Cullen Center Bank v. Hensley , 102 F.3d 1411 ( 1997 )

REVISED
United States Court of Appeals,
Fifth Circuit.
No. 96-20021.
In the Matter of John Leo CRISWELL, Debtor.
CULLEN CENTER BANK & TRUST, Appellee-Cross Appellant,
v.
Nelson T. HENSLEY, Trustee, Appellant-Cross Appellee.
Jan. 9, 1997.
Appeals from the United States District Court for the Southern District of Texas.
Before POLITZ, Chief Judge, and WIENER and STEWART, Circuit Judges.
WIENER, Circuit Judge:
In this bankruptcy case, both Appellant/Cross Appellee Nelson T. Hensley, Trustee of the
Estate of John Leo Criswell, (the trustee) and Appellee/Cross Appellant Cullen Center Bank & Trust,
now known as Frost National Bank, N.A., (Cullen) appeal from a district court decision affirming in
part and reversing in part a bankruptcy court grant of summary judgment. In its decision, the district
court (1) affirmed the bankruptcy court's finding that Cullen's filing of a judicial lien constituted an
avoidable preference under 11 U.S.C. § 547(b) but (2) reversed and remanded to the bankruptcy
court because it found that Cullen was entitled to assert the good faith transferee for value defense
allowed to subsequent transferees under 11 U.S.C. § 550(b). Concluding that the district court
correctly found that Cullen's filing of the judicial lien was avoidable under § 547(b) but that Cullen
was an "initial transferee," rather than a "subsequent transferee," and thus not entitled to assert any
defenses under § 550(b), we affirm in part, reverse in part, and remand to the bankruptcy court with
instructions that it reinstate its grant of summary judgment and order that the proceeds of the sale of
the properties at issue be included in the bankruptcy estate.
I
1
FACTS AND PROCEEDINGS
The events giving rise to this bankruptcy proceeding began to unfold in October 1988 when
John Leo Criswell executed a trust agreement creating the JC-5 Children's Trust (the Children's
Trust) and conveyed his interest in several oil and gas properties to the trustee of the Children's Trust.
This transaction, all parties now stipulate, was in fact a transfer in fraud of creditors. In fact,
sometime after this transaction occurred, FIMSA, Inc., one of Criswell's creditors, filed suit to set
aside the transfer under Texas' Uniform Fraudulent Transfer Act.1
In August 1989, approximately ten months after Criswell's fraudulent conveyance to the
Children's Trust, Cullen obtained a judgment against Criswell for $122,227.67 pl us interest. This
judgment arose out of a lawsuit Cullen had filed against Criswell for monetary damages resulting from
a lending transaction. Some six months after it obtained its judgment, on February 15, 1990 to be
precise, Cullen filed an abstract of judgment in several Texas counties, including Live Oak County
where the oil and gas properties previously transferred to the Children's Trust were located. Under
Texas law, Cullen's recordation of this "abstract of judgment" created a judicial lien on any real
property of Criswell, including after acquired real property, located in the counties in which it was
recorded and indexed.2
Exactly one week later, on February 22, 1990, Criswell filed a voluntary petition for
protection under Chapter 11 of the Bankruptcy Code. In October 1990, Criswell's case was converted
to a chapter 7 proceeding, and Hensley was appointed trustee of the bankruptcy estate.
In January 1991, the trustee filed a motion to intervene in the FIMSA litigation already
pending against Criswell and the Children's Trust. The following month the trustee filed a motion,
which was subsequently granted, for authority to compromise the FIMSA litigation. The resulting
settlement obtained by the trustee required the debtor and the Children's Trust to transfer all assets
held by the Children's Trust to Criswell's bankruptcy estate. The assets, including the oil and gas
1
See Tex. Bus. & Comm.Code § 24.001 et seq.
2
See Texas Prop.Code § 52.001.
2
properties here at issue, were so transferred in August 1991. Later, the trustee sold the oil and gas
properties to a third party, Forney Oil Corporation, for an amount greater than $122,227.67, the
amount Cullen claimed that Criswell owed it.
