Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-95-04120/USCOURTS-ca10-95-04120-0/pdf.json

Nature of Suit Code: 423
Nature of Suit: Bankruptcy Withdrawal 28 USC 157
Cause of Action: 

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J1' I L E --~ -- . .u 

lll.illted States Court or Appeiiii 

Tenth Circuit 

PUBLISH 

UNITED STATES COURT OF APPEALS 

AUG 2 7 1996 

PATRICK FISHER 

Clerk TENTH CIRCUIT 

STEPHEN W. RUPP, Trustee, 

Plaintiff- Appellant, 

v. 

EDWIN MARKGRAF, MARY A. 

MARKGRAF, 

Defendants - Appellees. 

No. 95-4120 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF UTAH 

(D.C. No. 94-CV -288) 

John Dustin Morris (Reid Takeoka and Stephen W. Rupp with him on the brief), 

of McKay, Burton & Thurman, Salt Lake City, Utah, for Plaintiff-Appellant. 

Francis Gerard Fanning, Mesa, Arizona (Steven W. Call of Ray, Quinney & 

Nebeker, Salt Lake City, Utah, with him on the brief), for Defendants-Appellees. 

Before EBEL, KELLY and HENRY, Circuit Judges. 

EBEL, Circuit Judge. 

Stephen W. Rupp, the Chapter 7 bankruptcy trustee of Cowboy Enterprises, 

Inc. ("Cowboy"), appeals the district court's dismissal of an adversary proceeding 

Appellate Case: 95-4120 Document: 01019278217 Date Filed: 08/27/1996 Page: 1 
to avoid and recover a fraudulent conveyance of Cowboy's property from 

appellees Edwin and Mary Markgraf under§§ 544(b) and 550 ofthe Bankruptcy 

Code, 11 U.S.C. §§ 544(b) & 550. We exercise jurisdiction under 28 U.S.C. 

§ § 15 8( d) & 1291 and remand for further proceedings consistent with this 

opmton. 

Background 

The events that give rise to this action began in 1988, when the Markgrafs 

became judgment creditors of Forrest Wood "Woody" Davis in the amount of 

$391,688. By December 1989, Mr. Davis and his wife, Mary, had become 

principal stockholders and officers in Cowboy. In December 1989, Mr. Davis 

agreed to pay the Markgrafs $100,000 in exchange for a pickup truck valued at 

$15,000 and satisfaction of the Markgrafs' judgment against him. 

On December 13, 1989, Mrs. Davis instructed First Interstate Bank of 

Nevada to issue a cashier's check in the amount of $100,000 made payable to 

Edwin and Mary Markgraf. The cashier's check was purchased using Cowboy 

funds and it stated on its face that it was purchased by Cowboy Enterprises. Mrs. 

Davis instructed First Interstate to send the cashier's check "by over night or Fed 

Ex to: Cowboy Enterprises, Inc. 3535 E. Little Cottonwood Lane, Sandy Utah 

84092." This address was not Cowboy's business address, but rather the address 

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where Mr. Davis was living at the time. Subsequently, on December 19, 1989, 

the cashier's check was delivered to the Markgrafs, and the Markgrafs delivered a 

satisfaction of judgment and the pickup truck to the Davises. 

In 1992, Cowboy filed for Chapter 11 bankruptcy protection, which was 

later converted to a Chapter 7 liquidation. The trustee brought this adversary 

proceeding in 1993 alleging that the transfer was fraudulent and seeking its 

avoidance and recovery against the Markgrafs under 11 U.S.C. §§ 544(b) & 550. 

The Markgrafs moved for judgment as a matter of law at the close of the trustee's 

case. The district court granted the Markgrafs' motion and dismissed the action 

on the grounds that the bank, and not the Markgrafs, was the "initial transferee" 

of Cowboy's funds under§ 550. Having considered the parties' arguments, we 

hold that the Markgrafs are liable as initial transferees, and that Forest Wood 

Davis is liable as the person for whose benefit the transfer was made. The issue 

of whether or not the transfer was fraudulent is not before us, and we therefore do 

not address it. 

Discussion 

The parties agree that this appeal presents a purely legal issue involving the 

interpretation and application of§ 550 of the Bankruptcy Code, a question that we 

review de novo. Jobin v. McKay (In reM & L Business Mach. Co.), 84 F.3d 

1330, 1334-35 (lOth Cir. 1996). Under§ 550 of the Bankruptcy Code, when a 

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transfer is avoided under § 544 of the Code, the trustee may recover the 

transferred property for the benefit of the estate. Section 550(a) provides that the 

trustee may recover from: 

( 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 transferee. 

11 U.S.C. § 550(a). However, the trustee's power to recover is limited by § 

550(b ), which prevents recovery from immediate or mediate transferees of the 

initial transferee under § 550(a)(2) who "take[] for value ... , in good faith, and 

without knowledge of the voidability of the transfer avoided." 11 U .S.C. § 

550(b)(l). No such good faith defense is available to the initial transferee or the 

"entity for whose benefit such transfer was made" under § 550(a)(l ); the trustee 

may always recover from the initial transferee regardless of good faith, value, or 

lack of knowledge of the voidability of the transfer. Therefore, the central issue 

in this appeal becomes the determination of which party is the initial transferee of 

Cowboy's fraudulently transferred funds. If the Markgrafs are the initial 

transferee, the trustee can recover; if not, the trustee must attempt to recover from 

the Markgrafs as immediate or mediate transferees, and the Markgrafs may utilize 

the good faith defense of§ 550(b)(1). We hold that the Markgrafs are initial 

transferees under § 550 of the Bankruptcy Code. 

