Kohut v. Wayne County Treasurer (In re Lewiston), 528 B.R. 387 (Bankr. E.D. Mich. 2015) –
The debtor made property tax payments on behalf of several real estate projects. The chapter 7 trustee sought to recover those payments from the county as fraudulent transfers. The County raised sovereign immunity as a defense.
A trustee has the power to void and recover transfers under several sections of the Bankruptcy Code, including preferences under Section 547 and fraudulent transfers under Section 548. In addition under Section 544 the trustee may assert certain causes of action available under non-bankruptcy law – including the rights of a hypothetical creditor or purchaser of real property under Section 544(a) and the rights of an actual creditor under Section 544(b).
The Bankruptcy Code also provides that sovereign immunity is “abrogated” with respect to 59 listed sections of the Bankruptcy Code, including Sections 544, 547 and 548. The Supreme Court has upheld the Section 106 abrogation of sovereign immunity as a valid exercise of congressional powers under the Constitution to enact “Laws on the subject of Bankruptcies.”
A typical applications of Section 544 is assertion of a state law fraudulent transfer action, as was done in this case. There are a couple of differences between the Bankruptcy Code version of fraudulent transfer under Section 548 and state law fraudulent transfers. Most notably, the statute of limitations for a Section 548 claim is generally two years, while state law claims are generally at least four years. (In this case, the statute of limitations under state law was six years.) In addition, if the trustee is asserting a claim using the rights of an unsecured creditor under Section 544(b)(1), the trustee must show that an actual creditor could have brought the claim outside of bankruptcy.
The County did not directly challenge abrogation of sovereign immunity in connection with claims under Section 544, nor did it challenge the power of Congress to do so. Instead, it argued that the trustee was required to show that an actual unsecured creditor could have brought the claim against the County outside of bankruptcy, and contended that no such creditor existed because outside of bankruptcy the County could have asserted sovereign immunity as a defense.
The County distinguished the Supreme Court case upholding abrogation of sovereign immunity on the basis that it dealt with Section 547, which is an action created by the...
