In re: THE ROBERT PLAN OF NEW YORK CORP., Debtor. KENNETH KIRSCHENBAUM, as Chapter 7 Trustee of the estate of THE ROBERT PLAN OF NEW YORK CORP., Plaintiff, v. LEEDS MORELLI & BROWN P.C. and NANCY ISSERLIS, Defendants.

 Case No. 808-74575-reg, Chapter 7, Adv. Proc. No.                                 

810-8157-reg
           UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF                                   

NEW YORK
                      456 B.R. 150; 2011 Bankr. LEXIS 1845

                              May 5, 2011, Decided

COUNSEL: For Kenneth Kirschenbaum, Plaintiff (8-10-08157-reg): Fletcher Strong,Kirschenbaum & Kirschenbaum PC, Garden City, NY, Steven B Sheinwald, LEADATTORNEY, Kirschenbaum & Kirschenbaum, Garden City, NY.
For Leeds Morelli & Brown P.C., Nancy Isserlis, Defendant (8-10-08157-reg): RoyJ Lester, Garden City, NY, Wayne M Greenwald, Wayne Greenwald, PC, New York, NY.

For Nancy Isserlis, Cross-Claimant (8-10-08157-reg): Wayne M Greenwald, WayneGreenwald, PC, New York, NY.
For Leeds Morelli & Brown P.C., Cross Defendant (8-10-08157-reg): Roy J Lester,Garden City, NY.
For The Robert Plan of New York Corporation, Debtor (8-08#x2D;75475-reg): HaroldS Berzow, Ruskin Moscou Faltischek, Uniondale, NY.
For Kenneth Kirschenbaum, Trustee: Kirschenbaum & Kirschenbaum, Garden City, NY,Fletcher Strong, Kirschenbaum & Kirschenbaum PC, Garden City, NY, KennethKirschenbaum, Kirschenbaum & Kirschenbaum, Garden City, NY.
JUDGES: Robert E. Grossman, United States Bankruptcy Judge.
OPINION BY: Robert E. Grossman
OPINION

DECISION AFTER TRIAL
   Before the Court is an adversary proceeding commenced by Kenneth Kirschenbaum(the "Trustee" or "Plaintiff"), the chapter 7 trustee of the debtor, The RobertPlan of New York Corp. (the "RPNY"), seeking to avoid and recover transfers fromthe Debtor to the defendants, Leeds Morelli & Brown P.C. ("LMB") and NancyIsserlis ("Isserlis") pursuant to 11 U.S.C. §§ 547(b) and 550. 1 In thecomplaint, dated April 21, 2010 ("Complaint"), the Trustee alleges that anaffiliated debtor, The Robert Plan Corporation ("RPC") made two transferstotaling $110,000 to the defendants that are avoidable preferences (the"Transfers"). (Together, RPNY and RPC, which have been substantivelyconsolidated, are referred to herein as the "Debtors"). The Transfers werepayments by the Debtors made pursuant to a pre-bankruptcy settlement, andresulting  judgment, in a tort action by Isserlis, represented by LMB, againstthe Debtors. The Trustee further contends that the Transfers are recoverablefrom both defendants as either initial or subsequent transferees of the subjectfunds.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -1   Thecomplaint also asserted constructive fraudulent conveyance claims under 11U.S.C. §548(a)(1)(B) and New York Debtor and Creditor Law §§ 273 and 274.However, those claims were not address in pre-trial or post-trial briefs filedby the Trustee, and at the commencement of trial counsel for LMB represented tothe Court that the fraudulent conveyance claims were waived, and the Trustee didnot contradict that representation. See Dec. 16, 2010 Tr. at 15.- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
   Prior to trial, the Trustee entered into a settlement agreement with Isserlispursuant to which Isserlis agreed to pay the Trustee $70,000 in settlement ofhis claims against her. The settlement subsequently was approved by the Court.The settlement with Isserlis specifically provided that it would not affect theTrustee's claims against LMB.
   A trial was conducted on December 16, 2010 against LMB only. Resolution ofthe claims against LMB requires a two-step analysis which necessarily involves adiscussion of Isserlis's role in the transactions, despite the fact that theclaims against her have been settled. First, the Trustee must prove that theTransfers are avoidable under section 547 by proving that the elements ofsection 547 have been met. Second, the Trustee must prove that he is entitled torecover the value of those Transfers from LMB pursuant to section 550.
