MEMORANDUM AND ORDER AFFIRMING THE BANKRUPTCY COURT'S DECISION

VIRGINIA A. PHILLIPS, Chief District Judge..

Michael Bello ("Bello") was the sole shareholder, sole director, and president of Walldesign, Inc. ("Walldesign"), a California corporation. (See Doc. No. 16 ("Responsive Br.") at 4.) Bello opened a bank account in Walldesign's name but kept it secret from others at Walldesign. (Id. at 4-5.) He covertly placed Walldesign funds into this account and spent them on his personal expenses. (Id. at 5-6.) Bello spent approximately $183,407.78 of the funds in this account on services provided by Appellant Grassi Construction, Inc. in connection with Bello's vineyard, Bello Family Vineyard, LLC. (Id. at 7.)

Walldesign filed its Chapter 11 petition for relief on January 4, 2012. The Official Committee ("the Committee") of Unsecured Creditors of the Estate of Walldesign was appointed on January 26, 2012.1 The Committee brought a number of separate adversary proceedings to recover payments Bello made from the secret account, including the payments to Grassi Construction, Inc. ("Grassi").

Appellee filed a motion for summary judgment against Appellant on April 13, 2016. The bankruptcy court granted Appellee's motion for summary judgment and Appellant timely filed the instant appeal.

After consideration of the papers filed by the parties in this appeal, the Court AFFIRMS the bankruptcy court's decision.

I. BACKGROUND

The Bankruptcy Court held that Appellant received actual fraudulent transfers from Walldesign and that Grassi was the initial transferee. (See E.R. at 55-57.)2

In this appeal, Appellant filed its opening brief on September 29, 2016. (See Doc. No. 9 ("Opening Br.").) Appellee filed his responsive brief on October 31, 2016. (Responsive Br.) Appellant filed its reply brief on November 14, 2016. (See Doc. No. 18 ("Reply Br.").)

II. LEGAL STANDARD

A "district court functions as an appellate court in reviewing a bankruptcy decision and applies the same standards of review as a federal court of appeals." In re Crystal Props., Ltd., 268 F.3d 743, 755 (9th Cir. 2001) (quoting another source). Accordingly, "[a] district court reviews a bankruptcy court's conclusions of law and interpretation of the Bankruptcy Code de novo." In re Orange Cnty. Nursery, Inc., 439 B.R. 144, 148 (C.D. Cal. 2010). It reviews factual findings for clear error, and it "must accept the bankruptcy court's findings of fact unless, upon review, the court is left with the definite and firm conviction that a mistake has been committed by the bankruptcy judge." In re Greene, 583 F.3d 614, 618 (9th Cir. 2009) (citing Latman v. Burdette, 366 F.3d 774, 781 (9th Cir. 2004)).

The bankruptcy court's decision to grant summary judgment is reviewed de novo. In re Raintree Healthcare Corp., 431 F.3d 685, 687 (9th Cir. 2005). "Summary judgment is to be granted if the pleadings and supporting documents, viewed in the light most favorable to the non-moving party, show that there is no genuine issue as to a material fact and the moving party is entitled to judgment as a matter of law." Id.

III. FACTS

The following facts are not in dispute.

A. Walldesign

Walldesign is a California corporation that was established in 1983. (Responsive Br. at 4.) Until 2012, it installed drywall, insulation, acoustical material, and plaster, and provided construction-related services to single and multi-family housing projects in California, Nevada, and Arizona. (Id.) Bello was Walldesign's sole shareholder, sole director, and president. (Id.)

B. The Secret Account

On November 1, 2002, Bello opened a bank account in Walldesign's name at Preferred Bank in Irvine, California ("the Secret Account"). (Id.) He used Walldesign's Federal Tax I.D. Number, a Statement by Domestic Stock Corporation, Walldesign's Articles of Incorporation, a Unanimous Consent of Shareholder of Walldesign to Corporate Action, and a signature card granting him authority as an agent of Walldesign to open the Secret Account. (See E.R. at 165-182.) He did not disclose the Account in Walldesign's general ledger or other books and records, and did not disclose the Secret Account to Walldesign's management or creditors. (Responsive Br. at 4-5.)

