Court Opinion

ID: 153866
Source: CourtListenerOpinion
Date Created: 2010-08-14 03:47:10+00
Date Added: 2024-06-11T15:08:36.248999
License: Public Domain

PUBLISH

                    UNITED STATES COURT OF APPEALS
Filed 8/27/96
                                 TENTH CIRCUIT

 STEPHEN W. RUPP, Trustee,

       Plaintiff - Appellant,
 v.                                                    No. 95-4120

 EDWIN MARKGRAF, MARY A.
 MARKGRAF,

       Defendants - Appellees.

          APPEAL FROM THE UNITED STATES DISTRICT COURT
                    FOR THE DISTRICT OF UTAH
                        (D.C. No. 94-CV-288)

John Dustin Morris (Reid Takeoka and Stephen W. Rupp with him on the brief),
of McKay, Burton & Thurman, Salt Lake City, Utah, for Plaintiff-Appellant.

Francis Gerard Fanning, Mesa, Arizona (Steven W. Call of Ray, Quinney &
Nebeker, Salt Lake City, Utah, with him on the brief), for Defendants-Appellees.

Before EBEL, KELLY and HENRY, Circuit Judges.

EBEL, Circuit Judge.

      Stephen W. Rupp, the Chapter 7 bankruptcy trustee of Cowboy Enterprises,

Inc. (“Cowboy”), appeals the district court’s dismissal of an adversary proceeding

to avoid and recover a fraudulent conveyance of Cowboy’s property from
appellees Edwin and Mary Markgraf under §§ 544(b) and 550 of the Bankruptcy

Code, 11 U.S.C. §§ 544(b) & 550. We exercise jurisdiction under 28 U.S.C.

§§ 158(d) & 1291 and remand for further proceedings consistent with this

opinion.

                                    Background

      The events that give rise to this action began in 1988, when the Markgrafs

became judgment creditors of Forrest Wood “Woody” Davis in the amount of

$391,688. By December 1989, Mr. Davis and his wife, Mary, had become

principal stockholders and officers in Cowboy. In December 1989, Mr. Davis

agreed to pay the Markgrafs $100,000 in exchange for a pickup truck valued at

$15,000 and satisfaction of the Markgrafs’ judgment against him.

      On December 13, 1989, Mrs. Davis instructed First Interstate Bank of

Nevada to issue a cashier’s check in the amount of $100,000 made payable to

Edwin and Mary Markgraf. The cashier’s check was purchased using Cowboy

funds and it stated on its face that it was purchased by Cowboy Enterprises. Mrs.

Davis instructed First Interstate to send the cashier’s check “by over night or Fed

Ex to: Cowboy Enterprises, Inc. 3535 E. Little Cottonwood Lane, Sandy Utah

84092.” This address was not Cowboy’s business address, but rather the address

where Mr. Davis was living at the time. Subsequently, on December 19, 1989,

                                        -2-
the cashier’s check was delivered to the Markgrafs, and the Markgrafs delivered a

satisfaction of judgment and the pickup truck to the Davises.

      In 1992, Cowboy filed for Chapter 11 bankruptcy protection, which was

later converted to a Chapter 7 liquidation. The trustee brought this adversary

proceeding in 1993 alleging that the transfer was fraudulent and seeking its

avoidance and recovery against the Markgrafs under 11 U.S.C. §§ 544(b) & 550.

The Markgrafs moved for judgment as a matter of law at the close of the trustee’s

case. The district court granted the Markgrafs’ motion and dismissed the action

on the grounds that the bank, and not the Markgrafs, was the “initial transferee”

of Cowboy’s funds under § 550. Having considered the parties’ arguments, we

hold that the Markgrafs are liable as initial transferees, and that Forest Wood

Davis is liable as the person for whose benefit the transfer was made. The issue

of whether or not the transfer was fraudulent is not before us, and we therefore do

not address it.

                                     Discussion

      The parties agree that this appeal presents a purely legal issue involving the

interpretation and application of § 550 of the Bankruptcy Code, a question that we

review de novo. Jobin v. McKay (In re M & L Business Mach. Co.), 84 F.3d
1330, 1334-35 (10th Cir. 1996). Under § 550 of the Bankruptcy Code, when a

transfer is avoided under § 544 of the Code, the trustee may recover the

                                        -3-
transferred property for the benefit of the estate. Section 550(a) provides that the

trustee may recover from:

      (1) the initial transferee of such transfer or the entity for whose
      benefit such transfer was made; or

      (2) any immediate or mediate transferee of such initial transferee.

11 U.S.C. § 550(a). However, the trustee’s power to recover is limited by §

550(b), which prevents recovery from immediate or mediate transferees of the

initial transferee under § 550(a)(2) who “take[] for value . . . , in good faith, and

without knowledge of the voidability of the transfer avoided.” 11 U.S.C. §

550(b)(1). No such good faith defense is available to the initial transferee or the

“entity for whose benefit such transfer was made” under § 550(a)(1); the trustee

may always recover from the initial transferee regardless of good faith, value, or

lack of knowledge of the voidability of the transfer. Therefore, the central issue

in this appeal becomes the determination of which party is the initial transferee of

Cowboy’s fraudulently transferred funds. If the Markgrafs are the initial

transferee, the trustee can recover; if not, the trustee must attempt to recover from

the Markgrafs as immediate or mediate transferees, and the Markgrafs may utilize

the good faith defense of § 550(b)(1). We hold that the Markgrafs are initial

transferees under § 550 of the Bankruptcy Code.

