Case Information
*1 Before B AUER F LAUM , Circuit Judges , V AN B OKKELEN District Judge .
F LAUM Circuit Judge
. case concerns whether bank ruptcy trustee can 544(b)(1) recoup debtor’s payment. Section 544(b)(1) allows step into shoes actual who avoided outside Of Northern District Indiana, sitting designation. ‐ using cause action. The federal prevents creditors suing IRS using law. However, another section Code, § 106(a)(1), abrogates govern ment’s “with to” 544.
The trustee’s ability tax payments thus hinges on interplay between 106. The courts below, relying on 106(a)(1), concluded debtor in pos session use 544(b)(1) bring an Illinois fraudulent transfer against IRS. But does displace actual creditor requirement in 544(b)(1). Ordinarily, an Illinois claim against IRS; therefore, 544(b)(1), neither can debtor in possession. reverse in favor United States.
I. Background
Equipment Acquisition Resources, Inc. (“EAR”), Illi nois subchapter S corporation, filed Chapter bank ruptcy in October In years before its petition, EAR made nine income tax payments IRS on behalf its shareholders. (Subchapter S corporations pay taxes corporate income; instead, liability passed through corporation’s shareholders.) EAR made eight these payments two years preceding petition. ninth payment just outside period.
Once Chapter EAR, acting debtor possession, filed adversary complaint seek *3 3 ‐ ing to recover all nine payments as fraudulent transfers. EAR sought to recover the eight most recent payments under U.S.C. § 548(a)(1), which provides a cause action the recovery transfers made within two years the filing. It sought recover ninth under U.S.C. § 544(b), provision (described above) enables a a law fraudulent ‐ transfer action. Illinois, like most states, has adopted Uniform Fraudulent Transfer Act, has four year statute limitations. Ill. Comp. Stat. Ann. 160/5(a)(2), 160/10. EAR asserted Code’s abrogation government’s immunity “with to” both precluded IRS from claiming immunity defense either theory recovery. See U.S.C. 106(a)(1).
The parties reached settlement. The United States agreed disgorge eight payments EAR could cover using but contested EAR’s ability ninth payment under 544(b). Because govern ment’s ordinarily prevents creditor from bringing Illinois IRS, government argued, ninth payment “voidable under applicable holding unsecured claim.” Id. 544(b)(1). The parties thus agreed disgorge ninth payment ly prevail motion dismiss count complaint.
The bankruptcy court rejected government’s theory. (Bankr. N.D. Ill. 2011). court found communicated Congress’s intent abolish suit listed causes action, including general 13 1480 waiver, court reasoned, showed “Congress intended include those causes of action available § 544(b)(1).” Id. at 464. The court grounded conclusion “[t]he plain, unambiguous language of § deliberate inclusion of 106(a), policy consideration favoring recovery for benefit of all creditors.” Id.
The United States appealed district court, which af firmed. (N.D. Ill. 2013). The district court framed dispute “whether 544(b), explicitly limits trustee’s ability avoid transfer, overrides 106(a)’s abrogation of sovereign immunity.” Id. at 592. It agreed bankruptcy court 106’s “complete abolishment” carried day. Id. “It simply does matter how defense invoked EAR’s claim,” district court held, because “106(a)(1) simply eliminates obstacle wherever appears ‘with spect to’ 544.” Id. (emphasis added). ap peals.
II. Discussion case concerns proper interpretation Bank ruptcy Code. decide legal question de novo. Wiese v. Cmty. Bank Cent. Wis. F.3d (7th Cir. 2009).
A. As mentioned, action implicates two dif ferent provisions: 544(b). Section pro vides stand alone cause recovery fraud ulent transfers. See U.S.C. (“The may avoid … interest debtor proper ty … made … or within years before date of the filing of the petition, if [certain criteria are met].”). Be ‐ cause is included in 106(a)(1)’s list of Code provisions for is abrogated—and because the cause of action is a creature of the itself—the Unit ed does assert a defense re covery under provision.
Section 544(b) is a different matter, however. Unlike 548, 544(b) is derivative law—that is, law external Bankruptcy Code. Section 544(b)(1) authorizes trustee avoid transfers are “voidable under applicable law creditor holding an unsecured claim.” Usually, “applicable law” is state’s transfer statute. See In re Xonics Photochem., Inc. F.2d (7th Cir. 1988). provision enables trustee do in pro ceeding what creditor have been able outside bankruptcy—except trustee will property benefit estate.