Walldesign purchased materials for its business in bulk, and its suppliers occasionally issued rebates or refunds for these purchases. (Id. at 5.) Rather than deduct the refund or rebate from the total invoice, the suppliers issued checks to Walldesign for the difference. (Id.) Bello deposited these checks into the Secret Account and actively concealed the deposits from Walldesign's management and employees, its creditors, and the Bankruptcy Court. (Id.)3

Bello used the money in the Secret Account to cover expenses unrelated to Walldesign, including operating costs for Bello Family Vineyard, a winery, and Michael Bello LLC, a horseracing stable, as well as other entities he controlled; his Las Vegas casino bills; his personal expenses charged on his American Express credit card; and his homeowners' association and country club fees for two private golf courses. (Id. at 5-6.)

C. Grassi Construction, Inc.

Mark Grassi founded Grassi Construction, Inc. ("Grassi") in 1980. (Opening Br. at 3.) In 2004, Bello hired Grassi to provide services with respect to the construction of Bello's residence at his vineyard property. (Id.)

IV. DISCUSSION

A. Actual Fraudulent Transfers

Appellant asserts that Appellee failed to provide any direct evidence, or sufficient circumstantial evidence, to establish that Bello's payments to Vineyard Management were made with the intent to hinder, delay, or defraud his creditors. (Opening Br. at 8-10.) Thus, Appellant contends that the bankruptcy court erred in finding that a number of Bello's payments to Vineyard Management were actual fraudulent transfers and granting summary judgment to Appellee. (Opening Br. at 8-14.)

California Civil Code section 3439.04 provides that:

Cal. Civ. Code § 3439.04(a)(1).

In cases of fraudulent transactions, where the real intent of the parties is solely within their own knowledge, "[d]irect proof of a transfer and of a fraudulent intent is often an impossibility. Hence proof indicative of a transfer and of fraud may come by inference from circumstances surrounding the transaction, the relationship and interest of the parties." Menick v. Goldy, 131 Cal.App.2d 542, 548, (1955). California Civil Code section 3439.04 includes the following circumstantial factors for a court to consider in making a determination regarding the intent of the debtor:

Cal. Civ. Code §§ 3439.04(b)(1)-(11).

This list of relevant factors "provides neither a counting rule, nor a mathematical formula." In re Beverly, 374 B.R. 221, 236 (B.A.P. 9th Cir. 2007), aff'd in part, dismissed in part, 551 F.3d 1092 (9th Cir. 2008). "No minimum number of factors tips the scales toward actual intent." Id.

Here, three badges of fraud are particularly relevant: the transfers were concealed from Walldesign; Walldesign did not receive reasonably equivalent value in exchange for the transfers; and the transfers and Secret Account were concealed from Walldesign's creditors.

As explained below, the Secret Account was a Walldesign account. Further, Bello did not disclose the Account in Walldesign's general ledger or other books and records, and did not disclose the Secret Account to Walldesign's management or creditors. (Responsive Br. at 4-5.) Further, no evidence has been presented to suggest that the services provided by Appellant to Bello Family Vineyard provided any value to Walldesign.

There is no minimum number of factors required for a court to make a finding of fraudulent intent. In re Beverly, 374 B.R. at 236. This Court finds that because the subject transfers were concealed from Walldesign and its creditors, and no evidence has been presented that Walldesign received any value from Grassi's services, there is no genuine dispute as to whether or not the subject transfers were made with actual intent to hinder, delay, or defraud Walldesign's creditors. Accordingly, the bankruptcy court did not err in finding that the transfers were made with the requisite fraudulent intent to be classified as actual fraudulent transfers.

B. The Initial Transferee

Appellant asserts that the bankruptcy court erred in finding that Appellant was the initial transferee as a matter of law. (Opening Br. at 1.)

1. Defining "Initial Transferee"

Under the Bankruptcy Code, a trustee of the debtor may recover a fraudulent transfer of estate property from either "(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." See Schafer v. Las Vegas Hilton Corp. (In re Video Depot, Ltd.), 127 F.3d 1195, 1197 (9th Cir. 1997) (quoting 11 U.S.C. § 550(a)).

