Opinion
NOT FOR PUBLICATION
Argued and Submitted at Seattle, Washington: January 21, 2011
Appeal from the United States Bankruptcy Court for the Western District of Washington. Bk. No. 09-16841, Adv. No. 09-01577. Honorable Samuel J. Steiner, Bankruptcy Judge, Presiding.
Donald A. Bailey, Esq., Shafer & Bailey LLP argued for Appellants Michael K. Mastro, Michael K. Mastro LLC, Michael K. Mastro II, LLC, Michael K. Mastro III, LLC.
Daniel W. Ferm, Esq., Williams, Kastner & Gibbs PLLC argued for Appellee James F. Rigby.
Before: JURY, MARKELL, and HOLLOWELL, Bankruptcy Judges.
This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1.
Appellants Michael K. Mastro (" MKM"), Michael K. Mastro, LLC, Michael K. Mastro II, LLC and Michael K. Mastro III, LLC (collectively, " MKM LLC") appeal from the bankruptcy court's judgment granting summary judgment for the chapter 7 trustee, James F. Rigby, in an avoidance proceeding under § 549(a).
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101- 1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
The trustee alleged claims for relief under § § 549, 548, 547, 544 and Wash. Rev. Code § 19.40 (Washington's version of the Uniform Fraudulent Transfer Act). The summary judgment on appeal concerns only the § 549 claim for relief.
Having considered the parties' briefs, all matters of record, and applicable legal authorities, we AFFIRM the bankruptcy court's decision on the avoidability of the transfers to MKM and MKM LLC. However, we conclude that the summary judgment record does not show uncontested facts regarding MKM's joint and several liability under § 550(a) for the transfers made to MKM LLC. Accordingly, we REVERSE the bankruptcy court's decision to hold MKM liable for the transfers made to MKM LLC.
I. FACTS
Debtor Michael R. Mastro owned Mastro Properties, a real estate development and investment business, which he operated as a sole proprietorship. MKM is debtor's son and the sole member of the three defendant-appellant LLCs bearing his name. The three MKM LLCs are Washington limited liability companies formed for the purpose of holding policies of insurance on debtor's life as part of his estate plan.
All transactions relating to MKM LLC were run through Mastro Properties' accounting system as if MKM LLC was a part of Mastro Properties. Accounting entries reflected deposits to Mastro Properties credited to MKM LLC and payments debited from MKM LLC. This practice continued until June 5, 2009, at which time MKM LLC established its own bank account with another bank. MKM LLC's new bank account was funded with an opening deposit of $900,000 in insurance proceeds.
The trustee did not file a separate statement of uncontroverted facts with his summary judgment motion, a requirement under Bankr. W.D. Wash. R. 7056-1(b). Appellants did not object to this procedural shortcoming on appeal, nor shall we address it, as any objection is waived. Defendants' Statement of Genuine Issues Of Material Fact, which is part of the record on appeal, does not contest these facts. Accordingly, we assume that these facts are undisputed.
On July 10, 2009, an involuntary chapter 7 petition was filed against debtor by three of his secured creditors. Debtor consented to the petition on August 20, 2009. The Order for Relief and Judgment Granting Petition for Involuntary Chapter 7 was entered on August 21, 2009 and Rigby was appointed the chapter 7 trustee on the same day.
During the period between the filing of the petition and the Order for Relief, referred to as the gap period, Mastro Properties issued three checks totaling $340,000 to MKM LLC on July 31, August 5 and August 6, 2009 (collectively, the " $340,000 transfer"). MKM LLC used some of the money to start a new company, HAR Construction, which funded a new payroll system to pay former employees of Mastro Properties.
Hamilton v. Lumsden (In re Geothermal Ress. Int'l, Inc.), 93 F.3d 648, 651 n.1 (9th Cir. 1996) (" The period between the filing of the involuntary petition and entry of the order for relief is known as the 'gap period.'"). Here, the gap period was July 10, 2009 through August 21, 2009.
Also during the gap period, Mastro Properties issued three checks totaling $22,000 directly to MKM on July 31, 2009 (the " $22,000 transfer").
In December 2009, the trustee filed a complaint against MKM and MKM LLC alleging a claim for relief under § 549 -- among others -- seeking to avoid the six unauthorized postpetition transfers which debtor made to MKM or MKM LLC during the gap period.
