two steps to reach the conclusion that Section 106 ( a )( 1 ) did not waive sovereign immunity under Section 544 ( b )( 1 ), or , as the Circuit stated it , “ that Section 106 does not displace the actual-creditor requirement in Section 544 ( b )( 1 ).” 742 F . 3d at 744 . The first question was “ whether there has been a waiver of sovereign immunity ,” which both parties in the case agreed had been done under Section 106 ( a )( 1 ). Id . at 746 – 47 . The second question was stated to be “ whether the source of substantive law upon which the claimant relies provides an avenue for relief .” Id . at 747 . The Seventh Circuit interpreted this question to require that a trustee must demonstrate that “ a creditor exists who could use a state ’ s ‘ applicable law ’ [ in this case the Illinois Uniform Fraudulent Transfer Act ] to recover the payment from the IRS .” Id . In phrasing the test this way , based on the “ unambiguous text ” of Section 544 ( b )( 1 ) that the trustee can only recover transfers that are “ voidable under applicable law by a creditor holding an unsecured claim ,” then since Section 106 ( a )( 1 ) only comes into play when a bankruptcy is filed and would not provide a waiver of sovereign immunity to a creditor with an unsecured claim at the time of the pre-petition transfer , no recovery was allowed against the IRS . Thus , the “ actual creditor ” requirement of Section 544 ( b )( 1 ) was interpreted to temper the broad sovereign immunity
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