Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-13-16020/USCOURTS-ca9-13-16020-0/pdf.json

Parties Involved:
Dane S. Field
Appellee
Mano-Y&M, Ltd.
Appellant
The Mortgage Store, Inc.
Debtor

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

IN RE: THE MORTGAGE

STORE, INC.,

Debtor.

MANO-Y&M, LTD.,

Appellant,

v.

DANE S. FIELD, Trustee;

GEORGE W. LINDELL; KAREN

K. LINDELL; HECTOR &

ALICIA INVESTMENTS, LLC;

HECTOR GUERRA,

Appellees.

No. 13-16020

Nos.

CV 12-0653 JMS KSC;

10-03454 (Chapter 7)

Adv. Pro. No.

10-90146

OPINION

Appeal from the United States District Court

for the District of Hawaii

J. Michael Seabright, District Judge, Presiding

Argued and Submitted

October 7, 2014—Honolulu, Hawaii

Filed December 5, 2014

Before: A. Wallace Tashima, Johnnie B. Rawlinson,

and Richard R. Clifton, Circuit Judges.

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2 IN RE: THE MORTGAGE STORE, INC.

Opinion by Judge Tashima

SUMMARY*

Bankruptcy

The panel affirmed the district court’s decision affirming

the bankruptcy court’s summary judgment in an adversary

proceeding seeking avoidance of a fraudulent transfer.

Applying the “dominion test,” the panel held that under

11 U.S.C. § 550, appellant Mano-Y&M Ltd. was the initial

transferee, rather than a subsequent transferee, of

$311,065.25 paid by the bankruptcy debtor, The Mortgage

Store, Inc., in connection with the sale of a shopping plaza. 

The panel concluded that McCarty v. Richard James Enters.,

Inc. (In re Presidential Corp.), 180 B.R. 233 (9th Cir. BAP

1995), which applied in part the “control test” for identifying

initial transferees, is no longer good law.

COUNSEL

Christopher J. Muzzi (argued) and Leila Rothwell Sullivan,

Tsugawa, Biehl, Lau & Muzzi, Honolulu, Hawaii, for

Appellant.

* This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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IN RE: THE MORTGAGE STORE, INC. 3

Simon Klevansky (argued), Alika L. Piper, and Nicole D.

Stucki, Klevansky Piper, LLP, Honolulu, Hawaii, for

Appellee Dane S. Field.

OPINION

TASHIMA, Circuit Judge:

Appellant Mano-Y&M, Ltd. (“Mano”) appeals from the

judgment of the district court holding that under 11 U.S.C.

§ 550 Mano was the initial transferee of $311,065.25 paid by

the debtor, The Mortgage Store, Inc., in connection with the

sale of a shopping plaza. We affirm.

I.

Mano owned the Raymondville Plaza, a six-acre shopping

plaza in Raymondville, Texas. In 2008, Mano was

approached by representatives of George Lindell (“Lindell”)

who offered, on Lindell’s behalf, to buy the plaza. In midDecember 2008, Mano and Lindell entered into a contract for

Mano to sell the plaza to Lindell for $2.2 million. Lindell

was to pay $300,000 cash; the remainder of the purchase

price was to be covered by a seller-financed mortgage. The

contract obligated both parties to pay fees associated with

closing. Additionally, Lindell was to pay $10,000 of the

purchase price immediately as earnest money. The contract

was signed by Lindell and Paulrajan Manoharan on behalf of

Mano.

The contract also assigned responsibilities to two thirdparties. First, Sierra Title Company (“Sierra”), listed as the

“title company” in the contract, was to take possession of the

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4 IN RE: THE MORTGAGE STORE, INC.

earnest money after the contract was signed and distribute it

to the appropriate party upon closing or cancellation of the

contract. Second, attorney Mark Freeland (“Freeland”) was

assigned responsibilities related to the closing. Freeland was

to receive the purchase money, distribute that money

according to the contract, record the deed and closing

documents, and distribute documents and copies according to

the parties’ instructions. Prior to and after the execution of

the contract, Freeland apparently served as Mano’s attorney

on other matters. However, under the contract Freeland was

entitled to payment from both Mano and Lindell.

