824 F.2d 1102 (D.C. Cir. 1987), 86-5285, Drabkin v. District of Columbia

Docket Nº:86-5285, 86-5287.
Citation:824 F.2d 1102
Party Name:Murray DRABKIN v. DISTRICT OF COLUMBIA, Appellant. Murray DRABKIN, Trustee v. DISTRICT OF COLUMBIA, Appellant.
Case Date:July 24, 1987
Court:United States Courts of Appeals, Court of Appeals for the District of Columbia Circuit

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824 F.2d 1102 (D.C. Cir. 1987)




Murray DRABKIN, Trustee



Nos. 86-5285, 86-5287.

United States Court of Appeals, District of Columbia Circuit

July 24, 1987

Argued Feb. 5, 1987.

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Lutz Alexander Prager, Asst. Deputy Corp. Counsel, with whom John H. Suda, Acting Corp. Counsel, Charles L. Reischel, Deputy Corp. Counsel, and Julia L. Sayles, Asst. Corp. Counsel, Washington, D.C., were on the brief for appellant.

Barry J. Dichter, New York City, for appellee.

Before RUTH B. GINSBURG, BUCKLEY and D.H. GINSBURG, Circuit Judges.

D.H. GINSBURG, Circuit Judge:

The liquidation of Auto-Train Corp. (Auto-Train) requires this court once again to address the question of whether a pre-bankruptcy payment by Auto-Train was a voidable preference or, alternatively, was from a trust. See In re Auto-Train Corp., Inc., 810 F.2d 270 (D.C.Cir.1987). The payment here concerns amounts of withheld employee income taxes, paid to the District of Columbia (District) within the 90-day period prior to Auto-Train's filing of a Chapter 11 reorganization petition. The bankruptcy court, summarily affirmed by the district court, held that the payment was a preference, voidable at the instance of the trustee, Murray Drabkin (Trustee), under 11 U.S.C. Sec. 547(b) (1982). 1 In so holding, the bankruptcy court rejected the District's contention that, as a result of D.C.Code Ann. Sec. 47-1812.8(f)(1) (1980), Auto-Train retained the withholding payments in trust for the District, and that therefore the payments were not "estate" property to which the preference and priority rules apply. See 11 U.S.C. Secs. 541, 547(b).

This appeal presents a single question of statutory interpretation, on which the lower courts are divided: whether Congress, in enacting the Bankruptcy Code in 1978, intended the mere fact of payment of funds covered by a statutory trust to be sufficient to exclude the funds from the property of the estate that is subject to distribution. In affirming the district court order, we hold that in such circumstances the fact of payment, without more, does not create a trust for purposes of the Code.


The parties do not dispute the facts as found by the bankruptcy court:

(a) On May 2, 1980, [Auto-Train] issued its check to the District in the amount of $6,606.29 to pay [Auto-Train's] obligations to the District for income tax withholdings for the quarter ended March 31, 1980. This check was dishonored for insufficient funds and was returned to the District unpaid.

(b) In August 1980, [Auto-Train] received a Notice of D.C. Tax Due from the District assessing [Auto-Train] $6,611.29 for unpaid taxes for the quarter ended March 31, 1980, plus a late payment charge of $1,322.26, interest in the amount of $264.45, and a defective check charge (for the "bounced" check) in the amount of $5.00, for a total due of $8,203.00.

(c) In response to the Notice of D.C. Tax Due, [Auto-Train] paid the District the amount demanded in the Notice, $8,203.00, by a cashier's check dated August 27, 1980.

Murray Drabkin, Trustee v. District of Columbia (In re Auto-Train Corp.), No. 82-0380, slip op. at 4-5 (Bankr.D.C. September 17, 1984). Concerning the payment, the bankruptcy court made the following findings, which are also undisputed:

[Auto-Train] did not in fact segregate from its general funds any funds which represented or were derived from any withholdings from employees for District of Columbia income taxes during the period from November 1976 through and including September 8, 1980, the date [Auto-Train] filed its petition in bankruptcy. Nor did [Auto-Train] establish

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or maintain during the same period any special tax or other trust bank accounts into which [Auto-Train] deposited any funds which represented or were derived from withholdings from employees for District of Columbia income taxes. Furthermore, the cashier's check used to pay the District was purchased by [Auto-Train] with a check drawn on an operating account whose sole source of deposits was receipts from the operation of [Auto-Train's] Virginia terminal. Moreover, no employee payroll checks were ever written from this account, and the account was not designated or used as a tax account.

Id., slip op. at 5-6.

