In Re: PONY EXPRESS DELIVERY SERVICES, INC., FLEET ACQUISITION CORP., and COURIER EXPRESS, INC., Debtors, ANDREINI & COMPANY, Plaintiff-Appellant, versus PONY EXPRESS DELIVERY SERVICES, COURIER EXPRESS, INC., Defendants-Appellees.
No. 05-13824
IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT
February 27, 2006
D. C. Docket Nos. 04-03595-CV-WBH-1 & 00-68309 BKC-WH. [PUBLISH]
(February 27, 2006)
FARRIS, Circuit Judge:
Andreini & Company appeals the bankruptcy court‘s grant of summary judgment, as affirmed by the district court, holding that Andreini was the initial transferee under
I
Andreini is a California insurance broker who arranges insurance coverage for its clients and bills them for the premiums due on these policies. Those payments are deposited in a client trust account, as required by California law.
From January through March of 2000 Andreini sent Pony Express several invoices for premiums due on its workers compensation insurance polices. The various premiums invoiced were due to the insurance carriers by May 18, 2000 and June 1, 2000. The total amount of the invoices was $310,422. On May 22, 2000 Andreini received from Pony Express a check for the full amount, which it deposited into its client trust account. The following day, Andreini issued several checks from its client trust account to Pony Express’ insurance carriers in payment of the insurance premiums that were now either overdue or due in one week.1 Unbeknownst to Andreini, Pony Express was in serious financial difficulty and its check was returned for insufficient funds. Pony Express had never before given Andreini an insufficient funds check. On June 2, Andreini re-deposited the check, but it was again returned.
Two days later, June 14, 2000, Pony Express filed a voluntary petition for bankruptcy under Chapter 11 of the Bankruptcy Code. As part of its bankruptcy petition, on May 31, 2002 Pony Express filed a complaint in the Northern District of Georgia Bankruptcy Court against Andreini (and other defendants not party to this appeal) seeking to recover several payments, including the wire transfer, as avoidable preferences under
II
Under
The term “initial transferee” is a term of art whose meaning in any given transaction is not always straightforward. See In re Int‘l Admin. Servs., Inc., 408 F.3d 689, 705 (11th Cir. 2005). Most circuit courts to have considered the issue, including the Eleventh Circuit, have adopted a “control” or “conduit” test to determine whether the recipient of an avoidable transfer of assets is the initial transferee. See id; see also Bonded Fin. Serv., Inc. v. European Am. Bank, 838 F.2d 890, 893 (7th Cir. 1988); In re Columbia Data Prods., Inc., 892 F.2d 26, 28 (4th Cir. 1989); In re Bullion Reserve of N. Am., 922 F.2d 544, 548-49 (9th Cir. 1991); In re Baker & Getty Fin. Servs., Inc., 974 F.2d 712, 722 (6th Cir. 1992); In re Coutee, 984 F.2d 138, 140-41 (5th Cir. 1993); In re First Sec. Mortgage Co., 33 F.3d 42, 44 (10th Cir. 1994); In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey, 130 F.3d 52, 58 (2d Cir. 1997). Under this test, a recipient of an avoidable transfer is an initial transferee only if they exercise legal control over the assets received, such that they have the right to use the assets for their own purposes, and not if they merely served as a conduit for assets that were under the actual control of the debtor-transferor or the real initial transferee. See Nordberg v. Societe Generale (In re Chase & Sanborn Corp.), 848 F.2d 1196, 1199-1200 (11th Cir. 1988);
This test takes on special significance where the recipients of avoidable transfers are agents or fiduciaries of the debtor-transferor, such as banks or, in this case, insurance brokers, who are duty-bound to take only limited actions with respect to the funds received. See, e.g., Societe Generale, 848 F.2d at 1200 (finding that debtor‘s bank was not an initial transferee); Ogden, 314 F.3d at 1202 (finding that an escrow agent was not an initial transferee); Bonded Fin. Serv., 838 F.2d at 893 (bank); In re Ala. State Fair Auth., 232 B.R. 252, 271-72 (N.D. Ala. 1999) (finding that an insurance broker was not an initial transferee). Often these fiduciaries or agents are not considered initial transferees because their legal control over the assets received is circumscribed by their legal duties to their clients. See Societe Generale, 848 F.2d at 1200 (contrasting, for the purposes of determining whether a bank was an initial transferee, a bank‘s receipt of funds for the sole purpose of depositing them in a customer‘s account with the receipt of funds earmarked for the payment of a debt owed to the bank); Ogden, 314 F.3d at 1202 (finding that an escrow agent was not an initial transferee where funds received were intended for a trust account); Bonded Fin. Serv., 838 F.2d at 893
