UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

In Re: FLORIDA HOTEL PROPERTIES

LIMITED PARTNERSHIP PLAN TRUST

AGREEMENT,

Debtor.

EDWARD P. BOWERS, Trustee,

Plaintiff-Appellant,

No. 97-2507

v.

KUSE ENTERPRISES, INCORPORATED,

Defendant-Appellee,

and

J. R. KUSE,

Defendant.

In Re: FLORIDA HOTEL PROPERTIES

LIMITED PARTNERSHIP PLAN TRUST

AGREEMENT,

Debtor.

EDWARD P. BOWERS, Trustee,

Plaintiff-Appellee,

No. 97-2583

v.

KUSE ENTERPRISES, INCORPORATED,

Defendant-Appellant,

and

J. R. KUSE,

Defendant.
Appeals from the United States District Court

for the Western District of North Carolina, at Charlotte.

Graham C. Mullen, Chief District Judge.

(CA-93-410-3-MU, BK-91-31425-C, AP-93-3080)

Argued: May 7, 1998

Decided: September 22, 1998

Before ERVIN and HAMILTON, Circuit Judges, and

BLAKE, United States District Judge for the

District of Maryland, sitting by designation.

_________________________________________________________________

Affirmed in part and reversed in part by unpublished opinion. Judge

Ervin wrote the opinion, in which Judge Hamilton and Judge Blake

joined.

_________________________________________________________________

COUNSEL

ARGUED: Joseph Williamson Grier, III, GRIER, BELTHOFF &

FURR, P.A., Charlotte, North Carolina, for Appellant. Brad Alexander Baldwin, JONES, DAY, REAVIS & POGUE, Atlanta, Georgia,

for Appellee. ON BRIEF: J. Cameron Furr, K. Lane Klotzberger,

GRIER, BELTHOFF & FURR, P.A., Charlotte, North Carolina, for

Appellant. R. Matthew Martin, JONES, DAY, REAVIS & POGUE,

Atlanta, Georgia, for Appellee.

_________________________________________________________________

Unpublished opinions are not binding precedent in this circuit. See

Local Rule 36(c).

_________________________________________________________________

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OPINION

ERVIN, Circuit Judge:

The parties to a bankruptcy proceeding cross-appeal the district

court's decisions below. Kuse Enterprises, Inc. ("Kuse") appeals the

district court's affirmance of the bankruptcy court's finding that it

was the initial transferee of an unapproved post-petition transfer made

by means of a cashier's check, and the court's subsequent entry of

summary judgment in favor of the Trustee for the bankruptcy debtor

Florida Hotel Properties Limited Partnership ("FHP"). The Trustee

appeals the district court's finding, reversing the bankruptcy court,

that Kuse is entitled to a set-off for the transfer in question because

of a settlement agreement between the Trustee and the bank that

issued the cashier's check. For the reasons stated herein, we agree that

Kuse was the initial transferee and affirm the grant of summary judgment, but reverse the district court and reinstate the bankruptcy

court's finding that Kuse was not entitled to a set-off for settlement

funds received by the Trustee.

I.

FHP owned ten Days Inn Hotels in Florida. Commercial Management Corporation ("CMC") managed FHP and controlled its operating bank accounts. At all times relevant to this case, Sam McMahon,

III, was the president and one-third owner of CMC.

On July 2, 1991, FHP filed a voluntary petition under Chapter 11

of the Bankruptcy Code and operated as a debtor-in-possession until

a special examiner was appointed on December 13, 1991. On October

4, 1991, while FHP was still debtor-in-possession, McMahon caused

CMC to write two checks, each from a separate FHP operating

account, in the respective amounts of $295,000 and $300,000, to

Southern National Bank ("the Bank"). McMahon then instructed the

Bank to issue two cashier's checks to J.R. Kuse in like amounts. Each

cashier's check showed FHP as the remitter.