The contract provided for a 30-day inspection period

following its “effective date,” defined as the date of “the last

of the signatures by Seller and Buyer . . . and Title

Company.” During this period, Lindell had the right to

terminate the contract for any reason, but after the 30-day

period expired, Lindell was contractually obligated to

purchase the property from Mano. The contract itself was not

dated, but the district court concluded that the contract’s

effective date was no later than December 16, 2008, because

that was the date on which Freeland sent the signed contract

and the earnest money to Sierra. In re the Mortg. Store, Inc.,

Civ. No. 12-0653 JMS, 2013 WL 1680636, at *2 (D. Haw.

Apr. 16, 2013). Thus, based on the contract and its effective

date, the thirty-day inspection period was to end no later than

January 15, 2009.

Lindell did not terminate the contract during the

inspection period. On January 19, 2009, a few days after the

end of the inspection period, Mano, Lindell, and Freeland

executed a settlement statement to close the contract. Several

other documents were also executed on January19. Paulrajan

Manoharan, on behalf of Mano, signed a special warranty

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IN RE: THE MORTGAGE STORE, INC. 5

deed granting the property to Lindell. Lindell executed an

assignment of rents and a promissory note for $1.9 million to

Mano, and a deed of trust to Freeland as trustee. 

Additionally, Yalini Manoharan, Paulrajan Manoharan’s

wife, signed the deed on behalf of Mano the following day. 

On January 20, 2009, The Mortgage Store wired

$311,065.25 to Freeland in satisfaction of Lindell’s

obligations under the contract. Freeland deposited the money

in a trust account he held with Compass Bank. The parties

dispute who was entitled to receive this money under the

settlement agreement. Mano contends that $34,635.42 of the

transfer was intended to cover closing costs Lindell owed to

entities other than Mano, including the Mosley Insurance

Agency, Sierra, and Freeland. Appellees contend that

because Lindell owed Mano $290,000 under the contract at

the time of the transfer, and the transfer was for $311,065.25,

the maximum amount of the transfer that could have been

intended for recipients other than Mano was $21,065.25. On

January 21, 2009, Freeland disbursed the money paid by The

Mortgage Store pursuant to the contract.

Lindell had a longstanding relationship with The

Mortgage Store. Lindell was the sole shareholder and

president of The Mortgage Store from 1996 to 2008. In 2009,

Lindell transferred ownership and management to his

daughter, but he retained control over The Mortgage Store’s

finances. On the other hand, Mano contends that it had no

contact with The Mortgage Store before December 2010.

In November 2010, The Mortgage Store filed for

bankruptcy protection under Chapter 7. After an audit, it

became clear that The Mortgage Store was operating a Ponzi

scheme. The trustee, Dane S. Field, commenced this action

in December 2010, alleging that The Mortgage Store’s

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6 IN RE: THE MORTGAGE STORE, INC.

transfer in connection with the plaza transaction was

fraudulent under 11 U.S.C. §§ 544(b), 548(a)(1), and Haw.

Rev. Stat. § 651C-4(a), and seeking to avoid the transfer and

recoup the funds from Mano. On the trustee’s motion for

summary judgment, the bankruptcy court held that the

transfer was fraudulent; it later determined that Mano was the

initial transferee, rather than a subsequent transferee. Mano

appealed to the U.S. District Court for the District of Hawaii,

which (1) affirmed that Mano was an initial transferee, and

(2) refused to consider Mano’s alternative argument that it

should not be held responsible for the entire $311,065.25

amount because Mano waived the argument by not raising it

in the bankruptcy court. In re the Mortg. Store, 2013 WL

1680636 at *7, *10. Mano now appeals the district court’s

judgment to this Court.

II.

We review the district court’s decision on an appeal from

the bankruptcy court de novo. Feder v. Lazar (In re Lazar),

83 F.3d 306, 308 (9th Cir. 1996). We apply the same

standard of review to the bankruptcy court’s findings as did

the district court. Id. Findings of fact are reviewed under the

clearly erroneous standard of review and legal conclusions

are reviewed de novo. Id. Because this dispute was decided

on summary judgment, we must determine whether “viewing

all evidence in the light most favorable to the nonmoving

party, there are any genuine issues of material fact and

whether the district court correctly applied the relevant

substantive law.” Whitman v. Mineta, 541 F.3d 929, 931 (9th

Cir. 2008).

