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Third Circuit Holds that Minimum Threshold under Section 547(c)(9) Requires Transfer-by-Transfer Analysis

Slobodian v. U.S. Internal Revenue Serv. (In re Net Pay Solutions, Inc.), No. 15-2833, 2016 WL 2731676 (3d. Cir. May 10, 2016)

In this precedential Opinion, the United States Court of Appeals for the Third Circuit (the “Third Circuit”) addressed whether multiple transfers may be aggregated for purposes of meeting the statutory minimum under section 547(c)(9) of the Bankruptcy Code.  The Court affirmed the ruling of the United States District Court for the Middle District of Pennsylvania (the “District Court”) that they may not be aggregated where the transfers are for the benefit of different creditors on distinct debts. The Court also addressed whether employee withholding taxes paid to the IRS by a payroll management company on behalf of an employer are immune from avoidance as “trust fund” taxes under 28 U.S.C. §7501(a), and held that they are.

Under the facts of the case, the chapter 7 trustee (the “Trustee”) sought to avoid and recover five preference period transfers (the “Transfers”) that Net Pay Services, Inc. (the “Debtor”) made to the IRS.  The Debtor was a payroll management services company, and the transfers related to amounts withheld from employee wages and paid to the IRS on behalf of five different employers.  The amount of the transfers ranged from $281.13 to $32,297.  Op. at *3.

Four of the five transfers were in amounts below the $5,850 statutory minimum applicable at the time for non-consumer debtors under section 547(c)(9) of the Bankruptcy Code. Accordingly, the IRS argued these transfers were immune from avoidance.  In response, the Trustee argued that section 547(c)(9) permitted it to aggregate the amount of the transfers to meet the minimum.  Since the combined amount of the transfers exceeded the threshold, the Trustee argued section 547(c)(9) did not apply.  Id. at *5.

In relevant part, section 547(c)(9) provides that trustees may only avoid preferential transfers where “the aggregate value of all property that constitutes or is affected by such transfer” exceeds the statutory minimum.”  11 U.S.C. 547(c)(9).  The Trustee argued that the reference to “transfer” in the statute should be interpreted as “transfers” to permit aggregation for purposes of section 547(c)(9).  Op. at *6.  His interpretation was based on section 102(7) of the Bankruptcy Code, which states “the singular includes the plural.”  11 U.S.C. 102(7).  However, the Court found this reasoning inapplicable and instead found “[t]he text and context of §547(c)(9) … demonstrate that the minimum threshold contemplates a transfer-by-transfer analysis.”  Op. at *10.

The Court did not enunciate a bright-line rule that transfers may never be aggregated for purposes of section 547(c)(9).  Nor did it disagree with authorities that indicate “[m]ultiple transfers to a single creditor may be aggregated where the underlying facts and circumstances indicate the transfers were part of a common plan.”  Op. at *11 (citations and emphasis omitted).  Accordingly, it does not appear likely the Opinion will preclude aggregation of payments under 547(c)(9) in common contexts, such as where a trustee sues a creditor under section 547 to avoid multiple payments made on a single account.  However, under the particular facts of the case—where the payments were on account of unrelated debts and different creditors and were therefore not part of a “common plan”—the Court upheld the District Court’s ruling that the transfers had to be considered separately for purposes of the statutory minimum. Op. at *11-12.

The Trustee also appealed the District Court’s dismissal of the avoidance action with respect to the $32,297 transfer on the ground that it was not property of the Debtor’s estate.  The lower court concluded that, under 28 U.S.C. §7501(a) and the Supreme Court’s ruling in Begier v. Comm’r, 496 U.S. 53 (1990), the amounts were “trust fund” taxes held for the benefit of the IRS.  Op. at *4.

On appeal, the Trustee tried to distinguish Begier because the taxes in the instant case were withheld by the Debtor—an intermediary third-party—rather than the employer.  However, the Third Circuit found this was not a meaningful distinction under the statutory language of 28 U.S.C. §7501(a), and upheld the District Court’s ruling on this issue as well. Op. at *15-18.