- Case Type:
- Case Status:
- 15-56220 (9th Circuit, Oct 02,2017) Published
- The appellants were deemed initial transferees and strictly liable for the return of the monies fraudulently transferred by the debtor.
- Procedural context:
- The Committee filed adversary proceedings against the appellants for the recovery of fraudulent transfers. The bankruptcy court granted the appellants' motions for summary judgment, finding the appellants were "subsequent transferees" and entitled to the safe harbor of Section 550(b)(1). On appeal, the District Court reversed, ruling the appellants were "initial transferees," and therefore liable to the Committee for the return of the monies fraudulently transferred. Appellants appealed to the Ninth Circuit, which affirmed (2-1). A dissent was written by Judge Nguyen..
- One notes the difficulty of this case when the Panel opens its opinion with the comment that these appeals 'test' the maxim 'bad facts make bad law' in the context of "the often esoteric backdrop of the Bankruptcy Code." Debtor's sole shareholder, director and president (Michael Bello) opened a second bank account in the name of the Debtor. Bello deposited rebate funds received from Debtor's suppliers in the secondary account. Bello used the funds in the secondary account solely to support his 'lavish lifestyle.' Over the years, Bello paid over $8.0 million to over 130 entities/persons, including $220,000 to appellants Bureshes (for the purchase of real property) and $230,000 to appellant Henry (for services rendered). Bello paid the appellants with checks drawn on the secondary account, which checks bore the name of the Debtor (Walldesign Incorporated). Appellants argued a "two-step transaction" approach contending Bello was the initial transferee as he had control over the funds in the secondary account, thus making the appellants subsequent transferees and entitled to the safe harbor provisions of Section 550(b)(1). Initially, to determine the status of a 'transferee,' the Ninth Circuit applied the "dominion test," or one who has "legal title and the ability of the transferee to freely appropriate the transferred funds." In applying this test in the context of a fraudulent transfer, the Ninth Circuit adopted the "one-step transaction" approach stating that Bello's control over the Debtor's business does not "compel a finding that [the principal] had dominion . . . over the funds transferred from [the corporation] to [a third party]." In ruling that Bello was not an initial transferee, the Panel noted that the secondary account was in the name of the Debtor and checks drawn on this account had the corporation's name "emblazoned" on each check; and though Bello may have had control over such account and the funds in the account, the account and the funds remained under the 'legal' control of the Debtor, not Bello. Thus, Bello could not be an 'initial transferee,' with the result that the appellants were deemed 'initial transferees' and strictly liable for the return of the funds they received. From a policy standpoint, the Ninth Circuit noted that the appellants were in a better position than the Debtor's creditors to monitor fraudulent transfers since the checks the appellants received were clearly identified as funds drawn from the Debtor's account.
- A. Wallace Tashima, Jacqueline H. Nguyen, Algenon L. Marbley
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