Successor Trustee Of A Trust Is Not A "Transferee" For Purposes Of 11 U.S.C. § 550
Mervyn’s LLC v. Lubert-Adler Group IV, LLC (In re Mervyn’s Holdings, LLC), Adv. Pro. No. 08-51402 (KG) (March 12, 2010) (K. Gross).
The Official Committee of Unsecured Creditors (the “Committee”) asserted a subsequent transferee claim pursuant to 11 U.S.C. § 550(a)(2) against Bank of America (in its capacity as successor trustee of a trust) to recover certain liens granted to the former trustee on transferred real estate. Due to numerous omissions in the original Complaint, which Bank of America addressed in a timely filed motion to dismiss, the Committee sought to amend its Complaint. Bank of America opposed the amendments, arguing that they would prove futile because Bank of America was not a “transferee” for purposes of 11 U.S.C. § 550.
The Court agreed with Bank of America, denying the Committee’s Motion to Amend as futile and granting Bank of America’s Motion to Dismiss.
The Committee argued that: (1) Bank of America constituted a “transferee” for purposes of § 550; (2) all of the transactions surrounding the sale of property should be collapsed in order to infer constructive fraud by Bank of America; and (3) Bank of America had constructive knowledge of the events surrounding the sale of property and therefore was a party to the constructively fraudulent conveyance.
First, the Court held that Bank of America was not a “transferee” for purposes of § 550 because its status as a trustee rendered it a mere conduit, akin to a courier or an intermediary, and not one with “dominion and control” as required under the applicable case law. Remarking that the term “transferee” is neither defined in the Bankruptcy Code nor discussed in the legislative history of Section 550, the Court adopted the “dominion and control” test set forth in In re Factory 2-U Stores, Inc., 2007 WL 2698207, at *3 (Bankr. D. Del. Sept. 11, 2007), which requires a transferee to have “dominion over the money or other asset [and] the right to put the money to one’s own purposes.” The Court reasoned that having possession over funds does not automatically render one a transferee of funds, especially where the entity in possession receives no benefit from said transfer and is holding the funds for the sole purpose of later making those funds available to a third party. Accordingly, the Court held that Bank of America was not a “transferee.”
Second, the Court concluded that the transactions surrounding the sale of property should not be collapsed because the Complaint was devoid of allegations of actual or constructive fraud as to Bank of America, or any involvement of Bank of America in the questioned transaction.
Third, because the Committee failed to identify the amounts of the transfers at issue or name a proper transferee acting in a non-trustee capacity, the Court held that the Complaint failed to state a valid fraudulent conveyance claim.
Accordingly, for the reasons articulated above, the Motion to Dismiss was granted and the Motion to Amend was denied.
