D.H. GINSBURG, Circuit Judge:
The liquidation of Auto-Train Corp. (Auto-Train) requires this court once again to address the question of whether a pre-bankruptcy payment by Auto-Train was a voidable preference or, alternatively, was from a trust. See In re Auto-Train Corp., Inc., 810 F.2d 270 (D.C.Cir.1987). The payment here concerns amounts of withheld employee income taxes, paid to the District of Columbia (District) within the 90-day period prior to Auto-Train's filing of a Chapter 11 reorganization petition. The bankruptcy court, summarily affirmed by the district court, held that the payment was a preference, voidable at the instance of the trustee, Murray Drabkin (Trustee), under 11 U.S.C. § 547(b) (1982).
This appeal presents a single question of statutory interpretation, on which the lower courts are divided: whether Congress, in enacting the Bankruptcy Code in 1978, intended the mere fact of payment of funds covered by a statutory trust to be sufficient to exclude the funds from the property of the estate that is subject to distribution. In affirming the district court order, we hold that in such circumstances the fact of payment, without more, does not create a trust for purposes of the Code.
The parties do not dispute the facts as found by the bankruptcy court:
Murray Drabkin, Trustee v. District of Columbia (In re Auto-Train Corp.), No. 82-0380, slip op. at 4-5 (Bankr.D.C. September 17, 1984). Concerning the payment, the bankruptcy court made the following findings, which are also undisputed:
Id., slip op. at 5-6.
On September 8, 1980, well within ninety days of the August 27th withholding tax payment, Auto-Train filed a reorganization petition under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq. After converting the case to a liquidation under Chapter 7, id. § 701 et seq., the bankruptcy court on May 29, 1981, authorized the Trustee to liquidate Auto-Train and to distribute its assets. On September 10, 1982, the Trustee filed a complaint against the District seeking to recover, as a voidable preference, Auto-Train's August 27th payment to the District. The Trustee and the District filed cross-motions for summary judgment on the preference issue. On September 17, 1984, the bankruptcy court, holding that the payment was a voidable preference, granted summary judgment on behalf of the Trustee and ordered the District to return the payment, with interest. On March 31, 1986, the district court summarily affirmed the bankruptcy court judgment. This appeal followed.
Under the 1978 Bankruptcy Code, liquidated assets comprising the debtor's estate are distributed among unsecured creditors according to the priority scheme established in 11 U.S.C. § 507.
A voidable preference can be found only insofar as payment is made from "property of the debtor," 11 U.S.C. § 547(b), which does not include assets held by the debtor in trust for another. Id. § 541(b).
According to the parties, we must decide only whether Auto-Train's August 27th payment to the District was of funds held
In rejecting the District's arguments, the bankruptcy court relied primarily on United States v. Randall, 401 U.S. 513, 91 S.Ct. 991, 28 L.Ed.2d 273 (1971), and case law interpreting it. Randall involved a somewhat different situation from the one before us insofar as it was a pre-Code case in which the Internal Revenue Service (IRS) sought to recover from the debtor, after the commencement of the case, withholding taxes that had accrued after the commencement of the case. (In contrast, the Trustee here seeks to recover back funds that Auto-Train paid to the District prior to the commencement of the case.) Under the Bankruptcy Act, which was then in effect, administrative costs and expenses enjoyed a priority over withheld taxes (as they continue to do so under the 1978 Code). Due to the amount of administrative costs incurred, the IRS could recover the withheld taxes only if it showed that they were held in trust by the debtor for the IRS, thereby excluding them from the "estate" and thus from the Act's priority scheme. Like the District in this case, however, the IRS in Randall could not connect the funds withheld by the debtor to a trust account established for the benefit of the taxing authority. In Randall:
Id. at 514, 91 S.Ct. at 993.
