Zazzali v. United States (In Re DBSI, Inc.)

FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

IN RE DBSI, INC., No. 16-35597
Debtor,
D.C. No.
1:13-cv-00086-
JAMES R. ZAZZALI, as Trustee for the MJP
DBSI Estate Litigation Trust,
Plaintiff-Appellee,
OPINION
v.

UNITED STATES OF AMERICA,
Defendant-Appellant.

Appeal from the United States District Court
for the District of Idaho
Marsha J. Pechman, District Judge, Presiding

Argued and Submitted May 17, 2017
Seattle, Washington

Filed August 31, 2017

Before: Michael Daly Hawkins, Ronald M. Gould,
and Richard A. Paez, Circuit Judges.

Opinion by Judge Paez
2 IN RE DBSI, INC.

SUMMARY*

Bankruptcy

The 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.

The 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 payments.

The panel addressed the trustee’s cross-appeal in a
concurrently filed memorandum disposition.

*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
 IN RE DBSI, INC. 3

COUNSEL

Ivan 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 Defendant-
Appellant.

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 Oregon.

Professor Stephen J. Lubben, Seton Hall University School of
Law, Newark, New Jersey, for Amicus Curiae National
Association of Bankruptcy Trustees.
4 IN RE DBSI, INC.

OPINION

PAEZ, Circuit Judge:

We must 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).

Here, James R. Zazzali (“Zazzali” or “Trustee”) invoked
Idaho’s Uniform Fraudulent Transfer Act (“UFTA”), Idaho
Code Ann. §§ 55-9011 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

1
In 2015, Idaho amended and renumbered certain sections of Title 55
of the Idaho Code by adopting the Uniform Voidable Transactions Act.
See H.R. 92, 63d Leg., 1st Reg. Sess. (Idaho 2015). All references in this
opinion to the Idaho Code Annotated are to those statutes in effect during
the period in question.
 IN RE DBSI, INC. 5

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 Idaho’s UFTA.

Both 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.2

I.

DBSI, 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

2
We have jurisdiction pursuant to 28 U.S.C. § 158(d) and review de
novo issues of statutory interpretation. See, e.g., In re Acequia, Inc.,
34 F.3d 800, 809 (9th Cir. 1994).
6 IN RE DBSI, INC.

convicted of various fraud crimes. Their convictions were
affirmed by our court.

DBSI 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.

In 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 IRS.3

In bringing his claims against the IRS, Zazzali relied on
two different sections of the Bankruptcy Code: 11 U.S.C.

3
The states settled with Zazzali, although several of them, along with
a few other interested states, filed an amicus brief (“State Amici”) urging
reversal in support of the United States.
 IN RE DBSI, INC. 7

§ 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 petition date.

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
8 IN RE DBSI, INC.

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 to dismiss.

Because 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),4
Zazzali could avoid any transfer made within four years of
filing his bankruptcy petition. However, relying on Idaho
Code Ann. § 55-917(1),5 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

4
Idaho Code Ann. § 55-913(1)(a) states, “A transfer made or
obligation incurred by a debtor is fraudulent as to a creditor, whether the
creditor’s claim arose before or after the transfer was made or the
obligation was incurred, if the debtor made the transfer or incurred the
obligation with actual intent to hinder, delay, or defraud any creditor of the
debtor.”
5
Idaho Code Ann. § 55-917(1) states, “A transfer or obligation is not
voidable under section 55-913(1)(a), Idaho Code, against a person who
took in good faith and for a reasonably equivalent value or against any
subsequent transferee or obligee.”
 IN RE DBSI, INC. 9

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.” The court likewise concluded that the government
did not receive the transfers in good faith. In sum, the district
court concluded that the government failed to establish its
affirmative defense, and thus Zazzali, as a matter of law, was
entitled to avoid the fraudulent transfers. The government
does not challenge this ruling.

