Firstpay, Inc. v. Wolff , 391 F. App'x 259 ( 2010 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 09-1076
In Re: FIRSTPAY, INCORPORATED,
Debtor.
------------------------------
UNITED STATES OF AMERICA,
Plaintiff - Appellant,
v.
MICHAEL G. WOLFF, Trustee,
Defendant - Appellee.
No. 09-1107
In Re: FIRSTPAY, INCORPORATED,
Debtor.
------------------------------
UNITED STATES OF AMERICA,
Plaintiff - Appellee,
v.
MICHAEL G. WOLFF, Trustee,
Defendant - Appellant.
Appeals from the United States District Court for the District
of Maryland, at Greenbelt. Peter J. Messitte, Senior District
Judge. (8:08-cv-00801-PJM; BK-03-30102-PM; AP-05-01695)
Argued: March 25, 2010 Decided: August 13, 2010
Before MICHAEL and DAVIS, Circuit Judges, and James A. BEATY,
Jr., Chief United States District Judge for the Middle District
of North Carolina, sitting by designation.
No. 09-1076 affirmed in part and vacated and remanded in part;
No. 09-1107 affirmed by unpublished per curiam opinion.
ARGUED: Ivan C. Dale, UNITED STATES DEPARTMENT OF JUSTICE,
Washington, D.C., for Appellant/Cross-Appellee. Jeffrey
Mitchell Orenstein, GOREN, WOLFF & ORENSTEIN, LLC, Rockville,
Maryland, for Appellee/Cross-Appellant. ON BRIEF: John A.
DiCicco, Acting Assistant Attorney General, Michael J. Haungs,
Tax Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington,
D.C.; Rod J. Rosenstein, United States Attorney, Baltimore,
Maryland, for Appellant/Cross-Appellee.
Unpublished opinions are not binding precedent in this circuit.
2
PER CURIAM:
In these consolidated appeals, the United States (“the
Government”) and Michael G. Wolff, Trustee of the bankruptcy
estate of debtor FirstPay, Inc. (“the Trustee”), seek review of
interlocutory and final orders of the United States District
Court for the District of Maryland, which exercised appellate
jurisdiction over two orders of the United States Bankruptcy
Court for the District of Maryland.
FirstPay, Inc. (“FirstPay” or “Debtor”), operated a payroll
and tax service company. The bankruptcy court adjudicated a
nine-count complaint filed in an adversary proceeding by the
Trustee against the Government. In his complaint, the Trustee
sought, inter alia, avoidance of alleged preferences and alleged
fraudulent conveyances amounting to hundreds of millions of
dollars in payments to the Internal Revenue Service (“IRS”)
FirstPay made on behalf of its clients. The Government prevailed
before the bankruptcy court, on summary judgment as to three
counts, and after a trial on the remaining six counts. Upon an
initial appeal to the district court, the judgment of the
bankruptcy court was affirmed in (substantial) part and vacated
in part, and the case was remanded for further proceedings as to
two claims. Upon the bankruptcy court’s consideration of the
remanded claims, the bankruptcy court, deeming itself
constrained by the order of the district court, granted summary
3
judgment in favor of the Trustee on one of the preference
claims. Upon the Government’s subsequent appeal, the district
court affirmed.
Before us, the parties challenge virtually each and every
one of the findings of fact and legal conclusions reached by the
courts below. For the reasons set forth within, in the
Government’s appeal, No. 09-1076, we agree with the Government
that the district court erred in finding that it was “undisputed
that the transfer of funds from the Debtor to the IRS . . . was
a transfer of an interest of the Debtor in property” under 11
U.S.C. § 547(b), a threshold requirement for finding a
preference. We also conclude that the bankruptcy court abused
its discretion in declining to consider the Government’s
“ordinary course of business” affirmative defense allowed under
11 U.S.C. § 547(c), notwithstanding the Government’s failure to
plead the defense in its answer to the complaint. Accordingly,
we vacate the judgment and remand the case for further
proceedings before the bankruptcy court as to the Trustee’s
preference claim. In the Trustee’s cross appeal, No. 09-1107, we
affirm the challenged rulings, substantially on the reasoning of
the lower courts.