   At trial, the Trustee relied upon the documentary evidence to prove hiscase-in-chief, and called a single witness in rebuttal to testify as to theDebtors' insolvency on the date of the Transfers. The defendant, LMB, called onewitness, Jefferey K. Brown, a partner at LMB. The Trustee's exhibits 1-15 wereadmitted into evidence, and LMB's exhibits 1-20 were admitted into evidencewithout objection.
   On January 31, 2011, both the Trustee and LMB filed post-trial briefs,findings of facts, and conclusions of law. On February 15, 2011, the partiessubmitted their final post-trial briefs.
   For the reasons that follow, the Court finds that the Transfers, althoughavoidable preferences under section 547 of the Bankruptcy Code, cannot berecovered from LMB under section 550 because LMB was not an initial transfereeof the Transfers, but rather was a subsequent transferee who took the transfersin good faith and for value and without knowledge of the avoidability of theTransfers.
Jurisdiction
   This adversary proceeding is a core proceeding and this Court hasjurisdiction over this matter pursuant to 28 U.S.C. §§157(b) and 1334(b). Thefollowing constitutes the Court's findings of fact and conclusions of lawpursuant to Fed. R. Bankr. P. 7052.
Facts
   On or about April 18, 2005, Nancy Isserlis ("Isserlis") retained the law firmof Leeds Morelli & Brown P.C. ("LMB") to represent her in an employmentdiscrimination suit against her former employer, The Robert Plan of New YorkCorporation ("RPNY"). Isserlis and LMB entered into a retainer agreementpursuant to which Isserlis agreed to pay LMB an initial retainer of $7,000, anadditional retainer deposit, plus a 30% contingency fee equal to the totalamount recovered from RPNY in the discrimination suit. Shortly after signing theretainer agreement, Isserlis tendered a check to LMB for $7,000.
   On June 21, 2007, LMB, on behalf of Isserlis, executed a settlement agreementwith RPC ("Settlement Agreement"), pursuant to which RPC agreed to pay Isserlis$500,000 as follows: $150,000 on or before June 30, 2007, and $350,000 on orbefore November 30, 2007. The Settlement Agreement provided that payments due toIsserlis would be distributed so that Isserlis received 70% of the grosspayments and "30% of each payment will be paid directly by check to [LMB]. . .as attorney's fees."  (Settlement Agreement at 1(emphasis added)). Isserlis,Jeffrey Brown, a partner at LMB, and Robert Wallach, CEO of RPC, all signed theSettlement Agreement.
   RPC failed to make any payment under the Settlement Agreement. RPC's defaultcaused Isserlis to commence an arbitration proceeding against RPC which resultedin an arbitration award in her favor. Isserlis later filed a state court actionagainst RPC to confirm the arbitration award ("State Court Action"). On January25, 2008, the parties signed a stipulation that was "so ordered" by the statecourt ("Stipulation"). The Stipulation provided for RPC to pay Isserlis $650,000which included all amounts due under the Settlement Agreement includingpenalties. RPC was to pay Isserlis in four installments from March 30, 2008 toJune 15, 2008. The Stipulation left unchanged the remaining provisions of theSettlement Agreement and provided that RPC would not "appeal, challenge, moveand/or petition to void, delay, stay, restrain and or vacate: i) the [SettlementAgreement] entered into by the parties, ii) the performance of said agreement .. . ." (Stipulation at 2-3). As part of the Stipulation the state court entereda judgment on February 21, 2008 (the "Judgment") in favor of Isserlis in theamount of $650,000.
   On July 18, 2008, RPNY delivered a check to "LMB as attys" in the amount of$80,000 in partial satisfaction of the Judgment. LMB deposited the $80,000 intoan escrow account separate from its operating accounts. On July 23, 2008, LMBissued a check to Isserlis for $56,000, representing 70% of the $80,000 payment.The word "settlement" was typed on the MEMO line of the check from LMB toIsserlis and the check was delivered to Isserlis. On the same day, LMB issued acheck from its escrow account to its operating account for $24,000 representingLMB's 30% share of the $80,000 payment. The words "N. Issleris Settlement" weretyped in the MEMO line of the check.
