Slobodian v. United States

• Decision Date: 29 June 2015
• Docket Number: Civil Action No. 1:13–CV–2677.
• Citation: 533 B.R. 126
• 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

533 B.R. 126

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.

Civil Action No. 1:13–CV–2677.

United States District Court, M.D. Pennsylvania.

Signed June 29, 2015.

Markian R. Slobodian, Law Offices of Markian R. Slobodian, Harrisburg, PA, for Plaintiff.

Ari D. Kunofsky, U.S. Department of Justice, Washington, DC, for Defendant.

MEMORANDUM

CHRISTOPHER C. CONNER, Chief Judge.

Presently before the court is an adversarial proceeding withdrawn from the United States Bankruptcy Court for the Middle District of Pennsylvania, wherein debtor Net Pay Solutions, Inc., d/b/a Net Pay Payroll Services, (“Net Pay”), through its bankruptcy trustee(“trustee”), seeks to avoid certain purportedly preferential transfers made to the United States of America, specifically the Internal Revenue Service (“IRS”), during the prepetition preference period.The United States and the trustee both moved for summary judgment.(Docs. 24, 29).For the reasons that follow, the court will grant the United States' motion (Doc. 24), deny the trustee's motion (Doc. 29), and enter summary judgment in favor of the United States.

I.Factual Background¹ and Procedural History

The facts undergirding the parties' opposing motions are largely undisputed.On August 2, 2011, Ney Pay filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code.(Doc. 25 ¶ 1;Doc. 30 ¶ 1).Prior to declaring bankruptcy, Net Pay operated as a payroll service provider.(Doc. 25 ¶ 2;Doc. 30 ¶ 2).In that role, Net Pay obtained funds from its customers' bank accounts and turned those funds over to customers' employees as well as the IRS and other taxing authorities.(Doc. 25 ¶ 2;Doc. 30 ¶ 2).Net Pay's relationship with each customer was governed by a payroll services agreement.(Doc. 25 ¶ 3;Doc. 30 ¶ 3).The agreement identifies Net Pay and its customers as “independent contractors” and expressly disclaims “any relationship of employment, agency, joint venture, partnership, or any other fiduciary relationship of any kind.”(Doc. 30 ¶ 3;Doc. 35 ¶ 3).The agreement obligated Net Pay to determine taxes and wages owed by each customer, transfer the necessary funds into Net Pay's operating account, and remit those funds to customers' employees, the United States, and other taxing authorities.(Doc. 25 ¶ 4;Doc. 30 ¶ 4).Net Pay maintained a bank account with Sovereign Bank, N.A., for purposes of making requisite payments.(SeeDoc. 30 ¶ 5;Doc. 35 ¶ 5).

On May 5, 2011, Net Pay made five electronic transfers to the United States in the amounts of $32,297, $5,338, $1,143, $353, and $281 on behalf of customers.(Doc. 25 ¶ 10;Doc. 30 ¶ 8).²Net Pay transferred the amounts as follows: $32,297 on behalf of Altus Capital Partner, Inc.(“Altus”); $5,338 on behalf of Healthcare Systems Connections, Inc.; and $1,143 on behalf of Project Services, LLC.(Doc. 30 ¶¶ 9, 12, 15;Doc. 35 ¶¶ 9, 12, 15³ ).Neither party's statement of facts attributes the $353 and $281 transfers to a customer of Net Pay, nor does either party's brief explain for whose benefit these transfers were made.(See generally Docs. 25, 30).

IRS Revenue Office AdvisorMichael Connelly explained that, per agency policy, payments made to the IRS are applied first to non-trust fund tax obligations.(ConnellyDecl. ¶ 8(Oct. 29, 2014), ECFNo. 24–2).According to the United States, Altus satisfied its non-trust fund obligations before May 5, 2011; thus, the entire $32,297 transferred to the United States on May 5, 2011, was applied to the trust fund portion of Altus's tax obligations.⁴(SeeDoc. 25 ¶ 13).The record is silent with regard to which portion of the customers' employment tax liabilities were satisfied by the four (4) remaining transfers.(See generally Docs. 25, 30).At the time the challenged transfers were made, Net Pay's obligations substantially exceeded its assets.(SeeDoc. 30 ¶ 18;Doc. 35 ¶ 18).Neither party disputes that the value of the transfers to the United States substantially exceeds any distribution Net Pay's customers could receive through their respective bankruptcy claims.(Doc. 30 ¶ 24;Doc. 35 ¶ 24).These five transfers are the subject of the trustee's preferential transfer claim.

On June 24, 2013, Net Pay, through its bankruptcy trustee, commenced the above-captioned adversary proceeding against the United States, through the IRS, seeking recovery of preferential transfers pursuant to 11 U.S.C. § 547(Count I) and fraudulent transfers pursuant to 11 U.S.C. § 548(Count II) and various provisions of Pennsylvania law (Count III).SeeIn re Net Pay, No. 1:13–AP–163, Doc. 1(June 24, 2013).The bankruptcy court thereafter issued an opinion holding that the United States Supreme Court's decision in Stern v. Marshall,––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475(2011) divested bankruptcy courts of authority to enter final judgments on the trustee's fraudulent transfer claims.In re Net Pay Solutions, Inc.,No. 1:13–AP–163, 2013 WL 5550207, at *3(Bankr.M.D.Pa.Oct. 7, 2013).The bankruptcy court also determined that the trustee's preferential transfer claim could not survive Rule 12(b)(6) scrutiny and dismissed Count I with leave to amend.Seeid. at *2.

