Henry v. Official Committee of Unsecured Creditors of Walldesign, Inc. (In Re Walldesign, Inc.)

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

IN THE MATTER OF WALLDESIGN, No. 15-56220

INC., a subchapter S. Corporation,

Debtor, D.C. No.

8:14-cv-01725-

VAP

LISA ANNE HENRY, DBA Henry

West Designs,

Appellant,

v.

OFFICIAL COMMITTEE OF

UNSECURED CREDITORS OF

WALLDESIGN, INC.,

Appellee.

IN THE MATTER OF WALLDESIGN, No. 15-56221

INC., a subchapter S. Corporation,

Debtor, D.C. No.

8:15-cv-00167-

VAP

DONALD F. BURESH, an individual;

SHARON J. PHILLIPS, an individual,

Appellants, OPINION

v.

2 IN THE MATTER OF WALLDESIGN

OFFICIAL COMMITTEE OF

UNSECURED CREDITORS OF

WALLDESIGN, INC.,

Appellee.

Appeals from the United States District Court

for the Central District of California

Virginia A. Phillips, District Judge, Presiding

Argued and Submitted March 10, 2017

Pasadena, California

Filed October 2, 2017

Before: A. Wallace Tashima and Jacqueline H. Nguyen,

Circuit Judges and Algenon L. Marbley, * District Judge.

Opinion by Judge Marbley;

Dissent by Judge Nguyen

*

The Honorable Algenon L. Marbley, United States District Court

Judge for the Southern District of Ohio, sitting by designation.

IN THE MATTER OF WALLDESIGN 3

SUMMARY **

Bankruptcy

The panel affirmed the district court’s reversal of the

bankruptcy court’s summary judgments in favor of the

defendants in two adversary proceedings seeking recovery

of fraudulent transfers.

Applying the “dominion test,” the panel held that

creditors who received misappropriated funds from the

debtor corporation’s sole shareholder, director, and

president were initial transferees under 11 U.S.C.

§ 550(a)(1). They therefore were not entitled to the safe

harbor of § 550(b)(1) for subsequent transferees, and the

Committee of Unsecured Creditors could recover the funds

both from the corporate cheat and those parties to whom he

first made payments from the corporate account.

The panel affirmed the district court’s judgments in favor

of the Committee and remanded with instructions to remand

both cases to the bankruptcy court for further proceedings.

Dissenting, Judge Nguyen wrote that the result of the

majority’s decision was not equitable. She wrote that the

court should consider adopting the “control test” used by

other circuits, or at least returning to a hybrid “dominion and

control” approach. In addition, even applying the dominion

test, the defendants were not initial transferees.

**

This summary constitutes no part of the opinion of the court. It

has been prepared by court staff for the convenience of the reader.

4 IN THE MATTER OF WALLDESIGN

COUNSEL

Steven J. Katzman (argued) and Anthony Bisconti, Bienert

Miller & Katzman PLC, San Clemente, California, for

Appellants.

John P. Reitman (argued) and Jack A. Reitman, Landau

Gottfried & Berger LLP, Los Angeles, California, for

Appellees.

OPINION

MARBLEY, District Judge:

It is said that bad facts make bad law. These appeals test

that maxim against the often esoteric backdrop of the

Bankruptcy Code. More specifically, the court must decide

who is liable for voidable payments in bankruptcy

proceedings when a debtor corporation’s sole shareholder,

director, and president misappropriates company funds to

fuel his own version of “lifestyles of the rich and famous.”

The bankruptcy court held that the Committee of

Unsecured Creditors (“the Committee”) could recover the

fraudulently transferred funds solely from the corporate

cheat, because the appellants were subsequent transferees

who accepted the payments for value, in good faith, and

without knowledge of their voidability. See 11 U.S.C.

§ 550(b)(1) (the “safe-harbor” provision).

The district court reversed, concluding that the

appellants were initial transferees under § 550(a)(1) and,

therefore, not entitled to the safe harbor under § 550(b)(1)

for subsequent transferees. Under the district court’s view,

the Committee could recover the funds from both the

IN THE MATTER OF WALLDESIGN 5

corporate cheat and those parties to whom he first made

payments from the corporate account.

Although the equities seem harsh at first glance, our

reading of the statute and the case law persuades us that the

district court was correct. By enacting 11 U.S.C. § 550,

Congress assigned liability for repaying voidable transfers to

both the “good guys” (initial transferees, like the appellants)

and the “bad guys” (those for whose benefit the transfer was

made, like corporate cheats), because “good guys” who are

party to those transfers generally stand in a better position to

guard against corporate fraud than do unsuspecting creditors.

We therefore AFFIRM the judgments of the district court in

favor of the Committee 1 and REMAND these cases to the

bankruptcy court for further proceedings.

I. BACKGROUND

Sections 544 and 548 of the Bankruptcy Code empower

a liquidating trustee to enlarge the debtor’s estate by

invalidating fraudulent transfers of property, including

money, thereby making the property a part of the debtor’s

estate again. 11 U.S.C. §§ 544(b)(1), 548(a)(1)(B).

Section 550, in turn, dictates who must reimburse the

trustee and, through the trustee, the debtor’s creditors, for

those fraudulent and “avoided” transfers. Id. § 550. These

appeals hinge on § 550 and determining whether the

1

Although the trustee of the liquidation trust established by

Walldesign’s confirmed Chapter 11 plan has replaced the Committee as

the real party in interest in these cases, all lower court proceedings and

the parties’ briefing on appeal still refer to the appellee as the Official

Committee of Unsecured Creditors of Walldesign, Inc. For ease of

reference and consistency with the record, our opinion will refer to the

appellee in these cases as “the Committee” as well.

6 IN THE MATTER OF WALLDESIGN

appellants were initial transferees of fraudulent payments

under § 550(a)(1), and thus strictly liable to the Committee,

or subsequent transferees, who may avail themselves of the

safe-harbor provision of § 550(b)(1).

A. Factual Background

Michael Bello served as the sole shareholder, director,

and president of Walldesign, Inc., a California corporation

that installed drywall, acoustical material, and plaster in

construction projects in California, Nevada, and Arizona.

Bello oversaw Walldesign’s day-to-day business operations,

as well as the company’s finances.

Walldesign maintained its primary bank account at

Comerica Bank in El Segundo, California. Walldesign

generally deposited its accounts receivable in and paid its

expenses from this primary account. The primary account

was disclosed in the general ledger and other books and

records of Walldesign. And, when Bello signed the

Schedules and Statement of Financial Affairs in

Walldesign’s bankruptcy case, he disclosed the company’s

primary account in those filings.

In 2002, Bello opened a different bank account in

Walldesign’s name at Preferred Bank in Irvine, California.

When he opened this account, Bello used Walldesign’s

Federal Tax I.D. Number, a Statement by Domestic Stock

Corporation, Walldesign’s Articles of Incorporation, a

Unanimous Consent of Shareholder of Walldesign to

Corporate Action, and a signature card granting him

authority as an agent of Walldesign to open the account.

That said, Bello used his home as the secondary account’s

address; he did not disclose the account in Walldesign’s

general ledger or other records; and he later made his wife—

who was not a Walldesign employee—a signatory to the

IN THE MATTER OF WALLDESIGN 7

account. Bello, moreover, tried to conceal the secondary

account during Walldesign’s bankruptcy proceedings.

Although most of Walldesign’s income and expenses

flowed through its primary account, Bello devised a system

whereby rebates from the company’s suppliers were

deposited into the secondary account instead. Rather than

deduct the rebates from Walldesign’s invoice, suppliers

issued checks to Walldesign for the difference. Bello then

deposited the rebate checks into Walldesign’s secondary

account, without disclosing the deposits to the company’s

management, its creditors, or even the bankruptcy court.

