822 F.3d 144
3rd Cir.2016Background
- Net Pay Services (debtor) processed payroll and tax withholdings for clients under contracts that allowed Net Pay to withdraw client funds and remit wages and taxes; contracts disclaimed fiduciary relationships.
- Five prepetition transfers (May 5, 2011) from Net Pay to the IRS are at issue: $32,297 (Altus), $5,338 (HealthCare Systems), $1,143 (Project Services), $352.84 (unknown client), $281.13 (unknown client). Net Pay filed Chapter 7 ~3 months later.
- Trustee Slobodian sought to avoid these as preferential transfers under 11 U.S.C. § 547(b); cross-motions for summary judgment produced a District Court ruling for the IRS.
- District Court held four smaller transfers were protected by the § 547(c)(9) minimum-dollar defense because each transfer was below the threshold and not transactionally related; it held the Altus payment non-avoidable because § 7501(a) created a trust such that Net Pay lacked an equitable interest.
- Trustee argued (1) small transfers could be aggregated to exceed the § 547(c)(9) threshold; and (2) the Altus payment (or at least $6,527.90 of it) was for non-trust employer taxes and thus not protected by § 7501(a).
- Third Circuit affirmed: no aggregation across distinct creditors; § 7501(a) applies to amounts withheld on employers’ behalf via a payroll intermediary, and the Altus payment was applied to trust-fund taxes.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether multiple small prepetition transfers to the IRS for different creditors may be aggregated to meet § 547(c)(9) minimum-dollar threshold | Slobodian: § 102(7) (singular includes plural) allows aggregation of transfers (especially to same transferee) so the four small payments in the aggregate exceed $5,850 | IRS: § 547(c)(9) applies creditor-by-creditor and transfer-by-transfer; aggregation only where transfers are transactionally related or on same debt | Court: Affirmed District Court — cannot aggregate unrelated transfers for different creditors; aggregation allowed only where transfers are effectively one transaction on same debt. |
| Whether funds paid to IRS on behalf of Altus were "an interest of the debtor in property" under § 547(b) (i.e., avoidable) given 26 U.S.C. § 7501(a) | Slobodian: Net Pay (not the employer) withheld/paid taxes as an intermediary, so § 7501(a) trust does not strip Net Pay of an interest | IRS: § 7501(a) creates a special trust when employer-required withholdings occur; outsourcing withholding to Net Pay does not avoid trust status; Begier tracing principles apply | Court: Affirmed District Court — § 7501(a) covers employer withholdings even when an intermediary performs withholding; Net Pay lacked equitable interest; payment not avoidable. |
| Whether part of the Altus payment ($6,527.90) designated for employer non-trust taxes is avoidable | Slobodian: payroll summary shows a non-trust portion, so some funds were for non-trust employer taxes and not protected by § 7501(a) | IRS: record evidence shows collection, deposits, and IRS application establish that the full $32,297 was applied to Altus’s trust-fund liability; IRS practice treats non-trust taxes as paid first and Altus’s non-trust liability was already covered | Court: Held District Court did not err — unrebutted evidence shows the full payment applied to trust-fund taxes; no genuine issue of material fact. |
| Appropriate standard for aggregation vs. transactional unity (avoidance of artful partitioning) | Slobodian: statutory language ambiguous; liberal aggregation prevents debtors from structuring around limits | IRS: statute and policy require preventing strategic slicing to defeat preferences, but only aggregation where transfers are transactionally related | Court: Adopted rule that permits looking behind form to aggregate where transfers are transactionally related or part of a common plan, but not across distinct debts/creditors. |
Key Cases Cited
- Begier v. Commissioner, 496 U.S. 53 (Sup. Ct. 1990) (§ 7501(a) creates a statutory trust at time of withholding; voluntary prepetition payment establishes nexus so funds used are trust funds and not property of the estate)
- In re Penn Cent. Transp. Co., 486 F.2d 519 (3d Cir. 1973) (federal common law trust principles applied where entity acts as conduit)
- In re Calabrese, 689 F.3d 312 (3d Cir. 2012) (characterization of trust-fund taxes and related tracing principles)
- In re FirstPay, Inc., 773 F.3d 583 (4th Cir. 2014) (discusses payroll-company intermediaries and trust presumptions; court noted differing analyses on § 7501 application)