In re Dominion Corporation, BAP No. NC-95-1707-VRAs. Bankruptcy No. 92-30432TC. Adv. No. 94-3087TC.
| Decision Date | 15 August 1996 |
| Docket Number | BAP No. NC-95-1707-VRAs. Bankruptcy No. 92-30432TC. Adv. No. 94-3087TC. |
| Citation | 199 BR 410 |
| Parties | In re DOMINION CORPORATION, fdba Dominion Systems, Inc., Debtor. Mohamed POONJA, Trustee, Appellant, v. CHARLES SCHWAB & CO., INC., Appellee. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Barry Milgrom, Kevin W. Coleman, San Francisco, CA, for Appellant.
Bernard A. Burk, Mark A. Sponseller, San Francisco, CA, for Appellee.
Before: VOLINN, RUSSELL, and ASHLAND, Bankruptcy Judges.
OVERVIEW
The principal of a chapter 11 debtor in possession used estate funds to open a securities account with appellee stockbrokerage firm in the debtor's name and used the account for his personal benefit without first seeking or obtaining bankruptcy court approval. The account provided a VISA debit card secured by the funds and securities in the account. Appellee debited the account for amounts paid against purchases made with the card. The chapter 7 trustee appointed after conversion of the case brought an adversary proceeding to recover from the stockbrokerage firm the amounts debited against the account. The bankruptcy court granted the stockbrokerage's cross-motion for summary judgment and dismissed the trustee's complaint. We AFFIRM.
The Dominion Corporation filed a voluntary chapter 11 petition on January 30, 1992. A chapter 11 trustee was appointed September 2, 1992. The case was converted to chapter 7 on October 30, 1992, and Mohamed Poonja, plaintiff below and appellant here, was appointed chapter 7 trustee.
Until the appointment of the chapter 11 trustee and the subsequent conversion of the case, Dominion was operated as debtor in possession by William L. Johnson, its president and secretary. On February 25, 1992, Johnson caused Dominion to open a "Schwab One Account" (the account) with appellee Charles Schwab & Co., Inc., a stockbrokerage firm. The account had two features: a brokerage account, consisting of a cash account and a margin and short account, and a bank account with a VISA debit card and checking privileges.
The customer was authorized to write checks or use the VISA debit card with third parties to pay for goods and services. Charges so made would be debited against the cash and securities in the brokerage account. In the event of an overdraft, Schwab was authorized to advance credit against securities in the account up to permissible margin limits.
Because Schwab is not a bank, the banking services provided with the account were furnished under an agreement between Schwab and Bank of America (B of A). B of A would issue the VISA card to a Schwab customer and clear charges made with the card with VISA USA, Inc. and VISA International. Schwab in turn maintained a "clearing account" at B of A. B of A would pay merchants or intermediate banks for charges and credit itself for the daily total against the clearing account. Schwab would then post corresponding debits to the individual customers' accounts.
Between February and August, Johnson deposited nearly $50,000 of estate funds into the account and then spent it all. He purchased some $2,000 worth of securities and subsequently sold them at a slight loss. In the main, however, his purchases, which included limousine services, hotel accommodations, and airline tickets, were for his personal benefit and were not approved by the bankruptcy court. After B of A credited itself in Schwab's clearing account for these expenditures, Schwab debited Dominion's account. The cash in the account was sufficient to satisfy all checks and debit card transactions save one: at one point, Johnson created an overdraft of some $800, which Dominion satisfied by selling securities in the account. By the time a trustee was appointed, the account was exhausted and stood overdrawn by about $600.
In February 1994, the trustee filed an adversary proceeding to recover the diverted funds, naming Schwab, B of A, Johnson, and merchants providing goods and services that Johnson paid for through the account. The trustee contended that Schwab's debiting of Dominion's account to credit such amounts to its own use made Schwab the initial transferee of unauthorized and avoidable postpetition transactions under § 549 and therefore liable to the estate under § 550(a)(1). On crossmotions for summary judgment, Schwab contended it was not a transferee at all, but merely a conduit for the funds. The bankruptcy court agreed, dismissing the trustee's complaint against Schwab and this appeal follows.1
Summary judgments are reviewed de novo, as are the bankruptcy court's conclusions of law. In re Florida, 164 B.R. 636, 639 (9th Cir. BAP 1994).