The distinction between an "initial transferee" and a subsequent transferee is critical. See id. "The trustee's right to recover from an initial transferee is absolute." Id. at 1197-98 (quoting Danning v. Miller (In re Bullion Reserve), 922 F.2d 544, 547 (9th Cir. 1991)). A subsequent transferee, on the other hand, has a defense. A trustee may not recover from a subsequent transferee if "the subsequent transferee accepted the transfer for value, in good faith, and without knowledge of the transfer's voidability." Id. at 1198; see also 11 U.S.C. § 550(b)(1). Therefore, if Appellant is the initial transferee, the Committee has an absolute right to recover the transfers at issue.

"Section 550(a) does not define the phrase `initial transferee.'" In re Incomnet, Inc., 463 F.3d 1064, 1069 (9th Cir. 2006).4 Over the years, judges have crafted two distinct tests to determine whether a party is an "initial transferee" under § 550(a)(1): the "dominion test" and the "control test." Id. The Ninth Circuit has explicitly adopted the dominion test; it has declined to adopt the control test. See id. at 1070.

"Under the dominion test, a transferee is one who has dominion over the money or other asset, the right to put the money to one's own purposes." Id. (citation, quotation marks, and alterations omitted). The test focuses on whether someone "had legal authority over the money and the right to use the money however" desired — for example, to invest the money in "lottery tickets or uranium stocks." Id. at 1070, 1073. The control test, on the other hand, "takes a more gestalt view of the entire transaction to determine who, in reality, controlled the funds in question." Id. at 1071.

The leading case on the dominion test, Bonded Financial Services, focuses on policy considerations. See Bonded Fin. Servs. Inc. v. European Am. Bank, 838 F.2d 890, 893 (7th Cir. 1988). Initial transferees are "the best monitor[s]" of fraudulent conveyances, it stated. Id. at 892-93. This status renders them defenseless to a trustee's right to recover fraudulent conveyances. Id. "[S]ubsequent transferees," on the other hand, "usually do not know where the assets came from and would be ineffectual monitors if they did." Id. They, therefore, have a defense.

In its most recent statement on the issue, the Ninth Circuit Court of Appeals echoed these considerations. See Mano-Y&M, Ltd. v. Field (In re The Mortgage Store), 773 F.3d 990 (9th Cir. 2014). In In re The Mortgage Store, the Ninth Circuit noted that "[i]n virtually every case involving a bankrupt entity, a third party will be injured because the debtor's obligations to creditors, by definition, outstrip its assets." Id. at 997. The "injury must fall on either the transferee of the conveyance or the debtor's creditors." Id. A court's aim in these cases "must be to allocate risk such that the parties tending to have the lowest monitoring costs [] bear the costs of a debtor's failings." Id. (citing Bonded Fin. Servs., 838 F.2d at 892-93). Congress determined that initial transferees have the lowest monitoring costs, and it therefore placed the risk of fraudulent conveyances on them rather than creditors. Id.

The In re The Mortgage Store Court further noted that "it is unreasonable to assume" a long-time president of a corporation from where a transfer came "has the proper incentives to monitor [that corporation] for fraud. . . . Charging a party with monitoring for fraud the entity that pays its debts would undermine the very structure of § 550." Id. at 998 n.1.

This notion is not novel. The Ninth Circuit in In re Video Depot earlier adopted the view that "[t]he mere power of a principal to direct the allocation of corporate resources does not amount to legal dominion and control." 127 F.3d at 1199 (citing Bowers v. Atlanta Motor Speedway, Inc. (In re Se. Hotel Properties Ltd. P'ship), 99 F.3d 151, 156 (4th Cir. 1996)).5 Many principals of corporations "exercise de facto control over the funds of the corporations they manage," it stated. Id. (quoting Bowers, 99 F.3d at 156). These principals "can choose to cause their corporations to use those funds appropriately or inappropriately. The distinction is only relevant to the question whether the principal's conduct amounted to a breach of duty to the corporation." Id. (quoting Bowers, 99 F.3d at 156). It is not relevant to whether the principal is an initial transferee. A rule making "every agent or principal of a corporation . . . the initial transferee when he or she effected a transfer of property in his or her representative capacity" would give "too much power to an unscrupulous insider to effect a fraudulent transfer." Id.

