In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 13‐1480
IN RE:
EQUIPMENT ACQUISITION RESOURCES, INC., Debtor.
APPEAL OF:
UNITED STATES OF AMERICA
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 11 C 05045 — Edmond E. Chang, Judge.
____________________
ARGUED DECEMBER 2, 2013 — DECIDED FEBRUARY 4, 2014
____________________
Before BAUER and FLAUM, Circuit Judges, and VAN
BOKKELEN, District Judge.
FLAUM, Circuit Judge. This case concerns whether a bank‐
ruptcy trustee can bring an action under § 544(b)(1) of the
Bankruptcy Code to recoup a debtor’s federal tax payment.
Section 544(b)(1) allows a trustee to step into the shoes of an
actual creditor who could have avoided the transfer outside
Of the Northern District of Indiana, sitting by designation.
2 No. 13‐1480
bankruptcy using a state‐law cause of action. The federal
government’s sovereign immunity prevents creditors from
suing the IRS using state law. However, another section of
the Bankruptcy Code, § 106(a)(1), abrogates the govern‐
ment’s sovereign immunity “with respect to” § 544.
The trustee’s ability to recover federal tax payments thus
hinges on the interplay between § 544 and § 106. The courts
below, relying on § 106(a)(1), concluded that a debtor in pos‐
session could use § 544(b)(1) to bring an Illinois fraudulent‐
transfer action against the IRS. But we find that § 106(a)(1)
does not displace the actual‐creditor requirement in
§ 544(b)(1). Ordinarily, a creditor cannot bring an Illinois
fraudulent‐transfer claim against the IRS; therefore, under
§ 544(b)(1), neither can the debtor in possession. We reverse
in favor of the United States.
I. Background
Equipment Acquisition Resources, Inc. (“EAR”), an Illi‐
nois subchapter S corporation, filed for Chapter 11 bank‐
ruptcy in October 2009. In the years before its petition, EAR
made nine federal income tax payments to the IRS on behalf
of its shareholders. (Subchapter S corporations do not pay
taxes on corporate income; instead, the tax liability is passed
through to the corporation’s shareholders.) EAR made eight
of these payments in the two years preceding its petition.
The ninth payment was just outside this period.
Once in Chapter 11, EAR, acting as debtor in possession,1
filed an adversary complaint against the United States seek‐
1 In a Chapter 11 bankruptcy, the debtor in possession can exercise
most of the powers of a trustee. 11 U.S.C. § 1107(a).
No. 13‐1480 3
ing to recover all nine payments as fraudulent transfers. EAR
sought to recover the eight most recent payments under 11
U.S.C. § 548(a)(1), which provides a cause of action for the
recovery of transfers made within two years of the filing. It
sought to recover the ninth under 11 U.S.C. § 544(b), the
provision (described above) that enables a trustee to bring a
state‐law fraudulent‐transfer action. Illinois, like most states,
has adopted the Uniform Fraudulent Transfer Act, which has
a four‐year statute of limitations. 740 Ill. Comp. Stat. Ann.
160/5(a)(2), 160/10. EAR asserted that the Bankruptcy Code’s
abrogation of the government’s sovereign immunity “with
respect to” both § 548 and § 544 precluded the IRS from
claiming immunity as a defense to either theory of recovery.
See 11 U.S.C. § 106(a)(1).
The parties reached a settlement. The United States
agreed to disgorge the eight payments that EAR could re‐
cover using § 548, but contested EAR’s ability to recover the
ninth payment under § 544(b). Because the federal govern‐
ment’s sovereign immunity ordinarily prevents a creditor
from bringing an Illinois fraudulent‐transfer action against
the IRS, the government argued, the ninth tax payment was
not “voidable under applicable law by a creditor holding an
unsecured claim.” Id. § 544(b)(1). The parties thus agreed
that the United States would disgorge the ninth payment on‐
ly if it could not prevail in its motion to dismiss the § 544(b)
count in EAR’s complaint.
The bankruptcy court rejected the government’s theory.