4
I.
A.
FirstPay operated a payroll services business. As a payroll
services company, FirstPay prepared and processed its clients’
employee payroll checks and in addition, for a significant
percentage of its clients, it also calculated, reported, and
paid to the IRS on its clients’ behalf the associated payroll
taxes and withholdings. As to this latter group of clients,
FirstPay would generally enter into a so-called Tax Reporting
Services Agreement (“TRSA”), which set forth FirstPay’s basic
duties and some minor operational detail. The TRSA provided in
part as follows:
[1] Client’s checking account shall be debited for the
aggregate total of all taxes and unemployment
insurance due, and credited to FIRSTPAY, Inc. a
minimum of three days prior to payroll date. This
is in addition to any funds withdrawn for payment of
employees. Client agrees to have such funds available
at that time.
[2] These 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.
[3] Client authorizes FIRSTPAY, Inc. to hold Limited
Power of Attorney to sign and send timely all
obligations and signed forms to appropriate
governments and banks, and [sic, as] required or as
requested by FIRSTPAY, Inc.
J.A. 147.
FirstPay’s clients would sign their tax returns and deliver
them to FirstPay for filing with the IRS. Client funds
5
representing the gross amount of employee pay, plus the
client/employer’s shares of withholding and other taxes, were
initially credited electronically to a FirstPay bank account,
which the parties refer as the “tax account” or the “tax pay
account.” With such funds in hand, FirstPay was supposed to
remit periodic pay checks to the clients’ employees in the net
amount of their pay after appropriate withholding and then, by
regular wire transfer (perhaps among other methods) pay the
taxes due and owing out of the tax account to the appropriate
federal, state and local taxing authorities. The Trustee
estimated that FirstPay transferred by wire more than $300
million from the tax account to the IRS within the three years
preceding FirstPay’s bankruptcy, of which $28 million was
transferred in the 90 days preceding the filing of the
bankruptcy petition.
Sadly for many of FirstPay’s clients, not all of the client
funds credited to the FirstPay tax account were used for the
purposes the clients intended. FirstPay transferred some of the
funds to its operating account (using such funds to pay its own
business expenses) and it transferred some of the funds into a
so-called exchange and reimbursement account, from which
FirstPay’s principals made lavish personal expenditures in
connection with a massive, years-long, fraud scheme. In
consequence of this misappropriation of client funds, FirstPay
6
failed to pay over to the IRS a substantial portion (apparently
more than $5 million) of its clients’ taxes that were due and
owing. Seemingly, it is undisputed that during the execution of
the scheme, FirstPay would use funds it received from one or
more clients to pay the tax obligations of one or more other
clients (thus the Trustee’s label: “Ponzi Scheme”). In other
words, it would use later-acquired client-provided funds to pay
earlier-accrued tax obligations of other clients.
The fraud scheme continued undetected for several years at
least in part because, although the IRS sent notices of non-
payment to FirstPay’s clients, the clients did not receive the
notices. The clients did not receive the notices because
FirstPay (clearly as part of the fraud scheme) had changed the
addresses on the tax returns submitted by FirstPay on behalf of
its clients from its clients’ addresses to its own address.
Thus, the IRS mailed the notices of non-payment to FirstPay
(using the altered addresses on the tax returns) rather than to
the client/taxpayers.
The fraud scheme unraveled in March 2003 when a FirstPay
principal (the architect of the fraud scheme) died while boating
in the British Virgin Islands. After his death, the Criminal
Investigation Division of the IRS and the Federal Bureau of
Investigation opened parallel investigations. In due course,
investigators executed search and seizure warrants at FirstPay’s
7
premises, seizing voluminous records and shutting down its
operations. Meanwhile, the IRS undertook to pursue the
collection of unpaid taxes from some of FirstPay’s clients, many
of which were small businesses, professional corporations, and
non-profits. It is undisputed that many FirstPay clients that
were contacted by the IRS for payment had remitted funds to
FirstPay for the purpose of satisfying their tax obligations.
