Thomas Carroll appeals from the Bankruptcy Court’s order granting summary judgment to Angela Tese-Milner, the Chapter 7 bankruptcy trustee of Red Dot Scenic, Inc. (“Red Dot”), on her claim that four payments to Carroll from Red Dot’s corporate checking account were fraudulent transfers that may be avoided by the trustee. For the reasons stated below, the decision of the Bankruptcy Court is affirmed.
I.
The following undisputed facts are drawn from the Bankruptcy Court’s opinion: In 1990, Carroll and David Bruñe became partners in Red Dot, a company that designed and constructed theatrical scenery. Red Dot was incorporated in 1994, and Carroll and Bruñe became sole, equal shareholders and officers of the newly formed corporation. By the end of 1995, Red Dot had incurred a $120,000 debt and Carroll, with the help of an office manager, implemented a plan to reduce the overall debt by approximately $56,000 during the course of 1996.
Despite Red Dot’s improved financial situation in 1996, Carroll and Bruñe decided to end their business association. On December 10, 1996, they entered into a written agreement pursuant to which Bruñe agreed to pay Carroll $57,000 for Carroll’s shares in Red Dot. In exchange for Carroll’s resignation as an officer and director of Red Dot, the agreement required that Bruñe tender a $15,000 down payment and then pay the balance in seven installments. Carroll’s shares were held by his attorney in an escrow account until full payment was received.
At the closing of the agreement, Bruñe gave Carroll a personal check in the amount of $15,000. From March 1997 through September 1997, Bruñe tendered four additional checks to Carroll totaling $18,000. However, unlike the first check, which was drawn from Brune’s personal account, these checks were issued from Red Dot’s corporate checking account. Red Dot received no consideration for these four payments.
On February 28, 1998, less than one year after each of the four transfers to Carroll, Red Dot filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code. The case was later converted to a Chapter 7 case.
Red Dot’s Chapter 7 trustee commenced an adversary proceeding to avoid the conveyance of Red Dot’s property to Carroll and recover that property pursuant to sections 548(a)(1) and 550(a)(1) of the Bankruptcy Code. 1 The trustee moved for summary judgment on the avoidance claim. In her summary judgment motion, the trustee contended that the $18,000 could be recovered from Carroll because he was an initial transferee of four payments from Red Dot’s corporate account. Alternatively, the trustee argued that even if Carroll was an immediate or mediate transferee, his good faith defense under section 550(b) would- fail as a matter of law. Carroll cross-moved for summary judgment, claiming that he was not an initial transferee as described by section 550(a)(1). Carroll argued instead that he was an immediate or mediate transferee who took for value, in good faith, and without knowledge of the voidability of the transfer.
The Bankruptcy Court for the Southern District of New York (Bohanon, B.J.) granted the trustee’s motion for summary
II.
Federal Rule of Bankruptcy Procedure 7056 applies Federal Rule of Civil Procedure 56(c) to summary judgment motions in bankruptcy proceedings. Under Rule 56(c), summary judgment is proper “if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Fed. R.Civ.P. 56(c). The court reviews the bankruptcy judge’s grant of summary judgment
de novo
and views the facts in the light most favorable to the non-mov-ant.
In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson, & Casey,
Section 548 of the Bankruptcy Code provides, in relevant part:
The trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year(before the date of the filing of the petition, if the debtor voluntarily or involuntarily — received less than a reasonably equivalent value in exchange for such transfer or obligation; and was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation.
11 U.S.C. § 548(a)(1) (2000). It is undisputed that there was a transfer of the debtor’s property, that Red Dot did not receive reasonably equivalent value for the transfers, and that Red Dot was insolvent at the time of the transfers to Carroll based on the definition of “insolvent” in section 101(32) of the Code. Thus, the elements of section 548 have been met, and the trustee is authorized to exercise her avoidance power.
Once it is established that the trustee is entitled to avoid transfers under section 548, section 550(a) permits the trustee to recover from particular transferees. The section provides, in relevant part: “[T]he trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, 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) (2000). Although the Code imposes strict liability on “initial transferees” and “entities] for whose benefit such transfer was made,” section 550(b) protects transferees subsequent to the initial transferee who “take[ ] for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voida-bility of the transfer avoided.” 11 U.S.C. § 550(b) (2000).
