Court Opinion

ID: 153030
Source: CourtListenerOpinion
Date Created: 2010-08-13 18:00:14+00
Date Added: 2024-06-11T17:24:30.504359
License: Public Domain

UNPUBLISHED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No. 09-1107 affirmed by unpublished per curiam opinion.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Unpublished opinions are not binding precedent in this circuit.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