Michael Wolff v. United States

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 13-2116
In Re: FIRSTPAY, INC.,
Debtor.
-------------------------
MICHAEL G. WOLFF, Trustee,
Plaintiff – Appellant,
v.
UNITED STATES OF AMERICA, IRS,
Defendant - Appellee.
Appeal from the United States District Court for the District of
Maryland, at Greenbelt. Peter J. Messitte, Senior District
Judge. (8:12-cv-02952-PJM; BK-03-30102; AP-05-01695)
Argued: September 17, 2014 Decided: December 12, 2014
Before MOTZ and DIAZ, Circuit Judges, and DAVIS, Senior Circuit
Judge.
Affirmed by published opinion. Senior Judge Davis wrote the
opinion, in which Judge Motz and Judge Diaz joined.
ARGUED: Jeffrey Mitchell Orenstein, GOREN, WOLFF & ORENSTEIN,
LLC, Rockville, Maryland, for Appellant. Michael J. Haungs,
UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for
Appellee. ON BRIEF: Kathryn Keneally, Assistant Attorney
General, Ivan C. Dale, Tax Division, UNITED STATES DEPARTMENT OF
JUSTICE, Washington, D.C.; Rod J. Rosenstein, United States
Attorney, OFFICE OF THE UNITED STATES ATTORNEY, Baltimore,
Maryland, for Appellee.
2
DAVIS, Senior Circuit Judge:
In this adversary bankruptcy proceeding, the trustee of the
bankruptcy estate of a payroll processing firm seeks a judgment
against the United States for an amount of payroll tax payments
the firm made on behalf of its employer-clients to the Internal
Revenue Service. After a series of decisions by the United
States Bankruptcy Court for the District of Maryland and appeals
to the U.S. District Court and to this Court, this appeal
presents one issue: whether the trustee in bankruptcy may
reclaim as property of the debtor the approximately $28 million
transferred by the debtor to the IRS during the 90 days
preceding the filing of the bankruptcy petition. We agree with
the bankruptcy court and the district court that, as a matter of
law, the debtor lacked an equitable interest in the funds paid
over to the IRS, and therefore we affirm the judgment.
I.
A detailed description of the facts and procedural history
of this case is provided in the opinion we issued the last time
this case came before us. See In re FirstPay, Inc. (In re
FirstPay I), 391 F. App’x 259, 262–67 (4th Cir. 2010) (per
curiam). Here, we provide only those facts and procedural
history necessary to understand the issue presented in the
instant appeal.
3
A.
FirstPay, Inc. (“FirstPay” or the “Debtor”) provided
payroll processing services pursuant to a Payroll Processing
Agreement with each of its clients as well as tax reporting and
depositing services to a number of its clients in accordance
with a Tax Reporting Services Agreement (“Services Agreement”).
Prior to each payroll date, FirstPay would withdraw funds from
the client’s checking account sufficient to cover the following
amounts: (1) taxes for which the client was liable; (2) payment
of the client’s employees’ wages; and (3) fees owed to FirstPay
for its services. FirstPay deposited the withdrawn funds into a
FirstPay account that the parties call the “tax account.” The
Services Agreement provided that FirstPay would hold the tax
funds until taxes were due and then remit payments to taxing
authorities.
Although FirstPay transferred a portion of the funds in the
tax account to taxing authorities toward satisfying the
obligations of some of its clients, not all of the funds in the
tax account were ultimately used for this purpose. FirstPay
transferred some of the funds from the tax account to an
“operating account” used to pay its own business expenses, and
another portion of the funds were transferred to an “exchange
and reimbursement account” that was used for lavish personal
expenditures by FirstPay’s principals. The parties are unaware
4
of how FirstPay determined what portions of the funds in the tax
account would be remitted to taxing authorities and what
portions would be transferred to the operating account or to the
exchange and reimbursement account.
FirstPay’s fraudulent scheme continued without detection
for several years, until the death of one of its principals in
2003. As a result of FirstPay’s misappropriation of its clients’
funds, a substantial portion of its clients’ tax obligations
went unpaid and now remain due and owing.
B.
Creditors filed an involuntary Chapter 7 bankruptcy
petition against FirstPay in the U.S. Bankruptcy Court for the
District of Maryland in May 2003. Appellant Michael Wolff was
appointed trustee of the bankruptcy estate.