B.
Creditors filed an involuntary Chapter 7 bankruptcy
petition against FirstPay in the United States Bankruptcy Court
for the District of Maryland in May 2003, and Michael Wolff was
appointed Trustee of the bankruptcy estate. Some of FirstPay’s
former clients filed Proofs of Claim against the bankruptcy
estate, prompted by the Government’s efforts to collect taxes
from them that they had already remitted to FirstPay but which
remained unpaid.
On June 24, 2005, in an effort to forestall the growing
number and magnitude of claims filed against the bankruptcy
estate or, in the alternative, to recover funds from the
Government with which to pay any allowed claims, the Trustee
filed a nine-count complaint in the bankruptcy court against the
8
United States. 1 The Trustee asserted the following specific
claims: (1) for a declaratory judgment that the United States
has no claim for taxes, interest or penalties against FirstPay
clients whose payroll taxes were paid to FirstPay but not
remitted to the United States (Count I); (2) avoidance of
preferences under 11 U.S.C. § 547(b)(4)(A) and (B), i.e.,
FirstPay’s payments of its clients’ payroll taxes to the IRS
(Counts II and III); 2 (3) avoidance as fraudulent conveyances
1
At trial before the bankruptcy court, the Trustee’s
counsel candidly admitted that he really did not wish to recover
funds from the Government, as that would likely create more
problems than it would solve:
The reality, Your Honor, is that the Trustee, although
he was compelled to file this action and prosecute it,
really doesn’t want the money back, which would then
require the IRS to go through the administrative
nightmare of debiting the accounts of taxpayers whose
accounts have been paid, sending the money back to the
Trustee, the Trustee then dividing the money among all
the claimants, and then the IRS going out and
reassessing.
J.A. 283. Thus, the Trustee has vigorously pursued his
ostensible declaratory judgment action.
2
Section 547(b) provides as follows:
(b) Except as provided in subsection (c) of this
section, the trustee may avoid any transfer of an
interest of the debtor in property-
(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
(Continued)
9
under 11 U.S.C. § 548 and Maryland law, of such payments (Counts
IV, V, VI, VII, and VIII); and (4) turnover of preferences
and/or avoided transfers under 11 U.S.C. § 550 (Count IX). In
total, the Trustee sought to recover for the benefit of
FirstPay’s estate $338 million in client funds that FirstPay
allegedly remitted to the IRS in the three years preceding the
bankruptcy filing. The Trustee did not join as parties any of
FirstPay’s former clients. Rather, the Trustee’s theory rested
on his assertion that the United States was a creditor of
FirstPay and that the transfers to the IRS were to pay FirstPay
debts to the Government. The Government filed an answer denying
the essential facts relied on by the Trustee but asserting no
affirmative defenses under 11 U.S.C. § 547(c).
(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 this
title;
(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). Congress’ recent amendment of the time
period in subsection (b)(4)(B) from one year to two years is not
applicable in this case.
10
Before the completion of discovery, and with the trial date
on the horizon, the Government moved for summary judgment. 3 The
Trustee opposed the motion on the merits, including the
Government’s invocation of the “ordinary course of business”
affirmative defense under 11 U.S.C. § 547(c)(2). On August 2,
2006, after a hearing, the bankruptcy court granted (but
reserved until after trial its explanation for granting) the
Government’s motion for summary judgment as to Counts I, II, and
III, i.e., the declaratory judgment and preference claims. The
court denied the motion as to, and scheduled a trial for August
9, 2006 on, the fraudulent conveyance claims. Following a one
day trial, by memorandum and order filed on August 17, 2006, the
bankruptcy court explained its reasons for granting summary
judgment on the declaratory judgment and preference claims, and
it further found and concluded that the Trustee had failed to
3
The Government argued that the bankruptcy court lacked
jurisdiction to hear the Trustee’s request for declaratory
relief; that the Trustee failed to state a claim for avoidance
of a fraudulent conveyance and that, in any event, the Trustee’s
state law fraudulent conveyance claims were barred by the
“voluntary payment” doctrine under Maryland law. With respect to
the Trustee’s preference claims (Counts II and III), the
Government argued, inter alia, that (1) the Trustee could not,
as a matter of law, meet the requirements of 11 U.S.C. §
547(b)(1) and (b)(2) because (1) the United States was not a
“creditor” of FirstPay and the remission of client taxes was not
“on account of an antecedent debt owed by” FirstPay; and (2) in
any event, the relevant transfers were “made in the ordinary
course of business” and could not be avoided under 11 U.S.C. §
547(c)(2).
