648 F.3d 232
4th Cir.2011Background
- Goldman, trustee for Nieves’ Chapter 7 estate, sought to avoid a sequence of transfers involving an 11.8 acre Maryland parcel (the Property); initial and second transfers were avoided by consent orders, and the case proceeded against the third transferee, Capital City Mortgage Corporation (CCM).
- CCM loaned $155,000 to 1st Financial Mortgage Services, LLC secured by the Property; 1st Financial’s status was uncertain and the loan relied on minimal company verification and documentation.
- CCM did not review 1st Financial’s deed, nor obtain financial information or a deed of trust for 1st Financial; CCM relied on a month-old certificate of good standing and a cursory close.
- The first transfer (to Edgardo Nieves) occurred August 2002 for zero consideration; the second transfer (to 1st Financial) occurred April 2003 for purported $18,000 and was not notarized; 1st Financial’s charter had been forfeited in 2001 and later voided, rendering it not a valid entity.
- Nastasi, owner of 1st Financial, misrepresented ownership and company name; CCM failed to verify organizational authority or search public records, leading to a questionable chain of title.
- The Property was sold in 2005 for $475,000; CCM was found to have taken the Property via a third transfer and was not able to satisfy § 550(b)(1)’s good faith and knowledge requirements.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether § 550(b)(1) requires actual knowledge or an objective standard for good faith | Trustee emphasizes knowledge prong; Mixon limits to actual knowledge. | CCM argues for broader, non-subjective standard; knowledge not limited to actual notice. | Knowledge requires actual knowledge of facts leading to voidability; but the court adopts objective good faith for the defense. |
| What standard governs the good faith prong for transferees under § 550(b)(1) | Trustee argues objective standard is appropriate based on industry practice and Mixon. | CCM urges a more lenient standard, arguing no need for inquiry into routine practices. | Court adopts an objective good faith standard, considering what transferee knew or should have known in light of industry practices. |
| Did CCM have knowledge of the voidability of the transfer | Trustee contends CCM had no actual knowledge of voidability and thus cannot defeat liability. | CCM argues lack of knowledge should be insufficient to defeat defense. | CCM did not have actual knowledge; however, examining what it knew, the district and bankruptcy courts erred by holding it responsible for undiscovered issues; the record supports lack of knowledge but the court ultimately affirms other bad-faith findings. |
| Was CCM’s taking of the Property in good faith under an objective standard | Trustee argues CCM’s conduct does not meet good faith due to failure to perform routine checks. | CCM contends standard should be subjective or less rigorous. | CCM did not take in good faith; the court held that wilful ignorance and failure to follow routine practices negate good faith. |
Key Cases Cited
- Smith v. Mixon, 788 F.2d 229 (4th Cir. 1986) (knowledge means actual notice; not a constructive notice standard)
- In re Harbour, Huffman v. Commerce Sec. Corp., 845 F.2d 1254 (4th Cir. 1988) (objective good-faith standard; wilful ignorance defeats good faith)
- In re Laines, 352 B.R. 397 (Bankr. E.D. Va. 2005) (objective standard for good faith; derives from commercial practice)
- In re Smoot, 265 B.R. 128 (Bankr. E.D. Va. 1999) (burden of proof on transferee for § 550 defense; expert discussion)
- Brown v. Third Nat’l Bank (In re Sherman), 67 F.3d 1348 (8th Cir. 1995) (recognizes objective good faith in § 550 context)
- Hayes v. Palm Seedlings Partners (In re Agric. Research & Tech. Group, Inc.), 916 F.2d 528 (9th Cir. 1990) (good-faith analysis in transfers; emphasis on reasonableness)
- Bonded Fin. Servs., Inc. v. European Am. Bank, 838 F.2d 890 (7th Cir. 1988) (good faith purchase doctrine in transfer context)
- Nordic Village, Inc. v. Future, 915 F.2d 1049 (6th Cir. 1990) (knowledge standards for § 550; factual inquiry considerations)