Section 544(b) is unique another regard: terms re quire actual existence an unsecured creditor could brought itself. “If there are cred itors whom is voidable under appli cable law, trustee powerless act section 544(b)(1).” Collier ¶ 544.06[1] (Alan N. Res nick & Henry J. Sommer eds., 16th ed. 2013); see also In Cybergenics Corp. F.3d (3d Cir. 2000) (“The avoidance power provided section distinct others because trustee or debtor possession can use power only if unsecured creditor debtor actually has requisite nonbankruptcy cause ac tion.”). other words, stands shoes actual unsecured creditor. And actual succeed for any reason—whether due statute of limitations, estoppel, res judicata, waiver, or other de fense—then trustee is similarly barred avoid transfer. Collier on Bankruptcy ¶ 544.06[3]. By contrast, there is no such limitation The stands own shoes exercises rights bestowed itself.
The question dividing parties is whether Code’s abrogation sovereign “with to” allows debtor possession law suit against government—even though, outside bankruptcy, bar reg ular doing so. confers such right.
B. Supreme Court has instructed when comes questions agency’s liability, must undertake “two analytically distinct inquiries.” FDIC v. Meyer U.S. (1994) (internal quotation marks omitted). “The first inquiry whether there has been waiver im munity.” Id. No issue there; all parties agree, based 106(a)(1), has been. But once this question an swered, “the second inquiry comes into play—that is, whether source substantive law upon which claimant relies provides avenue for relief.” Id. That ques tion crux appeal: whether source substan tive upon EAR relies—§ and, derivatively, Illinois Uniform Fraudulent Transfer Act—provides avenue relief IRS. answering it, EAR the courts below lay claim
the statutory interpretation high ground—the plain lan ‐ guage of the text. They maintain that is unambig ‐ uous: states that the government’s “ im ‐ munity is abrogated … respect to,” among other provi sions, 544. Therefore, argument goes, United States assert defense, in form, 544(b)(1) action. argument misses point. United States not contesting meaning 106(a). Its argument derives from plain language . That provision, by very terms, requires EAR show that creditor exists who could use state’s “applicable law” payment from IRS. If no such creditor exists, then can not bring claim. And no question no creditor exists this case—even district court acknowledged unsecured creditor have been barred from ing Illinois action against IRS out side bankruptcy. Thus, because unse cured obtain relief using Illinois Uniform Fraudulent Transfer Act, EAR’s payment “voidable applicable law” within meaning 544(b)(1). Congress did alter 544(b)’s substantive requirements merely stating abrogated “with to” provision. argument contrary draws support oth
er courts, which reasoned “[b]y cluding list sections set forth 106(a), Congress knowingly included causes within category suits sov *8 8 No. 13 1480 ereign defense no longer be asserted.” In re C.F. Foods , L.P. , 71, (Bankr. E.D. Pa. 2001). But cannot credit arguments about congressional intent when they run counter a provision’s unambiguous text. See , e.g. , Conn. Nat’l Bank v. Germain , U.S. 249, 253–54 (1992) (“[C]ourts must presume that legislature says statute what it means means statute what it says there.”). Here, unambiguous: may only transfers that are “voidable under applicable by credi tor holding an unsecured claim.” We decline invita tion read an exception into provision based ar guments about what meant accomplish. invitation “runs smack into Supreme Court’s insist ence judges implement as written, rather than make changes they see as improvements.” New Energy Corp. , 2501, WL 145274, at *2 (7th Cir. Jan. 2014) (citing RadLAX Gateway Hotel, LLC v. Amal gamated Bank S. Ct. (2012)). also note may be other reasons why 544(b)’s actual creditor requirement satisfied here.
