9th Cir.;
16-35597

The court of appeals affirmed a district court judgment. The court held that sovereign immunity does not bar a bankruptcy trustee's adversary proceeding to recover a debtor's fraudulent payments to the Internal Revenue Service.

Until it was eventually shut down, DBSI, Inc. engaged in an illegal Ponzi scheme to acquire, develop, manage, and sell commercial real estate. Between 2005 and 2008, DBSI, which was set up as an S corporation, paid the IRS approximately $17 million in tax payments on behalf of its shareholders. The vast majority of these payments were made on behalf of shareholders Doug Swenson and Thomas Reeve. The IRS ultimately refunded approximately $3.6 million to Swenson and Reeve in claimed overpayments of their individual income tax liabilities. In 2008, DBSI filed for bankruptcy. Bankruptcy trustee James Zazzali commenced an adversary proceeding in bankruptcy court to recover DBSI's allegedly fraudulent transfers to, among others, the IRS. Upon motion by Swenson and others, the adversary proceeding was transferred to the district court.