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A. 

The district court held that the initial transferee of Cowboy's funds was 

First Interstate Bank of Nevada. The court concluded that the "initial transfer, 

occurred when Mary Davis said, 'Bank, take Cowboy money and issue to us in 

return for Cowboy money, cashier's checks."' Aplt. App. doc. 1 at 6. The court 

therefore ruled that "[w]here a bank issues a cashier's check, it is an initial 

transferee of the funds used to purchase the check." Id. at 8. We disagree. 

In Bonded Fin. Servs .. Inc. v. European Am. Bank, 838 F.2d 890 (7th Cir. 

1988), the Seventh Circuit enunciated what is commonly referred to as the 

"conduit" theory for determining whether an intermediary, such as a bank, is an 

"initial transferee" for purposes of§ 550. In that case, the debtor (Bonded) sent a 

check to the bank payable to the bank's order, along with instructions to deposit 

the money into the account of a third party (Ryan), who was a principal of 

Bonded. Even though Ryan eventually used those funds to reduce his own 

indebtedness to the bank, the court held that the bank was not the initial 

transferee because it had no dominion over the money at the time it initially 

received the check from Bonded. Id. at 894. As the court reasoned, "[a]s the 

Bank saw the transaction on January 21, it was Ryan's agent for the purpose of 

collecting a check from Bonded's bank .... The Bank had no dominion over the 

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$200,000 until January 31, when Ryan instructed the Bank to debit the account to 

reduce the loan." I d. at 893-94 (citation omitted). 

We adopted the Bonded approach in Malloy v. Citizens Bank of Sapulpa 

(In re First Sec. Mortgage Co.), 33 F .3d 42 (1Oth Cir. 1994 ), holding that '"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."' Id. at 43-44 

(quoting Bonded, 838 F.2d at 893). In that case, the debtor's funds were 

fraudulently transferred to the defendant bank with instructions to deposit them in 

the account of Mr. Hobbs. We held that the bank was not the initial transferee 

because it "was obligated to make the funds available to Mr. Hobbs upon demand 

and, therefore, it acted only as a financial intermediary." Id. at 44. Moreover, 

the fact that in both Bonded and Malloy the funds were sent to the bank via an 

ordinary check rather than a cashier's check does not affect the bank's status as a 

conduit as opposed to a transferee. See Ross v. United States (In re Auto-Pak. 

Inc.), 73 B.R. 52, 54 (D.D.C. 1987) (bank was not the initial transferee where 

principal of debtor converted a check of the debtor into a cashier's check made 

payable to the IRS). 

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B. 

If the bank merely acted as a conduit, and exercised no dominion and 

control over Cowboy's funds, then the initial transferee must be either Mr. Davis 

or the Markgrafs. We conclude that the language and underlying policy of 11 

U.S.C. §§ 544(b) & 550, the law of this circuit, as well as persuasive authority 

from other jurisdictions supports the conclusion that the Markgrafs are the initial 

transferees, and Davis is the person "for whose benefit such transfer was made." 

Our decision in Malloy, adopting the approach taken by the Seventh Circuit 

in Bonded, indicates that we must apply the dominion and control test to 

determine the initial transferee of Cowboy's funds. See Malloy, 33 F .3d at 43-44; 

Bonded, 838 F.2d at 893-94. In doing so we must consider whether Davis 

exercised the requisite dominion and control over the funds either ( 1) by the mere 

act of causing the corporate debtor (Cowboy) to make a fraudulent transfer 

through his role as a principal of the corporate debtor, or (2) by conduct other 

than that stemming from his role as a principal of Cowboy. We conclude that 

Davis did not, through his capacity as principal or otherwise, exercise the type of 

dominion and control over the funds required in Bonded and Malloy. 

Because we have adopted the Seventh Circuit's approach in Bonded, our 

analysis begins there. As discussed above, in Bonded the debtor corporation 

(Bonded) sent a check to the bank of its principal, Michael Ryan, with a note 

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directing the bank to '"deposit this check into [Ryan]'s account."' Bonded, 838 

F .2d at 891 (alteration in original). Ten days later, Ryan instructed the bank to 

debit this account in order to reduce an outstanding balance on a loan he 

personally had with the bank. Id. The court concluded that the bank acted as a 

mere financial intermediary and that it was not the initial transferee under § 550. 

I d. at 893. In Bonded, the principal had the debtor's funds in his personal 

account for 10 days before he transferred the funds to a third party (the bank) in 

satisfaction of a personal debt owed to the bank. Thus, the principal clearly had 

the "right to put the money to [his] own purposes" for 10 days. I d. at 893. He 

could have paid the loan, as he did, or "invest[ ed] the whole [amount] in lottery 

tickets or uranium stocks." I d. at 894. 

After concluding that, under these circumstances, the bank was not the 

initial transferee, the court in Bonded went on to state hypothetically, "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)(l) 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."' I d. at 892; see also id. at 895. 

The distinction between the actual facts in Bonded and the contrasting 

hypothetical discussed by the court indicates that 

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the Bonded Court distinguishes between a one-step transaction in 

which the debtor's check is paid directly to its principal's creditor, 

and a two-step transaction in which the debtor's check is paid to the 

principal, who then pays his own creditor. In the first case, the 

creditor is the initial transferee, and the principal is the entity for 

whose benefit the transfer was made. In the second case, the 

principal is the initial transferee, and the creditor is the subsequent 

transferee. 

