Southeast Hotel Properties Ltd. Partnership, In re

• Decision Date: 31 October 1996
• Docket Number: No. 95-3188,95-3188
• Citation: 99 F.3d 151
• Parties: , 36 Collier Bankr.Cas.2d 1649, 29 Bankr.Ct.Dec. 1202, Bankr. L. Rep. P 77,158 In re SOUTHEAST HOTEL PROPERTIES LIMITED PARTNERSHIP, d/b/a Days Inn, d/b/a Howard Johnson; Florida Hotel Properties Limited Partnership Plan Trust Agreement, Debtors. Edward P. BOWERS, Trustee, Plaintiff-Appellee, v. ATLANTA MOTOR SPEEDWAY, INCORPORATED, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 151

99 F.3d 151

65 USLW 2351, 36 Collier Bankr.Cas.2d 1649,

29 Bankr.Ct.Dec. 1202, Bankr. L. Rep. P 77,158

In re SOUTHEAST HOTEL PROPERTIES LIMITED PARTNERSHIP, d/b/a

Days Inn, d/b/a Howard Johnson; Florida Hotel

Properties Limited Partnership Plan

Trust Agreement, Debtors.

Edward P. BOWERS, Trustee, Plaintiff-Appellee, v. ATLANTA MOTOR SPEEDWAY, INCORPORATED, Defendant-Appellant.

No. 95-3188.

United States Court of Appeals,

Fourth Circuit.

Argued Sept. 27, 1996.

Decided Oct. 31, 1996.

ARGUED: Robert Curtis Muth, James, McElroy & Diehl, P.A., Charlotte, NC, for Appellant. Joseph Williamson Grier, III, Grier & Grier, P.A., Charlotte, NC, for Appellee.

Before ERVIN and HAMILTON, Circuit Judges, and SPENCER, United States District Judge for the Eastern District of Virginia, sitting by designation.

Affirmed by published opinion. Judge HAMILTON wrote the opinion, in which Judge ERVIN and Judge SPENCER joined.

OPINION

HAMILTON, Circuit Judge:

Atlanta Motor Speedway (AMS) appeals the district court's affirmance of the bankruptcy court's entry of summary judgment in favor of the trustee for the bankruptcy debtors (Trustee), Florida Hotel Properties Limited Partnership (FHP) and Southeast Hotel Properties Limited Partnership (SEHP), in a consolidated adversary proceeding pursuant to § 549 of the Bankruptcy Code. See 11 U.S.C. § 549. For the reasons stated herein, we affirm.

I.

FHP and SEHP owned collectively twenty-five Days Inn Hotels in Florida and other Southeastern states. Commercial Management Corporation (CMC) managed both FHP and SEHP, and as their manager, controlled their operating bank accounts. Sam McMahon, III (McMahon) was president of CMC at all times relevant to this case.

On July 2, 1991, FHP filed a voluntary petition under Chapter 11 of the Bankruptcy Code and operated as a debtor-in-possession ¹ until a special examiner was appointed on December 13, 1991. On August 15, 1991, an involuntary bankruptcy petition was filed against SEHP, and on September 12, 1991, an order for relief was entered against SEHP. SEHP also operated as a debtor-in-possession until a special examiner was appointed on November 18, 1991.

In early October 1991, AMS provided a hospitality suite and guest services to Team III Racing, a corporation owned by McMahon, for which it subsequently issued an invoice to Team III Racing. On November 15, 1991, CMC issued two checks in an effort to satisfy the invoice: one from the FHP operating account for $12,500, and one from the SEHP operating account for $10,000. Rather than issuing the checks directly to AMS, CMC issued them to Southern National Bank (SNB) with the instruction that SNB issue a cashier's check to AMS in the amount of $22,500. Shortly thereafter, per CMC's instructions, SNB issued and delivered one cashier's check to AMS in the amount of $22,500, which noted "Florida Hotel Properties" as remitter. McMahon then caused an employee of CMC to create certain false documents to reflect the disbursement of $22,500 as refunds of guests' deposits for group tours booked with FHP and SEHP.

Because the transfers were effected post-petition, the Trustee for FHP and SEHP ² subsequently brought two adversary proceedings against AMS under §§ 549 and 550 of the Bankruptcy Code to avoid the transfers and recover the $22,500. See 11 U.S.C. § 549 (giving trustee authority to avoid unauthorized post-petition transfers of prop erty out of estate); id. § 550 (authorizing trustee to recover property transferred to extent transfer is avoided under § 549). After the bankruptcy court consolidated the two proceedings and discovery took place, both parties moved for summary judgment. Following a hearing, the bankruptcy court found that FHP and SEHP had made transfers after the commencement of the FHP bankruptcy proceeding and after the entry of the order for relief in the SEHP bankruptcy proceeding. The bankruptcy court found further that the transfer was not in the ordinary course of the business of either FHP or SEHP and was not authorized under the Bankruptcy Code. ³ The bankruptcy court concluded that the transfers were avoidable and that AMS was liable as the initial transferee of the transfers under § 550(a) of the Bankruptcy Code. ⁴

AMS appealed the bankruptcy court's decision to the United States District Court for the Western District of North Carolina. The district court affirmed the decision of the bankruptcy court granting the Trustee's motion for summary judgment. Specifically, the district court held that AMS was the "initial transferee" of the debtors' property under Section 550(a) of the Bankruptcy Code and, therefore, the Trustee could recover the $22,500. In addition, the district court held that there were no genuine issues of material fact as to whether the transfer was in the ordinary course of the debtors' businesses, making summary judgment appropriate. AMS noted a timely appeal.