   Two weeks later, on August 4, 2008, LMB's bank received a wire from RPNY inthe sum of $30,000. LMB directed the money be deposited in its escrow account.On that day LMB issued a check to Isserlis from its escrow account for $21,000,representing Isserlis's 70% share of the $30,000. The word "settlement" wastyped on the MEMO line of the check. LMB also issued a check to itself for$9,000, constituting LMB's 30% share of the $30,000. The words "N. IsserlisSettlement" were typed on the MEMO line of the check.
   On August 25, 2008, within ninety days of the $80,000 and $30,000 Transfers,RPC and RPNY filed for protection under Chapter 11 of the Bankruptcy Code. OnJanuary 19, 2010 the Debtors' cases were converted to Chapter 7 and on September8, 2010, they were substantively consolidated.
   On April 21, 2010, the Trustee commenced the instant adversary proceedingagainst Isserlis and LMB seeking to:
   (A) avoid and recover the $56,000 and $21,000 payments from RPNY to Isserlis,(i) as preferences pursuant to sections 547(b) and 550 of the Bankruptcy Code,and (ii) as constructive fraudulent conveyances pursuant to sections 548(b),544(b) and 550 of the Bankruptcy Code, and sections 273 and 274 of the New YorkDebtor and Creditor Law 2 and
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -2   Aspreviously mentioned in this Decision, the fraudulent conveyance claims havebeen waived.- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
    (B) avoid and recover the $24,000 and $9,000 payments from RPNY to LMB, (x)as preferences under sections 547(b) and 550 of the Bankruptcy Code, and (y) asconstructive fraudulent transfers under sections 548(a)(1)(B), 544(b) and 550 ofthe Bankruptcy Code, and sections 273 and 274 of the New York Debtor andCreditor Law.
   On May 24, 2010, LMB answered the Complaint, and asserted ten affirmativedefenses. LMB argues that the Trustee has not proven the elements of apreference under section 547(b), and that even if the Transfers are avoidableunder section 547(b), LMB is not an "initial transferee" under section 550 ofthe Bankruptcy Code. Rather, LMB argues that it is a subsequent transferee ofthe initial transfer to Isserlis and that it took in good faith, for value andwithout knowledge of the voidability of the Transfers. 3
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -3   On June10, 2010, Isserlis filed an answer to the complaint including a number ofaffirmative defenses, and a cross claim against LMB for malpractice in failingto obtain a security interest for the payment of RPC's obligations under theSettlement Agreement and Stipulation. Pursuant to a motion by Isserlis, thelegal malpractice cross claims were transferred to the District Court for theEastern District of New York.- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
The Preference Claims
   The Trustee asserts that the Transfers from RPNY to LMB pursuant to theSettlement Agreement and/or the Stipulation and Judgment are avoidablepreferences under section 547 of the Bankruptcy Code. To succeed on a preferenceclaim under section 547, the Trustee must prove that the subject Transfers (1)were made "to or for the benefit of a creditor," (2) "for or on account of anantecedent debt," (3) "while the debtor was insolvent," (4) "on or within 90days of the filing of the petition," and (5) that the Transfers enabled thecreditor to "receive more than such creditor would receive if the case was underchapter 7." 11 U.S.C. § 547(b).
   First, the Trustee must prove that the Transfers were made to or for thebenefit of a "creditor" of the Debtors. The Trustee argues that LMB is acreditor because LMB was a party to the Settlement Agreement. The Trusteeasserts that it is irrelevant that LMB's right to the 30% of the settlementfunds stemmed from LMB's representation of Isserlis and cites Phoenix Rest. Grp.v. Fuller, Fuller & Assocs. (In re Phoenix Rest. Grp.), 316 B.R. 671, 675(Bankr. M.D. Tenn. 2004), in support of this argument. LMB argues that it is nota "creditor" of RPNY or the Debtors and asserts LMB acted solely as counsel toIsserlis, and that the initial transfers to LMB were received for the benefit ofits client, Isserlis, and not LMB itself. LMB further argues that neither RPCnor RPNY was obligated to pay LMB's fees, and therefore LMB has and had no claimagainst the Debtors and cannot be considered a "creditor."
