595 B.R. 6
E.D.N.Y.2019Background
- Debtor (post-judgment and then in bankruptcy) paid roughly $237,692.42 in tuition to three schools for his children across pre- and post-petition periods; trustee sought to avoid and recover those payments.
- Bankruptcy court granted summary judgment to the schools, finding the children were the "initial transferees" and the schools merely subsequent transferees entitled to § 550(b) good-faith protection.
- Trustee conceded schools acted in good faith and narrowed the appeal to whether the schools were initial transferees or mere conduits/subsequent transferees under 11 U.S.C. § 550.
- The district court applied the Second Circuit’s "mere conduit"/dominion test (Bonded/Finley line): dominion/control over funds determines initial-transferee status.
- Court held payments refundable at time of transfer (i.e., student could have withdrawn and received refund) make the student the initial transferee and the school a mere conduit; payments made after refund rights lapsed (nonrefundable) make the school the initial transferee.
- The bankruptcy record did not establish refundability for all payments; district court vacated and remanded for factual development about timing/refundability of each payment.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Were the schools "initial transferees" under § 550? | Trustee: schools are initial transferees or children were mere conduits; funds earmarked for children. | Schools: they received and controlled payments and timing is irrelevant; they are initial transferees or, at least, subsequent transferees in good faith. | Timing-dependent: refundable payments -> student is initial transferee (school mere conduit); nonrefundable payments -> school is initial transferee. |
| Does the timing/refundability of tuition payments matter? | Trustee: characterization should not hinge on schools' bookkeeping or timing. | Schools: timing legally irrelevant; once received they were paid for tuition. | Timing is critical; refund rights at moment of payment determine dominion/control. |
| Were the debtor's children "mere conduits"? | Trustee: children were conduits because payments were meant only to fund education. | Schools: children had legal right to refunds and thus had dominion; not merely conduits. | Children are initial transferees for refundable payments because they had legal refund rights and dominion. |
| May the bankruptcy court resolve on summary judgment given record? | Trustee: record does not establish all payments were refundable; factual questions remain. | Schools: record suffices; court may rule for schools. | District court vacated summary judgment and remanded because the record lacks evidence about refundability/timing for all payments. |
Key Cases Cited
- Bonded Fin. Servs., Inc. v. Eur. Am. Bank, 838 F.2d 890 (7th Cir. 1988) (introduces dominion/control test; bank as mere conduit when it had no ownership or use of funds)
- Christy v. Alexander & Alexander of N.Y. Inc. (In re Finley), 130 F.3d 52 (2d Cir. 1997) (adopts "mere conduit" test for initial-transferee analysis)
- Carroll v. Tese-Milner (In re Red Dot Scenic, Inc.), 351 F.3d 57 (2d Cir. 2003) (no good-faith defense for initial transferees; reiterates dominion requirement)
- Meoli v. Huntington Nat'l Bank, 848 F.3d 716 (6th Cir. 2017) (account-holder's right to withdraw prevents bank from having dominion/control)
- Perrino v. Salem, Inc., 243 B.R. 550 (D. Me. 1999) (recipient without control over funds may not be initial transferee)
- Custom Contractors, LLC v. U.S. (In re Custom Contractors, LLC), 745 F.3d 1342 (11th Cir. 2014) (timing and existence of an actual debt matter; IRS treated as mere conduit where refund risk persisted)
- Nordberg v. Societe Generale (In re Chase & Sanborn Corp.), 848 F.2d 1196 (11th Cir. 1988) (timing can make effectively simultaneous transfers that negate creditor status)