## Facts

- Bonded Financial Services, Inc. was controlled by Michael Ryan, who also operated related entities and a horse business, Shamrock Hill Farm.
- Ryan had an outstanding $655,000 loan from European American Bank to finance Shamrock Hill Farm.
- On January 21, 1983, Bonded issued a $200,000 check payable to the Bank with instructions to deposit it into Ryan’s personal account.
- The Bank deposited the $200,000 into Ryan’s account as directed.
- On January 31, 1983, Ryan instructed the Bank to debit $200,000 from his account to reduce the Shamrock loan; the Bank complied.
- Bonded filed for bankruptcy on February 10, 1983; numerous related entities also filed.
- The parties agreed the $200,000 transfer from Bonded was avoidable as a fraudulent transfer under 11 U.S.C. § 548(a).
- The trustee sought recovery from the Bank under 11 U.S.C. § 550; the bankruptcy court granted summary judgment to the Bank, and the district court affirmed.

## Issues

1. Whether the Bank was the “initial transferee” under 11 U.S.C. § 550(a)(1) because the check was payable to the Bank.
2. Whether the Bank was the “entity for whose benefit such transfer was made” under 11 U.S.C. § 550(a)(1).
3. If the Bank was a subsequent transferee under 11 U.S.C. § 550(a)(2), whether it was protected by the § 550(b) defense for transferees who take for value, in good faith, and without knowledge of voidability.

## Decision

- The Seventh Circuit affirmed judgment for the Bank.
- The Bank was not the initial transferee; Ryan was the initial transferee because he obtained dominion over the funds once they were deposited into his account.
- The Bank was not the “entity for whose benefit” the transfer was made; that category covers parties who benefit without receiving the funds.
- The Bank was, at most, an immediate transferee of Ryan and was protected by § 550(b) because it took for value, in good faith, and without knowledge of the transfer’s voidability.

## Legal Principles

- “Initial transferee” under § 550(a)(1) requires dominion over the money: the right to use the funds for the recipient’s own purposes, not mere possession or ministerial handling.
- A bank that follows a depositor’s instructions to place funds into an account acts as a conduit and is not an initial transferee if it lacks discretion to apply the funds to its own debt.
- “Entity for whose benefit such transfer was made” in § 550(a)(1) is limited to a party whose liability is reduced by the transfer without receiving the funds (e.g., a guarantor), not a later recipient paid in a subsequent step.
- A subsequent transferee is shielded by § 550(b) if it takes (i) for value, including satisfaction of an antecedent debt, (ii) in good faith, and (iii) without knowledge of the voidability of the avoided transfer.

## Conclusion

The court held that depositing the debtor’s check into a principal’s account did not make the bank an initial transferee because the principal, not the bank, had dominion over the funds; the bank later received repayment as a protected subsequent transferee under § 550(b) when it applied the funds to an existing loan without knowledge of the transfer’s avoidability.


Bonded Fin. Servs., Inc. v. Eur. Am. Bank, 838 F.2d 890 (7th Cir. 1988)