Unable to show that anything resembling a trust existed in fact, the IRS argued that 26 U.S.C. § 7501(a), which essentially mirrors the provision on which the District here relies, imposed a trust by operation of law:
The Supreme Court rejected the IRS' argument, stating that "the statutory policy of subordinating taxes to costs and expenses of administration would not be served by creating or enforcing trusts which eat up an estate, leaving little or nothing for creditors and court officers whose goods and services created those assets." Id. at 517, 91 S.Ct. at 994. Lower courts subsequently interpreted Randall to preclude the recognition of trusts when, due to commingling, the funds allegedly withheld for payment could not be traced to the debtor
In the case before us, Auto-Train's August 27th payment to the District was made with a cashier's check that it purchased with funds drawn from an account unrelated to employee wages or income withholding. Therefore, relying primarily on cases that denied trusts when commingling prevented tracing, the bankruptcy court held that the August 27th payment was not traceable to a section 541 trust held by Auto-Train on behalf of the District. In so holding, the court rejected the District's argument that — as the court phrased it — "[Auto-Train's] purchase of a cashier's check in and of itself constituted a segregation of funds sufficient to establish a trust fund,"
On appeal, the District reiterates its argument rejected below, but it does not contend that the bankruptcy court misinterpreted Randall or the cases interpreting it. Instead, as both the District and the Trustee acknowledge, Congress in enacting the 1978 Bankruptcy Code relaxed the tracing requirement as previously applied by courts interpreting Randall, in order to ease the burden of showing that a trust has been created. The District and the Trustee dispute, however, and we must determine, the precise extent to which Congress relaxed that requirement. The parties do not rely on the Code itself, which simply does not address the issue of tracing. Instead, like the courts that have considered the matter, each relies on the legislative history of the Code, in which the Congress specifically addressed Randall and the question of how pre-petition tax payments should be treated. In particular, each party couches its argument in terms of how the Code differs from the original House and Senate bills, as well as on specific language found in the commentary concerning each successive draft of the legislation. Because of its complexity, and its centrality to this case, we review the legislative history at some length before turning to the prior court decisions and the arguments of the District and the Trustee.
Sections 541 and 547 of the Code reflect a compromise between the Senate and House bills. Section 541(a)(1) of the House bill (H.R. 8200) which passed first, defined estate property as "all legal or equitable interests of the debtor in property as of the commencement of the case," which under section 541(a)(3) included "any interest in property that the trustee recovers" as a voidable preference. Section 547(b)(2) of the bill provided a general rule making voidable any transfer "for or on account of an antecedent debt owed by the debtor before such transfer was made." Section 547(c) stated an exception for debts both
Thus, the House bill afforded no special treatment to either withheld taxes or to pre-petition tax payments, but as the accompanying House Report
Second, the Report's commentary on the section 547 preference rules indicated that some pre-petition payments of withheld taxes would not be recoverable by the trustee as voidable preferences:
Because the Senate bill incorporated many of the same provisions found in the House bill, the Senate Report
Senate and House floor managers then agreed upon compromise amendments to the Senate bill. In relevant part, the managers adopted the House versions of sections 541 and 547, rejecting the alternative language in the Senate bill. The managers also added section 547(a)(4), which stated that "a debt for a tax is incurred on the day when such tax is last payable, including any extension, without penalty." A joint explanatory statement of the compromise bill, given by Senator DeConcini and Representative Edwards respectively on the Senate and House floors, provides in relevant part:
Although nearly a decade has passed since the Code was enacted in 1978, only six courts have addressed the pre-petition tax payment situation before us.
The court in Razorback first distinguished Randall and In re Rohar
45 B.R. at 922 (emphasis in original). Citing Razorback as support, the court in Rodriguez reached a similar conclusion. As in Razorback, the Rodriguez court quoted the House Report (emphasizing the phrase — "as they will have been if the debtor is able to make the payments") and distinguished Randall as involving a post-petition attempt to reach assets still held by the debtor.
In holding that the mere fact of pre-petition payment does not create a section 541 trust, Olympic Foundry emphasized different passages from the legislative history, and it explicitly rejected the Razorback and Rodriguez cases.
Id. at 329.
Although, the court in Olympic Foundry reached a result contrary to those in Razorback and Rodriguez, a fundamental consensus emerges from this disagreement.
In analyzing the legislative history, it is important to keep in mind that the District and the Trustee view the dispute as involving whether the August 27th payment by Auto-Train to the District was from property of the debtor's estate or, alternatively, was from funds held in trust. If the former, then the Trustee argues the payment is recoverable as a preference; if the latter, then the District argues it is entitled to retain the payment. This question of whether the payment was of estate property or of trust funds requires a determination of the extent to which Congress, in enacting section 541 of the Code (which defines the property of the estate), intended to ease the tracing burden imposed by Randall.
