Martinez v. Hutton (In re Harwell)

No. 09-14997 (11th Cir. Dec. 29, 2010) [Publish]
Clarifying that the conduit or control exception to "initial transferee" liability under Section 550(a)(1) requires a showing of good faith.
Procedural context:
Appeal from district court's affirmance of M.D. Fla. Bankruptcy Court's grant of summary judgment in favor of Appellees (Steven D. Hutton & his law firm) on trustee's fraudulent transfer complaint. Bankruptcy Court concluded Hutton was mastermind of debtor's fraudulent transfer scheme, but was not an "initial transferee" under Section 550(a)(1). On appeal reversed and remanded.
Creditor ("Hill") obtained Colorado judgement against debtor ("Harwell"). In July 2005 Hill attempted to domesticate his judgment in Florida where Hill owned interests in two Florida businesses (CFE and SEI). Attorney ("Hutton") represented Harwell with respect to the domestication proceeding and on disputes with other investors in CFE and SEI. Settement with CFE and SEI was reached in early August 2005 which resulted in substantial cash distributions to Harwell within thirty days. Harwell failed to disclose settlement terms in post-judgment interrogatories in late August 2005. Funds were deposited into Hutton's trust account and subsequently disbursed on the same day to Harwell and other family members and selected creditors. Trustee commenced action against Hutton under Sections 548(a)(1)(A) and 550(a)(1) for aiding and abetting a fraudulent transfer and civil conspiracy to effect a fraudulent transfer. Hutton moved for, and was granted, summary judgment. Bankruptcy Court assumed that Hutton was the mastermind of the fraudulent transfer scheme, but held that he was not an "initial transferee" under Section 550(a)(1) as he never had dominion and control over the money. The District Court affirmed. The Circuit Court, reviewing the legal determinations de novo, reviewed prior 11th Circuit Court opinions addressing the term "initial transferee." The opinion provides a good walk through of the applicable case law. The Court concluded that the following clear pattern emerges from precedent: (1) The litieral or rigid interpretation of Section 550(a) means that the first recipient of the debtor's fraudulentlytransferred funds is an "initial transferee;" (2) courts have carved out an equitable exception known as the mere condut or control test (court have adopted a flexible, pragmatic, equitable approach of looking beyond the particular transfer in question to the circumstances of the transaction in its entirety); and (3) the court considers whether the intermediary "acts without bad faith, and is simply an innocent participant" the the fraudulent transfer. Therefore the burden of proof of a party seeking an equitable exception to the statutory language of Section 550(a)(1) must establish that (1) they did not have control over the assets received; and (2) that they acted in good faith and as an innocent participant to the fraudulent transfer. Court held that Bankrutpcy Court's assumption that Hutton was the mastermind of the fraudulent transfer scheme precluded summary judgment in his favor. Reversed and remanded for further proceedings consistent with the opinion.

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