                                          -4-
                                          A.

      The district court held that the initial transferee of Cowboy’s funds was

First Interstate Bank of Nevada. The court concluded that the “initial transfer,

occurred when Mary Davis said, ‘Bank, take Cowboy money and issue to us in

return for Cowboy money, cashier’s checks.’” Aplt. App. doc. 1 at 6. The court

therefore ruled that “[w]here a bank issues a cashier’s check, it is an initial

transferee of the funds used to purchase the check.” Id. at 8. We disagree.

      In Bonded Fin. Servs., Inc. v. European Am. Bank, 838 F.2d 890 (7th Cir.

1988), the Seventh Circuit enunciated what is commonly referred to as the

“conduit” theory for determining whether an intermediary, such as a bank, is an

“initial transferee” for purposes of § 550. In that case, the debtor (Bonded) sent a

check to the bank payable to the bank’s order, along with instructions to deposit

the money into the account of a third party (Ryan), who was a principal of

Bonded. Even though Ryan eventually used those funds to reduce his own

indebtedness to the bank, the court held that the bank was not the initial

transferee because it had no dominion over the money at the time it initially

received the check from Bonded. Id. at 894. As the court reasoned, “[a]s the

Bank saw the transaction on January 21, it was Ryan’s agent for the purpose of

collecting a check from Bonded’s bank . . . . The Bank had no dominion over the

                                          -5-
$200,000 until January 31, when Ryan instructed the Bank to debit the account to

reduce the loan.” Id. at 893-94 (citation omitted).

      We adopted the Bonded approach in Malloy v. Citizens Bank of Sapulpa (In

re First Sec. Mortgage Co.), 33 F.3d 42 (10th Cir. 1994), holding that “‘the

minimum requirement of status as a “transferee” is dominion over the money or

other asset, the right to put the money to one’s own purposes.’” Id. at 43-44

(quoting Bonded, 838 F.2d at 893). In that case, the debtor’s funds were

fraudulently transferred to the defendant bank with instructions to deposit them in

the account of Mr. Hobbs. We held that the bank was not the initial transferee

because it “was obligated to make the funds available to Mr. Hobbs upon demand

and, therefore, it acted only as a financial intermediary.” Id. at 44. Moreover, the

fact that in both Bonded and Malloy the funds were sent to the bank via an

ordinary check rather than a cashier’s check does not affect the bank’s status as a

conduit as opposed to a transferee. See Ross v. United States (In re Auto-Pak,

Inc.), 73 B.R. 52, 54 (D.D.C. 1987) (bank was not the initial transferee where

principal of debtor converted a check of the debtor into a cashier’s check made

payable to the IRS).

                                        -6-
                                         B.

      If the bank merely acted as a conduit, and exercised no dominion and

control over Cowboy’s funds, then the initial transferee must be either Mr. Davis

or the Markgrafs. We conclude that the language and underlying policy of 11

U.S.C. §§ 544(b) & 550, the law of this circuit, as well as persuasive authority

from other jurisdictions supports the conclusion that the Markgrafs are the initial

transferees, and Davis is the person “for whose benefit such transfer was made.”

      Our decision in Malloy, adopting the approach taken by the Seventh Circuit

in Bonded, indicates that we must apply the dominion and control test to

determine the initial transferee of Cowboy’s funds. See Malloy, 33 F.3d at 43-44;

Bonded, 838 F.2d at 893-94. In doing so we must consider whether Davis

exercised the requisite dominion and control over the funds either (1) by the mere

act of causing the corporate debtor (Cowboy) to make a fraudulent transfer

through his role as a principal of the corporate debtor, or (2) by conduct other

than that stemming from his role as a principal of Cowboy. We conclude that

Davis did not, through his capacity as principal or otherwise, exercise the type of

dominion and control over the funds required in Bonded and Malloy.

      Because we have adopted the Seventh Circuit’s approach in Bonded, our

analysis begins there. As discussed above, in Bonded the debtor corporation

(Bonded) sent a check to the bank of its principal, Michael Ryan, with a note

                                         -7-
directing the bank to “'deposit this check into [Ryan]’s account.'” Bonded, 838
F.2d at 891 (alteration in original). Ten days later, Ryan instructed the bank to

debit this account in order to reduce an outstanding balance on a loan he

personally had with the bank. Id. The court concluded that the bank acted as a

mere financial intermediary and that it was not the initial transferee under § 550.

Id. at 893. In Bonded, the principal had the debtor’s funds in his personal

account for 10 days before he transferred the funds to a third party (the bank) in

satisfaction of a personal debt owed to the bank. Thus, the principal clearly had

the “right to put the money to [his] own purposes” for 10 days. Id. at 893. He

could have paid the loan, as he did, or “invest[ed] the whole [amount] in lottery

tickets or uranium stocks.” Id. at 894.

      After concluding that, under these circumstances, the bank was not the

initial transferee, the court in Bonded went on to state hypothetically, “If the note

accompanying Bonded’s check had said: ‘use this check to reduce Ryan’s loan’

instead of ‘deposit this check into [Ryan]’s account,’ § 550(a)(1) would provide a

ready answer. The Bank would be the ‘initial transferee’ and Ryan would be the

‘entity for whose benefit [the] transfer was made.’” Id. at 892; see also id. at 895.