Approaching the House Report from this perspective, the Trustee, like the court in Olympic Foundry, contends that the initial phrase in the House Report — "if they have been properly held for payment" — preserves a strict tracing requirement, while the District, like the courts in Razorback and Rodriguez, argues that the succeeding phrase — "as they will have been if the debtor is able to make the payments" — means that the mere act of payment creates a trust on behalf of the creditor. Our inspection of the House Report, however, indicates that neither position is correct. If the House intended this passage to provide criteria for determining when property is considered within a debtor's estate and when it is held in trust, we would expect to find the passage in its commentary on section 541, which defines what property is included within the debtor's estate; instead we find in the section 541 commentary only the rather unremarkable statement that "[t]his section will not affect various statutory provisions ... that create a trust fund for the benefit of a creditor of the debtor." Nothing in this passage addresses the subject of tracing requirements even indirectly.
The parties and the courts have instead sought guidance from another passage in the Report, found not in the commentary on what is property of the estate under section 541, but rather on what qualifies as a section 547 preference and, in particular, as an antecedent debt under section 547(b). Yet, under the scheme embodied in the Code, one reaches the question of whether a payment is for an antecedent debt only after having concluded that funds were property of the estate at the time of payment. If the funds in question were trust funds, their pre-petition payment can never be a voidable preference because they are not property of the debtor's estate.
The fact that the much contested passage arises in a discussion of the section 547 preference rules strongly suggests (1) that the House did not intend it to illuminate what constitutes a trust under section 541, and (2) that pre-petition payments of withheld taxes might qualify as voidable preferences, at least under certain circumstances. This preliminary conclusion is confirmed when we turn to the passage in the section 547(c) commentary that relates to tax payments. After discussing section
It is therefore clear that, contrary to the District's contention, the House Report contemplated that at least in some circumstances pre-petition tax payment could be recoverable as a voidable preference.
At this point, we can also discern what the Report meant when it stated that "[a] payment of withholding taxes ... will not be a preference ... if [the taxes] have been properly held for payment, as they will have been if the debtor is able to make the payment." As we have just seen, the House bill subjected at least some tax payments to the preference rules of section 547(b)-(c). Under these provisions, the Report indicates in its discussion of section 547(c), the time when a tax payment is made is crucial for determining whether the payment is voidable (as it is for payments of other types of debt). With respect to section 547(c) of the bill, the Report states that if taxes are paid within 45 days after "they are due, either originally or under an extension," and if the other "ordinary course of business" criteria are satisfied, the tax payments are excluded from treatment as a preference. The Report's discussion of section 547(c) also states that tax payments are not recoverable if they are paid "when they are due, either originally or under an extension." Although this language occurs within the Report's commentary on section 547(c), it actually refers to the "antecedent debt" rule of section 547(b). We can readily infer this from inspecting the much contested commentary on section 547(b), in which this exact point is made explicitly with respect to estimated tax payments:
This passage immediately precedes the discussion of withholding taxes at dispute here, and we conclude that they address the same situation. Consequently, a payment of withheld taxes is not for an "antecedent debt," and is therefore not a voidable preference, if, as in the case of an estimated tax payment, the debtor makes this payment "when no tax is due" (i.e., before the penalty period begins to run).
Whereas the House Report hypothesized a situation in which "no tax is due when the payments are made," Auto-Train's August 27th payment was made months after the taxes had become due, as were the disputed payments in Razorback, Rodriguez, and Olympic Foundry. The House Report is therefore inapposite to the issue before us. Because the Report does not address the situation in which tax payments are past due, it offers no evidence for the District's position (and that of the courts in Razorback and Rodriguez) that
Although the original House bill served as the basis for the Code provisions relevant here, its final version was crucially influenced by the Senate bill. The District directs our attention to section 541(b)(3) of that bill, which would have excluded from estate property "taxes withheld or collected from others ... before the commencement of the case required to be paid to a governmental unit." According to the joint explanatory statement that accompanied the compromise legislation, this provision was not included in the Code because it was "unnecessary." The District appears to construe this comment as evidence that existing law already rendered prepetition tax payments as a rule unrecoverable by the trustee. This is an erroneous reading of these comments. Instead, as the joint statement explained, the Senate provision was "unnecessary" because, under section 541(b), "property of the estate does not include the beneficial interest in property held by the debtor as a trustee." In other words, because withheld taxes that are indisputably held in trust fall within the general rule excluding trusts from property of the estate, as the House and Senate Reports acknowledged, it was "unnecessary" to state so specifically, which is all the Senate provision would have done.