The court, however, still had to determine the extent to
which Zazzali could recover the transfers. In its motion for
summary judgment, the government argued that, even if the
court were to reject its affirmative defense, Zazzali was not
entitled to recover approximately $3.6 million of the
fraudulent transfers because it already refunded that amount
as tax overpayments to the shareholder-taxpayers. The
district court agreed, concluding that the IRS was not an
“initial transferee” within the meaning of 11 U.S.C.
§ 550(a)(1) (“Section 550(a)(1)”), and therefore the
approximately $3.6 million that the IRS already paid out as
tax overpayments was not subject to recovery.6

Having resolved all issues, the district court entered
judgment directing the IRS to return approximately $13.4
million of the total $17 million in fraudulent tax transfers.
The government asks us to reverse this part of the district

6
In a cross-appeal, Zazzali challenges the district court’s conclusion
that the $3.6 million in refunded tax payments is not subject to recovery
from the IRS. We address Zazzali’s cross-appeal, No. 16-35598, in a
concurrently filed memorandum disposition.
10 IN RE DBSI, INC.

court’s judgment and hold that sovereign immunity precludes
the return of the $13.4 million. We decline to do so, and
affirm the district court’s ruling.

II.

A.

Section 544(b)(1), in relevant part, provides that a “trustee
may avoid any transfer of an interest of the debtor in property
or any obligation incurred by the debtor that is voidable under
applicable law by a creditor holding an unsecured claim
. . . .” (emphasis added). By its terms, Section 544(b)(1)
requires the existence of an actual creditor who could avoid
the transfer. 5 Collier on Bankruptcy ¶ 544.01. In other
words, the effect of this section is “to clothe the trustee with
no new or additional right in the premises over that possessed
by a creditor, but simply puts him in the shoes of the latter.”
Id. ¶ 544.06[3] (quoting Davis v. Wiley, 263 F. 588, 589
(N.D. Cal. 1920), aff’d, 273 F. 397 (9th Cir. 1921)); see also
Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198, 1201
(9th Cir. 2005). “[I]f the actual creditor could not succeed for
any reason—whether due to the statute of limitations,
estoppel, res judicata, waiver, or any other defense—then the
trustee is similarly barred and cannot avoid the transfer.”
EAR, 742 F.3d at 746; accord In re Acequia, Inc., 34 F.3d
800, 809 (9th Cir. 1994) (“[l]ike Prometheus bound, the
trustee is chained to the rights of [such] creditors”).

Here, because the substantive law for Zazzali’s Section
544(b)(1) claim is Idaho’s UFTA, it is undisputed that there
is no actual unsecured creditor who could pursue such a claim
against the IRS outside of bankruptcy; the government’s
sovereign immunity would preclude any such claim. The
 IN RE DBSI, INC. 11

government argues that because there is no actual unsecured
creditor who could bring such a claim, Zazzali is likewise
precluded from bringing a Section 544(b)(1) claim in
bankruptcy court. We disagree. The government ignores that
Section 544(b)(1) does not exist in a vacuum; rather, it must
be read in concert with other sections of the Bankruptcy
Code. And, here, as the government readily acknowledges,
Section 106(a)(1) unambiguously abrogates the federal
government’s sovereign immunity “with respect to Section
544.” In other words, Section 106(a)(1)’s abrogation of
sovereign immunity is absolute with respect to Section
544(b)(1) and thus necessarily includes the derivative state
law claim on which a Section 544(b)(1) claim is based.7

In the following discussion, we begin with well-settled
canons of statutory interpretation that inform our
understanding of the interplay between Section 106(a)(1) and
Section 544(b)(1); next we address our divergence from the
Seventh Circuit’s reasoning in EAR; and finally, we observe
that our holding conforms with the Bankruptcy Code’s
overall purpose.

7
We note that on appeal one of Zazzali’s primary arguments is that
because Section 544(b)(1) addresses the “avoidance” of transfers, as
opposed to the “recovery” of the actual payments, a waiver of sovereign
immunity with respect to Section 544(b)(1) is unnecessary. See, e.g.,
5 Collier on Bankruptcy ¶ 550.01 (discussing the difference between
avoiding a transfer and recovering from the transferee). Although we
acknowledge that the concepts of “avoidance” and “recovery” are distinct,
we see no need to address Zazzali’s argument as the text of Section
106(a)(1) is clear—sovereign immunity has been waived with respect to
Section 544(b)(1).
12 IN RE DBSI, INC.

B.

1.

