Section 6.46 Liability of Transferee of an Avoided Transfer Under 11 U.S.C. § 550

• Library: Bankruptcy Practice (2007 Ed. + 2015 Cum Supp)

VI. (§6.46) Liability of Transferee of an Avoided Transfer Under 11 U.S.C. § 550

Once a transfer has been avoided by the trustee or debtor-in- possession, the Bankruptcy Code, 11 U.S.C. §§ 101 et seq., sets out guidelines for the trustee’s recovery and to whom the trustee may look for the recovery of property transferred or its value.

Once a transfer is avoided, “the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property” from the initial transferee or any immediate or mediate transferee of the initial transferee. 11 U.S.C. § 550(a).
SeeIn re Kroh Bros. Dev. Co., 86 B.R. 186 (Bankr. W.D. Mo. 1988) (See, B.J.); In re Kingsley, 208 B.R. 918 (B.A.P. 8^th Cir. 1997).

Section 550(b) provides that the trustee cannot recover from any immediate or mediate transferee if the transferee took “for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided; or . . . any immediate or mediate good faith transferee of such transferee.”

The Bankruptcy Code does not define good faith. In In re Sherman,67 F.3d 1348 (8^th Cir. 1995), the court looked at the provisions for a good faith transferee seeking the protections of § 550(b) and (c). The Sherman court noted that the test for good faith is as follows:

Good faith is not susceptible of precise definition and is determined on a case-by-case basis. To determine whether a transferee acts in good faith, “courts look to what the transferee objectively, ‘knew or should have known’” instead of examining the transferee’s actual knowledge from a subjective standpoint. In other words, a transferee does not act in good faith when he has sufficient knowledge to place him on inquiry notice of the debtor’s possible insolvency. In a related context to determine whether good faith exists, the court looks to whether “the transaction carries the earmarks of an arms-length bargain.”

Sherman, 67 F.3d at 1355 (citations omitted).

An additional element of the defense to the trustee’s recovery is that of knowledge. Again, neither the Bankruptcy Code nor its legislative history defines the term “knowledge.” The Sherman court noted that:

[W]e believe that a transferee has knowledge if he “knew facts that would lead a reasonable person to believe that the property transferred was recoverable.” In this vein, some facts suggest the underlying presence of other facts. If a...