Markian Slobodian, for the Bankr. Enet Pay Solutions, Inc. v. United States

• Decision Date: 12 May 2014
• Docket Number: CIVIL NO. 1:13-cv-2677
• Parties: MARKIAN SLOBODIAN, as Trustee for the Bankruptcy Estate of Net Pay Solutions, Inc., d/b/a Net Pay Payroll Services, Plaintiff, v. THE UNITED STATES OF AMERICA, through the Internal Revenue Service, Defendant.
• Court: U.S. District Court — Middle District of Pennsylvania

MARKIAN SLOBODIAN, as Trustee for the Bankruptcy Estateof Net Pay Solutions, Inc., d/b/a Net Pay Payroll Services, Plaintiff, v. THE UNITED STATES OF AMERICA, through the Internal Revenue Service, Defendant.

CIVIL NO. 1:13-cv-2677

UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA

Dated: May 12, 2014

(Chief Judge Conner)

MEMORANDUM

Presently before the court in the above-captioned adversary proceeding is the motion (Doc. 5) of the United States of America ("United States"), proceeding through the Internal Revenue Service ("IRS"), to dismiss the amended complaint (Doc. 8) filed by debtor Net Pay Solutions, Inc., d/b/a Net Pay Payroll Services ("Net Pay") through its trustee, Markian Slobodian("trustee"), which seeks recovery of certain preferential and fraudulent transfers.For the reasons that follow, the court will grant in part and deny in part the trustee's motion.

I.Procedural Background

On or about August 2, 2011, Net Pay filed a voluntary petition (the "Petition") under Chapter 7 of the Bankruptcy Code.In re Net Pay Solutions, Inc., d/b/a Net Pay Payroll Services("In re Net Pay"), No. 1:11-bk-5416, Doc. 1(Aug. 2, 2011).On June 24, 2013, Net Pay, through its trustee, filed the above-captioned adversary proceeding against the United States, through the IRS, seeking recovery of allegedpreferential transfers pursuant to 11 U.S.C. § 547 and alleged fraudulent transfers pursuant to 11 U.S.C. § 548 and various provisions of Pennsylvania law.In re Net Pay, No. 1:13-ap-0163, Doc. 1(June 24, 2013).On July 30, 2013, the IRS moved to dismiss the trustee's complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6).¹The bankruptcy court thereafter issued an opinion and order concluding that the Supreme Court's holding in Stern v. Marshall, 131 S. Ct. 2594, 180 L. Ed. 2d 475(2011) divested bankruptcy courts of the authority to enter final judgments on the trustee's fraudulent transfer claims.Id.Docs. 13-14 (Oct. 7, 2013).The court also concluded that the trustee had failed to state a claim for a preferential transfer under 11 U.S.C. § 547 and dismissed that claim with leave to amend.Id.

On October 28, 2013, the trustee filed an amended complaint in bankruptcy court contemporaneously with a motion to withdraw the reference.Id.Docs. 17-18 (Oct. 28, 2013).The bankruptcy court thereafter transmitted the motion (Doc. 1) to this court.On November 7, 2013, the trustee filed a certificate of concurrence (Doc. 3) indicating that the IRS agreed that withdrawal is appropriate.Consequently, this court issued an order (Doc. 4) on November 8, 2013, granting the motion and withdrawing the reference of the above-captioned adversary proceeding to the bankruptcy court.On November 12, 2013, the IRS moved to dismiss the trustee'samended complaint (Doc. 8) pursuant to Rule 12(b)(6).(Doc. 5).The motion is fully briefed (Docs. 6, 10, 11) and ripe for the court's review.

II.Standard of Review

Federal notice and pleading rules require the complaint to provide "the defendant notice of what the . . . claim is and the grounds upon which it rests."Phillips, 515 F.3d at 232(quotingBell Atl. Corp. v. Twombly, 550 U.S. 544, 555(2007)).To test the sufficiency of the complaint in the face of a Rule 12(b)(6) motion, the court must conduct a three-step inquiry.SeeSantiago v. Warminster Twp., 629 F.3d 121, 130-31(3d Cir.2010).In the first step, "the court must 'tak[e] note of the elements a plaintiff must plead to state a claim.'"Id.(quotingAshcroft v. Iqbal, 556 U.S. 662, 675(2009)).Next, the factual and legal elements of a claim should be separated; well-pleaded facts must be accepted as true, while legal conclusions may be disregarded.Id.;seealsoFowler v. UPMC Shadyside, 578 F.3d 203, 210-11(3d Cir.2009).Once the well-pleaded factual allegations have been isolated, the court must determine whether they are sufficient to show a "plausible claim for relief."Iqbal, 556 U.S. at 679(citingTwombly, 550 U.S. at 556);Twombly, 550 U.S. at 555(requiring plaintiffs to allege facts sufficient to "raise a right to relief above the speculative level").A claim "has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."Iqbal, 556 U.S. at 678.When the complaint fails to present a prima facie case of liability, however, courts should generally grantleave to amend before dismissing a complaint.SeeGrayson v. Mayview State Hosp., 293 F.3d 103, 108(3d Cir.2002);Shane v. Fauver, 213 F.3d 113, 116-17(3d Cir.2000).