However, even entities that have special legal relationships with the debtor-transferor can be initial transferees when they do, in fact, take legal control of an avoidable transfer; for example when they receive assets directly from the debtor-transferor as compensation for services or in payment of a genuine debt. See, e.g., Arab Banking, 904 F.2d at 599-600 (finding that a bank was the initial transferee of funds transferred for the express purpose of paying off loan principal owed to the bank). In these situations, the fiduciary or agent does exercise legal control over the transferred assets because they immediately become its own assets and
The bankruptcy court and the district court concluded that Andreini was the initial transferee because the wire transfer was made to satisfy a debt Pony Express owed to Andreini. The courts reasoned as follows: Andreini paid the premiums due on Pony Express’ insurance policies before the latter‘s check to Andreini had been honored. When that check was returned for insufficient funds, Andreini became a creditor to Pony Express in the amount of the premiums advanced. Since the subsequent wire transfer repaid funds Andreini had already advanced from its client trust account, the courts concluded that the wire transfer was not a payment of insurance premiums, assets over which Andreini would have had only limited legal control due to its fiduciary responsibilities as an insurance broker,
The courts rightly concluded that, under the control test, the initial transferee question turns on whether a debt existed for the purposes of
The control test “is a very flexible, pragmatic one; . . . courts must look beyond the particular transfers in question to the entire circumstance of the transactions.” Societe Generale, 848 F.2d at 1199 (internal quotation and citation omitted). The court must “step back and evaluate a transaction in its entirety to make sure that their conclusions are logical and equitable. This approach is consistent with the equitable concepts underlying bankruptcy law.” Id. In Societe General this Court considered a situation where a bank honored a check drawn on the debtor‘s account in advance of receiving funds from the debtor sufficient to cover the draft, thus creating an overdraft in the debtor‘s account. See id. at 1197-98.
The Societe General court relied on several facts in reaching its decision. The bank honored the check (creating the overdraft) because it was certain the funds would arrive, based on routine communications with the bank from which the debtor‘s transfer was originating. Id. In addition, the bank did not charge the debtor any interest on the overdraft, only fees that reflected the actual costs incurred. Id. Together these facts indicated that the bank did not view itself as a creditor in the transaction. Id. The court also noted that the funds transferred by the debtor were “expressly earmarked” to be credited to the debtor‘s account, not to satisfy a debt owed to the bank. Id.; see also Arab Banking, 904 F.2d at 599
In all critical respects Andreini is in the same position as the bank in Societe General. First, Andreini did not intend to become a creditor when it sent checks to the insurance carriers. It was Andreini‘s general policy to immediately pay insurance premiums that were due, without waiting for its clients’ checks to clear, so that insurance coverage would not lapse. The deficiency created in the client trust account when Pony Express’ check was returned for insufficient funds was, therefore, inadvertent. Second, as in Societe General, Andreini had every expectation that the actual funds the check was drawn upon would be immediately forthcoming; in its course of dealings with Pony Express all payments by check had been promptly honored and Andreini had no knowledge of Pony Express’ financial difficulties at the time it paid its insurance premiums. Third, Andreini charged no interest, or even any additional fees, for its “loan” to Pony Express, even though the deficiency in the client trust account existed for a longer period of time than in Societe General.
The evidence also indicates that the purpose of the wire transfer was to replace the bad check and reimburse the client trust account with funds for
In addition, the actual destination of the wire transfer is significant to determining whether a recipient has sufficient legal control over transferred funds. See Coutee, 984 F.2d at 141 (finding that a law firm was not an initial transferee where “the funds were deposited into the firm‘s trust account, as opposed to its business account, indicating that they were held merely in a fiduciary capacity.“). At no time were the transferred funds under the unrestricted legal control of Andreini. The funds were wired directly to Andreini‘s client trust account over which its control was quite limited. Under California law the client account was a
Based on this court‘s precedent and the facts in the record no genuine debt was created for the purposes of
REVERSED AND REMANDED.
I agree with the bankruptcy court and district court that Andreini was the initial transferee of the Pony transferred funds under