Wirum v. Owen Bird Law Corporation

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re
PLUSFIVE HOLDINGS, L.P., No. 06-10307
Debtor(s).
______________________________________/
ANDREA A. WIRUM, Trustee,
Plaintiff(s),
v. A.P. No. 07-1076
OWEN BIRD LAW CORPORATION,
Defendant(s).
_______________________________________/
Memorandum on Motion for Reconsideration
_________________
In this action to recover allegedly fraudulent transfers, the court declined to grant summary judgment
in favor of defendant Owen Bird Law Corporation, a Canadian law firm which received wire transfers of
estate funds, on the grounds that the court had no evidence of a legitimate reason for the transfers. The court
held that only where a law firm receives a client’s funds in trust for a legitimate purpose is it considered to be a
“mere conduit” with no liability under § 550(a)(1) of the Bankruptcy Code.
The court anticipated that Owen Bird would follow up on that ruling with a new motion setting forth
the legitimate purpose for the use of its trust account. Instead, Owen Bird has asked the court to reconsider.
It acknowledges that in some circuits a law firm is required to have acted honestly in order to avoid §
Entered on Docket
January 12, 2009
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 07-01076 Doc# 80 Filed: 01/12/09 Entered: 01/12/09 13:58:41 Page 1 of 3

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1There is an inconsistency in approach, in that Harbour treats the “mere conduit” exception as an
equitable exception to § 550(a)(1) whereas Incomnet disagrees. See Incomnet, 463 F.3d at 1073n8.
However, this disagreement only effects the burden of proof, not the underlying legal principles.
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550(a)(1) liability, but that in the Ninth Circuit a law firm is insulated from such liability even if it was engaging
in fraudulent or even criminal conduct.
While the Ninth Circuit has approached the issue differently than the Fourth Circuit in In re Harbour,
845 F.2d 1254, 1258 (4th Cir. 1988), it has not expressly disapproved that case. In such situations, the
proper role of a federal trial court is to attempt to harmonize circuit decisions, leaving declarations of a split of
among the circuits to the circuits themselves. See In re Berg, 188 B.R. 615, 620 (9th Cir. BAP 1995).
Owen Bird has cited no case where a transferee who has acted fraudulently or illegally in the receipt
of a debtor’s funds has nonetheless been held to be a mere conduit. The primary case relied upon by Owen
Bird, In re Comnet, Inc., 463 F.3d 1064 (9th Cir. 2006), is not necessarily inconsistent with Harbour in any
significant way.1 In that case, the Circuit affirmed the Appellate Panel’s reversal of a bankruptcy court
decision giving “mere conduit” status to a transferee. The court reiterated that “mere conduit” status is
restricted narrowly to those entities who had legal authority over the money and the right to use the money
however it wished, as opposed to the more expansive “control” test. 463 F.3d at 1070.
When a law firm uses its trust account lawfully and for a legitimate purpose, it has no legal authority
over the funds in the account and no right to use them as it wishes. Accordingly, it is a “mere conduit” as to
such funds transferred to it. However, when a law firm engages in a conspiracy with a client or otherwise
allows a client to improperly transfer funds through its trust account, then the normal rules governing attorney
trust funds no longer apply. The lawyer has no greater rights than any lay person asked to accept ill-gotten
gains on behalf of a wrongdoer. The lawyer has the discretion to turn the funds over to the perpetrator,
return them to the rightful owner, or use them to his or her own benefit, since they did not come into the trust
account for any lawful purpose.
Moreover, laws or regulations restrict how an entity can use funds in its custody do not automatically
confer “mere conduit” status on the transferee. Incomnet at 1075. If the debtor’s funds came into Owen
Case: 07-01076 Doc# 80 Filed: 01/12/09 Entered: 01/12/09 13:58:41 Page 2 of 3

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Bird’s trust account for no legitimate purpose, then Owen Bird had discretion to return them to the debtor
rather than enable the unlawful plans of its client. This discretion to decide when, if and how it disbursed the
funds is fatal to its claim to “mere conduit’ status. Incomnet at 1076.
For the foregoing reasons, Owen Bird’s motion for reconsideration will be denied. Counsel for
Wirum shall submit an appropriate form of order.
Dated: January 12, 2009
SAlan Jaroslovsky
U.S. Bankruptcy Judge
Case: 07-01076 Doc# 80 Filed: 01/12/09 Entered: 01/12/09 13:58:41 Page 3 of 3