In re Pony Exp. Delivery Services, Inc., No. 05-13824.

• Decision Date: 27 February 2006
• Docket Number: No. 05-13824.
• Citation: 440 F.3d 1296
• Parties: In Re: PONY EXPRESS DELIVERY SERVICES, INC., Fleet Acquisition Corp., and Courier Express, Inc., Debtors. Andreini & Company, Plaintiff-Appellant, v. Pony Express Delivery Services, Courier Express, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

440 F.3d 1296

In Re: PONY EXPRESS DELIVERY SERVICES, INC., Fleet Acquisition Corp., and Courier Express, Inc., Debtors.

Andreini & Company, Plaintiff-Appellant, v. Pony Express Delivery Services, Courier Express, Inc., Defendants-Appellees.

No. 05-13824.

United States Court of Appeals, Eleventh Circuit.

February 27, 2006.

COPYRIGHT MATERIAL OMITTED

Wendy Reingold Reiss, Grant Thomas Stein, Jason Harold Watson, Alston & Bird, LLP, Atlanta, GA, for Appellant.

Stuart Fletcher Clayton, Jr., Gary D. Stokes, Lambreth, Cifelli, Stokes & Stout, P.A., Atlanta, GA, for Appellee.

Appeal from the United States District Court for the Northern District of Georgia.

Before BLACK, HULL and FARRIS^*, Circuit Judges.

FARRIS, Circuit Judge:

Andreini & Company appeals the bankruptcy court's grant of summary judgment as affirmed by the district court, holding that Andreini was the initial transferee under 11 U.S.C. § 550 of a $310,422 wire transfer from Pony Express Delivery Services. As part of their insurance brokerage relationship, Pony Express wrote a check to Andreini's client trust account to cover insurance premiums owed to its insurance carriers. Andreini then paid these premiums with several checks from the trust account to the insurance carriers, but did so before the check written by Pony Express cleared its bank. Pony Express' check was returned twice for insufficient funds. Pony Express thereafter arranged a wire transfer to replace the check. We conclude that Andreini was not the initial transferee of the wire transfer, reverse, and remand to the district court.

I

Andreini is a California insurance broker who arranges insurance coverage for its clients and bills them for the premiums due on these policies. Those payments are deposited in a client trust account, as required by California law. These client trust funds are then remitted to the insurance carriers as payment for Andreini's client's insurance policies, less a commission for its brokerage services. Pony Express contracted with Andreini for insurance brokerage services with respect to its workers compensation and cargo insurance needs.

From January through March of 2000 Andreini sent Pony Express several invoices for premiums due on its workers compensation insurance polices. The various premiums invoiced were due to the insurance carriers by May 18, 2000 and June 1, 2000. The total amount of the invoices was $310,422. On May 22, 2000 Andreini received from Pony Express a check for the full amount, which it deposited into its client trust account. The following day, Andreini issued several checks from its client trust account to Pony Express' insurance carriers in payment of the insurance premiums that were now either overdue or due in one week.¹ Unbeknownst to Andreini, Pony Express was in serious financial difficulty and its check was returned for insufficient funds. Pony Express had never before given Andreini an insufficient funds check. On June 2, Andreini re-deposited the check, but it was again returned.

Andreini executives contacted Pony Express about the returned check and the deficiency created in the client trust account when the check bounced. To erase the deficiency, Pony Express' Director of Financial Reporting immediately authorized a wire transfer of the full amount of the check directly into Andreini's client trust account. On June 12, 2000 the $310,422 wire transfer was made.

Two days later, June 14, 2000, Pony Express filed a voluntary petition for bankruptcy under Chapter 11 of the Bankruptcy Code. As part of its bankruptcy petition, on May 31, 2002 Pony Express filed a complaint in the Northern District of Georgia Bankruptcy Court against Andreini (and other defendants not party to this appeal) seeking to recover several payments, including the wire transfer, as avoidable preferences under 11 U.S.C. § 547. Pony express claimed that, if avoidable under § 547, the wire transfer could be recovered from Andreini because Andreini was the initial transferee of the avoidable preference under 11 U.S.C. § 550. Pony Express moved for summary judgment before the bankruptcy court, which granted the motion on July 26, 2004, concluding that the wire transfer was an avoidable preference and that Andreini was the initial transferee. On appeal, the District Court for the Northern District of Georgia affirmed.

II

We review a grant of summary judgment de novo. See In re Optical Techs., Inc., 246 F.3d 1332, 1334-35 (11th Cir.2001). Federal Rule of Civil Procedure 56 governing summary judgment applies in an adversary bankruptcy proceeding. Fed. R. Bankr.P. 7056. Under this familiar standard, the court must view the facts and make all reasonable inferences in favor of the nonmoving party. Loren v. Sasser, 309 F.3d 1296, 1301-02 (11th Cir. 2002).

