In re Tap, Inc.

• Decision Date: 16 August 1985
• Docket Number: Adv. P. No. 85-0027.,Bankruptcy No. 83-1754-HL
• Citation: 52 BR 271
• Parties: In re TAP, INCORPORATED, Debtor. SHIPLEY COMPANY, INC., Plaintiff, v. Stephen B. DARR, Trustee, Defendant.
• Court: U.S. Bankruptcy Court — District of Massachusetts

52 B.R. 271 (1985)

In re TAP, INCORPORATED, Debtor SHIPLEY COMPANY, INC., Plaintiff, v. Stephen B. DARR, Trustee, Defendant.

Bankruptcy No. 83-1754-HL, Adv. P. No. 85-0027.

United States Bankruptcy Court, D. Massachusetts.

August 16, 1985.

Louis M. Guenin, Boyd, MacCrellish & Wheeler, Boston, Mass., for plaintiff.

William R. Baldiga, Brown, Rudnick, Freed & Gesmer, Boston, Mass., for Stephen B. Darr, trustee of debtor's estate.

MEMORANDA REGARDING CREDITOR'S COMPLAINT FOR RECLAMATION OF FUNDS

HAROLD LAVIEN, Bankruptcy Judge.

This matter was scheduled for trial on May 21, 1985. At that time, the parties stipulated to facts and all the relevant available evidence and the Court set a briefing schedule. After reviewing the stipulated facts and evidence, over a hundred-and forty-five pages of memoranda of counsels, and the applicable law, I make the following findings of fact and rulings of law.

For more than twenty years, the debtor, Tap, Incorporated, conducted a data processing business that provided customers with assistance in the processing of employee payrolls and the determination, reporting, and payment of federal and state payroll withholding taxes. The debtor, by 1983, had over seventy-five customers of which, the plaintiff, Shipley Company, Inc., was one. The typical service rendered to the plaintiff was at weekly intervals. The plaintiff reported to the debtor the number of hours worked by each employee of the plaintiff. With this information, and the employee's rate of compensation or salary already on file, the debtor calculated the amount of federal, state, and local withholding taxes for each employee, deducted the sum thereof from the employee's gross compensation, printed a check for the resultant net compensation to each employee, and delivered the checks to the plaintiff. The debtor would also prepare for the plaintiff's signature the appropriate tax returns for reporting liability for such withholding taxes, and then advise the plaintiff of the aggregate amount of federal, state, and local taxes payable, as well as the fee payable to the debtor for such services for the applicable period. Upon receipt of such tax advice, the plaintiff would remit the total such sum to the debtor in immediately available funds by an interbank transfer from the plaintiff's bank, Shawmut Bank of Boston, N.A., to the debtor's bank, Coolidge Bank and Trust Company of Watertown, Massachusetts (the "Depositary"), for credit to the debtor's checking account No. 168300 (the "Former Account"). The Former Account was registered in the name of the debtor (doing business as "Package Payroll Plan"), without any identification of the Former Account as constituting customer funds. Each remittance by the plaintiff represented three items: a federal tax payment, a state tax payment, and a fee for the debtor's services. All the foregoing steps would be accomplished according to a regular timetable predicated on the customary day of the week (Thursday) for delivery of payroll checks by the plaintiff to its employees. The plaintiff's remittances in accordance with the foregoing procedure were consistently timely and, because they were made by interbank transfer, were received by the debtor in immediately available funds on the day on which the plaintiff initiated the interbank transfer.

The debtor would next deposit funds equal to the amount remitted by the plaintiff for federal taxes with the Depositary. Such deposits were customarily made by the debtor within three days of the date (Thursday of each week) on which the plaintiff delivered its payroll checks to its employees, on the premise that such payment was required by law to be made within such time. (Internal Revenue Service Regulation § 31.6302c-1). This procedure was followed for 21 years. Since three days included a Saturday and Sunday, the funds passed through the debtor's hands almost instantly, as they would have to be transmitted to the Depositary Bank either the same day or the next day, Friday, unless, because of the weekend, payment could be delayed to the next banking day, namely, Monday.

In the case at bar, the plaintiff, on November 22, 1983,¹ remitted, by interbank transfer, the sum of $57,252.65 for credit to the account of the debtor with the Depositary. Of such transfer, $48,351.99 represented federal withholding and FICA taxes by the plaintiff. There were two additional deposits by unrelated customers on November 22, 1983; all three deposits totalled $74,146.52.