The In re Video Depot Court "conclude[d] that [a principal's] control over the business operations of [the corporation] does not, in itself, compel a finding that [the principal] had dominion and control over the funds transferred from the [the corporation] to [a third party]." Id. at 1199-1200.

As these cases demonstrate, a corporation's principal who effects a transfer from the corporation in his representative capacity does not have dominion over those funds in his personal capacity, and therefore does not constitute an initial transferee of those funds under the Bankruptcy Code.

2. Applying the Definition of "Initial Transferee"

Applying this definition of "initial transferee," the Court holds that Bello was not the initial transferee. Bello did not have dominion over the funds in the Secret Account except in his capacity as a Walldesign representative. Moreover, he was the sole shareholder and president of Walldesign, and he therefore did not have the proper incentives to monitor Walldesign for fraud. Considering him the initial transferee of a transfer from Walldesign would undermine the structure of § 550(a)(1).

Courts have suggested that a corporate principal's transfer of corporate funds into a personal bank account may afford the principal dominion over those funds. See In re Video Depot, 127 F.3d at 1199. The Secret Account was not, however, Bello's personal bank account. Bello opened it in Walldesign's name as a Walldesign representative, and he deposited Walldesign funds into the Account. The checks issued from the Secret Account bore the title, "WALLDESIGN INCORPORATED."

Appellant points to several facts to show that the Secret Account was Bello's personal account: Bello used his personal address to open the Secret Account; the account was never included on Walldesign's financial statements; and Bello's wife — who was not a Walldesign employee — was a signatory to the Account. (Opening Br. at 18).

On the other hand, Bello used Walldesign's Federal Tax I.D. Number, a Statement by Domestic Stock Corporation, Walldesign's Articles of Incorporation, a Unanimous Consent of Shareholder of Walldesign to Corporate Action, and a signature card granting him signing authority as an agent of Walldesign to open the Secret Account. (See E.R. at 165-182.) Hence, the Secret Account was a Walldesign account.

Although the transfers Bello made from the Secret Account were improper and breached his duty to the corporation, he effected them in his capacity as a Walldesign representative. He did not, therefore, have dominion over the funds in the Secret Account in his personal capacity, i.e., he was not the initial transferee.

C. Affirmative Defenses

Appellant contends that the bankruptcy court erred in its application of available affirmative defenses under the California Uniform Fraudulent Transfers Act and the Bankruptcy Code.

As written at the time of the relevant transfers,6 the California Uniform Fraudulent Transfers Act stated that an actual fraudulent transfer is not voidable "against a person who took in good faith and for a reasonably equivalent value or against any subsequent transferee or obligee." Cal. Civ. Code § 3439.08(a) (2005)(effective July 7, 2005). Before the 2015 amendment, the Ninth Circuit stated that a court's analysis of the availability of affirmative defenses under section 3439.08 "require[s] the determination of whether `reasonably equivalent value' was transferred from the transferee to the debtor." In re AFI Holding, Inc., 525 F.3d 700, 707 (9th Cir. 2008).

Here, Appellant does not contend that Walldesign received any value from the work done by Vineyard Management on Bello Family Vineyards. Appellant merely asserts that the statute, as previously written, did not expressly require that reasonably equivalent value be determined from the perspective of the debtor. (Opening Br. at 22.) The Ninth Circuit's statement in In re AFI Holding that reasonably equivalent value should be determined from the perspective of the debtor is consistent with the policy considerations of the California Uniform Fraudulent Transfers Act, which are further evidenced by the 2015 amendments that clarify this point. Thus, this Court finds that the bankruptcy court did not err in its finding that Appellant did not provide reasonably equivalent value to Walldesign in exchange for the money paid for Appellant's services.

Section 3439.08 (a) requires that the transfer be taken in both good faith and for reasonably equivalent value. The bankruptcy court did not err in its finding that Appellant did not provide reasonably equivalent value to Walldesign, and thus did not err in finding that Appellant was not entitled to the affirmative defense set forth in section 3439.08 (a). This Court does not address the bankruptcy court's analysis of whether or not Appellant received the transfer in good faith.

