Summary
The Ninth Circuit affirmed summary judgment for a bankruptcy trustee, holding that the government's prepetition seizure of the debtor's bank account constituted a potentially avoidable preferential transfer under 11 U.S.C. § 547(b). The court held that the government had to trace the seized funds to withheld taxes in order to establish that they were held in trust under 26 U.S.C. § 7501 and excluded from the bankruptcy estate. Because the government failed to present evidence creating a genuine issue of material fact, the judgment was affirmed.
Topics
Practice areas
Questions Presented
- Whether the government's prepetition seizure of funds from the debtor's general operating account was a transfer of an interest of the debtor in property subject to avoidance under 11 U.S.C. § 547(b).
- Whether the government could invoke the statutory trust created by Internal Revenue Code § 7501 without tracing the seized funds to unpaid withholding taxes.
- Whether the government established a genuine issue of material fact sufficient to defeat the trustee's motion for summary judgment.
Holdings
- The government may assert that funds used or seized to pay withholding taxes were held in trust only when the prepetition payment or levy occurs more than forty-five days after the tax payment was due, and the government must trace the debtor's assets to the unpaid taxes.
- The government failed to establish a genuine issue of material fact because it relied on unsupported allegations and offered no specific evidence that the general business account contained traceable trust funds.
Key quotations
“We adopt Drabkin's view and hold that the government may only assert that the funds used or seized to pay the taxes were held in trust if the pre-petition payments or seizures pursuant to levy occurs, as the seizure did here, more than forty-five days after the due date of the tax payment. As part of the trust analysis, the government is required to trace the debtor's assets to the unpaid taxes.” (887 F.2d at 987)
“This was sufficient to shift the burden to the government to establish an issue of fact as to whether these funds could properly be characterized as trust assets. See Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986); Note, The Movant's Burden in a Motion for Summary Judgment, 1987 Utah L.Rev. 731, 734-35. This the government failed to do.” (887 F.2d at 988)
Factual background
R & T Roofing failed to remit FICA and employee withholding taxes from the last quarter of 1979. After the IRS filed a tax-lien notice, the government seized $18,850.18 from the debtor's general operating account on October 23, 1980, more than forty-five days after the taxes were due. The debtor filed for Chapter 7 bankruptcy on January 9, 1981, within ninety days of the seizure. The government offered no evidence tracing the seized funds to withheld taxes or showing that the general account contained trust assets.
Procedural history
The bankruptcy court denied the government's motion for judgment on the pleadings, required the trustee to amend the complaint to assert a preference claim, and granted the trustee summary judgment. The district court affirmed, rejecting the government's arguments that the seized funds were held in trust under Internal Revenue Code § 7501, that the transfer occurred when the tax lien was filed, and that the levy constituted a nonavoidable statutory lien. The Ninth Circuit reviewed the summary-judgment decision de novo and affirmed.