III.Material Facts

Prior to August 2, 2011, Net Pay operated a payroll service in Harrisburg, Pennsylvania.(Doc. 8 ¶ 4).Net Pay collected funds from its clients as payment for services, for funding customers' payroll, and for payment of employee withholding obligations, "including . . . trust fund taxes for the benefit of [Net Pay]."(Id.¶ 5).Net Pay deposited all collected funds into a general operating account from which it made payments for the benefit of its customers in addition to its own operating expenses.(Id.¶ 6).In essence, Net Pay commingled all funds and used the same account to make payments on behalf of itself and its customers.(Id.)Net Pay's expenses, paid from the shared account, included both corporate income and other tax obligations.(Id.)The trustee's preferential and fraudulent transfer claims arise from multiple sets of transfers from this account while Net Pay was insolvent.

The preferential transfer claim pertains to transfers made on May 3, 2011, by Net Pay to the IRS, in the amount of $3,000,000 (the "2011 Transfers").(Id.¶ 8).At the time of the 2011 Transfers, Net Pay had not satisfied its own tax obligations with the IRS.(Id.¶ 9).As a result, the trustee asserts that the IRS was a creditor of Net Pay to the extent of Net Pay's tax obligations.(Id.¶ 10).According to the trustee, Net Pay was contractually obligated to its customers to pay the portion of collected funds attributable to the customers' trust fund tax obligations to the IRS.(Id.¶ 12).Because Net Pay failed to make these payments as well, the trusteeposits that its customers were also its creditors at the time of the 2011 Transfers.(Id.¶ 13).The trustee alleges that "a portion" of the 2011 Transfers were paid on its own behalf and not on behalf of its customers.(Id.¶ 11).

The trustee also asserts fraudulent transfer claims under both Pennsylvania law and the Bankruptcy Code.In support of its state law claim, the trustee asserts that on or after August 3, 2007, Net Pay transferred approximately $5,074,712.44 (the "Four Year Transfers") to the IRS.(Id.¶ 23).In support of the § 548 claim, the trustee asserts that on or about August 3, 2009, Net Pay transferred approximately $4,654,220.50 (the "Two Year Transfers") to the IRS.(Id.¶ 41).As with the 2011 Transfers, the trustee alleges that at the time of the Two and Four Year Transfers, some of Net Pay's customers were also its creditors.(Id.¶¶ 25, 43).The trustee alleges that Net Pay made both the Two and Four Year Transfers with intent to and as a part of a scheme to hinder, delay, or defraud some or all of its customers."(Id.¶¶ 26, 44).According to the trustee, Net Pay was insolvent at the time of each of the challenged transfers.(Id.¶¶ 17, 31, 47).

IV.Discussion

Pre-petition transfers of a debtor's property can be avoided under various avoidance doctrines.For example, a trustee or debtor in possession may avoid preferential transfers under 11 U.S.C. § 547 and fraudulent transfers under 11 U.S.C. § 548.Pennsylvania law similarly provides an avenue for avoidance of fraudulent transfers under 12 PA. CONS. STAT. § 5104.Net Pay's trustee, in his adversary complaint, asserts that the transfers made in 2007, 2009, and 2011 wereeither preferential or fraudulent, rendering them violative of and voidable under the Bankruptcy Code and Pennsylvania law.The United States' motion tests the sufficiency of each of these claims.

A.Preferential Transfers

The trustee first seeks to recover the 2011 Transfers from the United States under 11 U.S.C. § 547.Section 547 permits a trustee to avoid "any transfer of an interest of the debtor in property . . . to or for the benefit of a creditor . . . for or on account of an antecedent debt owed by the debtor . . . made while the debtor was insolvent."11 U.S.C. § 547(b)(1)-(3).The statute includes only those transfers made within 90 days after the filing date of the petition, or between 90 days and one year before the filing of the petition if the creditor at the time was an insider, and must have enabled the creditor to receive more than it would have received if the transfer had not been made and the creditor had been paid to the extent provided by Chapter 11. Id.§ 547(b)(4)-(5).

The bankruptcy court, ruling on the IRS's motion in its first iteration, noted the pleading requirements of a preferential transfer claim and observed that the complaint must include "(a) an identification of the nature and amount of each antecedent debt and (b) an identification of each alleged preference transfer by (i) date, (ii) name of the debtor/transferor, (iii) name of transferee, and (iv) the amount of the transfer."In re Net Pay, No. 1:13-ap-0163, Doc. 13at 4(quoting OHC Liquid.Trust v. Credit Suisse First Boston(In re Oakwood Homes Corp.), 340 B.R. 510, 521-22(Bankr. D. Del.2006)).The court reviewed the trustee's complaint and foundthat it failed to state any facts which, accepted as true, would establish a debtor and creditor relationship between Net Pay and the IRS.Id. at 4-5(quoting OHC Liquid.Trust v. Credit Suisse First Boston(In re Oakwood Homes Corp.), 340 B.R. 510, 521-22(Bankr. D. Del.2006)).For that reason, the bankruptcy court dismissed the preference action.The trustee reinstated his preference claim in the amended...