   Under section 101(10) of the Bankruptcy Code the term "creditor" is definedas an "entity that has a claim against the debtor that arose at the time of orbefore the order for relief concerning the debtor." 11 U.S.C. § 101(10). Theterm "claim" simply means the right to payment. 11 U.S.C. § 101(5). RPC'sobligation in this matter arose from the Settlement Agreement and the subsequentStipulation and Judgment. The Settlement Agreement states that it was "enteredinto by and between Nancy Isserlis ("Isserlis") and the Robert Plan Corporation("RPC" or the "Company") (Collectively the "Parties")." (Settlement Agreement¶1). The Settlement Agreement makes no mention of LMB as a party to theagreement. The Settlement Agreement states that "Isserlis will receive thefollowing gross payments . . .  and it being understood that 30% of each paymentwill be paid directly by check to Leeds Morelli & Brown, P.C. ("Isserlis'Counsel") as attorneys fees." (Id. ¶ 5 (emphasis added)).
   Based on the plain language of the Settlement Agreement, Isserlis wouldreceive the "gross payments" from RPC, with LMB receiving a portion of thepayment in satisfaction of the fees owed to it by Isserlis. The SettlementAgreement therefore, establishes Isserlis, not LMB, as a "creditor" of RPC onaccount of the debt arising from the settlement. LMB had no separate collectionrights as against RPC arising out of the Settlement Agreement.
   The Stipulation is further evidence that LMB is not a "creditor" of RPC. TheStipulation does not make any reference to direct payments to LMB, but ratherincorporates the payment distribution from the Settlement Agreement.(Stipulation ¶ 3). The Stipulation sets forth a schedule of payments that "willbe made to Ms. Isserlis" and does not mention any obligation on the part of RPCto make direct and separate payments to LMB. (Id. ¶5 (emphasis added)). Inaddition, both the Settlement Agreement and the Stipulation are signed by LMB"as attorneys" for Isserlis, not in its own capacity as a party to theagreement. (Id. at 3; Settlement Agreement, at 10). In addition, the Judgmententered by the state court grants Isserlis alone the right of repayment.
   Although LMB represented Isserlis in the State Court Action, the underlyingclaim was Isserlis's. The only interest LMB had in the State Court Action wasfor contingency fees owed by Isserlis to LMB stemming from the firm'srepresentation of her. At no point did LMB have a direct right to payment fromRPC, and therefore LMB never became a creditor of RPC.
   For these reasons, the Court finds that the Settlement Agreement, Stipulationand resulting Judgment granted Isserlis alone the right to receive payments fromRPC, and thus she is the "creditor" for purposes of this section 547 analysis.As the Court will discuss in detail in the context of its analysis of recoveryunder section 550 of the Bankruptcy Code, the Transfers in this case, despitebeing deposited into LMB's escrow account, are deemed to have been made directly"to" Isserlis, the creditor herein. It was for Isserlis's benefit that LMBreceived the funds into its escrow account. LMB did not have dominion andcontrol over the funds in its escrow account, but rather was a "mere conduit" ofthe funds.
   Second, the Trustee must prove that the Transfers were made "on account of anantecedent debt owed by the debtor before the transfer was made." 11 U.S.C. §547(b)(2). The Trustee argues that Transfers were made subsequent to and onaccount of an antecedent debt in that the genesis of the RPC's obligation wasthe execution of the Stipulation and the entry of the Judgment. In its defense,LMB argues that RPC was never obligated to pay its legal fees and the paymentsit received were fees due from Isserlis and not "on account of an antecedentdebt owed by the debtor before such transfer was made." 11 U.S.C. § 547(b)(2).The Court has found that the "creditor" in this case is Isserlis, and thepayments were made "to" Isserlis by way of LMB's escrow account. The Courttherefore finds that this element of the statute is satisfied in that thepayments from RPC were made on account of the antecedent debt owed to Isserlisby RPC as set forth in the Settlement Agreement, Stipulation and Judgment.