Even federal were an issue, who attempts wield Illinois Uniform Fraudu lent Transfer Act IRS outside face significant constitutional obstacles. For one thing, states enforce their laws so retrieve money coffers: Appropriations Clause Consti tution “means simply money can be paid out Treasury unless has been appropriated act Con gress.” Office Pers. Mgmt. v. Richmond U.S. (1990); accord id. (holding Appropriations Clause precludes liability equitable estoppel theory). For another, Supremacy *9 9 1480 Clause prevents states from enabling their residents to re cover tax payments directly from United . Cf. McCulloch v. Maryland , U.S. (4 Wheat.) (1819) (“[S]tates have no power, by taxation or otherwise, retard, impede, burden, or in any manner control, operations constitutional laws enacted by congress carry into exe cution powers vested in general government.”). Thus, sovereign immunity is just one reason why is no applicable law that would enable IRS outside bankruptcy. The courts below were mistaken in their assumption that if Congress eliminated sovereign immunity problem (which, stated, that Congress did not do), these other obstacles disappeared, too.
“An absence immunity does not result in liability substantive question intended reach entity.” U.S. Postal Serv. v. Flamingo Indus. (USA) Ltd. U.S. (2004). Nothing 106(a)(1) gives trus tee greater rights avoid transfers than unsecured cred itor under law. By concluding that 106(a)(1) did just that, courts below erred.
C. issue first impression for circuit court appeals. acknowledge interpreting 106(a)(1) In Abatement Environmental Resources, Inc. F. App’x (4th Cir. 2004), Fourth Circuit held case had established debtor’s payments IRS constituted transfers Maryland’s Uniform Fraudulent Conveyance Act. Fourth Circuit noted footnote “[t]here bar Trustee’s [MUFCA] claim because U.S.C. abrogates States’ actions *10 10 13 ‐ 1480 and § 544(b) we have, we diverge from all the bank ‐ ruptcy district courts consider issue context government. [3] In our opinion, those courts (fol ‐ lowing example earliest case, In re C.F. Foods ) fo ‐ cused too narrowly language § 106(a)(1), large ‐ ly disregarded 544(b)’s actual ‐ creditor requirement. And we do not their key arguments favor read ‐ ing persuasive.
First, not agree that States’ interpreta tion renders 106(a)(1)’s abrogation immunity with re spect 544 “almost meaningless.” In re Custom Contractors, LLC , 439 B.R. 544, 549 (Bankr. S.D. Fla. 2010). Sec tion 106(a)(1) abrogates immunity “gov brought pursuant U.S.C. 544(b)(1).” Id. n.2. Given case’s disposition, however, single sentence dicta. See In re Pharm. Distrib. Servs., Inc. , B.R. 817, (Bankr. S.D.
Fla. 2011) (finding enabled trustee bring a 544(b) action against IRS using state fraudulent transfer law); In re Custom Contractors, LLC , B.R. 544, 548–49 (Bankr. S.D. Fla. 2010) (same); In re C.F. Foods, L.P. , B.R. 71, 84–86 (Bankr. E.D. Pa. 2001) (same). But see In re Grubbs Constr. Co. , B.R. 346, 351–52 (Bankr. M.D. Fla. 2005) (hold ing trustee could not a 544(b) action against Florida—even though Florida had waived immunity bankrupt cy proceeding—because bars bringing Florida fraudulent transfer action against state); In re Abatement Envtl. Res., Inc. B.R. 832–36 (D. Md. 2003) (holding trustee could recover tax payment IRS using 544(b) “because claim barred governmental units taxing authority are entitled Maryland law”); An ton Motors, Inc. 65–66 (Bankr. D. Md. 1995) (holding assert Maryland county be cause Maryland’s be used payments). ‐
ernmental unit.” term encompasses just the government, but also and local governments. See U.S.C. § 101(27). So if waived own or local immunity to ‐ actions state’s courts, interplay sections and 544(b)(1) would enable trustee to same bankruptcy court.
Moreover, constitutes only half There also 544(a). Known strong arm power, 544(a) au thorizes trustee to assume rights hypothetical judgment lien creditor, execution creditor, or bona fide pur chaser; trustee can then knock off unperfected security interests so previously secured collateral becomes part estate. Crucially, subsection (a), unlike subsection (b), “empowers avoid certain prebankruptcy transfers could have been avoided certain types creditors or bona fide purchaser, whether or such credi tors or bona fide purchaser actually exist .” Collier on Bank ruptcy ¶ 544.01. And U.S.C. permits judgment lien creditors, execution creditors, bona fide purchasers quiet title property claims lien—so external obstacle trustee’s employing 544(a) govern ment. Thus, strong arm clause also explain why Congress included 106(a)’s list.
