Firstpay, Inc. v. WolffFirstpay, Inc. v. Wolff
United States of America, Plaintiff-Appellant, v. Michael G. Wolff, Trustee, Defendant-Appellee.
In re FirstPay, Incorporated, Debtor.
United States of America, Plaintiff-Appellee, v. Michael G. Wolff, Trustee, Defendant-Appellant.
Nos. 09-1076, 09-1107.
United States Court of Appeals, Fourth Circuit.
Argued: March 25, 2010.
Decided: Aug. 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No. 09-1076 affirmed in part and vacated and remanded in part; No. 09-1107 affirmed by unpublished PER CURIAM opinion.
Unpublished opinions are not binding precedent in this circuit.
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 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 challеnge 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
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:
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.
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.
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 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’ employeеs 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 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 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 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 corpоrations, 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.1
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 United States. 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
ances under
Before the completion of discovery, and with the trial date on the horizon, the Government mоved 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
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
Third, the transfers made by FirstPay to the IRS were not recoverable as fraudulent conveyances under
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 аssert 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 Act, the Trustee was barred on this claim by the “voluntary payment doctrine.” Id. at 253-55.
As to the two prеferential 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
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 Debtоr 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) was satisfied. The court
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 timе 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 located in the Debtor‘s debts to its taxpayer clients.” Id. Thus, the district court held that the “creditor” contemplated in subsection (b)(1) neеd 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 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 аll 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
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, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)); see
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 “ordinаry 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 not feel obliged to raise every possible issue in
The Trustee‘s rеsponse 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 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
B.
“Equality of distribution among creditors is a central policy of the [preference provisions of the] Bankruptcy Code. 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, 110 S.Ct. 2258, 110 L.Ed.2d 46 (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 delin-
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 mandatе that constrained its earlier assessment 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 “оrdinary course of business” defense under
Of course, “[i]n responding to a pleading, a party must affirmatively state any ... affirmative defense.”
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 Govеrnment‘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 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 lаck 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
Notes
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, whiсh 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.(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;
(4) made—
(A) on or within 90 days before the date of the filing of the petition; or
(B) betwеen 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.