Wachovia securities not liquidating funds

The Fourth Circuit, agreeing with the bankruptcy court, held that Wachovia neither had nor exercised legal dominion and control over the cash transfers.In support of its position Grayson argued that Wachovia had legal dominion and control over the accounts at issue via the agreements governing the accounts and exercised such control by removing commissions, margin interest, and prepayment fees from those accounts.

“[T]he transferred securities came to Derivium, not from or through Derivium.” Derivium only obtained rights in the securities after they were transferred into the accounts.

Because “initial transferee” is not defined by the Bankruptcy Code, the court applied the “dominion and control test” to determine whether Derivium was an initial transferee of the cash transfers of the liquidated securities.

Under the dominion and control test, an initial transferee must have legal dominion and control over the property (i.e., “the right to use the property for its own purpose”) and, in fact, exercise this legal dominion and control.

The proceeds from those stocks were then used to fund customers’ loans and the Derivium owners’ start-up ventures.

In late 2004 and early 2005, Derivium closed its accounts at Wachovia because it had difficulty returning customers’ securities when the loans matured.

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