Slobodian v. I.R.S

No. 15-2833 (3d Cir. May 10, 2016)
Five alleged preferential transfers made by Net Pay (a payroll processor) to the IRS, on behalf of five different clients, were not avoidable under 11 U.S.C. § 547(b) of the Bankruptcy Code. Four of the five payments were not avoidable because each fell below the 11 U.S.C. § 547(c)(9) statutory minimum ($5,850 as of 2013). Normally, the 11 U.S.C. § 547(c)(9) minimum is calculated based on the aggregate value of the allegedly preferential transfers received. However, in this case, Net Pay made five payments to the IRS on behalf of five different clients on account of five different antecedent debts. Because the payments were not related, the 11 U.S.C. § 547(c)(9) minimum was appropriately assessed on a payment by payment basis, and not in the aggregate. The fifth payment, on the other hand, exceeded the 11 U.S.C. § 547(c)(9) statutory minimum. However, the Court of Appeals ruled that the fifth payment was not avoidable under 11 U.S.C. § 547(b) because it was not a transfer of Net Pay's property, a required element to prove a preference. Instead, pursuant to the Internal Revenue Code, the funds Net Pay received from its clients to pay the IRS were statutorily held in trust and never became Net Pay's property. Because such funds never became Net Pay's property, they could not be avoided as a preference.
Procedural context:
Third Circuit Court of Appeals affirmed District Court for the Middle District of Pennsylvania's ruling (1) denying Chapter 7 Trustee's summary judgment motion seeking to avoid alleged preferential transfers under 11 U.S.C. § 547(b) of the Bankruptcy Code and (2) granting the IRS's summary judgment motion seeking to dismiss the alleged preferences.
Net Pay, as an independent contractor, managed its clients’ payrolls and handled their employment taxes. Net Pay's clients transferred funds from their bank accounts into Net Pay’s account, who, in turn, remitted those funds to the clients’ employees, the IRS, and other taxing authorities. At issue in the appeal were five transfers Net Pay made to the IRS on May 5, 2011, during the 90 day preference period, on behalf of five of its clients. The payments were $5,338, $1,143, $352.84, $281.13 and $32,297. The day after these transfers were made, Net Pay informed its clients that it was “ceasing business operations including all payroll processing." Net Pay subsequently filed Chapter 7.
SMITH and HARDIMAN, Circuit Judges

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