Bello channeled nearly $8 million of Walldesign funds into

the secondary account in the ten years he operated it.

Bello then used the funds in Walldesign’s secondary

account to support his own lavish lifestyle rather than for

legitimate business purposes. You name it, Bello spent it,

including paying for the following: (1) to operate Bello’s

family vineyards; (2) to operate Bello’s horseracing stable;

(3) to operate other unrelated business entities Bello

controlled; (4) Bello’s Las Vegas casino bills; (5) Bello’s

personal expenses charged on his American Express credit

card; (6) Bello’s homeowners association and country club

fees for two private golf courses; and (7) to pay for a “tasting

room” property purchased by RU Investments, one of

Bello’s other business ventures. In total, Bello paid nearly

$8 million from the secondary account to roughly

130 individuals and entities. All of the payments that Bello

caused Walldesign to make from this secondary account

were for his personal expenses and not for the benefit of the

company or its creditors.

Bello’s actions ultimately impacted the appellants,

Donald Buresh and Sharon Phillips (“the Bureshes”) and

Lisa Anne Henry. The Bureshes are a married couple who

8 IN THE MATTER OF WALLDESIGN

owned real property in St. Helena, California (“the

Property”). In 2009, they sold the Property to a Bello-

controlled entity, RU Investments, for roughly $220,000.

The Bureshes sold the Property for a fair value and at arms’

length. Over the next two years, Bello made payments to the

Bureshes from checks drawn on Walldesign’s secondary

account. These checks all bore the name “WALLDESIGN

INCORPORATED.” Ultimately, Bello located a Bello

Family Vineyard “tasting room” on the Property. Aside

from the sale of the Property, the Bureshes had no pre-

existing relationship and have no ongoing relationship with

Bello, his family, or any of his businesses.

Ms. Henry is the owner of Henry West Design, a small

interior design firm. She met Bello through a client, who

referred her to Bello for design services on a building he (not

Walldesign) owned. She provided design- and construction-

related services for Bello over nine years, always at her

standard rates, in arms’ length transactions. Bello did not

personally pay for these services; instead, he drew checks

from Walldesign’s secondary account, as well as from other

businesses he operated. In total, Bello spent over $230,000

on Ms. Henry’s design services. Aside from providing these

services, Ms. Henry had no pre-existing or ongoing

relationship with Bello, his family, or any of his businesses.

B. Procedural Background

Walldesign petitioned for bankruptcy on January 4,

2012. The Committee was appointed to represent creditors’

interests a few days later. The Committee eventually

brought ninety-six separate adversary proceedings to

recover payments Bello made from the secondary account,

including the payments to the Bureshes and Ms. Henry. All

told, the Committee sought to recover $220,350.00 from the

Bureshes and $232,948.16 from Ms. Henry.

IN THE MATTER OF WALLDESIGN 9

The Committee also filed a complaint against Bello, his

wife, and various other Bello-related individuals and

entities—seeking to recover an amount equal to all identified

payments made from the secondary account, including the

payments made to the Bureshes and Ms. Henry.

In June 2014, the Bureshes and Ms. Henry filed motions

for partial summary judgment against the Committee. The

Bureshes and Ms. Henry argued that they were not liable to

the Committee for any fraudulent transfers because they

were not “initial transferees” under 11 U.S.C. § 550(a)(1)

but, rather, were subsequent transferees entitled to the safe

harbor under § 550(b)(1). The bankruptcy court granted the

motions for partial summary judgment, first in an oral order

on July 31, 2014, and later issued brief written orders in both

cases. The Committee then appealed both orders to the

district court.

On July 17, 2015, the district court reversed the decision

of the bankruptcy court in the Bureshes’ case (the lead case).

In re Walldesign, Inc., No. SACV 15-00167-VAP, 2015 WL

4399843 (C.D. Cal. July 17, 2015). The district court found

the Bureshes strictly liable to the Committee because they

qualified as “initial transferees” of the fraudulent payments

that Bello made from Walldesign’s secondary account under

§ 550(a)(1). Id. at *7. In the same order, the court

administratively closed Ms. Henry’s appeal for the same

reason, thereby remanding both cases to the bankruptcy

court for further proceedings. Id.

The Bureshes and Ms. Henry timely filed their notices of

appeal of the district court orders.

10 IN THE MATTER OF WALLDESIGN

II. STANDARD OF REVIEW

We review the district court’s decision on an appeal from

a bankruptcy court de novo. Barclay v. Mackenzie (In re AFI

Holding, Inc.), 525 F.3d 700, 702 (9th Cir. 2008). Because

these appeals stem from the grant of summary judgment, we

must determine whether the pleadings and supporting

documents show that there is no genuine dispute as to a

material fact and that the moving parties are entitled to

judgment as a matter of law. Id.

III. ANALYSIS

A. Statutory Scheme: The Bankruptcy Code Draws a

Critical Distinction Between Initial and Subsequent

Transferees.

The Bankruptcy Code draws a critical distinction

between initial and subsequent transferees when it comes to

the recovery of fraudulent transfers. When a trustee has

proven the avoidability of a fraudulent transfer, the trustee

may recover the property (or its value) from “(1) the initial

transferee of such transfer or the entity for whose benefit

such transfer was made; or (2) any [subsequent] transferee

of such initial transferee.” 11 U.S.C. § 550(a). The trustee,

however, may not recover the property or its value from a

subsequent transferee if that transferee accepted the property

“for value . . . , in good faith, and without knowledge of the

voidability of the transfer.” Id. § 550(b)(1).

This distinction between initial and subsequent

transferees is “critical.” Schafer v. Las Vegas Hilton Corp.

(In re Video Depot, Ltd.), 127 F.3d 1195, 1197 (9th Cir.

1997). Trustees have an absolute right of recovery against

the “initial transferee” and any “entity for whose benefit

such transfer was made.” Danning v. Miller (In re Bullion

IN THE MATTER OF WALLDESIGN 11

Reserve of N. Am.), 922 F.2d 544, 547 (9th Cir. 1991). While

trustees “[t]heoretically” can recover from subsequent

transferees as well, subsequent transferees who accepted the

property “for value, in good faith, and without knowledge”

of the voidability of the transfer may avail themselves of the

“‘good faith’ defense of section 550(b).” Id.; accord In re

Video Depot, 127 F.3d at 1198.

B. Statutory Text: Who is an “Initial Transferee.”

We look first to the statutory text to determine whether

the Bureshes and Ms. Henry qualify as initial transferees.

Lamie v. U.S. Tr., 540 U.S. 526, 534 (2004). If the statute’s

text “is plain,” we must “enforce it according to its terms,”

so long as the result is not absurd. Id. (quotation omitted).

In a leading case on § 550, the Seventh Circuit explained

that “‘[t]ransferee’ is not a self-defining term; it must mean

something different from ‘possessor’ or ‘holder’ or ‘agent.’”

Bonded Fin. Servs., Inc. v. European Am. Bank, 838 F.2d

890, 894 (7th Cir. 1988). The court noted that treating

“anyone who touches the money” as a “transferee” could

lead to “absurd results” and require “useless [analytical]

steps.” Id. To avoid this result, the court opted to “slice

these [steps] off with Occam’s Razor and leave a more

functional rule” in their place. Id. Under that more

functional rule, the “minimum requirement [for] status as a

‘transferee’ is dominion over the money or other asset,” i.e.,

“the right to put the money to one’s own purposes.” Id. at

893 (emphasis added).