451 B.R. 454 (Bankr. N.D. Ill. 2011). The court found that
§ 106(a)(1) communicated Congress’s intent to abolish the
federal government’s immunity from suit under the listed
bankruptcy causes of action, including § 544. This general
4 No. 13‐1480
waiver, the court reasoned, showed that “Congress intended
to include those state law causes of action available under
§ 544(b)(1).” Id. at 464. The court grounded its conclusion in
“[t]he plain, unambiguous language of § 106, the deliberate
inclusion of § 544 in § 106(a), and the policy consideration
favoring recovery for the benefit of all creditors.” Id.
The United States appealed to the district court, which af‐
firmed. 485 B.R. 586 (N.D. Ill. 2013). The district court
framed the dispute as “whether § 544(b), which explicitly
limits a trustee’s ability to avoid a transfer, overrides
§ 106(a)’s abrogation of sovereign immunity.” Id. at 592. It
agreed with the bankruptcy court that § 106’s “complete
abolishment” of the government’s sovereign immunity in
bankruptcy carried the day. Id. at 593. “It simply does not
matter how a sovereign immunity defense is invoked against
EAR’s claim,” the district court held, because “106(a)(1)
simply eliminates the obstacle wherever it appears ‘with re‐
spect to’ § 544.” Id. (emphasis added). The United States ap‐
peals.
II. Discussion
This case concerns the proper interpretation of the Bank‐
ruptcy Code. We decide this legal question de novo. Wiese v.
Cmty. Bank of Cent. Wis., 552 F.3d 584, 588 (7th Cir. 2009).
A.
As we have mentioned, EAR’s action implicates two dif‐
ferent Code provisions: § 548 and § 544(b). Section 548 pro‐
vides a stand‐alone cause of action for the recovery of fraud‐
ulent transfers. See 11 U.S.C. § 548(a)(1) (“The trustee may
avoid any transfer … of an interest of the debtor in proper‐
ty … that was made … on or within 2 years before the date
No. 13‐1480 5
of the filing of the petition, if [certain criteria are met].”). Be‐
cause § 548 is included in § 106(a)(1)’s list of Code provisions
for which sovereign immunity is abrogated—and because
the cause of action is a creature of the Code itself—the Unit‐
ed States does not assert immunity as a defense to EAR’s re‐
covery under that provision.
Section 544(b) is a different matter, however. Unlike
§ 548, § 544(b) is derivative of state law—that is, law external
to the Bankruptcy Code. Section 544(b)(1) authorizes the
trustee to avoid transfers that are “voidable under applicable
law by a creditor holding an unsecured claim.” Usually, the
“applicable law” is a state’s fraudulent‐transfer statute. See In
re Xonics Photochem., Inc., 841 F.2d 198, 202 (7th Cir. 1988).
This provision enables the trustee to do in a bankruptcy pro‐
ceeding what a creditor would have been able to do outside
of bankruptcy—except the trustee will recover the property
for the benefit of the estate.
Section 544(b) is unique in another regard: its terms re‐
quire the actual existence of an unsecured creditor that could
have brought the state‐law action itself. “If there are no cred‐
itors against whom the transfer is voidable under the appli‐
cable law, the trustee is powerless to act under section
544(b)(1).” 5 Collier on Bankruptcy ¶ 544.06[1] (Alan N. Res‐
nick & Henry J. Sommer eds., 16th ed. 2013); see also In re
Cybergenics Corp., 226 F.3d 237, 243 (3d Cir. 2000) (“The
avoidance power provided in section 544(b) is distinct from
others because a trustee or debtor in possession can use this
power only if there is an unsecured creditor of the debtor
that actually has the requisite nonbankruptcy cause of ac‐
tion.”). In other words, the trustee stands in the shoes of an
actual unsecured creditor. And if the actual creditor could
6 No. 13‐1480
not succeed for any reason—whether due to the statute of
limitations, estoppel, res judicata, waiver, or any other de‐
fense—then the trustee is similarly barred and cannot avoid
the transfer. 5 Collier on Bankruptcy ¶ 544.06[3]. By contrast,
there is no such limitation in § 548. The trustee stands in its
own shoes and exercises rights bestowed by the Bankruptcy
Code itself.
