Connolly v. Asbestos Abatement, Inc. (In re Iley), Case No. 15-23985 EEB

CourtUnited States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Colorado
Writing for the CourtElizabeth E. Brown, Bankruptcy Judge
Citation606 B.R. 871
Parties IN RE: Don Richard ILEY, Debtor. In re: Iley & Associates, Inc., Debtor. Tom H. Connolly, chapter 7 trustee, Plaintiff, v. Asbestos Abatement, Inc., Defendant.
Decision Date17 September 2019
Docket NumberCase No. 15-23986 EEB Jointly Administered Under Case No. 15-23985 EEB,Case No. 15-23985 EEB,Adversary Proceeding No. 17-1519 EEB

606 B.R. 871

IN RE: Don Richard ILEY, Debtor.

In re: Iley & Associates, Inc., Debtor.


Tom H. Connolly, chapter 7 trustee, Plaintiff,
v.
Asbestos Abatement, Inc., Defendant.

Case No. 15-23985 EEB
Case No. 15-23986 EEB Jointly Administered Under Case No. 15-23985 EEB
Adversary Proceeding No. 17-1519 EEB

United States Bankruptcy Court, D. Colorado.

Signed September 17, 2019


606 B.R. 874

Andrew D. Johnson, Gabrielle Palmer, Denver, CO, for Plaintiff.

Thomas J. Carney, Golden, CO, for Defendant.

ORDER GRANTING IN PART MOTION FOR SUMMARY JUDGMENT

Elizabeth E. Brown, Bankruptcy Judge

THIS MATTER comes before the Court on the Motion for Summary Judgment, filed by Defendant Asbestos Abatement, Inc. ("AAI"), and the Trustee's Response. The Trustee has sued the Defendant, a former accounting client of the Debtors, to recover as preferential transfers certain payments the Debtors made to the IRS on AAI's behalf. The question presented is whether the monies transferred were the Debtors' property or rather statutory trust funds held for the benefit of the IRS under 26 U.S.C. § 7501. The Court concludes that, under the particular undisputed facts of this case, some of the funds were trust funds and, as such, the Trustee cannot avoid that portion of the funds under 11 U.S.C. § 547.1

I. BACKGROUND

The basic facts of this case are not in dispute. Don Iley was a certified public accountant who owned and operated Iley & Associates, Inc. ("I & A"), a tax and accounting business. I & A's business included payroll services for many of its clients. It calculated the client's federal employee taxes, prepared each client's IRS Form 941 quarterly tax return, and obtained the payroll tax monies owed by the client by means of an automated deduction from the client's bank account into an I & A bank account, referred to as account number x4136. I & A was then obligated to transmit the tax return and the payroll tax funds directly to the IRS.

In January 2009, Iley began a fraudulent scheme under which he prepared an accurate tax return for each client and

606 B.R. 875

transferred the client's payroll tax funds from the client's bank account into I & A's account x4136. He would transmit a copy of the accurate return to the client along with a letter indicating that I & A had or would pay the taxes and the client need not do anything further. Then he would modify the tax return that he transmitted to the IRS to show that the client had no employees and owed no payroll taxes for the quarter. Iley would then keep the client's tax funds for his own use. Through this scheme, Iley estimated that he stole at least $11 million of the payroll tax funds from more than 140 payroll clients. Iley spent the stolen money on a variety of things, including a luxury home, payments on personal credit cards, college tuition for his children, and other personal investments.

Defendant AAI was a payroll client of I & A from 2013 through 2015. During this period, AAI was a victim of the Debtors' fraudulent scheme—I & A filed false payroll tax returns for AAI and failed to forward the payroll taxes it obtained from AAI to the IRS. Records kept by both I & A and AAI show that for each pay period, I & A would prepare an "ACH Deduction Report" for AAI that listed the amounts I & A would be paying to AAI's employees as wages, and the amounts that it would purportedly be paying to the IRS for "Federal Payroll Tax Liability." See Trustee's Response, Ex. 4. Over the two-year period that AAI was a client of I & A, the ACH Deductions Reports and other records show that I & A deducted a total of $325,705.72 from AAI's bank account, purportedly for the payment of "Federal Payroll Tax Liabilities."2 Although I & A represented to AAI that it paid these amounts to the IRS, it did not in fact do so.

In the fall of 2015, AAI, along with several other of I & A's other payroll clients, found out about the scheme. These clients demanded that Iley rectify the situation and he conceded to those demands. In the six weeks between September 30, 2015 and November 13, 2015, I & A made payments to the complaining clients totaling $1.8 million. The payments were made either directly to those clients or to their principals. For other clients, he made payments totaling $866,000 directly to the IRS on their behalf during the same period. The vast majority of I & A's clients were not so "lucky" and did not learn of the scheme until after all the money was long gone.

When AAI discovered Iley's scheme, it demanded that he make payments to the IRS. Iley complied and caused I & A to issue the eight checks totaling $327,732.18 from account x4136 directly to the IRS (collectively, the "Payments"), along with amended tax returns:

606 B.R. 876
 Date Check No. Payee Amount
                 10/22/15 19335 U.S. Treasury $42,426.73
                 10/22/15 19336 U.S. Treasury $51,408.54
                 10/22/15 23127 U.S. Treasury $41,190.82
                 10/22/15 23128 U.S. Treasury $44,460.38
                 10/22/15 23129 U.S. Treasury $32,000.33
                 10/22/15 23130 U.S. Treasury $40,368.08
                 10/22/15 23131 U.S. Treasury $39,960.86
                 10/22/15 23132 U.S. Treasury $35,917.07
                 Total $327,732.81
                

Two months later, Iley's scheme completely collapsed. In December 2015, the government executed a search warrant on I & A's office, the employees quit, and the business shut down. Creditors filed an involuntary chapter 7 petition against both Debtors on December 28, 2015. On January 21, 2016, the Debtors moved to convert their cases to chapter 11 proceedings. The Orders for Relief entered on January 26, 2016. On May 11, 2016, the Court re-converted these cases to chapter 7 proceedings and the Trustee received his appointment on the same day. At the Trustee's request, the Court granted an unopposed motion to substantively consolidate both chapter 7 estates into the Mr. Iley's case on November 16, 2016. This Order effectively terminated the I & A case, but it expressly provided that the "Trustee's avoidance powers and claims ... are preserved as they existed on the Petition Date, without regard to substantive consolidation." Substantive Consolidation Order, at ¶ 4, In re Iley , No. 15-23985 EEB (Bankr. D. Colo. Nov. 16, 2016), ECF No. 478.

