Consumer Bankruptcy Journal Winter 2018 - Page 41

UP AGAINST THE WALL To avoid this result, the court opted to use a more functional rule, where 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. This is known as the “dominion test.” The keys to this test are “whether the recipient of funds has legal title to the and whether the recipient has the ability to use the funds as he sees fit. The first party to establish dominion over the funds after they leave the transferor is the initial transferee; other transferees are subsequent transferees. By adopting the harsher dominion test, the Ninth Circuit rejected the more lenient “control test,” which requires courts to “view the entire transaction as a whole to determine who truly had control of the money.” Bello clearly would have been the initial transferee under the control test. The Ninth Circuit opinion then explains how the majority of courts have dealt with cases involving the misappropriation of corporate funds by company directors, officers, or other insiders. According to the Ninth Circuit, most courts use a “one-step transaction” analysis, where the principal of a debtor corporation who misappropriates company funds to satisfy personal obligations is not an initial transferee. 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. So, in a triumph of form over substance, the Ninth Circuit found “[s]imply directing a transfer, i.e., such as directing a debtor to transfer funds, is not enough.” 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. 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. applying the dominion test, Judge Nguyen believed the defendants were not initial transferees. What this means in your world? This decision adds additional risks to these “third-party” checks. So when in doubt, insist the payor, whether person or entity, is the actual recipient of your goods or services. UPDATE – A petition has been filed for hearing en banc. In reaching this decision, the Ninth Circuit considered and rejected two BAP decisions: Poonja v. CharlesSchwab & Co. (In re Dominion Corp.), 199 B.R. 410, 415 (B.A.P. 9th Cir. 1996), and Ross v. John Mitchell, Inc. (In re Deitz), 94 B.R. 637, 642–43 (B.A.P. 9th Cir. 1988). 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 National Association of Consumer Bankruptcy Attorneys As the largest legal marketing network, we help thousands of attorneys across 55+ practice areas increase their visibility and credibility, generate targeted leads and convert two times more prospects to clients. See how we can help grow your business by visiting our booths 37 and 38 at NACBA. 866.925.2802 | | © 2017 Internet Brands, Inc. All rights reserved. Winter 2018 CONSUMER BANKRUPTCY JOURNAL 41