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Amounts Withheld for Payment of Taxes are Not Avoidable as Preferential Transfers

Slobodian v. United States IRS (In re Net Pay Sols., Inc.), No. 15-2833, 2016 U.S. App. LEXIS 8601 (3d Cir. May 10, 2016)

Debtor Net Pay Sols., Inc. managed its clients’ payrolls and handled their employment taxes pursuant to a payroll services agreement. The agreement gave clients the option of authorizing Net Pay to transfer funds from their bank accounts into Net Pay’s account and to remit those funds to the clients’ employees, the IRS, and other taxing authorities. At issue were five transfers Net Pay made on behalf of its clients to the IRS, three months before it filed its Chapter 7 petition. The Trustee for Net Pay, Markian Slobodian sought to recover the monies represented by these five payments, arguing that they were avoidable preferential transfers.

The District Court concluded that four of the five transfers were not subject to recovery as preference payments because they were less than the minimum amount established by law ($5,850) under Sec. 547(c)(9). The Trustee argued that the statutory threshold did not apply, as the payments exceed $5,850 in the aggregate. The District Court rejected this argument, reasoning that different transfers can be aggregated only if they are transactionally related to the same debt. Since, the five payments were separate and unrelated transactions in satisfaction of independent antecedent debts to different creditors, the Court held that they could not be aggregated to satisfy the statutory minimum. On appeal, the Third Circuit also affirmed the District Court judgment and held that Sec. 547(c)(9) precludes aggregation of multiple preferential transfers for the benefit of different creditors on distinct debts.

With regard to the fifth payment that exceeded the statutory minimum, the question remained whether it was a “transfer of an interest of the debtor in property.” The Court concluded that the fifth transfer was also not avoidable as a preferential transfer as the funds were withheld from the paychecks of employees of a client for payment of taxes and by statute the Debtor held those funds in trust for the IRS. Thus, the transfer of those funds did not constitute a transfer of an interest of the debtor in property subject to avoidance as a preferential transfer. The Third Circuit affirmed the District Court judgment.