In re Equipment Acquisition Resources, Inc.

Appeal from US Dist. Ct. ND IL ED, Case No. 11 C 05045
The 7th Circuit was asked to decide whether a Chapter 11 Debtor in Possession could bring an action to recoup its Federal tax payments pursuant to § 544(b)(1). The Court decided it could not, for the same reason that a creditor could not bring a fraudulent‐transfer claim against the IRS via applicable State (Illinois) law. This despite indications that Congress intended to disregard the sovereign immunity of the United States in the bankruptcy context.
Procedural context:
Bankruptcy Court ruled in favor of EAR's motion to recoup its payment at 451 B.R. 454 (Bankr. N.D. Ill. 2011), finding that 106 of the Code, which incorporates 544, illustrates Congressional intent to abrogate sovereign immunity in the bankruptcy context. The District Court affirmed that decision at 485 B.R. 586 (N.D. Ill. 2013) and the matter was appealed to the 7th Circuit, which heard arguments on Dec. 2, 2013 and decided it on Feb. 4. 2014.
Illinois corporation Equipment Acquisition Resources, Inc. (“EAR”) sought Chapter 11 protection after making 9 payments to the IRS - 8 in the 2 years prior to filing and 1 outside that period. EAR sued the IRS as the Debtor in Possession ("DIP") to recoup 8 of the payments as preferences and the remaining payment as a fraudulent transfer. The government agreed to disgorge all payments but the one made outside the 2-year preference period on the basis that it was not voidable under non-bankruptcy law as required by 544(b)(1).
Before BAUER and FLAUM, Circuit Judges, and VAN BOKKELEN, District Judge

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