11
establish his fraudulent conveyance claims. See In re FirstPay,
2006 WL 2959342 (Bankr. D.Md. Aug. 17, 2006).
The bankruptcy court reasoned as follows. First, the court
concluded that it lacked jurisdiction to grant declaratory
relief as to the federal tax liability of FirstPay’s former
clients because 11 U.S.C. § 505(a) “does not extend the
bankruptcy court’s jurisdiction to parties other than the
debtor.” Id. at *2. Second, the transfers made by FirstPay to
the IRS were not recoverable under 11 U.S.C. § 547(b) as
preferences because: (1) the Government is not a creditor of
FirstPay, but rather a creditor of FirstPay’s former clients;
(2) “the transfers alleged by [FirstPay] were not made for an
antecedent debt[] owed by [FirstPay]”; and (3) the Government is
not an “insider” as defined in 11 U.S.C. § 101(31) (as to the
claim under 11 U.S.C. § 547(b)(4)(B)). Id.Third, the transfers made by FirstPay to the IRS were not
recoverable as fraudulent conveyances under 11 U.S.C. § 548 or
under the Maryland Uniform Fraudulent Conveyance Act. This was
so, the court found, because, as to the former, FirstPay
received “reasonably equivalent value” in consideration of the
transfers made to the IRS on behalf of its clients, i.e.,
discharge of FirstPay’s responsibility to account for said funds
to its clients. As to the latter, such “claims are barred by the
‘voluntary payment’ doctrine under Maryland law, which prohibits
12
recovery of a tax paid voluntarily, absent a special statutory
provision authorizing a refund.” Id. at*3-*4. In light of these
findings and conclusions, the derivative turnover claim brought
pursuant to 11 U.S.C. § 550 was moot. The court entered judgment
of dismissal in favor of the Government.
The Trustee filed a timely appeal to the district court.
After briefing and oral argument, the district court affirmed in
part and vacated in part the order of the bankruptcy court.
Wolff v. United States, 372 B.R. 244 (D.Md. 2007). Specifically,
the district court affirmed the dismissal of the declaratory
judgment claim, one of the preference claims, and all of the
fraudulent conveyance claims. As to the claim for a declaratory
judgment the district court reasoned that (1) the Trustee lacked
standing to assert a claim against the Government on behalf of
FirstPay’s clients and (2) “section 505(a) does not extend the
bankruptcy court’s jurisdiction to parties other than the
debtor.” Id. at 249-51. As to the fraudulent transfer claims,
the court reasoned that those claims failed because: (1) the
Trustee offered no evidence of an intent to defraud in respect
to those payments to the IRS; (2) although FirstPay was
insolvent when it made the transfers to the IRS, FirstPay did
not receive less than a reasonably equivalent value for same;
and (3) pursuant to the Maryland Uniform Fraudulent Conveyance
13
Act, the Trustee was barred on this claim by the “voluntary
payment doctrine.” Id. at 253-55.
As to the two preferential transfer claims, the district
court reached a split decision. Id. at 251-53. First, the
district court agreed with the bankruptcy court that, as a
matter of law, the Government was not an “insider.” Thus, the
preference claim under 11 U.S.C. § 547(b)(4)(B) failed. Second,
the district court rejected the reasoning of the bankruptcy
court as to the preference claim under 11 U.S.C. § 547(b)(4)(A),
however, and vacated the dismissal of that claim and remanded.
