If a trustee already has a judgment avoiding a transfer against the initial transferee, the trustee is not necessarily required to prove voidability again in later suits against subsequent transferees, according to Bankruptcy Judge Laurel M. Isicoff of Miami.
However, Judge Isicoff ruled that a subsequent transferee may sometimes raise an affirmative defense and carry the burden of proof to show that the transfer was not avoidable after all. Judge Isicoff hinted that the subsequent transferee would be stuck with the prior judgment if claim or issue preclusion were applicable.
The Prior Suits
The trustee brought fraudulent transfer suits under Section 548 against three defendants who were the initial transferees from the debtor. The trustee won default judgments against two and a motion for summary judgment against the third, who defended himself pro se.
The trustee then sued a subsequent transferee under Section 550(a)(2). To “the extent that” a transfer has been avoided as a fraudulent transfer under Section 548, the section allows the trustee to recover the transferred property or its value from “any immediate or mediate transferee of such initial transferee.”
The subsequent transferee answered the complaint and naturally raised a defense under Section 550(b), claiming to have taken the property in good faith and without knowledge of the voidability of the transfers. Later, the subsequent transferee sought discovery aimed at proving that the initial transfers were not fraudulent.
The trustee moved to quash the discovery notices, contending that the subsequent transferee was stuck with the prior judgments finding the transfers to be fraudulent. In response, the defendant argued that the trustee could not rely on either the default judgments or the judgment against the pro se defendant, who raised no defenses to voidability.
Issues of First Impression
The discovery motion obliged Judge Isicoff to confront issues of first impression in the Eleventh Circuit. In her October 22 opinion, she said courts around the country are divided over whether a trustee must prove voidability against a subsequent transferee even if the trustee already has a judgment against the initial transferee.
Although there is no answer in the Eleventh Circuit, Judge Isicoff said that the Atlanta-based appeals court has ruled that a trustee may establish voidability in a suit against a subsequent transferee without having first obtained 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).
“However,” Judge Isicoff said, “the Eleventh Circuit has never ruled that the trustee MUST establish avoidability of a transfer as part of a recovery suit if the transfer has already been avoided.” [Emphasis in original.] Observing that Section 550 does not “require or suggest that the transfer must always be avoided in the action brought against the subsequent transferee,” she predicted that the Eleventh Circuit would never require new trials on voidability every time a trustee sues a subsequent transferee.
The trustee was not home free, however, because the subsequent transferee contended that the inability to challenge the voidability of the transfer would result in a deprivation of due process. Judge Isicoff cited the Madoff court for ruling that considerations of due process permit a defendant to raise voidability as an affirmative defense.
Next, Judge Isicoff addressed the question of whether the prior judgments took voidability off the table and barred the defendant’s affirmative defense.
Judge Isicoff ruled that the granting of summary judgment against one of the initial transferees satisfied the condition precedent that relieved the trustee of proving voidability as part of the trustee’s case-in-chief.
Judge Isicoff did not decide whether the default judgments also satisfied the Section 550 condition precedent. Why? Because the voidability of the initial transfers remained an issue ripe for discovery regardless of whether the trustee or the subsequent transferee bears the burden of proof.
In two footnotes, Judge Isicoff questioned whether claim and issue preclusion were applicable to invoke the Section 550 condition precedent because the subsequent transferee was not a party to the prior fraudulent transfer actions, nor was it in privity with the defendants.
If a trustee already has a judgment avoiding a transfer against the initial transferee, the trustee is not necessarily required to prove voidability again in later suits against subsequent transferees, according to Bankruptcy Judge Laurel M. Isicoff of Miami.
However, Judge Isicoff ruled that a subsequent transferee may sometimes raise an affirmative defense and carry the burden of proof to show that the transfer was not avoidable after all. Judge Isicoff hinted that the subsequent transferee would be stuck with the prior judgment if claim or issue preclusion were applicable.
The Prior Suits
The trustee brought fraudulent transfer suits under Section 548 against three defendants who were the initial transferees from the debtor. The trustee won default judgments against two and a motion for summary judgment against the third, who defended himself pro se.
The trustee then sued a subsequent transferee under Section 550(a)(2). To “the extent that” a transfer has been avoided as a fraudulent transfer under Section 548, the section allows the trustee to recover the transferred property or its value from “any immediate or mediate transferee of such initial transferee.”
The subsequent transferee answered the complaint and naturally raised a defense under Section 550(b), claiming to have taken the property in good faith and without knowledge of the voidability of the transfers. Later, the subsequent transferee sought discovery aimed at proving that the initial transfers were not fraudulent.