The trustee stated that it was unclear whether the reference to " MKM LLC" in the Mastro Properties Matrix Accounting System was to one, or more, of the three defendant LLCs. Therefore, the trustee sought relief against all three defendant LLCs.
The trustee moved for summary judgment. In his motion, the trustee argued that he was entitled to judgment as a matter of law because there were no genuine and disputed issues of material fact for the avoidability of the gap period transfers under § 549(a) or (b). The trustee submitted the declaration of Kent Mordy, the financial advisor and accountant for the trustee, and the declaration of Scott B. Henrie, the attorney for the trustee, along with various exhibits in support of the motion.
MKM opposed, asserting that the $22,000 transfer fell within the safe harbor of § 549(b) because it was for services performed by MKM during the gap period and represented the amount of his regular monthly salary. MKM also argued that the $340,000 transfer to MKM LLC was not property of the estate or, alternatively, fell within the scope of § 549(b) because value was exchanged for the transfer. In support of his argument, MKM submitted his own declaration and that of Tom Kenyon, the chief financial officer at Mastro Properties. Finally, MKM argued that he should not be held jointly and severally liable with MKM LLC for the $340,000 transfer because he was not a person " for whose benefit the transfer was made" within the meaning of § 550(a)(1).
After hearing the parties' argument, the bankruptcy court ruled orally from the bench and granted summary judgment for the trustee on all issues by order entered March 5, 2010. The judgment did not recite or indicate the legal analysis delivered at the hearing. The judgment contained a certification under Fed.R.Civ.P. 54(b) incorporated by Rule 7054, making it final for appeal.
Appellants timely appealed.
II. JURISDICTION
The bankruptcy court had jurisdiction over this proceeding under 28 U.S.C. § § 1334 and 157(b)(2)(A) and (E). We have jurisdiction under 28 U.S.C. § 158.
III. ISSUES
Did the bankruptcy court err in granting the trustee's motion for summary judgment and concluding as a matter of law that:
A. Debtor's $22,000 transfer to MKM and $340,000 transfer to MKM LLC were avoidable under § 549(a); and
B. MKM was jointly and severally liable with MKM LLC for the $340,000 transfer under § 550(a).
IV. STANDARD OF REVIEW
We review de novo the bankruptcy court's grant of a motion for summary judgment. Danning v. Miller (In re Bullion Reserve of N. Am.), 922 F.2d 544, 546 (9th Cir. 1991).
V. DISCUSSION
A. Summary Judgment Standards
In reviewing the bankruptcy court's decision on a motion for summary judgment, we apply the same standards as the bankruptcy court. Summary judgment is properly granted when no genuine and disputed issues of material fact remain, and, when viewing the evidence most favorably to the non-moving party, the movant is entitled to prevail as a matter of law. Fed.R.Civ.P. 56, incorporated by Rule 7056; Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Material facts which would preclude entry of summary judgment are those which, under applicable substantive law, could affect the outcome of the case. The substantive law will identify which facts are material. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
The moving party bears the initial burden of showing that there is no material factual dispute. When the moving party does not bear the burden of proof on an issue at trial, " the moving party may discharge its burden of production by either of two methods." Nissan Fire & Marine Ins. Co., Ltd., v. Fritz Cos., Inc., 210 F.3d 1099, 1106 (9th Cir. 2000). " The moving party may produce affirmative evidence negating an essential element of the nonmoving party's case, or, after suitable discovery, the moving party may show that the nonmoving party does not have enough evidence of an essential element of its claim or defense to carry its ultimate burden of persuasion at trial." Id . If the moving party meets its initial burden, the burden then shifts to the non-moving party to set out, by affidavits or admissible discovery material, specific facts showing a genuine issue for trial. Fed.R.Civ.P. 56(e)(2).
" A trial court can [ ] consider [only] admissible evidence in ruling on a motion for summary judgment." Orr v. Bank of Am., NT & SA, 285 F.3d 764, 773 (9th Cir. 2002). Moreover, we regard as true the non-moving party's evidence, if supported by affidavits or other evidentiary material. Celotex, 477 U.S. at 324.
B. The Trustee's Prima Facie Case Under § 549(a) And " Exchange For Value" Defense Under § 549(b): Burden of Proof
Section 549(a) authorizes the trustee to avoid a transfer of estate property that occurs after the commencement of the case. The trustee's prima facie case requires proof of (1) a transfer (2) of estate property; (3) that occurred after the commencement of the case; and (4) that was not authorized by statute or the court.