The distinction between the actual facts in Bonded and the contrasting

hypothetical discussed by the court indicates that

      the Bonded Court distinguishes between a one-step transaction in
      which the debtor’s check is paid directly to its principal’s creditor,

                                          -8-
      and a two-step transaction in which the debtor’s check is paid to the
      principal, who then pays his own creditor. In the first case, the
      creditor is the initial transferee, and the principal is the entity for
      whose benefit the transfer was made. In the second case, the
      principal is the initial transferee, and the creditor is the subsequent
      transferee.

Schafer v. Las Vegas Hilton (In re Video Depot, Ltd.), 186 B.R. 126, 132 (Bankr.

W.D. Wash. 1995). The facts of the case before us fit into the category of one-

step transactions discussed in Video Depot, and the hypothetical situation

discussed in Bonded. Cowboy had a cashier’s check issued to the Markgrafs,

which was made payable to the Markgrafs and listed Cowboy as remitter. The

funds were never deposited into any personal account controlled by Davis and

Davis never had dominion or control over the funds. Because he was neither

payee nor remitter, Davis could not personally access the funds represented by the

cashier’s check. He was, at most, a mere courier of the cashier’s check from

Cowboy to the Markgrafs. As was the case in the Bonded hypothetical, the funds

in this case were transferred directly from the debtor (Cowboy) to the principal’s

creditor (the Markgrafs). Thus, under the Bonded approach, which we have

adopted, the Markgrafs are the initial transferees of Cowboy's funds and Davis is

the entity for whose benefit the transaction was made.

      It is clear that the Bonded court’s discussion of dominion and control refers

to dominion and control over the funds after the disputed transfer, not dominion

                                         -9-
and control over the transferor before the transfer. This point is illustrated by the

fact that the court in Bonded presented two sets of contrasting facts, the actual

facts before the court and a hypothetical situation. As discussed above, the court

concluded that the result would be different in each case. Yet in both cases the

principal exercised control over the transferor prior to the transfer of funds and

caused the transferor to make transfer. Thus, the court’s reasoning in Bonded

could not have turned on any evaluation of the principal’s control over the debtor.

      This interpretation of Bonded was also applied by the Eleventh Circuit in

Nordberg v. Arab Banking Corp. (In re Chase & Sanborn Corp.), 904 F.2d 588

(11th Cir. 1990). In Nordberg, the Eleventh Circuit applied Bonded to the

following set of facts: (1) Duque was the principal of, and controlled, several

companies including Chase & Sanborn, (2) Duque borrowed several million

dollars from Arab Banking Corporation ("ABC") personally, and (3) payments

from Chase & Sanborn were made on Duque’s personal obligation to ABC. 904
F.2d at 591-92. The lower court found that “Duque, not ABC, was the ‘initial

transferee’ because of Duque’s control over Chase & Sanborn’s actions in

transferring the payments to ABC.” Id. at 597. The Eleventh Circuit reversed the

lower court, applying the principles enunciated in Bonded. The court concluded

that ABC was the initial transferee of loan payments made by Chase & Sanborn

on behalf of Duque where those payments were made directly to ABC with

                                         - 10 -
instructions to apply the funds to Duque’s outstanding loans. Id. at 599. The

court stated that

      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 . . . transfers at issue did not pass even
      momentarily through Duque’s account.

Id. at 599-600 (emphasis added). The court further concluded that Duque’s

conduct in forcing Chase & Sanborn to make the transfers was “irrelevant” to the

initial transferee inquiry. Id. at 598.

      The Sixth Circuit in Ray v. City Bank and Trust Co. (In re C-L Cartage Co.,

Inc.), 899 F.2d 1490 (6th Cir. 1990), came to the same conclusion under similar

circumstances. In Ray, a bank loaned money to the president of a company

personally. 899 F.2d at 1491. The president then put the money into the

company. Id. The company then made some payments directly to the bank in

repayment of the loan. Id. at 1495. The court concluded that the bank as creditor

was the initial transferee under § 550 for the payments it received directly from

the company. Id. (“The bank was the ‘initial transferee’ [of certain payments]

because the payments were made directly payable to the bank from [the debtor’s]

account.”) (emphasis added).

                                          - 11 -
      In this case, the only “control” Davis exercised over the funds after the

check was issued was that he delivered the check to the Markgrafs, thus acting as

a courier or agent for Cowboy. However, the court in Bonded clearly indicates

that those who act as mere “financial intermediaries” or “couriers” are not initial

transferees under § 550. See Bonded, 838 F.2d at 893. The term “transferee”

“must mean something different from ‘possessor’ or ‘holder’ or ‘agent,’” or

“anyone who touches the money.” Id. at 894. Here, Davis, as courier, could only

have prevented the Markgrafs from exercising dominion and control over the

funds if he chose to be an unfaithful courier (much like a mailman can prevent a

payee of a check mailed to the payee from ever exercising dominion over the

funds represented by the check if the mailman decides never to deliver that piece

of mail). However, because the check was made payable to the Markgrafs, this

control amounts to nothing more than the ability to defeat the Markgrafs’ “right to

put the money . . . to [their] own purposes.” Id. at 893. All couriers have this

type of control. In contrast, the dominion and control test from Bonded requires

control over the funds and the right to put those funds to one’s own purpose, not

merely the ability to prevent someone else from doing so. The contrary view, that

a courier assumes dominion and control over funds entrusted to the courier, would

transform the United States Postal Service into the initial transferee under § 550

in innumerable instances merely by virtue of having been given the right to

                                        - 12 -
deliver financial instruments. The Postal Service would be shocked, no doubt, to

learn of the potentially staggering financial liability it was assuming for the price

of a thirty-two cent stamp. Furthermore, the fact that the money was being used

by the Markgrafs to pay Davis’ debt, without more, simply makes Davis the

“entity for whose benefit [the] transfer was made.” See Bonded, 838 F.2d at 895

(“The paradigm ‘entity for whose benefit such transfer was made’ is a guarantor

or debtor -- someone who receives the benefit but not the money.”).