In 2005, the Trustee filed a nine-count complaint against
the United States in the bankruptcy court seeking a declaratory
judgment that the Government had no claim for taxes or penalties
against FirstPay clients whose payroll taxes were paid to
FirstPay but not ultimately remitted to the IRS (Count I);
avoidance of FirstPay’s payments of its clients’ payroll taxes
to the IRS as preferences under 11 U.S.C. § 547 1 and as
1
Section 547(b) provides that a trustee in bankruptcy
may avoid any transfer of an interest of the debtor in
property—
(Continued)
5
fraudulent conveyances under 11 U.S.C. § 548 and Maryland law
(Counts II through VIII); and turnover of avoided transfers
under 11 U.S.C. § 550 2 (Count IX). The bankruptcy court granted
the Government’s motion for summary judgment as to the Trustee’s
declaratory judgment and preference claims and, after a one-day
trial, entered judgment in favor of the Government on the
fraudulent conveyance claims.
On appeal, the district court reversed as to the claim to
avoid as preferences under § 547(b)(4)(A) the payments FirstPay
made to the IRS within 90 days prior to the filing of the
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by
the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date of the filing
of the petition; or
(B) between ninety days and one year before the date
of the filing of the petition, if such creditor at the
time of such transfer was an insider; and
(5) that enables such creditor to receive more than
such creditor would receive if—
(A) the case were a case under chapter 7 of [the
Bankruptcy Code];
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the
extent provided by the provisions of this title.
11 U.S.C. § 547(b).
2
A trustee in bankruptcy may recover, for the benefit of
the estate, property transferred to the extent that the transfer
is avoided under § 547 or § 548, or certain other sections of
the Bankruptcy Code. 11 U.S.C. § 550(a).
6
bankruptcy petition. It is undisputed that, during that 90-day
period, the IRS received from FirstPay, on behalf of its
clients, a total of $27,816,992.50 in payroll tax payments,
including $19,853,253.13 in taxes withheld from clients’
employees’ wages (i.e., “trust-fund taxes”) and $7,963,739.37 in
taxes owed by the client (i.e., “non-trust-fund taxes”). The
district court’s ruling was based in part on its determination
that “the transfer of funds from the Debtor to the IRS . . . was
a transfer of an interest of the Debtor in property” under §
547(b).
On remand, the bankruptcy court granted the Trustee’s
motion for summary judgment on the § 547(b)(4)(A) preference
claim (Count II) and the related turnover claim (Count IX),
entered judgment against the Government in the amount of $28
million plus interest, and denied the Government’s subsequent
motion to alter or amend the judgment. The Government appealed,
and the district court affirmed the bankruptcy court in a
summary order.
On appeal to this Court, we determined that the district
court erred in saddling the Government with a concession that
FirstPay’s transfer of tax funds to the IRS on behalf of its
clients was a transfer of FirstPay’s own interest in property.
In re FirstPay I, 391 F. App’x at 267–69. We remanded the matter
with an instruction that the bankruptcy court reconsider the
7
remaining preference claim without regard to any such
concession. Id. at 267. We also instructed the bankruptcy court
to determine the merits of the Government’s “ordinary course of
business” defense under 11 U.S.C. § 547(c)(2), which the court
had refused to consider as untimely. Id. at 270.
The parties stipulated to a set of facts for the bankruptcy
court to consider on remand and filed new summary judgment
motions. The bankruptcy court determined that the funds
transferred by FirstPay to the IRS were not FirstPay’s property
and therefore not preferences but, if the payments were
preferences, they would not be protected from avoidance under
the “ordinary course of business” exception. In re FirstPay,
Inc. (In re FirstPay II), BK-03-30102-PM, AP-05-1695-PM, 2012 WL
3778952 (Bankr. D. Md. Aug. 30, 2012). The court therefore
granted summary judgment in favor of the Government, and the
Trustee appealed. After the district court affirmed the
bankruptcy court, the Trustee timely filed a notice of appeal to
this Court.
II.
Summary judgment is appropriate when there is no genuine
issue of material fact, and the movant is entitled to judgment
as a matter of law. In re French, 499 F.3d 345, 351–52 (4th Cir.
2007) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247
(1986)); see also Fed. R. Civ. P. 56(c); Fed. R. Bankr. P. 7056.
8
This court reviews de novo a bankruptcy court’s award of summary
judgment and a district court’s affirmance thereof. Hager v.