To ascertain the meaning of Sections 106(a)(1) and
544(b)(1), we must look not only to the “particular statutory
language at issue” but also to “the language and design of the
statute as a whole.” K Mart Corp v. Cartier, Inc., 486 U.S.
281, 291 (1988); see also Carpenters Health & Welfare Tr.
Funds v. Robertson (In re Rufener Constr.), 53 F.3d 1064,
1067 (9th Cir. 1995). Statutory construction is a “holistic
endeavor,” United Sav. Ass’n of Tex. v. Timbers of Inwood
Forest Assocs., Ltd., 484 U.S. 365, 371 (1988), that relies on
context to be “a preliminary determinant of meaning,”
Antonin Scalia & Bryan A. Garner, Reading Law: The
Interpretation of Legal Texts 168 (2012). Here, read in light
of Section 106(a)(1)’s clear abrogation of sovereign
immunity, Section 544(b)(1) can only mean one thing: a
trustee need only identify an unsecured creditor, who, but for
sovereign immunity, could bring an avoidance action against
the IRS.

Section 544(b)(1) plainly states that the “trustee may
avoid any transfer . . . that is voidable under applicable law.”
But, we cannot read the plain text of Section 544(b)(1)—i.e.,
the triggering creditor requirement—devoid of the declaration
in Section 106(a)(1) that “sovereign immunity is abrogated as
to a governmental unit . . . with respect to Section[] . . . 544.”
See also In re Equip. Acquisition Res., Inc., 485 B.R. 586,
593 (Bankr. N.D. Ill. 2013), judgment rev’d by EAR, 742 F.3d
743 (“[S]overeign immunity is completely abolished with
respect to Section[] . . . 544.” (internal quotation marks
omitted)). “It simply does not matter how a sovereign
immunity defense is invoked against [Trustee]’s claims
 IN RE DBSI, INC. 13

[because] Section 106(a)(1) . . . eliminates the obstacle
wherever it appears ‘with respect to’ § 544 . . . .” Id. In other
words, Congress’s waiver of sovereign immunity is
unequivocal under Section 106(a)(1).8

2.

Our interpretation of the interplay between Section
106(a)(1) and Section 544(b)(1) is bolstered by the fact that
Section 106(a)(1) was enacted after Section 544(b)(1). See
Food & Drug Admin. v. Brown & Williamson Tobacco Corp.,
529 U.S. 120, 133 (2000). “The classic judicial task of
reconciling many laws enacted over time, and getting them to
make sense in combination, necessarily assumes that the
implications of a statute may be altered by the implications of
a later statute.” Id. at 143 (internal quotation marks and
citation omitted). Here, when Congress waived sovereign
immunity with respect to Section 544, Congress understood
that Section 544(b)(1) codified a trustee’s powers to invoke
state law. See S. Rep. 95-989, at 85 (1978), as reprinted in
U.S.C.C.A.N. 5787, 5871. Even more importantly, those
powers were deep rooted, and had existed since at least the

8
In United States v. Nordic Village, Inc., 503 U.S. 30, 39 (1992), the
Supreme Court made it unmistakably clear that for Congress to waive
sovereign immunity it must do so “unequivocal[ly].” As a result,
Congress amended Section 106(a)(1) in 1994, at least in part, as a
response to Nordic Village. H.R. Rep. 103-835, at 42 (1994); see also
Norton Bankr. L. & Prac. 3d § 14:4. After acknowledging the Supreme
Court’s holding in Nordic Village, Congress stated that “[t]his amendment
expressly provides for a waiver of sovereign immunity by governmental
units with respect to monetary recoveries as well as declaratory and
injunctive relief. It is the Committee’s intent to make section 106 conform
to the Congressional intent of the Bankruptcy Reform Act of 1978
waiving the sovereign immunity of the States and the Federal Government
in this regard.” Id.
14 IN RE DBSI, INC.

Bankruptcy Act of 1898. Bankruptcy Act of 1898 § 70(e),
ch. 541, 30 Stat. 544 (1898); see also Norton Bankr. L. &
Prac. 2d § 63:7 (1997); accord Stellwagen v. Clum, 245 U.S.
605, 614 (1918); Moore v. Bay, 284 U.S. 4 (1931). Since we
presume that “Congress understands the state of existing law
when it legislates,” Bowen v. Massachusetts, 487 U.S. 879,
896 (1988), it is clear that “[b]y including [Section] 544 in the
list of Bankruptcy Code sections set forth in [Section]
106(a)(1), Congress knowingly included state law causes of
action within the category of suits to which a sovereign
immunity defense could no longer be asserted.” Liebersohn
v. IRS (In re C.F. Foods, L.P.), 265 B.R. 71, 85 (Bankr. E.D.
Pa. 2001).