      The Markgrafs argue that Davis’ dominion and control began when he

directed Cowboy, as principal, to make the transfer in the first place (i.e., they

argued that a “transfer” to Davis occurred when he misappropriated Cowboy’s

funds by causing Cowboy to direct those funds to his own benefit through

payment to the Markgrafs). This argument, however, proves too much. 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.

However, that question is not before us. The issue under § 550 is to what extent

the principal, or anyone else for that matter, exercised control over the disputed

funds after the funds left the debtor. Determining the initial transferee of a

transaction is necessarily a temporal inquiry; there must be a transfer before there

                                         - 13 -
can be a transferee. The extent to which a principal has de facto control over the

debtor before the funds are transferred from the debtor, and the extent to which

the principal uses this control for his or her own benefit in causing the debtor to

make a transfer, are not relevant considerations in determining the initial

transferee under § 550. See Nordberg, 904 F.2d at 598 (“[T]he extent of [the

principal’s] control over [the debtor] generally, and over [the debtor’s] actions in

transferring the disputed funds to [the creditor] in particular, is entirely irrelevant

to the ‘initial transferee’ issue.”); but see IRS v. Nordic Village, Inc. (In re

Nordic Village, Inc.), 915 F.2d 1049, 1055 & n.3 (6th Cir. 1990) (indicating that

the creditor in that case could either be the initial transferee or an immediate

transferee, and without deciding, stating in dictum that there is “support for the

conclusion that when a corporate officer takes checks drawn from corporate funds

to pay personal debts, the corporate officer, and not the payee on the check is the

initial transferee”), rev’d on other grounds, 503 U.S. 30 (1992).

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

(Bankr. N.D. Cal. 1994), the court squarely addressed the issue the Markgrafs

raise here: “whether a principal who directs and benefits from a fraudulent

transfer of funds from a debtor to a third party is ipso facto the initial transferee

within the meaning of § 550 even though the debtor’s funds moved directly to the

third party; and if not, . . . whether merely by directing the debtor to use a

                                          - 14 -
cashier’s check to effectuate the transfer, the principal becomes the initial

transferee.” 164 B.R. at 124. In Richardson, the FDIC obtained a judgment

against Martha Mitchell, the sole shareholder of the corporation. Id. at 121.

Mitchell caused the corporation to purchase from the corporation’s bank a

cashier’s check payable to the FDIC in the amount that Mitchell owed the FDIC.

Id. The trustee of the corporation in Richardson argued that the FDIC was the

initial transferee, and the FDIC claimed (as the Markgrafs claim) that because

Mitchell had directed the corporation to pay her personal debt, Mitchell was the

initial transferee. The court rejected the FDIC’s argument and held that

      [t]he FDIC obtained full dominion and control over the funds with the right
      to put the money to its own purposes; it was not holding those funds in
      trust, or as an agent, for any other party. Therefore, applying the rationale
      of Bonded to the case sub judice, the FDIC is the "initial transferee," and
      Ms. Mitchell would be the entity "for whose benefit [the] transfer was
      made.”

Id. at 125 (citation omitted, second alteration in original).

      We find that Richardson’s interpretation of Bonded under these

circumstances is persuasive. The court provided the following discussion in

support of its interpretation of Bonded and its ultimate conclusion that Ms.

Mitchell was not the initial transferee:

              The Court believes that the proper focus when analyzing who
      is a transferee, is the flow of funds. In order to be an initial
      transferee, one must be a transferee in the ordinary sense of the
      word. A transfer that may be avoided under applicable sections of
      the Bankruptcy Code takes place from the debtor to some entity.

                                           - 15 -
Thus, receipt of the transferred property is a necessary element for
that entity to be a transferee under § 550. Simply directing a
transfer, i.e., such as by directing a debtor to transfer its funds, is not
enough. . . .

       This Court does not disagree that in order to be a transferee
one must obtain dominion and control over funds. But that does not
mean that merely because one has dominion and control of funds (as
principals of companies ordinarily do) that one is also a transferee.
Rather, in order for there to be a transfer of the debtor’s funds, the
debtor must dispose of or part with them, that is, such funds must
actually leave the debtor. In order to be a transferee of the debtor’s
funds, one must (1) actually receive the funds, and (2) have full
dominion and control over them for one’s own account, as opposed
to receiving them in trust or as agent for someone else. . . .

       The Court concludes that the mere fact that a debtor’s
fraudulent transfer was directed by a principal of the debtor does not
ipso facto transmute that principal into being the “initial transferee”
within the meaning of § 550. Reaching the contrary conclusion in
order to protect an “innocent” recipient of the transferred funds, is
contrary to policy considerations underlying the Bankruptcy Code.