The question dividing the parties is whether the Code’s
abrogation of sovereign immunity “with respect to” § 544
allows a debtor in possession to bring a state‐law fraudulent‐
transfer suit against the federal government—even though,
outside of bankruptcy, sovereign immunity would bar a reg‐
ular creditor from doing so. We find that § 106(a)(1) confers
no such right.
B.
The Supreme Court has instructed that when it comes to
questions of a federal agency’s liability, we must undertake
“two analytically distinct inquiries.” FDIC v. Meyer, 510 U.S.
471, 484 (1994) (internal quotation marks omitted). “The first
inquiry is whether there has been a waiver of sovereign im‐
munity.” Id. No issue there; all parties agree, based on
§ 106(a)(1), that there has been. But once this question is an‐
swered, “the second inquiry comes into play—that is,
whether the source of substantive law upon which the
claimant relies provides an avenue for relief.” Id. That ques‐
tion is the crux of this appeal: whether the source of substan‐
tive law upon which EAR relies—§ 544(b) and, derivatively,
the Illinois Uniform Fraudulent Transfer Act—provides an
avenue for relief against the IRS.
No. 13‐1480 7
In answering it, EAR and the courts below lay claim to
the statutory‐interpretation high ground—the plain lan‐
guage of the text. They maintain that § 106(a)(1) is unambig‐
uous: it states that the federal government’s “sovereign im‐
munity is abrogated … with respect to,” among other provi‐
sions, § 544. Therefore, the argument goes, the United States
cannot assert a sovereign immunity defense, in any form, to
a § 544(b)(1) action.
This argument misses the point. The United States is not
contesting the meaning of § 106(a). Its argument derives
from the plain language of § 544(b). That provision, by its
very terms, requires EAR to show that a creditor exists who
could use a state’s “applicable law” to recover the payment
from the IRS. If no such creditor exists, then the trustee can‐
not bring the claim. And there is no question that no creditor
exists in this case—even the district court acknowledged that
an unsecured creditor would have been barred from bring‐
ing an Illinois fraudulent‐transfer action against the IRS out‐
side of bankruptcy. 485 B.R. at 593. Thus, because no unse‐
cured creditor could obtain relief against the United States
using the Illinois Uniform Fraudulent Transfer Act, EAR’s
tax payment is not “voidable under applicable law” within
the meaning of § 544(b)(1). We find that Congress did not
alter § 544(b)’s substantive requirements merely by stating
that the federal government’s immunity was abrogated
“with respect to” this provision.
EAR’s argument to the contrary draws support from oth‐
er bankruptcy courts, which have reasoned that “[b]y in‐
cluding § 544 in the list of Bankruptcy Code sections set
forth in § 106(a), Congress knowingly included state law
causes of action within the category of suits to which a sov‐
8 No. 13‐1480
ereign immunity defense could no longer be asserted.” In re
C.F. Foods, L.P., 265 B.R. 71, 85 (Bankr. E.D. Pa. 2001). But we
cannot credit arguments about congressional intent when
they run counter to a provision’s unambiguous text. See, e.g.,
Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253–54 (1992)
(“[C]ourts must presume that a legislature says in a statute
what it means and means in a statute what it says there.”).
Here, § 544(b) is unambiguous: the trustee may only recover
transfers that are “voidable under applicable law by a credi‐
tor holding an unsecured claim.” We decline EAR’s invita‐
tion to read an exception into this provision based on its ar‐
guments about what § 106(a)(1) was meant to accomplish.
This invitation “runs smack into the Supreme Court’s insist‐
ence that judges implement the Bankruptcy Code as written,
rather than make changes that they see as improvements.” In
re New Energy Corp., No. 13‐2501, 2014 WL 145274, at *2 (7th
Cir. Jan. 15, 2014) (citing RadLAX Gateway Hotel, LLC v. Amal‐
gamated Bank, 132 S. Ct. 2065 (2012)).
We also note that there may be other reasons why
§ 544(b)’s actual‐creditor requirement is not satisfied here.
