Cases & Deals

Liquidation trustee successfully opposes petition for writ of certiorari

Clients Brian Weiss as Trustee of the Walldesign Liquidation Trust

Jones Day represented the respondent Brian Weiss—a liquidation trustee in the bankruptcy of Walldesign, Inc.—in successfully opposing a petition for a writ of certiorari.

The petitioners asked the Supreme Court to hear the case to resolve a circuit split regarding the meaning of “transferee” in Section 550 of the Bankruptcy Code. Each of the petitioners received fraudulent transfers from the bankruptcy debtor’s estate—transfers illegally ordered by Michael Bello, a corporate principal, who had the company transfer the funds to the petitioners in order to pay off his personal debts. Each of the petitioners indisputably qualified as a “transferee” of the funds. The question concerned whether Bello qualified as a “transferee” in light of his using the personal funds for his own benefit. This mattered because Section 550 makes initial transferees strictly liable to the debtor’s estate for fraudulent transfers, while subsequent transferees are liable only in narrower circumstances. If Bello qualified as the initial transferee, then the petitioners would be subsequent transferees. If not, then the petitioners would qualify as the initial transferees, making them strictly liable to the estate for the fraudulent transfers they received. In the decision below, the Ninth Circuit held that Bello was not a “transferee.” An individual can be a “transferee” of property, it explained, only by obtaining legal title to that property and the ability to use it as the individual sees fit. Since Bello had the funds illegally transferred directly from the debtor’s account, he never obtained the “dominion and control” needed to qualify as a transferee.

Most courts of appeals that have addressed the issue apply the dominion-and-control test, but the Eleventh Circuit does not; it has adopted the less-demanding “control” test. The petitioners asked the Court to grant certiorari so that it could adopt the control test. The Brief in Opposition acknowledged the split, but argued that the case should be denied anyway, for two main reasons: first, both tests led to the same outcome in this case, making it a poor vehicle for resolving the circuit split; second, the Ninth Circuit correctly held that transferee status requires title and dominion over property.

The Supreme Court denied certiorari on May 29, 2018. In so doing, it preserved a significant ruling for the creditors in this case, ensuring their access to funds fraudulently transferred from the debtor’s accounts.

Lisa Henry, et al. v. Brian Weiss, Liquidation Trustee of the Walldesign Liquidating Trust, Successor in Interest to the Official Committee of Unsecured Creditors of Walldesign, Inc., No. 17-1210 (U.S. Mar 01, 2018)

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