The district court reasoned as follows in concluding that
the bankruptcy court had erred in dismissing the § 547(b)(4)(A)
preference claim. First, the court found: “It is undisputed that
the transfer of funds from the Debtor to the IRS . . . was a
transfer of an interest of the Debtor in property” and that
Debtor was insolvent at the time [i.e., within 90 days of
bankruptcy] of the transfers. Id. at 251. This finding satisfied
the threshold requirement of the § 547(b)(4)(A) preference claim
(transfer of an “interest of the debtor in property”) as well as
subsections (b)(3) (“insolvency”) and (b)(4)(A)(the “90-day
lookback”). Second, the court found that, as the Government was
not a creditor of FirstPay, the Government “had received more
than it would have received in a distribution under chapter 7.”
Thus, the court found that the requirement of subsection (b)(5)
14
was satisfied. The court then evaluated whether the remaining
elements of the claim (subsections (b)(1) and (b)(2)) had been
(or could be) established.
As to subsection (b)(1), the court reasoned that the
transfers to the IRS had not been “to a creditor,” for, despite
the Trustee’s vigorous contention to the contrary, the
bankruptcy court had so found and the district court affirmed
that finding. Nevertheless, the district court observed, the
bankruptcy court had failed to consider whether the transfers to
the IRS had been “for the benefit of a creditor.” The court
concluded that this element could be satisfied if FirstPay’s
clients enjoyed a creditor/debtor relationship with FirstPay (as
opposed to, say, merely contracting parties). The district court
concluded that they did have such a relationship because “each
time the Debtor received payments intended for the IRS from a
particular client, a creditor/debtor relationship was created .
. . . And when the Debtor subsequently paid over some of the
client funds to the IRS by reason of its obligation to its
client, the client’s obligation to the IRS was simultaneously
satisfied.” “Thus, the Debtor’s payment to the IRS became a
payment ‘for the benefit of a creditor,’” satisfying subsection
(b)(1). Id. at 252.
As to subsection (b)(2), the district court concluded that
“‘the antecedent debt’ referred to in [that subsection] can be
15
located in the Debtor’s debts to its taxpayer clients.” Id.
Thus, the district court held that the “creditor” contemplated
in subsection (b)(1) need not be the same “creditor” mentioned
in subsection (b)(5); that FirstPay’s payments to the IRS
pursuant to the TRSA for the benefit of its clients (or at least
some of the payments for some of the clients) were made “on
account of an antecedent debt owed by the debtor,” such that
summary judgment in favor of the United States as to payments
made within 90 days prior to the filing of the bankruptcy
petition was erroneous. The district court remanded the case to
the bankruptcy court “for further proceedings not inconsistent
with” its opinion. Id. at 255. 4
On remand, the bankruptcy court granted the Trustee’s
motion for summary judgment in a summary order, entering
judgment against the Government for $28 million plus interest.
The Government moved to alter or amend the judgment. On March 6,
2008, the bankruptcy court filed a memorandum and order denying
the Government’s motion to alter or amend. In re Firstpay, Inc.,
2008 WL 687027 (Bankr. D.Md. Mar. 06, 2008). In denying the
4
The Government timely appealed, and the Trustee cross-
appealed the district court’s order to this court, but upon the
Government’s motion, we dismissed the appeals for lack of a
final appealable judgment.
16
motion to alter or amend, the bankruptcy court explained the
basis for its summary judgment in favor of the Trustee.
Plainly, the bankruptcy court was constrained by the
“mandate rule” to hew closely to the determinations the district
court had reached on its review of the bankruptcy court’s prior
judgment in favor of the Government. Id. at *2. The bankruptcy
court interpreted the district court’s reasoning as follows:
As described by the District Court, Firstpay's
modus operandi was to deposit all of its clients'
money into a single fund, with occasional payments to
the IRS to satisfy or partially satisfy clients’
outstanding tax obligations. Money paid by one client
was used to pay the liabilities of a different client
. . . . On appeal, the District Court noted this
court's error in its holding that because the IRS was
not a creditor of the Debtor that a preference action
would not lie in this case. This court overlooked the
fact that the transfers in question were for the
benefit of other creditor entities; namely, those of
the Debtor's clients who were fortunate enough to have
a portion of their obligations transmitted to the IRS,
thereby satisfying all or part of those clients’
obligations. In a nutshell, as the District Court
stated, the Debtor’s payments to the IRS were made
“for the benefit a creditor” and were made “on account
of an antecedent debt owed by the debtor.” Id. at 252.