That same day, McMahon's administrative assistant delivered the

checks to Scott Starnes, an employee of Starnes Aviation. Starnes in

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turn delivered the checks to Michael Kuse, an employee of Kuse

Enterprises and son of J.R. Kuse. Michael Kuse delivered to Starnes

a bill of sale dated October 3, 1991, transferring an Augusta 109A

helicopter from Kuse Enterprises to Starnes Aviation. J.R. Kuse

deposited the two checks into Kuse Enterprises' operating account.

In another bill of sale dated October 3, 1991, Starnes Aviation

transferred title to the helicopter to Southland Realty Associates, Inc.,

a corporation wholly owned by McMahon. While Southland Realty

owned the helicopter, it was used by Team III Racing. Team III Racing owned and operated a NASCAR racing team, and was also wholly

owned by McMahon. On October 31, 1991, Southland Realty transferred the helicopter to Leasing Consultants, Inc., which in turn leased

the helicopter to Team III Racing. The helicopter was at no time titled

in the name of FHP or used by or for the benefit of FHP. The

$595,000 payment by FHP for the helicopter was not approved by the

bankruptcy court.

On February 22, 1993, FHP's trustee in bankruptcy, Edward P.

Bowers ("the Trustee"), brought an adversary proceeding against

Kuse Enterprises and J.R. Kuse under §§ 549 and 550 of the Bankruptcy Code ("the Kuse proceedings"), seeking to recover the

$595,000 unauthorized post-petition transfer. See 11 U.S.C. § 549

(giving trustee authority to avoid unauthorized post-petition transfers

of property out of estate); id. § 550 (authorizing trustee to recover

property transferred to extent transfer is avoided under § 549). Both

parties moved for summary judgment. The bankruptcy court held a

hearing, and on December 14, 1993 entered findings of fact and conclusions of law which determined that the money Kuse had received

was an avoidable transfer under § 549 and that Kuse was liable for the

transfer under § 550(a)(1) as the "initial transferee." The bankruptcy

court further concluded that J.R. Kuse was a "mere conduit" for the

funds from whom the Trustee could not recover. Kuse appealed.

On July 2, 1993, while the Kuse proceedings were underway, the

Trustee also filed a complaint against the Bank on behalf of FHP,

alleging 18 causes of action and seeking to recover numerous transfers totaling over $14 million. Two of these causes of action alleged

that the Bank was the initial transferee of the $595,000 Kuse transfer.

On August 12, 1993, the Trustee filed a similar suit against the Bank

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on behalf of another debtor, Southeast Hotel Properties Limited Partnership ("SEHP"). In May 1995, after the bankruptcy court had

granted summary judgment for the Trustee in the Kuse proceedings,

the Bank and the Trustee agreed to settle all claims between them

with respect to both FHP and SEHP for a lump sum of $1.5 million.

The settlement agreement expressly stated that it settled "any and all

. . . claims, actions or causes of action . . . whether in law or in equity,

whether known or unknown, whether in tort or contract, of any kind

or character, which [the Trustee] now has . . ., or could have asserted,

or may hereafter accrue . . . ." The agreement itself did not provide

for any allocation of the settlement proceeds among the various

claims listed in the Trustee's 18-count suit against the Bank; however,

when the bankruptcy court approved the settlement agreement on

June 20, 1995, it allocated 60.85% of the $1.5 million settlement to

FHP's estate and 39.15% to SEHP's estate.

While this settlement agreement was being finalized, the Kuse proceedings remained on appeal in the district court. On November 14,

1995, the district court remanded the Kuse proceedings to the bankruptcy court for further consideration of certain affirmative defenses.

On remand, the bankruptcy court conducted a hearing and concluded

that none of those defenses barred summary judgment for the Trustee,

and Kuse, as the initial transferee, therefore remained liable for the

avoided transfer. At this hearing, however, Kuse raised the question

of whether it was entitled to a credit or set-off for funds received by

the Trustee from its settlement with the Bank under§ 550(d) of the

Bankruptcy Code, which prevents double recovery. See § 550(d)

(stating that trustee is entitled to only single satisfaction of claims

under § 550(a)). The bankruptcy court concluded that Kuse was not

entitled to any set-off.