On the same day, November 22, the debtor was made aware of an embezzlement by one of its employees. In addition to terminating the employment of such employee, the debtor stopped payment on all outstanding checks drawn on the Former Account, established a new checking account (the "New Account"), and transferred, on November 23, $80,677.80 from the Former Account to the New Account. This transfer consisted of the three deposits (including the $57,252.65) made on November 22 and an unidentifiable balance of $6,531.28 that had existed in the Former Account the morning of November 22.² On November 24,³ an adjustment in the amount transferred was made by returning $7,852.87 — this consisted of the $6,531.28 unidentifiable balance and $1,321.28 for the amount of checks paid on November 22, 1983 that were not returnable. It should be noted that the Former Account, upon the debiting of checks prepared and posted but not paid and later reversed because of the stop-payment order, along with all deposits posted, appeared to have closing balances of -$113,192.57 on November 18, -$247,218.00 on November 21, and -$294,367.81 on November 22. However, on the reversal of these unpaid stop-payment checks, the actual true opening balance on November 22 was $6,531.28.

Despite the requirements of the three-day rule, on November 30, 1983, the debtor prepared and executed a check drawn on the New Account payable to the Depositary in the amount of the tax payment in question ($48,351.99), with the plaintiff's name printed in the upper left. Again, for an unexplained reason and despite the three-day requirement, not until December 5, 1983, was the check deposited, accompanied by federal Form 510, with the Depositary. The balance of the New Account was sufficient for payment of such check; indeed, there had been sufficient funds to cover the amount in question since the inception of the New Account.

The next day, December 6, 1983, the debtor, for no known reason, submitted a stop-payment order to the Depositary on the $48,351.99 check. The Depositary thereupon issued a "Memo of Check Returned," stamped the check in question "DO NOT REDEPOSIT," and credited the New Account with $48,351.99. On December 7, 1983; however, the Depositary remitted and the Federal Reserve Bank received payment of the tax payment. The Depositary made the appropriate charges against the New Account. On December 12, 1983, the debtor withdrew its stop-payment order on the check in question.

On or after December 12, 1985, the Depositary contacted the Federal Reserve Bank by telephone and in writing and requested from the Internal Revenue Service a refund of $48,351.99.⁴ The refund request ascribed the sum to the plaintiff, identified by its taxpayer identification number. At the time of the refund request, no stop-payment order was then in effect. The check had cleared and the debtor's account had been debited. Nevertheless, in requesting the refund, the Depositary, with full knowledge to the contrary, represented that the check was uncollectible. On December 22, 1983, creditors of the debtor filed an Involuntary Petition in Bankruptcy. Throughout its processing of the refund request, the Federal Reserve Bank identified the tax payment with the plaintiff by name and taxpayer identification number. The requested refund was granted by the Internal Revenue Service on January 20, 1984, and remitted to the Depositary. The Depositary then sent to the trustee its Treasurer's Check No. 148614, payable to the debtor, on March 27, 1984. Subsequently, the trustee, at the request of the plaintiff, segregated such funds pending a judicial determination of entitlement thereto. Accordingly, the plaintiff filed a complaint for reclamation of the $48,351.00 tax payment.

For the plaintiff to recover upon Counts 1 and 2 of its complaint, two elements must be proven — one, that a trust or bailment relationship, either express or implied, existed, and, two, that the funds can be traced.

As to the first element, whether a trust relationship exists for the purposes of removing the alleged trust res from the pool of assets available for administration pursuant to the distribution scheme of the Bankruptcy Code, that is determined by reference to state, not federal, law. In re Richmond Children's Center, Inc., 49 B.R. 262, 264-65 (Bankr.S.D.N.Y.1985); Colletti v. Mass. Automatic Transmissions, Inc., 35 B.R. 328 (Bankr.D.Mass.1983). The Massachusetts' cases have consistently held that review of the circumstances are relevant in determining the intent to create a trust — the fact that the word "trust" is not utilized is not determinative because "the existence of trust does not depend upon the terminology used" and may be implied from all of the relevant circumstances. Gordon v. Gordon, 332 Mass. 193, 195, 124 N.E.2d 226 (1955); Herman v. Edington, 331 Mass. 310, 314-15, 118 N.E.2d 865 (1954); Rugo v. Rugo, 325 Mass. 612, 616, 91 N.E.2d 826 (1950); Levy v. Levy, 309 Mass. 486, 489-90, 35 N.E.2d 659 (1941); Sherwin v. Smith, 282 Mass. 306, 311-312, 185 N.E. 17 (1933); Robinson v. Cogswell, 192 Mass. 79, 84, 78 N.E. 389 (1906); Sawyer v. Cook, 188 Mass. 163, 165, 74 N.E. 356 (1905); Packard v. Old Colony Railroad, 168 Mass. 92, 96, 46 N.E. 433 (1897). See also, Restatement (Second); of Trusts, § 24 (1957):

§ 24. Mode of Manifestation of Intention.

(1) Except as otherwise provided by statute, the manifestation of intention to create a trust may be made by

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