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March 20, 2003


The opinion of the court was delivered by: Michael B. Mukasey, United States District Judge


Thomas Carroll appeals from the Bankruptcy Court's order granting summary judgment to Angela Tese-Milner, the Chapter 7 bankruptcy trustee of Red Dot Scenic, Inc. ("Red Dot"), on her claim that four payments to Carroll from Red Dot's corporate checking account were fraudulent transfers that may be avoided by the trustee. For the reasons stated below, the decision of the Bankruptcy Court is affirmed.


The following undisputed facts are drawn from the Bankruptcy Court's opinion: In 1990, Carroll and David Brune became partners in Red Dot, a company that designed and constructed theatrical scenery. Red Dot was incorporated in 1994, and Carroll and Brune became sole, equal shareholders and officers of the newly formed corporation. By the end of 1995, Red Dot had incurred a $120,000 debt and Carroll, with the help of an office manager, implemented a plan to reduce the overall debt by approximately $56,000 during the course of 1996.

Despite Red Dot's improved financial situation in 1996, Carroll and Brune decided to end their business association. On December 10, 1996, they entered into a written agreement pursuant to which Brune agreed to pay Carroll $57,000 for Carroll's shares in Red Dot. In exchange for Carroll's resignation as an officer and director of Red Dot, the agreement required that Brune tender a $15,000 down payment and then pay the balance in seven installments. Carroll's shares were held by his attorney in an escrow account until full payment was received.

At the closing of the agreement, Brune gave Carroll a personal check in the amount of $15,000. From March 1997 through September 199.7, Brune tendered four additional checks to Carroll totaling $18,000. However, unlike the first check, which was drawn from Brune's personal account, these checks were issued from Red Dot's corporate checking account. Red Dot received no consideration for these four payments.

On February 23, 1998, less than one year after each of the four transfers to Carroll, Red Dot filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code. The case was later converted to a Chapter 7 case.

Red Dot's Chapter 7 trustee commenced an adversary proceeding to avoid the conveyance of Red Dot's property to Carroll and recover that property pursuant to sections 548(a)(1) and 550(a)(1) of the Bankruptcy Code.*fn1 The trustee moved for summary judgment on the avoidance claim. In her summary judgment motion, the trustee contended that the $18,000 could be recovered from Carroll because he was an initial transferee of four payments from Red Dot's corporate account. Alternatively, the trustee argued that even if Carroll was an immediate or mediate transferee, his good faith defense under section 550(b) would fail as a matter of law. Carroll cross-moved for summary judgment, claiming that he was not an initial transferee as described by section 550(a)(1). Carroll argued instead that he was an immediate or mediate transferee who took for value, in good faith, and without knowledge of the voidability of the transfer.

The Bankruptcy Court for the Southern District of New York (Bohanon, B.J.) granted the trustee's motion for summary judgment on the ground that Carroll was an initial transferee under section 550(a)(1). Accordingly, the Bankruptcy Court found that the trustee was entitled to recover $18,000 from Carroll. Carroll appeals. This court has jurisdiction to hear Carroll's appeal under 28 U.S.C. § 158(a)(1).


Federal Rule of Bankruptcy Procedure 7056 applies Federal Rule of Civil Procedure 56(c) to summary judgment motions in bankruptcy proceedings. Under Rule 56(c), summary judgment is proper "if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). The court reviews the bankruptcy judge's grant of summary judgment de novo and views the facts in the light most favorable to the non-movant. In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson, & Casey, 130 F.3d 52, 55 (2d Cir. 1997)

Section 548 of the Bankruptcy Code provides, in relevant part:

The trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily — received less than a reasonably equivalent value in exchange for such transfer or obligation; and was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation.
11 U.S.C. § 548(a)(1)(2000). It is undisputed that there was a transfer of the debtor's property, that Red Dot did not receive reasonably equivalent value for the transfers, and that Red Dot was insolvent at the time of the transfers to Carroll based on the definition of "insolvent" in section 101(32) of the Code. Thus, the elements of section 548 have been met, and the trustee is authorized to exercise her avoidance power.

Once it is established that the trustee is entitled to avoid transfers under section 548, section 550(a) permits the trustee to recover from particular transferees. The section provides, in relevant part: "[T]he trustee may 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." 11 U.S.C. § 550(a)(2000). Although the Code imposes strict liability on "initial transferees" and "entit[ies] for whose benefit such transfer was made," section 550(b) protects transferees subsequent to the initial transferee who ...

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