In Re: The Mortgage Store, Inc.

Summarized by:

  • Court: 9th Circuit Court of Appeals Archives
  • Area(s) of Law: Bankruptcy Law
  • Date Filed: 12-05-2014
  • Case #: 13-16020
  • Judge(s)/Court Below: Circuit Judge Tashima for the Court; Circuit Judges Rawlinson and Clifton
  • Full Text Opinion

Upon the avoidance of a fraudulent transfer, a bankruptcy trustee may recover from the initial transferee, which is determined by whether the transferee has dominion over the asset and the right to put the asset to the transferee’s own purposes.

Mano-Y&M, Ltd. (“Mano”) sold its shopping plaza to George Lindell (“Lindell”) for $2.2 million. “Lindell was to pay $300,000 cash; the remainder of the purchase price was to be covered by a seller-financed mortgage. . . Additionally, Lindell was to pay $10,000 of the purchase price immediately as earnest money.” “The Mortgage Store wired $311,065.25 to [Mark] Freeland [the attorney assigned for closing responsibilities] in satisfaction of Lindell’s [contract] obligations.” The Mortgage Store later filed for Chapter 7 bankruptcy where it was discovered that “The Mortgage Store was operating a Ponzi scheme.” An action was filed by the trustee to “avoid the transfer and recoup the funds from Mano” because the transfer was fraudulent and Mano was the initial transferee. The bankruptcy court found the transfer fraudulent, and determined that Mano was the initial transferee. Mano appealed, and the district court affirmed that Mano was the initial transferee. The Ninth Circuit reviewed whether Mano was the initial transferee on appeal. The panel applied the “‘dominion test’” which states that “‘a transferee is one who. . . has dominion over the money or other asset, the right to put the money to one’s own purposes.’” Legal title and “‘the ability to use [the funds] as [the transferee] sees fit’” is key. Mano argued that Lindell was the initial transferee because “Lindell had dominion over the funds from the time they were received by Freeland to the time Freeland transferred them to the parties so enclosed under the contract.” However, the panel determined that Lindell “never held legal title to the funds at issue” and did not have “the ability to manipulate the funds on his own accord.” Since no other party was argued as the initial transferee, the panel affirmed the district court’s decision that Mano was the initial transferee. AFFIRMED.

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