05/25/2011 – Defendant’s Motion to Dismiss filed in the Kean Chuan Goh Adversary Proceedings by John Hancock Life Insurance Company (U.S.A.) before Judge Russell in the Central District of California (Los Angeles). The transfers involved pre-petition payments made by the debtor to his 401(k) account credited against a loan made to the debtor by the 401(k) plan. John Hancock provided investment and administrative services for accounts maintained pursuant to the 401(k) plan. Defendant John Hancock argues that the trustee’s recovery powers are limited by Section 550(a) and in order to recover from John Hancock, the Trustee must establish that John Hancock is a “transferee” under that Section.
Defendant John Hancock argued that it had no beneficial interest in the 401(k) plan, nor did it exercise dominion or control over the funds held by the Debtor in his 401(k) account. Although acknowledging that the Ninth Circuit had not addressed the specific issue in the context of a 401(k) plan, Defendant John Hancock urged the Court to apply more general case law requiring that a “transfee” must have had the ability to exercise legal dominion and control. The thrust of Defendant’s argument is contained in the following paragraphs (footnotes omitted):
While the term “transferee” is not defined in the Bankruptcy Code, it is generally accepted in the Ninth Circuit that the transferee is one who, at a minimum, has “dominion over the money or other asset, the right to put the money to one’s own purposes.”7 Practically speaking, the “dominion test,” as applied by the courts in this circuit, requires a transferee to be “free to invest the whole [amount] in lottery tickets or uranium stocks.” Dominion, therefore, “is akin to legal control (e.g., the right to invest as one chooses), not mere possession.”
As a threshold matter, it is important to note that the loans alleged in the complaint were not made by John Hancock. Rather, the statements accompanying the Complaint clearly show that the funds borrowed by the Debtor were taken directly from his 401(k) account. Thus, the Debtor merely borrowed the funds from himself, with an obligation to repay the loans pursuant to the terms of the Plan Contract. Further, pursuant to the Plan Contract, it is the Uni-Pack 401(k) Plan that controls the withdrawal of funds from plan accounts and determines whether plan participants may take loans against their account balances.”) Thus, the transfers made by the Debtor to his 401(k) account did not benefit John Hancock, as it had no interest, financial or otherwise, in the loan taken by the Debtor from his 401(k) account or the repayment of that loan.
As to the Debtor’s repayment of the alleged loan, John Hancock at no time exercised legal control over the funds transferred by the Debtor to his 401(k) account under the dominion test set forth above. As the account statements reflect, and pursuant to the terms of the Plan Contract, John Hancock merely received the transfers from the Debtor and credited his account accordingly. John Hancock had no right to invest the funds in question except as directed by the Debtor/account holder. While John Hancock had possession of the funds, it at no time exercised legal control over the amounts transferred by the Debtor to the Uni-Pack 401(k) Plan. Indeed, it was the Uni-Pack 401(k) Plan and the plan participants, pursuant to the terms of the Plan Contract, that exercised dominion over the funds held in the plan participant’s accounts.