Id. at *2-*3. In short, the court concluded, “as noted by the
District Court, the Trustee established each and every element
of a preference claim under § 547(b) as to all transfers to the
IRS made within 90 days before the filing of the petition.” Id.
at 3 (emphasis added). The court denied the motion to alter or
amend.
17
The Government timely appealed to the district court the
grant of summary judgment to the Trustee and the denial of the
Government’s motion to alter or amend. The Trustee took what he
says was a protective cross-appeal from the prior adverse
rulings of both the bankruptcy court and the district court (so
that he could bring all such rulings before us should he elect
to do so). On November 10, 2008, after entertaining oral
argument, the district court affirmed the bankruptcy court in a
summary order. The instant cross-appeals followed.
II.
Summary judgment is only appropriate when there is no
genuine issue of material fact, and the movant is entitled to
judgment as a matter of law. In re Apex Express Corp., 190 F.3d
624, 633 (4th Cir. 1999) (citing Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 247 (1986)); see Fed. R. Civ. Proc. 56(c);
see also Fed. R. Bankr. P. 7056. This court reviews de novo a
bankruptcy court’s award of summary judgment and a district
court’s affirmance thereof. In re French, 499 F.3d 345, 351 (4th
Cir. 2007) (citing In re Ballard, 65 F.3d 367, 370 (4th Cir.
1995)).
18
III.
The parties raise a host of issues. We are persuaded that
further proceedings must be conducted by the bankruptcy court in
respect to the 90-day preference claim. We conclude first that
the district court saddled the Government with a concession,
that FirstPay had transferred its own interest in property when
it made payments to the IRS, that is not borne out by the
record. In connection with that issue, we instruct the
bankruptcy court to reconsider the facts and the law, without
regard to any such concession. Second, we are persuaded that the
bankruptcy court abused its discretion in refusing to permit the
Government to advance its “ordinary course of business”
affirmative defense. In all other respects, we affirm the
judgment of the district court.
A.
The Government principally contends that the district court
committed an error of law in concluding that “it is undisputed
that the transfer of funds from the Debtor to the IRS in this
case was a transfer of an interest of the Debtor in property.”
We agree. Contrary to the district court’s finding, which
severely constrained the bankruptcy court on remand, the
Government has made quite clear throughout the litigation that
it made no such concession. J.A. 171, 288. As the Government
suggests, there are many moving parts to this litigation; it did
19
not feel obliged to raise every possible issue in response to
the claims asserted against it and it did not.
The Trustee’s response that the Government adduced “no
evidence” at trial to support the Government’s assertion that
FirstPay did not transfer property in which it had an interest
misses the mark. 5 Owing to the unusual procedural course followed
in this case, including the pretermission of discovery by
agreement of the parties and the fact that the precise issue was
never squarely presented to the bankruptcy court during its
consideration of the Government’s motion for summary judgment or
at trial, it simply has not been presented as a factual issue or
an appropriately-framed legal issue. 6 Once the district court
5
The Trustee apparently relies on the Government’s failure
to deny one or more of the Requests for Admissions he served on
the Government during the truncated period of discovery. We have
examined that issue closely and we are satisfied that even if
the requests are deemed admitted, as the bankruptcy court
determined during trial, the admissions by themselves fall far
short of establishing that the Government conceded that
FirstPay’s transfers to the IRS “was a transfer of an interest
of the Debtor in property” as the district court found, or that
there is no genuine dispute of material fact. Certainly, the
bankruptcy court never made such a finding. Whether and the
extent to which FirstPay enjoyed a cognizable interest in any
one or more of the transfers it made to the IRS during the 90-
day lookback will likely require extensive proceedings in
discovery.
