Dominion and Control Test Trumps Good Faith When Determining Initial Transferee Liability

By: Shelley Fredericks

St. John’s Law Student

American Bankruptcy Institute Law Review Staff


Under Section 550(a) of the Bankruptcy Code, a trustee may collect the full amount of an avoidable transfer from the initial transferee of a fraudulent transfer. In Whitlock v. Lowe, the United States District Court for the Western District of Texas held that Whitlock was the initial transferee because she obtained a fraudulent and avoidable transfer on behalf of the debtor.[1] Consequently, she was liable to the bankruptcy trustee for the total amount of the transferred funds.[2]

            Curtis DeBerry (the “Debtor”), filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code in February 2014.[3] Before filing, his wife and Cheri Whitlock (his sister-in-law) opened a joint bank account, into which they deposited $275,000 received from the Debtor.[4] Shortly thereafter, Debtor’s wife relinquished ownership interest in the account, leaving it solely under the control of Whitlock.[5] Whitlock then transferred the money to various individuals and entities, including Mrs. DeBerry and a company owned by Debtor.[6] Debtor admitted that he instructed Whitlock to make the transfers.[7] Whitlock asserted she was unaware that she was sole holder of the account, and although she signed the wire transfers, she had no control over whom the money was going to or how much, which was all decided by the Debtor.[8] Following the Debtor’s Chapter 7 filing, the trustee filed a complaint against Whitlock with the bankruptcy court to recover the funds from Whitlock.[9]

To collect under §550(a), a trustee must first show there was a fraudulent and avoidable transfer.[10] In this case, there was no dispute that Debtor fraudulently transferred funds. A trustee may then recover “the property transferred…or the value of such property from… the initial transferee of such transfer or the entity for whose benefit such transfer was made.”[11] A trustee may recover fraudulent transfers from an initial transferee regardless of the transferee’s good faith.[12] Initial transferees are strictly liable for fraudulent transfers.[13] The court adopted the “dominion and control” test used by the Fifth Circuit to determine initial transferee status.[14]

The court held that Whitlock had sole legal dominion and control over the transferred funds once she became the sole owner of the account. Legally, the funds belonged to her under her name, due to her endorsement of the checks and wire transfers.[15] Her signature was required for all transfers because she was in sole control of the account.[16] Once she became the sole owner and was the only one authorized to draw from the account, she had dominion and control over the funds.[17] While Whitlock argues that she was acting at the direction of the Debtor, she had no legal obligation to listen to these directions once she was the sole owner. There was no legal impediment that limited her ability to access the account; rather, there was merely personal pressure to follow the directions of Debtor.[18] Accordingly, Whitlock was liable to the trustee for the full value of the funds as an initial transferee.

Use of the dominion and control test to establish liability shows that legal control over the transferred funds trumps the good faith of the initial transferee. Even if an initial transferee does not know the transfer is fraudulent, or is acting at the express direction of the debtor, this will not shield the transferee from being liable for the full amount of those transferred funds. Courts that use this standard also show that protection of the trustee is the main concern regarding these types of actions. This type of rule is established to deter initial transferees from engaging in behavior that could harm the bankruptcy trustee. When a court cannot get to the transferred funds because Debtor has already moved or spent them, a trustee has a second avenue of recovery if the initial transferee can be held liable. The rule holding an initial transferee strictly liable adds an extra level of protection and recovery for the bankruptcy trustee while sending a message to those considering engaging

[1] Whitlock v. Lowe, 569 B.R. 94 (W.D. Tex. 2017).

[2] Id. at 101.

[3] Id. at 96.

[4] Id. at 97.

[5] Id.

[6] Id. at 97-98.

[7] Id. at 98.

[8] Id.

[9] Id. at 96.

[10] Id. at 100.

[11] 11 U.S.C. § 550(a).

[12] Whitlock v. Lowe, 569 B.R. at 100.

[13] Id.

[14] Id.

[15] Id.

[16] Id.

[17] Id.

[18] Id. at 101.