Shortly after this sale, on November 21, 1991, the trustee filed a complaint in the Criswell
chapter 7 bankruptcy case against Cullen seeking a declaratory judgment that the trustee had a
priority claim to the proceeds of the Forney sale. The trustee subsequently amended the complaint
to allege that Cullen's filing of the abstract of judgment constituted a preferential transfer and was
avoidable pursuant to 11 U.S.C. § 547(b). The trust ee eventually filed a motion for summary
judgment on this claim. Cullen responded to the trustee's motion for summary judgment by (1)
denying that the abstract of judgment constituted a transfer of property within the meaning of §
547(b), as there was no "interest of the debtor in property" to be transferred, and (2) arguing that
even if filing the abstract constituted a preferential transfer, then Cullen was nevertheless a subsequent
and good faith transferee for value from which the trustee could not recover pursuant to 11 U.S.C.
§ 550(b)
In August 1993, the bankruptcy court granted, without filing written reasons, the trustee's
motion for summary judgment. Cullen timely appealed the bankruptcy court ruling to the district
court. In a Judgment and accompanying Order and Memorandum, the district court affirmed the
bankruptcy court's finding that Cullen's filing of the abstract of judgment constituted a preferential
transfer of "an interest of the debtor in property" pursuant to § 547(b), but reversed the bankruptcy
court's grant of summary judgment against Cullen, finding that Cullen was entitled to assert the good
faith transferee for value defense allowed to subsequent transferees under § 550(b). The district court
then remanded the case to the bankruptcy court for proceedings consistent with its opinion.3
3
At our request, both parties have addressed whether the order from which they have appealed
is a "final" order pursuant 28 U.S.C. § 158(d) and in light of our decision in Matter of Aegis
Specialty Marketing Inc. of Alabama, 68 F.3d 919, 921 (5th Cir.1995). Both parties contend,
distinguishing Aegis, that the district court's order here is final because the limited and essentially
"ministerial" further proceedings required by its remand to the bankruptcy court will neither
enhance nor alter our resolution of the issues now before us, and, moreover, could well prove
futile. We agree with this reasoning, and are satisfied that we have jurisdiction to hear this appeal.
3
Both parties have appealed the district court's judgment. First, on direct appeal, the trustee
argues that, by filing its abstract of judgment, Cullen either (1) was not a transferee of any kind under
§ 547(b), as its lien did not attach to any real property of the debtor located in Live Oak County, or
(2) at most became an "initial transferee" from which the estate can recover under § 550(a) and which
cannot avail itself of the good faith transferee for value defense provided by § 550(b). In reply and
on cross-appeal, Cullen contends that (1) the district court erred in finding that there was "an interest
of the debtor in property" to be transferred as a preference pursuant to § 547(b), but (2) if there was
such an interest, the district court was correct in holding that Cullen is entitled to the good faith
transferee for value defense under § 550(b) because either (a) the trustee is judicially estopped from
now arguing that Cullen was not a transferee of any kind, or (b) Cullen is indeed a subsequent not
an initial transferee.
II
ANALYSIS
1. STANDARD OF REVIEW
We review a partial grant of summary judgment de novo and apply the same standards used
by the district court.4 Therefore, summary judgment is appropriate if there is no genuine issue as to
any material fact and the moving party is entitled to a judgment as a matter of law.5 Further, we note
that as the bankruptcy and district court rulings under consideration on this appeal are exclusively
conclusions of law, they are subject to de novo review.6
2. CRISWELL'S FRAUDULENT TRANSFER AND "AN INTEREST OF THE DEBTOR IN PROPERTY" UNDER §
547(B)
In the logic of the Bankruptcy Code's preference-avoiding statutes, the first issue to be
4
McMurtray v. Holladay, 11 F.3d 499, 502 (5th Cir.1993).
5
Fed.R.Civ.P. 56(c).
6
Matter of McDaniel, 70 F.3d 841, 843 (5th Cir.1995).
4
decided in this case is the one challenged by Cullen on cross appeal—that is, whether Cullen's filing
of its abstract of judgment constituted a preferential transfer of "an interest of the debtor in property"
under 11 U.S.C. § 547(b), given that Criswell had transferred legal title to the relevant properties to
the Children's Trust before Cullen filed its abstract of judgment.