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IN RE: THE MORTGAGE STORE, INC. 7

III.

A.

We first address Mano’s argument that it was not the

initial transferee under 11 U.S.C. § 550. Pursuant to § 550(a),

upon the avoidance of certain transfers, the trustee may

recover the property transferred or the value of such property

from the initial transferee or the entity for whose benefit the

avoided transfer was made.” Under § 550(a), “[t]he trustee’s

right to recover from an initial transferee is absolute.” 

Schafer v. Las Vegas Hilton Corp. (In re Video Depot, Ltd.),

127 F.3d 1195, 1197–98 (9th Cir. 1997). A trustee may

recover from a subsequent transferee – that is, any transferee

not an initial transferee – but the subsequent transferee will

be allowed to assert affirmative defenses that, if successful,

will prevent recovery. 11 U.S.C. § 550(b)(1); see Danning v.

Miller (In re Bullion Reserve of N. Am.), 922 F.2d 544, 547

(9th Cir. 1991). Whether the transfer was avoidable and

whether Mano’s affirmative defenses would succeed are not

at issue in this appeal. Rather, we must determine only

whether Mano was the initial or a subsequent transferee of the

funds remitted by The Mortgage Store as partial payment for

the plaza sale.

Section 550(a) does not define the term “initial

transferee.” In the absence of a statutory definition, we apply

the so-called “dominion test” to determine whether a party is

the initial transferee. Universal Serv. Admin. Co. v. PostConfirmation Comm. of Unsecured Creditors of Incomnet

Commc’n Corp. (In re Incomnet), 463 F.3d 1064, 1071 (9th

Cir. 2006). “Under the dominion test, a transferee is one who

. . . has dominion over the money or other asset, the right to

put the money to one’s own purposes.” Id. at 1070 (9th Cir.

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8 IN RE: THE MORTGAGE STORE, INC.

2006) (quoting Abele v. Modern Fin. Plans Serv., Inc. (In re

Cohen), 300 F.3d 1097, 1102 (9th Cir. 2002)) (internal

quotation marks omitted). Key in the dominion test is

“whether the recipient of funds has legal title to them” and

whether the recipient has “the ability to use [the funds] as he

sees fit.” Id. at 1071. As the Seventh Circuit explained in the

widely-cited case Bonded Financial Services, Inc. v.

European American Bank, an individual will have dominion

over a transfer if, for example, he is “free to invest the whole

[amount] in lottery tickets or uranium stocks.” 838 F.2d 890,

894 (7th Cir. 1988); see In re Incomnet, 463 F.3d at 1070

(characterizing Bonded Fin. Serv. as the “leading case in this

area”). The first party to establish dominion over the funds

after they leave the transferor is the initial transferee; other

transferees are subsequent transferees. See In re Cohen,

300 F.3d at 1102–07; In re Bullion Reserve, 922 F.2d at

547–49.

Mano does not dispute that the dominion test is the proper

method for determining the initial transferee, but, relying on

McCarty v. Richard James Enters., Inc. (In re Presidential

Corp.), 180 B.R. 233 (9th Cir. BAP 1995), it argues that a

party should be deemed the initial transferee when another

party receives and distributes funds on its behalf.

In In re Presidential, Manoukian, the sole shareholder of

Presidential Corp., directed Presidential to transfer a sum of

money to an escrow agent to pay for his personal residence. 

Id. at 234–35. The escrow agent received the money and held

it in escrow until the transaction closed, at which time the

escrow agent distributed the money to parties entitled to

payment under the contract, including Richard James

Enterprises (“Richard James”). Id. After Presidential went

bankrupt, the trustee sought to avoid the transfer to Richard

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IN RE: THE MORTGAGE STORE, INC. 9

James and the issue became whether Manoukian or Richard

James was the initial transferee. Id. The Ninth Circuit

Bankruptcy Appellate Panel (“BAP”) reasoned that “[w]here

a principal controls the disposition of funds through an agent

. . . the dominion or control test has been met.” Id. at 238. 