Gibson, 109 F.3d 201, 207 (4th Cir. 1997) (citing In re Ballard,
65 F.3d 367, 370 (4th Cir. 1995)).
III.
In furtherance of the policy against preferential treatment
of creditors embodied by the Bankruptcy Code, a trustee in
bankruptcy is permitted to avoid and recover certain payments
made by the insolvent debtor preferentially for the benefit of
some creditors prior to the filing of the bankruptcy petition.
See 11 U.S.C. §§ 547(b), 550(a). These avoidable preferences
include certain transfers made “on or within 90 days before the
date of the filing of the petition[.]” Id. § 547(b)(4)(A).
However, the trustee can only avoid a “transfer of an interest
of the debtor in property[,]” id. § 547(b), as only the debtor’s
property would have been available for distribution among
creditors in the absence of the transfer. See Begier v. I.R.S.,
496 U.S. 53, 58 (1990). The sole issue in this appeal is whether
the nearly $28 million FirstPay transferred to the IRS during
the 90 days preceding the bankruptcy filing constituted “an
interest of the debtor in property” under § 547(b).
In Begier, the Supreme Court looked to the scope of the
postpetition “property of the estate” as defined in 11 U.S.C. §
541(d) for guidance in determining the scope of the debtor’s
9
prepetition property under 11 U.S.C. § 547(b). See 496 U.S. at58–59. Property in which the debtor holds only legal title and
not an equitable interest is property of the debtor “only to the
extent of the debtor’s legal title, but not to the extent of any
equitable interest in such property that the debtor does not
hold.” Id. at 59 (quoting 11 U.S.C. § 541(d)). “[T]he debtor
does not own an equitable interest in property he holds in trust
for another,” and therefore any such trust property is not the
debtor’s for purposes of § 547(b). Id.
Because property interests are generally created and
defined by state law, we look to state law to determine the
nature of a debtor’s interest in the property at issue. Butner
v. United States, 440 U.S. 48, 54–55 (1979). “[A]bsent a
countervailing federal interest,” state law “determines whether
a given property falls within [the] federal framework” of a
bankruptcy estate. Am. Bankers Ins. Co. of Fla. v. Maness, 101
F.3d 358, 363 (4th Cir. 1996). Given that the agreements that
govern the relationships between FirstPay and its clients
provide that their terms are to be construed in accordance with
Maryland law, the parties agree that Maryland law applies here.
See Nat’l Glass, Inc. v. J.C. Penney Props., Inc., 650 A.2d 246,
248 (Md. 1994) (“[I]t is ‘generally accepted that the parties to
a contract may agree as to the law which will govern their
10
transaction[.]’”) (quoting Kronovet v. Lipchin, 415 A.2d 1096,
1104 (Md. 1980)).
We hold that, under Maryland law, FirstPay held the $28
million in tax funds in an express trust and therefore lacked
the equitable interest in the property necessary for its
transfers to be avoidable under 11 U.S.C. § 547(b); accordingly,
we affirm the judgment. 3
A.
Under Maryland law, “[a] trust exists where the legal title
to property is held by one or more persons, under an equitable
obligation to convey, apply, or deal with such property for the
benefit of other persons.” From the Heart Church Ministries,
Inc. v. African Methodist Episcopal Zion Church, 803 A.2d 548,
3
Based on the terms of the relevant agreements, the
bankruptcy court determined that FirstPay and its clients
created a “resulting trust” to which the tax funds were subject,
rather than an express trust. In re FirstPay II, 2012 WL
3778952, at *7. Under Maryland law, a resulting trust is a form
of implied trust that “arises upon the presumed intention of the
parties where the terms of the disposition or accompanying facts
establish that beneficial interest is not to go with legal
title.” Siemiesz v. Amend, 206 A.2d 723, 725 (Md. 1965). A court
sitting in equity may therefore declare a resulting trust where
the circumstances surrounding a transfer of property “raise an
inference, unrebutted by the facts, that the party making the
transfer did not intend to give the transferee the beneficial
interest in the property[.]” Levin v. Sec. Fin. Ins. Corp., 230
A.2d 93, 98 (Md. 1967). Although we are persuaded that the terms
of the relevant agreements are sufficient to create an express
trust under Maryland law, we agree with the bankruptcy court
that an intent to create a trust was, at minimum, implied by
those terms.