Our court followed suit in Universal Service

Administrative Co. v. Post-Confirmation Committee of

Unsecured Creditors (In re Incomnet), 463 F.3d 1064 (9th

Cir. 2006). There, we first noted that “Section 550(a) does

not define the phrase ‘initial transferee.’” Id. at 1069. But

12 IN THE MATTER OF WALLDESIGN

rather than relying on an over-simplistic syllogism from the

meaning of “transfer,” as the Bureshes and Ms. Henry

propose, we joined the Seventh Circuit in adopting the

“dominion test.” Id. at 1069–71 (describing Bonded

Financial Services as “[t]he leading case” on § 550 and

adopting its formulation of the “dominion test” to determine

initial-transferee status). Moreover, we adopted the

dominion test despite some “concerns that, by focusing on

whether a party had dominion over funds, courts may lose

track of the original question proposed by the statute—

namely, whether a party is a transferee.” Id. at 1073 n.11.

In 2014, our court again held that “[i]n the absence of a

statutory definition, we apply the so-called ‘dominion test’

to determine whether a party is the initial transferee.” Mano-

Y & M, Ltd. v. Field (In re Mortg. Store, Inc.), 773 F.3d 990,

995 (9th Cir. 2014). There, we confirmed that “[t]he proper

standard is the In re Incomnet dominion test” and that under

that test, “the touchstones . . . for initial transferee status are

legal title and the ability of the transferee to freely

appropriate the transferred funds.” Id. at 996.

Thus, any reliance on the meaning of “transfer” in

11 U.S.C. § 101(54)(D) is misplaced in connection with the

inquiry at hand: determining whether the Bureshes and Ms.

Henry qualify as “initial transferees” under § 550(a)(1).

C. Under the Dominion Test, the Bureshes and Ms.

Henry Qualify as “Initial Transferees.”

As explained below, the Bureshes and Ms. Henry qualify

as the “initial transferees” of payments made from

Walldesign’s secondary account under the dominion test.

As such, they remain strictly liable to the Committee.

IN THE MATTER OF WALLDESIGN 13

1. The Dominion Test Explained

Under the dominion test, “a transferee is one who . . . has

dominion over the money or other asset,”—in other words,

one with “the right to put the money to one’s own purposes.”

In re Mortg. Store, 773 F.3d at 995 (quoting In re Incomnet,

463 F.3d at 1070). The “key[s]” to this test are “‘whether

the recipient of funds has legal title to them’ and whether the

recipient has ‘the ability to use [the funds] as he sees fit.’”

Id. (quoting In re Incomnet, 463 F.3d at 1071). We further

explained that, “an individual will have dominion over a

transfer if, for example, he is ‘free to invest the whole

[amount] in lottery tickets or uranium stocks.’” Id. (quoting

Bonded Fin. Servs., 838 F.2d at 894). “The first party to

establish dominion over the funds after they leave the

transferor is the initial transferee; other transferees are

subsequent transferees.” Id. (citations omitted).

In adopting the “more restrictive ‘dominion test’” from

Bonded Financial Services, our court stressed that the test

“focuses on whether the recipient of funds has legal title to

them”; that “dominion . . . strongly correlates with legal

title”; and that “dominion . . . [is] akin to legal control.” In

re Incomnet, 463 F.3d at 1071, 1073 (emphasis added)

(quotation omitted); In re Mortg. Store, 773 F.3d at 996

(“[T]he touchstones . . . for initial transferee status are legal

title and the ability of the transferee to freely appropriate the

transferred funds.” (emphasis added)).

Indeed, in adopting the dominion test, we took care both

to distinguish it from the often-conflated “control test,” and

to reject that more lenient standard for determining initial-

transferee status. In re Incomnet, 463 F.3d at 1069–71

(explaining that “the ‘dominion test’ and the ‘control test,’

as originally stated, are not merely different names for the

same inquiry”). While the dominion test focuses on who had

14 IN THE MATTER OF WALLDESIGN

“legal authority over the money,” the control test involves a

more gestalt analysis and requires courts to “view the entire

transaction as a whole to determine who truly had control of

the money.” Id. at 1070 (emphasis added) (citations

omitted). After noting that some courts “combined these

tests” or their names, we held that the tests are

distinguishable. Id. at 1071. We then adopted the “more

restrictive ‘dominion test’” and rejected the “more lenient

‘control test.’” Id. (quotations omitted); see also In re

Mortg. Store, 773 F.3d at 995–96 (adhering to “the pure

dominion test”).

2. Application of the Dominion Test in Corporate

Misappropriation Cases: A One-Step or Two-Step

Transaction?

With these considerations in mind, courts have taken two

approaches when applying § 550 to fraudulent transfers

involving the misappropriation of corporate funds by

company directors, officers, or other insiders.

a. The Majority Approach

Under the majority approach, or “one-step transaction”

approach, courts hold that a principal of a debtor corporation

who misappropriates company funds to satisfy personal

obligations is not an initial transferee. In re Video Depot,

127 F.3d at 1198–99 (collecting cases); Sklar v.

Susquehanna Bank (In re Global Prot.), 546 B.R. 586, 622–

23 (Bankr. D. N.J. 2016) (same). These courts reason that

“[t]he mere power of a principal to direct the allocation of

corporate resources does not amount to legal dominion and

control,” which is required for initial-transferee status. In re

Video Depot, 127 F.3d at 1199 (emphasis added).

IN THE MATTER OF WALLDESIGN 15

As the Tenth Circuit has explained, “[m]any principals

presumably exercise de facto control over the funds of the

corporations they manage” and “can choose to cause their

corporations to use those funds appropriately or

inappropriately.” Id. (quoting Rupp v. Markgraf, 95 F.3d

936, 941 (10th Cir. 1996)). But “[this] distinction is only

relevant to the question whether the principal’s conduct

amounted to a breach of duty to the corporation.” Id.

(quotation omitted). The distinction is not relevant to

whether the principal qualifies as an initial transferee. Id.

Thus, a principal’s control over the business operations of a

corporation “does not, in itself, compel a finding that [the

principal] had dominion . . . over the funds transferred from

[the corporation] to [a third party].” Id. at 1200.

Three reasons support the majority approach and

viewing direct corporate misappropriations as “single-step

transactions.” First, the text of § 550(a)(1) compels this

result:

Determining the initial transferee of a

transaction is necessarily a temporal inquiry;

there must be a transfer before there can be a

transferee. The 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.

See Rupp, 95 F.3d at 941.

In other words, the “flow of funds” matters, and “receipt

of the transferred property is a necessary element for that

16 IN THE MATTER OF WALLDESIGN

entity to be a transferee under § 550.” Id. at 942 (emphasis

added) (quotation omitted). But “[s]imply directing a

transfer, i.e., such as directing a debtor to transfer funds, is

not enough.” Id. (emphasis added) (quotation omitted).

A principal, therefore, may establish dominion “by first

directing a transfer into his or her personal bank account and

then making the payment from his personal account to the

creditor.” See In re Video Depot, 127 F.3d at 1199. But a

principal does not establish dominion by misdirecting

company funds directly to a third party for personal gain.

See id. In that situation, the principal is not a transferee at

all but, rather, is the party for whose benefit the transfer was

made. In re Global Prot., 546 B.R. at 624.

Second, the structure of § 550(a)(1) indicates that a

principal does not become an initial transferee simply by

using his or her control over corporate assets to effect a

fraudulent transfer. See Gen. Elec. Capital Auto Lease, Inc.

v. Broach (In re Lucas Dallas), 185 B.R. 801, 809–10

(B.A.P. 9th Cir. 1995); In re Global Prot., 546 B.R. at 624;

In re Red Dot Scenic, Inc., 293 B.R. 116, 121 (Bankr.

S.D.N.Y. 2003), aff’d, 351 F.3d 57 (2d Cir. 2003). Section

550 imposes strict liability on both initial transferees and any

beneficiaries of the fraudulent transfers. 11 U.S.C.

§ 550(a)(1). From that starting point, the Ninth Circuit

Bankruptcy Appellate Panel (“BAP”) has reasoned:

[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

IN THE MATTER OF WALLDESIGN 17

transfer was made.” 11 U.S.C. § 550(a)(1).

