It is no secret that the IRS and other taxing authorities do well in bankruptcy, often at the frustration of both debtors and general unsecured creditors.” For debtors, tax claims frequently are nondischargeable. For general unsecured creditors, IRS claims are entitled to higher priority. However, a recent decision from the Ninth Circuit Court of Appeals, In re DBSI Inc., offers new precedent that swings the balance back toward debtors and general unsecured creditors at the expense of the IRS.

The DBSI court held that a trustee may, using a state’s enactment of the Uniform Fraudulent Transfer Act (UFTA), avoid a debtor’s pre-petition tax payment made to the IRS under § 544(b)(1), notwithstanding the doctrine of sovereign immunity. In so doing, the DBSI court declined to follow In re Equip. Acquisitions Res. Inc., a 2014 Seventh Circuit decision holding to the opposite effect, thereby creating a split between these two circuits. For plaintiffs in the Ninth Circuit prosecuting avoidance actions, the DBSI decision could provide a new, viable avenue for recovery.

In Levin v. Verizon Bus. Global LLC (In re OneStar Long Distance Inc.), the U.S. Court of Appeals for the Seventh Circuit recently issued an important opinion on the “new value” defense for preference actions, affirming the bankruptcy court’s “per diem” method of determining the precise amount of “subsequent new value” extended by a trade creditor on a given day during the preference period. The per diem method allocates a specific amount of new value to each day of a given month by dividing the total amount billed at the end of the month by the number of days in the month, then presuming that the resulting average daily value was provided on each day during the month. The Seventh Circuit is the first appellate court to endorse the use of this method of calculating the amount of new value provided by a preference defendant.