Kuse appealed to the district court. The district court affirmed the

bankruptcy court's grant of summary judgment for the Trustee, finding that Kuse was the initial transferee. However, the district court

reversed the bankruptcy court on the set-off issue, finding that Kuse

was entitled to a reduction in judgment based on settlement proceeds

the Trustee received from the Bank, and thus reduced Kuse's liability

to zero. Both parties now appeal the district court's rulings.

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II.

Our review of the district court's decision is plenary; we apply the

same standard of review as the district court applied to the bankruptcy

court's decision. Findings of fact are reviewed for clear error and conclusions of law are reviewed de novo. Bowers v. Atlanta Motor

Speedway, Inc. (In re Southeast Hotel Properties), 99 F.3d 151, 154

(4th Cir. 1996).

III.

The first issue we must decide is whether the district court and

bankruptcy court correctly determined that Kuse was the "initial

transferee" of the avoidable transfer under § 550 of the Bankruptcy

Code. According to Kuse, it cannot be considered the initial transferee

because the Bank that issued the cashier's checks at FHP's directions

is the initial transferee. We disagree and find that Kuse was indeed

the initial transferee. We therefore affirm the lower courts' grants of

summary judgment for the Trustee.

Section 549 of the Bankruptcy Code entitles a trustee in bankruptcy

to avoid unauthorized post-petition transfers. See 11 U.S.C. § 549.

The persons from whom the trustee may recover property where a

transfer has been avoided under § 549 are set out in § 550 of the

Code, which states that:

[T]he trustee may recover, for the benefit of the estate, the

property transferred, or if the court so orders, the value of

such property, from--

(1) the initial transferee of such transfer or the

entity for whose benefit such transfer was made.

11 U.S.C. § 550(a). According to § 550, the trustee's power to

recover from an "initial transferee" is absolute. See Bowers v. Atlanta

Motor Speedway, Inc. (In re Southeast Hotel Properties), 99 F.3d

151, 154 (4th Cir. 1996) (hereinafter "Bowers I") (noting § 550 protects a good faith mediate or immediate transferee who has taken for

value without knowledge of the avoidability of the transfer, but that

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the statute does not extend this same protection to either the "initial

transferee" or "the entity for whose benefit such transfer was made").

The Bankruptcy Code does not define "initial transferee." However, in Bowers I, a case related to this one and involving similar

facts, this court explicitly adopted the "dominion and control" test set

out in Bonded Financial Services, Inc. v. European American Bank,

838 F.2d 890 (7th Cir. 1988), to determine whether an entity is an

"initial transferee" under § 550(a). Bowers I, 99 F.3d at 156. The

dominion and control test, as we apply it, requires that in order to be

an initial transferee, a party must exercise legal dominion and control

over the property -- physical possession of the property is not sufficient. Thus, a party who is acting as a "mere conduit" for the transfer

of the property and who has no legal right to use the funds for its own

purposes is not the "initial transferee" for purposes of § 550(a). See,

e.g., Bowers I, 99 F.3d at 155 ("[T]he initial transferee of property is

not always the initial recipient of the property, and . . . a party cannot

be an initial transferee if he is a `mere conduit' for the party who had

a direct business relationship with the debtor." (citations omitted));

Rupp v. Markgraf, 95 F.3d 936, 941 (10th Cir. 1996) (stating that

dominion and control test requires that initial transferee have control

over the funds and "the right to put those funds to one's own purpose").

Applying the dominion and control test to the facts here, we conclude that Kuse was the initial transferee of the $595,000 transferred

from FHP's operating accounts. Although the funds were put in the

Bank's possession, they were placed there solely to enable the Bank

to issue the cashier's checks to Kuse. The Bank had no right to use

the funds for other purposes and therefore lacked the authority to

exercise legal dominion and control over the funds. Accordingly,

under the dominion and control test as adopted by this court in

Bowers I, the Bank was not the "initial transferee" of the funds under

§ 550 of the Bankruptcy Code. Accord Rupp v. Markgraf, 95 F.3d 936

(10th Cir. 1996) (applying dominion and control test and finding bank

that issued cashier's check not initial transferee because bank acted

only as financial intermediary).