11
566 (Md. 2002) (citing Milholland v. Whalen, 43 A. 43, 43–44
(Md. 1899)). The existence of a trust must be established by
clear and convincing evidence. Kelley v. Kelley, 13 A.2d 529,
533 (Md. 1940).
“Express trusts are created by the direct and willful acts
of the parties, by some writing, or deed, or words expressly
evidencing the intention to create a trust.” From the Heart
Church Ministries, 803 A.2d at 567 (citing Levin v. Sec. Fin.
Ins. Corp., 230 A.2d 93, 98 (Md. 1967)). The Maryland Court of
Appeals has outlined three elements of a valid, express trust:
“[f]irst, a definite subject-matter within the disposition of
the settlor; second, a lawful, definite object to which the
subject-matter is to be devoted; [and] third, clear and
unequivocal words or acts devoting the subject-matter to the
object of the trust.” Levin, 230 A.2d at 97 (quoting Sieling v.
Sieling, 135 A. 376, 381 (Md. 1926)) (internal quotation marks
omitted).
All of the elements of a valid, express trust are satisfied
in this case. The funds at issue comprise a definite subject
matter within the disposition of the FirstPay client,
transferred to FirstPay, and devoted to the lawful and definite
object of paying the client’s tax obligations by the clear and
unequivocal terms of the agreements between FirstPay and the
client. The Services Agreement states that “[c]lient’s checking
12
account shall be debited for the aggregate total of all taxes
and unemployment and credited to FIRSTPAY, Inc. a minimum of
three days prior to payroll date”; and that “[t]hese tax funds
will be held by FIRSTPAY, Inc. until such taxes are due, and
will be submitted by FIRSTPAY, Inc. in accordance with local,
state and federal regulations.” In short, FirstPay was but an
intermediary, and there was no intention that it would keep the
funds or at any point use them for its own purposes or benefit.
See In re Dameron, 155 F.3d 718, 722–23 (4th Cir. 1998) (holding
that debtor held funds subject to express trust under Virginia
law where contractual language and circumstances under which
debtor received funds showed that parties intended debtor “to
act merely as an intermediary[]” without any expectation that
debtor would keep the funds or “develop any equitable interest
in the funds[]”).
Although the agreements here do not use the term “trust,”
“[w]hether or not a trust has been created in any given case is,
in the last analysis, a question of intention[,]” and therefore,
“[n]o particular words are necessary to create a trust[.]”
Kozlowska v. Napierkowski, 170 A. 193, 195 (Md. 1934); see also
Restatement (Third) of Trusts § 13 cmt. b (2003) (“[A] trust may
be created without the settlor’s use of words such as “trust” or
“trustee[.]”). The language of the Services Agreement is
sufficient to evidence a clear intent by the parties that
13
FirstPay would be obligated to handle the tax funds solely for
the benefit of its clients and of the taxing authorities in
satisfaction of the clients’ tax obligations. Thus, FirstPay and
each of its clients expressly created a trust, and the tax funds
received and transferred by FirstPay pursuant to its obligations
under the Services Agreement were trust property in which
FirstPay held no equitable interest.
B.
The Trustee’s argument that, upon transfer to FirstPay, the
tax funds became a debt FirstPay owed to its clients and not
trust property, is without merit.
The Trustee correctly asserts that a “debt is not a trust.”
Dunlop Sand & Gravel Corp. v. Hospelhorn, 191 A. 701, 706 (Md.
1937) (quoting Restatement (First) of Trusts § 12 (1935)); see
also Restatement (Third) of Trusts § 5(k). When “one person pays
money to another, it depends upon the manifested intention of
the parties whether a trust or a debt is created.” Levin, 230
A.2d at 96.
If the intention is that the money shall be kept or
used as a separate fund for the benefit of the payor
or a third person, a trust is created. If the
intention is that the person receiving the money shall
have the unrestricted use thereof, being liable to pay
a similar amount whether with or without interest to
the payor or to a third person, a debt is created.
Dunlop Sand, 191 A. at 706 (quoting Restatement (First) of
Trusts § 12); see also Restatement (Third) of Trusts § 5 cmt.
14
k. “Where the language of the parties does not clearly show
their intention, all the circumstances must be considered in
order to determine whether a trust or a debt was intended.”
Levin, 230 A.2d at 96.
The terms of the agreements between FirstPay and its
clients clearly show that the parties did not intend for the
amount of the tax funds transferred to FirstPay to be a debt.
