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Section 550 Imposes Strict Liability on Both Initial Transferees and Beneficiaries of the Fraudulent Transfers

October 2, 2017, CaliforniaDebtor Walldesign, Inc. carried out construction projects. Michael Bello was a sole shareholder and the president of the Debtor and managed its operations and finances. Defendant Henry, an owner of Henry West Design, a small interior design firm provided design-and construction-related services to the Debtor. Bello did not personally pay for these services; instead, he drew checks from the Debtor’s secret secondary account, which he created to fuel his extravagant lifestyle. The Committee brought a complaint against Bello and other Bello-related individuals and entities and the Defendants to recover the payments made from the secondary account as the recipients of fraudulent transfers.

The bankruptcy court held that the committee could recover the fraudulently transferred funds solely from the corporate cheat because the Defendants were subsequent transferees who accepted the payments for value, in good faith, and without knowledge of their voidability. The district court reversed, concluding that the Defendants 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.

Affirming the district court’s decision, the Ninth Circuit concluded that Bello effected fraudulent transfers that involved misappropriation of corporate funds, but he was not the initial transferee under §550(a)(1) because he did not have dominion over the funds in a personal capacity. Maintaining a secret secondary bank account in the corporation’s name and using it for personal purposes did not establish dominion by the president. However, Bello was strictly liable as the party for whose benefit the transfers were made. The Defendants, i.e., the recipients of the funds were also strictly liable as initial transferees because they received funds directly from the Debtor. Accordingly, the Court ruled that the Debtor’s president and the Defendants both were liable and the committee may seek a single satisfaction from all the parties, jointly and severally.

[Henry v Official Comm. of Unsecured Creditors of Walldesign, Inc. (In re Walldesign, Inc.), 872 F3d 954 [9th Cir 2017]


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