773 F.3d 583
4th Cir.2014Background
- FirstPay, Inc. provided payroll processing and tax reporting services to clients under written agreements governed by Maryland law.
- Before payroll dates, client funds covering taxes, wages, and FirstPay fees were deposited into a separate tax account.
- Funds in the tax account were sometimes transferred to FirstPay’s operating or personal expenditure accounts, not solely to taxes.
- In 2003 a bankruptcy petition was filed; Michael Wolff was appointed trustee for FirstPay’s estate.
- The trustee sought to recover approximately $28 million paid to the IRS within 90 days before the petition, claiming it was an avoidable transfer.
- The district and bankruptcy courts held the funds were not property of FirstPay’s estate, and the trustee appealed seeking reconsideration of the avoidable-transfer issue under § 547(b)/(c).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the 90-day transfer to the IRS was a transfer of debtor’s property | Trustee contends funds were debtor property via trust or property interest | Government contends funds were trust property or not debtor’s property | Yes; funds were trust property and not debtor’s property, so not avoidable |
| Whether FirstPay held the tax funds in an express trust under Maryland law | Trustee asserts express trust existed over tax funds | Government asserts funds were not trust property | Yes; Maryland law recognizes an express trust over the funds |
| Whether commingling defeats tracing of trust funds under MD law | Trustee argues commingling does not defeat trust identification | Government asserts commingling undermines traceability | No; funds can be traced as trust property despite commingling |
Key Cases Cited
- Begier v. United States, 496 U.S. 53 (U.S. 1990) (trust-fund taxes treated as trust property not debtor property)
- In re Dameron, 155 F.3d 718 (4th Cir. 1998) (trust funds identifiable despite commingling; tracing principles apply)
- Levin v. Security Financial Corp., 230 A.2d 93 (Md. 1967) (distinguishes between trust and debt; intention governs)
- From the Heart Church Ministries, Inc. v. African Methodist Episcopal Zion Church, 803 A.2d 548 (Md. 2002) (three elements of an express trust; intent required)
- Page v. County Commissioners of Frederick County, 164 A.2d 182 (Md. 1933) (identification of trust property may allow tracing even with mingling)
- MacBryde v. Burnett, 132 F.2d 898 (4th Cir. 1942) (if trust funds mingled with trustee’s funds, still traceable unless indistinguishable)