These agreements do not permit FirstPay’s unrestricted use of
the tax funds it received from its clients and in fact leave
FirstPay with no discretion as to how it could handle the funds.
FirstPay’s freedom to use the funds is expressly limited to
holding them until the clients’ taxes are due and then remitting
them to the taxing authorities. The parties to these agreements
intended the tax funds to be used separately from other monies
the clients transferred to FirstPay and used for the separate
and limited purpose of satisfying the clients’ tax obligations.
It is clear that a trust was intended, and not a debt.
The Trustee points to a stipulation the parties entered
into that each time FirstPay withdrew contractually authorized
funds from a client’s account, FirstPay became indebted to the
client for the amount of tax funds included in that withdrawal
(but not for the fees FirstPay was to retain for its services).
In this regard, the parties have stipulated to what is
essentially a legal conclusion, one that we cannot accept. See H
15
& R Block E. Enters., Inc. v. Raskin, 591 F.3d 718, 723 n.10
(4th Cir. 2010) (“[A] court is not required ‘to accept what in
effect [is] a stipulation on a question of law.’”) (citation
omitted). It is immaterial whether the parties knew the precise
legal characteristics of a trust relationship and whether they
knew that their intended relationship is called a “trust” under
the law. Restatement (Third) of Trusts § 13 cmt. a. The terms of
FirstPay’s unambiguous agreements, which we interpret as a
matter of law, see Gresham v. Lumbermen’s Mut. Cas. Co., 404
F.3d 253, 260 (4th Cir. 2005), clearly establish that the tax
funds were intended to be held by FirstPay only for payment of
the clients’ taxes and therefore constituted trust property.
C.
The Trustee further argues that the funds FirstPay
ultimately transferred to the IRS cannot be deemed trust
property because they had been commingled with other funds and
therefore cannot be effectively identified or traced. The
Trustee points out that the money FirstPay obtained from each
client’s general operating account was first commingled in the
client’s account with funds intended and used for other purposes
by the client; and after FirstPay received the money, those
funds were again commingled in FirstPay’s “tax account” with
funds intended for payment of the client’s and other clients’
employees’ wages, payment of FirstPay for its payroll services,
16
and payment of other clients’ taxes. We are not persuaded that
the commingling of funds that occurred in this case defeated
creation of a trust.
The Trustee relies on the Maryland Court of Appeals
decision in Levin v. Sec. Fin. Ins. Corp., 230 A.2d 93 (Md.
1967). Levin involved claims by two savings and loan
associations to funds they had transferred to Security Financial
Insurance Corp. (“Security Financial”), an insurance company
that subsequently became insolvent. Id. at 94. Agreements
between the parties provided that the associations would make
payments into a “Trust Fund” held by Security Financial as
“Trustee” in order “to better indemnify [the association’s]
savings account shareholders and to also increase the liquidity
of said association and to set up a reserve fund for
contingencies.” Id. at 94–95.
After Security Financial became insolvent, the associations
initiated proceedings to secure refunds of their monies, and the
matter was referred to an auditor. Id. at 94. The auditor filed
a report concluding that the associations were entitled to funds
upon liquidation of the Trust Funds because Security Financial
“treated these funds as trust funds . . . and segregated them
from its general assets in all accounting,” which allowed them
to be traced. Id. at 95–96. Receivers of insolvent creditors of
the insurance company excepted to the report, arguing that the
17
funds were general assets of Security Financial and therefore
available for distribution to all creditors. Id. at 94.
The Maryland Court of Appeals affirmed the denial of the
creditors’ exceptions to the auditor’s report based on the
parties’ intention that the funds would be subject to a trust.
See id. at 96–99. 4 To be sure, the court specifically rejected
the auditor’s conclusion “that the mere segregation of the funds
plus their traceability will permit an original owner of
property to recover it from his insolvent transferee.” Id. at
96. Nevertheless, the court stated that “[i]dentification of
trust property, either in its original or altered form, is
essential to its recovery by the cestui que trust.” Id. 5
4
The court determined that the elements of an express trust
were present except that the trust had an unlawful purpose but,
given the parties’ intent that Security Financial not hold an
equitable interest in the funds, they had created a resulting
trust. Id. at 98.
5
Other cases cited by the Trustee are not directly
applicable as they involved “constructive trusts,” an equitable
remedy imposed by Maryland courts “where property has been
acquired by fraud, misrepresentation, or other improper method,”
or to otherwise “prevent the unjust enrichment of the holder of
the property.” Wimmer v. Wimmer, 414 A.2d 1254, 1258 (Md. 1980);
see also Brown v. Coleman, 566 A.2d 1091, 1097 (Md. 1989).
