Tuesday, December 03, 2019

Subsequent Transferee Liability re: Fraudulent Conveyance Lawsuits

By Bill Siegel

The Bankruptcy Code and the Uniform Fraudulent Transfer Act allow a bankruptcy Trustee to recover property that was allegedly fraudulently transferred to an “initial transferee” who then transferred the same  property to a “subsequent transferee.”  This article discusses the liability of a subsequent transferee when the trial court has already found that the initial transferee has received a fraudulent transfer, and then suit is filed against the subsequent transferee to recover damages or the property fraudulently transferred.

Yip v. Google
This issue was addressed in Yip v. Google LLC (In re Student Aid Center Inc.), 18-1493 (Bankr. S.D. Fla. Oct. 22, 2019).  In Yip, the bankruptcy Trustee had previously obtained a judgment against the initial transferees for a fraudulent transfer.  The Trustee then filed suit against the subsequent transferee seeking to avoid the same transfer.  The Trustee argued that the subsequent transferee was precluded from denying liability based on the judgments entered against the initial transferees.  (The good news is that unlike an initial transferee, a subsequent transferee can raise a good faith defense, i.e. the property was obtained in good faith and without knowledge of the voidability of the transfer.)

However, this still did not answer whether the Trustee had to re-prove that the fraudulent transfer took place.  In addressing this issue, the bankruptcy judge first noted that the Eleventh Circuit Court of Appeals had previously ruled that a Trustee may establish a fraudulent transfer against a subsequent transferee without first having to obtain a judgment against the initial transferee. See IBT International Inc. v. Northern (In re International Administrative Services), 408 F.3d 689 (11th Cir. 2005). Accord, Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC (In re Madoff Securities), 501 B.R. 26 (S.D.N.Y. 2013).  Yet, this did not directly speak to whether the subsequent transferee was precluded from denying that a fraudulent transfer took place based on prior judgement entered against the initial transferees. 

Being a case of first impression, the court found that the entry of a summary judgment against an initial transferee relieved the Trustee from having to prove the same as part of the Trustee’s case-in-chief.  However, the court was not finished.  Instead of precluding the subsequent transferee from denying a fraudulent transfer took place, the court basically shifted the burden of proof onto the subsequent transferee to prove, as an affirmative defense, that the transfer was not fraudulent and therefore voidable. 

The take away from this decision is that perhaps it may be advisable for a subsequent transferee to intervene in the initial proceeding filed against the initial transferee to avoid the shifting of the burden especially if counsel for the subsequent transferee does not have confidence that the initial transferee can put up a robust defense.

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Bill Siegel heads the Cowles and Thompson Bankruptcy and Creditors' Rights practice and regularly writes about the latest news in bankruptcy law, including recent shifts related to the retail sector and the potential impact on commercial landlords.

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