Source: https://avoidanceactionupdate.bayardlaw.com/2016/05/19/third-circuit-addresses-issue-of-first-impression-in-finding-the-payee-irrelevant-for-purposes-of-applying-section-547c9s-aggregate-value-threshold-in-in-re-net-pay-solutions-inc/
Timestamp: 2019-04-23 09:53:34+00:00

Document:
The United States Court of Appeals for the Third Circuit recently addressed an issue of first impression – whether a Chapter 7 trustee (the “Trustee”) could avoid multiple small-dollar payments to the Internal Revenue Service (“IRS”) that the debtor (the “Debtor”) had made on behalf of multiple clients, on the basis that all of the payments were made to the same payee. The Court rejected the Trustee’s argument as one that would render 11 U.S.C. § 547(c)(9) superfluous and ineffective. The Court also rejected the Trustee’s argument with respect to the one remaining transfer that surpassed the Bankruptcy Code’s $5,850 preference action threshold*, finding the payment qualified as a “trust fund tax” that was not an interest of the debtor in property. In the context of the latter ruling, the Court provides a detailed analysis of the Supreme Court’s Begier v. Commissioner, 496 U.S. 53 (1990) decision.
Debtor’s business involved managing its clients’ (the “Clients”) payrolls and employment taxes. The arrangement authorized Debtor to transfer funds from Client bank accounts into Debtor’s account and to remit those funds to the Clients’ employees, the IRS, and other taxing authorities. At issue in this case were five transfers (the “Transfers”) Debtor made to the IRS on behalf of the Clients in the ninety days leading up to August 2, 2011 (the “Petition Date”) – four of which were less than the $5,850 preference action threshold established by 11 U.S.C. § 547(c)(9). The fifth transfer was for $32,297 (the “Remaining Transfer”).
The Trustee sought to avoid the Transfers on the basis that, in the aggregate, the Transfers exceeded $5,850, and thus, the threshold was not a barrier. The District Court for the Middle District of Pennsylvania (“District Court”) disagreed, granting summary judgment to the IRS and finding the Transfers could only be aggregated if they are “transactionally related” to the same debt; in this case, the District Court found that the four sub-$5,850 Transfers were separate and unrelated transactions in satisfaction of independent antecedent debts to different creditors. The Remaining Transfer was found to fall outside the bounds of “property of the estate”, as it was protected by the Internal Revenue Code (“IRC”) provision which creates a statutory trust in favor of the United States for taxes withheld from employee paychecks. Trustee appealed.
On appeal, the Trustee argued that the Bankruptcy Code allows the aggregation of transfers that individually fall below the threshold, as long as they were all to the same transferee, citing 11 U.S.C. § 102(7) for the concept that “the singular includes the plural” in interpreting 11 U.S.C. § 547(c)(9). The Trustee further argued that section 547(c)(9) is internally contradictory, because the term “aggregate” implies a summation of various transfers, while the language “such transfer” implies the defense should be applied on a payment by payment basis.
As to the Remaining Transfer, the Trustee contended that Debtor was an intermediary that withheld and paid taxes on behalf of the Client, and that the “obvious meaning of the statute is that in order for a trust to be created, a person who is required to collect the tax must actually withhold the tax.” Trustee argues that because the Clients, not Debtor itself, were required to withhold the taxes at issue, those withholdings escape the statute’s limitations.
As to Trustee’s reliance on the “singular includes the plural” maxim, the Court found that it “simply means that (1) a creditor may invoke the defense for multiple, independently qualifying transfers (i.e., it’s not a “one-and-done” defense) and (2) a party may defeat the defense where the challenged transfers are strategically divided yet transactionally related.” Since each sub-threshold Transfer involved a different Client, unrelated antecedent debts, and distinct tax liabilities, they could not be aggregated to exceed the threshold.
Applying Begier to the instant case, the Court found that the fact that Debtor was an intermediary that withheld and paid taxes on behalf of the clients – the sole relevant distinction here from the facts of Begier – was irrelevant. To the contrary, the applicable IRC provision “does not say that clients themselves must be the only ones involved in the withholding process in order for trust principles to be implicated.” Nothing “suggests that an employer may avoid the fact that an amount required by law is being held in trust for the United States merely by outsourcing payroll processing to a third party.” The Court conceded that Trustee cited one non-jurisdictional bankruptcy court decision that directly supported his argument, but found that opinion to be “devoid of analysis”, a defect that was not corrected by a subsequent opinion from the pertinent Court of Appeals.
The Court adds, in an interesting footnote, that even without the preemption of federal law in this case, Pennsylvania law (which governed Debtor’s agreements with the Clients) would mandate that the Transfers be held in a resulting trust, as the IRS produced ample evidence to show that there was no intention by the Clients to give Debtor the beneficial interest in the Transfers.
Thus, the Court affirmed the District Court’s judgment in all respects.
Aside from this being a matter of first impression in the Third Circuit with respect to aggregation dispute, the Court provides a detailed breakdown of the Begier decision and its continued vitality in tax-related preference issues. Given the involvement of the IRC, the ultimate utility of this decision (as to its trust component) in other contexts remains to be seen.
A copy of the Net Pay Opinion can be found here.
This entry was posted in Elements (11 U.S.C. § 547(b)) and tagged 11 U.S.C. § 547(c)(9), 26 U.S.C. § 7501, Bankruptcy Court for the Middle District of Pennsylvania, Begier, District Court for the Middle District of Pennsylvania, Third Circuit, Trust Fund Tax on May 19, 2016 by Bayard, P.A..

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