Schafer v. Las Vegas Hilton (In re Video Depot. Ltd.), 186 B.R. 126, 132 (Bankr. 

W.D. Wash. 1995). The facts ofthe case before us fit into the category of onestep transactions discussed in Video Depot, and the hypothetical situation 

discussed in Bonded. Cowboy had a cashier's check issued to the Markgrafs, 

which was made payable to the Markgrafs and listed Cowboy as remitter. The 

funds were never deposited into any personal account controlled by Davis and 

Davis never had dominion or control over the funds. Because he was neither 

payee nor remitter, Davis could not personally access the funds represented by the 

cashier's check. He was, at most, a mere courier of the cashier's check from 

Cowboy to the Markgrafs. As was the case in the Bonded hypothetical, the funds 

in this case were transferred directly from the debtor (Cowboy) to the principal's 

creditor (the Markgrafs). Thus, under the Bonded approach, which we have 

adopted, the Markgrafs are the initial transferees of Cowboy's funds and Davis is 

the entity for whose benefit the transaction was made. 

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It is clear that the Bonded court's discussion of dominion and control refers 

to dominion and control over the funds after the disputed transfer, not dominion 

and control over the transferor before the transfer. This point is illustrated by the 

fact that the court in Bonded presented two sets of contrasting facts, the actual 

facts before the court and a hypothetical situation. As discussed above, the court 

concluded that the result would be different in each case. Yet in both cases the 

principal exercised control over the transferor prior to the transfer of funds and 

caused the transferor to make transfer. Thus, the court's reasoning in Bonded 

could not have turned on any evaluation of the principal's control over the debtor. 

This interpretation of Bonded was also applied by the Eleventh Circuit in 

Nordberg v. Arab Banking Corp. (In re Chase & Sanborn Corp.), 904 F.2d 588 

(11th Cir. 1990). In Nordberg, the Eleventh Circuit applied Bonded to the 

following set of facts: (I) Duque was the principal of, and controlled, several 

companies including Chase & Sanborn, (2) Duque borrowed several million 

dollars from Arab Banking Corporation ("ABC") personally, and (3) payments 

from Chase & Sanborn were made on Duque's personal obligation to ABC. 904 

F.2d at 591-92. The lower court found that "Duque, not ABC, was the 'initial 

transferee' because of Duque's control over Chase & Sanborn's actions in 

transferring the payments to ABC." Id. at 597. The Eleventh Circuit reversed the 

lower court, applying the principles enunciated in Bonded. The court concluded 

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that ABC was the initial transferee of loan payments made by Chase & Sanborn 

on behalf of Duque where those payments were made directly to ABC with 

instructions to apply the funds to Duque's outstanding loans. Id. at 599. The 

court stated that 

ABC exercised control over the funds immediately upon receiving 

them, and applied them to reduce a debt owed to ABC; neither Duque 

nor any other party exercised any control over the funds after they 

left Chase & Sanborn. There was no interregnum, as in Bonded, 

during which the funds sat in Duque's account subject to his use or 

control; indeed, the ... transfers at issue did not pass even 

momentarily through Duque's account. 

Id. at 599-600 (emphasis added). The court further concluded that Duque's 

conduct in forcing Chase & Sanborn to make the transfers was "irrelevant" to the 

initial transferee inquiry. Id. at 598. 

The Sixth Circuit in Ray v. City Bank and Trust Co. (In re C-L Cartage 

Co .. Inc.), 899 F.2d 1490 (6th Cir. 1990), came to the same conclusion under 

similar circumstances. In Ray, a bank loaned money to the president of a 

company personally. 899 F.2d at 1491. The president then put the money into 

the company. I d. The company then made some payments directly to the bank in 

repayment of the loan. I d. at 1495. The court concluded that the bank as creditor 

was the initial transferee under § 550 for the payments it received directly from 

the company. I d. ("The bank was the 'initial transferee' [of certain payments] 

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because the payments were made directly payable to the bank from [the debtor's] 

account.") (emphasis added). 

In this case, the only "control" Davis exercised over the funds after the 

check was issued was that he delivered the check to the Markgrafs, thus acting as 

a courier or agent for Cowboy. However, the court in Bonded clearly indicates 

that those who act as mere "financial intermediaries" or "couriers" are not initial 

transferees under§ 550. See Bonded, 838 F.2d at 893. The term "transferee" 

"must mean something different from 'possessor' or 'holder' or 'agent,"' or 

"anyone who touches the money." Id. at 894. Here, Davis, as courier, could only 

have prevented the Markgrafs from exercising dominion and control over the 

funds if he chose to be an unfaithful courier (much like a mailman can prevent a 

payee of a check mailed to the payee from ever exercising dominion over the 

funds represented by the check if the mailman decides never to deliver that piece 

of mail). However, because the check was made payable to the Markgrafs, this 

control amounts to nothing more than the ability to defeat the Markgrafs' "right to 

put the money ... to [their] own purposes." Id. at 893. All couriers have this 

type of control. In contrast, the dominion and control test from Bonded requires 

control over the funds and the right to put those funds to one's own purpose, not 

merely the ability to prevent someone else from doing so. The contrary view, that 

a courier assumes dominion and control over funds entrusted to the courier, would 

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transform the United States Postal Service into the initial transferee under § 550 

in innumerable instances merely by virtue of having been given the right to 

deliver financial instruments. The Postal Service would be shocked, no doubt, to 

learn of the potentially staggering financial liability it was assuming for the price 

of a thirty-two cent stamp. Furthermore, the fact that the money was being used 

by the Markgrafs to pay Davis' debt, without more, simply makes Davis the 

"entity for whose benefit [the] transfer was made." See Bonded, 838 F .2d at 895 

("The paradigm 'entity for whose benefit such transfer was made' is a guarantor 

or debtor-- someone who receives the benefit but not the money."). 

