By: WISCONSIN LAW JOURNAL STAFF//February 5, 2014//
United States Court of Appeals For the Seventh Circuit
Civil
Bankruptcy — recoupment
This case concerns whether a bankruptcy trustee can bring an action under sec. 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 bankruptcy using a state-law cause of action. The federal governments’ sovereign immunity prevents creditors from suing the IRS using state law. However, another section of the code, sec. 106(a)(1), abrogates the governments sovereign immunity with respect to sec. 544.
We find that sec. 106(a)(1) does not displace the actual creditor requirement in sec. 544 (b)(1). Ordinarily, a creditor cannot bring an Illinois fraudulent-transfer claim against the IRS; therefore, under sec.544(b)(1), neither can the debtor in possession. We reverse in favor of the United States.
Reversed.
Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. Flaum, J.