In re Cohen

• Decision Date: 20 August 2002
• Docket Number: No. 01-16080.,01-16080.
• Parties: In re: Cynthia COHEN, Debtor. Robert P. Abele, Trustee/Movant, Appellant, v. Modern Financial Plans Services, Inc., Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

300 F.3d 1097

In re: Cynthia COHEN, Debtor.

Robert P. Abele, Trustee/Movant, Appellant, v. Modern Financial Plans Services, Inc., Appellee.

No. 01-16080.

United States Court of Appeals, Ninth Circuit.

Submitted^* June 14, 2002.

Filed August 20, 2002.

COPYRIGHT MATERIAL OMITTED

Terry A. Dake, Terry A. Dake, LTD., Phoenix, AZ, for appellant.

Stanley M. Hammerman, Hammerman & Hultgren, P.C., Phoenix, AZ, for appellee.

Appeal from the United States District Court for the District of Arizona; Roslyn O. Silver, District Judge, Presiding. D.C. No. CV-00-970-PHX-ROS.

Before: LAY,^** THOMPSON, and TALLMAN, Circuit Judges.

TALLMAN, Circuit Judge.

In a case of first impression in this Circuit we are called upon to determine whether the person listed on the purchaser line of a cashier's check exercises dominion over the funds for the purpose of determining who may be subject to a voidable preference in a bankruptcy adversary action. Robert P. Abele, the debtor's Trustee, seeks to avoid a fraudulent transfer, under 11 U.S.C. § 548, which was made to settle a debt owed to appellee Modern Financial Plans Services ("Modern") by the debtor's husband. The debtor, Cynthia Cohen ("Cynthia") assisted her husband by purchasing a cashier's check payable to Modern (with separate funds not listed as an asset in her husband's bankruptcy), and designating her husband, Jeffrey Cohen ("Jeffrey"), as the purchaser on the face of the check.

The Trustee appeals the district court's decision affirming the bankruptcy court's judgment in Modern's favor. The district court held that Jeffrey was the initial transferee of the funds and that Modern was the subsequent transferee who accepted the funds in good faith, pursuant to 11 U.S.C. § 550(b). We have jurisdiction under 28 U.S.C. §§ 158(d) and 1291, and we reverse and remand. We hold that Modern was the initial transferee of the funds and is, therefore, strictly liable to the Trustee.

I

The facts of this case are not in dispute. In 1990, Jeffrey purchased a mobile home for approximately $90,000. Modern financed a third of the purchase price, and obtained a security interest in it. Jeffrey sold the mobile home in 1991, but failed to repay the loan. Modern subsequently filed an action for damages and replevin against Jeffrey and the buyer. Instead of responding to the lawsuit, Jeffrey filed his own chapter 7 petition in July 1996.

In August 1996, Modern proposed a Reaffirmation Agreement in which Jeffrey would pay $15,000 on or before September 13, 1996, and $5,000 in thirty-six monthly installments. Because of Jeffrey's financial instability, the Agreement required Cynthia to guarantee the $5,000 deferred payment. Jeffrey, again, failed to pay Modern. In October 1996, Modern filed a dischargeability complaint against Jeffrey.

Over the next seven months, the parties entered into various settlement agreements, none of which were consummated. Finally, on March 13, 1997, Jeffrey agreed to pay Modern $21,000 within seven days, $1,000 of which was to cover Modern's attorneys' fees. In exchange, Modern agreed to release its lien on the mobile home and dismiss its complaints against Jeffrey. Jeffrey timely paid Modern the full settlement amount, and Modern released the lien and dismissed the lawsuits.

To pay the settlement amount, Jeffrey gave his bankruptcy attorney a Bank of America cashier's check made payable to Modern's counsel. Jeffrey was designated as the purchaser on the face of the check. Unbeknownst to Modern, Cynthia had actually purchased the check from Bank of America with her own funds. At the time of the purchase, Cynthia was insolvent.

In June 1997, Cynthia filed her own chapter 7 petition. Cynthia's Trustee subsequently filed a complaint against Modern to recover the proceeds of the cashier's check alleging that the transfer was voidable, pursuant to § 548(a)(1), because Cynthia, not Jeffrey, made the payment to Modern, the payment took place less than one year prior to Cynthia's bankruptcy filing, and Cynthia was insolvent at the time of the transfer. Modern moved to dismiss, or for summary judgment, on the ground that Cynthia did not transfer the funds to Modern and that Modern was a subsequent "good faith" transferee under § 550(b). The Trustee filed a cross-motion for summary judgment arguing that Modern was the "initial transferee" under § 550(a), and that Jeffrey was simply a "courier" of the funds.

