Appeal from the United States District Courtfor the Western District of WashingtonCarolyn R. Dimmick, District Judge, PresidingArgued and SubmittedAugust 8, 1997--Seattle, WashingtonFiled November 5, 1997Before: Eugene A. Wright, Dorothy W. Nelson, andAlex Kozinski, Circuit Judges.Opinion by Judge Nelson
_____________________________COUNSEL Scott M. Mahoney, Las Vegas, Nevada, for the defendant-appellant.James L. Day, Bush, Strout, & Kornfeld, Seattle, Washington,for the plaintiff-appellee.OPINIOND.W. NELSON, Circuit Judge:Kenneth Schafer, the trustee of Video Depot, Ltd., bringsthis fraudulent conveyance action to recover the proceeds ofa cashier's check purchased by Video Depot and paid to theLas Vegas Hilton in partial satisfaction of gambling debtsincurred by Jeffrey Arlynn, Video Depot's principal. Hiltonappeals the district court's decision affirming the bankruptcycourt's judgment in favor of the trustee. We have jurisdictionpursuant to 28 U.S.C. S 1291, and we affirm.FACTUAL AND PROCEDURAL BACKGROUNDMost of the relevant facts are not in dispute. Jeffrey Arlynnwas the president of Video Depot, a consumer electronicscompany. Arlynn controlled virtually all of Video Depot'soperations.Arlynn was also an active gambler. Between 1985 and1990, he made approximately 60 trips to the Las Vegas Hil-ton. Initially, Arlynn gambled on funds he brought with him,or against credit that Hilton extended to him for the durationof each individual trip. In 1987, however, Arlynn obtained apermanent line of credit with Hilton in the amount of $50,000,which was increased to $75,000 in 1990.Prior to 1990, Arlynn regularly repaid his losses in fulleither at the end of each stay or at the beginning of the nexttrip. While he occasionally retained a balance, the balancewas always substantially less than his credit limit. In addition,Arlynn carefully controlled the size of his accumulated creditlosses. Until 1990, Arlynn's balance only twice exceeded$100,000 and never exceeded $125,000.In early May of 1990, however, Arlynn incurred a debt of$225,000, and he did not make a payment towards this debtbefore he left Las Vegas. On June 15, Video Depot purchaseda cashier's check payable to Hilton in the amount of $65,000.The check clearly indicated that Video Depot was the pur-chaser. When Arlynn returned to Las Vegas on June 16, hegave two checks to Hilton: the $65,000 cashier's check fromVideo Depot, and a personal cashier's check in the amount of$10,000. Arlynn had never before presented either a cashier'scheck or a check purchased by Video Depot to cover his gam-bling losses.Video Depot commenced bankruptcy proceedings on Sep-tember 14, 1990, and the trustee was appointed shortly there-after. The trustee then filed suit against Hilton to recover theproceeds of the $65,000 cashier's check. After an initial roundof litigation, both parties stipulated that the check was afraudulent transfer within the meaning of 11 U.S.C.S 548,and the bankruptcy court proceeded to determine whether Hil-ton was an initial transferee under 11 U.S.C. S 550(a) or asubsequent transferee lacking good faith knowledge of thevoidability of the transfer within the meaning of 11 U.S.C.S 550(b).Before trial, the bankruptcy court partially granted Hilton'smotion for summary judgment, determining that Hilton wasnot the initial transferee. Trial was held on Hilton's assertedsection 550(b) defense. The court thereafter determined thatcause existed to reconsider its oral grant of summary judg-ment. In a letter to the parties, the bankruptcy judge requestedsupplemental briefing on the initial transferee issue "[t]o theextent counsel feel it is necessary." The judge also inquiredwhether either side felt it necessary to introduce additionalevidence if the court reopened the initial transferee issue.Both parties declined to submit additional evidence.The bankruptcy court determined that Hilton was the debt-or's initial transferee and therefore was strictly liable to thebankruptcy estate under 11 U.S.C. S 550(a)(1). The court alsodetermined that, even if it were a subsequent transferee, Hil-ton had failed to establish a defense under 11 U.S.C. S 550(b).The district court affirmed on the ground that Hilton was aninitial transferee and consequently did not consider the section550(b) issue. Hilton now