In re Rodriguez
| Decision Date | 20 June 1985 |
| Docket Number | Adv. No. 183-0252.,Bankruptcy No. 181-12566-260 |
| Citation | 50 BR 576 |
| Parties | In re Dr. Rene F. RODRIGUEZ, Debtor. John PEREIRA, As Trustee of the Estate of Dr. Rene F. Rodriguez, Plaintiff, v. UNITED STATES of America, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of New York |
Charles R. Tropp, Staten Island, N.Y., for plaintiff-trustee.
Peter Sklarew, Trial Atty., U.S. Dept. of Justice, Washington, D.C., for U.S.
DECISION AND ORDER
This is an adversary proceeding in which a trustee in bankruptcy seeks to set aside payments made to the United States Internal Revenue Service ("IRS") as preferential transfers.
The debtor, Dr. Rene Rodriguez, filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on August 12, 1981. On May 15, 1983, the trustee commenced this adversary proceeding against the IRS to recover three payments totaling $9,650.85 made to it within the 90 day period preceding the filing, as preferences pursuant to Section 5471 of the Bankruptcy Code.
The payments were made in response to a notice of tax lien filed by the IRS in the Register's Office, Queens County, on May 8, 1981 on account of unpaid employee withholding taxes withheld by the debtor from employee wages for the five tax periods ending 12/31/79, 3/31/80, 6/30/80, 9/30/80 and 12/31/80 totalling $6,086.57 and his employees' federal unemployment taxes for 1978 and 1979 amounting to $778.94 for a total of $6,685.51 plus statutory additions.
On June 11, 1981 the IRS served a notice of levy on the debtor's two checking accounts at Banco de Ponce based upon the foregoing unpaid taxes. A check for $373.70 was issued by the bank on June 12, 1981 to the IRS. It is the first payment at issue and represents the balance in one of the debtor's two checking accounts at that bank. At the time of the levy the debtor's second account at Banco de Ponce showed an overdraft of $5,746.51.
On or about June 17, 1981 the IRS made an agreement with the debtor to release the levy on the bank accounts on condition that the debtor pay $7,391.87 to the IRS on or before June 30, 1981. Apparently, in anticipation of payment the levy was released on June 17, 1981. Shortly thereafter, on July 3, 1981 the bank debited the debtor's second checking account, for the sum of $7,391.87 and forwarded the bank's check for that amount to the IRS. The IRS receipt for the check was dated July 13, 1981. The front of the check stated "Re: Levy/IRS."
On August 6, 1981 the debtor made a third payment of $1,885.28 to the IRS by way of a check drawn on his account at the Pan American National Bank. The back of the check indicated that $1,616.47 of this payment was for withholding taxes for the quarter ending September 30, 1979, a period not included in the notice of lien filed May 8, 1981 or the levy. The check reflected that the remainder was for small balances still due on the tax periods which had been included in the tax lien of May 8, 1981. On August 12, 1981 the May 8, 1981 tax lien was released.
In his schedules, the debtor listed unsecured debts of $185,000 plus several unliquidated malpractice claims against him. Schedule A-1 indicates that over $19,000 of the unsecured debt constitutes priority taxes due and owing. He listed $7,000 due the State of New York based on warrants filed on September 12, 1980 and June 9, 1981. The State filed a priority tax claim for $4,690.68. He also listed $4,579.20 due the City of New York based on warrants filed on July 24, 1981. The City has not filed a claim to date. Also listed was $8,000 due the United States for income and withholding taxes.2 He listed in his petition less than $3,500 in assets consisting solely of exempt property.
At the time the trustee commenced this preference action there was less than $7,000 in the estate based on the recovery of preferential payments. Since then the trustee has had disbursements of $1,694.39, leaving a present balance of approximately $5,300 in the estate. The trustee has pending two more preference cases, besides this one, with a possible ultimate recovery of another $7,000. In addition, the trustee has a fraudulent conveyance action pending against the debtor's wife for property valued at approximately $500,000.
In the present preference action the trustee moved for summary judgment. He asserts that the facts indisputably establish all elements of a preference including the preferential effect enumerated in Section 547(b)(5), namely that the IRS received more than it would have if the payments had not been made and it received a payment according to the order of distribution set forth in the Bankruptcy Code for a Chapter 7 liquidation. He argues that the transfer of monies to the IRS violated the scheme of distribution contemplated by the Bankruptcy Code in a Chapter 7, thus, producing this preferential effect.
