Section 548 of the Bankruptcy Code (the “Code”) authorizes a trustee to avoid transfers that are made with intent to hinder, delay, or defraud creditors. In addition, section 544(b) of the Code permits a trustee to step into the shoes of an actual unsecured creditor and assert applicable state-law avoidance claims that oftentimes have a longer statute of limitations period than the analog Code provision. To qualify as a transferee, the recipient generally must have dominion or control over the transferred assets. Complicating matters, many fraudulent transfer claims involve not only an initial transferee, but also one or more subsequent transferees. Section 550 of the Code, then allows a trustee to recover an avoided transfer of property from the initial transferee, the entity for whose benefit the transfer was made, or “any immediate or mediate transferee” of the initial transferee.

While the foregoing Code provisions may appear straightforward, courts’ applications of those provisions have resulted in inconsistent rulings and a lot of confusion. Two of the main issues where courts disagree are: (i) whether the trustee must actually avoid the initial transfer before recovering from a subsequent transferee; and (ii) whether the initial transferee must be a named defendant in an action. 

In Phillips v. SS Associates, Judge Goldblatt of the Delaware Bankruptcy Court (the “Court”), recently ad-dressed both questions. The Court held that a trustee seeking to recover from a subsequent transferee must first prove each element necessary to avoid the initial transfer and actually avoid the transfer. How-ever, the Court held that the trustee does not need to name the initial transferee as a party to the action. Accordingly, this decision offers practical guidance for the prosecution of fraudulent transfer actions in Delaware and may influence how other courts within the Third Circuit may approach similar claims in the future. For trade creditors and other vendors, the main takeaway is that a party that received funds down-stream may still face fraudulent transfer exposure even if the alleged initial wrongdoer is not named in the lawsuit.

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