   Third, the Trustee must prove that the Transfers were made while RPC wasinsolvent. The Trustee argues that RPC was insolvent based on the testimony ofRPC's former Senior Vice President and Chief Operating Officer, PhilbertNezamoodeen. Nezamoodeen testified that in the months leading up to RPC filingfor bankruptcy protection, RPC did not have sufficient funds to pay employees,rent, or utilities. Nezamoodeen also testified that prior to the bankruptcyfiling, RPC's liabilities far exceeded its assets and therefore it wasinsolvent. LMB argues that the Trustee failed to make a sufficient showing thatthe Debtors were insolvent at the time of the Transfers because Nezamoodeen'stestimony was conclusory and not supported by evidence.
   Under section 101(32)(A) of the Bankruptcy Code the term "insolvent" isdefined as the "financial condition such that the sum of the entity's debts isgreater than all of such entity's property, at a fair valuation. ..." 11 U.S.C.§ 101(32)(A). For purposes of section 547 avoidance of transfers, a "debtor ispresumed to have been insolvent on and during the 90 days immediately precedingthe date of the filing of the petition." 11 U.S.C. § 547(f). In addition to thispresumption, the Trustee sought to establish RPC's insolvency throughNezamoodeen's testimony and a sworn affidavit. Nezamoodeen testified that in themonths leading up to the filing of the petition, RPC was unable to pay employeesalaries, office rent, or office utilities. (Affidavit of Philbert Nezamoodeen¶7-11; Dec. 16, 2010 Tr. at 124-25). He also testified that prior to the filingof the bankruptcy petition the total assets of RPC were $21,874,000 while thetotal liabilities were $41,056,000. (Dec. 16, 2010 Tr. at 128 - 29). LMB arguesthat the Debtors' own schedules prove that they were solvent on the date of thebankruptcy filing because their reported assets exceeded their liabilities.However, the Debtors' schedules included an $80,000,000 contingent asset, namelya potential claim against AIG Insurance Co., and its affiliates. The Court findsthat the inclusion of this contingent asset at anything close to full value wasmisleading and did not present an accurate depiction of the Debtors' financialcondition. This finding is underscored by the fact that during the pendency ofthis bankruptcy proceeding, the Debtor's claims against AIG were settled for asmall fraction of the value ascribed to the contingent asset in the schedules.
   Because there is a statutory presumption of insolvency, and based on thetestimony that RPC could not pay its debts as a going concern during the monthswhen the Transfers were made, and that RPC's liabilities greatly exceeded itsassets, the Court finds that the Trustee has met its burden of establishing thatRPC was insolvent at the time of the Transfers. See In re Roblin Indus. Inc., 78F.3d 30, 35-36 (2d Cir. 1996) ("The Bankruptcy Court has broad discretion whenconsidering evidence to support a finding of insolvency.").
   Fourth, the Trustee must prove that the Transfers occurred within 90 daysbefore the date of the filing of the petition for bankruptcy relief. TheTransfers took place on or around July 18, 2008 and August 4, 2008, and thebankruptcy petition was filed on August 25, 2008. There is no dispute that theTransfers took place within 90 days before the filing of the bankruptcy petitionand the Court finds that this element of the statute is satisfied.
   Fifth, the Trustee must prove that the creditor who received the Transfers,or for whose benefit the Transfers were made, received more than it would have"if the case were under Chapter 7 . . . [and] the transfer had not been made."11 U.S.C. § 547(b)(5). The Trustee argues that based on his administration ofthe estate, there will not be sufficient assets in  the estate to satisfy asecured claim filed by New York State for over three million dollars, andunsecured creditors are not likely to receive any distribution. Therefore, theTrustee argues that any payment to LMB, an unsecured creditor, would be morethan LMB would receive in the chapter 7 liquidation. In its defense, LMB assertsthat because it is not a creditor of RPC, section 547(b)(5) does not apply asagainst LMB and has not been proven by the Trustee.
   Again, the Court has found that the "creditor" in this case is Isserlis, notLMB, and thus the analysis must be whether the Transfers enabled Isserlis toreceive more than she would have received in this chapter 7 liquidation. Basedon the evidence presented and the proceedings in the consolidated bankruptcycases, the Court finds that the Transfers enabled Isserlis to receive more thanshe otherwise would have received in the chapter 7 liquidation. New York Statehas a secured claim against RPC of three million dollars which will not likelybe paid in full. As a result, unsecured creditors, including Isserlis, are notlikely to receive any payment from the Debtors' bankruptcy estate. Therefore, asa result of the Transfers Isserlis received more than she would have in achapter 7 liquidation.