       A non-individual debtor such as a corporation or partnership
almost always effects a fraudulent transfer through the actions of its
principals, or through the principals of its parent corporation, or
other similar entity. . . .

       Turning every unscrupulous principal into the initial transferee
does extreme disservice to § 550, and twists the word “transferee”
beyond recognition. It violates the statutory language and purpose
and severely and unfairly limits the ability of a trustee to recover
misappropriated estate property so as to effect a pro rata distribution
among a debtor’s creditors who have been defrauded. It would, as a
practical matter, operate to block trustees from being able to recover
funds fraudulently transferred from debtor’s estates in numerous
bankruptcy cases.

       Rendering the principal an initial transferee to insulate the
entity that actually received the money, also gives too much power to

                                   - 16 -
      an unscrupulous insider to effect a fraudulent transfer (e.g., to satisfy
      a personal obligation as was the case here) without allowing a trustee
      to have the means for avoiding the transfer for the benefit of the
      debtor’s creditors.

Id. at 126-28.

      We find this reasoning from Richardson persuasive and rationally based on

the principles set forth in Bonded. The reasoning and holding of Richardson was

also recently adopted by the Bankruptcy Appellate Panel of the Ninth Circuit.

See General Electric Capital Auto Lease, Inc. v. Broach (In re Lucas Dallas, Inc.),

185 B.R. 801 (Bankr. 9th Cir. 1995). In General Electric, the court held 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.” 185 B.R. at 809. The court

stated that “[t]his result is consistent with the fact that corporations must always

act through individuals.” Id. (citing Richardson, 164 B.R. at 127-28). The court

went on to state that

      if the distinction between an initial and a subsequent transferee turns
      on whether the party benefitting from the transfer “forced” the debtor
      to make the transfer, then the scope of liability under section 550 is
      unduly narrowed. Section 550(a)(1) subjects to strict liability not
      only the initial transferee, but also “the entity for whose benefit such
      transfer was made.” 11 U.S.C. § 550(a)(1). The party who forces a
      debtor to make a transfer is almost always “the entity for whose
      benefit such transfer was made,” and thus is generally always subject
      to strict liability. Yet Congress intended to make initial transferees
      also strictly liable for the transfer (subject to the restriction that the
      trustee is entitled to only one recovery under section 550(c),
      presently codified at 11 U.S.C. § 550(d)). "The implication is that

                                         - 17 -
      the entity for whose benefit the transfer was made is different from a
      transferee, immediate or otherwise." Consideration of whether the
      beneficiary of the transfer “forced” the debtor to make the transfer
      would collapse the two prongs of strict liability into a single party. It
      would permit entities who are “initial transferees” in the plain sense
      of the term to escape liability, and deprive the bankruptcy estate (and
      thus the debtor’s creditors) of an additional source for recovery.
      There is nothing in the statute or otherwise to justify this result.

Id. at 809-10 (citation omitted).

      Concluding here, as we do, that Davis is the person for whose benefit the

transfer was made and that the Markgrafs are the initial transferees permits the

trustee in this case to recover under § 550 from either party. Thus, the trustee has

a greater chance of recovering the funds for the benefit of the estate. Section 550

expressly allows the trustee to recover from either party, indicating that, as a

matter of policy, the option should be preserved where possible. If we were to

conclude that Davis was the initial transferee, the Markgrafs would become

“subsequent” transferees, and they would not then be regarded as the persons for

whose benefit the transfer was made. Bonded, 838 F.2d at 895 (“[A] subsequent

transferee cannot be the ‘entity for whose benefit’ the initial transfer was

made.”). 1

      1
             The Markgrafs rely primarily on four cases to support their assertion
that Davis is the initial transferee, Thompson v. Jonovich (In re Food & Fibre
Protection, Ltd.), 168 B.R. 408 (Bankr. D. Ariz. 1994); Kendall v. Sorani (In re
Richmond Produce Co.), 151 B.R. 1012 (Bankr. N.D. Cal. 1993), aff'd, 195 B.R.
455 (N.D. Cal. 1996); Robinson v. Home Savings of Am. (In re Concord Senior

                                         - 18 -
      Our decision here is also consistent with considerations of equity and

fairness. In most, if not all, bankruptcy cases someone is going to be injured.

This is especially true when there has been a fraudulent transfer of the debtor’s

funds. However, Congress has already balanced the equitable considerations

under § 550 by distinguishing between initial transferees, who are strictly liable,

and subsequent transferees, who are not strictly liable. Initial transferees are in

the best position to monitor fraudulent transfers from the debtor. Bonded, 838
F.2d at 892-93 (“The initial transferee is the best monitor; subsequent transferees

usually do not know where the assets came from and would be ineffectual

monitors if they did.”). “[Section] 550(b) leaves with the initial transferee the

burden of inquiry and the risk if the conveyance is fraudulent.” Id. at 892. The

fairness of this approach is illustrated by the case before us. The Markgrafs, as

initial transferees of Cowboy’s funds, were in the best position to bear the risk of

receiving a fraudulent transfer. They received a check purchased by one entity

(Cowboy) for the purpose of paying a debt owed to them by another entity

Housing Found.), 94 B.R. 180 (Bankr. C.D. Cal. 1988); and Ross v. United States
(In re Auto-Pak, Inc.), 73 B.R. 52 (D.D.C. 1987). With respect to the first three
cases from bankruptcy courts in the Ninth Circuit, in light of the Ninth Circuit
Bankruptcy Appellate Panel’s decision in General Electric, these cases are no
longer good law to the extent that they support the proposition that a principal
becomes a “transferee” by the mere act of causing the debtor to make a fraudulent
transfer. With respect to the last case, In re Auto-Pac, we agree with the court in
Richardson that the approach taken in In re Auto-Pac “is unpersuasive and in
conflict with the ordinary definition of transferee.” Richardson, 164 B.R. at 127.