Even if federal sovereign immunity were not an issue, a
creditor who attempts to wield the Illinois Uniform Fraudu‐
lent Transfer Act against the IRS outside of bankruptcy
would face significant constitutional obstacles. For one thing,
states cannot enforce their laws so as to retrieve money from
the federal coffers: the Appropriations Clause of the Consti‐
tution “means simply that no money can be paid out of the
Treasury unless it has been appropriated by an act of Con‐
gress.” Office of Pers. Mgmt. v. Richmond, 496 U.S. 414, 424
(1990); accord id. at 426 (holding that the Appropriations
Clause precludes the federal government’s liability under an
equitable estoppel theory). For another, the Supremacy
No. 13‐1480 9
Clause prevents states from enabling their residents to re‐
cover tax payments directly from the United States. Cf.
McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 436 (1819)
(“[S]tates have no power, by taxation or otherwise, to retard,
impede, burden, or in any manner control, the operations of
the constitutional laws enacted by congress to carry into exe‐
cution the powers vested in the general government.”).
Thus, sovereign immunity is just one reason why there is no
applicable state law that would enable a creditor to recover
from the IRS outside of bankruptcy. The courts below were
mistaken in their assumption that if Congress eliminated the
sovereign‐immunity problem (which, as stated, we find that
Congress did not do), these other obstacles disappeared,
too.
“An absence of immunity does not result in liability if
the substantive law in question is not intended to reach the
federal entity.” U.S. Postal Serv. v. Flamingo Indus. (USA) Ltd.,
540 U.S. 736, 744 (2004). Nothing in § 106(a)(1) gives the trus‐
tee greater rights to avoid transfers than the unsecured cred‐
itor would have under state law. By concluding that
§ 106(a)(1) did just that, the courts below erred.
C.
This is an issue of first impression for any circuit court of
appeals.2 We acknowledge that by interpreting § 106(a)(1)
2 In In re Abatement Environmental Resources, Inc., 102 F. App’x 272
(4th Cir. 2004), the Fourth Circuit held that the trustee in that case had
not established that the debtor’s tax payments to the IRS constituted
fraudulent transfers under Maryland’s Uniform Fraudulent Conveyance
Act. The Fourth Circuit noted in a footnote that “[t]here is no sovereign
immunity bar to the Trustee’s [MUFCA] claim because 11 U.S.C.
§ 106(a)(1) abrogates the United States’ sovereign immunity for actions
10 No. 13‐1480
and § 544(b) as we have, we diverge from all of the bank‐
ruptcy and district courts to consider the issue in the context
of the federal government.3 In our opinion, those courts (fol‐
lowing the example of the earliest case, In re C.F. Foods) fo‐
cused too narrowly on the language in § 106(a)(1), and large‐
ly disregarded § 544(b)’s actual‐creditor requirement. And
we do not find their key arguments in favor of EAR’s read‐
ing persuasive.
First, we do not agree that the United States’ interpreta‐
tion renders § 106(a)(1)’s abrogation of immunity with re‐
spect to § 544 “almost meaningless.” In re Custom Contractors,
LLC, 439 B.R. 544, 549 (Bankr. S.D. Fla. 2010). Sec‐
tion 106(a)(1) abrogates sovereign immunity for any “gov‐
brought pursuant to 11 U.S.C. § 544(b)(1).” Id. at 274 n.2. Given the case’s
disposition, however, that single sentence is dicta.
