The majority opinion, written by Judge Marbley (sitting by designation from the Southern District of Ohio), begins by saying that "bad facts make bad law" and that this case "tests that maxim". That's a nice way of saying that the horrible, facially inequitable result reached in the opinion allegedly makes sense notwithstanding that result. Judge Tashima joins that opinion.
Judge Nguyen dissents. She begins her opinion by saying:
"Bankruptcy courts 'are courts of equity' that 'appl[y]
the principles and rules of equity jurisprudence.' [Cite] There is nothing
equitable about today’s decision.
Donald Buresh, Sharon Phillips, and Lisa Henry are not
Michael Bello’s family members, friends, or even close
associates. They are a married couple who sold their
property to Bello to fund their retirement and a small
business owner who performed design and construction
services for him. Unbeknownst to them, the checks with which Bello paid them, which bore the name of his company,
were in fact drawn from a sham bank account that he created
to fraudulently siphon money away from his company and
use for his personal expenses. Their dealings with Bello
were legitimate, arms-length transactions. Yet they each
now owe Bello’s creditors hundreds of thousands of
dollars—a ruinous sum for most retirees and small
businesses. I strongly disagree with this result."
Those are fairly starkly divergent ways of viewing the same case.
The majority's central argument is that it makes sense to impose liability on the innocent, bona fide recipients of these funds because they had "some" ability to root out the fraud, and hence "allocates the
monitoring costs and risks of repayment" to the appropriate person. And, in truth, there were at least some events that -- in retrospect -- might raise "red flags"; namely, the fact that the recipients were paid with a company check for seemingly personal services.
But two points.
First, I strongly doubt that most people would automatically think that a corporate officer had two sets of books and was siphoning money out of a company just because they received a company check. Imagine that you're a groundskeeper, or (as here) a designer, and receive a company check for your services. Would you say: "No, sorry, I can't take this as payment, at least until you show me all the books for your corporation that proves that you're not illegally siphoning off funds?" Or would you assume -- as I would -- that the guy was probably authorized to do it, or was paying you out of the business for tax reasons, or simply realized that it wasn't your province to try to decide how you got paid? (Oh, and, as far as I can tell, the majority's holding would equally apply to cash payments from the company's tiller, right? It doesn't rely on the fact that it was a company check, but only that the funds came from the company.)
So I think the majority's belief that "allocating" the responsibility to the recipients of the funds makes for good policy and/or best roots out fraud doesn't really work. It defies what we know from our own experiences and common sense.
Second, the majority says that these innocent purchasers have a greater ability and incentive to root out fraud that then alternatives. Really? Remember: the funds here are going to the creditors of the company (and/or the stockholders). People who rationally invested -- at some level -- in the actual company itself. Unlike an interior designer that, at the end of the process, merely receives a check, these people actually did conduct due diligence on the company before extending it credit. Or at least easily could have.
What the majority is saying is that it makes more sense to allocate monitoring costs to a bona fide seller like the individuals here -- who, in truth, have absolutely no leverage or ability to monitor the transaction -- as opposed to creditors who routinely engage in precisely such monitoring. I'm not so sure I'm persuaded by either the rationality or equity of that allocation.
Sure, if Congress had clearly and unambiguously said that any time you take money from anyone, you're hereby on notice that you're at risk of having to give that money back if the guy turns out to have stolen it, then, yeah, I'd be compelled to follow that rule. But it clearly hasn't said that. Not only is there is a majority and minority rule amongst the circuits, but bankruptcy courts get to both develop and apply equitable principles. Including here.
As between business creditors who are hosed by a company versus third parties who just get money retrospectively from a person who secretly stole from that company, I'm not sure it doesn't make more sense to allocate losses to the former rather than the latter.
Even though the Ninth Circuit does the exact opposite here.