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 . . . .

“The implication is that the entity for whose

benefit the transfer was made is different

from a transferee, immediate or otherwise.”

Bullion Reserve, 922 F.2d at 548.

Consideration of whether the beneficiary of

the transfer “forced” the debtor to make the

transfer would collapse the two prongs of

strict liability into a single party. . . . There is

nothing in the statute or otherwise to justify

this result.

In re Lucas Dallas, 185 B.R. at 809–10. This distinction

between the beneficiaries of a transfer and initial transferees

“thus strongly indicates that, as a general rule, beneficiaries

and initial transferees are separate parties to a fraudulent

transfer.” In re Red Dot, 293 B.R. at 121.

Third, the policy concerns underlying § 550 counsel in

favor of treating beneficiaries, initial transferees, and

subsequent transferees separately and requiring “legal

control” over the funds as opposed to mere “de facto” control

for initial-transferee status. In re Mortg. Store, 773 F.3d at

997–98 & n.1; In re Video Depot, 127 F.3d at 1199. The

alternative approach—by which “every agent or principal of

a corporation [is] deemed the initial transferee when he or

she effected a transfer of property in his or her representative

capacity”—both misallocates the monitoring costs that

§ 550 sought to impose and deprives the trustee of a

18 IN THE MATTER OF WALLDESIGN

potential source of recovery for creditors. See In re Video

Depot, 127 F.3d at 1199; In re Red Dot, 293 B.R. at 121.

After all, foxes (like corporate cheats) rarely guard

henhouses (like corporate treasuries) with much success. In

re Mortg. Store, 773 F.3d at 998 n.1. And Congress likely

decided that “recovery from [an] embezzling principal

would be difficult, thus it also made the first recipient of

those funds liable to returning them.” See In re Global Prot.,

546 B.R. at 625.

As these cases demonstrate, a corporate principal

(whether a shareholder, director, officer, or other insider)

who effects a transfer of company funds in his or her

representative capacity does not have dominion over those

funds in his or her personal capacity. Therefore, such a

principal does not qualify as an initial transferee under

§ 550(a)(1) of the Bankruptcy Code.

b. The Minority Approach

To be sure, a minority of courts view misappropriation

cases differently and reason that corporate principals may be

strictly liable as initial transferees when they misuse

company funds for personal gain. See, e.g., Internal

Revenue Serv. v. Nordic Vill., Inc. (In re Nordic Vill., Inc.),

915 F.2d 1049, 1055 (6th Cir. 1990), rev’d on other grounds,

United States v. Nordic Vill., Inc., 503 U.S. 30 (1992).

Under this “two-step transaction” approach, the debtor

company is deemed to have made the initial transfer to the

corporate principal, thus making him or her strictly liable as

the initial transferee. See In re Nordic Vill., 915 F.2d at 1055

(“If Lah is viewed as having taken money illegally from

Nordic, he is the ‘initial transferee’ and the delivery of the

cashier’s check to the IRS makes the IRS ‘[a subsequent]

transferee . . . .’”); see id. (“If the IRS is considered as an

IN THE MATTER OF WALLDESIGN 19

‘immediate transferee’ of Lah, the IRS can prevail if . . . it

took for value, in good faith, and without knowledge of the

voidability of the transfer.”).

c. The Ninth Circuit Follows the Majority Approach

Because the minority approach suffers from several

flaws, our court has rejected it. In re Video Depot, 127 F.3d

at 1198–1200; see In re Mortg. Store, 773 F.3d at 995–96.

For starters, the minority approach draws largely on

equitable principles and a concern that seemingly “innocent”

third parties will be held liable for fraudulent transfers unless

corporate principals are deemed the initial transferees. In re

Global Prot., 546 B.R. at 624. But our court has noted that

these types of “equitable considerations fit much more

comfortably under the control test,” which we repeatedly

have rejected. See In re Mortg. Store, 773 F.3d at 996.

The minority approach also predates Bonded Financial

Services, on which we have relied so heavily in adopting the

dominion test, and focuses instead on the separate definition

of “transfer” from 11 U.S.C. § 101(50). E.g., In re Nordic

Vill., 915 F.2d at 1055 & n.3 (citing a pair of pre-Bonded

district court cases for the proposition that “[t]here is

substantial support for the conclusion that when a corporate

officer takes checks drawn from corporate funds to pay

personal debts, the corporate officer, and not the payee on

the check[,] is the initial transferee”).

Due to these shortcomings (and others), we have

declined to follow the minority approach. In fact, in In re

Video Depot, we acknowledged that although “the Sixth

Circuit has expressed tentative support for [the minority

approach], . . . no circuit has based a decision on it,” and,

therefore, we expressly “decline[d] to depart from the

considered judgment of the other circuits.” 127 F.3d at 1199

20 IN THE MATTER OF WALLDESIGN

(citing In re Nordic Vill., 915 F.2d at 1049). In the process,

we also rejected both lower-court decisions on which the

Sixth Circuit based its reasoning. Id. at 1198 (declining to

follow both In re Auto-Pak, Inc., 73 B.R. 52 (D.D.C. 1987),

and In re Jorges Carpet Mills, Inc., 50 B.R. 84 (Bankr. E.D.

Tenn. 1985)); see In re Nordic Vill., 915 F.2d at 1055 n.3

(citing In re Auto-Pak and In re Jorges Carpet Mills).

In recent years, we have moved even further away from

the equitable concerns that drive the minority approach in

favor of strict application of “the pure dominion test” and its

focus on legal control. See In re Mortg. Store, 773 F.3d at

996–98 & n.1.

3. Application of the Majority Approach in These Cases

Here, application of the majority approach proves

straight-forward: Bello was not the initial transferee of the

funds in the secondary account because he lacked dominion

over them. Rather than possessing legal title to the funds

and the ability to freely appropriate them, Bello abused his

power as a principal to direct company funds to third parties

for his own benefit. Because “[l]egal control over the funds

. . . passed directly from [Walldesign] to [the Bureshes and

Ms. Henry],” Bello is not the initial transferee. See In re

Video Depot, 127 F.3d at 1199.

Recall the facts, which are not in dispute. Bello, acting

as an agent for Walldesign, established a bank account in the

company’s name using Walldesign’s Federal Tax I.D.

Number, a Statement by Domestic Stock Corporation,

Walldesign’s Articles of Incorporation, a Unanimous

Consent of Shareholder of Walldesign to Corporate Action,

and a signature card granting him signing authority as

Walldesign’s agent to open the secondary account. As all

parties necessarily agree, the secondary account belonged to

IN THE MATTER OF WALLDESIGN 21

Walldesign—not to Bello. Bello then deposited Walldesign

funds (and Walldesign funds alone) into the secondary

account. 2 Bello later misdirected those company funds

directly to third parties like the Bureshes and Ms. Henry, by

way of company checks clearly emblazoned

“WALLDESIGN INCORPORATED,” without ever

depositing them in his own personal account or otherwise

taking legal control of them.

This was a classic “one-step transaction”—with funds

moving from Walldesign (the transferor) to the Bureshes and

Ms. Henry (the initial transferees), on behalf of Bello (the

party for whose benefit the transfers were made). Bello may

have exercised de facto control over those funds as a

corporate principal, but he never exercised legal control over

them, as required for initial-transferee status. See, e.g., In re

Video Depot, 127 F.3d at 1199 (suggesting that “a principal

may establish legal control and dominion by first directing a

transfer into his or her personal bank account and then

making the payment from his personal account to the

creditor,” but holding that a principal does not establish

dominion simply by misdirecting corporate funds “directly

from [the company] to [a third party]”); Rupp, 95 F.3d at

941–42 (rejecting argument that “a principal who directs and

benefits from a fraudulent transfer of funds from a debtor to

a third party is ipso facto the initial transferee” where “the

debtor’s funds moved directly to the third party” (quotation

omitted)); see also 5 Collier on Bankruptcy ¶ 555.02[4][a] at

550–18 (15th ed. 1996) (explaining that although “[t]he

2

The fact that Bello later decided to use the checks made payable to

Walldesign for his own personal gain does not negate that the money

legally belonged to Walldesign. See Cal. Com. Code § 3110(a) (“The

person to whom an instrument is initially payable is determined by the

intent of the person . . . signing as . . . the issuer of the instrument.”).