Although Manoukian could not exercise direct control over

the funds nor “change his mind as to their disposition,” they

“were not beyond Manoukian’s dominion or control in

another sense, however, because he was applying them for his

personal benefit in accordance with his sole wishes.” Id. The

BAP concluded that Manoukian, not Richard James, was the

initial transferee. Id.

The facts of In re Presidential resemble those here, so it

is necessary for us to address In re Presidential’s continuing

validity as precedent. Although we “treat the BAP’s

decisions as persuasive authority,” we are not bound by its

decisions. State Comp. Ins. Fund v. Zamora (In re

Silverman), 616 F.3d 1001, 1005 n.1 (9th Cir. 2010). In fact,

as the BAP has recognized, our decisions are binding

precedent that the BAP must follow. See Ball v. Payco Gen.

Am. Credits, Inc. (In re Ball), 185 B.R. 595, 597 (9th Cir.

BAP 1995) (“We will not overrule our prior rulings unless a

Ninth Circuit Court of Appeals decision, Supreme Court

decision or subsequent legislation has undermined those

rulings.).

In 1995, when In re Presidential was decided, we

employed a hybrid “dominion and control” test to identify

initial transferees. See In re Video Depot, 127 F.3d at

1199–1200. Although this test included elements of the

dominion test, it also drew from the alternative “control test,”

which “requires courts to step back and evaluate a transaction

in its entirety to make sure that their conclusions are logical

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10 IN RE: THE MORTGAGE STORE, INC.

and equitable.” Nordberg v. Societe Generale (In re Chase

& Sanborn Corp.), 848 F.2d 1196, 1199 (11th Cir. 1988); see

In re Incomnet, 463 F.3d at 1070–71. The control test, which

has had influence in our sister circuits, “is a very flexible,

pragmatic one” that does not depend on “facial

appearance[s].” Andreini & Co. v. Pony Express Delivery

Servs. (In re Pony Express Delivery Servs., Inc.), 440 F.3d

1296, 1302 (11th Cir. 2006) (quoting In re Chase &Sanborn,

848 F.2d at 1199). However, in In re Incomnet, we explicitly

rejected the control test’s flexible, equitable approach and

embraced the pure dominion test. See In re Incomnet,

463 F.3d at 1071. In so doing, we clarified that the

touchstones in this circuit for initial transferee status are legal

title and the ability of the transferee to freely appropriate the

transferred funds. Id.

Although In re Presidential referenced both the dominion

test and the control test, the panel’s reasoning aligned more

closely with the control test. See In re Presidential, 180 B.R.

at 238–39. Rather than focusing on Manoukian’s ability to

direct the funds to whatever legal end he desired, as our most

recent precedents require, the BAP’s analysis turned on

whether the funds were being applied for Manoukian’s

benefit and in accordance with his prior wishes. Id. Such

equitable considerations fit much more comfortablyunder the

control test. Cf. In re Pony Express Delivery Servs., 440 F.3d

at 1303 (placing weight, under the control test, on the

“purpose” of a disputed transfer). Put differently, had the

BAP in In re Presidential applied the pure dominion test as

later articulated in In re Incomnet, it would have been

compelled to deem Richard James the initial transferee. 

Because we conclude that the BAP’s conclusions rested

primarily on the control test, we now hold that In re

Presidential is no longer good law in this Circuit insofar as it

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IN RE: THE MORTGAGE STORE, INC. 11

conflicts with the pure dominion test articulated in In re

Incomnet. Accordingly, Mano’s reliance on In re

Presidential is misplaced. The proper standard is the In re

Incomnet dominion test.

B.

We now apply the dominion test to the facts of this case

to ascertain which party was the initial transferee. Mano

asserts that Lindell was the initial transferee and argues that

Lindell had dominion over the funds from the time they were

received by Freeland to the time Freeland transferred them to

the parties so entitled under the contract. Although Lindell

did not actually possess the funds, Mano argues that

Freeland’s receipt and distribution of the funds on Lindell’s

behalf was sufficient to give Lindell dominion.

