ENFORCING AVOIDANCE JUDGMENTS AGAINST LATER TRANSFEREES – WHAT DOES THE SECOND CASE REQUIRE?
In voidable transfer litigation, when litigating claims against subsequent transferees, there is a split in authority between courts that require the avoidance of a transfer to an initial transferee before seeking to recover from a subsequent transferee and courts that permit a claimant to proceed directly against the subsequent transferee.
As explained through the lens of a 4 February 2026 memorandum opinion – Phillips v. SS Associates LLC – by the US Bankruptcy Court for the District of Delaware, most courts analysing the issue have found that a plaintiff need not proceed first against the initial transferee.
However, Phillips also discussed another point of contention in fraudulent transfer litigation: when a judgment avoiding a transfer is obtained against the initial transferee, what is the plaintiff required to prove to recover from a subsequent transferee in a separate recovery suit?
Must the plaintiff reestablish that the transfer is avoidable in the second suit, or is the avoidance judgment preclusive, even where the subsequent transferee was not a party to the initial suit?
This article examines various issues with which courts have grappled in lawsuits brought by holders of avoidance judgments against subsequent transferees.
Factual and procedural background
In Phillips, the debtors were two entities formed to raise capital for commercial real estate projects. The complaint alleged the debtors’ principal raised investor funds by promising those investments 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.
Jul-Sep 2026 issue
King & Spalding LLP