In a March 8, 2022 decision, the United States Court of Appeals for the Fourth Circuit issued an opinion holding, in part, that the Internal Revenue Service (the “IRS”) does not have sovereign immunity for claims arising under section 544(b)(1) of Title 11 of the United States Code (the “Bankruptcy Code”) (a 544(b)(1) claim is described below). This decision falls in line with a similar holding in the Ninth Circuit from 2017 but stands in stark contrast to a 2014 decision from the Seventh Circuit. The result is a widening circuit split on an interesting question of statutory interpretation.
In In re Yahweh Center Inc., Case No. 20-1685 (4th Cir. March 8, 2022), the Fourth Circuit made short work of the question regarding the IRS’s immunity. In the eyes of the Fourth Circuit, section 106(a) answers the question rather simply. On its face, this appears straightforward, as section 106(a) expressly states that “sovereign immunity is abrogated” with respect to various Bankruptcy Code provisions, including section 544. In addition, the Fourth Circuit held that the IRS had waived any sovereign immunity defense under section 106(b) when it filed a proof of claim in the case.