McClarty v. Hatchett (In re Hatchett)
| Decision Date | 18 April 2018 |
| Docket Number | Adv. P. No. 17-04700-MBM,Case No. 17-45163-MBM |
| Citation | 588 B.R. 472 |
| Parties | In the MATTER OF: Laurestine HATCHETT, Debtor. Homer W. McClarty, Chapter 7 Trustee, Plaintiff, v. Elbert Hatchett, Elbert L. Hatchett, P.C., Hatchett, DeWalt & Hatchett, PLC, and the United States Government, through the its agent, the Internal Revenue Service, Defendants. |
| Court | U.S. Bankruptcy Court — Eastern District of Michigan |
Mark H. Shapiro, Southfield, MI, for Plaintiff.
Scott Kwiatkowski, Southfield, MI, Peter Sklarew, Pingping Zhang, U.S. Department of Justice, Washington, DC, for Defendants.
OPINION DENYING THE INTERNAL REVENUE SERVICE'S MOTION TO DISMISS
This matter is before the Court on a Motion to Dismiss filed by the Internal Revenue Service ("IRS"). Plaintiff/Trustee's adversary complaint alleges that debtor, Laurestine Hatchett, used her assets to pay federal tax liabilities owed by her husband, Elbert Hatchett, and/or his law firm. The Trustee claims that the payments constitute fraudulent transfers under 11 U.S.C. §§ 544(a) and (b), and seeks to recover the payments for Debtor's bankruptcy estate. The IRS asserts that the Trustee's claims are barred by sovereign immunity. For the reasons stated in this Opinion, the Motion to Dismiss is denied.
In December, 2014, debtor Laurestine Hatchett's children, Ayanna and Franklin Hatchett, were appointed co-conservators of Debtor based on Debtor's mental disability.
In December, 2014, Debtor's husband, Elbert Hatchett, and their daughter, Ayanna, were appointed Debtor's co-guardians.
In early 2015, a Florida condominium owned 50/50 by Debtor and her son, was sold for $335,000. The sale was approved by the probate court.
After payment of property taxes, closing costs, and recorded liens (including an uncontested IRS tax lien against Debtor of $16,589.56), Debtor was entitled to net proceeds of $122,827.09.
Debtor's son/co-conservator, Franklin Hatchett, turned Debtor's proceeds over to Debtor's husband/co-guardian, Elbert Hatchett, who deposited the funds into an account in the name of his law firm, defendant Hatchett, DeWalt & Hatchett. Some portion of those proceeds (between $75,000 and $104,000) were used to pay the IRS for tax liabilities owed by Elbert Hatchett and/or his law firm.
On April 6, 2017, an involuntary Chapter 7 petition was filed against debtor Laurestine Hatchett.
On June 6, 2017, an Order for Relief was entered by the Court.
On October 6, 2017, the Trustee filed the present adversary complaint against Elbert Hatchett, his law firm, and the IRS, seeking to avoid and recover the tax payments made to the IRS. The Trustee asserts that the money used to pay the tax liabilities of Elbert Hatchett and his law firm belong to Debtor's bankruptcy estate, and the payments constitute fraudulent transfers pursuant to 11 U.S.C. §§ 544(a) and (b).
On December 8, 2017, the IRS filed the present Motion to Dismiss the Trustee's complaint. The IRS asserts that as an agency of the federal government, it has sovereign immunity and cannot be sued by the Trustee.
On February 9, 2018, the Trustee filed a response to the IRS's motion. The Trustee asserts that pursuant to 11 U.S.C. § 106(a), Congress waived sovereign immunity as to actions brought by a bankruptcy trustee under § 544 of the Bankruptcy Code, and that the IRS's Motion to Dismiss must be denied.
On March 13, 2018, the IRS filed a reply to the Trustee's response.
On April 17, 2018, the Court heard oral argument on the Motion to Dismiss. The Motion was denied on the record, and the Court indicated that this written Opinion would follow.
A Motion to Dismiss under Rule 12(b)(1) () challenges a federal court's subject matter jurisdiction. A defendant may move to dismiss under Rule 12(b)(1) if the complaint does not allege sufficient grounds to establish subject matter jurisdiction on its face, or by factually contesting the plaintiff's allegations that subject matter jurisdiction exists. Establishing jurisdiction in an action against the United States includes establishing that there has been a waiver of sovereign immunity. U.S. v. Dalm, 494 U.S. 596, 608, 110 S.Ct. 1361, 108 L.Ed.2d 548 (1980). ’ " Id. (citations and quotations omitted).
Fraudulent transfers can be avoided under two different sections of the Bankruptcy Code: 11 U.S.C. § 548, which creates a body of federal fraudulent transfer law, and 11 U.S.C. § 544 (b), which gives the trustee power to avoid a fraudulent transfer by the debtor if the transfer would be voidable by one of the debtor's creditors under state law. Specifically, § 544(b)(1) permits a trustee to step into the shoes of an actual creditor who has a fraudulent transfer remedy under other "applicable law" (i.e. a state fraudulent transfer statute) and exercise that creditor's remedies on behalf of the bankruptcy estate. 11 U.S.C. § 544(b)(1) provides, in relevant part, 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..."
