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Avoidance of Initial Transfer is Not Prerequisite to Recovery From Subsequent Transferees

By Karl Johnson posted 06-01-2018 01:26 PM

  
BANKRUPTCY BULLETIN
Editors-in-Chief
Karl J. Johnson, Hellmuth & Johnson, PLLC
Jeffrey D. Klobucar, Bassford Remele, P.A.

 Contributing Editor: Natasha Wells, Dorsey & Whitney LLP
Judge_Sanberg___Kelley_v__McDonald__In_re_Petters_Co___Inc__.pdf
Judge_Sanberg___Kelley_v__Stapleton__In_re_Petters_Co___Inc__.pdf

In companion cases, Kelley v. McDonald (In re Petters Co., Inc.), Adv. No. 17-4107-KHS (Bankr. D. Minn. Jan. 17, 2018), and Kelley v. Stapleton (In re Petters Co., Inc.), Adv. No. 17-4108-KHS (Bankr. D. Minn. Jan. 17, 2018), the bankruptcy court denied the defendants’ motions to dismiss the trustee’s fraudulent transfer actions, holding that 11 U.S.C. § 550 does not require actual avoidance of the initial transfer before a trustee can sue a subsequent transferee. Rather, the trustee need only allege that the initial transfer is avoidable. 

In each case, the defendants were subsequent transferees.  The trustee’s suits to avoid the initial transfers were still pending. The subsequent transferees moved for dismissal under Federal Rule of Bankruptcy Procedure 7012(b)(6) for failure to state a claim, arguing that 11 U.S.C. § 550 implicitly requires that the initial transfer be actually avoided before the trustee can sue a subsequent transferee. The court denied the motions, holding that the trustee need only allege that an initial transfer is avoidable when suing a subsequent transferee to recover the value of the property transferred pursuant to 11 U.S.C. § 550(a). 

The court acknowledged a split of authority, and sided with a majority of courts examining the legislative history of § 550 and applying a less restrictive interpretation of § 550(a).  The court reasoned that the language, “to the extent that,” as used in § 550 was intended to incorporate protections granted to transferees. So if an initial transferee has an avoidance defense, then a subsequent transferee may also raise that defense. Any amount granted under § 550(a) would be limited to the initial transfer amount, but the ability to avoid is not limited. The court further reasoned that to hold otherwise under a strict interpretation of § 550(a) would lead to an absurd, futile, and costly result in which the trustee would have to prepare and incur costs of filing the same complaint at a later time to assert the same causes of action.

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