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 
2

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.
3

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.
4

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 
5

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. § 5471 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)
6

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. § 5502 (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).
7

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 
8

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. 
9

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 
10

prepetition property under 11 U.S.C. § 547(b). See 496 U.S. at 

58–59. 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 
11

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.
12

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 
13

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 
14

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. 
15

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 
16

& 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, 
17

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 
18

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.
19

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 
20

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.
21

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 “trustfund 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 § 
22

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. 
23

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 
25

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.