3.

Finally, the interpretation offered by the government
would essentially nullify Section 106(a)(1)’s effect on
Section 544(b)(1), an interpretation we should avoid. See,
e.g., United States v. Powell, 6 F.3d 611, 614 (9th Cir. 1993)
(“It is a basic rule of statutory construction that one provision
should not be interpreted in a way which is internally
contradictory or that renders other provisions of the same
statute inconsistent or meaningless.” (internal quotation
marks and citation omitted)). Adopting the government’s
position would mean that Section 106(a)(1)’s abrogation of
sovereign immunity would have no effect on Section
544(b)(1) because a trustee would always need to
demonstrate that Congress provided for a separate waiver of
sovereign immunity with respect to any “applicable law.” As
one bankruptcy court deftly put it,

Why would Congress explicitly waive
sovereign immunity for all other avoidance
 IN RE DBSI, INC. 15

actions under the Bankruptcy Code, and
include a waiver of sovereign immunity for
actions under section 544 knowing that
section 544 encompasses state law theories,
but then require a separate waiver of
sovereign immunity for the necessary state
law component in actions under section 544?

Furr v. U.S. Dep’t of Treasury (In re Pharmacy Distrib.
Servs., Inc.), 455 B.R. 817, 821 (Bankr. S.D. Fla. 2011). The
government insists that Section 106(a)(1)’s waiver of
sovereign immunity would not be rendered meaningless if we
adopted its approach. However, we find the government’s
arguments unavailing.

First, the government notes that the waiver of sovereign
immunity would still apply to Section 544(a) because Section
544(a) contains no triggering creditor requirement. Although
this is true, it is beside the point. Surely, had Congress
intended to limit Section 106(a)(1)’s application to Section
544(a), as opposed to all of Section 544, it knew how to do
so. In fact, elsewhere in the Bankruptcy Code, Congress has
demonstrated that it knows how to make a specific provision
only applicable to a subsection of Section 544. See, e.g.,
11 U.S.C. § 546(c)(1), (d), (h); id. § 541(b)(4); see also
Keene Corp. v. United States, 508 U.S. 200, 208 (1993)
(“Where Congress includes particular language in one section
of a statute but omits it in another . . . , it is generally
presumed that Congress acts intentionally and purposely in
the disparate inclusion or exclusion.” (internal quotation
marks and citation omitted)).

Second, the government explains that Section 106(a)(1)
applies not only to the federal government but to all
16 IN RE DBSI, INC.

governmental entities. This is true: Section 106(a)(1)
abrogates sovereign immunity for all “governmental units,”
which the Bankruptcy Code defines to include, among other
entities, states and municipalities. 11 U.S.C. § 101(27). The
government then asserts that as long as state or local
municipalities have waived sovereign immunity to permit
fraudulent transfer actions against their governments, Section
106(a)(1)’s waiver with respect to Section 544(b)(1) would
serve a purpose.9 But this assertion suffers from the same
fundamental flaw as the government’s underlying argument.
If a state or local municipality has already waived sovereign
immunity, Section 106(a)(1)’s waiver of immunity is
unnecessary and adds nothing.10 We agree with the
bankruptcy court that the government’s interpretation would
render Section 106(a)(1)’s application to Section 544(b)(1)
practically meaningless, and therefore it is an interpretation
to which we cannot subscribe.

9
The government notes, for example, that states like Illinois,
Connecticut, New York, and Ohio have such general waivers of immunity.
705 Ill. Comp. Stat. § 505/8(a) (allowing claims under Illinois state law to
be brought against the State in its court of claims); Conn. Gen. Stat. § 4-
142 (allowing claims against the state to be brought through an Office of
the Claims Commissioner); N.Y. Ct. Cl. Act § 8 (authorizing suits if
brought in court of claims); Ohio Rev. Code Ann. § 2743.02(A)(1) (same).
10
State Amici argue that interpreting Section 106(a)(1)’s waiver of
sovereign immunity to apply to the underlying state law causes of action
raises constitutional concerns by subjecting states to non-uniform
bankruptcy laws. State Amici acknowledge that Congress has the ability
to waive state sovereign immunity under the Bankruptcy Clause of the
Constitution, but they nonetheless argue that this right derives from the
fact that states have agreed to subordinate their sovereign immunity to
uniform laws. While there may be outer limits to Congress’s power to
waive state sovereign immunity under the Bankruptcy Code, see Cent. Va.
Cmty. Coll. v. Katz, 546 U.S. 356, 378 n.15 (2006), we need not, and do
not, address that issue here as it is not before us.
 IN RE DBSI, INC. 17