Kuse makes two separate arguments why it cannot be the initial

transferee of the funds in question. First, it contends that the cashier's

 7
checks constituted funds of the Bank, rather than of the estate. In

reaching this conclusion, Kuse relies heavily on the bankruptcy

court's decision in Ellis v. State Bank of Towner (In re Archie Campbell, Inc.), 45 B.R. 416 (Bankr. D.N.D. 1984), which held that a cashier's check is a transfer of funds of the issuing bank rather than funds

of the debtor. Id. at 419. The reasoning of the Archie Campbell bankruptcy court was rejected by the district court that heard the case on

appeal, however, with that court holding that payment by cashier's

check did not preclude a finding that there had been a transfer of the

debtor's property. Ellis v. Dakota Bank & Trust (In re Archie Campbell, Inc.), 54 B.R. 116, 118 (D.N.D. 1985) (remanding case to bankruptcy court to determine whether under facts of the case cashier's

check in question involved a transfer of the bank's or debtor's property).

Here, the checks written on FHP's account depleted the bankruptcy

estate by the not inconsiderable sum of $595,000. Kuse, in turn,

received $595,000 -- upon receipt of which it transferred the Augusta

109A helicopter to a third party. We therefore find that the payment

by cashier's check was a transfer, albeit indirect, of the debtor's funds

rather than of the Bank's funds. In reaching this conclusion, we join

numerous courts, including our own decision in Bowers I, that have

treated payment made by cashier's checks as transfers of a debtor's

property. See, e.g., 99 F.3d 151 (assuming without discussion that

payment by cashier's check was transfer of debtor's property);

Schafer v. Las Vegas Hilton Corp. (In re Video Depot, Ltd.), 127 F.3d

1195 (9th Cir. 1997) (same); IRS v. Nordic Village, Inc. (In re Nordic

Village, Inc.), 915 F.2d 1049 (6th Cir. 1990) (same).

Kuse's second argument is that the Bank acted in bad faith in its

handling of the debtor's funds, and is therefore not eligible for the

"mere conduit" exception to the strict application of § 550(a). Kuse

bases this argument on our decision in Huffman v. Commerce Security

Corp. (In re Harbour), 845 F.2d 1254 (4th Cir. 1998), in which we

held that when an "initial recipient is asking the court to ignore the

literal meaning of section 550(a)(1) on essentially equitable grounds,

this party must have acted in `good faith' with respect to the relevant

transaction in order to be spared the effects of this code provision."

Id. at 1258. This case, however, is readily distinguishable from

Harbour on its facts.

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In Harbour, the debtor made a number of avoidable transfers to a

friend of his. These transfers were made through a third party, who

happened to be a close family friend of the debtor and the mother of

the recipient of the funds. Claiming to have been entirely ignorant of

the reasons behind the financial maneuverings of the debtor and her

son, this third party argued that she should be considered a "mere conduit" for the funds and not the initial transferee. We rejected her argument, finding that she was at best a "willing dupe" in the transaction

and her failure to act in good faith prohibited us from finding her a

"mere conduit" in the transfer. However, as we noted in our Harbour

opinion, "the likelihood of bad faith on [a] defendant's part is lessened where the defendant is a commercial enterprise handling transactions in a routine manner." Id. We find this case distinguishable on

those grounds. The Bank here, in contrast to the defendant in

Harbour, is a commercial entity that is in the business of issuing

cashier's checks in the course of its normal commercial transactions,

and Kuse has presented no evidence -- other than the allegations contained in the Trustee's complaint against the Bank-- that the Bank's

issuance of the cashier's checks in question were other than routine

commercial transactions. We therefore see no basis for viewing the

Bank as other than a conduit for the funds transferred to Kuse, and

agree with the bankruptcy court's and district court's conclusion that

Kuse was the initial transferee of the unauthorized $595,000 transfer.

Accordingly, we affirm the grant of summary judgment for the

Trustee.

IV.