“[U]nlike either a resulting trust or an express trust, a
constructive trust is remedial in character.” Restatement
(Third) of Trusts § 7 cmt. d (2003). Although lack of
identification and traceability may prevent a court sitting in
equity from imposing a constructive trust, the existence of an
express trust or a resulting trust will depend only on the
intentions of the parties.
18
We do not read Levin to have held, as the Trustee here
suggests, that funds must be segregated in order to be traceable
and subject to a trust. “[C]ourts have consistently rejected the
notion that commingling of trust property, without more, is
sufficient to defeat tracing.” In re Dameron, 155 F.3d at 723–24
(4th Cir. 1998). In another case, the Maryland Court of Appeals
held that “[i]t is not essential to a sufficient identification
that the fund or property delivered to the trustee be traced in
the precise or identical form in which it was received[.]” Cnty.
Comm’rs of Frederick Cnty. v. Page, 164 A. 182, 190 (Md. 1933);
see also MacBryde v. Burnett, 132 F.2d 898, 900 (4th Cir. 1942)
(holding that, under Maryland law, “it is not necessary in
asserting the rights of the cestui que trust that the trust
funds be specifically traced”).
A beneficiary’s entitlement to a trust fund fails for
insufficiency of identification “where it appears that the trust
fund has been dissipated or so mingled and merged with the
general assets of the insolvent estate as not to be separable or
distinguishable therefrom[.]” Page, 167 A. at 191. However, “if
a trustee or fiduciary mixes trust funds with his own, the whole
will be treated as trust property, except so far as he may be
able to distinguish what is his from that which belongs to the
trust[.]” MacBryde, 132 F.2d at 900 (4th Cir. 1942) (quoting
Englar v. Offutt, 16 A. 497, 499 (Md. 1889)). “So long as a
19
trust fund can be traced, the court will always attribute the
ownership thereof to the cestui que trust, and will not allow
the right to be defeated by the wrongful act of the trustee or
fiduciary in mixing or confusing the trust fund with funds of
his own, or even those of a third party.” Englar, 16 A. at 499.
Thus, Maryland law does not countenance FirstPay’s
frustration of the Government’s entitlement to the benefits of
the trust by simply mingling the tax funds with other funds in
the tax account. The commingling that occurred while the nearly
$28 million in tax funds at issue were in FirstPay’s possession
was not so severe that it prevented the funds from fulfilling
the purpose of the trust. The funds were not “mingled and
merged” with FirstPay’s general assets or “dissipated” but,
rather, were received from FirstPay’s clients, held in the tax
account, and then transferred to the IRS as intended under the
terms of FirstPay’s agreements with its clients. 6 These tax funds
can thus be traced and connected to the trust.
The Supreme Court examined an analogous situation involving
a federal statutory trust and drew the same conclusions. See
6
Funds withdrawn from the tax account and moved either to
the “operating account” to pay FirstPay’s operating expenses or
to the “exchange and reimbursement account” to be squandered by
FirstPay’s principals are not at issue in this appeal. There is
no contention here that those funds are identifiable or
traceable as trust property.
20
Begier, 496 U.S. at 58–67. In Begier, a trustee in bankruptcy
sought to avoid under § 547(b) tax payments the debtor airline,
American International Airways, Inc. (“AIA”), had made to the
IRS during the 90 days prior to the bankruptcy filing. Id. at
57. AIA was required to hold excise taxes collected from its
customers and federal income taxes and Federal Insurance
Contributions Act taxes withheld from its employees’ wages in “a
special fund in trust for the United States[.]” Id. at 55–56
(quoting 26 U.S.C. § 7501(a)). AIA’s payments of these “trust-
fund taxes” were made from both its general operating funds and
from a separate bank account devoted to the withheld taxes. Id.
at 56.
The Court determined that AIA’s prepetition payment of
payroll taxes from its general operating accounts was not a
transfer of its own property but a transfer of trust property to
which it held no equitable interest. See id. at 67. First, the
Court rejected the trustee’s argument that the trust was
defeated by AIA’s failure to segregate the tax funds from its
general operating funds, noting that a requirement to segregate
the funds “would mean that an employer could avoid the creation
of a trust simply by refusing to segregate.” Id. at 61.