In evaluating this assertion, we note first that Lindell

never held legal title to the funds at issue, a factor the In re

Incomnet court identified as highly significant in the

dominion analysis. In re Incomnet, 463 F.3d at 1073; see

also In re Cohen, 300 F.3d at 1102. Lindell may have had

some equitable interest in the funds while they were in

Freeland’s possession, but that interest was too constrained to

satisfy the dominion test. Because the conditions precedent

for the contract’s consummation had been satisfied by the

time The Mortgage Store transferred the funds to Freeland,

Lindell had no right to control their distribution. Lindell

could not have prevented the distribution of funds to Mano,

much less chosen to invest them in “lottery tickets or uranium

stocks.” Bonded Fin. Serv., 838 F.2d at 894. Ultimately,

whether Freeland was acting on Lindell’s behalf when he

received the funds from The Mortgage Store and distributed

them is irrelevant to whether Lindell had dominion. What

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12 IN RE: THE MORTGAGE STORE, INC.

matters is whether Lindell had the ability to manipulate the

funds on his own accord. See In re Incomnet, 463 F.3d at

1071–73. The record shows Lindell did not. Because we

conclude Lindell was not a transferee and Mano has not

argued that any other party was the initial transferee, we hold

that the district court did not err in deeming Mano the initial

transferee of the disputed funds.

We acknowledge that the result this case produces may

seem harsh, given that Mano was not involved in the

impropriety that brought about the trustee’s action. However,

Congress’ intent in enacting § 550 and our precedents

construing it compel judgment for appellees. In virtually

every case involving a bankrupt entity, a third party will be

injured because the debtor’s obligations to creditors, by

definition, outstrip its assets. In the case of a debtor’s

fraudulent conveyance, injury must fall on either the

transferee of the conveyance or the debtor’s creditors. For

creditors, letting a fraudulent transfer lie would result in a

“last-minute diminution[ ] of the pool of assets in which they

have interests.” Bonded Fin. Serv., 838 F.2d at 892. The aim

of § 550, and this Court’s aim, to the extent our discretion is

not constrained, must be to allocate risk such that the parties

tending to have the lowest monitoring costs must bear the

costs of a debtor’s failings. Id. at 892–93; see Durkin v.

Shields (Imperial Corp. of Am.), No. 92-1003-IEG, 1997 WL

808628, at *8–*9 (S.D. Cal. Aug. 20, 1997).

In distinguishing between initial and subsequent

transferees, Congress determined that, as between creditors

and transferees, “[t]he initial transferee is the best monitor.” 

Bonded Fin. Serv., 838 F.2d at 892. Unlike subsequent

transferees, who “usually do not know where the assets came

from and would be ineffectual monitors if they did,” initial

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IN RE: THE MORTGAGE STORE, INC. 13

transferees tend to have relationships and influence with the

debtor. Id. at 892–93; see also In re Video Depot, 172 F.3d

at 1199 (“An initial transferee is exposed to stricter liability

than a subsequent transferee because the initial transferee is

in the best position to evaluate whether the conveyance is

fraudulent.”). By placing the risk on initial transferees rather

than creditors, Congress ensured that creditors “need not

monitor debtors so closely,” the idea being that “savings in

monitoring costs make businesses more productive.” Bonded

Fin. Serv., 838 F.2d at 892 (citing Douglas G. Baird &

Thomas H. Jackson, Fraudulent Conveyance Law and Its

Proper Domain, 38 Vand. L. Rev. 829 (1985); Robert Charles

Clark, The Duties of the Corporate Debtor to Its Creditors,

90 Harv. L. Rev. 505, 554–60 (1977)); see also Tese-Miller

v. Brune (In re Red Dot Scenic, Inc.), 293 B.R. 116, 121

(S.D.N.Y. 2003) (noting that strict liability for initial

transferees “lowers the cost of credit”). We need not weigh

the merits of this trade-off because Congress’ intent is clear

in § 550’s text. It would be inappropriate for us to secondguess Congress’ considered judgment on this matter of

policy.