22 IN THE MATTER OF WALLDESIGN

Code does not define the term [] ‘initial transferee’ . . .

[g]enerally, the party who receives a transfer of property

directly from the debtor is the initial transferee” (emphasis

added)).

Thus, Bello is strictly liable as the party for whose

benefit such transfers were made, while the Bureshes and

Ms. Henry are strictly liable as initial transferees. Several

cases bear this out. In In re Global Protection, for example,

the bankruptcy court held that a corporate principal was not

the initial transferee where he misdirected company funds

directly to a bank to pay his personal debts because “[t]he

money never passed through [his] hands.” 546 B.R. at 623.

The court instead held that the bank, as recipient of the funds,

was the initial transferee, but that both the bank and the

principal were strictly liable under § 550(a)(1). Id. at 625.

Likewise, in In re Red Dot, the court held that a corporate

principal was “the party for whose benefit the transfer was

made,” and not an initial transferee, where he “caused the

debtor . . . to transfer money direct[ly] to a personal creditor”

without any “intermediary step between the Debtor’s

issuance of the check and the [creditor’s] receipt of the

funds.” 293 B.R. at 122 (quotation omitted). There again,

the court held both parties strictly liable under § 550(a)(1).

Id.

Although this result may “elevate[] form over

substance,” as the Bureshes and Ms. Henry suggest, form

matters a great deal in fraudulent-transfer cases due to the

policy concerns underlying § 550. In re Video Depot,

127 F.3d at 1199; Richardson v. U.S. Internal Revenue Serv.

(In re Anton Noll, Inc.), 277 B.R. 875, 882 (B.A.P. 1st Cir.

2002) (“[D]ifferentiating between a one step and a two step

transaction has real legal significance—it is not merely an

act of upholding form over substance.”).

IN THE MATTER OF WALLDESIGN 23

The majority approach, which we employ, allocates the

monitoring costs and risks of repayment among the parties

as Congress intended. In re Video Depot, 127 F.3d at 1199.

It would undermine § 550 to declare Bello the initial

transferee because it is “unreasonable to assume” that an

insider who misappropriates company funds “ha[s] the

proper incentives to monitor [the company] for fraud.” See

In re Mortg. Store, 773 F.3d at 998 n.1. Appellant suggested

at oral argument that Bello’s wife, who also was a signatory

to the secondary account, had the ability and incentive to

monitor the company for fraud. This suggestion assumes

facts not in the record—namely, that Bello’s wife was an

innocent signatory on the account, and not acting in cahoots

with her husband. In truth, we have no indication what role,

if any, Bello’s wife played as a signatory on the account. It

seems equally likely that Bello’s wife knew what her

husband was doing but turned a blind eye anyway.

Likewise, it is fair to view the Bureshes and Ms. Henry

as the initial transferees since they “receive[d] funds directly

from [the] debtor,” and thus, their “capacity [and burden] to

monitor . . . [were] at [their] greatest.” In re Video Depot,

127 F.3d at 1199. Although the Bureshes and Ms. Henry

suggest that they lacked the ability to monitor for fraud, the

record shows otherwise. It is undisputed that the Bureshes

sold their Property to a Bello-controlled entity called “RU

Investments.” Yet they received all payments for that sale

from checks bearing the name “WALLDESIGN

INCORPORATED”—providing at least some indication

that something was amiss. Likewise, Ms. Henry performed

all services for Bello in his individual capacity. Yet she

received all payments from checks bearing the name

“WALLDESIGN INCORPORATED” or from one of

Bello’s other businesses—again, providing at least some

indication of an irregularity in the payments. As between

24 IN THE MATTER OF WALLDESIGN

Walldesign’s creditors, who had no idea of the fraudulent

transfers, and the Bureshes and Ms. Henry, who had some

indication of these irregularities, the Bureshes and Ms.

Henry stood in a better position to monitor for fraud. See In

re Mortg. Store, 773 F.3d at 997.

Finally, viewing the Bureshes and Ms. Henry as the

initial transferees, while viewing Bello as the party for

whose benefit the transfers were made, allows the

Committee to recover from all parties under § 550(a)(1), as

Congress intended. After all, “Section 550 expressly allows

the trustee to recover from either party, indicating that, as a

matter of policy, the option should be preserved where

possible.” Rupp, 95 F.3d at 943; see also In re Global Prot.,

546 B.R. at 624–25 (recognizing importance of permitting

recovery from “good guys” and “bad guys” alike, because

“recover[ing] from the embezzling principal would be

difficult”); In re Red Dot, 293 B.R. at 122 (noting that “[a]n

alternative result would be inconsistent with the Bonded

[Financial Services] framework and would contravene the

structure and purpose of section 550(a)”).

4. The Bureshes’ and Ms. Henry’s Arguments to the

Contrary Lack Merit

The Bureshes and Ms. Henry offer several rejoinders, but

they all lack merit. First, they argue that we should scrap

the dominion test from In re Incomnet in favor of the control

test that the Eleventh Circuit employs. See In re Chase &

Sanborn Corp., 848 F.2d 1196, 1199 (11th Cir. 1988). We

have been down this road twice before, and both times, we

explicitly declined similar invitations. In re Mortg. Store,

773 F.3d at 996 (“[I]n In re Incomnet, we explicitly rejected

the control test’s flexible, equitable approach and embraced

the pure dominion test.”); In re Incomnet, 463 F.3d at 1071

(“[W]e take care not to apply the more lenient ‘control test’

IN THE MATTER OF WALLDESIGN 25

put forth in In re Chase & Sanborn Corp.”). Because we

cannot overrule a prior panel’s decision without intervening

Supreme Court (or en banc) precedent, this argument is a

non-starter. Koerner v. Grigas, 328 F.3d 1039, 1050 (9th

Cir. 2003) (citing Hart v. Massanari, 266 F.3d 1155, 1171–

72 (9th Cir. 2001)). For better or worse, we must employ

“the pure dominion test” in these cases. In re Mortg. Store,

773 F.3d at 996.

Second, they suggest that we should “clarify” the

dominion test by confining it to cases involving “mere

conduits,” like banks operating under the express direction

of a depositor or trustees who direct the disbursement of the

funds in a trust account they manage. See In re Incomnet,

463 F.3d at 1073–74 (outlining two mere-conduit scenarios

where dominion test is especially useful). This argument is

wrong twice over.

For one thing, our decision in In re Incomnet began with

the proposition that “[t]he dominion test we have crafted

strongly correlates with legal title,” and is “akin to legal

control.” 463 F.3d at 1073 (emphasis added) (quotation

omitted). Thus, “[i]n the vast majority of cases, possessing

legal title to funds will equate to having dominion over

them.” Id. Only after establishing this baseline

understanding, which runs directly counter to the Bureshes’

and Ms. Henry’s position in these appeals, did we

acknowledge that in “unusual situations” involving mere

conduits, “legal title to funds and the right to put those funds

to use” may be separated and, thus, “[t]he focus on

‘dominion’” may be especially useful. Id. at 1073–74. We

therefore recognized that while “conduit cases” seem “most

likely to fall into the narrow set of circumstances where the

identity of the transferee is sufficiently unclear as to require

the application of the dominion test,” that test applies with

26 IN THE MATTER OF WALLDESIGN

equal force in all transfer cases and “is not limited to the

context of ‘conduit cases.’” Id. at 1073 n.11. Later, of

course, we applied the dominion test in In re Mortgage

Store, which itself was not a mere conduit case. 773 F.3d at

996. Here again, a pair of prior panel decisions forecloses

the Bureshes’ and Ms. Henry’s argument. Legal title is the

starting point to the dominion inquiry, not an afterthought.