In addition, as explained above, the bankruptcy court did not err in finding that Grassi was the initial transferee. Thus, the bankruptcy court did not err in finding that Appellant was not entitled to affirmative defenses under California Civil Code section 3439.08(b) and Bankruptcy Code Section 550(b) because Appellant was not a subsequent transferee.

D. Evidentiary Objections

Appellant asserts that the bankruptcy court erred in admitting the declarations of Jack Reitman and Brian Weiss. (Opening Br. at 26-27.) Further, Appellant contends that the bankruptcy court improperly allowed Appellee to proceed with a claim under the California Uniform Fraudulent Transfers Act without citing admissible evidence that actual creditors existed at the time that the subject transfers occurred. (Id. at 27-28.) Finally, Appellant argues that the bankruptcy court erred in finding that there was no genuine issue of material fact concerning the date of Walldesign's insolvency. (Id. at 28-29.)

A district court reviews a "bankruptcy court's evidentiary rulings for an abuse of discretion." In re Slatkin, 525 F.3d 805, 811 (9th Cir. 2008)(citations omitted). "To reverse on the basis of an erroneous evidentiary ruling, [the reviewing court] must conclude not only that the bankruptcy court abused its discretion, but also that the error was prejudicial." Id.

1. The Reitman and Weiss Declarations

Appellant contends that the bankruptcy court abused its discretion in admitting the declarations of Jack Reitman and Brian Weiss because they contain material that is based upon information and belief as well as impermissible hearsay. (Opening Br. at 26-27.) Appellee asserts that the declarations were admissible as summaries of voluminous documents under Federal Rule of Evidence 1006.

Federal Rule of Evidence 1006 provides that:

Fed. R. Evid. 1006.

This court has reviewed Appellant's evidentiary objections and agrees with the bankruptcy court that the Reitman and Weiss declarations were properly admissible under Rule 1006. It appears that these declarations were summaries of the case background and shortened the record by hundreds of pages. (Responsive Br. at 27.) This court finds that the bankruptcy court did not abuse its discretion in admitting the Reitman and Weiss Declarations, and even if it did, any potential abuse of discretion was not prejudicial.

2. The Existence of an Actual Creditor at the Time of the Transfers

Appellant contends that the bankruptcy court improperly allowed Appellee to proceed with a claim under the California Uniform Fraudulent Transfers Act without providing admissible evidence that actual creditors existed at the time that the subject transfers occurred. (Opening Br. at 27-28.)

Under California law, an action to void an actual fraudulent transfer requires the existence of a creditor whose claim "arose before or after the transfer was made or the obligation was incurred." Cal. Civ. Code § 3439.04. An action to void a constructive fraudulent transfer requires the existence of "a creditor whose claim arose before the transfer was made or the obligation was incurred." Cal. Civ. Code § 3439.05.

Here, Appellant contends that Appellee failed to include any admissible evidence indicating the existence of these claims in the materials submitted in support of his motion for summary judgment. (Opening Br. at 28.) Appellee argues that he did prove the existence of these claims with the proof of claims filed on the main bankruptcy docket. (Responsive Br. at 28-29.)

Federal Rule of Evidence 201 provides that a court may take judicial notice on its own of an adjudicative fact that "can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned." Fed. R. Evid. 201. Thus, the bankruptcy court could have taken judicial notice of the existence of proofs of claim filed by Walldesign creditors on the main bankruptcy docket.

Further, even if the bankruptcy court did abuse its discretion in taking judicial notice of the existence of claims, Appellant has not asserted that these claims did not in fact exist. Thus, Appellant has failed to show that it were prejudiced in any way. Therefore, the bankruptcy court did not err by taking judicial notice of the existence of claims against Walldesign by creditors prior to October 31, 2008.

3. The Debtor's Solvency Date

Appellant contends that the bankruptcy court erred in its determination that Walldesign was insolvent as of October 31, 2008 despite Appellant's contention that there was a genuine issue of material fact concerning the date of Walldesign's insolvency. (Opening Br. at 28-29.)

The bankruptcy found that Walldesign was insolvent by no later than October 31, 2008, which was the opinion of Appellee's expert. (See E.R. at 53, 339-401.) Appellant points to Walldesign's balance sheets, which show that the company was solvent through 2010, and argues that these balance sheets demonstrate that there is a genuine dispute of material fact regarding the date of Walldesign's insolvency.