   The Trustee has therefore met his burden in establishing the elements of anavoidable preference and the Transfers are subject to avoidance under section547(b). 4
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -4   LMB alsoargues that even if the elements of section 547(b) are met, the Transfers cannotbe avoided because of the exception under section 547(c)(6) which states thatthe trustee may not avoid a transfer "that is the fixing of a statutory lienthat is not avoidable under section 545" of the Bankruptcy Code. See 11 U.S.C. §547(c)(6). LMB argues RPNY's transfer of funds to Isserlis gave rise to ajudiciary charging lien in LMB's favor, pursuant to section 475 of the New YorkJudiciary Law. The Trustee argues that LMB's charging lien never attached to thetransferred funds because those funds constituted avoidable preferences and assuch there was no fund to which LMB's charging lien attached. This, the Trusteeargues, defeats LMB's security interest in the funds. The Court finds that it isnot necessary to decide this issue as a result of the Court's finding that thetransfers cannot be recovered from LMB under section 550.- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
Recovery for the Benefit of the Estate -- Section 550
   Having found that the Transfers are avoidable preferences under section 547the Court must now determine whether the value of the Transfers can be recoveredfrom LMB. In order to recover the value of the Transfers from LMB, the Trusteemust prove that LMB is an "initial transferee" under section 550(a)(1), or an"immediate or mediate transferee" of the initial transferee under section550(a)(2). The Trustee asserts that LMB is an "initial transferee" under section550(a)(1) because LMB received an aggregate of $33,000 from RPC under theSettlement Agreement and Stipulation. The Trustee relies on a number of cases,including, Buckley v. Jeld-Wen, Inc. (In re Interior Wood Prods. Co.), 986 F.2d228 (8th Cir. 1993), Lawless v. Eastern Milk Producers Coop. (In re Stop-N-Go ofElmira, Inc.), 30 B.R. 721 (Bankr. W.D.N.Y. 1983), and McHale v. Boulder CapitalLLC (In re 1031 Tax Grp., LLC), 439 B.R. 47 (Bankr. S.D.N.Y. 2010), to supporthis argument that LMB is an initial transferee notwithstanding the fact that itreceived the funds through an escrow account.
   In its defense, LMB argues that the Trustee cannot recover the value of theTransfers from LMB because LMB is not an initial transferee, and if LMB is amediate or immediate transferee, it has the defense that it took the funds forvalue, in good faith, and without knowledge of the avoidability of the transfer.See 11 U.S.C. § 550.  LMB argues that Isserlis is the initial transferee of thefunds, and it was merely a conduit for the funds that were deposited into itsescrow account.
   Section 550 allows a trustee to recover avoided transfers from the initialtransferee, or the immediate and mediate transferees of the initial transferee.11 U.S.C. § 550(a). However, section 550 limits the extent to which the Trusteecan recover property from an immediate or mediate transferee. A trustee cannotrecover from an immediate or mediate transferee who takes the property forvalue, in good faith, and without knowledge of the voidability of the transfer.11 U.S.C. § 550(b).
   Although an "initial transferee" is not defined by the Bankruptcy Code, theSecond Circuit has held that an initial transferee is one that has "dominionover the money or other asset," and "the right to put the money to one's ownpurpose." Christy v. Alexander & Alexander of New York, Inc. (In re Finley,Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey), 130 F.3d 52, 57-58(2d. Cir. 1997) (adopting the "mere conduit test" in the Second Circuit). A"mere conduit" of transferred funds is not considered to be an "initialtransferee" because it has no dominion or control over the property, but ratheris a party with actual or constructive possession of the asset beforetransferring it to another person. See id.; Authentic Fitness Corp. v. DobbsTemp. Help Servs. (In re Warnaco Grp.), No. 01 B 41643(RLB), 2006 U.S. Dist.LEXIS 4263, 2006 WL 278152, at *6 (S.D.N.Y. Feb. 2, 2006). Conduits can do nomore than to transmit the transferred property received to another party. In reWarnaco Grp., 2006 U.S. Dist. LEXIS 4263, 2006 WL 278152, at *6.