The Markgrafs argue that Davis' dominion and control began when he 

directed Cowboy, as principal, to make the transfer in the first place (i.e., they 

argued that a "transfer" to Davis occurred when he misappropriated Cowboy's 

funds by causing Cowboy to direct those funds to his own benefit through 

payment to the Markgrafs). This argument, however, proves too much. Many 

principals presumably exercise de facto control over the funds of the corporations 

they manage. They can choose to cause their corporations to use those funds 

appropriately or inappropriately. The distinction is only relevant to the question 

whether the principal's conduct amounted to a breach of duty to the corporation. 

However, that question is not before us. The issue under § 550 is to what extent 

the principal, or anyone else for that matter, exercised control over the disputed 

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funds after the funds left the debtor. Determining the initial transferee of a 

transaction is necessarily a temporal inquiry; there must be a transfer before there 

can be a transferee. The extent to which a principal has de facto control over the 

debtor before the funds are transferred from the debtor, and the extent to which 

the principal uses this control for his or her own benefit in causing the debtor to 

make a transfer, are not relevant considerations in determining the initial 

transferee under§ 550. See Nordberg, 904 F.2d at 598 ("[T]he extent of [the 

principal's] control over [the debtor] generally, and over [the debtor's] actions in 

transferring the disputed funds to [the creditor] in particular, is entirely irrelevant 

to the 'initial transferee' issue."); but see IRS v. Nordic Village. Inc. (In re 

Nordic Village. Inc.), 915 F.2d 1049, 1055 & n.3 (6th Cir. 1990) (indicating that 

the creditor in that case could either be the initial transferee or an immediate 

transferee, and without deciding, stating in dictum that there is "support for the 

conclusion that when a corporate officer takes checks drawn from corporate funds 

to pay personal debts, the corporate officer, and not the payee on the check is the 

initial transferee"), rev' d on other grounds, 503 U.S. 30 (1992). 

In Richardson v. FDIC (In re M. Blackburn Mitchell Inc.), 164 B.R. 117 

(Bankr. N.D. Cal. 1994), the court squarely addressed the issue the Markgrafs 

raise here: "whether a principal who directs and benefits from a fraudulent 

transfer of funds from a debtor to a third party is ipso facto the initial transferee 

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within the meaning of§ 550 even though the debtor's funds moved directly to the 

third party; and if not, ... whether merely by directing the debtor to use a 

cashier's check to effectuate the transfer, the principal becomes the initial 

transferee." 164 B.R. at 124. In Richardson, the FDIC obtained a judgment 

against Martha Mitchell, the sole shareholder of the corporation. I d. at 121. 

Mitchell caused the corporation to purchase from the corporation's bank a 

cashier's check payable to the FDIC in the amount that Mitchell owed the FDIC. 

I d. The trustee of the corporation in Richardson argued that the FDIC was the 

initial transferee, and the FDIC claimed (as the Markgrafs claim) that because 

Mitchell had directed the corporation to pay her personal debt, Mitchell was the 

initial transferee. The court rejected the FDIC's argument and held that 

[t]he FDIC obtained full dominion and control over the funds with the right 

to put the money to its own purposes; it was not holding those funds in 

trust, or as an agent, for any other party. Therefore, applying· the rationale 

of Bonded to the case sub judice, the FDIC is the "initial transferee," and 

Ms. Mitchell would be the entity "for whose benefit [the] transfer was 

made." 

Id. at 125 (citation omitted, second alteration in original). 

We find that Richardson's interpretation of Bonded under these 

circumstances is persuasive. The court provided the following discussion in 

support of its interpretation of Bonded and its ultimate conclusion that Ms. 

Mitchell was not the initial transferee: 

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The Court believes that the proper focus when analyzing who 

is a transferee, is the flow of funds. In order to be an initial 

transferee, one must be a transferee in the ordinary sense of the 

word. A transfer that may be avoided under applicable sections of 

the Bankruptcy Code takes place from the debtor to some entity. 

Thus, receipt of the transferred property is a necessary element for 

that entity to be a transferee under § 550. Simply directing a 

transfer, i.e., such as by directing a debtor to transfer its funds, is not 

enough .... 

This Court does not disagree that in order to be a transferee 

one must obtain dominion and control over funds. But that does not 

mean that merely because one has dominion and control of funds (as 

principals of companies ordinarily do) that one is also a transferee. 

Rather, in order for there to be a transfer of the debtor's funds, the 

debtor must dispose of or part with them, that is, such funds must 

actually leave the debtor. In order to be a transferee of the debtor's 

funds, one must ( 1) actually receive the funds, and (2) have full 

dominion and control over them for one's own account, as opposed 

to receiving them in trust or as agent for someone else .... 

The Court concludes that the mere fact that a debtor's 

fraudulent transfer was directed by a principal of the debtor does not 

ipso facto transmute that principal into being the "initial transferee" 

within the meaning of§ 550. Reaching the contrary conclusion in 

order to protect an "innocent" recipient of the transferred funds, is 

contrary to policy considerations underlying the Bankruptcy Code. 

A non-individual debtor such as a corporation or partnership 

almost always effects a fraudulent transfer through the actions of its 

principals, or through the principals of its parent corporation, or 

other similar entity .... 