In general, § 547(b) permits a trustee to avoid various preferential transfers of the debtor's
property made prior to the commencement of a bankruptcy case.7 Congress enacted this
preference-avoiding section with two intertwined purposes in mind: (1) discouraging creditors from
racing to the courthouse to dismember the debtor during his slide into bankruptcy, and (2) facilitating
the prime bankruptcy policy of equality of distribution among creditors of the debtor.8 As one of the
leading treatises has observed, the underlying theory for voiding preferences must be distinguished
7
11 U.S.C. 547(b) provides in full:
Except as provided in Subsection (c) of this section, the trustee may avoid any
transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such
transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the
petition, if such creditor at the time of the transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would
receive if—
(A) the case were a case under Chapter 7 of this title;
(B) the transfer had not been made; and
(c) such creditor received payment of such debt to the extent provided by
the provisions of this title (emphasis added).
8
H.R.Rep. No. 595, 95th Cong., 1st Sess., at 177-78 (1977), reprinted in 1978 U.S.C.C.A.N.
5963, 6138.
5
from the rationale for voiding fraudulent transfers: "A preference is an infraction of the rule of equal
distribution among all creditors; a fraudulent transfer goes further, and by it the debtor seeks through
deceitful means to secure a personal advantage out of what in law should belong to creditors and not
to the debtor."9 Accordingly, neither the intent nor motive of the parties is relevant in consideration
of an alleged preference under § 547(b).10
Turning now to the application of § 547(b) to the specific facts of this case, we first observe
that the definition of "transfer" under the Bankruptcy Code is comprehensive and includes every
conceivable mode of alienating property, whether directly or indirectly, voluntarily or involuntarily.11
Given this broad meaning of "transfer," the fixing of a non-statutory, judicial lien—such as the one
created by Cullen's filing of its abstract of judgment—is avoidable as a preferential "transfer" provided
§ 547(b)'s other requirements are satisfied.12 In the instant case, the parties properly stipulated that
a "transfer" of property did take place when Cullen filed its abstract of judgment and further agreed
that all but one of the other requirements of § 547(b) were satisfied. Thus narrowed, their dispute,
which we now confront on appeal, centers on whether the oil and gas properties located in Live Oak
County, Texas, to which Cullen's abstract of judgment purportedly attached, were "properties of the
debtor,"—or, in the language of the Code, whether there was "an interest of the debtor [Criswell] in
property" that could have been transferred by the filing of the abstract of judgment.
Regrettably, the term "property of the debtor" (i.e., "interest of the debtor in property") is not
defined for purposes of the preference-avoiding statute itself.13 In the absence of an express definition
of this term, Cullen argues that as the Children's Trust actually held legal title to the subject oil and
9
Lawrence P. King, ed., 4 Collier on Bankruptcy, ¶ 547.01, at 547-12 (15th edition 1996).
10
Id. at 547-13.
11
11 U.S.C. § 101(54).
12
4 Collier on Bankruptcy, ¶ 547.03, at 547-20; 11 U.S.C. § 547(c)(6). See also In re
Cockreham, 84 B.R. 757, 762 (D.Wyo.1988) (nonconsensual transfers such as execution sales
obtained through judicial proceedings are within the purview of Code's definition of "transfer").
13
4 Collier on Bankruptcy, ¶ 547.03, at 547-24.
6
gas properties on the day that the abstract of judgment was filed, the properties cannot be considered
"property of the debtor," but instead were property of the Children's Trust. Consequently, Cullen
reasons, there was no "interest of the debtor in property" in Live Oak County to be transferred by
Cullen's otherwise preferential filing of the abstract of judgment.14 Both the bankruptcy and district
courts, however, rejected this theory, with the latter using, in essence, a two-step analysis.
