Memorandum of Decision Re: Transferees

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re ZYTREK CORPORATION,                                       No. 5-85-01254      Debtor. ________________________/ JEROME E. ROBERTSON, Trustee,      Plaintiff,    v.                                                                              A.P. No. 870222 NIESAR, KREGSTEIN & CECCHINI, and NEISAR & WICKERSHAM,      Defendants. _______________________/
     The facts in this matter are undisputed. On April 29, 1985, debtor Zytrex Corporation filed its Chapter 11 petition. On September 26, 1985, Zytrek entered into an agreement with Investment Management International, Inc. ("IMI") whereby IMI would provide postpetition financing to Zytrek. Part of the agreement provided that the president of IMI would also become the president of Zytrek.      Defendant Niesar & Wickersham, which later became Niesar, Kregstein & Cecchini, was the law firm which represented IMI. In March, 1986, this firm billed IMI for legal fees in the amount of $11,358.35. The president of IMI, who was now also the president of Zytrek, had a check for the fees drawn on Zytrek's account. The defendant law firm recognized that this was improper, and returned the check with the advice that payment must come from IMI, not Zytrek. A day or two later, a cashier's check for the amount of the bill was received by the law firm and cashed.      Zytrek's case was later converted to Chapter 7, and plaintiff Jerome Robertson was appointed Trustee. He discovered that the cashier's check had been purchased with Zytrek's money and accordingly made demand on the defendant law firm for return of the funds as an unauthorized postpetition transfer pursuant to section 549 of the Bankruptcy Code. At first, the law firm promised to repay the funds within ten days; subsequently, it declined to do so and the Trustee commenced this action.      The defendant law firm now defends the action on two legal theories. First, it claims that it is a good faith transferee which took the funds without knowledge of the voidability of the transfer, and therefore has a defense under section 550(b)(1). Alternatively, it argues that the bank which issued the cashier's check was such a good faith transferee and the law firm took the transfer from the bank, so that it is protected by section 550(b)(2).      Defendant misreads the law as standing for the proposition that an initial transferee is not liable if he took in good faith. This defense is only available to subsequent transferees, not initial transferees; section 550(b) applies only to section 550(a)(2), not 550(a)(1).      Defendant's argument that the bank which issued the cashier's check is the initial transferee is without merit. A cashier's check is equivalent to cash and is simply a convenient way of transferring the check purchaser's cash to the check's payee. The issuing bank is merely a conduit, not the initial transferee. In re Auto-Pac, Inc. (Bkrtcy.D.Colo.1986) 63 B.R. 321, 322-23. The only case remotely supporting the defendant's position is In re Jorges Carpet Mills, Inc. (Bkrtcy.E.D.Tenn.1985) 50 B.R. 84, in which the court found that a corporate officer (not the issuing bank) was the initial transferee of a cashier's check. To the extent that Jorges Carpet Mills is at all applicable, the court rejects it and adopts the sound reasoning of Auto-Pac.      Even if the bank or someone else is considered to be the initial transferee, the defendant law firm prevail only if it can be considered a good faith transferee under section 550(b)(1). The court finds that as a matter of law it cannot be so considered.      The defendant law firm admits that it knew the debtor was controlled by the president of IMI and that it knew that the first attempt to pay it was improper. Under these circumstances, the subsequent acceptance of a cashier's check not containing the debtor's name did not magically transform the law firm into an innocent transferee. It merely gave the law firm some sort of "deniability" which the court declines to find a substitute for good faith. Once the law firm learned of the attempt to pay it with the debtor's funds, it was under an affirmative duty to make sure that the subsequent payment by cashier's check was not merely a change in the form of the improper transaction. Having failed to do so, it cannot now argue that it is a good faith transferee.      For the reasons set forth above, the Trustee's motion for summary judgment is granted. Counsel for the Trustee shall submit an appropriate form of judgment, which shall include interest at the legal rate from the date of the transfer.
Dated: November 6, 1987                                                                              ________________________                                                                                                                      ALAN JAROSLOVSKY                                                                                                                      U.S. BANKRUPTCY