PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
In Re: STEPHEN S. MEREDITH, CPA,
P.C.,
Debtor.
ROY M. TERRY, JR., Trustee for the
Estate of Stephen S. Meredith,
CPA, P.C., No. 07-1509
Trustee-Appellant,
v.
DARLENE MEREDITH; MEREDITH
FINANCIAL GROUP, INCORPORATED,
Defendants-Appellees.
Appeal from the United States District Court
for the Eastern District of Virginia, at Richmond.
Henry E. Hudson, District Judge.
(3:06-cv-00848-HEH; AP-05-3050)
Argued: March 18, 2008
Decided: June 3, 2008
Before NIEMEYER and SHEDD, Circuit Judges, and
Irene M. KEELEY, United States District Judge for the
Northern District of West Virginia, sitting by designation.
Affirmed by published opinion. Judge Shedd wrote the opinion, in
which Judge Niemeyer and Judge Keeley joined.
2 IN RE: MEREDITH
COUNSEL
ARGUED: Peter John Barrett, KUTAK & ROCK, L.L.P., Richmond,
Virginia, for Appellant. Kevin D. Holden, KAUFMAN &
CANOLES, P.C., Richmond, Virginia, for Appellees. ON BRIEF:
Kimberly A. Pierro, KUTAK & ROCK, L.L.P., Richmond, Virginia,
for Appellant. Jeffrey L. Marks, KAUFMAN & CANOLES, P.C.,
Richmond, Virginia, for Appellees.
OPINION
SHEDD, Circuit Judge:
Roy M. Terry, trustee for the bankruptcy estate of Stephen S. Mer-
edith, CPA, P.C. (the "Trustee") brought an adversary proceeding
against Darlene Meredith ("Ms. Meredith") claiming that he is enti-
tled to recover from her the value of certain assets fraudulently trans-
ferred from the bankruptcy estate, pursuant to 11 U.S.C. § 550(a)(1).
The bankruptcy court and district court rejected the Trustee’s claim,
holding that Ms. Meredith is not the "entity for whose benefit such
transfer was made" under § 550(a)(1). We agree and therefore affirm.
I
Stephen S. Meredith, ("Mr. Meredith") a certified public accoun-
tant, was the sole shareholder, officer, and director of the debtor in
these proceedings, Stephen S. Meredith, CPA, P.C., (the "PC").
Through the PC, Mr. Meredith was engaged in the business of provid-
ing tax and accounting services. In December 2002, a $250,000 judg-
ment debt was entered against Mr. Meredith and the PC. The same
month, Mr. Meredith transferred his accounting practice from the PC
to Meredith Financial Group, Inc. ("MFG"), a corporation run by Mr.
Meredith and used as a clearinghouse for several businesses operated
by the Merediths. Ms. Meredith was president and sole shareholder
of MFG.
In July 2003, an involuntary Chapter 7 bankruptcy proceeding was
filed against the PC. Around the same time, Ms. Meredith initiated
IN RE: MEREDITH 3
divorce proceedings against Mr. Meredith, at which point Mr. Mere-
dith formed Stephen S. Meredith, CPA, PLLC (the "PLLC") in an
effort to continue his accounting practice despite the bankruptcy.
As part of the bankruptcy proceedings, the Trustee initiated an
adversary proceeding against MFG, the PLLC, and Ms. Meredith.1
The Trustee sought a determination that MFG and the PLLC were
alter egos and/or corporate successors of the PC and were therefore
jointly and severally liable for its debts. He also sought avoidance of
the transfer of the accounting practice from the PC to MFG under 11
U.S.C. § 548 and the return of the accounting practice to the bank-
ruptcy estate pursuant to 11 U.S.C. §§ 549 and 550. Finally, he sought
recovery against Ms. Meredith personally on the theory that MFG’s
corporate veil should be pierced or, in the alternative, that she was the
"entity for whose benefit" the avoidable transfer was made under 11
U.S.C. § 550(a)(1). Shortly after the adversary proceeding began, Mr.
Meredith committed suicide.