The question that we must decide is not that addressed by the Senate's version of section 541(b)(3) — whether "withheld or collected taxes" that are concededly "held in trust" constitute property of the estate; the undisputed answer is that they do not. Rather, we must decide the antecedent question, viz., in which circumstances may we conclude that withheld taxes have been "held in trust." (In this case, were withheld taxes "held in trust" by the mere fact of their pre-petition payment to the District?)
The Senate provision referred to, section 547(b)(2), stated that:
One can immediately see how the Senate's provision conflicted with the original House version. Whereas the House bill would have excluded from the category of "antecedent debt" only tax payments that are made when "no tax is due" (as the House Report indicated), the Senate bill would have excluded from the reach of the voidable preference rules all pre-petition tax payments, regardless of their timeliness (i.e., in spite of the fact that they may be for an antecedent debt). The Senate bill therefore would have achieved the result sought by the District, i.e., no recovery by the trustee of pre-petition tax payments, although by a different statutory route. Under the reasoning of the District and the Senate, whether the payments are for an antecedent debt is irrelevant; for the District, because the payments are made from trust assets, and thus not made from property of the estate; for the Senate, because the trustee's power to avoidance is limited apparently regardless of whether the funds are trust assets.
In drafting the final version of the Code, the Senate and House floor managers rejected the Senate rule. Under the Code, tax payments are not voidable as a preference if they are made "not later than 45 days after such debt was incurred," section 547(c)(2)(B), a tax debt being "incurred on the day when such tax is last payable, including any extension, without penalty," section 547(a)(4). If the tax payment is made before that 45-day period expires, the trustee may not recover it, regardless of whether it is traceable to a trust account; the fact of payment is enough to preclude recovery by the trustee. If the Auto-Train tax payment had been made within 45 days after the penalty period began, then the Trustee could not recover the payment. As it is, the August 27th payment occurred over three months after the initial penalty date.
When the payment occurs after that 45-day period, as here, it qualifies as a voidable preference under section 547(b)-(c) unless the funds used are traceable to a trust and therefore are excluded from the debtor's estate under section 541. We must therefore determine what tracing rule Congress intended courts to apply to pre-petition payments occurring after the 45-day period. The most obvious alternatives would be either the strict tracing rule imposed by pre-Code cases or the "reasonable assumptions" described by the joint explanatory statement with regard to post-petition creditors claims.
We believe that the "reasonable assumptions" rule should govern. First, the 90-day preferential payment rule inherently
We must therefore decide whether it is a "reasonable assumption" to "conclusively presume that the funds used for payment necessarily are endowed with trust character." Olympic Foundry, 63 B.R. at 329. The joint explanatory statement's sole example of a "reasonable assumption" involved commingled accounts. While this example should not be interpreted as exclusive, it certainly does not compel us to accept the District's position. In contrast to the commingled account situation, the funds used by Auto-Train for the August 27th payment had no prior relationship whatsoever to withheld tax funds or to employee wages. Any "assumption" that would enable the District to trace the August 27th payment to the taxes withheld must therefore be considerably more farreaching and presumably less "reasonable" than that required in order to trace a payment to funds held in a commingled account.
That the "assumption" espoused by the District is not "reasonable" but indeed heroic becomes obvious when we consider the 45-day rule. If Congress had intended the mere fact of pre-petition payment to be a "reasonable assumption" in the tax context, it could have simply enacted the Senate's version of section 547(b)(2), because that provision would have achieved the same result of entitling a taxing authority to retain all pre-petition payments. Congress,
For the reasons discussed above, the judgment is
RUTH B. GINSBURG, Circuit Judge, dissenting:
This case, as I comprehend it, turns on the answer to the following question: Does section 547 of the Bankruptcy Code, 11 U.S.C. § 547, empower the bankruptcy trustee to recover funds transferred to tax authorities during the pre-petition period in satisfaction of the debtor's withholding tax obligation? Congress, I believe, considered this precise question and answered it in the negative. I therefore dissent.