3 See In re Pharm. Distrib. Servs., Inc., 455 B.R. 817, 821 (Bankr. S.D.
Fla. 2011) (finding that § 106(a)(1) enabled the trustee to bring a § 544(b)
action against the IRS using state fraudulent‐transfer law); In re Custom
Contractors, LLC, 439 B.R. 544, 548–49 (Bankr. S.D. Fla. 2010) (same); In re
C.F. Foods, L.P., 265 B.R. 71, 84–86 (Bankr. E.D. Pa. 2001) (same). But see In
re Grubbs Constr. Co., 321 B.R. 346, 351–52 (Bankr. M.D. Fla. 2005) (hold‐
ing that the trustee could not bring a § 544(b) action against the state of
Florida—even though Florida had waived its immunity in the bankrupt‐
cy proceeding—because state sovereign immunity bars a creditor from
bringing a Florida fraudulent‐transfer action against the state); In re
Abatement Envtl. Res., Inc., 301 B.R. 830, 832–36 (D. Md. 2003) (holding
that the trustee could not recover a tax payment to the IRS using § 544(b)
“because the claim is barred by an immunity to which governmental
units with taxing authority are entitled under Maryland law”); In re An‐
ton Motors, Inc., 177 B.R. 58, 65–66 (Bankr. D. Md. 1995) (holding that the
trustee could not assert a § 544(b) action against a Maryland county be‐
cause Maryland’s fraudulent‐transfer law cannot be used to recover tax
payments).
No. 13‐1480 11
ernmental unit.” This term encompasses not just the federal
government, but also state and local governments. See 11
U.S.C. § 101(27). So if any state waived its own or a local
government’s immunity to fraudulent‐transfer actions in the
state’s courts, the interplay of sections 106(a)(1) and 544(b)(1)
would enable the trustee to bring the same action in the
bankruptcy court.
Moreover, § 544(b) constitutes only half of § 544. There is
also § 544(a). Known as the strong‐arm power, § 544(a) au‐
thorizes the trustee to assume the rights of a hypothetical
judgment lien creditor, execution creditor, or bona fide pur‐
chaser; the trustee can then knock off unperfected security
interests so that the previously secured collateral becomes
part of the estate. Crucially, subsection (a), unlike subsection
(b), “empowers the trustee to avoid certain prebankruptcy
transfers that could have been avoided by certain types of
creditors or a bona fide purchaser, whether or not such credi‐
tors or a bona fide purchaser actually exist.” 5 Collier on Bank‐
ruptcy ¶ 544.01. And 28 U.S.C. § 2410 permits judgment lien
creditors, execution creditors, and bona fide purchasers to
quiet title to property on which the United States claims a
lien—so there is no external sovereign‐immunity obstacle to
the trustee’s employing § 544(a) against the federal govern‐
ment. Thus, the strong‐arm clause could also explain why
Congress included § 544 in § 106(a)’s list.
Unconvinced, the bankruptcy court below reasoned that
if this interpretation were correct, Congress would have
specified that it was abrogating immunity with respect to
§ 544(a) only. See 451 B.R. at 465 (“As is evident in numerous
provisions of the Code, Congress knows how to specify ap‐
plicable subsections and paragraphs when it wishes to do
12 No. 13‐1480
so.”). Setting aside the fact that the abrogation still has some
application to § 544(b), we still find this responsive unper‐
suasive. All of the fifty‐nine provisions listed in § 106(a)(1)
cite to a Code provision generally, without listing particular
subsections. Yet, as the United States correctly points out,
many of the listed provisions have subsections that do not
implicate sovereign immunity.4 We believe the better conclu‐
sion is that Congress simply listed undivided Code sections
if any part of that section included something for which sov‐
ereign immunity should be waived.
In re C.F. Foods and its progeny also invoke the legislative
history surrounding § 106(a). This history cannot overcome
the unambiguous language in § 544(b), see, e.g., Newsom v.
Friedman, 76 F.3d 813, 816–17 (7th Cir. 1996), and in any
event, is no help at all. The House Report accompanying the
Bankruptcy Reform Act of 1994 indicated that Congress re‐
worked § 106 to respond to the Supreme Court’s decisions in
Hoffman v. Connecticut Department of Income Maintenance, 492
U.S. 96 (1989), and United States v. Nordic Village, Inc., 503
U.S. 30 (1992). H.R. Rep. No. 103‐835, at 42 (1994). In both
cases, the Court found that the predecessor to the current
§ 106 was not sufficiently explicit to waive the state and fed‐
eral governments’ immunity with respect to bankruptcy
causes of action. Neither case involved a trustee’s power un‐
der § 544(b) to bring state‐law actions, though. Thus, Con‐
gress’s apparent disapproval of the results in Hoffman and
Nordic Village sheds no light on the present dispute.
