Court Opinion

ID: 4200573
Source: CourtListenerOpinion
Date Created: 2017-08-31 20:01:23.935839+00
Date Added: 2024-06-11T13:58:08.405921
License: Public Domain

FILED
                           NOT FOR PUBLICATION
                                                                           AUG 31 2017
                     UNITED STATES COURT OF APPEALS                     MOLLY C. DWYER, CLERK
                                                                         U.S. COURT OF APPEALS

                            FOR THE NINTH CIRCUIT

In re: DBSI, INC.,                               No.   16-35598

          Debtor,                                D.C. No. 1:13-cv-00086-MJP
______________________________

JAMES R. ZAZZALI, as Trustee for the             MEMORANDUM*
DBSI Estate Litigation Trust,

              Plaintiff-Appellant,

 v.

UNITED STATES OF AMERICA,

              Defendant-Appellee.

                   Appeal from the United States District Court
                             for the District of Idaho
                   Marsha J. Pechman, District Judge, Presiding

                        Argued and Submitted May 17, 2017
                               Seattle, Washington

Before: HAWKINS, GOULD, and PAEZ, Circuit Judges.
      This memorandum is concurrently filed with our opinion in Case No. 16-

35597, in which we affirm the district court’s judgment that sovereign immunity

      *
             This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
does not preclude James R. Zazzali (“Zazzali”) from bringing an avoidance action

against the Internal Revenue Service (“IRS” or “government”) under 11 U.S.C.

§ 544(b)(1) and the derivative state law on which Zazzali relied, Idaho’s Uniform

Fraudulent Transfer Act (“UFTA”), Idaho Code Ann. §§ 55-9011 et seq. This

memorandum addresses Zazzali’s cross-appeal from the district court’s judgment

limiting his recovery.2

      In his cross-appeal, Zazzali contests the district court’s judgment that the

IRS is exempt from returning approximately $3.6 million, which it had refunded in

tax overpayments to the debtor’s shareholders. Whether Zazzali can recover that

money from the IRS depends on the proper interpretation of the term “initial

transferee” in 11 U.S.C. § 550(a)(1) (“Section 550(a)(1)”) of the Bankruptcy Code.

      We have jurisdiction pursuant to 28 U.S.C. § 158(d) and review de novo

issues of statutory interpretation. See, e.g., In re Acequia, Inc., 34 F.3d 800, 809

(9th Cir. 1994). We reverse and remand for further proceedings.

      1
         In 2015, Idaho amended and renumbered certain sections of Title 55 of the
Idaho Code by adopting the Uniform Voidable Transactions Act. See H.R. 92, 63d
Leg., 1st Reg. Sess. (Idaho 2015). All references in this disposition to the Idaho
Code Annotated are to those statutes in effect during the period in question.
      2
        The relevant facts are provided in the concurrently filed opinion so we do
not repeat them here.
                                           2
       Section 550(a)(1) allows for the recovery of avoided transfers from the

“initial transferee.” However, the statute fails to define “initial transferee.”

Universal Serv. Admin. Co. v. Post-Confirmation Comm. of Unsecured Creditors

of Incomnet Commc’ns Corp. (In re Incomnet, Inc.), 463 F.3d 1064, 1069 (9th Cir.

2006). “In the absence of a clear statutory definition, two standards to determine

whether a party is an ‘initial transferee’ have emerged: the ‘dominion test’ and the

‘control test.’” Id. We have “explicitly adopted the more restrictive dominion

test.” Id. at 1071 (internal quotation marks and citations omitted).

       Here, however, the district court cited to an Eleventh Circuit case, Menotte v.

United States (In re Custom Contractors, LLC), 745 F.3d 1342 (11th Cir. 2014),

which uses the “control test,” to support its determination that the IRS was not an

“initial transferee.” We employ the “dominion test,” which the district court failed

to apply.

       As the district court erred in failing to apply the correct test, we remand this

case to the district court so that it can properly apply the “dominion test” in the

first instance.

       REVERSED and REMANDED.

                                            3