In the Matter of Walldesign, Inc., a subchapter S. Corporation, Debtor,
Official Committee of Unsecured Creditors of Walldesign, Inc., Appellee. Lisa Anne Henry, DBA Henry West Designs, Appellant, In the Matter of Walldesign, Inc., a subchapter S. Corporation, Debtor, Donald F. Buresh, an individual; Sharon J. Phillips, an individual, Appellants,
Official Committee of Unsecured Creditors of Walldesign, Inc., Appellee.
and Submitted March 10, 2017 Pasadena, California
from the United States District Court for the Central
District of California D.C. No. 8:14-cv-01725-VAP,
8:15-cv-00167-VAP Virginia A. Phillips, District Judge,
J. Katzman (argued) and Anthony Bisconti, Bienert Miller
& Katzman PLC, San Clemente, California, for Appellants.
P. Reitman (argued) and Jack A. Reitman, Landau Gottfried
& Berger LLP, Los Angeles, California, for Appellees.
Before: A. Wallace Tashima and Jacqueline H. Nguyen, Circuit
Judges and Algenon L. Marbley, [*] District Judge.
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
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.
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.
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.
MARBLEY, District Judge
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."
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
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 corporate cheat and those parties to whom
he first made payments from the corporate account.
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 and
REMAND these cases to the bankruptcy court
for further proceedings.
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).
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 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
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.
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.
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 account.
Bello, moreover, tried to conceal the secondary account
during Walldesign's bankruptcy proceedings.
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.
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.
actions ultimately impacted the appellants, Donald Buresh and
Sharon Phillips ("the Bureshes") and Lisa Anne
Henry. The Bureshes are a married couple who 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 preexisting relationship and have no ongoing
relationship with Bello, his family, or any of his
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
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
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.
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
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.
Bureshes and Ms. Henry timely filed their notices of appeal
of the district court orders.
STANDARD OF REVIEW
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.
Statutory Scheme: The Bankruptcy Code Draws a Critical
Distinction Between Initial and Subsequent
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).
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 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