   In a case similar to the matter before the Court, in Gropper v. Unitrac, S.A.(In re Fabric Buys of Jericho, Inc.), 33 B.R. 334, 336-37 (Bankr. S.D.N.Y. 1983), the trustee attempted to avoid as a preference, payments to a law firm for thesettlement of a claim for one of the firm's clients. The settlement paymentswere paid to the law firm, which deposited the payments in an escrow account,and then issued checks to the client from the escrow account. Id. The court heldthat the payments to the law firm could not be recovered from the firm, as thefirm was not an initial transferee. Id. Rather, the firm was a mere conduit ofthe funds, transferring the funds from the debtor to the creditor. The courtstated that an initial transferee is one who deals directly with the debtor. Inthat case, the client of the law firm, and not the law firm itself, dealtdirectly with the debtor, giving rise to the debt and the eventual law suit.Therefore, the mere fact that the money passed through the law firm's escrowaccount did not make the law firm an initial transferee. Id. at 337.
   The holding of Gropper applies to this case as well. The Court finds thatwhen LMB received the Transfers from RPNY LMB was acting as a mere conduit ofthe Transfers from RPNY to Isserlis. The facts established at trial show thatLMB acted as an escrow agent for the settlement funds transferred from RPNY andthat LMB did not transfer the funds to Isserlis or its own operating accountuntil it was given direction to do so by Isserlis. Jeffrey K. Brown, a partnerat LMB, testified that it was the ordinary business practice of LMB to placesettlement or other awards from contingency fee cases in an escrow account,separate from the firm's general accounts, and deduct the attorney's fees fromthe award, pursuant to the retainer agreement signed by the client. He furthertestified that LMB did not have discretion to exercise dominion and control overthe funds in its escrow account absent the client's direction. Finally, Mr.Brown testified at trial that Isserlis  specifically directed LMB to receive thepayments in the escrow account for her benefit and release the fund at herdirection. (Dec. 16, 2010 Tr. at 40, 53).
   The Court finds that LMB did not exercise dominion over the funds and did nothave the right to use the funds for its own benefit. The only direction LMBreceived was to place the money transferred from RPNY into the escrow account ofthe firm, deduct the agreed upon fees, and transfer the balance to Isserlis. SeeIn re Warnaco Grp., 2006 U.S. Dist. LEXIS 4263, 2006 WL 278152, at *7 (statingthat an entity is not an initial transferee where it has no choice but totransfer money to another party).
   LMB's conduct and the Court's characterization of its role in the transfer ofthe settlement funds from RPNY to Isserlis, is entirely consistent with New Yorklaw. Under New York law, an escrow agent has a "contractual duty to follow theescrow agreement, [and] additionally becomes a trustee of anyone with abeneficial interest in the trust . . . with the 'duty not to deliver the escrowto anyone except upon strict compliance with the conditions imposed.'" Takayamav. Schaefer, 240 A.D.2d 21, 25, 669 N.Y.S.2d 656 (N.Y. App. Div. 1998) (internalcitations omitted); see Great Am. Ins. Co. v. Canandaigua Nat'l Bank & Trust Co., 23 A.D.3d 1025, 1027, 804 N.Y.S.2d 177 (N.Y. App. Div. 2005) (stating that inan escrow agreement "the funds are to be delivered to a third party conditionedupon the performance of some act or the occurrence of some event."). Inaddition, in New York, any "lawyer in possession of any funds . . . belonging toanother person, where such possession is incident to his or her practice of law,is a fiduciary, and must not misappropriate such funds . . . or commingle suchfunds . . . with his or her own." Rules of Prof'l Conduct R. 1.15 (McKinney2009) (emphasis added). Failure of an attorney to comply with his fiduciaryduties as an escrow agent, and duties under the code of ethics, can result inthe disbarment or suspension of the lawyer. See In re Katz, 61 A.D.3d 213, 217,874 N.Y.S.2d 192 (N.Y. App. Div. 2009); In re Kirschenbaum, 29 A.D.3d 96, 103,812 N.Y.S.2d 54 (N.Y. App. Div. 2006). Therefore, under New York law, the natureof an escrow account requires the escrow agent to hold the funds for the benefitof the client and the escrow agent is precluded from accessing those funds forits own use without the direction of the client.