The district court first concluded that the term "interest of the debtor in property" under §
547(b) is, for purposes of this case, equivalent to the term "property of the estate" under § 541 and
therefore encompasses "all legal or equitable interests of the debtor in property as of the
commencement of the case."15 Second, with this definitional equivalency in mind, the district court
reasoned that, as Criswell's transfer of the properties to the Children's Trust in October 1988 was
fraudulent under state law, the debtor must be deemed to have maintained at least an equitable, if not
a legal, interest in the property fraudulently transferred to the Children's Trust, whi ch interest
therefore could be the subject of an avoidable preference under § 547(b). We find the district court's
analysis compelling; it properly resolves this first issue and is consistent with the reasoning in
decisions of the Supreme Court, this circuit, and other courts in similar cases.
We begin, just as the district court did, by noting that § 541 defines the property of a
bankruptcy estate first and most generally as including "all legal or equitable interests of the debtor
in property as of the commencement of the case,"16 before it goes on to include "[a]ny interest in
property that the trustee recovers under section ... 550 [the recovery provision for § 547 preferences
14
It seems clear to us that Cullen must acknowledge that Criswell maintained some kind of
interest in the Live Oak County properties, at least under Texas law, if Cullen's abstract of
judgment is to entitle Cullen to a priority claim (vis-á-vis the estate) to the proceeds of the sale of
the properties to Forney. Otherwise, there would be no reason for Cullen's contesting the
trustee's claim in this case because Cullen then would be treated just like any of Criswell's other
unsecured creditors.
15
11 U.S.C. § 541(a)(1) (emphasis added).
16
Id.
7
and §§ 544 and 548 fraudulent transfers],"17 and "[a]ny interest in property that the estate acquires
after the commencement of the case."18 These § 541 "property of the estate" definitions have been
directly linked with the term "interest of the debtor in property" under § 547(b) by a number of
courts, including the Supreme Court.
First, in Begier v. IRS,19 a case concerning whether payment by a corporate debtor of withheld
payroll, income, and excise taxes (i.e., "trust-fund t axes") to the IRS was an avoidable preference
under § 547, the Supreme Court recognized that the term "property of the debtor" is not defined for
purposes of § 547. The Court then observed, however, that, given the purposes of the preference
avoiding statute, the term "is best understood as that property that would have been part of the estate
had it not been transferred before the commencement of bankruptcy proceedings."20 Thus, the court
concluded:
For guidance, then, we must turn to § 541, which delineates the scope of "property of the
estate" and serves as the post-petition analog to § 547(b)'s "property of the debtor."21
The Court, in Begier, then used § 541's primary definition of "property of the estate" to make an
inquiry into the "equitable" interests of the debtor in the later transferred property.22
In somewhat similar circumstances, the Eighth Circuit, in In re Bellanca Aircraft Corp.,23
17
11 U.S.C. § 541(a)(3).
18
11 U.S.C. § 541(a)(7).
19
496 U.S. 53, 110 S. Ct. 2258, 110 L. Ed. 2d 46 (1990).
20
496 U.S. at 58, 110 S.Ct. at 2263.
21
496 U.S. at 58-59, 110 S.Ct. at 2263.
22
In Begier, the Court eventually found that the funds at issue (withheld FICA, income and
excise taxes) were held in trust for the government and then transferred. As the debtor had
neither equitable or legal title to these funds, there was no "property of the debtor" to transfer and
no voidable preference under § 547(b). See 496 U.S. at 60-67, 110 S.Ct. at 2263-67. In the
instant case, by contrast, there is no dispute that before the debtor transferred the oil and gas
properties to the Children's Trust, they were properties of the debtor. Hence, though Begier is
distinguishable on its facts, its reasoning remains on point.
