Second Circuit Insulates Innocent Friend from Corporate Debtor's Fraudulent Transfer Liability

Relevance

The Code does not define "initial transferee", leading to a raft of fact-intensive appellate decisions on the subject. Generally, a financial intermediary or conduit would not be a "transferee" of the debtor's property because it does not have control over that property. See, e.g., In re Pony Express Delivery Servs. Inc., 440 F.3d 1296, 1304 (11th Cir. 2006) (insurance broker received premium payments from debtor more than three weeks after paying insurance carriers on debtor's behalf; held, insurance broker was not initial transferee under §550); Christy v. Alexander & Alexander Inc., 130 F.3d 52, 59 (2d Cir. 1997) (insurance broker mere conduit), cert denied, 524 U.S. 912 (1998); In re Red Dot Scenic, Inc., 351 F.3d 57, 58 (2d Cir. 2003) (debtor's purchasing shareholder paid personal debt with checks drawn on debtor's corporate accounts; held, recipient of checks was initial transferee "and was therefore required to return the funds regardless of any potential good faith defense"; purchasing shareholder was not initial transferee because "he exercised no control over funds at issue once they were transferred from [debtor's] account"); Bonded Fin Servs., Inc. v. European AM Bank, 838 F.2d 890, 893 (7th Cir. 1988) ("minimum requirement of status as a 'transferee' is dominion over the money or other asset, the right to put the money to one's own purposes").

Facts

The defendant in BICOM was a friend of the corporate debtor's principal and "opened a joint bank account with [the principal] that was intended to hold only her money and to facilitate her permanent residency in the United States." Bicom, 2022 WL 1419997, at *1. According to the lower courts, the "defendant believed (rightly or not) that she could not open a U.S. bank account on her own because she lacked a U.S. Social Security number." In re BICOM NY, LLC, 619 B.R. 795, 796 (Bankr. S.D.N.Y. 2020). When the debtor's principal "ran into financial troubles and needed to move funds between his businesses while keeping his lending banks in the dark," he "routed $1 million from [the corporate debtor] through the joint account, where it stayed for two days before [the principal] transferred it to his other business via a forged check in [the defendant's] name to hide the source." BICOM, 2022 WL 1419997, at *1.