Although Kuse is deemed to be the initial transferee of the

$595,000 payment, the Bankruptcy Code's prohibition against double

recovery means that Kuse is entitled to offset its liability for the transfer by any amount that the Trustee has already received for it from

another source. See 11 U.S.C. § 550(d). The second issue before this

court, therefore, is whether the $595,000 Kuse transfer was included

in the $1.5 million settlement agreement between the Trustee and the

Bank. If it was, then Kuse is entitled to a set-off. We find that the

transfer at issue was not included in the settlement agreement between

the Trustee and the Bank, and Kuse is not therefore entitled to any

set-off.

 9
As noted above, in his attempt to recover the property of the estate,

the Trustee claimed, in separate litigation, both that Kuse was the initial transferee of the $595,000 payment (in its suit against Kuse), and

that the Bank was the initial transferee of the same payment (in two

counts of its suit against the Bank). The bankruptcy court ruled that

Kuse was the initial transferee two years prior to the settlement agreement between the Trustee and the Bank; however, this ruling remains

on appeal to this day and the Trustee never formally amended his

complaint against the Bank to remove his claim for the $595,000

transfer.

Nonetheless, the bankruptcy court found that there had been no

merit in the Trustee's claim against the Bank under§§ 549 and 550

for the $595,000 Kuse transfer at the time of the settlement. Bankr.

Ct. Order, Oct. 7, 1996, at 3, in J.A. 914. Furthermore, in the alternative, the court noted that the Trustee and the Bank based their settlement negotiations on "a theory for potential recovery from [the Bank]

based on transfers about which [the Bank] might have had actual

knowledge of impropriety," and that "[d]uring the parties' settlement

negotiations, the parties did not consider the Kuse Transfer as a transfer for which [the Bank] might be liable under that theory." Id. Based

on this, the bankruptcy court made a finding of fact that "[t]he settlement amount agreed [to] by the parties did not include recovery for

the funds transferred to Kuse." Id. The bankruptcy court therefore

concluded that the Trustee would not receive a double recovery for

the $595,000 Kuse transfer and Kuse was not entitled to a set-off

based on the Trustee's settlement with the Bank. Id.

The district court disagreed with this analysis, holding that the

bankruptcy court had committed clear error in finding that the settlement agreement did not include the Kuse transfer because the agreement expressly stated that it settled "any and all . . . claims, actions

or causes of action" asserted by the Trustee against the Bank. The district court noted that at the time the settlement was reached, Kuse was

appealing the bankruptcy court's finding that it was the initial transferee of the $595,000 payment and, because the Trustee had not

amended his complaint to remove his claim against the Bank for the

identical transfer, the Bank still faced the risk that it could be held liable for the $595,000 Kuse transfer. The district court therefore concluded that, "[d]espite what the Trustee and[the Bank] may have

 10
contemplated," the language of the settlement agreement encompassed the Kuse transfer and Kuse was therefore entitled to a full setoff from the settlement proceeds. District Ct. Order of Sept. 30, 1997,

at 7-8, in J.A. at 1007-08.

We agree with the district court that whether or not the parties to

the settlement intended to include the Kuse transfer in their settlement

agreement is not dispositive. In a closely analogous case involving a

trustee's attempt to recover a preferential transfer claim under § 550

of the Bankruptcy Code, the Ninth Circuit warned of the "collusive

forces at play in these situations." Sims v. De Armond (In re Lendvest

Mortgage, Inc.), 42 F.3d 1181, 1182 (9th Cir. 1994). In Lendvest

Mortgage, the debtor had transferred $50,000 to an entity called Fund

II on behalf of the De Armonds. This $50,000 was deemed to be a

preferential transfer, and the trustee in bankruptcy sought recovery of

it from the De Armonds, for whose benefit the transfer had been

made. The trustee also brought an adversary proceeding against Fund

II, on grounds unrelated to the $50,000 preferential transfer. The

trustee and Fund II settled, and as part of the settlement the trustee

agreed to withdraw his claim (filed as part of Fund II's bankruptcy

proceedings) relating to the $50,000 transfer. The trustee then went

after the De Armonds for the transfer. See Sims v. De Armond (In re

Lendvest Mortgage, Inc.), 123 B.R. 623, 624 (Bankr. N.D. Cal. 1991).