Section 547 itself, I acknowledge, does not explicitly address the question critical here, but the legislative history of the section does, in language I find dispositive:
H.R.Rep. No. 595, 95th Cong., 1st Sess. 373 (1977) (emphasis added), U.S.Code Cong. & Admin.News 1978, pp. 5787, 6329.
The House Report passage quoted above is, in my view, dispositive of the only issue properly reached in this case — whether Auto-Train's payment can be voided as a section 547 preference. The majority, however, considers the passage irrelevant to the issue it sees as critical: "[W]hether Congress ... intended the mere fact of payment of funds covered by a statutory trust to be sufficient to exclude the funds from the property of the estate ...." Court's opinion at 1103 (emphasis added). The majority thus transforms a case I believe to be properly focused on section 547's definition of a voidable preference, into one in which section 541's definition of "property of the estate" becomes the center of attention. The quoted House Report passage, in the majority's view, is not helpful because it appears in the "wrong" place in the Report. See Court's Opinion at 1112 ("If the House intended this passage to provide criteria for determining when property is considered within a debtor's estate and when it is held in trust, we would expect to find the passage in its commentary on section 541[.]").
True enough, "[i]f the funds in question were trust funds" — i.e., were not "property of the estate" under section 541 — "their pre-petition payment [could] never be a voidable preference." Court's Opinion at
Examination of the legislative history on which the majority relies, moreover, suggests that the question the majority poses — "whether the payment was of estate property or of trust funds," Court's Opinion at 1112 — was not the issue Congress wanted courts to resolve when faced with pre-petition withholding tax payments. The question the majority asks "requires a determination of the extent to which Congress, in enacting section 541 of the Code ... intended to ease the tracing burden imposed by [United States v.] Randall [401 U.S. 513, 91 S.Ct. 991, 28 L.Ed.2d 273 (1971)]." Court's Opinion at 1112. That "tracing burden," it must be recalled, was imposed in a case (Randall) in which no pre-petition payment was made, and the IRS, in disregard of the priority distribution scheme (now contained in section 507, 11 U.S.C. § 507), attempted to claim assets remaining in the debtor's possession post-petition. Congress addressed Randall by instructing courts:
124 Cong.Rec. 32417 (Sept. 28, 1978) (statement of Rep. Edwards); 124 Cong.Rec. 34016-17 (Oct. 5, 1978) (statement of Sen. DeConcini), quoted in Court's Opinion at 1108-1109 (emphasis added).
As the italicized portions of the above excerpt clarify, Congress was directing courts to use "reasonable assumptions" to trace funds where no pre-petition payments were made, i.e., in Randall-type cases, in order to allow the tax authorities to demonstrate that the trust funds "are still in the debtor's possession at the commencement
For the reasons stated, I would vacate the judgment for the trustee (except as to the recovery of interest and penalties) and instruct the entry of judgment for the District.
Id. at 11.
124 Cong.Rec. 32400 (September 28, 1978) (statement of Representative Edwards); 124 Cong.Rec. 34000 (Oct. 5, 1978) (statement of Senator DeConcini). The first sentence restates in substance the comment on section 547 in the joint statement, quoted above in the text. The second sentence clarifies the voidability of preferential federal tax payments by the waiver of sovereign immunity in 11 U.S.C. § 106(c). The House Report had indicated that sovereign immunity might prevent trustees from recovering preferences in the possession of the government. See H.R.Rep. 95-595, at 373, U.S.Code Cong. & Admin.News 1978, p. 6329, quoted in text at note 19, supra. This waiver is more extensively discussed elsewhere in the legislative history. See 124 Cong.Rec. 32394 (September 28, 1978) (statement of Representative Edwards); 124 Cong.Rec. 33993 (October 5, 1978) (statement of Senator DeConcini).
