To recover from the sole shareholder of a company when the company was the initial recipient of a fraudulent transfer, the trustee need only show that the shareholder was the intended beneficiary. It is not necessary for the trustee to allege that the shareholder was the alter ego for the company, Bankruptcy Judge Mary Kay Vyskocil said in a March 22 opinion.
The debtor corporation allegedly perpetrated a fraud that had some of the features of a Ponzi scheme. To carry out the fraud, the debtor entered into transactions with third parties who may or may not have known there was fraud.
The trustee mounted a fraudulent transfer suit against a corporation that, wittingly or not, allowed its bank accounts to be used to further the fraud. The corporation’s sole shareholder made a loan to the debtor that allegedly furthered the fraud. The trustee filed the suit against the corporation within the two-year statute of limitations contained in Section 546(a).
After the two years ran out, the trustee confirmed that the defendant corporation was defunct. The trustee then consented to dismissal of the suit against the corporation.
Less than a year after dismissal, the trustee initiated an adversary proceeding against the former defendant’s sole shareholder, contending he was either the intended beneficiary or a subsequent recipient of the fraudulent transfers and was therefore liable under Section 550(a).
The shareholder filed a motion to dismiss, contending that the complaint was deficient because it did not allege that he was the company’s alter ego. The shareholder argued that the trustee should have won a judgment against the corporation and then pursued an alter ego claim.
Judge Vyskocil said the argument “ignores the plain language” of Section 550. She explained how Section 550(a) allows recovery against three types of recipients.
Under Section 550(a)(1), the trustee can recover from the initial transferee or “the entity for whose benefit the initial transfer was made.” Under Section 550(a)(2), the trustee can recover from a subsequent transferee.
Significantly, Judge Vyskocil said, “It is not necessary to establish that a party who benefits from an initial transfer exercises dominion and control over the funds transferred, otherwise the Code would not distinguish such a party from an initial transferee in Section 550(a)(1).” Instead, to recover from an entity for whose benefit a transfer was made under Section 550(a)(1), the trustee must only allege “that (1) the entity was the intended beneficiary, and (2) the intended benefit originated from the initial transfer.”
Judge Vyskocil then analyzed the facts laid out in the complaint and denied the motion to dismiss because the complaint made plausible allegations that the sole shareholder was either a subsequent transferee or the intended beneficiary.
Judge Vyskocil’s opinion also contains an important synthesis of two Madoff decisions from the Southern District of New York dealing with the statutes of limitations pertaining to complaints against subsequent transferees under Section 550(a). See Picard v. Bureau of Labor Insurance (In re Bernard L. Madoff Investment Securities LLC), 480 B.R. 501 (Bankr. S.D.N.Y. 2012) (by late Bankruptcy Judge Burton R. Lifland); and Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC (In re Bernard L. Madoff Investment Securities LLC), 501 B.R. 26 (S.D.N.Y. 2013) (by District Judge Jed Rakoff).
Both decisions mean, Judge Vyskocil said, “that a judgment of avoidance against an initial transferee is not a pre-condition to a subsequent recovery against a subsequent transferee.” Judge Rakoff’s opinion means, she said, that suit against a subsequent transferee is timely under Section 550(f) if it is brought within one year after final disposition of the original suit against the initial transferee.
Because the suit against the shareholder was brought less than one year after dismissal of the suit against the defunct corporation, Judge Vyskocil therefore denied the facet of the shareholder’s motion to dismiss based on the argument that the suit against him was untimely because it was not brought within the two years prescribed in Section 546(a).