6
The bankruptcy court had before it at the time of trial
the Trustee’s motion to compel discovery, but it appears that it
never ruled on the motion. Yet, it further appears that the
Government (which the courts below criticized for what they
seemed to have regarded as exaggerated claims of confidentiality
(Continued)
20
erroneously deemed the Government to have conceded the issue,
the bankruptcy court felt itself bound by the district court
“mandate.” Manifestly, genuine disputes of material fact
surround the issue of whether, and if so how many and what
portion of, any of the numerous transfers by FirstPay to the IRS
may be preferences. Cf. In re Fulghum Constr. Corp., 706 F.2d
171 (6th Cir. 1983) (“Section 547(b) deliberately defines a
preference as a ‘transfer’, rather than as an aggregate of
transfers.”).
In any event, it is the Trustee’s burden to prove a
preference, including the threshold requirement of whether the
debtor transferred property in which it enjoyed an interest. See
11 U.S.C. § 547(g) (“For the purposes of [section 547], the
trustee has the burden of proving the avoidability of a transfer
under subsection (b).”). Thus, we conclude that the judgment in
favor of the Trustee must be vacated.
B.
“Equality of distribution among creditors is a central
policy of the [preference provisions of the] Bankruptcy Code.
as to taxpayer information) may have been sanctioned sub
silentio. On remand, discovery practice should follow a more
orderly course and, if indeed, the Government is deserving of
sanction, same should be imposed transparently. All that said,
we indicate no view on how the bankruptcy court should manage
discovery in this unusual case.
21
According to that policy, creditors of equal priority should
receive pro rata shares of the debtor’s property.” Begier v.
I.R.S., 496 U.S. 53, 58 (1990) (citations omitted; alteration
added). The Government contends here that it was not a creditor
of FirstPay and that the funds it received from FirstPay
comprised the property of FirstPay’s clients, not FirstPay’s
property.
In Begier, the Court noted that “[t]he Bankruptcy Code does
not define [the term] ‘property of the debtor.’” Id. Thus, it
drew on “[11 U.S.C.] § 541, which delineates the scope of
‘property of the estate’ and serves as the postpetition analog
to § 547(b)’s ‘property of the debtor.’” Id. at 59. Under 11
U.S.C. § 541(a)(1), the commencement of a bankruptcy action
creates an estate, “comprised of all legal or equitable
interests of the debtor in property as of the commencement of
the case.” However, “[p]roperty in which the debtor holds . . .
only legal title and not an equitable interest . . . becomes
property of the estate under subsection [§ 541](a)(1) . . . only
to the extent of the debtor’s legal title to such property, but
not to the extent of any equitable interest in such property
that the debtor does not hold.” 11 U.S.C. § 541(d). Ultimately,
the Court concluded that the funds at issue (withheld FICA,
income and excise taxes paid or held for payment by American
International Airlines, Inc. (“AIA”) to the IRS) were held in
22
trust for the Government. Id. at 60-67. The Court held that
“AIA’s payments of trust-fund taxes to the IRS from its general
accounts were not transfers of ‘property of the debtor,’ but
were instead transfers of property held in trust for the
Government.” Id. at 67. Accordingly, the payments could not be
avoided as preferences. Id. Relatedly, in a case closely
analogous to the case before us, involving a tax service
company, the First Circuit stated that “[t]he plain text of §
541(d) excludes property from the estate where the bankrupt
entity is only a delivery vehicle and lacks any equitable
interest in the property it delivers.” City of Springfield v.
Ostrander (In re LAN Tamers, Inc.), 329 F.3d 204, 210 (1st Cir.
2003) (citation omitted).