Under 11 U.S.C. § 547 certain transfers of assets made by a bankrupt company in the 90 days prior to filing a Chapter 11 petition can be declared avoidable preferences. See 11 U.S.C. § 547. The bankruptcy court found that the wire transfer to Andreini's client trust account two days before Pony Express filed for bankruptcy was an avoidable preference, a finding that is not challenged. However, under 11 U.S.C. § 550, an avoidable transfer of assets can only be recovered from certain parties, including the "initial transferee." 11 U.S.C § 550(a)(1). Whether, as the bankruptcy court and district court concluded, Andreini was the initial transferee of the wire transfer is in dispute. To resolve this issue, the pivotal question is whether Andreini was a mere conduit for funds earmarked for payment of insurance premiums or whether a debt was created by Andreini's unintentional prepayment of insurance premiums such that it had legal control over funds transferred to satisfy the debt. The record indicates that the wire transfer was not repayment of a genuine debt but was intended simply as payment of insurance premiums and made to a trust account.

The term "initial transferee" is a term of art whose meaning in any given transaction is not always straightforward. See In re Int'l Admin. Servs., Inc., 408 F.3d 689, 705 (11th Cir.2005). Most circuit courts to have considered the issue, including the Eleventh Circuit, have adopted a "control" or "conduit" test to determine whether the recipient of an avoidable transfer of assets is the initial transferee. See id.; see also Bonded Fin. Serv., Inc. v. European Am. Bank, 838 F.2d 890, 893 (7th Cir.1988); In re Columbia Data Prods., Inc., 892 F.2d 26, 28 (4th Cir.1989); In re Bullion Reserve of N. Am., 922 F.2d 544, 548-49 (9th Cir.1991); In re Baker & Getty Fin. Servs., Inc., 974 F.2d 712, 722 (6th Cir.1992); In re Coutee, 984 F.2d 138, 140-41 (5th Cir.1993); In re First Sec. Mortgage Co., 33 F.3d 42, 44 (10th Cir. 1994); In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey, 130 F.3d 52, 58 (2d Cir.1997). Under this test, a recipient of an avoidable transfer is an initial transferee only if they exercise legal control over the assets received, such that they have the right to use the assets for their own purposes, and not if they merely served as a conduit for assets that were under the actual control of the debtor-transferor or the real initial transferee. See Nordberg v. Societe Generale (In re Chase & Sanborn Corp.), 848 F.2d 1196, 1199-1200 (11th Cir.1988); Nordberg v. Arab Banking Corp. (In re Chase & Sanborn Corp.), 904 F.2d 588, 599, 599 n. 26 (11th Cir.1990); Bonded Fin. Serv., 838 F.2d at 893; In re Ogden, 314 F.3d 1190, 1202, 1204 (10th Cir.2002).

This test takes on special significance where the recipients of avoidable transfers are agents or fiduciaries of the debtor-transferor, such as banks or, in this case insurance brokers, who are duty-bound to take only limited actions with respect to the funds received. See, e.g., Societe Generale, 848 F.2d at 1200 (finding that debtor's bank was not an initial transferee); Ogden, 314 F.3d at 1202 (finding that an escrow agent was not an initial transferee); Bonded Fin. Serv., 838 F.2d at 893 (bank); In re Ala. State Fair Auth., 232 B.R. 252, 271-72 (N.D.Ala.1999) (finding that an insurance broker was not an initial transferee). Often these fiduciaries or agents are not considered initial transferees because their legal control over the assets received is circumscribed by their legal duties to their clients. See Societe Generale, 848 F.2d at 1200 (contrasting, for the purposes of determining whether a bank was an initial transferee, a bank's receipt of funds for the sole purpose of depositing them in a customer's account with the receipt of funds earmarked for the payment of a debt owed to the bank); Ogden, 314 F.3d at 1202 (finding that an escrow agent was not an initial transferee where funds received were intended for a trust account); Bonded Fin. Serv., 838 F.2d at 893 ("[W]e 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."); Ala. State Fair Auth., 232 B.R. at 271-72 (finding that an insurance broker who held a debtor's assets in trust for payment to insurance companies was not an initial transferee). This can be true even where the transferred assets ultimately come under the agent's or fiduciary's full control through a subsequent transfer. See Bonded Fin. Serv., 838 F.2d at 893 (finding that a bank became a mediate, but not initial, transferee only after the debtor-transferor directed it to apply funds initially transferred to the debtor's account toward repayment of a loan from the bank).

However, even entities that have special legal relationships with the debtor-transferor can be initial transferees when they do, in fact, take legal control of an avoidable transfer; for example when they receive assets directly from the debtor-transferor as compensation for services or in...