                                         - 19 -
(Davis). However, the check clearly showed Cowboy as remitter. Thus, the

Markgrafs had inquiry notice that they potentially were receiving funds to which

they were not entitled. They could have protected themselves by making adequate

inquiry or requiring Davis to issue them a check from his own account. However

innocent the Markgrafs may have been, they presumably were no less innocent

than the other creditors of the Cowboy estate who have been injured by this

fraudulent transfer of funds from the Cowboy estate. Yet the Markgrafs, as initial

transferees, were in a better position to investigate and determine the fraudulent

nature of this transfer. By receiving these funds without further investigation or

without structuring the payment to make sure the funds came through Davis, the

Markgrafs received funds to which they were not entitled. We do not think it is

inequitable, under these facts, to make the Markgrafs bear the risk of the

fraudulent nature of this transaction rather than Cowboy’s other creditors in

bankruptcy. In any event, Congress has made its own judgment of who should

bear the risk of loss under these situations when it enacted Section 550, and we

are bound to accept that judgment. 2

      2
               The Markgrafs argue that even if the district court’s dismissal of the
case was legally flawed, the dismissal is supported by the record as a whole. The
district court dismissed this case based solely on its conclusion that the bank was
the initial transferee under § 550. In doing so, the district court did not make
factual findings regarding the evidence presented for trial sufficient to justify our
dismissing the case on appeal. Therefore, we remand the case for further
proceedings not inconsistent with this opinion.

                                        - 20 -
                                  Conclusion

      Based upon the forgoing discussion, we REVERSE the district court order

dismissing this case, and REMAND the case for further proceedings not

inconsistent with this opinion.

                                     - 21 -
No. 95-4120, Rupp v. Markgraf.

KELLY, Circuit Judge, dissenting.

      I cannot agree with the Court that Mr. Davis is not a transferee of

Cowboy’s funds. I do agree that the bank was merely a conduit; the fact that the

funds flowed through the bank is immaterial to the central issue, which is the

bank’s lack of dominion and control over the funds. The Court similarly strays

from the central issue by analyzing the flow of funds through various accounts

rather than asking if Mr. Davis, in fact, exercised dominion and control over the

funds as required by the test established in Bonded Fin. Serv., Inc. v. European

Am. Bank, 838 F.2d 890 (7th Cir. 1988), and adopted by us in Malloy v. Citizens

Bank of Sapulpa (In re First Sec. Mortgage Co.), 33 F.3d 42 (10th Cir. 1994). I

believe that the most persuasive case law as well as the concerns of equity and

fairness support finding Mr. Davis to be the initial transferee and the Markgrafs

to be subsequent transferees.

      As the Court begins its analysis with the Seventh Circuit’s decision in

Bonded, so do I. Both Bonded and our decision in Malloy held that a bank which

acted as a conduit of funds was not an initial transferee under § 550 because the

bank did not exercise dominion and control over those funds. Malloy, 33 F.3d at

44; Bonded, 838 F.2d at 893-94. Neither case directly answered the question of

who, if not the bank, is the initial transferee. However, those decisions do

indicate that we must apply the dominion and control test to determine whether
Mr. Davis or the Markgrafs is the initial transferee of Cowboy’s funds. See

Malloy 33 F.3d at 43-44; Bonded 838 F.2d at 893-94. In IRS v. Nordic Village,

Inc. (In re Nordic Village, Inc.), 915 F.2d 1049 (6th Cir. 1990), rev’d on other

grounds, 503 U.S. 30 (1992), the Sixth Circuit confronted a similar factual

situation. In that case, Joseph Lah, an officer and shareholder of the debtor, drew

a check on the corporate account made payable to a bank, which in turn issued

several cashier’s checks to Lah. The cashier’s check at issue was made payable to

the IRS, and bore the notation “REMITTER: SWISS HAUS, INC.,” under which

name the debtor was doing business at the time. Id. at 1050. The court held that

the IRS was liable, but it did so on the grounds that the IRS did not demonstrate

that it took the cashier’s check for value, in good faith, and without knowledge of

the fraud, without reaching the “initial transferee” issue. Id. at 1055-56 & n.3. In

a line of reasoning that is applicable to the case before us, the court stated in

dictum:

      If Lah is viewed as acting for Nordic, then the IRS is the “initial
      transferee.” If Lah is viewed as having taken money illegally from
      Nordic, he is the “initial transferee” and the delivery of the cashier’s
      check to the IRS makes the IRS an “immediate transferee” of Lah,
      the “initial transferee.” If the IRS is considered as an “immediate
      transferee” of Lah, the IRS can prevail if the IRS shows that it took
      for value, in good faith, and without knowledge of the voidability of
      the transfer.

                                          -2-
Id. at 1055 (footnote omitted). 3

      Based on this reasoning, it seems clear that Mr. Davis is the initial

transferee of Cowboy’s funds. The Davises purchased the cashier’s check using

Cowboy funds, and then used it to satisfy Mr. Davis’s personal indebtedness to

the Markgrafs. Surely, under these circumstances, Mr. Davis must be viewed as

having taken Cowboy’s money illegally, see Nordic, 915 F.2d at 1055, making

him the initial transferee of the fraudulent conveyance.