The question presented, then, is whether, based on the undisputed facts, Carroll was an “initial transferee” under section 550(a)(1) of the Bankruptcy Code. If Carroll was an “initial transferee,” he is liable for the $18,000 he received from Red Dot. However, if he was not an “initial transferee” but rather a subsequent transferee, Carroll may assert a good faith defense under section 550(b). Because I agree with the Bankruptcy Court that Carroll was an “initial transferee” under section 550(a)(1), I affirm the Bankruptcy Court’s grant of summary judgment in favor of the trustee and do not reach the question of
III.
The Bankruptcy Code does not define the term “initial transferee.” However, every circuit that has considered the issue, including the Second Circuit, has applied the “dominion and control” test explicated by the Seventh Circuit in
Bonded Fin. Servs. v. European Am. Bank,
In the course of explaining that the bank was merely Ryan’s agent immediately after the transfer and so was not an initial transferee, the Bonded Court stated hypothetically: “If the note accompanying Bonded’s check had said: ‘use this check to reduce Ryan’s loan’ instead of ‘deposit this check in [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. Thus, in applying the dominion and control test, the Court distinguished between a one-step transaction in which a debtor’s check is paid directly to its principal’s creditor and a two-step transaction in which the check is paid to the principal, who then pays his personal creditor. In the first situation, the creditor is the initial transferee. In the second situation, the situation that arose in Bonded itself, the principal is the initial transferee and the principal’s creditor is a subsequent transferee. See id. at 894 (“So the two-step transaction is indeed different from the one-step transaction we hypothesized at the beginning of this discussion.”).
The Bankruptcy Court in this case, relying on the hypothetical in Bonded, concluded that Carroll was the initial transferee. The Court reasoned that Bruñe, who, in contrast to Ryan, never deposited the money in his personal account, did not have “dominion and control” over the money. Carroll, on the other hand, who received four checks directly from the debt- or, could invest the whole amount as he chose.
Carroll concedes that Bonded, which was embraced by the Second Circuit in Finley, controls the case at bar. However, Carroll takes issue with the Bankruptcy Court’s application of Bonded. Carroll argues that, under the dominion and control test, a principal who, for his own benefit, causes a corporate debtor to make a fraudulent transfer, should be considered an initial transferee ' under section 550(a)(1). According to Carroll, when Bruñe used his power as a principal to divert Red Dot’s assets to a personal creditor, he asserted dominion and control over the funds at issue, and should be held accountable for using those funds to pay a personal debt.
The Tenth Circuit squarely rejected Carroll’s argument in a case that is, for the
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 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 trans-feror to make transfer.
Id.
Based on its interpretation of
Bonded,
the Court concluded that “[t]he 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.”
Id.
at 941. Here, the Court followed both the Eleventh Circuit’s and the Bankruptcy Appellate Panel for the Ninth Circuit’s interpretation of section 550(a)(1).
See Gen. Elec. Capital Auto Lease, Inc. v. Broach, 185
B.R. 801, 809 (9th Cir. BAP 1995) (finding “that the principal of a corporate debtor does not become a ‘transferee’ by the mere act of causing the debtor make a fraudulent transfer”);
In re Chase & Sanborn Corp.,
[I]f 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.” 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.... “The implication is that the entity for whose benefit the transfer was made is different from a transferee, immediate or otherwise.”
General Electric,
Where, as here, a corporate principal directs debtor to transfer assets to a third party in satisfaction of a personal debt, the policy underlying fraudulent transfer law counsels strongly against departing from the general rule that beneficiaries and initial transferees are separate parties. Congress chose to hold initial transferees, in addition to beneficiaries, strictly liable for fraudulent transfers because, as the Seventh Circuit explained, “[t]he 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.”
