## Facts

- The Mortgage Store, Inc. later entered Chapter 7 bankruptcy, and an audit indicated it had operated a Ponzi scheme.
- Mano–Y & M, Ltd. owned the Raymondville Plaza shopping center and agreed in December 2008 to sell it to George Lindell for $2.2 million, including $300,000 in cash plus closing costs.
- The sale documents designated a title company to hold and distribute earnest money and designated an attorney to receive purchase funds and disburse them according to closing instructions.
- On January 20, 2009, the debtor wired $311,065.25 to the attorney’s trust account to satisfy Lindell’s cash and closing-cost obligations under the sale contract.
- The attorney disbursed the wired funds to the entitled payees under the closing, including Mano as seller.
- The Chapter 7 trustee sought to avoid the January 2009 transfer as fraudulent and to recover the funds from Mano under 11 U.S.C. § 550, alleging Mano was the initial transferee.
- The bankruptcy court granted summary judgment for the trustee, the district court affirmed, and Mano appealed.

## Issues

1. Under 11 U.S.C. § 550(a)(1), who was the “initial transferee” of the $311,065.25 transfer: the seller who received the funds, or the buyer/intermediaries through whom the funds passed?
2. Whether escrow-type intermediaries (closing attorney/title company) should be treated as “mere conduits” rather than transferees under the Ninth Circuit’s dominion test.
3. Whether an earlier “control” approach could treat the buyer as initial transferee, allowing the seller to claim the § 550(b) good-faith defense as a subsequent transferee.

## Decision

- The Ninth Circuit affirmed summary judgment for the trustee.
- Mano was the “initial transferee” under § 550(a)(1) because it was the first entity with legal right to use the funds for its own purposes.
- The closing attorney and title company functioned as intermediaries obligated to distribute funds pursuant to instructions and therefore did not have dominion over the funds.
- Because Mano was the initial transferee, it was strictly liable for recovery of the transfer and could not invoke the § 550(b) defense available only to subsequent transferees.
- The court rejected the earlier “control” approach as inconsistent with Ninth Circuit precedent and stated it was no longer good law to the extent it conflicted with the dominion test.

## Legal Principles

- Under 11 U.S.C. § 550(a)(1), an avoided transfer may be recovered from the initial transferee (or the entity for whose benefit the transfer was made); initial transferees are not eligible for the § 550(b) good-faith defense.
- In the Ninth Circuit, initial transferee status is determined by the “dominion test”: legal title plus the ability to use the funds for one’s own purposes.
- Escrow agents, title companies, and closing attorneys who hold and disburse funds pursuant to contractual instructions generally lack dominion and are treated as “mere conduits,” not transferees.
- A seller receiving payment through an escrow-type closing may be the initial transferee when it is the first party with dominion over the debtor’s funds, even if the payment satisfied a buyer’s obligation and the seller lacked knowledge of the funds’ avoidability.

## Conclusion

The Ninth Circuit held that the seller who first obtained dominion over debtor-supplied closing funds was the initial transferee under § 550, making the seller strictly liable for return of the avoided transfer and foreclosing the § 550(b) good-faith defense, while treating closing intermediaries as mere conduits.


In re Mortgage Store, Inc., 773 F.3d 990 (9th Cir. 2014)