While there are still many unknowns in FTX’s bankruptcy including what, exactly, happened to billions of dollars of customer deposits on the former crypto trading platform, one thing is almost certain: there will be an explosion of what the media has described as “clawback” lawsuits aimed at recovering as much of the missing customer funds as possible. And a 2021 ruling from the Second Circuit Court of Appeals in the long-running Bernie Madoff SIPC liquidation may dramatically expand the reach of those clawbacks.
Technically speaking, the “clawback” suits that FTX—or, quite possibly, someone with the title of “liquidating trustee”—will prosecute will come in the form of statutory fraudulent transfer actions. Bankruptcy Code sections 548(a) and 550(a) collectively give chapter 11 debtors in possession (and trustees appointed for bad-boy debtors and post-confirmation liquidating trusts) the power to sue and recover money and other forms of property the debtor sold, loaned, gifted, or otherwise transferred to third parties within two years of the bankruptcy filing if the transfers were (literally or constructively) designed to defraud other creditors.
As a baseline, section 550(a) doesn’t limit the trustee to recovery of fraudulently transferred property from the direct (initial) recipient of the transfer. Rather, 550(a) gives the trustee an expansive power to recover money and other property from not only initial transferees, but also secondary…
