In July 2020, the Court in In re Generation Res. Holding Co., LLC, 964 F.3d 958, 962 (10th Cir. 2020), held that subsequent transferees do not qualify as immediate or mediate transferees under Section 550(a)(2) because they did not possess the initial property transferred, and only possessed the proceeds of the transfer. In Generation, the debtor’s insiders created a new entity and transferred a contract right to receive payments to said entity. The insiders sold the entity and used the proceeds from the sale to pay two law firms. The trustee sued the law firms to recover the proceeds. The Tenth Circuit ultimately reversed the District Court’s decision and held that the “law firms are not [immediate or mediate] transferees because they never received the property transferred.” See id. at 967. The Tenth Circuit’s reasoning focused on the subsequent transferees lack of dominion and control over the initial property transferred (the contract right to receive payments), resulting in their inability to qualify under Section 550(a) as a mediate transferee.

The United States Bankruptcy Court for the Southern District of Texas recently addressed a similar scenario in determining whether subsequent transferees qualify as immediate or mediate transferees when the subsequent transferee does not exercise control over the initial property transferred. See Cage v. Davis (In re Giant Gray Inc.), 20-3127, Doc. No. 20 at 40 (Bankr. S.D. Tex. Oct. 22, 2020).

In In re Giant Gray Inc., the appointed Chapter 7 trustee in the involuntary bankruptcy case against the debtor sued the recipients of fraudulently transferred money to recover certain funds when, prior to the petition date, the debtor’s CEO transferred more than $5 million of the proceeds from a fraudulent stock sale to the “subsequent transferees” (or the “Defendants”). Specifically, the Debtor’s CEO privately arranged for the debtor to issue $15 million in convertible preferred stock, which the CEO sold for $15 million shortly after the issuance. The defendants received more than $5 million of the proceeds from this sale of stock.

The trustee argued that the Tenth Circuit was wrong in Generation and that the decision created perverse incentives for fraudsters who are able to “immunize” the proceeds of a fraudulent transfer because the subsequent transferees were not in possession of the actual “initial property” that was transferred.

Faced with limited case law directly on point, the Court in In re Giant Grey began with the plain language of Section 550 and employed the relevant canons of statutory construction. The Court explained that a natural reading of Section 550 is that the “transferred property” is “whatever property that was the subject of the related avoidance action.” See Giant Gray Inc. at 40.  However, this limited reading of the statute restricts the pool of individuals of whom you can recover from, because you can only recover from those who have dominion or control over the “transferred property that was the subject of the related avoidance action.” The Court found that the “transferred property” is the convertible preferred stock, but not the proceeds from the sale of the stock. This logic results in the trustee’s ability to recover from anyone who controls the preferred stock or the value of the preferred stock (pursuant to a court order). However, the Court emphasized that this reading of the statute does “not give enough consideration to the language used in subsections (a)(1) and (a)(2)” and the statute as a whole. See id. To qualify as an immediate or mediate transferee, one only needs to be a transferee of the initial transferee. The statute is clear and does not add an additional restriction that the immediate or mediate transferee must be “of the property transferred.” Id. Conversely, in order to qualify as an initial transferee, one must be an “initial transferee of such transfer.” It is of note that this additional restriction is not placed on immediate or mediate transferees.

Further, when the Court read the statute as a whole it did not logically make sense that the complete defense provided for immediate or mediate transferees in Section 550(b) would apply to individuals who took proceeds of property in bad faith or were aware of the voidability of the transfer. The purpose of the complete defense in Section 550(b) is to protect those who did not engage in fraudulent activity or wrongdoing, not those who reap the benefits of the proceeds from a fraudulent transfer by simply turning a blind eye to the merits of the transfer. The Court’s reasoning aligned with the criticism that followed the Tenth Circuit’s ruling earlier this summer. The Court noted that if the immediate and mediate transferees are limited to only those who exercised control over the property it creates “perverse incentives” and “transferees could take with knowledge of the voidability of the transfer, in bad faith, or without providing value and escape unscathed with property belonging to a debtor.” Id. at 42. These perverse incentives do not align with the fundamental principles of the Bankruptcy Code and the goal to maximize the estate for all creditors. With limited case law directly on point, it will be fascinating to see how this subject develops and whether bankruptcy courts across the country will side with the Tenth Circuit or the statutory reading adopted in In re Giant Grey.


Stephanie Slater is a Law Clerk, based in the firm’s Wilmington, DE office.