Court Opinion

ID: 5478
Source: CourtListenerOpinion
Date Created: 2010-04-25 05:06:18+00
Date Added: 2024-06-11T13:31:00.925242
License: Public Domain

IN THE UNITED STATES COURT OF APPEALS

                        FOR THE FIFTH CIRCUIT

                                No. 92-4552

IN THE MATTER OF: THELTON COUTEE and
                  EMOGENE COUTEE,
                                                Debtors.

SECURITY FIRST NATIONAL BANK,
                                                Appellant-Cross-Appellee,

                                   versus

BRETT BRUNSON and FUHRER FLOURNOY
HUNTER & MORTON,
                                                Appellees-Cross-Appellants.

          Appeals from the United States District Court
              for the Western District of Louisiana

                         ( February 5, 1993)

Before GARZA,     Reynaldo   G.,    HIGGINBOTHAM,      and   DeMOSS,   Circuit
Judges.

PER CURIAM:

     Security First National Bank and the law firm of Fuhrer,

Flournoy, Hunter & Morton appeal the decision of the district court

holding that payment by chapter 7 debtors of a Security First note

unconditionally    guaranteed      by   the   law   firm   was   an   avoidable

preference under § 547 of the Bankruptcy Code, 11 U.S.C. § 1 et

seq., recoverable from the bank as the initial transferee under 11

U.S.C. § 550(a)(1), and that the firm's guaranty of the note was

not extinguished by the voided payment.             We affirm.
                                 I.

     Fuhrer, Flournoy, Hunter & Morton is a plaintiff's personal

injury firm. To assist its clients financially pending litigation,

the firm would arrange for Security First to loan the clients

money, with the firm serving as unconditional guarantor on the

notes.   These loans were made in reliance only on the guaranty of

the firm; the bank made no investigation into the creditworthiness

of the clients.   The money loaned by the bank represented amounts

which could be ethically advanced to clients by the firm itself

under the Louisiana Code of Professional Conduct.

     Thelton and Emogene Coutee were represented by the firm in a

personal injury suit, in which they were awarded a $48,000 judgment

in November 1989.    They had borrowed $24,644 in June 1989 from

Security First under the arrangement described above.      When the

Coutees received the check in satisfaction of their judgment in

December 1989, they endorsed it to the firm, which deposited the

funds into its trust account.   The firm then claimed its legal fees

out of the funds,1 returned a portion of the award to the Coutees,

and paid the Security First note in full with the remaining money.

Security First marked the note paid and delivered it to the firm,

which in turn delivered it to the Coutees.

     1
      The legal fees were disputed. A contingent fee arrangement
called for the Coutees to pay an attorney's fee of 33-1/3% of
gross recovery in addition to necessary costs and expenses. The
dispute was settled when the firm reduced its fees and expenses
to $12,587.08, allowing it to return $2,500 to the Coutees.
These negotiations took place after the $48,000 was deposited in
the firm's trust account.

                                  2
     Within ninety days of the payment of the note, the Coutees

filed a voluntary petition for Chapter 7 bankruptcy.               In November

1990, the bankruptcy trustee filed this action against Security

First, seeking to avoid the payment of the note on grounds that it

was a preference under § 547 of the Bankruptcy Code.                 Security

First, having been denied a motion to compel joinder of the firm,

filed a third party demand against the firm, seeking recovery on

the unconditional guaranty in the event that the trustee was

successful in avoiding the payment of the note.

     The case was submitted to the bankruptcy court on fully

stipulated facts.       That court held that (1) the payment of the note

was void as a preference, (2) the bank was the "initial transferee"

under § 550(a)(1) of the Bankruptcy Code, and (3) the firm's

guaranty had been satisfied by payment of the note.            On appeal by

the bank, the district court affirmed the holding that the bank was

the initial transferee, but reversed the holding that the guaranty

was extinguished by the voided payment.          Both the bank and the firm

appeal its decision to this court.

                                     II.

                                     A.

     Security First contends that the firm, not it, was the initial

transferee   of   the    funds   because   the   firm   received    the   money

directly from the Coutees.