After a hearing on the motions, the bankruptcy court held that Modern was the "initial transferee," and granted the Trustee's Motion. Modern appealed to the Bankruptcy Appellate Panel ("BAP"), which reversed the bankruptcy court's decision and remanded the case for a determination of whether Modern was a good faith subsequent transferee under § 550(b)(1). See Modern Fin. Plans & Servs. v. Abele (In re Cohen), 236 B.R. 1, 7-8 (9th Cir.BAP 1999).

On remand, the bankruptcy court determined that Modern had no duty of inquiry because the cashier's check stated on its face that Jeffrey, the obligor, was the purchaser of the instrument. It therefore held § 550(b)(1) provided Modern with a safe harbor and granted judgment in its favor. The Trustee appealed to the United State District Court for the District of Arizona, which affirmed the BAP's decision that Modern was not the initial transferee, and upheld the bankruptcy court's holding that Modern had satisfied § 550(b)(1). Accordingly, the district court affirmed the bankruptcy court's final order granting Modern's motion for summary judgment.¹ This appeal followed.

II

In reviewing a district court's affirmance of a bankruptcy court decision, we follow the same rule as the district court — findings of fact are reviewed under the "clearly erroneous" standard, and conclusions of law are reviewed de novo. In re Cal. Trade Technical Sch., Inc., 923 F.2d 641, 645 (9th Cir.1991). See also Onink v. Cardelucci (In re Cardelucci), 285 F.3d 1231, 1233 (9th Cir.2002). Issues of statutory interpretation are also reviewed de novo. See In re Cardelucci, 285 F.3d at 1233.

A trustee may set aside a transfer of an interest of the debtor if the debtor made the transfer within one year of the date she filed a chapter 7 petition, and if she was insolvent at the time of the transfer. See 11 U.S.C. § 548(a)(1) (1993). In this case, the parties do not dispute that a fraudulent transfer occurred within the meaning of the statute. If a transfer is voidable under § 548, the debtor's trustee may recover from either: "(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 transfer." 11 U.S.C. § 550(a)(1) & (2) (1993).

A trustee's right to recover differs dramatically depending on which section is applicable. Under the first section, "[t]he trustee's right to recover from an initial transferee is absolute." Schafer v. Las Vegas Hilton Corp. (In re Video Depot), 127 F.3d 1195, 1197-98 (9th Cir.1997) (citing 11 U.S.C. § 550(b)). Under the second section, the trustee may only recover if the subsequent transferee did not accept the transfer for value, in good faith, and without knowledge of the transfer's voidability. Id. Thus, the "good faith" exception, or safe harbor, is only available to subsequent transferees.

While the term transferee is not defined by the Bankruptcy Code, it is generally accepted that a transferee is one who, at a minimum, has "dominion over the money or other asset, the right to put the money to one's own purposes." Bonded Fin. Servs., Inc. v. European Am. Bank, 838 F.2d 890, 893 (7th Cir.1988). See also In re Video Depot, 127 F.3d at 1198 (same); In re Bullion Reserve of N. Am., 922 F.2d 544, 548 (9th Cir.1991) (same). In practical terms, the "dominion test" requires that a transferee be "free to invest the whole [amount] in lottery tickets or uranium stocks."² Bonded Fin. Servs., 838 F.2d at 894. Dominion is therefore akin to legal control (e.g., the right to invest the funds as one chooses), not mere possession. See Bowers v. Atlanta Motor Speedway, 99 F.3d 151, 156 (4th Cir.1996) ("[T]he dominion and control test as set forth in Bonded requires legal dominion and control over the funds transferred."); In re Coutee, 984 F.2d 138, 141 n. 4 (5th Cir.1993) ("Dominion or control means legal dominion or control.").

Based upon the above definitions, the Trustee contends that Modern was the "initial transferee." We agree.

A

Case law discussing the rights of a remitter, or purchaser, of a cashier's check is scant. The most closely analogous case in this Circuit, and that relied upon by the district court, the BAP, and Modern, to argue that Modern was not the initial transferee, is In re Video Depot.

In Video Depot, Jeffrey Arlynn, the president of Video Depot and an active gambler, purchased a cashier's check with Video Depot's funds in order to pay off his gambling debt at Hilton in Las Vegas, Nevada. The check was made payable to Hilton and listed Video Depot as the purchaser on the face of the instrument. Arlynn delivered the cashier's check (together with a personal check) to Hilton. Several months later, Video Depot filed for bankruptcy and the company's trustee brought a fraudulent transfer claim against Hilton.

In determining whether Hilton was the initial transferee of the cashier's check purchased by Video Depot, the bankruptcy court considered whether a corporate principal's power to direct corporate resources constituted legal dominion or control. Holding in the negative, the bankruptcy court held that even though Arlynn controlled the business operations of Video Depot, once the check was issued he did not have legal control over the funds, even though he retained physical possession of the instrument. Because the cashier's check was construed as a direct transfer from Video Depot to Hilton, "Arlynn ... did not have the right to use the money for any other purpose than to give it to Hilton." Video Depot, 127...