Section 549(a) states in relevant part:
The trustee's avoidance power under § 549(a) is limited by subsection (b) which provides that in an involuntary case, gap period transfers are not avoidable to the extent value is given after the commencement of the case. " The purpose of the [§ 549(b)] exception is to allow a business to continue normal operations while an involuntary petition is pending." Yancey v. Varner (In re Pucci Shoes, Inc.), 120 F.3d 38, 40 (4th Cir. 1997). However, the exception is a narrow one. Id .; Cossitt v. First Am. State Bank (In re Fort Dodge Creamery Co.), 121 B.R. 831, 834 (Bankr. N.D. Iowa 1990).
Section 549(b) provides:
MKM asserts a defense under § 549(b) with respect to all transfers. Rule 6001 provides: " [a]ny entity asserting the validity of a transfer under § 549 of the Code shall have the burden of proof." Thus, appellants would have the ultimate burden of proof at trial to show the transfers were valid under § 549(b).
C. Summary Judgment As To The $22,000 Transfer
MKM concedes that the trustee met his initial summary judgment burden by proving his prima facie case under § 549(a) for avoidance of the $22,000 transfer. However, he contends the transfer is protected under § 549(b) because he gave " value" by providing " services" to debtor during the gap period. Section 549(b) explicitly includes " services" within its definition of " value." To prove his exchange for value defense under § 549(b), MKM must provide evidence of services performed and facts from which to measure the reasonable value of those services. Geothermal, 93 F.3d at 651-52. Proof of either element necessarily requires some description of the services performed that allowed Mastro Properties to continue " normal operations" during the gap period. See Pucci Shoes, 120 F.3d at 40.
To address the essential elements of MKM's defense, the trustee submitted evidence that MKM was never treated as an employee of Mastro Properties and thus never received a salary; i.e., he was not included in Mastro Properties' employee payroll system nor did Mastro Properties pay or withhold taxes on payments made to MKM. Moreover, the trustee submitted copies of MKM's tax returns which showed that MKM did not report income in the form of a salary. MKM concedes that he never received a W-2 from Mastro Properties, but argues that this fact is irrelevant for purposes of his § 549(b) defense.
MKM argues in his opening brief that the trustee submitted incomplete copies of federal tax returns for MKM from 2004 through 2007 in his reply documents. Nowhere does MKM explain why the tax returns are incomplete nor can we discern that he ever raised an evidentiary objection to the tax returns in the bankruptcy court because we do no have a transcript of that proceeding.
However, MKM's relevance argument overlooks that the trustee's evidence flatly contradicts MKM's declaration that the $22,000 represented his " monthly salary" for the past five years. Moreover, the inference is that the $22,000 monthly amount was a " draw" which represented profits or anticipated profits and not the reasonable cost of MKM's services. Even so, as explained below, nothing in MKM's declaration gave rise to a genuine issue of material fact on the essential elements of his defense.
MKM had the burden to identify evidence that precluded summary judgment. Fed.R.Civ.P. 56(e), entitled " Affidavits; Further Testimony" states in relevant part:
(2) Opposing Party's Obligation to Respond. When a motion for summary judgment is properly made and supported, an opposing party may not rely merely on allegations or denials in its own pleading; rather, its response must - by affidavits or as otherwise provided in this rule - set out specific facts showing a genuine issue for trial. If the opposing party does not so respond, summary judgment should, if appropriate, be entered against that party.
To prove that he performed services, the only " evidence" MKM points to is his own declaration which contains a single conclusory self-serving statement that " [t]he $22,000 was for services I performed for the Debtor during the Gap Period." The declaration provides no further factual details or evidentiary support regarding what those services consisted of or how they allowed Mastro Properties to continue its normal operations during the gap period.
Moreover, nowhere in the record do we find evidence where MKM supported the " value" he provided to Mastro Properties. Instead, MKM again offers only his conclusory self-serving statements: " [t]he $22,000 was my regular monthly salary from the Debtor for approximately five years prior to the Gap Period . . . . The $22,000 payment was a fair value for my services." MKM's conclusory statements are not " evidence" that he performed services or that the $22,000 transfer was the reasonable cost for his services. For this reason, MKM failed to raise a genuine issue of fact for trial through his declaration. See FTC v. Publ'g Clearing House, Inc., 104 F.3d 1168, 1171 (9th Cir. 1997) (" A conclusory, self-serving affidavit, lacking detailed facts and any supporting evidence is insufficient to create a genuine issue of material fact.").
