Bonded Financial Services, Inc. v. European American Bank

Michael Ryan owned Bonded Financial Services (Bonded) (debtor). Ryan also owned horses as Shamrock Hill Farm (Shamrock). Ryan borrowed $655,000 from European American Bank (the bank) to run Shamrock. In January 1983, Bonded sent the bank a $200,000 check, payable to the bank, with instructions to deposit the check into Ryan’s account. Ryan then instructed the bank to debit his account $200,000 to reduce the balance of the Shamrock loan. Bonded filed for bankruptcy in February 1983. Ryan was subsequently convicted of mail fraud and imprisoned. The bankruptcy trustee sought to recover the $200,000 transferred from Bonded in January 1983 as a fraudulent conveyance. Given Ryan’s insolvency, the trustee sought recovery from the bank under 11 U.S.C. § 550(a)(1), which permits recovery of a fraudulent transfer from the initial transferee or the entity for whose benefit the transfer was made. The trustee contended, among other things, that the bank was the initial transferee of the $200,000 because the check was payable to the bank. The trustee further argued that if the bank was instead a subsequent transferee—from which recovery would be permitted under § 550(a)(2) unless the transferee took the transfer for value, in good faith, and without knowledge of the transfer’s voidability—the bank had not given value to Bonded and should have known that something about the transaction was suspicious because Bonded had transferred such a large amount to Ryan. The bankruptcy court granted summary judgment for the bank, and the district court affirmed. The trustee appealed.