The trustee thereafter filed an amended complaint contemporaneously with a motion to withdraw the reference of the adversary proceeding.SeeIn re Net Pay,No. 1:13–AP–0163, Docs.17–18.The bankruptcy court transmitted the motion to withdraw to this court, (Doc. 1), and on November 7, 2013, the trustee filed a certificate of concurrence, (Doc. 3), indicating that the United States agreed to withdrawal of the reference.On November 8, 2013, the undersigned issued an order (Doc. 4) granting the trustee's motion and withdrawing the reference of the above-captioned adversary proceeding to the bankruptcy court.

The United States thereafter moved to dismiss the amended adversary complaint, testing the sufficiency of each of the trustee's claims.(SeeDoc. 5).On May 12, 2014, the court issued an opinion and order granting in part and denying in part the United States' motion.SeeSlobodian,2014 WL 2041815.The court first dismissed the trustee's fraudulent transfer claims in Counts II and III, observing that the amended complaint offered nothing more than a “formulaic recitation of the elements” of those claims.Seeid. at *5.Regarding the trustee's preference claim, the court acknowledged the timeliness concerns raised by the United States with regard to the bulk of the contested transactions, but ultimately declined to parse the various transfers.The court concluded instead that the appropriate course was to allow the trustee to develop the record with respect to transfer dates.Id. at *4.Following a period of discovery, the parties filed the instant cross-motions(Docs. 24, 29) for summary judgment.Both motions are fully and timely briefed⁵ and ripe for disposition.

II.Standard of Review

Through summary adjudication, the court may dispose of those claims that do not present a “genuine dispute as to any material fact” and for which a jury trial would be an empty and unnecessary formality.Fed. R. Civ. P. 56(a).The burden of proof tasks the non-moving party to come forth with “affirmative evidence, beyond the allegations of the pleadings,” in support of its right to relief.Pappas v. City of Lebanon,331 F.Supp.2d 311, 315(M.D.Pa.2004);see alsoCelotex Corp. v. Catrett,477 U.S. 317, 322–23, 106 S.Ct. 2548, 91 L.Ed.2d 265(1986).This evidence must be adequate, as a matter of law, to sustain a judgment in favor of the non-moving party on the claims.SeeAnderson v. Liberty Lobby, Inc.,477 U.S. 242, 250–57, 106 S.Ct. 2505, 91 L.Ed.2d 202(1986);Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,475 U.S. 574, 587–89, 106 S.Ct. 1348, 89 L.Ed.2d 538(1986).Only if this threshold is met may the cause of action proceed.Pappas,331 F.Supp.2d at 315.

The court is permitted to resolve cross-motions for summary judgment concurrently.InterBusiness Bank, N.A. v. First Nat'l Bank of Mifflintown,318 F.Supp.2d 230, 235(M.D.Pa.2004);see alsoIrvin v. United Mine Workers of Am. Health & Ret. Funds,No. 2:05–CV–1072, 2007 WL 539646, at *1(W.D.Pa.Feb. 15, 2007); 10A Charles Alan Wright et al., Federal Practice and Procedure 2720 (3d ed. 2014).When doing so, the court is bound to view the evidence in the light most favorable to the non-moving party with respect to each motion.Fed. R. Civ. P. 56;Int'l Raw Materials, Ltd. v. Stauffer Chem. Co.,898 F.2d 946, 949(3d Cir.1990);see alsoStrategic Learning, Inc. v. Wentz,No. 1:05–CV–0467, 2006 WL 3437531, at *4(M.D.Pa.Nov. 29, 2006).

III.Discussion

The trustee seeks to recover the five (5) challenged transfers pursuant to Section 547 of the Bankruptcy Code.Section 547 permits a bankruptcy trustee to recover certain preferential transfers made by a debtor to a creditor in the ninety (90) day period preceding the bankruptcy petition.See11 U.S.C. 547(b).Section 547 is designed “to facilitate ‘the prime bankruptcy policy of equality of distribution among creditors of the debtor.’ ”In re Kiwi Int'l Air Lines, Inc.,344 F.3d 311, 316(3d Cir.2003)(citing2 Collier on Bankruptcy 547.01(15th ed. rev. 2003)).It aims to “prevent preferences of certain creditors” and fairly distribute assets among all of a debtor's creditors, “not merely those that are favored.”Mellon Bank, N.A. v. Metro Commc'ns, Inc.,945 F.2d 635, 641(3d Cir.1991)(citingKapela v. Newman,649 F.2d 887(1st Cir.1981) ).

In order to recover a purportedly preferential transfer, a trustee must demonstrate a “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).A trustee can avoid only those...