Turning every unscrupulous principal into the initial transferee 

does extreme disservice to § 550, and twists the word "transferee" 

beyond recognition. It violates the statutory language and purpose 

and severely and unfairly limits the ability of a trustee to recover 

misappropriated estate property so as to effect a pro rata distribution 

among a debtor's creditors who have been defrauded. It would, as a 

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practical matter, operate to block trustees from being able to recover 

funds fraudulently transferred from debtor's estates in numerous 

bankruptcy cases. 

Rendering the principal an initial transferee to insulate the 

entity that actually received the money, also gives too much power to 

an unscrupulous insider to effect a fraudulent transfer (~, to satisfy 

a personal obligation as was the case here) without allowing a trustee 

to have the means for avoiding the transfer for the benefit of the 

debtor's creditors. 

l.d.:. at 126-28. 

We find this reasoning from Richardson persuasive and rationally based on 

the principles set forth in Bonded. The reasoning and holding of Richardson was 

also recently adopted by the Bankruptcy Appellate Panel of the Ninth Circuit. 

See General Electric Capital Auto Lease. Inc. v. Broach (In re Lucas Dallas. Inc.), 

185 B.R. 801 (Bankr. 9th Cir. 1995). In General Electric, the court held that "the 

principal of a corporate debtor does not become a 'transferee' by the mere act of 

causing the debtor [to] make a fraudulent transfer." 185 B.R. at 809. The court 

stated that "[t]his result is consistent with the fact that corporations must always 

act through individuals." Id. (citing Richardson, 164 B.R. at 127-28). The court 

went on to state that 

if the distinction between an initial and a subsequent transferee turns 

on whether the party benefitting from the transfer "forced" the debtor 

to make the transfer, then the scope of liability under section 550 is 

unduly narrowed. Section 550(a)(l) subjects to strict liability not 

only the initial transferee, but also "the entity for whose benefit such 

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transfer was made." 11 U.S.C. § 550(a)(l). The party who forces a 

debtor to make a transfer is almost always "the entity for whose 

benefit such transfer was made," and thus is generally always subject 

to strict liability. Yet Congress intended to make initial transferees 

also strictly liable for the transfer (subject to the restriction that the 

trustee is entitled to only one recovery under section 550(c), 

presently codified at 11 U.S.C. § 550(d)). "The implication is that 

the entity for whose benefit the transfer was made is different from a 

transferee, immediate or otherwise." Consideration of whether the 

beneficiary of the transfer "forced" the debtor to make the transfer 

would collapse the two prongs of strict liability into a single party. 

It would permit entities who are "initial transferees" in the plain 

sense of the term to escape liability, and deprive the bankruptcy 

estate (and thus the debtor's creditors) of an additional source for 

recovery. There is nothing in the statute or otherwise to justify this 

result. 

I d. at 809-10 (citation omitted). 

Concluding here, as we do, that Davis is the person for whose benefit the 

transfer was made and that the Markgrafs are the initial transferees permits the 

trustee in this case to recover under § 550 from either party. Thus, the trustee has 

a greater chance of recovering the funds for the benefit of the estate. Section 550 

expressly allows the trustee to recover from either party, indicating that, as a 

matter of policy, the option should be preserved where possible. If we were to 

conclude that Davis was the initial transferee, the Markgrafs would become 

"subsequent" transferees, and they would not then be regarded as the persons for 

whose benefit the transfer was made. Bonded, 838 F.2d at 895 ("[A] subsequent 

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transferee cannot be the 'entity for whose benefit' the initial transfer was 

made."). 1 

Our decision here is also consistent with considerations of equity and 

fairness. In most, if not all, bankruptcy cases someone is going to be injured. 

This is especially true when there has been a fraudulent transfer of the debtor's 

funds. However, Congress has already balanced the equitable considerations 

under § 550 by distinguishing between initial transferees, who are strictly liable, 

and subsequent transferees, who are not strictly liable. Initial transferees are in 

the best position to monitor fraudulent transfers from the debtor. Bonded, 83 8 

F .2d at 892-93 ("The initial transferee is the best monitor; subsequent transferees 

usually do not know where the assets came from and would be ineffectual 

monitors if they did."). "[Section] 550(b) leaves with the initial transferee the 

The Markgrafs rely primarily on four cases to support their assertion 

that Davis is the initial transferee, Thompson v. Jonovich (In re Food & Fibre 

Protection. Ltd.), 168 B.R. 408 (Bankr. D. Ariz. 1994 ); Kendall v. Sorani On re 

Richmond Produce Co.), 151 B.R. 1012 (Bankr. N.D. Cal. 1993 ), affd, 195 B.R. 

455 (N.D. Cal. 1996); Robinson v. Home Savings of Am. (In re Concord Senior 

Housing Found.), 94 B.R. 180 (Bankr. C.D. Cal. 1988); and Ross v. United States 

(In re Auto-Pak. Inc.), 73 B.R. 52 (D.D.C. 1987). With respect to the first three 

cases from bankruptcy courts in the Ninth Circuit, in light of the Ninth Circuit 

Bankruptcy Appellate Panel's decision in General Electric, these cases are no 

longer good law to the extent that they support the proposition that a principal 

becomes a "transferee" by the mere act of causing the debtor to make a fraudulent 

transfer. With respect to the last case, In re Auto-Pac, we agree with the court in 

Richardson that the approach taken in In re Auto-Pac "is unpersuasive and in 

conflict with the ordinary definition oftransferee." Richardson, 164 B.R. at 127. 