Under California law, the solvency of a debtor can be determined by the application of one of three tests. "A debtor is insolvent if, at fair valuations, the sum of the debtor's debts is greater than all of the debtor's assets." Cal. Civ. Code § 3439.02(a). Additionally, "[a] debtor who is generally not paying his or her debts as they become due is presumed to be insolvent. Cal. Civ. Code § 3439.02(c). The third test for insolvency requires a determination of whether the debtor "was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction." Cal. Civ. Code § 3439.04(a)(2)(A).

Here, Appellee's expert's methodology addressed the "Balance Sheet Test" under California Civil Code §3439.02(a), and determined that the sum of Walldesign's debts was greater than all of its assets by no later than October 31, 2008. (See E.R. at 344.) In determining the date of Walldesign's insolvency, Appellee's expert used the "fair value" method as required by California Civil Code 3439.02(a), using the balance sheet reports on which Appellant relies. (Id. at 344,354).

Appellant relies solely on Walldesign's balance sheets, which were created using generally accepted accounting principles ("GAAP") in order to demonstrate that Walldesign was solvent through 2010. (Opening Br. at 28.) California Civil Code section 3439.02(a) is clear that "fair valuation" rather than GAAP is the appropriate methodology to employ in a determination of insolvency. Cal. Civ. Code § 3439.02(a); See also In re Richmond Produce Co., Inc., 151 B.R. 1012, 1019 (Bankr. N.D. Cal. 1993), aff'd, 195 B.R. 455 (N.D. Cal. 1996)(explaining that generally accepted accounting principles do not control the determination of solvency because certain assets that are recognized under GAAP cannot be sold to satisfy a creditor's claim, and thus are not a component of fair value). Appellant has not challenged the methodology of Appellee's expert nor has it provided an analysis of Walldesign's insolvency that comports with the requirements of California Civil Code § 3439.02(a). Thus, Appellant has failed to demonstrate that there is a genuine issue of material fact concerning Walldesign's date of insolvency. Accordingly, the bankruptcy court did not err in holding the same.

E. Prejudgment Interest

The bankruptcy court has discretion to award prejudgment interest on avoided fraudulent transfers. In re Fink, 217 B.R. 614, 623 (Bankr. C.D. Cal. 1997). State law regarding prejudgment interest controls in cases where state law causes of action are asserted in bankruptcy by virtue of 11 U.S.C. §544(b). In re Acequia, Inc., 34 F.3d 800, 818 (9th Cir. 1994).

California Civil Code section 3287 governs the award of prejudgment interest in this action. Subsection (a) of that statute provides that "[a] person who is entitled to recover damages certain, or capable of being made certain by calculation, and the right to recover which is vested in the person upon a particular day, is entitled also to recover interest thereon from that day. . . ." Cal. Civ. Code § 3287. "The rate of seven percent per annum is appropriate on the claims under state law, asserted by virtue of 11 U.S.C. § 544(b)." In re Richmond Produce Co., 151 B.R. at 1022. Prejudgment interest is calculated from the time that damages "vest" or become certain and "not the time liability to pay those amounts is determined." Evanston Ins. Co. v. OEA, Inc., 566 F.3d 915, 921 (9th Cir. 2009).

Here, there is no dispute about the amount of damages because the subject transfers are definite in nature. Thus, the damages vested at the time that the transfers were made, and prejudgment interest should be calculated from the date of transfer. Accordingly, the bankruptcy court did not abuse its discretion by awarding prejudgment interest from the date of transfer, and did not err in finding that seven percent per annum is the appropriate interest rate.

V. CONCLUSION

The Court holds that the bankruptcy court did not err in finding that the transfers to Grassi were actual fraudulent transfers. The Court also holds that the bankruptcy court did not err in finding that Grassi was the initial transferee. Further, the Court holds that the bankruptcy court did not err in its analysis of the available affirmative defenses, did not err in its evidentiary holdings, and did not err in awarding prejudgment interest. The Court therefore AFFIRMS the findings of the bankruptcy court's Judgement Against Grassi Construction, Inc.

IT IS SO ORDERED.