United States District Court, M.D. Pennsylvania
MARKIAN SLOBODIAN, as Trustee for the Bankruptcy Estate of Net Pay Solutions, Inc., d/b/a Net Pay Payroll Services, Plaintiff
THE UNITED STATES OF AMERICA, through the Internal Revenue Service, Defendant
For Markian R. Slobodian, Plaintiff: Markian R. Slobodian, LEAD ATTORNEY, Law Offices of Markian R. Slobodian, Harrisburg, PA.
For United States of America Internal, Revenue Service, Defendant: Ari D Kunofsky, LEAD ATTORNEY, U.S. Department of Justice - Tax Division, Washington, DC.
For United States Trustee, Trustee: Anne K. Fiorenza, LEAD ATTORNEY, Office of the United States Trustee, Harrisburg, PA.
Christopher C. Conner, Chief United States District 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Presently before the court is an adversarial proceeding withdrawn from the United States Bankruptcy Court for the Middle District of Pennsylvania, wherein debtor Net Pay Solutions, Inc., d/b/a Net Pay Payroll Services, (" Net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 Background 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. (See Doc. 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). Net 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, 15 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 Advisor Michael Connelly explained that, per agency policy, payments made to the IRS are applied first to non-trust fund tax obligations. (Connelly Decl. ¶ 8 (Oct. 29, 2014), ECF No. 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. (See Doc. 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. (See Doc. 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 ...