23
850 F.2d 1275, 1278-79 (8th Cir.1988).
8
faced the question whether proceeds of airplane sales that were seemingly in the hands and under the
control of a debtor but which were soon passed on to a third party were "property of the debtor"
under § 547(b). In this context, the court made the following observation:
Because "property of the estate" includes "all legal or equitable interests of the debtor in
property ... [,]" § 541(a)(1), "property of the debtor" as used in the definition of a voidable
preference, see § 547(b), is for these purposes equivalent to "property of the estate."24
Finally, a bankruptcy court, in a carefully considered opinion concerning a preference
avoidance action under § 547(b), noted the absence of a definition of "property" in that statute, but
found that § 541's definition of "property of the estate" could usefully be employed to determine what
constitutes "property of the debtor" under § 547(b).25 That court pointed to two additional reasons
for its linkage of these terms:
(1) as sections 541(a) and 301 indicate, property of the debtor is property of the estate upon
filing of the bankruptcy petition subject to any exemptions claimed under section 522; and
(2) the principle of section 547 is to avoid "only those preferential transfers that result in a
depletion of the debtor's estate and that do not fall within one of the exceptions listed in
section 547(c)."26
In light of the instructive reasoning of all three of these decisions, we agree with the district
court that it makes most sense to read the term "interest of the debtor in property" under § 547(b)
as here being synonymous with the the term "property of the estate" under § 541.
With this in mind, we turn now to our decision in In re MortgageAmerica,27 in which we held
that the automatic stay provisions of 11 U.S.C. § 362 prevented a creditor from continuing to pursue
a cause of action under the Texas Uniform Fraudulent Transfer Act after a petition for bankruptcy
had been filed by the debtor/transferor. In reaching this holding, we observed:
24
Id. at 1279 n. 8.
25
In re General Office Furniture Wholesalers, Inc., 42 B.R. 232, 234-35
(Bankr.E.D.Va.1984).
26
Id. at 235 (quoting 4 Collier on Bankruptcy, ¶ 547.21, at 547-79 to 547-85 (15th ed.1984)
(emphasis added)).
27
714 F.2d 1266 (5th Cir.1983). Even though a Second Circuit decision, In re Colonial Realty
Co., 980 F.2d 125, 131 (2nd Cir.1992), has criticized part of our reasoning, the
MortgageAmerica decision remains binding precedent in this circuit.
9
An action under t he [Texas] Fraudulent Transfers Act is essentially one for property that
properly belongs to the debtor and which the debtor has fraudulently transferred in an effort
to put it out of reach of creditors. The transferee may have colorable title to the property, but
the equitable interest—at least as far as the creditors (but not the debtor) are concerned—is
considered to remain in the debtor so that creditors may attach or execute judgment upon
it as though the debtor has never transferred it. We think that when such a debtor is forced
into bankruptcy, it makes most sense to consider the debtor as continuing to have a "legal or
equitable interest[ ]" in the property fraudulently transferred within the meaning of section
541(a)(1) of the Bankruptcy Code.28
We then concluded:
[p]roperty fraudulently conveyed and recoverable under the Texas Fraudulent Transfers Act
remains, despite the purported transfer, property of the estate within the meaning of 70(a)(4)
of the old Bankruptcy Act, and hence of section 541(a)(1) of the new Code.29
In other words, what we recognized in MortgageAmerica is that when a soon-to-be-bankrupt debtor
(like Criswell) fraudulently transfers property to shield it from his creditors, that debtor/transferor
should be considered to have retained an equitable interest in the property so that it will continue to
be considered "property of the estate."30 Applying MortgageAmerica 's principles to the facts of this
case makes it clear that Criswell must be deemed to have retained an equitable interest in the oil and
gas properties he fraudulently transferred to the Children's Trust, and that these properties should
therefore be deemed to be both "property of the estate" under § 541 and "property of the debtor"
under § 547(b).
Cullen argues predictably that MortgageAmerica is distinguishable from the facts of this case
because (1) an additional state cause of action asserted by the creditor (aside from its Fraudulent
Transfer Act claim) was based on the "corporate trust fund" doctrine, and (2) the case did not involve
a preferential transfer and therefore was not concerned with the meaning of the term "an interest of
the debtor in property" as used in § 547(b). Cullen's first objection completely misses the mark.
Despite Cullen's unrelenting insistence on the distinguishing importance of the corporate trust fund
doctrine in MortgageAmerica, a careful and unbiased reading of the decision reveals that our
28
Id. at 1275 (citations omitted) (emphasis added).
29
Id. at 1277 (emphasis added).
30
Id. at 1275.
