Doing the Splits Doing the Splits : Waiving Sovereign Immunity — “ Unambiguous ” Code Provisions Yield Opposite Results
Annette W . Jarvis , Greenberg Traurig , LLP Secretary , American College of Bankruptcy
Section 544 ( b ) of the Bankruptcy Code allows a trustee to step into the shoes of a creditor to avoid certain transfers for the benefit of the bankruptcy estate . When the transferee is the federal government , the Seventh and Ninth Circuits have reached antithetical conclusions on whether the federal government has waived its sovereign immunity to permit the trustee to sue it . Both Circuits rely on “ unambiguous ” readings of the plain language of Sections 544 ( b )( 1 ) and 106 ( a )( 1 ) but reach opposite results . How plain is the plain language , and how does the concept of “ the tie goes to the government ” fit into these contradictory conclusions ?
With a recent appeal to the Tenth Circuit on this issue , we will soon see which Circuit ’ s unambiguous view will prevail as the majority view .
The Seventh Circuit in In re Equip . Acquisition Res ., Inc ., 742 F . 3d 743 ( 7th Cir . 2014 ) found “ the substantive requirements of § 544 ( b )( 1 ) unambiguous ” and determined that Section 106 ( a )( 1 ) did not waive sovereign immunity in meeting those statutory requirements . Id . at 746 . However , the Ninth Circuit in Zazzali v . United States ( In re DBSI , Inc .), 869 F . 3d 1004 ( 9th Cir . 2017 ), considered the Seventh Circuit ’ s conclusion and ruled the opposite . It stated : “ In sum , we conclude that the text of Section 106 ( a )( 1 ) is unambiguous and clearly abrogates sovereign immunity as to Section 544 ( b )( 1 ), including the underlying state law cause of action .” Id . at 1013 .
The differences focus on the requirement of Section 544 ( b )( 1 ) that a trustee may avoid a “ transfer of an interest of the debtor in property ” that is “ voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 . . . .” As in both of these Circuit decisions , this avoidance power is typically used to access the greater reach back of state fraudulent transfer statutes — four years in each of these cases — as compared to the two-year reach back in Section 548 . However , to use Section 544 ( b )( 1 ), one must meet the requirement of establishing that an actual creditor existed at the time of the transfer . Unlike statutory avoidance actions established in the Bankruptcy Code where the trustee is given independent statutory standing , Section 544 ( b )( 1 ) allows a trustee to “ stand in the shoes ” of an actual creditor existing at the time of the transfer to assert avoidance rights under state law . In both of these decisions , the avoidance actions were brought by trustees against a federal agency , the Internal Revenue Service ( the “ IRS ”), thus raising the issue of sovereign immunity . In both cases , there was no dispute that an actual creditor existed at the time of the challenged transfer , nor was there any dispute