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burden of inquiry and the risk if the conveyance is fraudulent." I d. at 892. The 

fairness of this approach is illustrated by the case before us. The Markgrafs, as 

initial transferees of Cowboy's funds, were in the best position to bear the risk of 

receiving a fraudulent transfer. They received a check purchased by one entity 

(Cowboy) for the purpose of paying a debt owed to them by another entity 

(Davis). However, the check clearly showed Cowboy as remitter. Thus, the 

Markgrafs had inquiry notice that they potentially were receiving funds to which 

they were not entitled. They could have protected themselves by making 

adequate inquiry or requiring Davis to issue them a check from his own account. 

However innocent the Markgrafs may have been, they presumably were no less 

innocent than the other creditors of the Cowboy estate who have been injured by 

this fraudulent transfer of funds from the Cowboy estate. Yet the Markgrafs, as 

initial transferees, were in a better position to investigate and determine the 

fraudulent nature of this transfer. By receiving these funds without further 

investigation or without structuring the payment to make sure the funds came 

through Davis, the Markgrafs received funds to which they were not entitled. We 

do not think it is inequitable, under these facts, to make the Markgrafs bear the 

risk of the fraudulent nature of this transaction rather than Cowboy's other 

creditors in bankruptcy. In any event, Congress has made its own judgment of 

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who should bear the risk of loss under these situations when it enacted Section 

550, and we are bound to accept that judgment.2 

Conclusion 

Based upon the forgoing discussion, we REVERSE the district court order 

dismissing this case, and REMAND the case for further proceedings not 

inconsistent with this opinion. 

2 The Markgrafs argue that even if the district court's dismissal of the 

case was legally flawed, the dismissal is supported by the record as a whole. The 

district court dismissed this case based solely on its conclusion that the bank was 

the initial transferee under § 550. In doing so, the district court did not make 

factual findings regarding the evidence presented for trial sufficient to justify our 

dismissing the case on appeal. Therefore, we remand the case for further 

proceedings not inconsistent with this opinion. 

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No. 95-4120, Rupp v. Markgraf. 

KELLY, Circuit Judge, dissenting. 

I cannot agree with the Court that Mr. Davis is not a transferee of 

Cowboy's funds. I do agree that the bank was merely a conduit; the fact that the 

funds flowed through the bank is immaterial to the central issue, which is the 

bank's lack of dominion and control over the funds. The Court similarly strays 

from the central issue by analyzing the flow of funds through various accounts 

rather than asking if Mr. Davis, in fact, exercised dominion and control over the 

funds as required by the test established in Bonded Fin. Serv .. Inc. v. European 

Am. Bank, 838 F.2d 890 (7th Cir. 1988), and adopted by us in Malloy v. Citizens 

Bank of Sapulpa (In re First Sec. Mortgage Co.), 33 F .3d 42 (I Oth Cir. 1994 ). I 

believe that the most persuasive case law as well as the concerns of equity and 

fairness support finding Mr. Davis to be the initial transferee and the Markgrafs 

to be subsequent transferees. 

As the Court begins its analysis with the Seventh Circuit's decision in 

Bonded, so do I. Both Bonded and our decision in Malloy held that a bank which 

acted as a conduit of funds was not an initial transferee under § 550 because the 

bank did not exercise dominion and control over those funds. Malloy, 33 F .3d at 

44; Bonded, 838 F.2d at 893-94. Neither case directly answered the question of 

who, if not the bank, is the initial transferee. However, those decisions do 

indicate that we must apply the dominion and control test to determine whether 

Appellate Case: 95-4120 Document: 01019278217 Date Filed: 08/27/1996 Page: 22 
Mr. Davis or the Markgrafs is the initial transferee of Cowboy's funds. See 

Malloy 33 F.3d at 43-44; Bonded 838 F.2d at 893-94. In IRS v. Nordic Village. 

Inc. (In re Nordic Village. Inc.), 915 F .2d 1049 (6th Cir. 1990), rev'd on other 

grounds, 503 U.S. 30 (1992), the Sixth Circuit confronted a similar factual 

situation. In that case, Joseph Lah, an officer and shareholder of the debtor, drew 

a check on the corporate account made payable to a bank, which in turn issued 

several cashier's checks to Lah. The cashier's check at issue was made payable 

to the IRS, and bore the notation "REMITTER: SWISS HAUS, INC.," under 

which name the debtor was doing business at the time. I d. at 1050. The court 

held that the IRS was liable, but it did so on the grounds that the IRS did not 

demonstrate that it took the cashier's check for value, in good faith, and without 

knowledge of the fraud, without reaching the "initial transferee" issue. I d. at 

1055-56 & n.3. In a line of reasoning that is applicable to the case before us, the 

court stated in dictum: 

If Lah is viewed as acting for Nordic, then the IRS is the "initial 

transferee." If Lah is viewed as having taken money illegally from 

Nordic, he is the "initial transferee" and the delivery of the cashier's 

check to the IRS makes the IRS an "immediate transferee" of Lah, 

the "initial transferee." If the IRS is considered as an "immediate 

transferee" of Lah, the IRS can prevail if the IRS shows that it took 

for value, in good faith, and without knowledge of the voidability of 

the transfer. 