Pursuant to § 550(a)(1), the trustee was entitled to recover the preferential transfer claim from either Fund II, as the initial transferee, or

the De Armonds, as the persons for whose benefit the transfer was

made. Section 550(c) [now § 550(d)], however, limited the trustee to

a single satisfaction of the amount in question. The trustee argued that

its settlement with Fund II did not include any recovery on the

$50,000 transfer, because that claim had simply been dropped. The

Ninth Circuit approved of the bankruptcy court's refusal to accept the

allocation urged by the trustee, observing:

The settling defendant only cares about the total amount of

the settlement, but the plaintiff [trustee] greatly prefers that

the settlement be allocated to non-joint liabilities so as to

allow the plaintiff to recover more from other defendants.

Because of the lack of truly adverse interests, . . . the par-

 11
ties' allocation is virtually meaningless and may not reasonably reflect the parties' relative liabilities.

Lendvest Mortgage, 42 F.3d at 1184. The Ninth Circuit, however,

rejected the bankruptcy court's proposed antidote to the collusive

forces at play in such a situation, which would have required a trustee

to give prior notice of the settlement to the affected non-settling parties and get judicial approval of the allocation of the settlement in

order to prevent a non-settling party from using the settlement to offset for its own liability. Id. at 1183. Rather, the Ninth Circuit held,

"the bankruptcy court must undertake an independent allocation of the

settlement before it may conclude that the . . .[avoidable] transfer

claim has been completely or partially satisfied." Id. at 1185.

Here, as in Lendvest Mortgage, the interests of the Trustee and the

Bank were not truly adverse when they drafted their settlement agreement: the Bank cared only about the total amount of the settlement,

while the Trustee would of course have preferred that the settlement

be structured so as to allow him to recover from other defendants,

such as Kuse. We therefore agree with the district court that, although

the parties to the settlement apparently did not consider the $595,000

Kuse transfer to be a part of their settlement, given the collusive

potential of such an agreement and the subsequent risk of prejudice

to the interests of non-settling parties, the court is not compelled to

accept the Trustee's assertion that its settlement with the Bank did not

include the Kuse transfer, but must undertake an independent allocation of the settlement.

The bankruptcy court did precisely that. Based on its knowledge of

the settlement negotiations and terms of the settlement agreement

between the Trustee and the Bank, it concluded as a matter of fact that

the Kuse transfer claim was not part of the settlement. We cannot say

that this finding is clearly erroneous. The amount of the settlement,

its terms, as well as the negotiations between the parties to the settlement all indicate that no portion of the settlement was allocated to the

Kuse transfer. The Trustee simply received no recovery on the Kuse

transfer as a result of his settlement with the Bank.

Furthermore, we agree with the bankruptcy court that the Trustee's

claim against the Bank, which was based on its contention that the

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Bank was the "initial transferee" for the Kuse transfer, was never

strong to begin with. Every court that has considered this claim has

rejected Kuse's argument that the Bank be held liable as the initial

transferee, and while the Trustee obviously attempted to make the

same argument in his complaint against the Bank, there was little

merit to it. At best there was never more than an attenuated risk that

the Bank might be liable for the Kuse transfer. Without any real risk

of liability on the Bank's part, the bankruptcy court did not clearly err

in finding the settlement did not cover this claim. Consequently, we

reverse the district court and reinstate the bankruptcy court's order

that Kuse not receive any credit or set-off against the court's judgment based on the Trustee's subsequent settlement with the Bank.

V.

We find that Kuse Enterprises, as the first party to have legal

dominion and control over the unauthorized post-petition transfers

from the debtor's accounts, was the initial transferee under 11 U.S.C.

§ 550(a), and affirm the district court's grant of summary judgment

for the Trustee. Because the settlement agreement and receipt of

funds by the Trustee from the Bank does not constitute a double

recovery for the Trustee on the avoided transfer in question, Kuse

Enterprises is not entitled to any set-off against the settlement proceeds. Accordingly, we reverse the district court's order granting a

set-off and direct the district court to reinstate the bankruptcy court's

order denying a set-off.

AFFIRMED IN PART AND REVERSED IN PART

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