In three cases where courts ventured an opinion concerning whether the mere fact of payment would by itself create a statutory trust, the statement was pure dictum. In Selby v. Ford Motor Co., 590 F.2d 642, 646 n. 6, 648-49 (6th Cir.1979), the court stated that "it appears that § 541 of the new Act intends to modify or overrule the holdings in the Randall and England cases," id. at 648 n. 18, but the court did not decide the issue because "[i]n the instant case tracing creates no problem. The funds subject to the statutory trust were paid to the subcontractor as trust beneficiaries prior to bankruptcy." Id. at 649 (footnote omitted). In re Casco Electrical Corp., 28 B.R. 191 (Bkr.E.D.N.Y.), aff'd, 35 B.R. 731 (E.D.N.Y.1983), involved commingled funds; thus the court's discussion ("it is arguable that by the very act of payment, [the debtor] identified the funds as trust assets," 28 B.R. at 195) is dictum. See also In re Fresh Approach, Inc., 51 B.R. 412, 418-24 (Bkr.N.D.Tex.1985).
Finally, two other cases that address the Code's legislative history do not involve a situation in which the taxing authority relied solely on the fact of a pre-petition tax payment to support its claim that a trust was created. In re American International Airways, Inc., 70 B.R. 102 (Bkr.E.D.Pa.1987), the IRS successfully sought, post-petition, funds that had been deposited in segregated accounts for payment of withheld taxes, rendering tracing unproblematic. In finding a trust, the court stated that "we do believe that [the Code], read in light of the legislative history, overrules the holding in Shakesteers and Tamasha, where the debtor did segregate the funds as directed". Id. at 105 (emphasis in original). In re Major Dynamics, 59 B.R. 697 (Bkr.S.D.Cal.1986), the IRS was trying post-petition to reach commingled funds held by the debtor.
See text accompanying note 19, supra. We can detect nowhere in this passage any requirement that the funds used for such a timely payment be held separate, like trust funds, in order to avoid treatment as a preference. As for the statement relied on by the Trustee — "if [the taxes] have been properly held for payment" — we think it signifies only that if a debtor is able to pay over withheld taxes in a timely fashion, one may assume that the taxes "ha[d] been properly held for payment."
As noted in Olympic Foundry, 63 B.R. at 328, this "language is dicta since the case involved property seized by the IRS, pursuant to a tax lien, prior to the filing of a Chapter 11 petition. The court ruled that the IRS was subject to turnover of the seized assets under 11 U.S.C. § 542(a) as property of the estate." Furthermore, the Court purported to do no more than paraphrase the joint explanatory statement. Finally, the Whiting Pools footnote does not address the question before us, which is not whether tracing is necessary (which the Court correctly noted is required), but rather how rigorous the required tracing must be.
Read in the context of section 547, the passage means only that a timely tax payment is not for an "antecedent debt" and therefore does not constitute a voidable preference under section 547(b). Supra at 1112-14. We consequently consider the language inapposite to the facts of this case, in which it is undisputed that Auto-Train's payment occurred long after it was "due;" therefore, it clearly was for an "antecedent debt." It is only after concluding that the payment would qualify as a voidable preference, if it was from estate property, that we proceed to determine whether Auto-Train held the payment in trust. The remainder of the legislative history indicates that the mere fact of pre-petition payment is not sufficient to create a trust. As a result, the Auto-Train payment must be voided. (We therefore do not, as the dissent claims, rely upon the bald, bold, and by itself erroneous proposition that "if the funds were property of the estate, then the pre-petition payment would be a voidable preference." Diss. op. at 1119. (emphasis in original). Our decision proceeds from the facts before us, in which this untimely payment is a voidable preference unless it was made from funds held in trust.)
Furthermore, in concluding that "[t]he House Report is ... inapposite to the issue before us," Court's Opinion at 1113, the majority relies on Report language accompanying section 547(c) as evidence that, "contrary to the District's contention," Congress "contemplated that at least in some circumstances pre-petition tax payment could be recoverable as a voidable preference." Id. at 1113. Neither the District nor anyone else, however, could contend otherwise, for tax obligations generally, e.g., corporate or sales taxes, are not covered by "statutory trust" provisions of the kind involved in this case. The section 547(c)-related Report language quoted by the majority, it seems to me, does not bear on whether Congress contemplated that pre-petition withholding tax payments could be recoverable as a voidable preference.