and Submitted May 17, 2017 Seattle, Washington
from the United States District Court for the District of
Idaho, No. 1:13-cv-00086-MJP Marsha J. Pechman, District
Clay Dale (argued), Thomas J. Clark, and Gilbert S.
Rothenberg, Attorneys; Diana L. Erbsen, Deputy Assistant
Attorney General; Caroline D. Ciraolo, Principal Deputy
Assistant Attorney General; Tax Division, United States
Department of Justice, Washington, D.C.; for
Jennifer A. Hradil (argued), Mark B. Conlan, Michael F.
Quinn, and Brett S. Theisen, Gibbons P.C., Newark, New
Jersey, for Plaintiff-Appellee.
Carolyn Wade, Senior Assistant Attorney General; Benjamin
Gutman, Solicitor General; Ellen F. Rosenblum, Attorney
General; Oregon Department of Justice, Salem, Oregon; Karen
Cordry, Bankruptcy Counsel, National Association of Attorneys
General, Washington, D.C.; for Amici Curiae States of Idaho,
Illinois, Montana, Nebraska, New Mexico, New York, and
Professor Stephen J. Lubben, Seton Hall University School of
Law, Newark, New Jersey, for Amicus Curiae National
Association of Bankruptcy Trustees.
Before: Michael Daly Hawkins, Ronald M. Gould, and Richard A.
Paez, Circuit Judges.
panel affirmed the district court's decision affirming
the bankruptcy court's order denying in part the motion
of the United States to dismiss an adversary proceeding filed
by a chapter 11 bankruptcy trustee, seeking avoidance of the
debtor's federal tax payment.
trustee sought to avoid the tax payment as a fraudulent
transfer under 11 U.S.C. § 544(b)(1) and Idaho's
Uniform Fraudulent Transfer Act. Disagreeing with the Seventh
Circuit, the panel held that the abrogation of sovereign
immunity in 11 U.S.C. § 106(a)(1) "with respect
to" § 544(b)(1) extended to the derivative Idaho
law, and no additional waiver of sovereign immunity was
necessary. Accordingly, the government could not rely on
sovereign immunity to prevent the avoidance of the tax
panel addressed the trustee's cross-appeal in a
concurrently filed memorandum disposition.
decide whether a bankruptcy trustee can, through an adversary
proceeding, avoid a debtor's federal tax payment, or
whether the Internal Revenue Service's ("IRS"
or "government") sovereign immunity prevents such
relief. To resolve this question, we must consider the
interplay between two Bankruptcy Code statutes: 11 U.S.C.
§§ 106(a)(1) ("Section 106(a)(1)") and
544(b)(1) ("Section 544(b)(1)"). In Section
106(a)(1), Congress unambiguously abrogated sovereign
immunity "with respect to" Section 544(b)(1). Under
Section 544(b)(1), a trustee may avoid fraudulent transfers
when the trustee can demonstrate that an actual unsecured
creditor could avoid the same transfer under "applicable
law" outside of bankruptcy. This is known as the
"actual creditor" or "triggering
creditor" requirement as it requires the existence of an
actual creditor in whose shoes a trustee can stand.
See 5 Collier on Bankruptcy ¶ 544.01
(Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2017).
James R. Zazzali ("Zazzali" or "Trustee")
invoked Idaho's Uniform Fraudulent Transfer Act
("UFTA"), Idaho Code Ann. §§
55-901 et seq., as the "applicable
law" to bring a Section 544(b)(1) adversary action to
avoid $17 million in tax payments that the debtor, DBSI,
Inc., fraudulently transferred to the IRS. An unsecured
creditor who seeks to avoid such tax payments under Idaho law
outside of bankruptcy would be precluded from doing so
because of the government's sovereign immunity. The
question, then, is whether, in the bankruptcy context,
Congress's abrogation of sovereign immunity with respect
to Section 544(b)(1) extends to the underlying state cause of
action, or whether a trustee must also establish that
Congress has waived sovereign immunity with respect to
the bankruptcy court and the district court ruled that
Section 106(a)(1)'s abrogation of sovereign immunity
"with respect to" Section 544(b)(1) extends to the
derivative "applicable law"-here, Idaho's UFTA.
In other words, an additional waiver of sovereign immunity
was not necessary. As a result, the government could not rely
on sovereign immunity to prevent the avoidance of the tax
payments at issue. We agree, and affirm.