On September 8, 1980, well within ninety days of the August 27th withholding tax payment, Auto-Train filed a reorganization petition under Chapter 11 of the Bankruptcy Code, 11 U.S.C. Sec. 1101 et seq. After converting the case to a liquidation under Chapter 7, id. Sec. 701 et seq., the bankruptcy court on May 29, 1981, authorized the Trustee to liquidate Auto-Train and to distribute its assets. On September 10, 1982, the Trustee filed a complaint against the District seeking to recover, as a voidable preference, Auto-Train's August 27th payment to the District. The Trustee and the District filed cross-motions for summary judgment on the preference issue. On September 17, 1984, the bankruptcy court, holding that the payment was a voidable preference, granted summary judgment on behalf of the Trustee and ordered the District to return the payment, with interest. On March 31, 1986, the district court summarily affirmed the bankruptcy court judgment. This appeal followed.


Under the 1978 Bankruptcy Code, liquidated assets comprising the debtor's estate are distributed among unsecured creditors according to the priority scheme established in 11 U.S.C. Sec. 507. 2 Creditors assigned a higher priority recover their claims in full before a lower-priority creditor recovers anything. The "estate" from which distribution is made consists of "all legal or equitable interests of the debtor in property as of the commencement of the case," as well as "[a]ny interest in property that the estate acquires after the commencement of the case." 11 U.S.C. Sec. 541(a)(1), (7). Under 11 U.S.C. Sec. 547(b)-(c), as then in effect, the trustee may "avoid," as "preferential," payments of estate property that were

(1) "for or on account of an antecedent debt owed by the debtor before such transfer was made"; 3

(2) made by the debtor "on or within 90 days before the date of the filing of the petition"; 4

(3) made, or were for a debt incurred, outside the ordinary course of business, 5 or were made "later than 45 days after such debt was incurred"; 6 and

(4) enabled the creditor to receive more than the creditor would have received under the priority rules. 7

A voidable preference can be found only insofar as payment is made from "property of the debtor," 11 U.S.C. Sec. 547(b), which does not include assets held by the debtor in trust for another. Id. Sec. 541(b). 8

According to the parties, we must decide only whether Auto-Train's August 27th payment to the District was of funds held

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in trust for purposes of section 541. 9 If not, then the payment, they agree, constituted a voidable preference under section 547. 10 The District has argued, both here and below, that a section 541 trust in the withheld employee income taxes was created by D.C.Code Ann. Sec. 47-1812.8(f)(1) (1980), which provides that "... [a]ny sum or sums withheld in accordance with the provisions of this section shall be deemed to be, and shall be, held in trust by the employer for the District." As seen in Part VI of this opinion, infra, other questions must be resolved before we reach this one.


In rejecting the District's arguments, the bankruptcy court relied primarily on United States v. Randall, 401 U.S. 513, 91 S.Ct. 991, 28 L.Ed.2d 273 (1971), and case law interpreting it. Randall involved a somewhat different situation from the one before us insofar as it was a pre-Code case in which the Internal Revenue Service (IRS) sought to recover from the debtor, after the commencement of the case, withholding taxes that had accrued after the commencement of the case. (In contrast, the Trustee here seeks to recover back funds that Auto-Train paid to the District prior to the commencement of the case.) Under the Bankruptcy Act, which was then in effect, administrative costs and expenses enjoyed a priority over withheld taxes (as they continue to do so under the 1978 Code). Due to the amount of administrative costs incurred, the IRS could recover the withheld taxes only if it showed that they were held in trust by the debtor for the IRS, thereby excluding them from the "estate" and thus from the Act's priority scheme. Like the District in this case, however, the IRS in Randall could not connect the funds withheld by the debtor to a trust account established for the benefit of the taxing authority. In Randall:

[The debtor] was kept in possession of its business by court order.... The order required it to open three separate bank accounts for its general, payroll, and tax indebtedness and to make appropriate disbursements from those accounts....

The debtor did not comply with those requirements. Although it withheld income and social security taxes from the wages of its employees, it did not deposit them in the special tax account and did not pay them, as required, to the United States.

Id. at 514, 91 S.Ct. at 993.

Unable to show that anything resembling a trust existed in fact, the IRS argued that 26 U.S.C. Sec. 7501(a), which essentially mirrors the provision on which the District here relies, imposed a trust by operation of law:

Whenever any person is required to collect or withhold any internal revenue tax from any other person and to pay over such tax to the United States, the amount of tax so collected or withheld shall be held to be a special fund in trust for the United States.

The Supreme Court rejected the IRS' argument, stating that "the statutory policy of subordinating taxes to costs and expenses of administration would not be served by creating or enforcing trusts which eat up an estate, leaving little or nothing for...

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