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Home / Case News / If Seizure of Funds Qualifies as a Valid Setoff under §553, Then § 547 (b) Does Not Apply

If Seizure of Funds Qualifies as a Valid Setoff under §553, Then § 547 (b) Does Not Apply

June 28, 2018, PennsylvaniaPlaintiff, Neblett, Chapter 7 Trustee for the bankruptcy estate of the Debtor, AEH Trucking LLC brought a lawsuit against Internal Revenue Service (IRS) to avoid and recover the alleged preferential transfers and to seek damages and turnover of the funds.

The Debtor owed certain funds to the IRS for outstanding employment tax liabilities over $731,727.50. IRS recovered that amount from the Debtor on January 29, 2016, and applied them towards the Debtor’s employment taxes obligations for the periods ending June 30, 2013, through June 30, 2014. Subsequently, on February 26, 2016, the IRS received $1,403.86 from the bank which was applied to the Debtor’s tax obligations for the period ending December 31, 2013. Subsequently, the Debtor filed a voluntary Chapter 7 petition on April 15, 2016.

Neblett alleged that the two seizures made by the IRS were made pre-petition during the preference period, and hence they were avoidable under Sec. 547 of the Bankruptcy Code.

IRS first argued that the $1,403.86 collected from the Debtor’s bank account was well below the minimum threshold that is required for a claim under § 547(c)(9). Next, the IRS denied that the cash was for an antecedent debt owed by the IRS before the seizures were made and further argued that the pre-petition transfers constituted setoff of debt owed by United States agencies and such setoffs cannot be avoided as preferential transfers under § 547.

As to the first argument, the Court concluded that the Trustee was not entitled to avoid a transfer of funds from the Debtor’s bank account because there was no dispute that the amount of the transfer was $1,403.86, which was less than the threshold amount for avoidance under § 547(c)(9).

Next, the Court concluded that the Debtors could not utilize § 547 for purposes of recovery of the set-off unless the set-off was not valid.Since the Debtors had not put into issue the validity of the set-off by any factual allegations in their complaint, the Court ruled that there was proper and valid set-off of the Debtors’ 2006 federal income tax refund against the pre-petition indebtedness owed by the Debtors. Finally, as the IRS had undisputedly seized funds and applied them pre-petition to tax liabilities, they were no longer property of the estate and therefore could not be subject to turnover under § 542.

Neblett v. United States (In re AEH Trucking Co., LLC), Nos. Chapter: 7, 1:16-bk-01608-R, 1-17-ap-00042-R, 2018 Bankr. LEXIS 1955 (Bankr. M.D. Pa. June 28, 2018)