Inc. and its affiliated entities, including FOR 1031, DDRS,
and DBSI Investments (collectively, "DBSI"),
engaged in the acquisition, development, management, and sale
of commercial real estate properties throughout the United
States. They did so, however, through an illegal Ponzi
scheme-during their last two years in operation they
purportedly lost $3 million per month and used new investor
funds to meet existing obligations. This scheme eventually
caught up with them, and in May 2013, the United States
indicted several of the company insiders, who were later
convicted of various fraud crimes. Their convictions were
affirmed by our court.
was set up as an S corporation, and, while still in
operation, made tax payments on behalf of its shareholders.
Tax payments were handled in this manner because S
corporations do not themselves pay taxes on corporate income,
but rather the tax liability is passed through to the
corporation's shareholders. I.R.C. §§ 1363,
1366. Between 2005 and 2008, DBSI paid the IRS a total of
approximately $17 million in tax payments on behalf of its
shareholders. The vast majority of these payments were made
on behalf of Doug Swenson ("Swenson") and Thomas
Var Reeve ("Reeve"), two of the largest
shareholders. The IRS ultimately refunded approximately $3.6
million to Swenson and Reeve in claimed overpayments of their
individual income tax liabilities.
November 2008, DBSI filed for bankruptcy. A plan of
liquidation was confirmed in October 2010, and, as part of
that plan, Zazzali was appointed as trustee to administer the
DBSI Estate Liquidation Trust. Shortly thereafter, Zazzali
commenced an adversary proceeding in bankruptcy court to
recover DBSI's allegedly fraudulent transfers to (1)
company insiders, and (2) the IRS and taxing authorities of
twenty-five states on behalf of company shareholders. This
appeal concerns only those transfers that were made to the
bringing his claims against the IRS, Zazzali relied on two
different sections of the Bankruptcy Code: 11 U.S.C. §
548 ("Section 548") and, as discussed above,
Section 544(b)(1). Section 548 and Section 544(b)(1) both
permit a trustee to avoid transfers, however they impose
different statutes of limitations. Section 548 has a two-year
statute of limitations, while Section 544(b)(1) incorporates
the statute of limitations of the applicable law. Here,
Idaho's UFTA has a four-year statute of limitations.
Idaho Code Ann. § 55-918. Accordingly, pursuant to
Section 548, Zazzali sought to recover transfers in the
amount of approximately $56, 000 that were made in the two
years prior to the bankruptcy petition date. The government
did not contest this claim. Under Section 544(b)(1), Zazzali
sought to recover the remaining portion of the $17 million by
avoiding transfers that were made within four years of the
government moved to dismiss Zazzali's Section 544(b)(1)
counts for failure to state a claim under Federal Rule of
Civil Procedure 12(b)(6). See Fed. R. Bankr. P.
7012(b). The government argued that Congress had not
abrogated sovereign immunity with respect to the Section
544(b)(1) underlying state law cause of action, and
therefore, there was no unsecured creditor who could sue the
government under Idaho's UFTA. The bankruptcy court
rejected this argument and concluded that Section
106(a)(1)'s waiver of sovereign immunity permitted the
Trustee's suit to proceed. The government appealed the
bankruptcy court's ruling to the district court. While
the government's appeal was pending, the Seventh Circuit
decided In re Equipment Acquisition Resources, Inc.
("EAR"), 742 F.3d 743 (7th Cir. 2014),
which analyzed the identical issue before the district court,
and which is at issue in the current appeal. The Seventh
Circuit came to the opposite conclusion as the bankruptcy
court, and held that Section 106(a)(1)'s waiver of
sovereign immunity does not extend to Section 544(b)(1)'s
derivative state law claim. Nonetheless, the district court
was unpersuaded by the Seventh Circuit's reasoning, and
affirmed the bankruptcy court's ruling. Further, the
district court declined to certify for interlocutory appeal
its order affirming the denial of the government's motion
the adversary proceeding had been transferred to the district
court pursuant to a motion by Swenson and his fellow
defendants, proceedings continued in that court with respect
to the merits of Zazzali's fraudulent transfer claims.
The parties ultimately filed cross-motions for summary
judgment. In its motion for summary judgment, the government
conceded that the payments made to the IRS were fraudulent
and that, pursuant to Section 548(a)(1)(A), Section
544(b)(1), and Idaho Code Ann. § 55-913(1)(a),
Zazzali could avoid any transfer made
within four years of filing his bankruptcy petition. However,
relying on Idaho Code Ann. § 55-917(1),  the government
asserted an affirmative defense-that it received the payments
or transfers in good faith and for value. The district
court's resolution of the summary judgment motions turned
on whether the government could prove the elements of its
affirmative defense. The district court first concluded that
the government did not receive the payments for value,
stating that "[e]very legal theory offered by the
[g]overnment to defend its right to retain this transfer
seems to ignore the fact that the money at issue here is the
proceeds of a widespread and devastating fraudulent scheme,
stolen from scores of investors." ...