The IRS appearing by the United States Attorney opposes the trustee's motion maintaining that there are issues of fact, including the possible recovery of substantial property by the bankruptcy estate, which precludes the trustee from meeting his burden of proof on the Section 547(b)(5) "receive more" issue. The thrust of its argument is that property allegedly fraudulently conveyed to the debtor's wife, if recovered by the estate in a pending action, will so enlarge the bankruptcy estate as to permit not only a 100% distribution to it, but also to all creditors.
In addition, the IRS made a cross-motion for summary judgment in its favor. It contends that the greater portion of each of the three payments was for withholding taxes which are funds held in trust for the United States pursuant to Section 7501(a)3 of the Internal Revenue Code. It argues that the trust fund monies were property of the government, not of the debtor, and therefore, not subject to a preference action. The trustee counters this by asserting that the failure of the debtor to collect and segregate the withholding taxes and the United States' consequent inability to trace a trust res, took the alleged trust fund payments out of 26 U.S.C. § 7501(a) and places them within the reach of 11 U.S.C. § 547.
A. Were payments of withholding taxes by the debtor to the United States Internal Revenue Service within the 90 day period preceding the filing of his petition in bankruptcy property of the debtor subject to recovery by a preference action pursuant to § 547(b)?
B. Did payments made to the Internal Revenue Service within 90 days of bankruptcy provide the IRS with more than what it would have received if the transfers had not been made and it received payment in a Chapter 7 liquidation?
Summary judgment may be awarded in an adversary proceeding under Bankruptcy Rule 7056 which incorporates Rule 56 of the Federal Rules of Civil Procedure. Rule 56 provides that summary judgment will be granted when the moving party shows there is no genuine issue as to any material fact and that it is entitled to judgment as a matter of law. American Mfg. Mut. Ins. Co. v. American Broadcasting Paramount Theatres, Inc., 388 F.2d 272, 279 (2d Cir.1967), cert. denied, 404 U.S. 1063, 92 S.Ct. 737, 30 L.Ed.2d 752 (1972). To sustain such a motion the movant has "the burden of showing the absence of a genuine issue as to any material fact." Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970). "Cross-motions for summary judgment do not warrant the court in granting summary judgment unless one of the moving parties is entitled to judgment as a matter of law upon facts that are not genuinely disputed." 6 J. Moore, Moore's Federal Practice para. 56.13 at 56-341 (2d ed. 1983).
Initially, we will consider the government's cross-motion for summary judgment. We find that the government has met its burden regarding the monies paid to the IRS which represented withholding taxes due. They are trust funds within 26 U.S.C. § 7501(a) and thus not property of the debtor. For the reasons set forth below, we grant summary judgment in favor of the government as to those portions of the payments made that represented withholding taxes which are in the nature of trust funds.
To prevail in a preference action, the trustee must show that a "transfer of property of the debtor" took place.4 The trustee here has not met this burden with regard to those monies paid to the IRS on account of withholding taxes.
Each of the three payments at issue in this proceeding involved taxes reported on Forms 941 which are filed quarterly by employers to report (1) employees' income taxes withheld from wages, (2) employees' FICA (social security) withheld from wages, and (3) the employer's contributions to employees' FICA. The first two categories are internal revenue taxes which the employer is "required to collect or withhold . . . from any other person and pay over" to the United States under § 7501(a) of the Internal Revenue Code.5 That section is a congressional recognition of the character of withheld taxes. Slodov v. United States, 436 U.S. 238, 98 S.Ct. 1778, 56 L.Ed.2d 251 (1978).
The legislative history accompanying § 547 of the Bankruptcy Code supports the position that a person having a duty to withhold taxes is holding the money in trust until it can be turned over to the United States. The House Report on § 547 states:
A payment of withholding taxes constitutes a payment of money held in trust under Internal Revenue Code Section 7501(a), and thus will not be a preference because the beneficiary of the trust, the taxing authority is in a separate class with respect to those taxes, if they have been properly held for payment, as they will have been if the debtor is able to make the payments. (Emphasis added).
H.R. No. 595, 95th Cong., 1st Sess. 373 (1977); reprinted in 1978 U.S.Code Cong., & Ad.News 5787, 5963, 6329.
Moreover, the legislative history accompanying Section 541(a) which delineates...
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