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. In interpreting these statutes in this manner, we are
mindful of the Supreme Court’s instruction that where a
plausible interpretation of a provision that would preserve
immunity is available, we should adopt that interpretation and
preserve the government’s sovereign immunity. See United
States v. Nordic Village, Inc., 503 U.S. 30, 37 (1992). But,
here, we do not believe there is an alternative construction
that is plausible: Congress unambiguously and unequivocally
waived sovereign immunity for causes of action brought
under Section 544(b)(1). To construe the statutes in the
manner in which the government proposes would be to ignore
the plain text of Section 106(a)(1), something we are not at
liberty to due. See, e.g., United States v. Butler, 297 U.S. 1,
65 (1936) (“These words cannot be meaningless, else they
would not have been used.”); see also Conn. 47Nat’l Bank v.
Germain, 503 U.S. 249, 253–54 (1992) (“We have stated time
and again that courts must presume that a legislature says in
a statute what it means and means in a statute what it says
there.”).

C.

1.

We recognize that our opinion conflicts with the Seventh
Circuit’s opinion in EAR, the only other case to have
addressed the interplay between Section 106(a)(1) and
18 IN RE DBSI, INC.

Section 544(b)(1).11 We turn briefly to the Seventh Circuit’s
opinion and the reasons why we disagree with its analysis.

In EAR, the Seventh Circuit addressed a nearly identical
situation, but reached the opposite result. The Seventh
Circuit, drawing from FDIC v. Meyer, 510 U.S. 471 (1994),
employed a two-step framework to determine the IRS’s
liability. In doing so, the Seventh Circuit explained that to
determine the IRS’s liability, a court must “undertake two
analytically distinct inquiries . . . [t]he first inquiry is whether
there has been a waiver of sovereign immunity . . . the second
inquiry . . . is [] whether the source of substantive law upon
which the claimant relies provides an avenue for relief.”
EAR, 742 F.3d at 747 (quoting Meyer, 510 U.S. at 484)
(internal quotation marks and citations omitted). Applying
this framework, the Seventh Circuit first acknowledged that
there is no issue as to the first inquiry—everyone agrees that
with the adoption of Section 106(a)(1) Congress has waived
sovereign immunity with respect to Section 544(b)(1). Id. at
746–47. Proceeding to the second inquiry, the Seventh
Circuit looked at the applicable law for the trustee’s Section

11
Although the Seventh Circuit is the only other circuit to have
addressed the issue in a published opinion, bankruptcy courts and district
courts throughout the nation have nearly uniformly adopted a statutory
construction in line with our holding today. See, e.g., VMI Liquidating Tr.
Dated December 16, 2011 v. United States (In re Valley Mortg., Inc.), No.
10-19101-SBB, 2013 WL 5314369 (Bankr. D. Colo. Sept. 18, 2013); Furr
v. U.S. Dep’t of Treasury (In re Pharmacy Distrib. Servs., Inc.), 455 B.R.
817 (Bankr. S.D. Fla. 2011); Menotte v. United States (In re Custom
Contractors, LLC), 439 B.R. 544 (Bankr. S.D. Fla. 2010); Sharp v. United
States (In re SK Foods, L.P.), No. 09-229162-D-11, 2010 WL 6431702
(Bankr. E.D. Cal. July 14, 2010); Tolz v. United States (In re Brandon
Overseas, Inc.), No. 08-11035-BKC-RBR, 2010 WL 2812944 (Bankr.
S.D. Fla. July 16, 2010); Liebersohn v. IRS (In re C.F. Foods, L.P.),
265 B.R. 71 (Bankr. E.D. Pa. 2001).
 IN RE DBSI, INC. 19

544(b)(1) cause of action—the Illinois Uniform Fraudulent
Transfer Act—and determined that it did not provide an
avenue for relief because any unsecured creditor who
attempted to bring such a claim against the IRS in Illinois
would be barred from doing so by the government’s
sovereign immunity. The Seventh Circuit concluded that
Section 106(a)(1)’s abrogation of sovereign immunity with
respect to Section 544(b)(1) did not “alter [Section] 544(b)’s
substantive requirements merely by stating that the federal
government’s authority was abrogated ‘with respect to’ that
provision.” Id.

