Henry v. Official Committee of Unsecured Creditors of Walldesign, Inc. (In Re Walldesign, Inc.)

Dissent by Judge Nguyen

*959 OPINION

It is said that bad facts make bad law. These appeals test that maxim against the often esoteric backdrop of the Bankruptcy Code. More specifically, the court must decide who is liable for voidable payments in bankruptcy proceedings when a debtor corporation’s sole shareholder, director, and president misappropriates company funds to fuel his own version of “lifestyles of the rich and famous.”

The bankruptcy court held that the Committee of Unsecured Creditors (“the Committee”) could recover the fraudulently transferred funds solely from the corporate cheat, because the appellants were subsequent transferees who accepted the payments for value, in good faith, and without knowledge of their voidability. See 11 U.S.C. § 550 (b)(1) (the “safe-harbor” provision).

The district court reversed, concluding that the appellants 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 coiporate cheat and those parties to whom he first made payments from the corporate account.

Although the…

dissenting:

Bankruptcy courts “are courts of equity” that “applfy] the principles and rules of *973 equity jurisprudence.” Young v. United States, 535 U.S. 43, 50 , 122 S.Ct. 1036 , 152 L.Ed.2d 79 (2002) (quoting Pepper v. Litton, 308 U.S. 295, 304 , 60 S.Ct. 238 , 84 L.Ed. 281 (1939)). There is nothing equitable about today’s decision.

Donald Buresh, Sharon Phillips, and Lisa Henry are not Michael Bello’s family members, friends, or even close associates. They are a married couple who sold their property to Bello to fund their retirement and a small business owner who performed design and construction services for him. Unbeknownst to them, the checks with which Bello paid them, which bore the name of his company, were in fact drawn from a sham bank account that he created to fraudulently siphon money away from his company and use for his personal expenses. Their dealings with Bello were legitimate, arms-length transactions. Yet they each now owe Bello’s creditors hundreds of thousands of dollars—a ruinous sum for most retirees and small businesses. I strongly disagree with this result.

I.

For many years, “we employed a hybrid ‘dominion and control’ test to identify initial…

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

IN THE MATTER OF WALLDESIGN, No. 15-56220 INC., a subchapter S. Corporation, Debtor, D.C. No. 8:14-cv-01725-

VAP

LISA ANNE HENRY, DBA Henry West Designs, Appellant,

v.

OFFICIAL COMMITTEE OF

UNSECURED CREDITORS OF

WALLDESIGN, INC.,

Appellee.

IN THE MATTER OF WALLDESIGN, No. 15-56221 INC., a subchapter S. Corporation, Debtor, D.C. No. 8:15-cv-00167-

VAP

DONALD F. BURESH, an individual; SHARON J. PHILLIPS, an individual, Appellants, OPINION

v. 2 IN THE MATTER OF WALLDESIGN

OFFICIAL COMMITTEE OF

UNSECURED CREDITORS OF

WALLDESIGN, INC.,

Appellee.

Appeals from the United States District Court for the Central District of California Virginia A. Phillips, District Judge, Presiding

Argued and Submitted March 10, 2017 Pasadena, California

Filed October 2, 2017

Before: A. Wallace Tashima and Jacqueline H. Nguyen, Circuit Judges and Algenon L. Marbley, * District Judge.

Opinion by Judge Marbley; Dissent by Judge Nguyen

* The Honorable Algenon L. Marbley, United States District Court Judge for the Southern District of Ohio, sitting by designation.

IN THE…