MKM further argues in his opening brief that " [w]ithout citing any legal authority, the Trustee calls the payments to Michael K a 'draw' and concludes without a rationale that he is outside the protection of § 549(b). That contention is without merit." These statements are merely argument and, as previously mentioned, there is no evidentiary support for the essential elements of MKM's defense in the record. See British Airways Bd. v. Boeing Co., 585 F.2d 946, 952 (9th Cir. 1978) (legal memoranda and oral argument are not evidence and cannot create issues of fact capable of defeating otherwise valid motion for summary judgment).
In sum, MKM has for the most part relied on his pleadings or conclusory statements in his declaration to raise a triable issue of fact. This proof is insufficient. A " complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial" to entitle the moving party to summary judgment. Celotex, 477 U.S. at 323. Accordingly, on the basis of the facts stated in Mordy's and Henrie's declarations and accompanying exhibits, summary judgment for the trustee was appropriate with respect to the $22,000 transfer.
D. Summary Judgment As To The $340,000 Transfer
MKM argues that the $340,000 transfer is not avoidable because the funds were not property of the estate and, therefore, the trustee failed to meet one of the elements for his prima facie case under § 549(a), or, alternatively, even if the funds were property of debtor's estate, the exchange for value defense applies.
1. Property Of The Estate
For a transfer to be avoided under § 549(a), it must be a transfer of " property of the estate." " Property of the estate" is defined by the Bankruptcy Code as " all legal or equitable interests of the debtor in property as of the commencement of the case." § 541(a)(1).
Generally, under bankruptcy law, money transferred by the debtor from commingled bank accounts under the debtor's control " presumptively constitutes property of the debtor's estate, " because the money could have been used to pay other creditors. Bullion, 836 F.2d at 1217. Moreover, funds in a commingled account are property of the debtor's estate when the debtor has the right to withdraw, transfer, or otherwise use the payment funds in any way it wanted. Hansen v. MacDonald Meat Co. (In re Kemp Pac. Fisheries, Inc.), 16 F.3d 313, 316-17 (9th Cir. 1994).
In support of his summary judgment motion, the trustee showed that the $340,000 transfer to MKM LLC came from Mastro Properties' bank account which was controlled by debtor. Further, the trustee's evidence, which was uncontroverted by MKM, showed that the past practice was for debtor to treat MKM LLCs funds as his own. Mordy declared:
The transactions relating to MKM LLC were run through the Mastro Properties Matrix Account system as if MKM LLC was a part of Mastro properties with all cash receipts and disbursement running through the debtor's Commerce Bank accounts. I have located one document indicating that MKM LLC established its own bank account with Washington Trust . . . on June 5th, 2009.
MKM argues that the LLCs agreed to advance funds postpetition to help finance Mastro Properties' operations; that the funds coming from insurance policy proceeds were the property of the LLCs; that MKM LLC advanced $420,000 to Mastro Properties; and that Mastro Properties paid MKM LLC back in part with the LLCs " own funds" of $340,000.
MKM points to no evidence in the record that supports these factual assertions. MKM cites only his own and Kenyon's declaration, both of which state the same facts in conclusory fashion. Neither declaration states that Mastro Properties repaid MKM LLC with MKM LLC's " own funds" nor do they provide further detail or refer to other evidence to support MKM's contentions. In short, for the most part MKM relied on his pleadings or conclusory statements in his or Kenyon's declaration. The declarations fail to provide admissible evidence or reference facts established by admissible records that raise a triable issue of fact on this issue. Thus, as a matter of law, the $340,000 transfer was property of debtor or the estate within the meaning of the applicable provisions of the Bankruptcy Code. Accordingly, unless the exchange for value defense is applicable, the trustee may avoid the transfer because it was property of debtor's estate.
MKM made no attempt to trace MKM LLCs interest in the funds that were commingled with those in Mastro Properties' bank accounts.