Id. (“[T]he touchstones in this circuit for initial transferee

status are legal title and the ability of the transferee to freely

appropriate the transferred funds.” (emphasis added)).

After arguing that we should not apply the dominion test

because these cases did not involve a conduit scenario, the

Bureshes and Ms. Henry turn around and try to force the

facts in these cases into both of the two “unusual [conduit]

situations” we identified “in which legal title to funds and

the right to put those funds to use have been separated.” See

In re Incomnet, 463 F.3d at 1073–74. This attempt fails on

every level. Walldesign was not akin to a bank, operating at

the direction of a depositor, because the funds belonged to

Walldesign (not Bello), and there was no legal obligation for

Walldesign to follow Bello’s instructions. See In re

Incomnet, 463 F.3d at 1074 (outlining first example). Bello

may have had de facto control over the funds, but he lacked

legal control over them. See Rupp, 95 F.3d at 941.

Likewise, Bello was not akin to a trustee, “who is able to

direct the disbursement of the funds in a trust account he

manages, even though he does not own them.” See In re

Incomnet, 463 F.3d at 1074 (outlining second example).

This argument again conflates “control” with “dominion.”

Corporate principals simply do not have unfettered legal

authority to do as they wish with company funds, the way

that trustees have nearly unfettered legal authority over trust

funds. See In re Ferrall’s Estate, 41 Cal. 2d 166, 176–77

IN THE MATTER OF WALLDESIGN 27

(Cal. 1953) (noting that trustees generally have “absolute or

unlimited or uncontrolled discretion” over disbursement of

trust funds). Corporate principals have, at most, de facto

control over company funds.

Third, the Bureshes and Ms. Henry argue that Bello

qualifies as the initial transferee, even under the dominion

test from In re Incomnet. They note that Bello kept the

secondary account “secret” from Walldesign, that he

dominated the company to use the secondary account as his

own “personal piggy bank,” and that he made his wife a

signatory on the account, thus meeting the requisite level of

“dominion” for initial-transferee status.

Make no mistake: Bello did his best to conceal the

secondary account from Walldesign’s books and ledgers, its

employees, and even the bankruptcy court. Bello, through

his oversized role at Walldesign and spendthrift ways,

likewise served as a poster boy for dominating a corporation

and its assets solely for personal gain. And he did make his

wife a signatory on the secondary account.

But the Bureshes and Ms. Henry do not explain why

these facts change the outcome under the dominion test. As

for the secrecy of the secondary account, California law

imputes to a corporation any “[k]nowledge of an officer of

[that] corporation within the scope of his duties.” Peregrine

Funding, Inc. v. Sheppard Mullin Richter & Hampton LLP,

35 Cal. Rptr. 3d 31, 46 (Ct. App. 2005). This rule applies

even when an owner/officer of a debtor corporation defrauds

the company. Id. at 46–47 (collecting cases). Because Bello

was the sole shareholder, director, and president of

Walldesign, he acted within the scope of his duties in

opening a corporate bank account—thereby imputing

knowledge of the secondary account to Walldesign. See

Mem’l Hosp. Ass’n v. Pac. Grape Prods. Co., 45 Cal. 2d

28 IN THE MATTER OF WALLDESIGN

634, 637 (Cal. 1955) (“Where the president of a corporation

is also its general manager . . . he has implied authority to

make any contract or do any other act appropriate in the

ordinary course of its business.”). In any event, the Bureshes

and Ms. Henry point to no authority holding that company

knowledge is the sine qua non for initial-transferee status in

corporate misappropriation cases. Presumably, secrecy will

remain a hallmark of these types of cases—whether it be

secrecy in individual transactions that skim from a company

account or secrecy in the underlying account itself. See

Bowers v. Atlanta Motor Speedway, Inc. (In re Se. Hotel

Props. Ltd. P’ship), 99 F.3d 151, 152–53 (4th Cir. 1996)

(explaining how corporate principal “caused an employee

. . . to create certain false documents to reflect the

disbursement of $22,500 as refunds of guests’ deposits for

group tours booked with [debtor hotel]” to hide skimming

for personal gain).

Likewise, Bello’s level of de facto control, while

troubling, does not amount to “dominion” and initial-

transferee status. A principal who “utterly dominates a

corporation . . . may be forced to assume a corporation’s

liabilities under an alter ego theory or he may be otherwise

liable for breach of fiduciary duty.” In re Red Dot, 293 B.R.

at 124. But “he does not, simply by virtue of such

domination, become an initial transferee.” Id. As the Tenth

Circuit explained, “[t]he extent to which a principal has de

facto control over 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.” Rupp, 95 F.3d at 941; accord In re Se. Hotel Props.,

99 F.3d at 156 (following Rupp’s analysis); In re Global

Prot., 546 B.R. at 591, 623 (concluding that corporate

IN THE MATTER OF WALLDESIGN 29

principal who was “100% owner of the Debtor” nevertheless

failed to qualify for initial-transferee status).

And while Bello made his wife a signatory to

Walldesign’s secondary account, the Bureshes and Ms.

Henry did not cite any authority for the proposition that by

so doing, he transformed the company’s bank account into

his own personal account or otherwise became an initial

transferee. See Cal. Com. Code § 4104(a)(5) (“[Bank]

‘Customer’ means a person having an account with a bank

or for whom a bank has agreed to collect items . . . .”);

Rodriguez, 75 Cal. Rptr. 3d at 547 (rejecting argument that

“the name on the signature card determines the identity of

the [bank] customer”). Corporations, churches,

associations, and other entities are free to structure their

banking needs as they see fit (within the bounds of

applicable banking laws), and they often add non-employees

like accountants, spouses, or other closely associated

individuals as signatories to their accounts. This act alone,

however, does not change legal ownership over the

depository account.

Relying on California law, the dissent argues that Bello’s

opening of the sham account should not be imputed to

Walldesign because, by acting adversely to the corporation

in opening the account, he did so in his personal capacity

rather than as an officer of the company. See Diss. Op. at

36–37. According to the dissent, under Software Design &

Application, Ltd. v. Hoefer & Arnett, Inc., 56 Cal. Rptr. 2d

756 (Ct. App. 1996) and Rodriguez v. Bank of the West, 75

Cal. Rptr. 3d 543 (Ct. App. 2008), Bello acted in his personal

capacity despite “using his ostensible authority as

Walldesign’s president in opening the account.” Diss. Op.

at 37. While the dissent is correct that here, “[a]s in both

Software Design and Rodriguez, the rogue agent opened a

30 IN THE MATTER OF WALLDESIGN

secret bank account, purportedly on behalf of the principal,

for the agent’s own nefarious ends,” id. at 38, Software

Design and Rodriguez are distinguishable. In Software

Design, the sham accounts were set up in the name of a

fictitious entity, not the name of the corporation. Software

Design, 56 Cal. Rptr. 2d at 476–77. And in Rodriguez, the

law firm’s office manager opened the sham accounts and

forged the principal’s signature on checks drawn on the

accounts to steal client money. Rodriguez, 76 Cal. Rptr. 3d

at 545. Here, by contrast, Bello opened the sham account in

Walldesign’s name, using Walldesign’s documents, and a

signature card granting Bello authority as Walldesign’s

agent to open the account. Thus, Bello’s actions, while

certainly fraudulent, do not transform the sham account into

his personal account. 3

Fourth, the Bureshes and Ms. Henry argue that we

should follow the BAP decisions in Poonja v. Charles

Schwab & Co. (In re Dominion Corp.), 199 B.R. 410, 415

(B.A.P. 9th Cir. 1996) and Ross v. John Mitchell, Inc. (In re

3

The dissent also asserts that “Meyer [v. Glenmoor Homes, Inc.,

54 Cal. Rptr. 786, 794 (Ct. App. 1966)] clearly rejected the majority’s

conclusion that a corporate officer’s fraudulent transaction should be

imputed to the company merely because the officer had authority to

perform that type of transaction in other circumstances.” Diss. Op. at 35.

