In Re: Net Pay Solutions Inc

Net Pay managed clients’ payrolls and handled their employment taxes pursuant to a “Payroll Services Agreement,” which required clients to provide their employee payroll information and gave clients the option of authorizing Net Pay to transfer funds from their bank accounts into Net Pay’s account and to remit those funds to the clients’ employees, the IRS, and other taxing authorities. The Agreement established an independent contractor relationship between Net Pay and its clients. About three months before it filed its Chapter 7 petition, Net Pay transferred $32,297 on behalf of Altus; $5,338 on behalf of HealthCare Systems; $1,143 on behalf of Project Services; $352.84 for an unknown client; and $281.13 for another unknown client. The next day, Net Pay informed its clients that it was ceasing operations. The trustee for Net Pay sought to recover the five payments, arguing that they were avoidable preferential transfers, 11 U.S.C. 547(b). The district court concluded that four of the transfers were not subject to recovery, being below the minimum amount established by law ($5,850), and that distinct transfers may be aggregated only if “‘transactionally related’ to the same debt.” Because the IRS applied the entire $32,297 toward Altus’s trust fund tax obligations, the court held that the payment was not avoidable. The Third Circuit affirmed. Net Pay lacked an equitable interest in the Altus funds by operation of 26 U.S.C. 7501(a). View "In Re: Net Pay Solutions Inc" on Justia Law