10
discussion of that doctrine was entirely independent of the analysis we used in relation to the
creditor's claim under the Texas Fraudulent Transfer Act—the portion of the opinion that is relevant
here.31
Cullen's second objection to MortgageAmerica contains an accurate observation about that
case but still does not undermine the applicability of the decision's reasoning to this case. Even
though the claims in MortgageAmerica did not require its panel to consider the meaning of "property
of the debtor" in § 547(b), we find it logical to conclude that if a creditor's mere attempt to "attach
or execute a judgment upon [fraudulently transferred property]" is a violation of the automatic stay
under MortgageAmerica,32 this same action, if completed before the commencement of the case (as
it was here by Cullen), should also constitute a transfer of "an interest of the debtor in property"
within the meaning of § 547(b). Stated differently, the single fact that the creditor here perfected its
judicial lien against fraudulently transferred property after the debtor had thus transferred it but before
he filed for bankruptcy protection does not alter, or render inapposite, our basic recognition in
MortgageAmerica that, for purposes of the Bankruptcy Code, a debtor/transferor retains an equitable
interest in property that he has sought to transfer fraudulently.
In sum, we hold, relying on Begier, on the other property definition cases, and on
MortgageAmerica, that (1) the term "interest of the debtor in property" under § 547(b) includes "all
legal or equitable interests of the debtor as of the commencement of the case,"33 (2) Criswell
maintained at least an equitable interest in the oil and gas properties located in Live Oak County
which he had transferred to the Children's Trust in fraud of his creditors, and (3) Cullen's filing of the
abstract of judgment created a lien which therefore attached to this equitable interest of Criswell and
constituted an avoidable preference under § 547(b).
31
Id. at 1275-76 (Fraudulent Transfer Act analysis) & 1276-77 (trust fund (denuding) doctrine
analysis).
32
Id.
33
11 U.S.C. § 541(a)(1) (emphasis added).
11
3. AN "INITIAL TRANSFEREE" UNDER § 550(A)
That determination completes only the first part of the two-part inquiry in this case. Having
determined that the lien created by Cullen's filing of the abstract of judgment constituted a preferential
transfer, we are asked in part two whether Cullen was an "initial transferee," from which the trustee
may recover under 11 U.S.C. § 550(a) regardless of good faith, or a "subsequent transferee" entitled
to assert protection as a good faith transferee for value under 11 U.S.C. § 550(b).
The statutes relevant to this issue are straightforward. Section 550(a) generally endows the
trustee, once he has avoided a transfer pursuant to § 547 or some other transfer-avoiding statute, with
the ability to recover:
for the benefit of the estate, the property transferred, or, if the court so orders, the value of
such property, from—
(1) the initial transferee of such transfer or the entity for whose benefit such transfer
was made, or
(2) any immediate or mediate transferee of such initial transferee.34
The next subsection, § 550(b), however, offers relief for those transferees that qualify under
subsection (a)(2) as an "immediate or mediate transferee of such initial transferee" (hereafter
"subsequent transferee"). Specifically, the statute provides:
The trustee may not recover under section (a)(2) of this section from—
(1) a transferee that takes for value, including satisfaction or securing of a present or
antecedent debt, in good faith, and without knowledge of the voidability of the
transfer avoided;....35
In the instant case, the district court analyzed in detail whether Cullen had (1) taken property
"for value," (2) "in good faith," and (3) "without knowledge of the voidability of the transfer
avoided," and concluded that Cullen either satisfied these requirements as a matter of law or raised
issues of fact that precluded summary judgment in favor of the trustee. As the trustee does not
seriously challenge these rulings on appeal, the sole remaining question is the threshold one—that is,
34
11 U.S.C. § 550(a) (emphasis added).
35
11 U.S.C. § 550(b) (emphasis added).
12
whether Cullen was (1) any kind of transferee at all, (2) an "initial transferee" under § 550(a)(1), or
(3) a subsequent transferee under § 550(a)(2).