Unconvinced, court below reasoned interpretation were correct, Congress specified it abrogating 544(a) only. See (“As evident numerous provisions Code, Congress knows how specify ap plicable subsections paragraphs when wishes *12 12 No. 13 ‐ 1480 so.”). Setting aside fact that abrogation still has some application to § 544(b), still responsive unper suasive. All fifty nine provisions listed in cite to Code provision generally, without listing particular subsections. Yet, United States correctly points out, many listed provisions subsections that implicate immunity. [4] believe better conclu sion Congress simply listed undivided sections any part section included something which sov ereign immunity should be waived.
In re C.F. Foods and its progeny also invoke legislative history surrounding 106(a). history overcome unambiguous language in 544(b), see, e.g. , Newsom v. Friedman , 76 F.3d 816–17 (7th Cir. 1996), and event, no help at all. House Report accompanying Reform Act 1994 indicated Congress worked respond Supreme Court’s decisions Hoffman v. Connecticut Department Income Maintenance U.S. (1989), and v. Nordic Village, Inc. U.S. (1992). H.R. Rep. at (1994). both cases, Court found predecessor current sufficiently explicit waive fed eral governments’ causes action. Neither case involved trustee’s power un der actions, though. Thus, Con gress’s apparent disapproval results Hoffman Nordic Village sheds no light present dispute. Finally, these lower courts argue policy considera tions favor their reading. They figure it makes sense for Congress have wanted the trustee to use state fraudulent transfer actions federal government because “[a]ny recovery will benefit all debtor’s creditors, including IRS. Moreover, en hancement rights others detriment fed eral government, particularly government ʹ s capacity collector, is commonplace, including within Bank ruptcy Code itself.” C.F. Foods True, it would be anomalous for Congress design scheme maximizes estate’s recovery. But all trustee’s avoidance tools contain substantive limitations. see why Congress implicitly relax these limitations just because federal government one disgorging property.
Moreover, are countervailing policy concerns favor our interpretation. It one thing for Congress ex pose agencies fraudulent suits on Code’s terms—under for example. But quite another for Congress expose agencies suit based “applicable” state law, dimensions Congress control. A could statute limi tation for such actions extends past typical four years. Indeed, some do. And legislatures relax criteria what constitutes transfer, render These include Iowa, Iowa Ann. 684.9 (five years); Kentucky, Ky. Rev. Stat. Ann. 413.120 (five years); Maine, Me. Rev. Stat. Ann. tit. (six years); Michigan, Mich. Comp. Laws Ann. §§ 566.39, 600.5813 (six years); Minnesota, Minn. Stat. Ann. 541.05 (six years); New York, N.Y. C.P.L.R. (six years).
ing federal revenue even more vulnerable to unexpected recovery actions. It would make sense Congress to be cognizant IRS’s “exceedingly strong interest in finan ‐ cial stability.” v. Clintwood Elkhorn Mining Co. , U.S. (2008). is consistent with judicial presumption that when it comes to immunity, ties go to govern ‐ ment. Supreme Court has repeatedly warned against interpretations that expand scope liability beyond point where consent is unequivocal. E.g. FAA v. Cooper , S. Ct. (2012) (“For same reason that we refuse enforce waiver that is not unam biguously expressed statute, we also construe ambiguities scope waiver favor sover eign.”). fact, Court has instructed that where ex ists plausible interpretation provision pre serve immunity—even interpretation not only reading available—that “is enough establish read ing imposing monetary liability on Government not ‘unambiguous’ therefore should not be adopted.” Nordic Village U.S. To be clear, we need rely presumption against waiver resolve dispute. find substantive requirements 544(b)(1) unambigu ous, those requirements are simply met action. But Court’s insistence Congress be unmistakably clear when opening government suit further reason why Congress did so implicitly. If Congress intends eliminate 544(b)’s actu al requirement actions gov ernment, must say so. ‐
III. Conclusion We are confident continuing enforce actual requirement as written, disser vice Code’s abrogation provision. EAR, acting with avoidance powers unsecured creditor, does viable cause avoid payment issue. R EVERSE judgment district court R EMAND instruc tions dismiss complaint insofar relied Code.
[1] Chapter bankruptcy, debtor possession can exercise most powers trustee. U.S.C. 1107(a).
[4] To take example, included 106(a)(1)’s list, but 524(f) only states debtor may voluntarily repay debt after discharge—a situation has ap plication all.