In re Presidential Corp.
| Decision Date | 07 April 1995 |
| Docket Number | BAP No. WW-94-2109-HCAs. Bankruptcy No. 91-03264. Adv. No. 94-00042. |
| Citation | 180 BR 233 |
| Parties | In re PRESIDENTIAL CORPORATION, dba Presidential Homes, Debtor. Michael McCARTY, Trustee, Appellant, v. RICHARD JAMES ENTERPRISES, INC., State of Washington, Department of Revenue, Lancaster Homes, Inc., and Seafirst Bank, Appellees. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Kenneth C. Weil, Seattle, WA, for appellant.
Glenn R. Nelson, Seattle, WA, for appellee Richard James Enterprises, Inc.
Before HAGAN, CASE,1 and ASHLAND, Bankruptcy Judges.
Presidential Corporation ("debtor") is a debtor under chapter 7 of Title 11, United States Code. Michael McCarty ("trustee"), the bankruptcy trustee, filed suit against a number of parties to recover a fraudulent conveyance. The bankruptcy court granted a motion for summary judgment in favor of Richard James Enterprises, Inc. ("RJE"). The trustee appeals and RJE moves for sanctions for bringing the appeal. We AFFIRM the bankruptcy court's grant of summary judgment and DENY RJE's motion for sanctions.
This case involves a fraudulent conveyance to purchase property through escrow. There is no dispute regarding the facts.
Vatche Manoukian ("Manoukian") was the president, sole director, and sole shareholder of the debtor. On April 20, 1990, the debtor transferred $76,866.81 to Chicago Title as part of the purchase price for a personal residence for Manoukian. RJE was the listing agent for the seller in the transaction. This transfer was made without receiving reasonably equivalent value. At closing, Chicago Title disbursed a total of $256,440.05 to various parties, including $4,499.87 to RJE as its realtor's commission.
An involuntary Chapter 7 petition was filed against the debtor on May 3, 1991. Pursuant to a stipulation, the bankruptcy court entered an order for relief under Chapter 11 on August 21, 1991. The case was converted to Chapter 7 on January 15, 1992.
On or about January 3, 1994, the trustee filed an adversary proceeding against a number of parties2 to recover the pro rata portion of the debtor's funds applied to the purchase of Manoukian's residence. This action was brought pursuant to 11 U.S.C. § 544(b) and Wash.Rev.Code Ann. 19.40.041(a)(2) (Washington Uniform Fraudulent Transfer Act). The trustee requested relief in the form of a judgment against RJE for $1,384, the pro rata portion of the debtor's funds transferred into escrow.
RJE filed a motion for summary judgment under Rule 56 of the Federal Rules of Civil Procedure (). The basis of RJE's motion was that the funds RJE received were a realtor's commission due and owing from the seller, that the transfer of the funds to RJE was made from the seller's proceeds at the close of escrow, that the seller was thus the initial transferee under 11 U.S.C. § 550(a)(1), and that RJE was therefore a subsequent transferee entitled to the defenses of 11 U.S.C. § 550(b)(1).
The trustee opposed the motion, contending RJE was the initial transferee because under the escrow arrangement it was the first party to have dominion over the funds.
After a hearing, the bankruptcy court held that RJE was not the initial transferee, and granted the motion for summary judgment. The order was entered on August 29. From this order the trustee timely appeals.
Whether RJE was the initial transferee of the debtor's funds for the purposes of 11 U.S.C. § 550(a)(1).
A grant of a motion for summary judgment is reviewed de novo. Danning v. Miller (In re Bullion Reserve of N. Am.), 922 F.2d 544, 546 (9th Cir.1991). Construing the evidence in the light most favorable to the nonmoving party, the Panel must determine whether there are genuine issues of material fact and whether the lower court correctly applied the relevant law. Id.
This action is based on section 19.40.041 of the Revised Code of Washington, which states in its pertinent part:
Wash.Rev.Code Ann. § 19.40.041(a)(2) (West 1989). The trustee brings this action pursuant to section 544,3 which provides:
The trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.
11 U.S.C. § 544(b).
The trustee's ability to recover under section 544(b) is circumscribed by section 550. This section provides in part:
11 U.S.C. § 550(a), (b)(1). Thus, both initial transferees and mediate or immediate transferees are liable to return a fraudulent transfer. However, subsequent transferees are provided a defense not available to an initial transferee; the subsequent transferee is insulated to the extent it took for value, in good faith, and without knowledge of the transfer's voidability. 11 U.S.C. § 550(b)(1). Initial transferees are subject to strict liability. Danning v. Miller (In re Bullion Reserve of N. Am.), 922 F.2d 544, 547 (9th Cir.1991).
Here, the trustee concedes that RJE is eligible for the defense of section 550(b)(1) if RJE is a subsequent transferee. The entirety of the trustee's case is based on the contention that RJE is the initial transferee, and therefore is strictly liable under section 550(a)(1).
The definitive case in this circuit regarding the definition of "transferee" is Bullion Reserve, 922 F.2d at 544 et seq. In Bullion Reserve, Saxon, the president of the debtor, agreed to contribute $1.5 million to another corporation in exchange for an ownership interest. Miller and Kopelson, two directors of the other corporation, had the corporation issue 100,000 shares of stock to them "for Saxon's benefit." Saxon had the debtor transfer $1.5 million to his personal account. He then loaned Miller and Kopelson the $1.5 million, depositing the funds in Kopelson's account. The directors granted Saxon a security interest in the stock, and paid the funds over to the corporation. When the debtor filed bankruptcy, the trustee sued both directors to recovery the money as a fraudulent transfer. On appeal, the Ninth Circuit Court of Appeals considered whether Miller was a subsequent transferee under section 550(a)(2).
The court concluded Miller was not a transferee. The court adopted the so-called "dominion" or "control" test, as adopted by the Seventh Circuit in Bonded Fin. Servs. v. European Am. Bank, 838 F.2d 890 (7th Cir. 1988).
Bullion Reserve, 922 F.2d at 548 (emphasis deleted) (quoting Bonded, 838 F.2d at 893). "To paraphrase Judge Easterbrook, an entity does not have `dominion over the money' until it is, in essence, `free to invest the whole amount in lottery tickets or uranium stocks.'" Bullion Reserve, 922 F.2d at 549 (alteration in original) (quoting Bonded, 838 F.2d at 894). The Court of Appeals for the Ninth Circuit also suggested that courts should "`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 Nordberg v. Societe Generale (In re Chase & Sanborn Corp.), 848 F.2d 1196, 1199 (11th Cir.1988)).
The Bonded case also provides guidance. Ryan controlled a number of currency exchanges, one of which was Bonded, the debtor. Ryan borrowed $655,000 from a bank to finance his ownership of horses. Ryan had the debtor send the bank a check for $200,000 with a note directing the bank to deposit the funds into Ryan's account. Approximately one week later Ryan instructed the bank to debit his account $200,000; using the funds to reduce the loan for his horses. The bank did so. Bonded filed bankruptcy, and the trustee sought to recover the transfer as fraudulent.
In finding that the Bank was not an initial transferee, the Bonded court stated in dicta that:
If the note accompanying Bonded\'s check had said: "use this check to reduce Ryan\'s loan" instead of "deposit this check into Ryan\'s account", § 550(a)(1) would provide a ready answer. The Bank would be the "initial transferee" and Ryan would be the "entity for whose benefit the transfer was made".
838 F.2d at 892 (alteration in original). The court then discussed the policy considerations behind the fraudulent transfer statute and the limitations on liability.
The considerations behind the...
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