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Id. at 1055 (footnote omitted). 3 

Based on this reasoning, it seems clear that Mr. Davis is the initial 

transferee of Cowboy's funds. The Davises purchased the cashier's check using 

Cowboy funds, and then used it to satisfy Mr. Davis's personal indebtedness to 

the Markgrafs. Surely, under these circumstances, Mr. Davis must be viewed as 

having taken Cowboy's money illegally, see Nordic, 915 F .2d at 1055, making 

him the initial transferee of the fraudulent conveyance. 

Other case law supports this conclusion. In Ross v. United States (In re 

Auto-Pak. Inc.), 73 B.R. 52 (D.D.C. 1987), the owner of the debtor company 

converted a check of the debtor intended for the IRS into a cashier's check drawn 

on the debtor's account made payable to the IRS. He then directed the cashier's 

check to the IRS with a notation to apply it toward taxes owed by another, nonbankrupt, corporation he owned. Sitting in an appellate capacity, the district 

court held that by converting the debtor's check into a cashier's check and writing 

the name of another corporation on it, the owner "essentially took control of the 

funds underlying the cashier's check .... It would defy logic to hold an innocent 

3 As indicated above, the Supreme Court later reversed the Sixth Circuit's 

decision in Nordic. 503 U.S. 30 (1992). However, it did so on the alternative ground 

that the judgment against the government was jurisdictionally barred by the doctrine of 

sovereign immunity. Id. at 39. In disposing of the case on jurisdictional grounds, the 

Court expressed no opinion at all regarding the merits. 

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and mediate party such as the IRS a party to this alleged fraudulent conveyance." 

Id. at 54. 

Another case, Kendall v. Sorani (In re Richmond Produce Co.), 151 B.R. 

I 012 (Bankr. N.D. Cal. 1993 ), illustrates how a principal can rise to the level of a 

transferee by exercising sufficient control over a transaction. In Kendall, the 

court noted: 

The evidence is clear that Clow [the principal] picked up the 

Cashier's Check from Mechanics Bank and delivered it to BanCal. .. 

. If a messenger service had picked up the Cashier's Check from 

Mechanics Bank and delivered it to BanCal, the messenger service 

would not have been deemed a transferee .... 

However, clearly, Clow was no mere messenger. Rather, Clow 

exercised complete control over the transaction. It was devised and 

executed for his benefit. Under these circumstances, the Court must 

conclude that the Cashier's Check was transferred to Clow when he 

picked it up from Mechanics Bank. 

I d. at 1021. 

In the present case, Mr. Davis and his wife exerciseda similar degree of 

control over the transaction. The Davises chose to instruct the bank to make the 

cashier's check payable to the Markgrafs, but, in their position as principals of 

Cowboy, they could have ordered the bank to issue the cashier's check to anyone, 

and for any purpose. Mr. Davis then delivered the cashier's check to the 

Markgrafs in satisfaction of his personal debt. Moreover, the fact that the bank 

sent the cashier's check to Mr. Davis's home address illustrates his dominion and 

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control over the funds. Once he had possession of the cashier's check, Mr. Davis 

could have returned it to the bank, altered it in some way, or otherwise chosen not 

to deliver it. See Laird v. Bartz (In re Newman Cos.), 140 B.R. 495, 498 (Bankr. 

E.D. Wis. 1992). Of course, if the cashier's check had never reached the 

Markgrafs, the Markgrafs would not be deemed a transferee of the funds. I 

cannot agree with the Court's contention that Mr. Davis was "at most, a mere 

courier." Ct. Op. at 9. The intermediate steps taken by the Davises evince the 

dominion and control required to find them to be the initial transferees. 

Finally, in Robinson v. Home Sav. of Am. (In re Concord Senior Hous. 

Found.), 94 B.R. 180 (Bankr. C.D. Cal. 1988), the debtor hired Karl Gerwer, 

doing business as Charter Pacific Management, Inc. ("CPM"), to manage its 

apartment building. Gerwer collected rent for debtor and deposited it into a 

certificate of deposit at defendant bank in the name of Gerwer and CPM only. 

Subsequently, Gerwer used the deposited amounts as collateral to secure loans by 

Gerwer from the bank for his personal use. When Gerwer defaulted, the bank 

seized the CD. When the trustee tried to recover the seized funds from the bank, 

the court held that Gerwer, not the bank, was the initial transferee. The court 

held that "[t]he initial transfer of property from [debtor's] estate occurred when 

Gerwer used the CD for his own benefit by pledging it to secure his loans." Id. at 

183. This misappropriation of the estate's funds by the estate's agent constituted 

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a transfer of those funds to the agent. Similarly, when the Davises stepped 

outside of their role as principals of Cowboy and effectuated a fraudulent 

conveyance of Cowboy's funds to satisfy a personal obligation of Mr. Davis, Mr. 

Davis became the initial transferee of those funds. 

The majority relies heavily on Richardson v. FDIC (In re Blackburn 

Mitchell. Inc.), 164 B.R. 117 (Bankr. N.D. Cal. 1994), and General Electric 

Capital Auto Lease. Inc. v. Broach (In re Lucas Dallas. Inc.), 185 B.R. 801 

(Bankr. 9th. Cir. 1995), to reject the above cited cases as bad law and hold that 

Mr. Davis is not the initial transferee, but rather the "entity for whose benefit 

such transfer was made." I disagree with this reasoning. It is true, as the 

Bankruptcy Appellate Panel stated in General Electric, that corporations must 

always act through individuals. 185 B.R. at 809. However, there is an important 

difference between a principal's actions on behalf of a corporation for corporate 

purposes, albeit misguided, and actions for purely personal purposes. Making 

such a distinction does not "collapse the two prongs of strict liability [for initial 

transferees and entities for whose benefit the transfer was made] into a single 

party, as the General Electric Court warns. Id. Rather, it merely recognizes that 

the statute does not hold two separate parties strictly liable in all cases, but only 

in those where there are separate identifiable parties who are the "initial 

transferee" and the "entity for whose benefit such transfer was made." As I 

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believe Mr. Davis is a transferee, he cannot be the entity for whose benefit such 

transfer was made. 