Curiously, without apparent question or analysis, the district court apparently assumed or
accepted Cullen's assertion that, as the property in question was first transferred from Criswell to the
Children's Trust, the filing of the abstract of judgment constituted a subsequent transfer for value
under section 550(b), and therefore Cullen is in fact a subsequent transferee. On appeal, the trustee
challenges this finding with two arguments.
The trustee first contends that Cullen cannot be considered a transferee of any kind because,
at the time it filed its abstract of judgment, legal title to the oil and gas properties had been conveyed
to and was clearly held by the Children's Trust; accordingly, the trustee reasons, Cullen's judgment
lien did not attach to any real property of the debtor located in Live Oak County. In essence, the
trustee is asserting that the filing of the abstract of judgment did not effectuate a transfer of "an
interest of the debtor in property" under § 547(b). Ironically, this is precisely the argument that
Cullen previously asserted and that the trust ee successfully opposed in both the bankruptcy and
district courts and that he still opposes in response to Cullen's cross-appeal. As the doctrine of
judicial estoppel bars a party from assuming a position that is inconsistent with one tha36 the trustee
here is judicially estopped from asserting this new position and concomitantly must be bound by the
district court's finding that there was "an interest of the debtor in property" against which the filing
of the judgment lien attached so as to constitute a preference under § 547(b), and that the creation
of the judgment lien constitutes a transfer for purposes of § 547(b).
The t rust ee's second and, in the end, prevailing argument is simply that if Cullen is a
transferee at all, it has to be an "initial transferee" under § 550(a)(1), not a subsequent transferee
36
See Brandon v. Interfirst Corp., 858 F.2d 266, 268 (5th Cir.1988) ("Judicial estoppel is a
common law doctrine by which a party who has assumed one position in his pleadings may be
estopped from assuming an inconsistent position. Generally, the doctrine applies when a party
attempts to contradict his own sworn statement in the prior litigation."); U.S. for Use of
American Bank v. C.I.T. Const. Inc. of Texas, 944 F.2d 253, 259 (5th Cir.1991) (doctrine of
judicial estoppel applies if first court has accepted the party's prior inconsistent position).
13
under § 550(a)(2) and (b). Stated more completely, the logic goes as follows: Cullen's abstract of
judgment created a judicial lien which attached to "an interest of the debtor in property;" that lien
constituted a transfer from the debtor whose interest was subjected to the lien to Cullen as the lienor;
that transfer constituted a preference under § 547(b), being the actual transfer that the trustee avoided
pursuant to § 547(b)—and being the value he here seeks to "recover for t he benefit of the estate"
pursuant to § 550(a); with respect to this action, the lien's transfer of the debtor's equitable interest
in the Live Oak County minerals to Cullen as lienor is, inescapably, an initial transfer, making Cullen
an "initial transferee;" and, as "an initial transferee," Cullen cannot assert protection under the good
faith transferee for value clause which is reserved for subsequent transferees only under § 550(b).
Cullen's response to this common sense argument is that it was a subsequent transferee
because there were in fact two transfers involving the same property: the first from Criswell to the
Children's Trust and the second represented by the filing of the abstract of judgment which created
the judgment lien—presumably from that trust directly to Cullen. The crucial flaw in Cullen's logic,
however, begins with its refusal to acknowledge that (1) Criswell, the debtorhe subject minerals and
(2), even if he had, the nullification of his transfer to the Children's Trust on stipulated grounds of
fraud made that transfer void ab initio as a matter of law, so that Criswell is deemed to have owned
the subject minerals on the day that Cullen filed its abstract of judgment. Under either analysis, the
only transfer with which the Bankruptcy Code is concerned for purposes of an action to avoid a
preference under § 547 and recover for the benefit of the estate under § 550 is the actual transfer that
the trustee sought to avoid under § 547(b) as a preference—here, the lien created by the recording
of the abstract of judgment . The only significance of the "other" transfer (from Criswell to the
Children's Trust) to this entire case is that the bankruptcy court was required to ignore the transfer
of legal title that such indisputably fraudulent transfer purported to effect, and recognize instead that
equitable title remained with the debtor so that Cullen's judgment lien could be deemed to attach to
"an interest of the debtor in property" under 547(b). In short, there was only one preferential transfer
that was avoided in this case, the lien created by the filing of the abstract of judgment: Criswell was
14
its transferor and Cullen was unmistakably its "initial" transferee.