1

See Clark v. Balcor Real Estate Fin., Inc. (In re

1 Holding Mano liable also comports with the broader purposes of § 550. 

Although Mano asserts it did not have direct contact with the debtor until

well after the transfer, Mano was represented by counsel in the transaction

and entered a contract that allowed Lindell to satisfy his obligations under

the contract through a third party. In so doing, Mano accepted the risk

that Lindell’s obligation would be satisfied through an avoidable

conveyance. Cf. Scholes v. Lehmann, 56 F.3d 750, 761 (7th Cir. 1995)

(noting that conveyance recipients could hold cash reserves or obtain

liability insurance to hedge against the possibility of a fraudulent

conveyance).

Moreover, accepting Mano’s proposed resolution to this case and

deeming Lindell the initial transferee would raise troubling implications. 

Lindell, the record indicates, was the long-time president of The Mortgage

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14 IN RE: THE MORTGAGE STORE, INC.

Meridith Hoffman Partners), 12 F.3d 1549, 1557 (10th Cir.

1993) (explaining, in the bankruptcy context, that “courts’

equitable powers do not permit them to disregard the clear

language of the statute, regardless of how unfair it may seem

to be”).

IV.

Mano argues in the alternative that it should not be held

responsible for the entire $311,065.25 transfer because some

of that amount was received by parties other than Mano. We

decline to address the merits of this argument because Mano

waived it by failing to raise the issue in the bankruptcy court.

In general, “a federal appellate court does not consider an

issue not passed upon below.” Singleton v. Wulff, 428 U.S.

106, 120 (1976). A litigant may waive an issue by failing to

raise it in a bankruptcy court. See Kieslich v. United States

(In re Kieslich), 258 F.3d 968, 971 (9th Cir. 2001); Price v.

Lehtinen (In re Lehtinen), 332 B.R. 404, 411 (9th Cir. BAP

Store and maintained close ties with the company when the transfer

occurred. Given these ties, it is unreasonable to assume that Lindell had

the proper incentives to monitor The Mortgage Store for fraud. Yet

naming Lindell the initial transferee would make precisely that

assumption. See Bonded Fin. Serv., 838 F.3d at 892–93. Most instances

in which one party covers another party’s contractual obligations likely

arise from a close relationship. Charging a party with monitoring for

fraud the entity that pays its debts, as Mano suggests, thus would

undermine the very structure of § 550. Cf. In re Video Depot, 127 F.3d at

1199 (noting that a rule making “every agent or principal of a corporation

. . . the initial transferee when he or she effected a transfer of property in

his or her representative capacity” would “give[ ] too much power to an

unscrupulous insider to effect a fraudulent transfer” (quoting Richardson

v. FDIC (In re M. Blackburn Mitchell, Inc.), 164 B.R. 117, 128 (Bankr.

N.D. Cal. 1994))).

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2005). We have discretion to consider arguments raised for

the first time on appeal, but do so only if there are

“exceptional circumstances.” El Paso City of Tex. v. Am. W.

Airlines, Inc. (In re Am. W. Airlines), 217 F.3d 1161, 1165

(9th Cir. 2000). We will address a waived issue (1) when

review is required to “prevent a miscarriage of justice or to

preserve the integrity of the judicial process,” (2) “when a

new issue arises while appeal is pending because of a change

in the law,” and (3) “when the issue presented is purely one

of law and either does not depend on the factual record

developed below, or the pertinent record has been fully

developed.” In re Mercury Interactive Corp. Sec. Litig.,

618 F.3d 988, 992 (9th Cir. 2010) (quoting Bolker v.

Commissioner, 760 F.2d 1039, 1042 (9th Cir. 1985)).

In this case, Mano made no mention of the alternative

argument in its memoranda opposing summary judgment in

the bankruptcy court. No change in law occurred while this

case was pending that would justify this failure to raise the

issue. Whether Mano is liable for the entire transfer from

Freeland is not a pure issue of law; rather, it is a disputed and

poorly developed factual question. No miscarriage of justice

is apparent. Accordingly, we deem Mano’s alternative

argument waived and do not exercise our discretion to

consider the issue.

V.

For the foregoing reasons, we conclude that the district

court did not err in determining that Mano was the initial

transferee of the disputed funds and in declining to address

Mano’s alternative argument because it was waived. The

judgment of the district court is AFFIRMED.

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