4 To take the government’s example, § 524 is included in § 106(a)(1)’s
list, but § 524(f) only states that a debtor may voluntarily repay a debt
after its discharge—a situation to which sovereign immunity has no ap‐
plication at all.
No. 13‐1480 13
Finally, these lower courts argue that policy considera‐
tions favor their reading. They figure that it makes sense for
Congress to have wanted the trustee to use state fraudulent‐
transfer actions against the federal government because
“[a]ny recovery by the bankruptcy trustee will benefit all of
the debtor’s creditors, including the IRS. Moreover, en‐
hancement of the rights of others to the detriment of the fed‐
eral government, particularly in the governmentʹs capacity
as tax collector, is commonplace, including within the Bank‐
ruptcy Code itself.” In re C.F. Foods, 265 B.R. at 86. True, it
would not be anomalous for Congress to design a scheme
that maximizes the estate’s recovery. But all of the trustee’s
avoidance tools contain substantive limitations. We do not
see why Congress would implicitly relax these limitations
just because the federal government is the one disgorging
the property.
Moreover, there are countervailing policy concerns that
favor our interpretation. It is one thing for Congress to ex‐
pose federal agencies to fraudulent‐transfer suits on the
Bankruptcy Code’s terms—under § 548, for example. But it is
quite another for Congress to expose federal agencies to suit
based on “applicable” state law, the dimensions of which
Congress cannot control. A state could have a statute of limi‐
tation for such actions that extends past the typical four
years. Indeed, some do.5 And state legislatures could relax
the criteria for what constitutes a fraudulent transfer, render‐
5 These include Iowa, Iowa Code Ann. § 684.9 (five years); Kentucky,
Ky. Rev. Stat. Ann. § 413.120 (five years); Maine, Me. Rev. Stat. Ann. tit.
14, § 3580 (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. § 213 (six years).
14 No. 13‐1480
ing federal tax revenue even more vulnerable to unexpected
recovery actions. It would make sense for Congress to be
cognizant of the IRS’s “exceedingly strong interest in finan‐
cial stability.” United States v. Clintwood Elkhorn Mining Co.,
553 U.S. 1, 12 (2008).
This is consistent with the judicial presumption that
when it comes to sovereign immunity, ties go to the govern‐
ment. The Supreme Court has repeatedly warned against
interpretations that expand the scope of the government’s
liability beyond the point where its consent is unequivocal.
E.g., FAA v. Cooper, 132 S. Ct. 1441, 1448 (2012) (“For the same
reason that we refuse to enforce a waiver that is not unam‐
biguously expressed in the statute, we also construe any
ambiguities in the scope of a waiver in favor of the sover‐
eign.”). In fact, the Court has instructed that where there ex‐
ists a plausible interpretation of a provision that would pre‐
serve immunity—even if that interpretation is not the only
reading available—that “is enough to establish that a read‐
ing imposing monetary liability on the Government is not
‘unambiguous’ and therefore should not be adopted.” Nordic
Village, 503 U.S. at 37. To be clear, we do not need to rely on
the presumption against waiver to resolve this dispute. We
find the substantive requirements of § 544(b)(1) unambigu‐
ous, and those requirements are simply not met with respect
to EAR’s action. But the Court’s insistence that Congress be
unmistakably clear when opening the federal government to
suit is further reason why we cannot find that Congress did
so implicitly. If Congress intends to eliminate § 544(b)’s actu‐
al‐creditor requirement in actions against the federal gov‐
ernment, it must say so.
No. 13‐1480 15
III. Conclusion
We are confident that by continuing to enforce the actual‐
creditor requirement in § 544(b) as written, we do no disser‐
vice to the Code’s abrogation‐of‐immunity provision. EAR,
acting with the state‐law avoidance powers of an unsecured
creditor, does not have a viable cause of action against the
United States to avoid the tax payment at issue. We REVERSE
the judgment of the district court and REMAND with instruc‐
tions to dismiss EAR’s complaint insofar as it relied on § 544
of the Bankruptcy Code.