Opinion ID: 542394
Heading Depth: 2
Heading Rank: 3

Heading: The Initial Transferee Issue

Text: 24 The courts below found that even if any of the disputed transfers were avoidable, they were not recoverable from ABC because ABC was not the initial transferee of such transfer or the entity for whose benefit such transfer was made. 11 U.S.C.A. Sec. 550(a)(1). They concluded that Duque, not ABC, was the initial transferee because of Duque's control over Chase & Sanborn's actions in transferring the payments to ABC. See Dist.Ct.Op. at 14-17. 21 The district court's reasoning on the initial transferee issue constitutes a misapplication of the governing control test enunciated by this Court in In re Chase & Sanborn Corp. (Nordberg v. Societe Generale), 848 F.2d 1196 (11th Cir.1988) (Societe Generale ). 22 25 The term control test and the general framework for analysis adopted by Societe Generale are taken from this Court's opinion in In re Chase & Sanborn (Nordberg v. Sanchez), 813 F.2d 1177 (11th Cir.1987) (Sanchez ). 23 See Societe Generale, 848 F.2d at 1199. It is important to emphasize, however, that Sanchez dealt with an issue different from that addressed in Societe Generale. Sanchez applied its control test to analyze whether certain funds transferred by Chase & Sanborn to the defendant in that case were in fact property of the debtor under 11 U.S.C.A. Sec. 548(a), or were under the actual control of Duque. On the facts of Sanchez, involving a two-day layover of funds in a Chase & Sanborn account which had only recently been opened and was closed soon thereafter, this Court found that Duque, not Chase & Sanborn, controlled the transfer at issue. Sanchez, 813 F.2d at 1182. 26 In this case, by contrast, both courts below either explicitly or implicitly found, and ABC does not contest on appeal, that Chase & Sanborn exercised sufficient control over the transferred funds at issue to satisfy the property of the debtor prerequisites of both sections 547(b) and 548(a). Thus, while Sanchez involved the degree of control over transferred funds exercised by the transferor, Societe Generale addressed the distinct issue of the transferee 's control over such funds. See Societe Generale, 848 F.2d at 1199 ([T]he general approach outlined in [Sanchez ] applies regardless of whether a court is attempting to determine whether a debtor controlled the transferred funds it transferred to a defendant or a defendant gained control over the funds transferred to it.) (emphasis in original). Thus, the extent of Duque's control over Chase & Sanborn generally, and over Chase & Sanborn's actions in transferring the disputed funds to ABC in particular, is entirely irrelevant to the initial transferee issue. The relevant issue is ABC 's control over the funds, vis-a-vis Duque, Chase & Sanborn, or anyone else, when they arrived at ABC. See Societe Generale, 848 F.2d at 1200 (stating issue as whether the banks actually controlled the funds or merely served as conduits, holding money that was in fact controlled by either the transferor or the real transferee) (emphasis added); see also In re Columbia Data Products, Inc., 892 F.2d 26, 28 (4th Cir.1989) (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). We suggest that Societe Generale 's test might better be labeled a conduit test in order to distinguish it from the control test as applied in Sanchez. Societe Generale held that 27 where a bank receives money from a debtor to pay off a debt owed to the bank, courts have found that the bank gained control of the funds and have allowed recovery against the bank. When banks receive money for the sole purpose of depositing it into a customer's account, on the other hand, the bank never has actual control of the funds and is not a section 550 initial transferee. 28 Id. (citations omitted); see also Columbia Data, 892 F.2d at 28 (When a creditor receives money from its debtor to pay a debt, the creditor is not a mere conduit.). Societe Generale relied in part on Judge Easterbrook's scholarly opinion for the Seventh Circuit in Bonded Financial Services, Inc. v. European American Bank, 838 F.2d 890 (7th Cir.1988), in which the court declined to find a bank an initial transferee where the bank deposited a check into a party's account and the party, ten days later, authorized the bank to debit the account to pay a pre-existing debt owed by the party to the bank. See Bonded, 838 F.2d at 893-94. Bonded held, however, that if the check had been specifically earmarked for immediate use in paying the party's debt to the bank, the bank would have been the initial transferee. Bonded, 838 F.2d at 892; see also Societe Generale, 848 F.2d at 1200 (citing Bonded on this point). Societe Generale held that if the one-day paper overdraft 24 at issue in that case had 29 constituted a debt owed to [the bank] ... then the money wired to [the bank]--for the express purpose of paying off the overdraft--would actually have been sent to [the bank]. If [that were] the case, then [the bank] had actual control of the funds when it received the money from Chase & Sanborn, and [Creditor Trustee] Nordberg can recover the money from the bank. 30 Id. at 1200-01 (emphasis in original). 31 Applying these principles to the facts of this case, it is clear that ABC was the initial transferee of Chase & Sanborn's last two loan payments. The bankruptcy court found that the March 3, 1983 transfer was sent directly to ABC with specific instructions to apply the $400,000 to Duque's loan principal, and that ABC followed those instructions. 25 Bkr.Ct.Op. at 10. The bankruptcy court found that the March 31, 1983 transfer was wired from an account of [Chase & Sanborn] to Duque's account [at ABC] with directions that it be applied to Duque's $22 million note. The directions were followed. Bkr.Ct.Op. at 11. 26 Thus, 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 two transfers at issue did not pass even momentarily through Duque's account. See notes 25 & 26, supra. Substituting the names of the relevant parties in this case for the equivalent parties involved in Bonded, the Seventh Circuit in Bonded held: 32 If the note accompanying [Chase & Sanborn's] check had said: use this check to reduce [Duque's] loan instead of deposit this check into [Duque's] account, Sec. 550(a)(1) would provide a ready answer. [ABC] would be the initial transferee and [Duque] would be the entity for whose benefit [the] transfer was made. 27 The [Creditor Trustee] could recover the [transfer] from [ABC], [Duque], or both, subject to the rule of Sec. 550(c) that there may be but one recovery. 33 Bonded, 838 F.2d at 892 (footnote added). This case is thus precisely analogous to the hypothetical envisioned by Bonded; just as in Societe Generale, the transfers at issue here were sent for the express purpose of paying off part of Duque's debt. See Societe Generale, 848 F.2d at 1200-01. 28 34 For these reasons, we conclude that the March 3 and March 31, 1983 loan payments by Chase & Sanborn are both voidable and recoverable from ABC.