A close reading of Meyer, however, does not support this assertion. On

the issue of authority, the court stated “the uncontradicted testimony

shows that the directors of the corporation plaintiff never sold or

authorized a sale of, the two blocks in controversy, nor did its president

ever agree to sell them, and that the deed, when signed, was a blank, and

was never acknowledged. Under these circumstances, the deed was . . .

absolutely void . . . .” Meyer, 54 Cal. Rptr. at 794. Moreover, in Meyer,

authority was a contested issue at trial. Here, Bello’s authority is

uncontroverted. As the dissent admits, [n]o one disputes that Bello had

authority generally to open a bank account on Walldesign’s behalf.”

Diss. Op. at 36–37.

IN THE MATTER OF WALLDESIGN 31

Deitz), 94 B.R. 637, 642–43 (B.A.P. 9th Cir. 1988) by

declaring this a two-step transaction. As the district court

properly held, however, decisions of the BAP are not

binding on this court; rather, it’s the other way around. In re

Mortg. Store, 773 F.3d at 995–96 (“Although we treat the

BAP’s decisions as persuasive authority, we are not bound

by its decisions. In fact, as the BAP has recognized, our

decisions are binding precedent that the BAP must follow.”

(quotation omitted)). The BAP decisions cited not only

predate our opinion in In re Video Depot; they conflict with

it. See In re Video Depot, 127 F.3d at 1199. Accordingly,

In re Video Depot controls, and this remains a one-step

transaction because the funds “passed directly from

[Walldesign] to [the Bureshes and Ms. Henry],” without

Bello assuming legal dominion or control of them. Id.

Finally—and at bottom, what all of their other arguments

boil down to—the Bureshes and Ms. Henry suggest that

Bello was the initial transferee because any other holding

would be inequitable to them. That may be so. But in any

event, “[w]e need not weigh the merits of th[e] trade-off”

between assigning responsibility to seemingly innocent

initial transferees, like the Bureshes and Ms. Henry, and

creditors, like the Committee, because Congress already

performed that task for us. In re Mortg. Store, 773 F.3d at

997. Here, as in In re Mortgage Store and other cases, “[i]t

would be inappropriate for us to second-guess Congress’

considered judgment on this matter of policy.” Id. at 997–

98. Moreover, it’s not as if by holding the Bureshes and Ms.

Henry strictly liable we somehow are allowing Bello to

escape scot-free. Instead, Bello remains strictly liable too as

the party for whose benefit the fraudulent transfers were

made. See id. at 994. And the Committee is limited to

seeking “a single satisfaction” from Bello, the Bureshes, and

Ms. Henry. 11 U.S.C. § 550(d).

32 IN THE MATTER OF WALLDESIGN

In sum, we agree that the Bureshes and Ms. Henry (as

opposed to Bello) qualify as initial transferees under this

Circuit’s dominion test. This was a classic one-step

transaction.

IV. CONCLUSION

The Bureshes and Ms. Henry are strictly liable to the

Committee as initial transferees. 11 U.S.C. § 550(a)(1).

Bello is strictly liable to the Committee as the party for

whose benefit the transfers were made. Id. And the

Committee may seek a “single satisfaction” from all three

parties, jointly and severally. Id. § 550(d).

We AFFIRM the judgments of the district court in favor

of the Committee and REMAND both cases to the district

court with directions to in turn remand these cases to the

bankruptcy court for further proceedings consistent with this

opinion.

NGUYEN, Circuit Judge, dissenting:

Bankruptcy courts “are courts of equity” that “appl[y]

the principles and rules of equity jurisprudence.” Young v.

United States, 535 U.S. 43, 50 (2002) (quoting Pepper v.

Litton, 308 U.S. 295, 304 (1939)). There is nothing

equitable about today’s decision.

Donald Buresh, Sharon Phillips, and Lisa Henry are not

Michael Bello’s family members, friends, or even close

associates. They are a married couple who sold their

property to Bello to fund their retirement and a small

business owner who performed design and construction

services for him. Unbeknownst to them, the checks with

IN THE MATTER OF WALLDESIGN 33

which Bello paid them, which bore the name of his company,

were in fact drawn from a sham bank account that he created

to fraudulently siphon money away from his company and

use for his personal expenses. Their dealings with Bello

were legitimate, arms-length transactions. Yet they each

now owe Bello’s creditors hundreds of thousands of

dollars—a ruinous sum for most retirees and small

businesses. I strongly disagree with this result.

I.

For many years, “we employed a hybrid ‘dominion and

control’ test to identify initial transferees.” In re Mortg.

Store, Inc., 773 F.3d 990, 996 (9th Cir. 2014) (citing In re

Video Depot, Ltd., 127 F.3d 1195, 1199–1200 (9th Cir.

1997)). Because the hybrid test incorporated the

“pragmatic” control test used in other circuits, id., it would

have produced the correct result here without fuss and held

Bello personally liable for his fraudulent acts as the initial

transferee.

Unfortunately, in In re Incomnet, Inc., 463 F.3d 1064

(9th Cir. 2006), “we explicitly rejected the control test’s

flexible, equitable approach and embraced the pure

dominion test.” Mortg. Store, 773 F.3d at 996. There was

no reason to do so. Incomnet’s “resolution . . . [did] not turn

on the question of which of the[] two standards governs in

this circuit.” Incomnet, 463 F.3d at 1069–70.

Here, while I disagree with the majority that the

Bureshes and Henry were the initial transferees under the

dominion test, the very fact of our disagreement shows how

difficult it can be to determine who had legal control over

funds in situations where practical control is clear. We

should consider ditching the dominion test and adopting the

control test used successfully by other circuits. At the very

34 IN THE MATTER OF WALLDESIGN

least, we should return to a hybrid approach that allows us

“to step back and evaluate a transaction in its entirety to

make sure that [our] conclusions are logical and equitable.”

Mortg. Store, 773 F.3d at 996 (quoting In re Chase &

Sanborn Corp., 848 F.2d 1196, 1199 (11th Cir. 1988)).

II.

Even applying the dominion test, as we must, the

Bureshes and Henry were not the initial transferees. The

majority concludes that Bello didn’t possess legal title to the

misappropriated funds or the ability to freely appropriate

them because the sham bank account actually belonged to

Walldesign. According to the majority, Bello merely

“abused his power as a principal to direct company funds to

third parties for his own benefit.” Maj. Op. at 20. I disagree.

Under the dominion test, the sham account never belonged

to Walldesign.

As the majority acknowledges, in a one-step transaction,

“a principal who directs a debtor corporation . . . to pay for

a personal debt is not an initial transferee” because “[t]he

mere power of a principal to direct the allocation of

corporate resources does not amount to legal dominion and

control.” Video Depot, 127 F.3d at 1199 (citing In re S.E.

Hotel Props. LP, 99 F.3d 151, 155–56 (4th Cir. 1996); Rupp

v. Markgraf, 95 F.3d 936, 941 (10th Cir. 1996)). Therefore,

had Bello paid the Bureshes and Henry directly from

Walldesign’s account at Comerica Bank, the transactions

unquestionably would have taken place in one step.