Bonded,
If corporate principals who direct debtor corporations to transfer assets to personal creditors were deemed “initial transferees” in addition to beneficiaries, the purpose of section
550(a)(1)
— i.e., imposing a burden of inquiry on parties dealing directly with debtors — would be undermined. The principal’s personal creditors would have no incentive to inquire into the source of repayments even when they receive checks drawn on corporate accounts. Thus, in the present case, if Bruñe were the initial transferee, Carroll would have no incentive to find out why the source of the loan repayments had changed; rather, because he would not be strictly liable under sec
Like the principal in
Rupp
as well as the principal in the
Bonded
hypothetical, Bruñe caused the debtor corporation to transfer money direct to a personal creditor. There was no “intermediary step between the Debtor’s issuance of the check and the [creditor’s] receipt of the funds.”
Anton Noll,
Recognizing that
Rupp
cannot be meaningfully distinguished from this case, Carroll contends that the rule in
Rupp
— that a principal does not become an initial transferee merely by causing a corporation to satisfy a personal debt — has not been accepted in this circuit. In support of this claim, Carroll cites
In re Orange County Sanitation, Inc.,
The purpose of this detailed summary of
Orange County
is to show that the facts of that case were quite different from those in
Rupp,
and, far from supporting appellant’s argument that Bruñe was the initial transferee in this case,
Orange County
has little bearing here. Although the bankruptcy judge in
Orange County
stated broadly that “[t]he requisite dominion or control is present when a corporate officer or shareholder causes the corporation to make payments on his personal debts or for his personal benefit,”
id.
at 327, the Court qualified that statement by explaining that “[w]hen a corporate officer
receives a check
drawn on a corporate ac
Orange County
is distinguishable from this case and from
Rupp
insofar as Gott-lieb and the Mongellis each exercised some control over the money eventually paid to the IRS. That is not to say that they exercised sufficient control over the check to be deemed initial transferees. Because Gottlieb held the funds in escrow and the Mongellis held a check made out to the IRS, it appears that neither had the right to invest the money at will. Thus, it is possible that, unlike Ryan in
Bonded,
Gottlieb and the Mongellis were not initial transferees.
6
See Anton Noll,
Carroll appears to argue also that where an individual such as Bruñe dominates a corporation, he should be deemed an initial transferee even if the
Rupp
approach is otherwise followed. Whatever the merits of this argument, Carroll did not raise it in the Bankruptcy Court. The argument has been waived.
See Medforms, Inc. v. Healthcare Mgmt. Solutions, Inc.,
# * ‡ ifc ❖ ‡
For the reasons stated, the Bankruptcy Court’s decision is affirmed. The trustee is entitled to recover from Carroll the $18,000 Carroll received direct from Red Dot’s corporate account.
Notes
. Initially, the trustee also sued Bruñe. However, after Bruñe filed for personal bankruptcy, the claims against him were stayed and severed from this proceeding.
. The Bankruptcy Appellate Panel for the First Circuit's recent decision in
In re Anton Noll, Inc.,
. As appellant points out, one can imagine potential exceptions to this general rule, such as, for example, cases in which a principal pays himself a bonus on the eve of bankruptcy. In that situation, however, unlike in the present situation, the dominion and control test is easily passed, because the transferee is in no sense a "mere conduit.” The issue here is whether a principal who forces a corporation to make a fraudulent transfer directly to a personal creditor is an initial transferee, not whether a principal who simply transfers money from a corporation to himself is an initial transferee.
. As a subsequent transferee, Carroll also could not be “the entity for whose benefit’’ the transfer was made.
See Bonded,
. The Court did not need to decide which party was the initial transferee, but only that the IRS was not the initial transferee. Id. at 328.
. The counterargument would be that Gott-lieb converted the money in his escrow account to his own use and that Flynn, an agent of the principals with no authority to act on behalf of the debtors, took possession of the check and directed the IRS to reduce the Mongellis' personal tax liability. Further, the IRS received the check from an agent of the Mongellis — indeed, an agent who reasonably believed that the bankruptcy case had been dismissed — rather than from a corporate principal, and was therefore in a poor position to monitor the debtor's disbursement of funds. Thus, as discussed above, Orange County is distinguishable from a case like Rupp in which the principal simply causes a corporation to pay off a personal debt directly from a corporate account.