In its March 6, 2008 memorandum and order denying the
Government’s motion to alter or amend the bankruptcy court’s
summary judgment in favor of the Trustee, the bankruptcy court
distinguished Begier on the grounds that it “involved payment of
withholding taxes by the employer from its general account, not,
as here, payments by a third party,” and because “FirstPay is
not the person required to collect or withhold and to pay over
the tax.” We think the bankruptcy court, now freed of the
district court mandate that constrained its earlier assessment
23
of the remaining preference claim, will want to take another,
closer look at this issue. 7
C.
In denying the Government’s motion to alter or amend the
judgment, the bankruptcy court stated that “the IRS neither
pleaded nor proved any of the affirmative defenses to a
preference action set out in § 547(c),” and thus refused to
consider the “ordinary course of business” defense on the ground
that “[e]ven if such defenses existed, they were waived by not
being pled in the answer.” The Government contends that the
bankruptcy court abused its discretion in summarily refusing to
consider the Government’s belated assertion of the “ordinary
course of business” defense under 11 U.S.C. § 547(c)(2). We
agree.
Of course, “[i]n responding to a pleading, a party must
affirmatively state any . . . affirmative defense.” Fed. R. Civ.
P. 8(c). When a party fails to assert an affirmative defense in
the appropriate pleading, such a failure will sometimes result
in a binding waiver. Emergency One, Inc. v. American Fire Eagle
7
FirstPay’s clients were subject to the same withholding
requirements as was AIA; they simply contracted with a payroll
service provider to calculate and withhold employee taxes for
them. Whether FirstPay converted and misappropriated some of its
clients’ funds in order to make payments to the IRS on behalf of
other clients, among other issues, will have to be determined by
the bankruptcy court in the first instance.
24
Engine Co., Inc., 332 F.3d 264, 271 (4th Cir. 2003) (citation
omitted). Nevertheless, we have observed that where there is a
waiver, it “should not be effective unless the failure to plead
resulted in unfair surprise or prejudice.” S. Wallace Edwards &
Sons, Inc. v. Cincinnati Ins. Co., 353 F.3d 367, 373 (4th Cir.
2003). Our longstanding approach to liberal amendment of
pleadings in the absence of undue prejudice, see Laber v.
Harvey, 438 F.3d 404, 426-29 (4th Cir. 2006) (en banc) (finding
abuse of discretion in denial of leave to amend complaint),
applies equally to amendments to assert affirmative defenses.
E.g., IGEN Int'l, Inc. v. Roche Diagnostics GmbH, 335 F.3d 303,
311 (4th Cir. 2003) (citations omitted).
We can discern no undue prejudice to the Trustee from
allowing the Government to amend its answer to assert its
affirmative defense. Here, there was no prejudice or unfair
surprise to the Trustee when the Government raised the “ordinary
course of business” defense in its motion for summary judgment.
In fact, the Trustee did not object to the Government’s
assertion of the defense in a dispositive motion or otherwise
claim that it was waived because it was not included as an
affirmative defense in the Government’s answer. Rather, the
Trustee disputed the Government’s argument on its merits. And
even though it was not part of the bankruptcy court’s original
decision, the Government again raised the ordinary course
25
defense in its brief on the first appeal to the district court
and again without objection from the Trustee. Thus, we remand
for a determination regarding the merits of the Government’s
“ordinary course of business” defense.
D.
In its cross-appeal, the Trustee takes aim at the adverse
rulings of the lower courts dismissing counts I and counts III
through VIII of his complaint. Having had the benefit of full
briefing and oral argument, and having carefully examined the
Trustee’s assignments of error and found them to lack merit, we
affirm the orders dismissing such claims, substantially for the
reasons stated in the opinions of the lower courts. Wolff v.
United States, 372 B.R. 244 (D.Md. 2007), aff’g in part and
rev’g in part, In re Firstpay, 2006 WL 2959342 (Bankr. D.Md.
Aug. 17, 2006).
IV.
For the reasons set forth above, we affirm in part and
vacate in part the orders under review. We remand this action
for further proceedings in conformity with the views expressed
herein.
No. 09-1076 AFFIRMED IN PART AND
VACATED AND REMANDED IN PART
No. 09-1107 AFFIRMED
26