The bankruptcy court found in favor of the Trustee, holding that
MFG and the PLLC were both corporate successors and alter egos of
the PC, and that the Trustee was therefore entitled to recover their
assets. The bankruptcy court also held that the transfer of the account-
ing practice from the PC to MFG was fraudulent and therefore avoid-
able. However, the bankruptcy court denied any recovery against Ms.
Meredith personally, holding (1) that she was not liable under a veil-
piercing theory, and (2) that because she had received no benefit from
the transfer of the accounting practice from the PC to MFG, she was
not the "entity for whose benefit such transfer was made" under
§ 550(a)(1).
The district court affirmed the order of the bankruptcy court in full.
The Trustee now appeals, arguing that the bankruptcy court and dis-
trict court erred by refusing to award him recovery against Ms. Mere-
dith under § 550(a)(1). Specifically, the Trustee argues that as
president and sole shareholder of MFG, Ms. Meredith received a
valuable benefit when MFG acquired the accounting practice. He
argues that the estate has not been made whole by the recovery of the
1
Default judgment was entered against the PLLC, and it is not a party
to this appeal.
4 IN RE: MEREDITH
practice’s remaining assets because the value of the assets recovered
is far less than the value of the practice itself at the time it was trans-
ferred to MFG.2
II
We review the district court’s decision by applying the same stan-
dard of review that it applied to the decision of the bankruptcy court,
reviewing findings of fact for clear error and conclusions of law de
novo. In re Kielisch, 258 F.3d 315, 319 (4th Cir. 2001).
A.
The issue presented in this appeal is whether Ms. Meredith is "the
entity for whose benefit" the transfer of the accounting practice from
the PC to MFG was made for purposes of § 550(a)(1).3 Section 550(a)
provides:
Except as otherwise provided in this section, to the extent
that a transfer is avoided under section 544, 545, 547, 548,
549, 553(b), or 724(a) of this title, the trustee may recover,
for the benefit of the estate, the property transferred, or if
the court so orders, the value of such property, from —
(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 trans-
feree.
2
The bankruptcy court determined the value of the accounting practice
at the time of the transfer to be $138,752.99. The value of the practice
was severely diminished by Mr. Meredith’s death and when the Trustee
liquidated it several weeks later, its assets consisted only of client lists,
office furniture, and office supplies.
3
Courts have sometimes referred to "the entity for whose benefit such
transfer was made" as the "transfer beneficiary." See, e.g., In re McCook
Metals, L.L.C., 319 B.R. 570, 590 (Bankr. N.D. Ill. 2005).
IN RE: MEREDITH 5
The traditional examples of the "entity for whose benefit such
transfer was made" are a debtor of the transferee or the guarantor of
a debt owed by the bankrupt party to the transferee. See, e.g., In re
Columbia Data Prods., Inc., 892 F.2d 26, 29 (4th Cir. 1989). In both
cases, the transfer of an asset from the bankrupt party to the transferee
extinguishes the liability of "the entity for whose benefit such transfer
was made." Thus, we have described that entity as "‘someone who
receives the benefit but not the money.’" Id. (quoting Bonded Fin.
Servs., Inc. v. European Am. Bank, 838 F.2d 890, 895 (7th Cir. 1988)).4
However, nothing in the text of § 550(a)(1) limits "the entity for
whose benefit" the transfer was made only to a debtor or guarantor
and under some circumstances other persons will receive the benefit
of a transfer from the bankrupt to a third party. See, e.g., Boyer v.