appeals on both grounds.STANDARD OF REVIEWIn an appeal of a district court decision reviewing a deci-sion of the bankruptcy court, this court does not defer to thedistrict court. Friedkin v. Sternberg, (In re Sternberg), 85 F.3d1400, 1404 (9th Cir. 1996). We review the bankruptcy court'sconclusions of law de novo and must uphold its findings offact unless they are clearly erroneous. Feder v. Lazar (In reLazar) 83 F.3d 306, 308 (9th Cir. 1996).ANALYSISThe central issue before us is whether Hilton was the initialtransferee of the $65,000 cashier's check purchased by VideoDepot.The Statutory Scheme[1] The parties have stipulated that the $65,000 payment toHilton was a fraudulent transfer within the meaning of 11U.S.C. S 548. Once a transfer has been determined to be void-able as a fraudulent conveyance under section 548, the trusteeof the debtor may recover it from either (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 ini- tial transferee.11 U.S.C. S 550(a). The distinction between the two, how-ever, is a critical one. The trustee's right to recover from aninitial transferee is absolute. See Danning v. Miller (In re Bul-lion Reserve), 922 F.2d 544, 547 (9th Cir. 1991). On the otherhand, the trustee may not recover from a subsequent trans-feree if the subsequent transferee accepted the transfer forvalue, in good faith, and without knowledge of the transfer'svoidability. 11 U.S.C. S 550(b). Subsequent transferees there-fore have a defense unavailable to initial transferees.[2] The purpose of this scheme is to protect creditors "fromlast-minute diminutions of the pool of assets in which theyhave interests," while at the same time to guard against "thewaste that would be created if people either had to inquirehow their transferors obtained their property or to accept arisk that a commercial deal would be reversed for no reasonthey could perceive at the time." Bonded Fin. Servs., Inc. v.European American Bank, 838 F.2d 890, 892 (7th Cir. 1988).Section 550 balances these two goals by imposing on the ini-tial transferee the "burden of inquiry and the risk if the con-veyance is fraudulent." Id. While the initial transferee is in thebest position to monitor the transaction, "subsequent transfer-ees usually do not know where the assets came from andwould be ineffectual monitors if they did." Id. at 892-93.In this case, the bankruptcy court determined, and the dis-trict court agreed, that Hilton was the initial transferee. Onappeal, Hilton makes two arguments to the contrary. First,Hilton contends that Arlynn, not Hilton, was the initial trans-feree because Arlynn controlled Video Depot and directedthat the funds be transferred to Hilton. Alternatively, Hiltonargues that Arlynn was the initial transferee because VideoDepot's ledger appears to indicate that the cashier's checkwas a "loan" to Arlynn. We address each of these argumentsin turn.I. Arlynn's Control over Video Depot[3] While the Bankruptcy Code does not define"transferee," it is widely accepted that a transferee is one who,at a minimum, has " `dominion over the money or other asset,the right to put the money to one's own purposes.' " In re Bul-lion, 922 F.2d at 548 (quoting Bonded Fin. Servs., 838 F.2dat 893). The bankruptcy court determined that Arlynn did nothave dominion over the $65,000. The court reasoned thatalthough Arlynn controlled Video Depot's operations andarranged for the check to be issued, the check was a directtransfer from Video Depot to Hilton. Once the check wasissued, Arlynn no longer had legal control over the funds,even if he retained physical control over them. Arlynn there-fore did not have the right to use the money for any other pur-pose than to give it to Hilton. Hilton maintains that Arlynnhad dominion over the $65,000 because he was VideoDepot's principal and, in that capacity, directed Video Depotto purchase the cashier's check.The bankruptcy courts are split on the question of whetherthe principal of a debtor corporation necessarily is the initialtransferee of corporate funds used to satisfy a personal obliga-tion. Compare General Electric Capital Auto Lease, Inc. v.Broach (In re Lucas Dallas, Inc.), 185 B.R. 801, 809 (9th Cir.BAP 1995) (holding that "the principal of a corporate debtordoes not become a `transferee' by the mere act of causing thedebtor [to] make a fraudulent transfer"); Richardson v. FDIC(In re M. Blackburn Mitchell Inc.), 164 B.R. 117, 127 (Bankr.N.D. Cal. 1994) (holding that principal who caused debtor toissue cashier's check to satisfy personal obligation was notinitial transferee); with Ross v. United States (In re Auto-Pak,Inc.), 73 B.R. 52, 54 (D.D.C. 1987) (concluding that principalof corporation was initial transferee when principal arrangedfor corporation's purchase of cashier's check to satisfy finan-cial obligations independent of corporation); Still v. AmericanNat'l Bank & Trust Co. (In re Jorges Carpet Mills, Inc.), 50B.R. 84, 85 (Bankr. E.D. Tenn. 1985) (same); see also Robin-son v. Home Savings of America (In re Concord Senior Hous-ing Foundation), 94 B.R. 180, 183 (Bankr. C.D. Cal. 1988)(holding that agent of corporation who used corporate fundsto secure personal loan was initial transferee). Hilton urges usto reject the rule set forth in Lucas Dallas and Mitchell andinstead to follow the Auto-Pak line of cases.Although the Ninth Circuit has not squarely addressed thisissue, all of the circuit courts that have considered it haveadopted the same approach as the Lucas Dallas and Mitchellcourts. In Nordberg v. Arab Banking Corp. (In re Chase &Sanborn Corp.), 904 F.2d 588 (11th Cir. 1990), on which thebankruptcy court in the present case relied, the Eleventh Cir-cuit held that a bank was the initial transferee of loan pay-ments made by a corporation even though the corporation'sprincipal directed the transfer and the loan was the principal'sprivate debt. Id. at 599-600. The court determined that "theextent of [the principal's] control over [the corporation] gen-erally, and over [the corporation's] actions in transferring thedisputed funds to [the bank] in particular, is entirely irrelevantto the `initial transferee' issue." Id. at 598.[4] Since the bankruptcy court's decision, two other cir-cuits, citing Lucas Dallas and the district court's opinion inthis case, also have concluded that a principal who directs adebtor corporation to issue a certified check to pay for a per-sonal debt is not an initial transferee. See Bowers v. AtlantaMotor Speedway, Inc. (In re Southeast Hotel Properties Lim-ited Partnership), 99 F.3d 151 (4th Cir. 1996); Rupp v. Mark-graf, 95 F.3d 936 (10th Cir. 1996). These courts have heldthat a principal or agent does not have "dominion and control"over funds unless he or she has "legal dominion and control,"in other words, the "right to put those funds to one's ownpurpose." Bowers, 99 F.3d at 155 (emphasis in original); seealso Rupp, 95 F.3d at 941. The mere power of a principal todirect the allocation of corporate resources does not amountto legal dominion and control: Many principals presumably exercise de facto control over the funds of the corporations they man- age. They can choose to cause their corporations to use those funds appropriately or inappropriately. The distinction is only relevant to the question whether the principal's conduct amounted to a breach of duty to the corporation.Bowers, 99 F.3d at 156 (citing Rupp, 95 F.3d at 941).[5] Other circuit courts have held that a principal mayestablish legal control and dominion by first directing a trans-fer into his or her personal bank account and then making thepayment from his personal account to the creditor. Rupp, 95F.3d at 939 (citing Bonded Fin. Servs., 838 F.2d at 892). Inthe present case, however, Video Depot purchased a cashier'scheck payable to Hilton, with Video Depot listed as the pur-chaser. Legal control over the funds consequently passeddirectly from Video Depot to Hilton.[6] Hilton contends that this view elevates form over sub-stance. Whether Video Depot, at Arlynn's direction, pur-chased a cashier's check payable directly to Hilton or, instead,issued the funds to Arlynn, enabling him then to write a per-sonal check for the sum, there is, so the argument goes, thesame result -- that Arlynn used corporate funds to satisfy apersonal debt. What Hilton's argument fails to acknowledge,however, is the basic rationale for distinguishing in section550 between initial and subsequent transferees. An initialtransferee is exposed to stricter liability than a subsequenttransferee because an initial transferee is in the best positionto evaluate whether the conveyance is fraudulent. See BondedFin. Servs., 838 F.2d at 892-93. Where, as here, a transfereereceives funds directly from a debtor, the transferee's capacityto monitor -- and, accordingly, its burden to monitor -- is atits greatest. Thus, Hilton's receipt of a cashier's check clearlypurchased by Video Depot subjects it to a burden of inquirythat it may not have had upon receipt of a check from JeffreyArlynn's personal account.