Furthermore, Cullen's citation of our decision in Matter of Coutee,37 in which we stated that
a party who receives a preferential transfer of funds "directly from the debtor will not be considered
the initial transferee unless that party gains dominion or control over the funds,"38 does nothing to
help its cause. As the context of Coutee and the line of cases it relied on makes clear, the so-called
"dominion or control" test applies only in situations involving conduits or intermediaries, such as the
law firm in Coutee which transferred funds it received for a client/debtor to a bank which had, at the
firm's request, loaned money to the client. Applying the test in Coutee itself, we found that the bank,
not the law firm, was the "initial transferee" because the firm had only held judgment proceeds in trust
before deducting its legal fees, returning a portion of the funds to the client, and paying the bank's
note in full.39 In a word, Coutee, the cases cited therein, and the other two "dominion and control"
cases cited by Cullen,40 are inapposite to situations like the one we consider today, i n which the
creation of a judgment lien constituted the avoided preference.
By contrast, in one instructive case, which does address the avoiding of a preferential judicial
lien under § 547(b) and a judgment creditor's status as a transferee under § 550, a district court held
(correctly) that (1) a judgment creditor which had obtained a writ of execution allowing a sheriff to
execute on and sell a debtor's property to third parties—all within the 90 day pre-petition automatic
preferential transfer period—was the "initial transferee" for purposes of a § 550 recovery action and
(2) the only possible "subsequent transferees" who could be shielded from the trustee's avoiding
37
984 F.2d 138 (5th Cir.1993).
38
Id. at 141 (emphasis added).
39
Id.
40
In re Reeves, 65 F.3d 670, 676 (8th Cir.1995) (to be an "initial transferee" creditor must
have dominion and control over "transferred funds "); In re First Security Mortgage Company,
33 F.3d 42, 43-44 (10th Cir.1994) (bank was not "initial transferee" because it held funds in
lawyer's trust account only as a financial intermediary).
15
powers were the purchasers at the Sheriff's sale.41 In like manner, the only persons in the instant case
who could plausibly assert the subsequent transferee defense under § 550(b) would be either one to
whom Cullen had assigned its lien after t he abstract was recorded (had there been such an
assignment), or a purchaser of the property at a sheriff's or marshal's sale (had there been such a sale).
In sum, we must conclude that the district court erred in ruling that Cullen is entitled to assert
the good faith transferee for value defense reserved for subsequent transferees under § 550(b), an
error flowing naturally enough once the court assumed or accepted as a given that Cullen was a
subsequent transferee. We hold, to the contrary, that Cullen is an "initial transferee" under §
550(a)(1) from which the trustee may recover for the benefit of the estate, regardless of Cullen's
"faith," good or otherwise.
CONCLUSION
For the reasons first above set forth, we agree with the district court's determination that the
filing of Cullen's abstract of judgment in Live Oak County created a judicial lien which attached to
the oil and gas properties that Criswell had fraudulently transferred to the Children's Trust, and that
the lien thus created constituted a transfer of an interest of Criswell, as debtor, in the subject
propert ies. But for reasons last above set forth, we disagree with the district court's apparent
assumption that Cullen was a subsequent transferee, and we hold instead that Cullen was an initial
transferee of the subject properties. As such it was not entitled to assert good faith as protection
against recovery of those properties as preferences, and thus cannot prevail against the trustee's
asserted claim for recovery of preferentially transferred property of the debtor. We therefore reverse
the judgment of the district court to the extent it found Cullen to be entitled to assert the good faith
protection of § 550(b), and, in the interest of judicial economy, we remand this case directly to the
bankruptcy court with instructions to reinstate its grant of summary judgment in favor of the trustee,
and order that the proceeds of the trustee's sale of the Live Oak oil and gas properties belong to the
estate of the debtor, not to Cullen.
41
In re Cockreham, 84 B.R. 757, 762 (D.Wyo.1988).
16
REVERSED and REMANDED with instructions.
17