Next, the Court turned to the issue of “whether the
particular dollars that AIA paid to the IRS from its general
operating accounts were ‘property of the debtor[]’” under §
21
547(b). Id. at 62. Upon examination of legislative history of §
541, Justice Marshall stated that courts should permit
“reasonable assumptions” in determining whether particular funds
in the debtor’s possession are tax funds held in trust for the
Government in both prepetition and postpetition contexts. Id. at
65. One such reasonable assumption, based on the Court’s
examination of legislative history, was that “any voluntary
prepetition payment of trust-fund taxes out of the debtor’s
assets is not a transfer of the debtor’s property[]” but rather
a transfer of funds held in trust for payment to the Government.
Id. at 66–67.
Common-law principles provide a basis for a court to make
similar reasonable assumptions in the context of a common-law
trust. One such principle provides that if a trustee holds trust
funds in an account where those funds are mingled with non-trust
funds and then makes a withdrawal from the account for a trust
purpose, the trustee will be deemed to have withdrawn trust
funds. George Gleason Bogert & George Taylor Bogert, The Law of
Trusts and Trustees § 926 (2d ed. rev. 1995). Another principle
provides that if a trustee holds funds subject to one trust in
an account mingled with funds subject to a separate trust and
then makes a withdrawal for the express purpose or benefit of
the first trust, the withdrawn funds will be deemed subject to
the first trust and distinct from other trust funds. Id. § 927.
22
Under these principles, a court may presume that funds
received, held, and conveyed by a trustee in accordance with the
purpose and for the benefit of a trust, although commingled with
funds not subject to that trust, are indeed funds subject to the
trust. In the context of a preference avoidance claim, the
burden rests with the party claiming ownership of the funds to
rebut the presumption.
This position comports with both the Maryland law of trusts
and the Bankruptcy Code. As previously stated, when a trustee
mingles trust funds with its own funds, Maryland law places the
burden on the trustee to distinguish its property from the trust
property. MacBryde, 132 F.2d at 900; Englar, 16 A. at 499.
Further, under 11 U.S.C. § 547(g), a bankruptcy trustee “who
seeks to reclaim for the estate a pre-petition transfer . . . as
a voidable preference bears the burden of demonstrating the
presence of all elements of a preference, as established in §
547(b).” In re Virginia-Carolina Fin. Corp., 954 F.2d 193, 196
(4th Cir. 1992). The Trustee in the instant case, therefore,
bears the burden of proving that the nearly $28 million he seeks
to reclaim from the Government was FirstPay’s own property and
not the tax funds it held in trust for the benefit of its
clients and the Government. The Trustee has not carried his
burden here.
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In sum, we hold that, in the absence of contrary proof, the
law will presume that any funds received, held, and ultimately
transferred by a trustee in accordance with the trust purpose
are indeed trust funds. The burden rests with the trustee to
rebut that presumption and establish that the funds so held and
transferred, or any portion thereof, were not subject to a trust
but were the trustee’s own property prior to transfer. Here, the
Trustee has not met this burden on behalf of FirstPay’s estate
with respect to the approximately $28 million at issue in this
appeal. Summary judgment was therefore properly granted in favor
of the Government on the Trustee’s claim to recover these funds
under § 547(b) and § 550(a).
D.
It is regrettable that the employer-clients entrusted their
money to a fraudster and, as a result of the fraudulent conduct
and apparently not any action by the employers themselves, some
of those employers are now better off than others; indeed some
face the real prospect of double liability. As noted previously,
FirstPay’s remission of clients’ tax funds to the IRS only
satisfied the tax obligations of some of its clients while it
only partially satisfied the obligations of others and a third
set of clients had no tax payments applied on their behalf. We
do not know how FirstPay decided which clients’ taxes it would
pay and which it would not, and we regret that some of the
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clients remain liable to the IRS for tax payments they had
entrusted funds to FirstPay to make. But the employers assumed
the risk of FirstPay’s mishandling of their funds when they
selected the firm for vital payroll processing and tax reporting
services.
We recognize that the Government has made efforts to
minimize distress to those employers who remain liable for taxes
by, for instance, waiving otherwise applicable penalties and
other measures. We expect that responsible government officials
will continue to proceed with sensitivity to the realities of
this painful situation in which these businesses find
themselves.
IV.
For the reasons set forth above, the judgment is
AFFIRMED.
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