      Other case law supports this conclusion. In Ross v. United States (In re

Auto-Pak, Inc.), 73 B.R. 52 (D.D.C. 1987), the owner of the debtor company

converted a check of the debtor intended for the IRS into a cashier’s check drawn

on the debtor’s account made payable to the IRS. He then directed the cashier’s

check to the IRS with a notation to apply it toward taxes owed by another, non-

bankrupt, corporation he owned. Sitting in an appellate capacity, the district

court held that by converting the debtor’s check into a cashier’s check and writing

the name of another corporation on it, the owner “essentially took control of the

funds underlying the cashier’s check. . . . It would defy logic to hold an innocent

      3
              As indicated above, the Supreme Court later reversed the Sixth Circuit’s
decision in Nordic. 503 U.S. 30 (1992). However, it did so on the alternative ground
that the judgment against the government was jurisdictionally barred by the doctrine of
sovereign immunity. Id. at 39. In disposing of the case on jurisdictional grounds, the
Court expressed no opinion at all regarding the merits.

                                          -3-
and mediate party such as the IRS a party to this alleged fraudulent conveyance.”

Id. at 54.

       Another case, Kendall v. Sorani (In re Richmond Produce Co.), 151 B.R.
1012 (Bankr. N.D. Cal. 1993), illustrates how a principal can rise to the level of a

transferee by exercising sufficient control over a transaction. In Kendall, the

court noted:

       The evidence is clear that Clow [the principal] picked up the
       Cashier’s Check from Mechanics Bank and delivered it to BanCal. . .
       . If a messenger service had picked up the Cashier’s Check from
       Mechanics Bank and delivered it to BanCal, the messenger service
       would not have been deemed a transferee. . . .

             However, clearly, Clow was no mere messenger. Rather, Clow
       exercised complete control over the transaction. It was devised and
       executed for his benefit. Under these circumstances, the Court must
       conclude that the Cashier’s Check was transferred to Clow when he
       picked it up from Mechanics Bank.

Id. at 1021.

       In the present case, Mr. Davis and his wife exercised a similar degree of

control over the transaction. The Davises chose to instruct the bank to make the

cashier’s check payable to the Markgrafs, but, in their position as principals of

Cowboy, they could have ordered the bank to issue the cashier’s check to anyone,

and for any purpose. Mr. Davis then delivered the cashier’s check to the

Markgrafs in satisfaction of his personal debt. Moreover, the fact that the bank

sent the cashier’s check to Mr. Davis’s home address illustrates his dominion and

                                         -4-
control over the funds. Once he had possession of the cashier’s check, Mr. Davis

could have returned it to the bank, altered it in some way, or otherwise chosen not

to deliver it. See Laird v. Bartz (In re Newman Cos.), 140 B.R. 495, 498 (Bankr.

E.D. Wis. 1992). Of course, if the cashier’s check had never reached the

Markgrafs, the Markgrafs would not be deemed a transferee of the funds. I

cannot agree with the Court’s contention that Mr. Davis was “at most, a mere

courier.” Ct. Op. at 9. The intermediate steps taken by the Davises evince the

dominion and control required to find them to be the initial transferees.

      Finally, in Robinson v. Home Sav. of Am. (In re Concord Senior Hous.

Found.), 94 B.R. 180 (Bankr. C.D. Cal. 1988), the debtor hired Karl Gerwer,

doing business as Charter Pacific Management, Inc. (“CPM”), to manage its

apartment building. Gerwer collected rent for debtor and deposited it into a

certificate of deposit at defendant bank in the name of Gerwer and CPM only.

Subsequently, Gerwer used the deposited amounts as collateral to secure loans by

Gerwer from the bank for his personal use. When Gerwer defaulted, the bank

seized the CD. When the trustee tried to recover the seized funds from the bank,

the court held that Gerwer, not the bank, was the initial transferee. The court

held that “[t]he initial transfer of property from [debtor’s] estate occurred when

Gerwer used the CD for his own benefit by pledging it to secure his loans.” Id. at

183. This misappropriation of the estate’s funds by the estate’s agent constituted

                                         -5-
a transfer of those funds to the agent. Similarly, when the Davises stepped

outside of their role as principals of Cowboy and effectuated a fraudulent

conveyance of Cowboy’s funds to satisfy a personal obligation of Mr. Davis, Mr.

Davis became the initial transferee of those funds.

      The majority relies heavily on Richardson v. FDIC (In re Blackburn

Mitchell, Inc.), 164 B.R. 117 (Bankr. N.D. Cal. 1994), and General Electric

Capital Auto Lease, Inc. v. Broach (In re Lucas Dallas, Inc.), 185 B.R. 801

(Bankr. 9th. Cir. 1995), to reject the above cited cases as bad law and hold that

Mr. Davis is not the initial transferee, but rather the “entity for whose benefit

such transfer was made.”          I disagree with this reasoning. It is true, as the

Bankruptcy Appellate Panel stated in General Electric, that corporations must

always act through individuals. 185 B.R. at 809. However, there is an important

difference between a principal’s actions on behalf of a corporation for corporate

purposes, albeit misguided, and actions for purely personal purposes. Making

such a distinction does not “collapse the two prongs of strict liability [for initial

transferees and entities for whose benefit the transfer was made] into a single

party, as the General Electric Court warns. Id. Rather, it merely recognizes that

the statute does not hold two separate parties strictly liable in all cases, but only

in those where there are separate identifiable parties who are the “initial

transferee” and the “entity for whose benefit such transfer was made.” As I

                                          -6-
believe Mr. Davis is a transferee, he cannot be the entity for whose benefit such

transfer was made.