     Section 547 of the Bankruptcy Code provides, in pertinent

part, that a trustee may avoid a transfer made by the debtor within

90 days before the filing of the bankruptcy petition while the

                                      3
debtor was solvent to a creditor on account of an antecedent debt

if the transfer enables the creditor to receive more than a

designated   share   of   the   debtor's   estate.     Section   550(a)(1)

provides that the trustee may recover a preference avoided under

§ 547 from "the initial transferee of such transfer or the entity

for whose benefit such transfer was made."2      As noted, the district

court concluded that the bank was the initial transferee of the

funds, and that the firm was a mere conduit.         Because the essential

facts of the case are not in dispute, questions regarding the legal

relationship of the parties is one of law, so we review the

district court's determination de novo.        See Horn v. C.L. Osborn

Contracting Co., 591 F.2d 318, 320 (5th Cir. 1979).

     The Bankruptcy Code does not define "initial transferee," and

this circuit has not articulated a definition. Other circuits that

have, however, use a dominion or control test to determine whether

a party is an initial transferee.          See, e.g., Bonded Financial

Services, Inc. v. European American Bank, 838 F.2d 890 (7th Cir.

1988); In Re Chase & Sanborn Corp., 848 F.2d 1196 (11th Cir. 1988);

In Re Columbia Data Products, Inc., 892 F.2d 26 (4th Cir. 1989); In

Re Bullion Reserve of North America, 922 F.2d 544 (9th Cir. 1991);

In Re Baker & Getty Financial Services, Inc., 974 F.2d 712 (6th

     2
      A trustee may not recover an avoidable preference from a
transferee other than the initial transferee if the transferee
takes for value, in good faith, and without knowledge of the
voidability of the transfer avoided. 11 U.S.C. § 550(b)(1).
Here, the trustee stipulated that Security First did take for
value, in good faith, and without knowledge of the voidability of
the transfer. Thus, the trustee may recover from Security First
only if it was the initial transferee.

                                     4
Cir. 1992).       Under this test, a party that receives a transfer

directly from      the   debtor   will       not   be   considered   the   initial

transferee unless that party gains actual dominion or control over

the funds.      See Bonded, 838 F.2d at 893.3

       In Bonded, the Seventh Circuit held that dominion over funds

means the right to put the money to one's own use. 838 F.2d at

893.       According to that court, an entity does not have dominion

over the money until it is, in essence, "free to invest the whole

[amount] in lottery tickets or uranium stocks" if it wishes.                  See

Bonded, 838 F.2d at 894.4          In Bonded, the court held that the

intermediary party was not the initial transferee because it held

the funds "only for the purpose of fulfilling an instruction to

make the funds available to someone else."                Id. at 893.

       Adopting the dominion or control test, we find that the bank,

not the firm, was the initial transferee of the funds.                     As the

district court noted, the funds were deposited into the firm's

trust account, as opposed to its business account, indicating that

       3
      Where this is not the case, the intermediary party is often
referred to as a mere conduit or agent. See Lippi v. City Bank,
955 F.2d 599, 611 (9th Cir. 1992); Chase & Sanborn, 848 F.2d at
1200; Columbia Data Products, 892 F.2d 28 (4th Cir. 1989).
       4
      Dominion or control means legal dominion or control. Thus,
the fact that the firm could have violated its fiduciary
obligation to the Coutees by taking the money out of the trust
account and spending it as it pleased would make no difference in
the analysis. See, e.g., In Re Baker & Getty Financial Services,
Inc., 974 F.2d 712 (6th Cir. 1992) (holding that agent was not
initial transferee even though he could have "violated his
[principal's] instructions and taken the cash to a race track or
a jewelry store"). But cf. In Re Concord Senior Housing
Foundation, 94 B.R. 180, 182 (Bankr. C.D. Cal. 1988) (holding
that fiduciary who misappropriated funds for his own use became
the initial transferee).

                                         5
they were held merely in a fiduciary capacity for the Coutees.

