Being the “initial recipient” of a fraudulent transfer by itself isn’t enough to be liable as an “initial transferee,” for reasons explained by the Second Circuit in an opinion on May 5.
A foreign national needed a bank account in the U.S. to obtain a green card. Having a Social Security number was a requirement for having a U.S. bank account, but the foreigner had none.
So, the foreigner opened a joint bank account with a U.S. resident, using the U.S. resident’s Social Security number. The record was clear that the account was only intended to hold funds belonging to the foreigner.
The U.S. resident was having financial problems with his auto dealerships. He needed to transfer funds from one dealership to another, but his bank loan agreement prohibited transfers.
To hide transfers from his bank, the U.S. resident opened a secret account for one dealership at a different bank. From the secret account belonging to the dealership that would end up in bankruptcy in New York, the U.S. resident sent $1 million to the joint account with the foreigner.
The $1 million remained in the joint account for two days, when the U.S. resident forged the foreigner’s signature on a check and sent the $1 million to the account of his other dealership.
The bankruptcy trustee sued the foreigner for $1 million, alleging she was the “initial transferee” of a fraudulent transfer and thus liable under Section 550(a)(1).
Bankruptcy Judge Michael E. Wiles granted summary judgment in favor of the foreigner and dismissed the trustee’s lawsuit. The district court affirmed.
The Circuit’s Affirmance
The Second Circuit affirmed in a nonprecedential, per curiam opinion that has succinct statements of useful black letter law.
The appeals court began by saying that an “initial transferee” has “strict liability” under Section 550(a)(1). To the extent that a transfer is avoided as a preference or a fraudulent transfer, for instance, the section says that a trustee may recover from “the initial transferee of such transfer or the entity for whose benefit such transfer was made.”
The foreigner was certainly in good faith because she never even knew the $1 million was in the joint account, but as an initial transferee, she had no good faith defense, unlike subsequent transferees under Section 550(b)(1).
The outcome turned on whether the foreigner was an “initial transferee,” a term not defined in the Bankruptcy Code.
The trustee contended that the foreigner was the initial transferee because she could have drawn a check on the $1 million while it was in her account. However, the appeals court had held in 1997 that “the term ‘initial transferee’ references something more particular than the initial recipient.” In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey, 130 F.3d 52, 57 (2d Cir. 1997).
In Finley, Kumble, the Second Circuit held that “mere conduits” of fraudulent transfers are not “initial transferees.” Id.
The appeals court agreed with the trustee that the foreigner was the initial recipient and that she “hypothetically” could have controlled the $1 million while it was in the joint account. Still, the court said she never had a “realistic opportunity” to use the funds “because she did not know about them.”
Indeed, the appeals court went on to say that “she had no reason to suspect” that the $1 million would be in her account because it was only supposed to hold her funds.
The appeals court affirmed dismissal, holding that the foreigner “was a ‘mere conduit’ of the fraudulent transfer and cannot be liable to the bankruptcy estate for funds she never knew about.”
The opinion is Jalbert v. Gryaznova (In re Bicom NY LLC), 21-1821 (2d Cir. May 5, 2022).
Being the “initial recipient” of a fraudulent transfer by itself isn’t enough to be liable as an “initial transferee,” for reasons explained by the Second Circuit in an opinion on May 5.
A foreign national needed a bank account in the U.S. to obtain a green card. Having a Social Security number was a requirement for having a U.S. bank account, but the foreigner had none.
So, the foreigner opened a joint bank account with a U.S. resident, using the U.S. resident’s Social Security number. The record was clear that the account was only intended to hold funds belonging to the foreigner.
The U.S. resident was having financial problems with his auto dealerships. He needed to transfer funds from one dealership to another, but his bank loan agreement prohibited transfers.