Moreover, the Richardson case, on which the reasoning of General Electric 

is largely based, both misapplies the legal rule established in Bonded, and is 

distinguishable on its facts. The Richardson court explained: 

The Court believes that the proper focus when analyzing who is a 

transferee, is in the flow of funds. In order to be an initial transferee, 

one must be a transferee in the ordinary sense of the word. 

This Court does not disagree that in order to be a transferee one must 

obtain dominion and control over funds. But that does not mean that 

merely because one has dominion and control of funds (as principals 

ordinarily do) that one is also a transferee. . . . In order to be a 

transferee of the debtor's funds, one must (1) actually receive the 

funds, and (2) have full dominion and control over them for one's 

own account, as opposed to receiving them in trust or as agent for 

someone else. 

Id. at 126. This is not what Bonded holds. The Bonded court specifically shifts 

the emphasis from the mechanical movement of money through accounts and 

establishes the dominion and control test. Bonded, 83 8 F .2d at 893. It is clear 

that "transferee" cannot simply be defined under the "ordinary sense of the 

word;" rather, Bonded holds that "'[t]ransferee' is not a self-defining term; it 

must mean something different from 'possessor' or 'holder' or 'agent."' I d. at 

894. In Richardson, the court created an overly restrictive definition by 

combining the dominion and control requirement of Bonded with the "ordinary" 

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meaning of "transferee" as someone who actually holds the funds in his account. 

Of course, not every principal in a business, who ordinarily would have dominion 

and control over company funds, should be considered a transferee. As discussed 

above, there is a difference between a principal acting in his official capacity and 

a principal who abuses his official role and effectively steals money from his 

company to achieve personal rather than corporate purposes. ~Nordic, 915 

F .2d at 105 5. It is this second type of principal whose wrongdoing causes him to 

abandon his official capacity and exercise personal dominion and control over 

corporate funds. The facts of this case clearly support the conclusion that Mr. 

Davis and his wife exercised personal dominion and control over Cowboy's funds 

by improperly using their official status to satisfy personal obligations. These 

facts demonstrate more clearly than in Richardson that Mr. Davis did exercise the 

requisite dominion and control to be considered the initial transferees. Arguably, 

Ms. Mitchell in Richardson could be compared to the hypothetical situation in 

Bonded in which Ryan in his official capacity tells the bank to "use this check to 

reduce Ryan's loan." In that case, the court explained that the bank, and not 

Ryan, would be the initial transferee. Bonded, 838 F.2d at 892. Here, however, 

the situation of Mr. Davis is more akin to the dominion and control exercised by 

parties who were found to be initial transferees in the cases discussed above. ~ 

Kendall, 151 B.R. at 1021; Robinson, 94 B.R. at 183. 

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If, as the Court contends, Mr. Davis is the "entity for whose benefit such 

transfer was made," the Markgrafs would be the initial transferees. However, not 

every case includes a party who can be labeled as the "entity for whose benefit 

such transfer was made." In Bonded, the court makes clear that "the categories 

'transferee' and 'entity for whose benefit such transfer was made' are mutually 

exclusive." Bonded, 838 F .2d at 896; see also Danning v. Miller (In re Bullion 

Reserve ofN. Am.), 922 F.2d 544, 548 (9th Cir. 1991). Therefore, in a simple 

example where the debtor fraudulently transfers funds to A, who in turn transfers 

them to B, there is no party who can be properly described as the "entity for 

whose benefit such transfer was made." A is the initial transferee and B is an 

immediate or mediate transferee. 

The single distinguishing characteristic of an "entity for whose benefit such 

transfer was made" is, therefore, that it is not a transferee under § 550. Rather, in 

order to avoid redundancy, I interpret the phrase "entity for whose benefit such 

transfer was made" to describe a party that exists outside of the chain of transfer, 

but who nonetheless receives a direct benefit from the occurrence of the transfer, 

such as a guarantor of a loan or other third party beneficiary. Accord Laird, 140 

B.R. at 498-99 ("The structure of section 550 distinguishes transferees ... from 

entities that get a benefit because someone else received the money or property. 

Since the bank was a subsequent transferee, it could not be the 'entity for whose 

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Appellate Case: 95-4120 Document: 01019278217 Date Filed: 08/27/1996 Page: 30 
benefit' the initial transfer was made."). Employing the test of Bonded and its 

progeny, an "entity for whose benefit such transfer was made" must therefore be a 

party that does not exercise dominion and control over the transferred funds and 

is outside the chain of transfer. The facts presented clearly support finding Mr. 

Davis to be a transferee; consequently, under Bonded, he cannot be "the entity for 

whose benefit such transfer is made." Mr. Davis was no mere courier; his 

improper intent and dominion and control over the transaction is crystal clear, 

compelling my conclusion that he was a transferee of the funds, and more 

specifically, the initial transferee. As Mr. Davis is the initial transferee, the 

Markgrafs are subsequent transferees who can utilize the good faith defense of § 

550(b )(1 ). 

Because the Court chooses to limit its focus to the form of the transaction, 

totally ignoring its substance, I respectfully dissent. 

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