Whether an entity that maintains accounts for customers is a transferee for purposes of § 550 when it credits itself from the customer's account for payments it has made upstream in the clearing procedure for charges made by the customer.
Pursuant to the Bankruptcy Code,2 11 U.S.C. § 549,3 the trustee may avoid a transfer of estate property not authorized by any provision of the Code or by the bankruptcy court that occurs after the commencement of the case. All of the transfers at issue here, totalling some $50,000, were unauthorized, and all occurred after commencement of the case.
When a transfer is avoidable, § 550(a)4 provides that the trustee may recover the avoided property — or its value — for the benefit of the estate from the initial transferee and the entity for whose benefit the transfer was made, and from any subsequent transferees, both "immediate and mediate." This chain of potentially liable parties is cut off by a subsequent transferee who takes for value and in good faith. The initial transferee and the entity for whose benefit the transfer was made, however, are held strictly liable to the trustee. In re Bullion Reserve of N. Am., 922 F.2d 544, 547 (9th Cir.1991); In re Presidential Corp., 180 B.R. 233, 236 (9th Cir. BAP 1995). Even where he has taken in good faith and for value, the only recourse for an initial transferee is a general unsecured claim in the bankruptcy under § 502(h). The initial transferee is held to be in the best position to evaluate the transaction and protect itself (and collaterally, the estate) from unauthorized transfers of property out of the estate. Id. at 237 (citing Bonded Fin. Servs. v. European Am. Bank, 838 F.2d 890, 892-93 (7th Cir.1988)).
The Code defines "transfer" broadly, to mean "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor's equity of redemption." § 101(54). However, the Code does not define what a transferee is. The absence of a definition for "transferee" and the harsh result of an overly literal approach to § 550 give rise to the "conduit" defense to avoidance liability.
The defense first arose in Bank of Marin v. England, 385 U.S. 99, 103, 87 S.Ct. 274, 277, 17 L.Ed.2d 197 (1966), and the Code has legislated the exception in § 542(c).5 The accepted definition of "transferee" was developed in Bonded Fin. Servs. v. European Am. Bank, 838 F.2d 890 (7th Cir.1988), which established the "dominion" or "control" test:
Although the Bankruptcy Code does not define "transferee," and there is no legislative history on the point, we think 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. When A gives a check to B as agent for C, then C is the "initial transferee;" the agent may be disregarded.
The conduit is merely a facilitator. It does not assert sufficient control over the funds passing through its hands to be considered a transferee of the transfer, even though a routine commercial exchange — the payment for goods by check, for example, or a charge made on a debit card in an account such as the one at issue here — can be viewed as a series of transfers rather than a simple one-step transaction. To this end, courts are admonished to "step back and evaluate a transaction in its entirety to make sure that their conclusions are logical and equitable." Bullion Reserve, 922 F.2d at 549 (quoting In re Chase & Sanborn Corp., 848 F.2d 1196, 1199 (11th Cir.1988)).6 An entity does not have dominion or control unless it is "free to invest the whole amount in lottery tickets or uranium stocks." Bonded Fin. at 894. While this latter test is at the outer extreme, its essential reference to the element of unfettered control has been adopted by the Ninth Circuit and the BAP. Bullion Reserve at 549; Presidential at 236.
The parties focus on the transfer of funds out of the account.7 The trustee contends this transfer went to Schwab, and that was the end of it; it is technically correct that when Schwab received the funds, it was under no obligation to transfer them to anyone else. The trial court applied the conduit theory:
Transcript of Proceedings, May 26, 1995 at 11:11-23.
The trustee raises two objections to the court's application of...
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