[7] Moreover, the rule advocated by Hilton would have theanomalous result that every agent or principal of a corporationwould be deemed the initial transferee when he or sheeffected a transfer of property in his or her representativecapacity. See Bowers, 99 F.3d at 156. Such a rule "gives toomuch power to an unscrupulous insider to effect a fraudulenttransfer . . . without allowing a trustee to have the means foravoiding the transfer for the benefit of the debtor's creditors."In re Mitchell, 164 B.R. at 128. While the Sixth Circuit hasexpressed tentative support for this approach, see IRS v. Nor-dic Village, Inc. (In re Nordic Village), 915 F.2d 1049 (6thCir. 1990), rev'd on other grounds,
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(1992), nocircuit court has based a decision on it, and we decline todepart from the considered judgment of the other circuitstoday. Thus, we conclude that Arlynn's control over the busi-ness operations of Video Depot does not, in itself, compel afinding that Arlynn had dominion and control over the fundstransferred from Video Depot to Hilton.II. Video Depot's "Loan" to ArlynnHilton next contends that the transfer of funds from VideoDepot constituted a loan to Arlynn, giving Arlynn controlover how the funds were spent and making him, not Hilton,the initial transferee. The bankruptcy court rejected this argu-ment, citing insufficient evidence. Because we find nothing inthe record to support a finding that Arylnn had dominion overthe funds after they were disbursed by Video Depot, we agreewith the bankruptcy court.Hilton's argument rests on two documents that it submittedin support of its motion for summary judgment: excerpts froma ledger that appear to track payments by Video Depot onArlynn's behalf and an affidavit from Arlynn. In the affidavit,Arlynn maintains: On or about June 15, 1990, I borrowed the sum of $65,000.00 from Video Depot and caused this loan transaction to be recorded in the records of the cor- poration. The $65,000.00 in corporate funds was used to purchase a cashier's check in the amount of $65,000 made payable to the Las Vegas Hilton in partial satisfaction of a debt I owed. . . . Prior to the commencement of involuntary bankruptcy proceed- ings against Video Depot, I repaid this specific loan to the corporation.The ledger lists payments to Jeffrey Arlynn in the amount of$10,000 and $65,000 on June 15. On the credit side of the led-ger, a $75,000 payment from Arlynn is shown.[8] Simply referring to the transfer as a "loan" in the com-pany ledger does not suffice, however, to demonstrate that atany point in time Arlynn exercised independent control overthe funds. So long as the money remained in Video Depot'saccount, Arlynn's legal right to it was circumscribed by hisduties to the corporation and its creditors. Once the fundswere disbursed, Arlynn could use them only to pay Hilton.Regardless of how Hilton chooses to characterize the transfer,Hilton has failed to explain how Video Depot's issuance of acheck earmarked expressly for the purchase of a cashier'scheck to the Las Vegas Hilton gave Arlynn dominion over thefunds.[9] Arlynn was a courier, not a transferee. Particularly inview of the fact that Arlynn, as principal of Video Depot,could direct that the transfer be called anything he pleased inthe company ledger, we require more substantial evidencethat he exercised independent control over the funds after theyleft Video Depot's account. The bankruptcy court gave Hiltonample opportunity to present such evidence, and Hilton failedto do so.CONCLUSIONThe bankruptcy court had adequate grounds for determin-ing that Hilton was an initial transferee under section 550(a).Accordingly, we affirm the district court's decision affirmingthe bankruptcy court. Since we find Hilton to have been aninitial transferee, we do not reach Hilton's section 550(b)argument.AFFIRMED. the end