Commercial Banking, Collections, and Bankruptcy

Debtor in instant Chapter 11 proceeding was entitled to stay of Bankruptcy Ct. order that found that debtor’s failure to assume building leases that housed debtor’s franchise restaurants within applicable six-month limitations period under 11 USC section 365(d)(4) also meant that debtor’s franchise agreement had expired. Debtor argued that longer limitation period for assuming leases applied where leases were tied to franchise agreements, and that it was entitled to stay where it would have no way to recover franchises once they had been terminated, even if it were to prevail on appeal. As such, stay was appropriate because debtor’s loss was significantly greater if stay were not imposed than any loss to franchisor if stay were imposed.

Bankruptcy Ct. erred in finding that debtor in possession in instant Chapter 11 bankruptcy proceeding could bring Illinois fraudulent transfer action under section 544(b)(1) of Bankruptcy Code against IRS to recoup debtor’s federal tax payment. While section 544(b)(1) allows Trustee to step in shoes of actual creditor, who could have avoided transfer outside of bankruptcy using state law action, federal govt.’s sovereign immunity prevents creditors from suing IRS using state law. Moreover, while section 106(a)(1) of Bankruptcy Code abrogates govt.’s sovereign immunity with respect to certain subsections of section 544, section 106(a)(1) does not displace actual-creditor requirement in section 544(b)(1). Thus, because actual creditor could not bring Illinois fraudulent-transfer claim under section 544(b)(1) against IRS, instant debtor in possession could not bring instant action against IRS.