In re Malmart Mortg. Co., Inc.

• Decision Date: 15 December 1989
• Docket Number: Adv. No. 88-1359-CJK.,Bankruptcy No. 87-11681-CJK
• Citation: 109 BR 1
• Parties: In re MALMART MORTGAGE CO., INC., Debtor. Harry GRAHAM, Trustee for Malmart Mortgage Co., Inc., Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. Bankruptcy Court — District of Massachusetts

109 B.R. 1 (1989)

In re MALMART MORTGAGE CO., INC., Debtor.

Harry GRAHAM, Trustee for Malmart Mortgage Co., Inc., Plaintiff, v. UNITED STATES of America, Defendant.

Bankruptcy No. 87-11681-CJK, Adv. No. 88-1359-CJK.

United States Bankruptcy Court, D. Massachusetts.

December 15, 1989.

Robert O. Resnick, Boston, Mass., for trustee.

Merrell Green, Wayne Budd, U.S. Atty. for the Dist. of Massachusetts, Boston, Mass., for United States.

MEMORANDUM OF DECISION ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

CAROL J. KENNER, Bankruptcy Judge.

The plaintiff brings this adversary proceeding pursuant to 11 U.S.C. § 547(b) to recover two withholding-tax payments, which the plaintiff alleges were preferential transfers, made by Malmart Mortgage Company, Inc. ("Malmart" or "the Debtor") to the Internal Revenue Service less than ninety days before Malmart filed its petition under Chapter 11 of the Bankruptcy Code. The United States answers with two defenses: the funds transferred were not property of the bankruptcy estate, and the United States' sovereign immunity bars this suit. The matter is now before the Court on the plaintiff's motion for summary judgment. The motion requires that the Court determine whether the transferred funds, which were derived from Malmart's general operating and payroll accounts, not from a segregated account containing only withheld federal income taxes, were "property of the debtor", as § 547(b) requires, in spite of 26 U.S.C. § 7501(a)'s dictate that "the amount of tax so withheld shall be held to be a special fund in trust for the United States." The Court concludes that the funds were property of the Debtor and that judgment should enter for the plaintiff as a matter of law.

Statement of the Facts

On a motion for summary judgment, "the judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." F.R.Civ.P. 56(c). The evidence before the Court on this motion consists of the admissions in the defendant's answer to certain allegations in the plaintiff's complaint; the affidavits of Robbin D. Gargiulo, Robert Owen Resnick and Harry G. Graham, filed February 22, 1989; the Second Affidavit of Robbin Gargiulo, filed March 20, 1989¹; the defendant's stipulations in its Proposed Pre-Trial Stipulation of Facts, filed March 30, 1989; and the Proofs of Claim filed by the Internal Revenue Service on behalf of the United States in the Malmart Mortgage Company bankruptcy case.

The evidence shows that the following facts are undisputed. Within ninety days before October 29, 1987, the date on which the Debtor filed its petition under Chapter 11 of the Bankruptcy Code, the Debtor made two $100,000.00 payments to the Internal Revenue Service ("I.R.S."). The first was made on September 15, 1987, by a check (# 3281) drawn on the Debtor's Payroll and Tax Account. The Second was made on October 14 or 15, 1985, by another check (# 3283) drawn on the same account. Both checks were duly honored. By agreement with the Debtor, the I.R.S. applied the payments primarily to the Debtor's withholding tax liabilities for the fourth quarter of 1985 and the first and second quarters of 1986. The remainder, $1,318.73, was applied to satisfy the Debtor's tax arrearages for 1985 under the Federal Unemployment Tax Act.

Malmart's Payroll and Tax Account was not established exclusively for tax payments to the I.R.S. Rather, it was used to pay wages for all Malmart's employees and to pay all local, state, and federal taxes. The specific funds that were used to make the two disputed payments to the I.R.S. were taken almost entirely from Malmart's Receipts Clearing Account. That is, at the start of business on September 15, 1987, Malmart's Payroll and Tax Account contained only $5,586.84. Later that day, Malmart transferred $100,000.00 from its Receipts Clearing Account to its Payroll and Tax Account, and then paid the first $100,000.00 to the I.R.S., thus returning the Payroll and Tax Account's balance to $5,586.84. Likewise, at the start of business on October 15, 1987, the Payroll and Tax Account contained only $7,138.63. Later that day, Malmart transferred $100,000.00 from its Receipts Clearing Account to the Payroll and Tax Account and then paid the second $100,000.00 to the I.R.S., thus returning the balance of the Payroll and Tax Account to $7,138.63.