2.

Meyer sets out a useful framework for analyzing whether
sovereign immunity precludes an action against the
government. Our disagreement with the Seventh Circuit is at
step two, as all parties agree that Congress has
unambiguously waived sovereign immunity. Therefore, we
focus our discussion on whether Section 544(b)(1) and
Idaho’s UFTA—the substantive law on which Zazzali relies
for his fraudulent transfer cause of action—provide an avenue
for relief, or, in other words, envision the government as a
potential defendant.

First, the fact that Congress waived sovereign immunity
with respect to Section 544(b)(1) leaves no doubt that both
Section 544(b)(1), and the derivative state law, provide a
substantive cause of action against the government. It would
defy logic to waive sovereign immunity as to a claim which
could not be brought against the government. In general, a
government defendant does not need immunity from a suit
which cannot be brought.
20 IN RE DBSI, INC.

Second, the statutory definitions of the relevant
parties—creditors and debtors—further demonstrate that
Section 544(b)(1), and the derivative law upon which it relies,
contemplate suits against the government. See U.S. Postal
Serv. v. Flamingo Indus., 540 U.S. 736, 744–56 (2004)
(analyzing the Sherman Act’s, 15 U.S.C. § 1 et seq.,
definition of “person” to conclude that the statute
contemplates a government defendant). Under both the
Bankruptcy Code and Idaho’s UFTA, debtors and creditors
are defined to include the government. See 11 U.S.C.
§§ 101(10), (13), (15), (41); Idaho Code §§ 55-910(4), (9).
In turn, both Section 544(b)(1) and Idaho’s UFTA provide a
substantive cause of action against the government—i.e., an
avenue for relief. See Meyer, 510 U.S. at 484. The Seventh
Circuit’s conclusion to the contrary is not persuasive. Under
the Seventh Circuit’s approach, a substantive cause of action
against the government would exist only if Congress also
waived sovereign immunity with respect to the particular
applicable law under Section 544(b)(1). To impose such a
requirement, as discussed above, would be contrary to the
plain text of Section 106(a)(1).

In sum, although Meyer’s general framework is helpful,
we reach an alternate conclusion to the Seventh Circuit.

3.

We note one other area in which we disagree with the
Seventh Circuit’s reasoning in EAR. Both the government
and the Seventh Circuit suggest that the result we reach today
runs afoul not only of sovereign immunity, but also
potentially of the Appropriations Clause and the Supremacy
Clause. EAR, 742 F.3d at 747–48. According to the Seventh
Circuit: “Even if federal sovereign immunity were not an
 IN RE DBSI, INC. 21

issue, a creditor who attempts to wield the Illinois Uniform
Fraudulent Transfer Act against the IRS outside of
bankruptcy would face significant constitutional obstacles.”
Id. While it may be true that an unsecured creditor who seeks
to bring such claims against the IRS in state court would face
constitutional obstacles, that is irrelevant to our inquiry as our
holding is limited only to the rights of a trustee to bring
fraudulent transfer actions in bankruptcy.

As to the Appropriations Clause, the Seventh Circuit, in
dicta, notes that it precludes any creditor from recovering
against the federal government in a state court because money
cannot be taken from the treasury without congressional
approval. Id. at 748. But this is of no moment because
Section 544(b)(1) says nothing about recovery; a trustee must
only demonstrate that the transfer is “voidable under
applicable law.”12 The recovery of fraudulent transfers is
authorized by federal law—Section 550(a)(1)—and Congress
has waived sovereign immunity with respect to that
provision. 11 U.S.C. § 106(a)(1). In other words, we agree
with the Seventh Circuit that Congress must approve the
release of funds from its coffers, see Office of Pers. Mgmt. v.
Richmond, 496 U.S. 414, 424 (1990), but here it has done so
through Sections 106(a)(1) and 550(a)(1). Thus, we fail to
share the Seventh Circuit’s concern that there may be an
Appropriations Clause issue here.

