In re: DBSI, INC. v. United States of America

NOT FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: DBSI, INC.,
Debtor,
______________________________
JAMES R. ZAZZALI, as Trustee for the
DBSI Estate Litigation Trust,
Plaintiff-Appellant,
v.
UNITED STATES OF AMERICA,
Defendant-Appellee.
No. 16-35598
D.C. No. 1:13-cv-00086-MJP
MEMORANDUM*
Appeal from the United States District Court
for the District of Idaho
Marsha J. Pechman, District Judge, Presiding
Argued and Submitted May 17, 2017
Seattle, Washington
Before: HAWKINS, GOULD, and PAEZ, Circuit Judges.
This memorandum is concurrently filed with our opinion in Case No. 16-
35597, in which we affirm the district court’s judgment that sovereign immunity
FILED
AUG 31 2017
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
* This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.

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does not preclude James R. Zazzali (“Zazzali”) from bringing an avoidance action
against the Internal Revenue Service (“IRS” or “government”) under 11 U.S.C.
§ 544(b)(1) and the derivative state law on which Zazzali relied, Idaho’s Uniform
Fraudulent Transfer Act (“UFTA”), Idaho Code Ann. §§ 55-9011 et seq. This
memorandum addresses Zazzali’s cross-appeal from the district court’s judgment
limiting his recovery.2
In his cross-appeal, Zazzali contests the district court’s judgment that the
IRS is exempt from returning approximately $3.6 million, which it had refunded in
tax overpayments to the debtor’s shareholders. Whether Zazzali can recover that
money from the IRS depends on the proper interpretation of the term “initial
transferee” in 11 U.S.C. § 550(a)(1) (“Section 550(a)(1)”) of the Bankruptcy Code.
We have jurisdiction pursuant to 28 U.S.C. § 158(d) and review de novo
issues of statutory interpretation. See, e.g., In re Acequia, Inc., 34 F.3d 800, 809
(9th Cir. 1994). We reverse and remand for further proceedings.
1 In 2015, Idaho amended and renumbered certain sections of Title 55 of the
Idaho Code by adopting the Uniform Voidable Transactions Act. See H.R. 92, 63d
Leg., 1st Reg. Sess. (Idaho 2015). All references in this disposition to the Idaho
Code Annotated are to those statutes in effect during the period in question.
2 The relevant facts are provided in the concurrently filed opinion so we do
not repeat them here.
2

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Section 550(a)(1) allows for the recovery of avoided transfers from the
“initial transferee.” However, the statute fails to define “initial transferee.”
Universal Serv. Admin. Co. v. Post-Confirmation Comm. of Unsecured Creditors
of Incomnet Commc’ns Corp. (In re Incomnet, Inc.), 463 F.3d 1064, 1069 (9th Cir.
2006). “In the absence of a clear statutory definition, two standards to determine
whether a party is an ‘initial transferee’ have emerged: the ‘dominion test’ and the
‘control test.’” Id. We have “explicitly adopted the more restrictive dominion
test.” Id. at 1071 (internal quotation marks and citations omitted).
Here, however, the district court cited to an Eleventh Circuit case, Menotte v.
United States (In re Custom Contractors, LLC), 745 F.3d 1342 (11th Cir. 2014),
which uses the “control test,” to support its determination that the IRS was not an
“initial transferee.” We employ the “dominion test,” which the district court failed
to apply.
As the district court erred in failing to apply the correct test, we remand this
case to the district court so that it can properly apply the “dominion test” in the
first instance.
REVERSED and REMANDED.
3

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