Opinion ID: 3171011
Heading Depth: 2
Heading Rank: 3

Heading: Liability of SIPI

Text: Once a transfer is avoided as fraudulent, the Bankruptcy Code assigns the liability of the transferees under § 550. It divides transferees into two categories: the “initial transferee” under § 550(a)(1) and “any immediate or mediate transferee” under § 550(a)(2). 11 U.S.C. § 550. No. 15-1166 23 A transferee is one who exercises “dominion over the money or other asset, the right to put the [asset] to one’s own purposes.” Bonded Financial Services v. European American Bank, 838 F.2d 890, 893 (7th Cir. 1988). Accordingly, while an agent of a third party acting as an intermediary may not be a transferee, an entity that takes title or otherwise possesses the asset certainly is. Id. (“When A gives a check to B as agent for C, then C is the ‘initial transferee’; the agent may be disregarded.”). The initial transferee, then, is simply the first transferee in the chain of title. And unlike an immediate or mediate transferee, the initial transferee has no defense against liability under § 550. The bankruptcy court correctly treated SIPI as the initial transferee and therefore liable to the Smiths. As the tax buyer, SIPI bought the tax lien at the tax sale, was awarded control over the tax lien, and then applied for and received title to the property in the transfer that was constructively fraudulent and thus avoidable. SIPI makes two arguments against this conclusion. First, it asserts that Congress, in enacting § 550(a)(1), could never have meant it to apply to tax buyers like SIPI because that would render tax deeds unmerchantable and remove all incentives for tax buyers to purchase liens. This argument lacks a textual basis in the statute and overstates the consequences of this decision. This argument presents essentially the same concerns we addressed earlier in determining that applying § 548 to Illinois tax sales should not wreak havoc on Illinois tax sales. Under § 548, a transfer may be avoided only within a narrow two-year window, and only if the debtor was insolvent and the conveyance was not for reasonably equivalent 24 No. 15-1166 value. An Illinois tax deed should remain an attractive investment even though it will remain contingent for two more years. SIPI also argues it was not the initial transferee because the county was technically the first to take title to the property so that the county was the initial transferee and SIPI a subsequent transferee entitled to assert a defense. In support, it cites the Fifth Circuit’s decision in T.F. Stone where the county was determined to have taken title to property subject to an Oklahoma tax sale before it was later transferred. 72 F.3d at 471. This argument does not work in this Illinois case. Under Illinois law, the county acts as a facilitator of the tax sale to fulfill the delinquency judgment. The county collector merely “offer[s] the property for sale pursuant to the judgment.” 35 Ill. Comp. Stat. 200/21-190 (2015). At no point in this transaction does the county take title. The “purchaser” of the property is the bidder at the sale offering to pay the amount due at the lowest penalty percentage interest. 35 Ill. Comp. Stat. 200/21-215 (2015). Here, that was SIPI. At best, the county was an agent in the transfer of the property between the Smiths and SIPI much in the way that, in Bonded Financial, European American Bank was the intermediate agent between Michael Ryan and Bonded Financial Services. 838 F.2d at 893. As in that case, the county as agent never exercised dominion over the debtors’ property. “In the case of an involuntary transfer of real estate through the tax sale procedure [in Illinois], the State is more like a conduit than a transferee.” In re Butler, 171 B.R. 321, 327 (Bankr. N.D. No. 15-1166 25 Ill. 1994). The county has “no ownership rights in the property,” and is therefore “never a transferee.” Id. at 328. We agree with that interpretation of Illinois law. SIPI’s view that the county was the initial transferee would produce improbable results. In all tax sales, the county would become the initial transferee, which would render the county, which recognized no profit from the transaction other than collecting delinquent property taxes, always liable for a constructively fraudulent transfer. And it would mean that tax buyers like SIPI—assuming they purchased in good faith— could capture substantial profits from the sales shielded from recovery by the debtor. SIPI’s reliance on T.F. Stone is not persuasive. As explained above, that decision depended on an entirely different Oklahoma tax sale method. But even setting that aside, SIPI misreads the opinion. In T.F. Stone, Bryan County “was forced to take title” at the original sale “because there were no bids on the Oklahoma property.” T.F. Stone Co. v. Harper, 72 F.3d 466, 471 (5th Cir. 1995) (emphasis in original). The Fifth Circuit never suggested that the county took title before the transfer to the bidder. In this case there were bids for the Smiths’ property, and SIPI came out the victor.