The Receipts Clearing Account was an account in which Malmart deposited mortgage payments it received from mortgagors. It contained funds to be transferred to investor banks pursuant to Malmart's loan portfolios. It also contained deposits of profits realized by Malmart for the servicing of its mortgage portfolios.

The I.R.S., on behalf of the United States, has filed at least two Proofs of Claim in the Malmart bankruptcy case. The first, filed January 25, 1988, asserts an unsecured priority claim under 11 U.S.C. § 507(a)(7) for $693,510.52, most of which is for withholding taxes due from the second quarter of 1986 through the third quarter of 1987. The remainder ($3,209.62 in taxes due and $280.22 in interest) is a claim for federal unemployment taxes. The second Proof of Claim, filed February 21, 1989, after the case had been converted to a case under Chapter 7 of the Bankruptcy Code, asserts an unsecured priority claim under § 507(a)(7) for $643,862.19, but does not itemize the claim.

Plaintiff Harry Graham has himself submitted an affidavit that indicates that the bankruptcy estate's bank account contains approximately $650,000.00, but that the administrative claims that have been filed against the estate total approximately two million dollars.

Sovereign Immunity

The United States asserts that the Court lacks jurisdiction over this adversary proceeding because the United States has not waived its sovereign immunity. The Trustee contends that 11 U.S.C. § 106(c) itself constitutes a waiver of sovereign immunity with respect to preference actions brought under § 547; and in the alternative, he contends that pursuant to 11 U.S.C. § 106(a), the United States has waived its immunity to suit by filing a proof of claim against the estate. The Court agrees with the latter argument and so need not rule on the former.

Subsection 106(a) provides:

A governmental unit is deemed to have waived sovereign immunity with respect to any claim against such governmental unit that is property of the estate and that arose out of the same transaction or occurrence out of which such governmental unit\'s claim arose.

This subsection is a waiver of the United States' sovereign immunity with respect to certain claims against the United States. It applies when three requirements are satisfied: (1) the claim against the United States must be property of the estate; (2) the United States must have filed a claim against the estate; and (3) the claim against the United States must arise out of the same transaction or occurrence out of which the United States' claim arises.

Each of these requirements is satisfied here. First, the preference claim the Trustee is bringing against the United States belongs to the estate and is being brought for the estate's benefit. Second, the United States has filed a claim against the estate. And third, the Trustee's and the United States' claims arise from the same transaction or occurrence: both arise from Malmart's failure to make timely payments of withheld income taxes, withheld F.I.C.A. taxes, and unemployment taxes. The United States seeks payment of the remaining tax arrearages. The Trustee seeks to recoup payments already made on account of those arrearages, claiming that they enabled the United States to receive more than it would have received in a distribution under Chapter 7 of the Bankruptcy Code if the payments had not been made. See 11 U.S.C. § 547(b)(5). The United States' and Trustee's claims thus "arose out of the same transaction or occurrence." See WJM, Inc. v. Massachusetts Department of Public Welfare, 840 F.2d 996, 1005 (1st Cir.1988) (which defines "transaction" as it is used in 11 U.S.C. § 106(a) as including a series or course of interrelated dealings). Therefore, by filing its proofs of claim, the United States is deemed to have waived its sovereign immunity with respect to the Trustee's preference claim.

Preferential Transfer

The Trustee seeks to avoid the payments to the I.R.S. by invoking his power under 11 U.S.C. § 547(b), which states (in relevant part):

The trustee may avoid any transfer of an interest of the debtor in property —

(1) to or for the benefit of a creditor;

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

(3) made while the debtor was insolvent;

(4) made —

(A) on or within 90 days before the date of the filing of the petition; . . . and

(5) that enables such creditor to receive more then such creditor would receive if —

(A) the case were a case under Chapter 7 of this title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the extent provided by the provisions of this title.

11 U.S.C. § 547(b). The parties have no dispute regarding parts (1) through (4) of this subsection. The uncontradicted evidence shows that the United States was a creditor of Malmart, that the payments were made to and for the benefit of the United States, that they were made on an antecedent debt, and that they were made within ninety days before the filing of the petition. The United States does not concede that the transfers were made while the Debtor was insolvent, but neither has it submitted evidence tending to prove otherwise. Therefore, pursuant to the presumption created by 11 U.S.C. § 547(f),² the Debtor is deemed to have been insolvent when these transfers were made. The United States puts the plaintiff to...