The key difference between an action under § 548 and an action under § 544(b)(1) is the reach-back period. Section 548, captures only transfers made in the two years preceding the filing of the bankruptcy. Section § 544(b)(1) looks to the specific state statute's reach-back period, which is generally longer than two years. Thus, a bankruptcy trustee seeking to recover transfers made more than two years prior to the filing of the bankruptcy must file an action under § 544(b)(1).
The doctrine of sovereign immunity bars all lawsuits against the United States or its agencies in the absence of its consent as expressly manifested by Congress. Block v. North Dakota , 461 U.S. 273, 103 S.Ct. 1811, 75 L.Ed.2d 840 (1983). This doctrine has its origin in the English concept that the governing royalty should be permitted to exercise his or her authority undisturbed by liability. Wright, Miller & Cooper, Federal Practice and Procedure: Jurisdiction 2d § 3654 (2015). As applied in its modern context, sovereign immunity is grounded in the practical realization that essential governmental activities should not be interrupted or slowed by litigation or liability. Id. Sovereign immunity operates to deprive a court of subject matter jurisdiction over the suit unless the sovereign consents to be sued. Id.
If Congress has expressly abrogated sovereign immunity, such consent must be read narrowly, with any ambiguities construed in favor of immunity. F.A.A. v. Cooper, 566 U.S. 284, 290-91, 132 S.Ct. 1441, 182 L.Ed.2d 497 (2012). Congress may provide the conditions under which an action can be maintained against the United States. Stanley v. CIA , 639 F.2d 1146, 1156 (5th Cir. 1981), cert. denied, 483 U.S. 1020, 107 S.Ct. 3262, 97 L.Ed.2d 761 (1987).
Congress has expressly abrogated sovereign immunity for actions brought under 59 sections of the Bankruptcy Code. 11 U.S.C. § 106 (), provides, in relevant part:
11 U.S.C. § 106(a)(1) (emphasis added).1
In the present case, the Trustee is suing the IRS to recover alleged fraudulent transfers under § 544(b)(1) pursuant to the Michigan Uniform Voidable Transactions Act ( Mich. Comp. Laws Ann. §§ 566.31 - 566.43 ). Notwithstanding the plain language of 11 U.S.C. § 106(a)(1), the IRS argues that its immunity has not been abrogated as to suits under § 544(b)(1) because there is no actual creditor who could maintain a cause of action against the IRS, if a creditor attempted to sue the IRS in state court under state law.
The scope of the Bankruptcy Code's abrogation of immunity as applied to fraudulent transfer actions under § 544(b)(1) has not been addressed by the U.S. Supreme Court or the Sixth Circuit Court of Appeals, thus this Court is not bound by Sixth Circuit law. Fortunately, however, the Ninth Circuit Court of Appeals recently addressed this identical issue in Zazzali v. U.S. (In re DBSI, Inc.) , 869 F.3d 1004 (9th Cir. 2017). That case involved DBSI, Inc. which was set up as an "S" corporation. While the company was operating, it made tax payments to the IRS on behalf of its shareholders. "Tax payments were handled in this manner because S corporations do not themselves pay taxes on corporate income, rather the tax liability is passed through to the corporation's shareholders." Id. at 1007. A total of $17 million was paid to the IRS on behalf of the shareholders. Id. DBSI later filed a Chapter 11 bankruptcy, and the trustee filed an adversary proceeding to recover the tax payments as fraudulent transfers to the IRS under several theories, including § 544(b)(1) and Idaho's Uniform Fraudulent Transfer Act. Id. at 1007–08.
The IRS moved to dismiss the claim...
To continue reading
Request your trial
-
Miller v. United States (In re All Resort Grp., Inc.)
...DBSI , 869 F.3d at 1013.59 Id. at 1011-12.60 See Lewiston , 528 B.R. at 391-94 (collecting cases); McClarty v. Hatchett (In re Hatchett) , 588 B.R. 472, 479-80 (Bankr E.D. Mich. 2018) (same).61 DBSI , 869 F.3d at 1013.62 EAR , 742 F.3d at 747.63 Jamestown S'Klallam Tribe v. McFarland , 579 ......
-
Brekelmans v. Salas (In re Salas)
...fraudulent transfer statute) and exercise that creditor's remedies on behalf of the bankruptcy estate." McClarty v. Hatchett (In re Hatchett), 588 B.R. 472, 477 (Bankr. E.D. Mich. 2018) (emphasis added). Because the Trustee stands in the shoes of an actual creditor, "the Trustee is 'subject......
-
Cafferty v. Blackmar (In re Blackmar)
...more than two years prior to the filing of the bankruptcy must file an action under § 544(b)(1).McClarty v. Hatchett (In the Matter of Hatchett), 588 B.R. 472, 477 (Bankr. E.D. Mich. 2018). Plaintiff's amended complaint clearly invokes both § 548 of the Bankruptcy Code and Ohio Revised Code......
- Higgs v. Colliau