2. Exchange For Value Defense Under § 549(b)
MKM argues that the exchange for value defense applies because MKM LLC provided a net benefit of $192,000 to Mastro Properties. MKM arrives at this figure by taking the payments by MKM LLC of $420,000 and $112,000 made to Mastro Properties during the gap period and subtracting the $340,000 transfer. MKM urges us to consider the entire transaction, namely, what MKM LLC got and what it gave up during the gap period.
For this proposition MKM cites Pucci Shoes, 120 F.3d at 41. Pucci Shoes simply holds that the value provided and the property of the bankruptcy estate do not have be exchanged simultaneously. Rather, all that is required is that the property and the value be exchanged during the gap period. Pucci Shoes does not stand for the proposition that transfers made during the gap period are simply netted out without reference to any other facts to determine the extent of the " value" .
Because the purpose of the § 549(b) exception is to allow a business to continue normal operations while an involuntary petition is pending, Pucci Shoes, 120 F.3d at 40, cash payments made to a debtor could conceivably constitute " value" under § 549(b). However, we could locate no evidence that met the threshold inquiry whether the cash paid by MKM LLC allowed Mastro Properties to continue operations during the gap period. The only evidence presented is that Mastro Properties transferred funds of $900,000 from insurance proceeds to MKM LLC, of which MKM LLC transferred back $420,000 and $112,000, and Mastro Properties transferred back $340,000. Moreover, the evidence showed that MKM LLC transferred $258,000 of the $340,000 to a new entity, HAR Construction, which then paid the former employees of Mastro Properties allegedly for their work preparing debtor's schedules. These transactions do not show that any of MKM LLC's alleged cash payments were used to " fund operations" of Mastro Properties during the gap period.
Moreover, these payments would not constitute value under § 549(b) if they were made in satisfaction of a debt that arose before the commencement of the case. The trustee sought to show the $340,000 transfer fell within this exclusion. In support of his motion, the trustee submitted Mordy's declaration showing (1) that MKM LLC never had any independent financial existence until shortly before the bankruptcy filing; (2) that the sole purpose of MKM LLC was to hold insurance policies on the life of debtor, (3) that no separate accounting existed for MKM LLC until June 25, 2009, 15 days before the involuntary petition, when $900,000 attributed to " insurance" was deposited into the new MKM LLC bank account; (4) that the only other significant deposit into the MKM LLC bank account was $340,000 made by Mastro Properties during the gap period; (5) that debtor had made payments for the benefit of MKM LLC totaling $1,402,832.61 between April 2008 and July 6, 2009; and (5) that Mastro Properties also transferred $2.4 million to Northern Trust Bank for the benefit of MKM LLC, out of the proceeds from the closing of a sale of the debtor's property on North 94th Street in Seattle, WA.
In addition, attached to the declaration of Henrie was a fax transmission dated March 21, 2008, from Gary R. English, an attorney for either debtor or MKM. In that memorandum, English stated that MKM LLC still owed debtor $1,525,000. The purpose of the communication was for estate tax planning purposes in which English opined that debtor should explore getting bank financing for MKM LLC in order to comply with IRS estate tax guidelines.
If uncontroverted, this evidence shows that MKM LLC had no financial independence and thus was indebted to debtor, warranting summary judgment in favor of the trustee.
MKM had the burden of producing evidence that raised a triable issue of fact on these issues. MKM submitted the declaration of Kenyon, who declared that the English fax transmission was " not an accounting" and also failed to take into account an $11.4 million loan from Citibank which was paid off by MKM LLC in the Northern Trust refinance and which resulted in a benefit to debtor of $9.5 million. According to Kenyon, if one considers this transaction, debtor owed $8 million to MKM LLC rather than MKM LLC owing $1.5 million to debtor. Kenyon further declared that the accounting system showed that from the second half of 2007, through the bankruptcy petition date, the LLC was a net supplier of cash to debtor of $1,642,176.
When considering a summary judgment, we do not weigh the evidence or assess credibility. Anderson, 477 U.S. at 255. Instead, " the evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor." Id . However, this does not mean that we accept as true assertions made by the non-moving party that are flatly contradicted by the record. See Scott v. Harris, 550 U.S. 372, 380, 127 S.Ct. 1769, 167 L.Ed.2d 686 (2007) (" When opposing parties tell two different stories, one of which is blatantly contradicted by the record, so that no reasonable jury could believe it, a court should not adopt that version of the facts for purposes of ruling on a motion for summary judgment.").
