5. Cynthia Cohen, Robert P. Abele, v. Modern Financial Plans Services, Inc

PRIOR HISTORY:  [**1]  Appeal from the United States District Court for the District of Arizona. D.C. No. CV-00-970-PHX-ROS. Roslyn O. Silver, District Judge, Presiding.   

DISPOSITION: Reversed and remanded with instructions.  

COUNSEL: Terry A. Dake, Terry A. Dake, LTD., Phoenix, Arizona, for the appellant.  

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

JUDGES: Before: Donald P. Lay, ** David R. Thompson, and Richard C. Tallman, Circuit Judges. Opinion by Judge Tallman.  

** Honorable Donald P. Lay, Senior United States Circuit Judge for the Eighth Circuit, sitting by designation.  

OPINIONBY: Richard C. Tallman  

OPINION:  [*1100]  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 [**2]  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 [**3]  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  [*1101] America with [**4]  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 [**5]  § 550(b)(1). See  Modern Fin. Plans & Servs. v. Abele (In re Cohen), 236 B.R. 1, 7-8 (B.A.P. 9th Cir. 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. n1 This appeal followed.  

n1 Modern argued in the district court that its status as an initial transferee was not properly before that court because the BAP decision was a final order and was only appealable to this Court. The district court rejected this argument, holding that the BAP decision was not a final order and therefore not appealable. While this issue is not raised on appeal, we nevertheless affirm the district court's holding based upon our own review of the four-factor finality test set forth in Neary v. Padilla (In re Padilla), 222 F.3d 1184, 1188 (9th Cir. 2000). Both the bankruptcy court order, which was appealed to the district court, and the district court's judgment were final appealable orders, and thus we have jurisdiction over the present appeal. See  In re Padilla, 222 F.3d at 1188.  

 [**6]

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.

[1] 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  [*1102]  transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial [**7]  transfer." 11 U.S.C. §  550(a)(1) & (2) (1993).

[2] A trustee's right to recover differs dramatically depending on which section is applicable. Under the first section, "the 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 accepted 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.

[3] 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)[**8]  (same). In practical terms, the "dominion test" requires that a transferee be "free to invest the whole [amount] in lottery tickets or uranium stocks." n2 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) ("The 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.").  

n2 Contrary to the BAP, the district court, and Modern's contentions, we have not explicitly adopted the "control test" set forth in Nordberg v. Societe Generale (In re Chase & Sanborn Corp.), 848 F.2d 1196, 1199 (11th Cir. 1988). See  In re Cohen, 236 B.R. at 5. The "control test" advises that courts "step back and evaluate a transaction in its entirety to make sure that their conclusions are logical and equitable." In re Chase & Sandborn Corp., 848 F.2d at 1199. In the case of In re Bullion Reserve of N. Am., we discussed both the "dominion test" set forth in Bonded and the "control test" set forth in Chase & Sandborn and selected the more restrictive "dominion test." 922 F.2d at 548-49 . In Video Depot, while the terms dominion and control were used interchangeably, we relied entirely upon Bonded's definition of "transferee." 127 F.3d at 1198. In this case, we again rely exclusively upon the "dominion test" propounded in Bonded.  

 [**9]

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.

 [*1103]  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,  [**10]  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 F.3d at 1198.

We affirmed, holding that Arlynn's control over the business operations did not, by itself, indicate that he had dominion over the funds. Although we suggested that Arlynn may have established dominion over the funds by first directing a transfer into his personal bank account and then making a payment therefrom, directing the corporation to purchase the cashier's check, placing the corporation's name on the purchaser line, and making it payable to Hilton, did not entitle Arlynn to legal control. See  id. at 1199. "Legal control over the funds consequently passed directly from Video Depot to Hilton." Id.

While this line of reasoning further supports the definition of dominion set forth in  [**11]  Bonded, Video Depot is not directly applicable to this case because the rights of the purchaser of the cashier's check were not at issue. This distinction is critical. Video Depot did not consider whether the actual purchaser, or the purchaser listed on the cashier's check (which happened to be the same entity) had control over the funds once the cashier's check was issued. Thus, contrary to the district court, the BAP, and Modern's conclusions, Video Depot does not stand for the proposition that a person listed as the purchaser on the face of a cashier's check has legal control over the instrument. In fact, it stands for precisely the opposite -- that a person who neither purchases the cashier's check nor is listed as the purchaser has no right to enforce the instrument.

Although Video Depot did not squarely address whether a remitter has the right to enforce a cashier's check, this issue was thoughtfully addressed in Perrino v. Salem, Inc., 243 B.R. 550 (D. Me. 1999). In that case, Mainly Payroll, Inc., ("MPI") purchased a cashier's check from Fleet Bank of Maine ("Fleet") at the direction of the company's president, Clifford Levesque. Levesque ordered [**12] Fleet to make the cashier's check payable to Salem, an automobile dealership. In addition, Levesque directed Fleet to list Bond Brook Motors ("Bond Brook") as the remitter on the face of the check. Fleet subsequently issued the check; MPI delivered it to Bond Brook; and Bond Brook delivered it to Salem in exchange for a Chevrolet Tahoe sport utility vehicle. Several months later, MPI filed for bankruptcy. Because MPI was insolvent at the time of the transaction, MPI's trustee brought a fraudulent transfer claim against Salem pursuant to §&nb