In a two-step transaction, “a principal may establish legal

control and dominion by first directing a transfer into his or

her personal bank account and then making the payment

from his personal account to the creditor.” Id. (citing Rupp,

95 F.3d at 939). The question here then is whether the

IN THE MATTER OF WALLDESIGN 35

second account, which Bello secretly used as his “personal

piggy bank” in stealing money from Walldesign, Maj. Op. at

27, should be treated as Bello’s personal account or imputed

to the company. In that regard, “[s]tate law . . . determines

the nature and extent of a debtor’s interest in property.” In

re Cohen, 300 F.3d 1097, 1104 (9th Cir. 2002) (quoting In

re Richmond Produce Co., 151 B.R. 1012, 1016 (Bankr.

N.D. Cal. 1993)).

The majority says that “California law imputes to a

corporation any ‘[k]nowledge of an officer of [that]

corporation within the scope of his duties,’” and Bello “acted

within the scope of his duties in opening a corporate bank

account.” Maj. Op. at 27 (quoting Peregrine Funding, Inc.

v. Sheppard Mullin Richter & Hampton LLP, 35 Cal. Rptr.

3d 31, 46 (Ct. App. 2005)). But “in order to have authority

[to act on behalf of a corporation] which is implied in fact

the agent, be he president or general manager of a

corporation, or both, must be performing an act which is

‘appropriate in the ordinary course of its business.’” Meyer

v. Glenmoor Homes, Inc., 54 Cal. Rptr. 786, 794 (Ct. App.

1966) (quoting Mem’l Hosp. Ass’n of Stanislaus Cnty. v.

Pac. Grape Prods. Co., 290 P.2d 481, 483 (Cal. 1955)).

Meyer clearly rejected the majority’s conclusion that a

corporate officer’s fraudulent transaction should be imputed

to the company merely because the officer had authority to

perform that type of transaction in other circumstances. In

Meyer, the general manager had authority to buy land on the

corporation’s behalf and had previously done so by taking

title in the name of individuals, and such transactions were

sometimes signed by only one officer and did not always

appear in the corporate minutes. Id. at 795. In the

transaction at issue, the general manager secretly purchased

36 IN THE MATTER OF WALLDESIGN

land for himself in exchange for a promissory note

purportedly obligating the corporation.

The court held that the transaction could not be imputed

to the corporation because the corporation “[n]ever engaged

in transactions where it became obligated to pay for land . . .

which was conveyed to another for the use and benefit of that

grantee as distinguished from the use and benefit of the

corporation.” Id. (emphasis added). “The knowledge

acquired by the agent who is acting adversely to his principal

will not be attributed to the principal.” Id. at 801 (citing

People v. Parker, 44 Cal. Rptr. 900, 905–06 (Ct. App. 1965);

Commercial Lumber Co. v. Ukiah Lumber Mills, 210 P.2d

276, 279 (Ct. App. 1949)); see also Peregrine Funding,

35 Cal. Rptr. 3d at 47 (“Nor is a corporation chargeable with

the knowledge of an officer who collaborates with outsiders

to defraud the corporation.” (citing Meyer, 54 Cal. Rptr. at

801)). 1

The circumstances here are the same. No one disputes

that Bello had authority generally to open a bank account on

Walldesign’s behalf. But Bello’s authority to do so didn’t

extend to opening a secret account solely for his own

personal benefit at the company’s expense. He owed

Walldesign a fiduciary duty to act in good faith in the

company’s best interests. See, e.g., Sheley v. Harrop,

215 Cal. Rptr. 3d 606, 624 (Ct. App. 2017). Because Bello

1

The majority speculates that Bello’s wife, who was a signatory to

the sham account despite not having any affiliation with Walldesign,

could have been “acting in cahoots with her husband.” Maj. Op. at 23.

If so, then the sham account was not attributable to Walldesign because

Bello was collaborating with an outsider to defraud it. At a minimum,

this is a factual issue that should be resolved by the bankruptcy court

before we decide as a matter of law that the account belonged to the

corporation.

IN THE MATTER OF WALLDESIGN 37

was acting adversely to Walldesign in opening the sham

account, he did so in his personal capacity, not as an officer

of the company.

That Bello used his ostensible authority as Walldesign’s

president in opening the account makes no difference. For

example, in Software Design & Application, Ltd. v. Hoefer

& Arnett, Inc., 56 Cal. Rptr. 2d 756 (Ct. App. 1996), a

financial consultant with authority to handle a corporation’s

investment funds placed the funds into a brokerage account

in the name of a fictitious partnership with the same name as

the corporation. He never reported the brokerage accounts

to the corporation and had the monthly statements sent to a

post office box that he falsely represented as the

partnership’s. Id. at 759. The court held that at the time of

these deposits, the consultant “had already stolen money and

securities from [the owners], having wrested control of these

funds by placing them in bogus accounts.” Id. at 763.

Similarly in Rodriguez v. Bank of the West, 75 Cal. Rptr.

3d 543 (Ct. App. 2008), the office manager of a law firm

opened two sham bank accounts in the lawyer’s name and

forged his signature on numerous checks that she used to

steal client money from the law firm. Id. at 544–45. In

rejecting the lawyer’s negligence claims against the banks,

the court explained that the banks had no duty to the lawyer

because, despite being the named accountholder, he was not

their customer: “he did not consent to the creation of any of

the accounts and, indeed, did not even know of their

existence until after [the office manager’s] wrongful acts

were completed.” Id. at 546. Instead, the office manager

was the banks’ true customer because she “opened accounts

at banks at which [the lawyer] had no existing relationship,

then converted the money to her own use.” Id. at 548. The

38 IN THE MATTER OF WALLDESIGN

court found these facts “indistinguishable” from Software

Design. Id.

Here too, the putative accountholder, Walldesign, was

not the true owner of Bello’s sham bank account. As in both

Software Design and Rodriguez, the rogue agent opened a

secret bank account, purportedly on behalf of the principal,

for the agent’s own nefarious ends. As in Rodriguez,

Walldesign had no relationship with the bank. As in

Software Design, the account address of record—Bello’s

home—was one belonging to him personally rather than to

Walldesign.

This was a classic two-step transaction. First, Bello

converted corporate funds by transferring them into his

personal account, making him the initial transferee. Then,

he transferred the funds to others, including the Bureshes and

Henry, who were subsequent transferees.

III.

In arguing that Bello wasn’t in the best position to

monitor the fraud, the majority quips that “foxes (like

corporate cheats) rarely guard henhouses (like corporate

treasuries) with much success.” Maj. Op. at 18 (citing

Mortg. Store, 773 F.3d at 998 n.1). But allowing a corporate

cheat to easily shift liability for his wrongdoing onto

innocent third parties simply by signing the corporation’s

name on a secret bank account instead of his own only

encourages this kind of embezzlement. As the majority

notes, the Committee is entitled to a single satisfaction from

Bello, on the one hand, and the Bureshes and Henry on the

other. Id. at 33 (citing 11 U.S.C. § 550(d)). Every dollar the

Committee is able to recover from the Bureshes and Henry

is a dollar for which Bello is off the hook.

IN THE MATTER OF WALLDESIGN 39

The majority admits that its holding “may be”

inequitable, Maj. Op. at 31, but suggests that the Bureshes

and Henry nonetheless should have monitored for fraud,

since they “had some indication of . . . irregularities”

because Bello’s checks bore Walldesign’s name. Id. at 23–

24. I disagree. Businesses often pay for their executives’

personal expenses, and it’s not unusual for individuals to

structure their transactions through corporations for tax

reasons. I don’t see anything inherently suspicious about

Bello paying his personal debts from the account of a

closely-held corporation. Recipients of such payments, like

the Bureshes and Henry, are generally not well placed to

question the legitimacy of a reputable organization’s bank

account.

I respectfully dissent.