Here, in reviewing the record as a whole, we conclude that MKM fails to provide evidence on his exchange for value defense other than to create a dispute concerning the characterization of the English " accounting." However, this " accounting" between MKM LLC and debtor does not provide us with crucial additional information such as the intent of the parties and why they departed from past practice with these particular transfers. MKM recognizes this shortfall by arguing in his opening brief that " at minimum, there is an issue of material fact as to intent of the parties to provide GAP period funding . . . ." Yet, MKM did not provide debtor's declaration nor did he provide evidence that documented the purpose of the transfers.
Instead, the uncontroverted evidence presented by the trustee through Mordy was that MKM LLC was never a supplier of cash to debtor since all insurance related receipts and disbursements ran through Mastro Properties' bank account until $900,000 was deposited into the newly opened MKM LLC account in June 2009. Moreover, Mordy declared that MKM LLC had no independent financial existence from Mastro Properties and that debtor always treated MKM LLC as part of Mastro Properties until shortly before the bankruptcy filing. Even then, MKM LLC did not have any substantial cash that was truly its own; all cash came from debtor's assets. Thus, without any evidence that the parties intended to treat these transactions differently, we cannot conclude MKM raised a triable issue of fact. See Scott, 550 U.S. at 380 (noting that [r]espondent's version of events was so utterly discredited by the record that no reasonable jury could have believed him). Accordingly, the bankruptcy court's grant of summary judgment for the trustee on the $340,000 transfer was proper.
E. MKM's Liability For The $340,000 Transfer Under § 550
Once the trustee establishes a prima facie case, to the extent that a transfer is avoided under § 549, the trustee may recover, for the benefit of the estate, the property transferred, or the value of such property, from the initial transferee or subsequent transferee. § 550(a)(1) and (2). Section 550 provides in relevant part:
(a) Except as otherwise provided in this section, to the extent that a transfer is avoided under section . . . 549 . . . of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from --
(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 initial transferee.
Here, the judgment for the $340,000 transfer was joint and several against MKM and MKM LLC.
The trustee argues that MKM should be held liable for the transfer because he was a person " for whose benefit such transfer was made" within the meaning of § 550(a)(1). In the trustee's view, the transfer was made for MKM's benefit because, as the sole member of MKM LLC, he had the right to receive the funds. Further, the trustee sought to show that MKM actually received a benefit because MKM LLC transferred $22,000 directly to MKM and MKM received another $60,000 from HAR Construction, a company that was established with funds transferred from MKM LLC.
MKM acknowledges that MKM LLC would be liable under § 550(a)(1) as the initial transferee, but contends that he is not liable under this section because he was not a person " for whose benefit such transfer was made." MKM argues that the transfer was intended to fund new companies during the post-gap period and that one of those companies paid Mastro Properties' former employees to prepare debtor's bankruptcy schedules. At most, MKM contends he was a subsequent transferee of only a part of the $340,000 in transfers.
We observe that the parties' arguments blend together the separate and legally distinct concepts of " transferee" status and that of an " entity for whose benefit such transfer was made."
The structure of [section 550(a)] separates initial transferees and beneficiaries, on the one hand, from 'immediate or mediate transferee[s]', on the other. The implication is that the 'entity for whose benefit' is different from a transferee, 'immediate' or otherwise.
Bonded Fin. Svcs. v. European Am. Bank, 838 F.2d 890, 895 (7th Cir. 1988). To determine " transferee" status under § 550(a), the focus is the level of dominion the transferee has over the funds. Universal Serv. Admin. Co. v. Post-Confirmation Comm. of Unsecured Creditors (In re Incomnet, Inc.), 463 F.3d 1064, 1070 (9th Cir. 2006). " Under the dominion test, 'a transferee is one who . . . has 'dominion over the money or other asset, the right to put the money to one's own purposes.'" Id . at 1069.
The trustee argued in his motion for summary judgment that " MKM LLC is the initial transferee from which recovery is available. [MKM] is the sole controlling member of the MKM LLCs . . . ." The trustee further argued that MKM " used the money as he wished just as if he had taken a distribution [from the LLC]. His use of the money was no different than if he had taken a distribution and spent it how he wished, which is exactly what he did." In his opening brief on appeal, the trustee contends that " [u]nless one concludes that the LLC was a sham to begin with, the son had control over what happened to the money. The son took money out or directed it to his new 'restart' venture." These arguments are more relevant to determining whether MKM was a " transferee" because he had the requisite dominion over the funds.