Eventually, Iley pled guilty to wire fraud and aiding in the preparation of false tax returns. He received a sentence of twelve and one-half years of incarceration, followed by three years of supervised release.

In this case, the Trustee seeks to recover the Payments as preferential transfers under 11 U.S.C. § 547. AAI's Motion for Summary Judgment argues that the Trustee has failed to establish all the required elements of that claim. In particular, AAI claims that the Trustee cannot establish that Payments were property of the Debtors because those funds were allegedly held in trust for the IRS pursuant to 26 U.S.C. § 7501.

II. APPLICABLE STANDARD

Federal Rule of Civil Procedure 56(c), made applicable to this proceeding by Fed. R. Bankr. P. 7056, provides that a court

606 B.R. 877

may award summary judgment only when there is no material issue of fact to be tried, and the movant is entitled to judgment as a matter of law. Celotex Corp. v. Catrett , 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In applying this standard, this Court examines the factual record and reasonable inferences therefrom in the light most favorable to the party opposing summary judgment. Schwartz v. Bhd. of Maint. of Way Employees , 264 F.3d 1181, 1183 (10th Cir. 2001). The movant bears the burden of showing that no genuine issue of material fact exists. Sports Unlimited, Inc. v. Lankford Enter., Inc. , 275 F.3d 996, 999 (10th Cir. 2002). If the moving party makes a prima facie case, the burden then shifts to the non-moving party to set forth specific facts demonstrated by evidence, "from which a rational trier of fact" could find in its favor. Whitesel v. Sengenberger , 222 F.3d 861, 866 (10th Cir. 2000).

When the movant will not bear the burden of persuasion at trial, it need not negate the nonmovant's claim, but may meet its burden by "pointing out to the court a lack of evidence for the nonmovant on an essential element of the nonmovant's claim." Adler v. Wal-Mart Stores , 144 F.3d 664, 671 (10th Cir. 1998). If the movant meets this initial burden, the nonmovant must "go beyond the pleadings" and "set forth specific facts" that would be admissible in evidence in the event of trial from which a rational trier of fact could find for the nonmovant." Id.

III. DISCUSSION

To establish a prima facie case for an avoidable preference under § 547(b), the Trustee must show that the transfer at issue: "(1) is of an interest of the debtor in property; (2) is for the benefit of a creditor; (3) is made for or on account of an antecedent debt owed by the debtor before the transfer was made; (4) is made while the debtor is insolvent; (5) is made on or within ninety days before the date the bankruptcy petition was filed; and (6) allows the creditor to receive more than the creditor would otherwise be entitled to receive from the bankruptcy estate." Bailey v. Big Sky Motors, ltd. (In re Ogden) , 314 F.3d 1190,...

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2 practice notes
  • Marcus v. Horton (In re Horton), Case No. 19-11162-t7
    • United States
    • United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of New Mexico
    • June 26, 2020
    ...Services, Inc. ), 268 B.R. 579, 601 n.33 (Bankr. N.D. Okla. 2001) ; In re Mayer , 451 B.R. 702, 713 (E.D. Mich. 2011) ; In re Iley , 606 B.R. 871, 885 (Bankr. D. Colo. 2019) ; In re Mitchell , 548 B.R. 862, 881 n.27 (Bankr. M.D. Ga. 2016) ; In re Kamand Constr., Inc. , 298 B.R. 251, 255 (Ba......
  • Ja, LLC v. Sarria (In re Sarria), Bankruptcy Case No. 18-00572-JMM
    • United States
    • United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Idaho
    • September 20, 2019
    ...Without more, this conclusory allegation is not sufficient to persuade the Court that Plaintiff "unreasonably and vexatiously" increased 606 B.R. 871 the costs in this case. Defendant did not describe with any specificity which costs in this case were excessive or unreasonable and why they ......
2 cases
  • Marcus v. Horton (In re Horton), Case No. 19-11162-t7
    • United States
    • United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of New Mexico
    • June 26, 2020
    ...Services, Inc. ), 268 B.R. 579, 601 n.33 (Bankr. N.D. Okla. 2001) ; In re Mayer , 451 B.R. 702, 713 (E.D. Mich. 2011) ; In re Iley , 606 B.R. 871, 885 (Bankr. D. Colo. 2019) ; In re Mitchell , 548 B.R. 862, 881 n.27 (Bankr. M.D. Ga. 2016) ; In re Kamand Constr., Inc. , 298 B.R. 251, 255 (Ba......
  • Ja, LLC v. Sarria (In re Sarria), Bankruptcy Case No. 18-00572-JMM
    • United States
    • United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Idaho
    • September 20, 2019
    ...Without more, this conclusory allegation is not sufficient to persuade the Court that Plaintiff "unreasonably and vexatiously" increased 606 B.R. 871 the costs in this case. Defendant did not describe with any specificity which costs in this case were excessive or unreasonable and why they ......

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