II.

Because the district court sits as an appellate court in bankruptcy, our review of the district court's decision is plenary. See Brown v. Pennsylvania State Employees Credit Union, 851 F.2d 81, 84 (3d Cir.1988). In other words, we apply the same standard of review as the district court applied to the bankruptcy court's decision. Findings of fact are reviewed for clear error, and conclusions of law are reviewed de novo. In re Johnson, 960 F.2d 396, 399 (4th Cir.1992).

III.

AMS's first contention on appeal is that the district court and bankruptcy court erred in holding that AMS was the "initial transferee" of the avoidable transfers under § 550 of the Bankruptcy Code. Instead, AMS argues that either CMC or McMahon was the initial transferee in this case.

A.

As noted above, a trustee in bankruptcy is entitled to avoid unauthorized post-petition transfers. See 11 U.S.C. § 549. 11 U.S.C. § 550 sets forth the transferees from whom a trustee may recover property where a transfer has been avoided under § 549 of the Bankruptcy Code. See 11 U.S.C. § 550. Specifically, § 550 provides that to the extent that a transfer is avoided under § 549 of the Code, the trustee may recover the property from:

(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or

(2) any immediate or mediate transferee of such initial transferee.

42 U.S.C. § 550(a). Section 550 further provides that the trustee may not recover under § 550(a)(2) from:

(1) a transferee that takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided; or

(2) any immediate or mediate good faith transferee of such transferee.

42 U.S.C. § 550(b). Thus, § 550 protects a mediate or immediate transferee who has taken for value in good faith without knowledge of the voidability of the transfer. First Nat'l Bank of Barnesville v. Rafoth (In re Baker & Getty Fin. Serv., Inc.), 974 F.2d 712, 722 (6th Cir.1992). However, neither the "initial transferee" nor "the entity for whose benefit such transfer was made" receives this protection. Id. Rather, the trustee's power to recover from these entities under § 550(a)(1) is absolute. Danning v. Miller, 922 F.2d 544, 547 (9th Cir.1991).

Therefore, under § 550(a), if AMS constitutes the initial transferee of the November 15, 1991 transfers, the Trustee is entitled to recover the $22,500 from AMS. The term "initial transferee" is not defined in the Bankruptcy Code. See Malloy v. Citizens Bank of Sapulpa (In re First Sec. Mortgage Co.), 33 F.3d 42, 43 (10th Cir.1994). However, in Bonded Fin. Serv., Inc. v. European Am. Bank, 838 F.2d 890 (7th Cir.1988), the Seventh Circuit set forth the definition of "initial transferee" employed by every circuit that has subsequently considered the question. See, e.g., Malloy, 33 F.3d at 44; Security First Nat'l Bank v. Brunson (In re Coutee), 984 F.2d 138, 140-41 (5th Cir.1993); Rafoth, 974 F.2d at 722; Danning, 922 F.2d at 549.

In Bonded, the Seventh Circuit articulated a "dominion and control" test for determining whether an entity is an "initial transferee" under § 550. According to the Bonded court, "the minimum requirement of status as a 'transferee' is dominion over the money or other asset, the right to put the money to one's own purposes." Bonded, 838 F.2d at 893. The court stated further that " 'transferee' is not a self-defining term; it must mean something different from 'possessor' or 'holder' or 'agent.' " Id. at 894. Finally, the Bonded court held that the terms "initial transferee" and "entity for whose benefit [the] transfer was made" as used in § 550 are mutually exclusive, precluding an entity from constituting both the transferee and the entity for whose benefit such transfer was made. Id. at 895-96.

Although our circuit has not explicitly adopted the test set forth in Bonded, we have recognized principles consistent with the dominion and control test. For example, we have recognized that the initial transferee of property is not always the initial recipient of the property, Huffman v. Commerce Security Corp. (In re Harbour), 845 F.2d 1254, 1257 (4th Cir.1988), and that a party cannot be an initial transferee if he is a "mere conduit" for the party who had a direct business relationship with the debtor, Lowry v. Security Pac. Business Credit, Inc. (In re Columbia Data Products), 892 F.2d 26, 28 (4th Cir.1989). In addition, we relied on Bonded when we held that the entity "for whose benefit [the] transfer was made," see 11 U.S.C. § 550(a)(1), cannot be a subsequent transferee of the property, but rather is " 'a guarantor or debtor--someone who receives the benefit but not the money.' " Lowry, 892 F.2d at 29 (quoting Bonded, 838 F.2d at 895).

While courts have consistently held that the Bonded dominion and control test is the appropriate test to apply when determining whether a person or entity constitutes an initial transferee under § 550, those same courts have disagreed about the type of...