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In re FirstPay, Inc.

United States Court of Appeals, Fourth Circuit

December 12, 2014

In Re: FIRSTPAY, INC., Debtor. MICHAEL G. WOLFF, Trustee, Plaintiff - Appellant,
v.
UNITED STATES OF AMERICA, IRS, Defendant - Appellee

Argued September 17, 2014

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Appeal from the United States District Court for the District of Maryland, at Greenbelt. (8:12-cv-02952-PJM; BK-03-30102; AP-05-01695). Peter J. Messitte, Senior District Judge.

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.

Before MOTZ and DIAZ, Circuit Judges, and DAVIS, Senior Circuit Judge. Senior Judge Davis wrote the opinion, in which Judge Motz and Judge Diaz joined.

OPINION

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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.

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

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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 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 ...


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