      Moreover, the Richardson case, on which the reasoning of General Electric

is largely based, both misapplies the legal rule established in Bonded, and is

distinguishable on its facts. The Richardson court explained:

      The Court believes that the proper focus when analyzing who is a
      transferee, is in the flow of funds. In order to be an initial
      transferee, one must be a transferee in the ordinary sense of the
      word.
      ....

      This Court does not disagree that in order to be a transferee one must
      obtain dominion and control over funds. But that does not mean that
      merely because one has dominion and control of funds (as principals
      ordinarily do) that one is also a transferee. . . . In order to be a
      transferee of the debtor’s funds, one must (1) actually receive the
      funds, and (2) have full dominion and control over them for one’s
      own account, as opposed to receiving them in trust or as agent for
      someone else.

Id. at 126. This is not what Bonded holds. The Bonded court specifically shifts

the emphasis from the mechanical movement of money through accounts and

establishes the dominion and control test. Bonded, 838 F.2d at 893. It is clear

that “transferee” cannot simply be defined under the “ordinary sense of the word;”

rather, Bonded holds that “‘[t]ransferee’ is not a self-defining term; it must mean

something different from ‘possessor’ or ‘holder’ or ‘agent.’” Id. at 894. In

Richardson, the court created an overly restrictive definition by combining the

dominion and control requirement of Bonded with the “ordinary” meaning of

                                        -7-
“transferee” as someone who actually holds the funds in his account. Of course,

not every principal in a business, who ordinarily would have dominion and

control over company funds, should be considered a transferee. As discussed

above, there is a difference between a principal acting in his official capacity and

a principal who abuses his official role and effectively steals money from his

company to achieve personal rather than corporate purposes. See Nordic, 915
F.2d at 1055. It is this second type of principal whose wrongdoing causes him to

abandon his official capacity and exercise personal dominion and control over

corporate funds. The facts of this case clearly support the conclusion that Mr.

Davis and his wife exercised personal dominion and control over Cowboy’s funds

by improperly using their official status to satisfy personal obligations. These

facts demonstrate more clearly than in Richardson that Mr. Davis did exercise the

requisite dominion and control to be considered the initial transferees. Arguably,

Ms. Mitchell in Richardson could be compared to the hypothetical situation in

Bonded in which Ryan in his official capacity tells the bank to “use this check to

reduce Ryan’s loan.” In that case, the court explained that the bank, and not

Ryan, would be the initial transferee. Bonded, 838 F.2d at 892. Here, however,

the situation of Mr. Davis is more akin to the dominion and control exercised by

parties who were found to be initial transferees in the cases discussed above. See

Kendall, 151 B.R. at 1021; Robinson, 94 B.R. at 183.

                                         -8-
      If, as the Court contends, Mr. Davis is the “entity for whose benefit such

transfer was made,” the Markgrafs would be the initial transferees. However, not

every case includes a party who can be labeled as the “entity for whose benefit

such transfer was made.” In Bonded, the court makes clear that “the categories

‘transferee’ and ‘entity for whose benefit such transfer was made’ are mutually

exclusive.” Bonded, 838 F.2d at 896; see also Danning v. Miller (In re Bullion

Reserve of N. Am.), 922 F.2d 544, 548 (9th Cir. 1991). Therefore, in a simple

example where the debtor fraudulently transfers funds to A, who in turn transfers

them to B, there is no party who can be properly described as the “entity for

whose benefit such transfer was made.” A is the initial transferee and B is an

immediate or mediate transferee.

      The single distinguishing characteristic of an “entity for whose benefit such

transfer was made” is, therefore, that it is not a transferee under § 550. Rather, in

order to avoid redundancy, I interpret the phrase “entity for whose benefit such

transfer was made” to describe a party that exists outside of the chain of transfer,

but who nonetheless receives a direct benefit from the occurrence of the transfer,

such as a guarantor of a loan or other third party beneficiary. Accord Laird, 140
B.R. at 498-99 (“The structure of section 550 distinguishes transferees . . . from

entities that get a benefit because someone else received the money or property.

Since the bank was a subsequent transferee, it could not be the ‘entity for whose

                                         -9-
benefit’ the initial transfer was made.”). Employing the test of Bonded and its

progeny, an “entity for whose benefit such transfer was made” must therefore be a

party that does not exercise dominion and control over the transferred funds and

is outside the chain of transfer. The facts presented clearly support finding Mr.

Davis to be a transferee; consequently, under Bonded, he cannot be “the entity for

whose benefit such transfer is made.” Mr. Davis was no mere courier; his

improper intent and dominion and control over the transaction is crystal clear,

compelling my conclusion that he was a transferee of the funds, and more

specifically, the initial transferee. As Mr. Davis is the initial transferee, the

Markgrafs are subsequent transferees who can utilize the good faith defense of §

550(b)(1).

      Because the Court chooses to limit its focus to the form of the transaction,

totally ignoring its substance, I respectfully dissent.

                                          - 10 -