You Never Give Me Your Money: The Original Receiver of Funds Isn’t Always a ‘Transferee’ Responsible for Fraudulent Transfers | Arnall Golden Gregory LLP


In a recent summary order on appeal from a bankruptcy court, the United States Court of Appeals for the Second Circuit reaffirmed that the mere receipt of a fraudulent transfer is not always sufficient to render the recipient a “original transferee” strictly responsible for returning the funds. to the trustee under Section 550(a)(1) of the Bankruptcy Code. In other words, the mere fact that a person or entity received a transfer that is later determined to be fraudulent does not necessarily mean that the recipient is liable to a trustee in bankruptcy for those funds.

In Jalbert vs. Gryaznova (In re Bicom NY, LLC)No. 21-1821 (2n/a Cir. May 5, 2022), the defendant (Ms. Gryaznova) had opened a joint bank account with the principal of the debtor, Benjamin Nilva. The evidence indicated that the account was only intended to hold the defendant’s money while she established her permanent residence in the United States. Years later, Nilva struggled with financial problems and decided to transfer funds between his companies in an effort to protect them from his lenders. Nilva funneled $1 million from the debtor to the joint account with the defendant, where he remained for two days, then transferred the funds to another of his companies, via a fake check in the name of the defendant in order to hide the source funds . When the Debtor subsequently filed for bankruptcy, the Debtor’s Bankrupt Estate Trustee sought to avoid and recover the transfer of $1 million from the Defendant as the “original assignee”. The bankruptcy court granted summary judgment in favor of the defendant. The trustee appealed to the District Court, which upheld the decision, and the trustee then appealed to the Second Circuit.

On appeal, the Second Circuit noted that once a transfer is avoided as fraudulent under Code Section 544 or 548, the “original transferee” (unlike a subsequent transferee) is strictly responsible for returning the property transferred or the value of the transfer to the estate under Section 550(a)(1) – i.e. even an original transferee who is innocent of any wrongdoing and has acted with the utmost good faith has no defense against the fiduciary’s ability to recover the property or funds in question. Yet the term “original assignee” is not defined in the Code, leaving it to the courts to determine who qualifies as an “initial assignee”. On this issue, the Second Circuit reaffirmed a principle it had previously adopted in a decision in 1997, that’s to saythat “the term ‘initial assignee’ refers to something more particular than [being] the original recipient. The court therefore “refused to equate[] mere receipt with liability,” and held that “mere conduits” of fraudulent transfers are not original assignees under section 550(a)(1).

On the facts before it, the Second Circuit rejected the trustee’s assertion that the defendant was an initial assignee simply because it briefly had the hypothetical ability to control the funds, or even get out of the bank with them. , while they were in the joint account. . While the court recognized that the defendant was the primary beneficiary of the million dollars transferred by the debtor, since she was co-owner of the joint account, it concluded that this fact alone was “insufficient to confer the status of ‘initial transferee’ ” to the defendant. Instead, “[a]Although she was hypothetically able to exercise control over the funds because they were in the joint account for two days, it is undisputed that she never had “a realistic opportunity to use” the funds because she didn’t know about it. Indeed, she had no reason to suspect that Nilva would use the joint account in this way based on their agreement that the joint account should only contain her money, not hers. On this basis, the Second Circuit found that the district court (and the bankruptcy court) correctly determined that the defendant was a “mere conduit” of the fraudulent conveyance at issue, and therefore could not be liable to the mass. of bankruptcy” for the funds she never knew.

While the facts in the Bicom NY cases are somewhat unusual, the Second Circuit decision likely has wider applicability. A defendant in a fraudulent transfer case may have a defense where, even if he was the original recipient of the funds involved, he had no knowledge of the transfer of funds and/or no realistic possibility of owning or controlling the disposition. of these funds. At a minimum, the decision provides at least one possible exception, based on the facts, to the more general maxim in bankruptcy that, once a transfer has been found to be fraudulent under section 544 or 548 of the Bankruptcy Code, an original assignee under Section 550(a)(1) is strictly responsible for returning funds to the bankruptcy estate.


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