However, the record lacks evidence that shows MKM had the requisite dominion over the funds once they were transferred to MKM LLC. In fact, the trustee has presented contrary evidence showing that MKM LLC had no independent financial existence from debtor; that debtor treated MKM LLC as part of Mastro Properties; and that even when MKM LLC opened its own bank account, Mastro Properties' CFO, Tom Kenyon, had signing authority over the account. Thus, we cannot conclude that the record establishes uncontested facts on the issue of MKM's control over the funds transferred into MKM LLC. If anything, the trustee's arguments in his own brief show that the record establishes debtor's continuing control over the funds and that the ultimate beneficiaries of the transfers were the former employees of Mastro Properties who were paid through HAR.
Even without transferee status, if MKM was a person " for whose benefit the transfer was made" he is strictly liable under § 550(a)(1). The trustee relies on Kosmala v. Imhof (In re Hessco Indus., Inc.), 295 B.R. 372 (9th Cir. BAP 2003) to show that MKM was a person " for whose benefit the transfer was made." However, Hessco is factually distinguishable.
In Hessco, as part of a complex sale and leaseback transaction, a corporation sold a parcel of commercial property to a family trust. The trust then leased back the property to the corporation. One of the income beneficiaries of the family trust was then elected to the corporation's Board of Directors. The trust received substantial payments from the corporation within the year preceding the corporation's bankruptcy, but none of the money was distributed to the income beneficiaries.
A chapter 7 trustee was appointed for the corporation, and she brought a preference action against several parties, including the individual income beneficiaries of the trust. The bankruptcy court found that the income beneficiaries were persons for whose benefit the transfers were made.
The individuals argued on appeal that § 550 mandates liability for initial transferees and subsequent transferees, but the income beneficiaries were in neither category. The BAP affirmed the bankruptcy court's finding that due to the nature of the trust at issue, the deposits made into the trust were for the benefit of the Imhofs even though they were not the sole beneficiaries. The BAP found the individuals liable even though they had received no money.
[S]uch parties are liable, whether or not they actually benefit from the transfers in question . . . [I]f the transfer is for one's benefit, one is classed with initial transferees, and not as a subsequent transferee.
While the holding in Hessco is instructive, this appeal does not involve a trust, but a limited liability company formed under Washington law. Moreover, from the holding and facts in Hessco, we cannot make the leap that MKM is a " beneficiary" within the meaning of § 550(a)(1) simply because he is the sole member of the LLC. As highlighted above, the uncontroverted facts imply debtor directed the use of the funds to benefit employees of Mastro Properties.
In reality, MKM does not fit into the traditional examples of the " entity for whose benefit such transfer was made." That is, " a guarantor or debtor -- someone who receives the benefit but not the money." Bonded, 838 F.2d at 895. The benefit must derive directly from the transfer, not from the use to which it is put by the transferee. " Someone who receives the money later on is not an 'entity for whose benefit such transfer was made.'" Id . at 896. For this reason, we conclude that MKM's rights as the sole member of MKM LLC is not alone sufficient to qualify him as a person for whose benefit the transfer was made within the meaning of § 550(a)(1).
In sum, reversal is appropriate because we cannot conclude that the summary judgment record established uncontested facts on this issue.
This decision does not foreclose the possibility of the trustee filing another motion for summary judgment.
VI. CONCLUSION
For the reasons stated above, we AFFIRM the bankruptcy court's decision granting summary judgment for the trustee on the avoidability of the transfers. However, we conclude that the record does not establish as a matter of law that MKM was a person " for whose benefit the [$340,000] transfer was made." Accordingly, we REVERSE the bankruptcy court's decision to grant summary judgment on MKM's joint and several liability for the $340,000 transfer.
Except as provided in subsection (b) or (c) of this section, the trustee may avoid a transfer of property of the estate --(1) that occurs after the commencement of the case; and(2)(A) . . .; or (B) that is not authorized under this title or by the court.
In an involuntary case, the trustee may not avoid under subsection (a) of this section a transfer made after the commencement of such case but before the order for relief to the extent any value, including services, but not including satisfaction or securing of a debt that arose before the commencement of the case, is given after the commencement of the case in exchange for such transfer, notwithstanding any notice or knowledge of the case that the transferee has.