Moreover, the negotiations regarding the firm's legal fees, which

occurred after it received the funds, indicate that the firm was

not free at that time simply to keep the money.                The only control

exercised over the funds was the control delegated to the law firm

by the Coutees.   As the bankruptcy court noted, "[t]he law firm,

under Louisiana law, was required to keep the client's funds in an

identifiable   trust   account   in       order   to   avoid    the   charge   of

conversion."   See Louisiana State Bar Ass'n v. Gross, 576 So. 2d 504

(La. 1991).

     The bank urges that "this Court should disregard the Bank's

role in order to identify who in fact was the creditor," and that

the firm, not the bank, actually loaned the money.5                   The bank's

position ignores the obvious; that no matter how instrumental the

firm was in assisting the Coutees in obtaining the loan, it was

still the bank that loaned them the money.              The firm's role with

respect to the received money was to accept the funds in settlement

of its client's case, deposit the money in trust, keep as fees only

what the Coutees agreed to, and pay the rest to the bank on behalf

of the Coutees in satisfaction of their loan.              Cf. In Re Fabric

     5
      The bank's contention hinges on its interpretation of one
of the stipulations of fact, which reads:

     6.   The firm arranges for their clients to obtain
     loans from the Bank. These loans are arranged for
     purposes for which an attorney may ethically advance
     money to a client under the Louisiana Code of
     Professional Conduct.

The stipulation does not state that the firm itself advanced
funds to the Coutees.

                                      6
Buys of Jericho, Inc., 33 B.R. 334, 337 (Bankr. S.D.N.Y. 1983)

(holding that the law firm that accepted settlement check on behalf

of client, deposited check into escrow account separate from firm's

working accounts, and paid funds to client was mere conduit, not

initial transferee).    The law firm had no legal right to put the

funds to its own use, and thus lacked the requisite dominion

required to be the initial transferee.

                                 B.

     The firm contends that the district court erred in holding

that its guaranty obligation was not extinguished by the avoided

transfer to the bank.

     Because the payment to the bank was an avoidable preference,

the parties are returned to the status quo ante; it is as if the

payment was never made.     The firm does not contest the district

court's holding that the accessory obligation of suretyship thus

survived when the payment of the principal obligation was voided,

under La. Civ. Code Ann. arts. 3035, 3059.

     Instead, the firm brings its arguments under La. Rev. Stat.

Ann. § 9:5001, which creates a statutory privilege in favor of

attorneys with respect to their fees and amounts advanced to a

client as ethically permitted.    The firm contends that under the

statute, it enjoys secured creditor status with respect to the

funds received from debtors.     As stated above, however, the firm

did not advance any funds to the Coutees; therefore, the statutory

privilege does not apply.

                                  7
       Additionally, the firm seems to argue that because it would

not be subject to a preference action if it had advanced the money

itself (by virtue of its alleged secured status under 9:5001), see

11 U.S.C. § 547(b)(5), its guaranty obligation should also be

privileged. There is nothing in the Louisiana statute, however, to

indicate that the attorney privilege applies to an obligation

guaranteed by an attorney, as opposed to one owed to him.     To the

contrary, because this statute creates a privilege or lien in

derogation of common rights, it should be strictly construed and

may not be extended by analogy or implication.      Calk v. Highland

Construction & Manufacturing, Inc., 368 So. 2d 1100, 1101 (La. 3d

Cir.), rev'd on other grounds, 376 So. 2d 495 (La. 1979).6

       Finally, the firm contends that its payment of the note out of

its trust account should extinguish its guaranty obligation because

it would violate concepts of fairness and equity to require the

firm to pay the bank a second time.      We have held, however, that

the money deposited in the trust account was never the firm's money

at all; thus, it never even paid the bank once.     It was precisely

the risk of the clients' insolvency that the firm assumed when it

signed the unconditional guaranty.      It cannot now avoid that risk

by attempting to convert the transaction into something that it was

not.

                                 III.

       For the foregoing reasons, the judgment is AFFIRMED.

       6
      Additionally, there is no authority indicating that the
firm's alleged secured status somehow transfers to the bank.

                                  8