AVOIDANCE WITHOUT THE INITIAL TRANSFEREE: IS PRIMARY AVOIDANCE REQUIRED BEFORE SUING SUBSEQUENT TRANSFEREES?
In a 4 February 2026 memorandum opinion, the US Bankruptcy Court for the District of Delaware addressed a question that has divided courts in voidable-transfer litigation: whether a bankruptcy trustee may recover from a subsequent transferee under section 550 of the Bankruptcy Code without first suing, and avoiding the transfer to, the initial transferee. In Phillips v. SS Associates LLC, Judge Craig T. Goldblatt held that the answer is yes, concluding that avoidance of the initial transfer is an element of section 550 liability that can be first established in an action solely against a subsequent transferee.
But not all courts agree. This article therefore begins by outlining the existing circuit split before exploring Phillips’ implications for post‑confirmation litigation, particularly where initial transferees have already been released, discharged or are otherwise rendered unavailable as defendants.
Factual and procedural background
In Phillips, the debtors were two entities formed to raise capital for commercial real estate projects. The complaint alleged that the debtors’ principal raised investor funds by promising the funds would be used for specific real estate acquisitions. Instead, he diverted the funds from the debtors’ bank accounts into his own account for personal use.
In 2023, the debtors filed Chapter 11 petitions. The bankruptcy court confirmed the debtors’ plan, which included a global settlement and release of claims against the principal. Two years later, the liquidating trustee filed an adversary proceeding against SS Associates LLC. The complaint asserted fraudulent transfer claims under sections 544 and 548 and sought recovery from SS Associates as a subsequent transferee under section 550(a)(2).
Apr-Jun 2026 issue
King & Spalding LLP