For a second time in the current term, the Supreme Court declined to resolve a circuit split and give better definition to what is or isn’t a “transfer” and who is or isn’t an “initial transferee.”
Yesterday, the high court denied a petition for certiorari in Henry v. Official Committee of Unsecured Creditors (In re Walldesign Inc.), 872 F.3d 954 (9th Cir. Oct. 2, 2017), cert. denied sub nom Henry v. Weiss, 17-1210 (Sup. Ct. May 29, 2018). In October, the Court denied certiorari in Ivey v. First Citizens Bank & Trust Co., 138 S. Ct. 314, 199 L. Ed. 2d 207 (Sup. Ct. Oct. 10, 2017).
Although “transfer” is defined in Section 101(54), the term “initial transferee” is not. The statutory definition, however, sometimes does not answer the question.
In the Ninth Circuit’s Walldesign case, the owner of a business for years had maintained a secret bank account in the company’s name into which he diverted business income that he used for his own benefit. After bankruptcy, the trustee filed fraudulent transfer suits against 130 people or entities that received money from the secret account.
In a test case, a recipient of a payment from the secret account filed a motion to dismiss, claiming to be a subsequent transferee who gave full value and was therefore eligible to raise the good faith defense under Section 550(b)(1) because she unaware of the fraud. The defendant contended that the fraudster was the initial transferee because he had complete control over the secret account, even though the account was in the company’s name.
Taking sides with the Seventh Circuit in a circuit split, the Ninth Circuit employed the more stringent “dominion test” in a 2/1 decision and held that the defendant was the initial transferee, thus precluding the defendant from raising the good faith defense and potentially making her liable for receipt of a constructively fraudulent transfer even though she was unaware of fraud. Ninth Circuit Judge Jacqueline H. Nguyen issued a vigorous dissent, saying, “There is nothing equitable about today’s decision” while urging her brothers and sisters on the circuit to sit en banc and adopt the more lenient “control test.”
Walldesign is not the only recent case involving uncertainty over what is or what isn’t a transfer, despite the definition in Section 101(54). In Ivey v. First Citizens Bank & Trust Co. (In re Whitley), 848 F.3d 205 (4th Cir. Jan. 31, 2017), the Fourth Circuit held that a deposit into one’s own bank account is not a “transfer” within the meaning of Section 101(54) and therefore provides no basis for a fraudulent transfer with actual intent to hinder or delay creditors under Section 548(a)(1)(A).
The high court also denied certiorari in Ivey. See Ivey v. First Citizens Bank & Trust Co., 138 S. Ct. 314, 199 L. Ed. 2d 207 (Sup. Ct. Oct. 10, 2017).
To read ABI’s discussion of Walldesign, click here. For Ivey, click here and here.