As to the Supremacy Clause, the Seventh Circuit
suggests, again in dicta, that the interpretation of the interplay

12
“[T]he Bankruptcy Code enunciates the separation between the
concepts of avoiding a transfer and recovering from the transferee.” In re
Acequia, 34 F.3d at 809 (internal quotation marks and citation omitted);
see also 5 Collier on Bankruptcy ¶ 550.01.
22 IN RE DBSI, INC.

between Section 106(a)(1) and Section 544(b)(1) that we
reach today is erroneous because “the Supremacy Clause
prevents states from enabling their residents to recover tax
payments directly from the United States.” EAR, 742 F.3d at
748.13 But, again, this suggestion ignores the federal nature
of a claim under Section 544(b)(1). Section 544(b)(1) does
not authorize a trustee to bring an avoidance action in state
court, rather the statute permits a trustee to pursue a federal
cause of action in bankruptcy court. VMI Liquidating Tr.
Dated December 16, 2011 v. United States (In re Valley
Mortg., Inc.), No. 10-19101-SBB, 2013 WL 5314369, at *5
(Bankr. D. Colo. Sept. 18, 2013). Simply put, we fail to see
any Supremacy Clause issue here.14

13
Again, we note that the Seventh Circuit conflates the concepts of
avoidance and recovery. Section 544(b)(1), by its terms, says nothing of
recovery.
14
In its opening brief, the government argues that the Internal
Revenue Code (I.R.C.) preempts Zazzali’s claims. Aside from the fact,
as explained supra, that Zazzali’s claims are federal causes of action and
therefore cannot be preempted, the government’s argument fails for
another reason. The government argues that Section 7422 of the I.R.C.,
which is “applicable when taxes have been improperly assessed or are not
otherwise properly due,” In re Valley Mortg., Inc., 2013 WL 5314369, at
*5, preempts Zazzali’s avoidance claims. But I.R.C. § 7422 is
inapplicable here because “the trustee is not standing in the shoes of the
debtors, as taxpayers, seeking to recover tax refunds, but rather, in the
shoes of a creditor seeking to recover property fraudulently transferred
. . . .” Id. (quoting In re SK Foods, L.P., 2010 WL 6431702, at *4). “In
short, I.R.C. section 7422 simply has no bearing on [our] interpretation of
. . . [S]ections 544 and 106 . . . .” Id. at *6.
 IN RE DBSI, INC. 23

D.

We close by noting that although not necessary to our
disposition since we conclude the statutes are unambiguous,
our interpretation is supported by both equitable principles
and the “object and policy” of the Bankruptcy Code. See
Kelly v. Robinson, 479 U.S. 36, 43 (1986) (“In expounding a
statute, we must not be guided by a single sentence or
member of a sentence, but look to the provisions of the whole
law, and to its object and policy.” (quoting Offshore
Logistics, Inc. v. Tallentire, 477 U.S. 207, 222 (1986))).
“Critical features of every bankruptcy proceeding are the
exercise of exclusive jurisdiction over all of the debtor’s
property, [and] the equitable distribution of that property
among the debtor’s creditors . . . .” Cent. Va. Cmty. Coll. v.
Katz, 546 U.S. 356, 364 (2006). In allowing for the
avoidability of transfers made to the IRS, Congress ensured
that the IRS is on equal footing with all other creditors. See
S. Rep. No. 95-989, at 90 (1978), as reprinted in
1978 U.S.C.C.A.N. 5787, 5876. As the Tenth Circuit
explained in In re Franklin Savings Corp., 385 F.3d 1279,
1290 (10th Cir. 2004), the waiver of sovereign immunity
contained in the Bankruptcy Code “is based on equity[;] in
essence, it would be unfair for a governmental unit to
participate in the distributions of a bankruptcy case while at
the same time shielding itself from liability.” (internal
quotation marks and citation omitted).

Congress provided for a waiver of sovereign immunity
“with respect to” Section 544 because it aligns with the
primary goal of federal bankruptcy law—collecting and
preserving a debtor’s assets for equitable distribution among
all creditors. See, e.g., Sherwood Partners, 394 F.3d at
1204–05.
24 IN RE DBSI, INC.

III.

We affirm the district court’s judgment that sovereign
immunity does not preclude Zazzali from avoiding the $17
million in tax payments that were fraudulently transferred to
the IRS. We likewise affirm the district court’s judgment that
the government must return the funds received as tax
payments, except as to the amount already paid out as
refunds. We remand for further proceedings consistent with
this opinion. Each party shall bear its own costs on appeal.

AFFIRMED and REMANDED.