“Bare legal ownership” of a bank account isn’t enough to turn the account holder into the initial transferee of a fraudulent transfer made into the account, according to the interpretation of Second Circuit law by Bankruptcy Judge Michael E. Wiles of Manhattan.
In substance, Judge Wiles said that Section 550(a)(1) is not a “gotcha” statute. “Strict liability,” he said, “is appropriate as a way of addressing wrongs, not as a way of victimizing innocent parties.”
The defendant, a Russian citizen, said she needed a bank account in the U.S. as a stepping stone to a green card. Claiming she was unable to open an account because she had no Social Security number, she opened a joint account with a friend, who later became the debtor. She deposited $10,000 into the joint account.
The erstwhile friend was busy defrauding one of his bank lenders. To abscond with $1 million, he transferred the money into the joint account and immediately sent it elsewhere.
In his September 21 opinion, Judge Wiles said that the woman never used any of the $1 million and didn’t know about the transfer until she was sued for receipt of a fraudulent transfer by her friend’s chapter 7 trustee. In other words, Judge Wiles said that the money was “long gone” before the woman ever knew about the transfer.
The trustee contended that the woman was the initial transferee of the fraudulent transfer under Section 550(a)(1) and thus had absolute liability as the account holder, relying on the Second Circuit’s landmark decision in In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey, 130 F.3d 52 (2d Cir. 1997).
Judge Wiles rejected the argument and granted summary judgment to the defendant, dismissing the lawsuit. He said that the trustee’s argument “pushes legal fictions to extremes that make no sense and that are inconsistent with the teachings of the Finley Kumble decision.”
In Finley Kumble, an insurance broker received payments from the debtor and paid everything out within 14 days to an insurance company to purchase policies that were worthless, according to the trustee. The trustee sued the broker as the initial transferee of constructively fraudulent transfers.
The trustee contended that Finley Kumble stands for the principle that dominion and control over a bank account creates absolute liability for the account holder as the initial recipient of a fraudulent transfer.
Judge Wiles disagreed. The broker in Finley Kumble was “functionally just a conduit,” Judge Wiles said. Dominion and control are the “minimum” requirements for treating someone as a transferee, but Finley Kumble “did not hold that they were always sufficient by themselves.” “Emphatically,” he said, every recipient of funds is not automatically an initial transferee.
According to Judge Wiles, the trustee incorrectly relied on cases where the defendants “knowingly act as transferees for the purpose of hiding the funds from creditors.”
In the “real world,” Judge Wiles said, the defendant “had no such control at all” because no “real world transfer of funds [to the defendant] was intended, and none was accomplished.” The debtor, he said, had simply “used the joint account solely to facilitate the transfer.”
“Bare legal ownership” of a bank account isn’t enough to turn the account holder into the initial transferee of a fraudulent transfer made into the account, according to the interpretation of Second Circuit law by Bankruptcy Judge Michael E. Wiles of Manhattan.
In substance, Judge Wiles said that Section 550(a)(1) is not a “gotcha” statute. “Strict liability,” he said, “is appropriate as a way of addressing wrongs, not as a way of victimizing innocent parties.”
The defendant, a Russian citizen, said she needed a bank account in the U.S. as a stepping stone to a green card. Claiming she was unable to open an account because she had no Social Security number, she opened a joint account with a friend, who later became the debtor. She deposited $10,000 into the joint account.
The erstwhile friend was busy defrauding one of his bank lenders. To abscond with $1 million, he transferred the money into the joint account and immediately sent it elsewhere.