   The Court finds that LMB did not exercise dominion and control over thepayments from RPNY, and finds that Isserlis, not LMB, was the "initialtransferee" of the funds received from RPNY. 5 However, when the settlementfunds were subsequently transferred from the escrow account to LMB's operatingaccount, LMB became an immediate or mediate transferee of the initial transfer.Section 550 allows for recovery not just from an initial transferee, but from animmediate or mediate transferee as well. 11 U.S.C. § 550(a)(2). The ability torecover avoided transfers from an immediate or mediate transferee, however, issubject to statutory limitations. Under section 550(b)(1) a transfer cannot berecovered from an immediate or mediate transferee where the transferee "takesfor value, including in satisfaction or securing of a present or antecedentdebt, in good faith, and without knowledge of the voidability of the transferavoided." 11 U.S.C. § 550(b)(1).
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -5   Aspreviously mentioned, the Trustee has settled his claims against Isserlis for$70,000 and has forfeited the right to collect the balance of the preferentialpayments from her.- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
   The Trustee argues that LMB cannot avail itself of the good faith defensebecause LMB had knowledge of the voidability of the Transfers. While the Trusteeis correct in asserting that knowledge of voidability does not require "completeunderstanding of the facts and receipt of a lawyer's opinion that such transferis voidable; some lesser knowledge will do," Bonded Fin. Servs. v. European Am.Bank, 838 F.2d 890, 898 (7th Cir. 1988), that "lesser knowledge" has not beenmet in this case. There is no evidence that LMB was aware that the Transferswere subject to avoidance. At trial, Mr. Brown stated that he had heardconflicting rumors that "things were booming" at RPC, yet there was a "bigissue" with a potential lawsuit with AIG. (Dec. 16, 2010 Tr. at 59--60). TheCourt finds that these conflicting rumors do not rise to the level of knowledgeof the voidability of the Transfers. See In re Parklex Assocs., 435 B.R. 195,212 (Bankr. S.D.N.Y. 2010) (citing Wasserman v. Bressman (In re Bressman), 327F.3d 229, 236 (3d. Cir. 2003)) (stating that the proper inquiry for knowledge ofvoidability of the transfer is whether the transferee possessed knowledge offacts that suggest the transfer may be fraudulent).
   In addition to lacking knowledge of the potential avoidability of theTransfers, LMB also took the Transfers for value. When LMB transferred thesubject funds from its escrow account to its operating account it was to satisfyIsserlis's obligation to compensate LMB for its representation of her in theState Court Action. Thus, LMB took the transfer from Isserlis for value. SeeWasserman v. Bressman, 327 F.3d at 235-36 (finding that where a law firmreceives money in satisfaction for completed work, the firm "takes for value").In addition, LMB had a statutory charging lien on the settlement proceedspursuant to section 475 of the New York Judiciary Law which further validatesits entitlement to receive the subject funds.
   Finally, there is no indication that LMB did not act in good faith when ittransferred the funds from its escrow account to its operating account insatisfaction of its fee arrangement with Isserlis. See First IndependenceCapital Corp. v. Merrill Lynch Bus. Fin. Servs. (In re First IndependenceCapital Corp.), 181 F. App'x 524, 528 (6th Cir. 2006) (referencing multipledefinitions of good faith, but holding that good faith existed where there wasno "egregious, vindictive or intentional misconduct").
   Therefore, the Trustee cannot recover the Transfers from LMB as an initialtransferee or as an immediate or mediate transferee.
Conclusion
   For all of the foregoing reasons, the Court finds that the subject Transfersare subject to avoidance pursuant to section 547 of the Bankruptcy. The Courtfurther finds that the avoided Transfers may not be recovered from LMB pursuantto section 550 of the Bankruptcy Code.
   Dated: Central Islip, New York
   May 5, 2011
   /s/ Robert E. Grossman
   Robert E. Grossman
   United States Bankruptcy Judge