Opinion ID: 747564
Heading Depth: 2
Heading Rank: 1

Heading: Arlynn's Control over Video Depot

Text: 17 While the Bankruptcy Code does not define transferee, it is widely accepted that a transferee is one who, at a minimum, has  'dominion over the money or other asset, the right to put the money to one's own purposes.'  In re Bullion, 922 F.2d at 548 (quoting Bonded Fin. Servs., 838 F.2d at 893). The bankruptcy court determined that Arlynn did not have dominion over the $65,000. The court reasoned that although Arlynn controlled Video Depot's operations and arranged for the check to be issued, the check was a direct transfer from Video Depot to Hilton. Once the check was issued, Arlynn no longer had legal control over the funds, even if he retained physical control over them. Arlynn therefore did not have the right to use the money for any other purpose than to give it to Hilton. Hilton maintains that Arlynn had dominion over the $65,000 because he was Video Depot's principal and, in that capacity, directed Video Depot to purchase the cashier's check. 18 The bankruptcy courts are split on the question of whether the principal of a debtor corporation necessarily is the initial transferee of corporate funds used to satisfy a personal obligation. Compare General Electric Capital Auto Lease, Inc. v. Broach (In re Lucas Dallas, Inc.), 185 B.R. 801, 809 (9th Cir.BAP1995) (holding 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); Richardson v. FDIC (In re M. Blackburn Mitchell Inc.), 164 B.R. 117, 127 (Bankr.N.D.Cal.1994) (holding that principal who caused debtor to issue cashier's check to satisfy personal obligation was not initial transferee); with Ross v. United States (In re Auto-Pak, Inc.), 73 B.R. 52, 54 (D.D.C.1987) (concluding that principal of corporation was initial transferee when principal arranged for corporation's purchase of cashier's check to satisfy financial obligations independent of corporation); Still v. American Nat'l Bank & Trust Co. (In re Jorges Carpet Mills, Inc.), 50 B.R. 84, 85 (Bankr.E.D.Tenn.1985) (same); see also Robinson v. Home Savings of America (In re Concord Senior Housing Foundation), 94 B.R. 180, 183 (Bankr.C.D.Cal.1988) (holding that agent of corporation who used corporate funds to secure personal loan was initial transferee). Hilton urges us to reject the rule set forth in Lucas Dallas and Mitchell and instead to follow the Auto-Pak line of cases. 19 Although the Ninth Circuit has not squarely addressed this issue, all of the circuit courts that have considered it have adopted the same approach as the Lucas Dallas and Mitchell courts. In Nordberg v. Arab Banking Corp. (In re Chase & Sanborn Corp.), 904 F.2d 588 (11th Cir.1990), on which the bankruptcy court in the present case relied, the Eleventh Circuit held that a bank was the initial transferee of loan payments made by a corporation even though the corporation's principal directed the transfer and the loan was the principal's private debt. Id. at 599-600. The court determined that the extent of [the principal's] control over [the corporation] generally, and over [the corporation's] actions in transferring the disputed funds to [the bank] in particular, is entirely irrelevant to the 'initial transferee' issue. Id. at 598. 20 Since the bankruptcy court's decision, two other circuits, citing Lucas Dallas and the district court's opinion in this case, also have concluded that a principal who directs a debtor corporation to issue a certified check to pay for a personal debt is not an initial transferee. See Bowers v. Atlanta Motor Speedway, Inc. (In re Southeast Hotel Properties Limited Partnership ), 99 F.3d 151 (4th Cir.1996); Rupp v. Markgraf, 95 F.3d 936 (10th Cir.1996). These courts have held that a principal or agent does not have dominion and control over funds unless he or she has legal dominion and control, in other words, the right to put those funds to one's own purpose. Bowers, 99 F.3d at 155 (emphasis in original); see also Rupp, 95 F.3d at 941. The mere power of a principal to direct the allocation of corporate resources does not amount to legal dominion and control: 21 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. 22 Bowers, 99 F.3d at 156 (citing Rupp, 95 F.3d at 941). 23 Other circuit courts have held that a principal may establish legal control and dominion by first directing a transfer into his or her personal bank account and then making the payment from his personal account to the creditor. Rupp, 95 F.3d at 939 (citing Bonded Fin. Servs., 838 F.2d at 892). In the present case, however, Video Depot purchased a cashier's check payable to Hilton, with Video Depot listed as the purchaser. Legal control over the funds consequently passed directly from Video Depot to Hilton. 24 Hilton contends that this view elevates form over substance. Whether Video Depot, at Arlynn's direction, purchased a cashier's check payable directly to Hilton or, instead, issued the funds to Arlynn, enabling him then to write a personal check for the sum, there is, so the argument goes, the same result--that Arlynn used corporate funds to satisfy a personal debt. What Hilton's argument fails to acknowledge, however, is the basic rationale for distinguishing in section 550 between initial and subsequent transferees. An initial transferee is exposed to stricter liability than a subsequent transferee because an initial transferee is in the best position to evaluate whether the conveyance is fraudulent. See Bonded Fin. Servs., 838 F.2d at 892-93. Where, as here, a transferee receives funds directly from a debtor, the transferee's capacity to monitor--and, accordingly, its burden to monitor--is at its greatest. Thus, Hilton's receipt of a cashier's check clearly purchased by Video Depot subjects it to a burden of inquiry that it may not have had upon receipt of a check from Jeffrey Arlynn's personal account. 25 Moreover, the rule advocated by Hilton would have the anomalous result that every agent or principal of a corporation would be deemed the initial transferee when he or she effected a transfer of property in his or her representative capacity. See Bowers, 99 F.3d at 156. Such a rule gives too much power to an unscrupulous insider to effect a fraudulent transfer ... without allowing a trustee to have the means for avoiding the transfer for the benefit of the debtor's creditors. In re Mitchell, 164 B.R. at 128. While the Sixth Circuit has expressed tentative support for this approach, see IRS v. Nordic Village, Inc. (In re Nordic Village), 915 F.2d 1049 (6th Cir.1990), rev'd on other grounds, 503 U.S. 30, 112 S.Ct. 1011, 117 L.Ed.2d 181 (1992), no circuit court has based a decision on it, and we decline to depart from the considered judgment of the other circuits today. Thus, we conclude that Arlynn's control over the business operations of Video Depot does not, in itself, compel a finding that Arlynn had dominion and control over the funds transferred from Video Depot to Hilton.