Belavilas, 474 F.3d 375, 377 (7th Cir. 2007) (wife of debtor was "the
entity for whose benefit" avoidable transfer was made when she
diverted funds from custodial accounts for her children to a corpora-
tion she owned and controlled). What is apparent from all of these
examples is that a person must actually receive a benefit from the
transfer in order to be an "entity for whose benefit" the transfer was
made. As the Fifth Circuit has observed, our purpose "is to look
through the form of the transaction and determine which entity actu-
ally benefitted from the transfer." In re Compton Corp., 831 F.2d 586,
595 (5th Cir. 1987); see also In re Int’l Mgmt. Assocs., 399 F.3d
1288, 1293 (11th Cir. 2005) (holding that sole shareholder of debtor
corporations was not "the entity for whose benefit" transfer was made
because he received no benefit from the debtors’ buy-out of former
shareholder); Rupp v. Markgraf, 95 F.3d 936, 941 (10th Cir. 1996)
(primary shareholder of debtor corporation was "the entity for whose
benefit" transfer was made because transfer extinguished his debt to
transferee).5
4
Indeed, "the entity for whose benefit" the transfer is made is never a
holder of the transferred asset itself, because the holder of the asset is the
"initial," "immediate," or "mediate" transferee. See In re Finley, Kumble
et al., 130 F.3d 52, 57 (2d Cir. 1997) (the "entity for whose benefit" the
transfer is made "references entities that benefit as guarantors of the
debtor, or otherwise, without ever holding the funds.").
5
A few courts have held that a person need not receive a benefit in
order to be the "entity for whose benefit [the] transfer was made." See,
6 IN RE: MEREDITH
B.
Here, the Trustee argues that Ms. Meredith is "the entity for whose
benefit" the transfer was made because she received a valuable bene-
fit when the accounting practice was transferred to MFG. He argues
that prior to the transfer, Ms. Meredith "was the sole shareholder of
a corporate shell" and "[a]s soon as the transfer took place, [she] was
the sole shareholder of a viable and profitable accounting practice."
Br. of Appellant at 19.
The bankruptcy court rejected this argument, finding as a matter of
fact that Ms. Meredith received no benefit from the transfer of the
accounting practice from the PC to MFG. The bankruptcy court found
that despite MFG’s ownership of the accounting practice, Ms. Mere-
dith did not personally control any aspect of the practice or receive
anything of value from its operations.6 Moreover, once Mr. Meredith
transferred his accounting practice to the PLLC, Ms. Meredith was
again the "sole shareholder of a corporate shell." We cannot conclude
that the bankruptcy court’s findings are clearly erroneous. The mere
fact that Ms. Meredith was, for a brief period of time, the nominal
owner of a business effectively controlled by her husband does not
demonstrate that she received any benefit from that ownership.
e.g., In re Bullion Reserve of N. Am., 922 F.2d 544, 547 (9th Cir. 1991)
(citing authority holding that "an entity need not actually benefit, so long
as the transfer was made for his benefit"). We reject this view. The rule
adopted by these courts is inconsistent with the "well-established rule
that fraudulent transfer recovery is a form of disgorgement, so that no
recovery can be had from parties who participated in a fraudulent trans-
fer but received no benefit from it." McCook, 319 B.R. at 591. Moreover,
permitting the trustee to recover from a party who received no benefit
from the transfer solely on the basis of the transferor’s intent "could be
seen as a deprivation of property without due process" in violation of the
substantive rights protected by the Fifth Amendment. Id.; see also Larry
Chek & Vernon O. Teofan, The Identity and Liability of the Entity for
Whose Benefit a Transfer is Made Under Section 550(a): An Alternative
to the Rorschach Test, 4 J. Bankr. L. & Prac. 145, 156-57 (1995).
6
Although she received salary payments from MFG, the bankruptcy
court concluded that these payments were attributable to her work for
related companies owned by her and her husband and that MFG was
used as a "clearinghouse" for such payments.
IN RE: MEREDITH 7
The Trustee also contends that Ms. Meredith is "the entity for
whose benefit" the transfer was made because Mr. Meredith effected
the transfer from the PC to MFG in part to provide for her support.
The bankruptcy court did conclude that providing support for Ms.
Meredith was one of Mr. Meredith’s goals in making the transfer.
However, Mr. Meredith’s subjective intent to benefit Ms. Meredith is
not determinative of the question of whether she is "the entity for
whose benefit" the transfer was made under § 550(a)(1). Rather, as
we have explained, the determinative inquiry is whether Ms. Meredith
received a benefit from the transfer. Because the bankruptcy court’s
finding that she did not is not clearly erroneous, we conclude that Ms.
Meredith is not "the entity for whose benefit" the transfer was made.
III
For the foregoing reasons, we affirm the judgment of the district
court.
AFFIRMED