Академический Документы
Профессиональный Документы
Культура Документы
No. 13-1058
In Re:
VIJAY K. TANEJA,
Debtor.
Appeal from the United States District Court for the Eastern
District of Virginia, at Alexandria.
Anthony J. Trenga,
District Judge. (1:12-cv-01097-AJT-TRJ; 08-13293-RGM; 10-01225RGM)
Argued:
Decided:
The
good-faith
employees.
defense
based
on
the
testimony
of
two
bank
standard
in
determining
that
the
bank
employees
banks
burden
of
proving
its
affirmative
defense
under
Section 548(c).
did
err
not
clearly
in
holding
that
the
bank
accepted
the
I.
In the 1990s, Taneja began operating FMI, a legitimate
business engaged in originating home mortgages and selling those
loans to investors (secondary purchasers), who aggregated the
mortgage loans and often securitized them for sale to different
investors.
Typically,
The
warehouse
lenders
required
FMI
to
sell
the
As
fraudulent
conduct,
result,
which
FMI
and
included
Taneja
selling
began
the
engaging
same
in
mortgage
as
fraudulent
intermediary
conduct
parties
continued
to
during
conceal
2007
the
and
fraud.
2008,
The
when
the
business
activities,
4
their
fraudulent
conduct
relationship
began
in
2007
with
First
when
the
Tennessee,
bank
received
warehouse
a
referral
Before extending
returns
conducted
submitted
research
by
using
FMI
a
and
Taneja.
private
The
mortgage
bank
also
database
that
of
fraud,
and
material
suspicions
of
fraud.
any
negative
business
information
involving
FMI
or
Taneja.
On July 2, 2007, the bank and FMI executed an agreement in
which the bank provided FMI with a line of credit in the amount
of $15 million (the lending agreement).
relationship
bank
was
short-lived,
and
the
ultimately
made
The
lending
agreement
obligated
the
bank
to
send
funds
Although FMI
November
vice
1,
2007,
president
of
Robert
A.
mortgage
Garrett,
warehouse
the
banks
lending,
and
In
of
such
mortgage
loan
purchaser
would
not
purchase
especially
during
the
difficult
After
this
meeting,
documentation,
the
obligations,
mortgage
market
Garrett
In the
secondary
conditions
further
in
2007.
investigated
FMIs
about
outstanding
informed
FMIs
unsold
loan
with
the
Garrett
that
Wells
loans.
Wells
Garrett
Fargo
Fargo
had
reviewed
each
representative,
not
purchased
who
FMIs
November
and
December
2007,
FMI
made
six
principal
According to Garrett, he
and
files
Daugherty
planned
to
obtain
the
from
FMI
for
its
collateral
estate
to
pay
swap,
the
in
which
bank
off.
Taneja
would
Taneja
sell
other
represented
that
real
the
mortgage loans had lost value, and that Taneja did not want to
sell them until their value increased.
7
You
Tanejas
whether
there
dont
want
attorney
was
these
loans.
whether
any
FMIs
fraud
Garrett
loans
involved
were
in
immediately
valid,
these
and
loans.
placed
materials,
on
those
Garrett
and
properties.
Daugherty
After
again
reviewing
met
with
these
Tanejas
is
forbearance
not
problem.
agreement
with
bank
in
ultimately
which
Taneja
approved
agreed
a
to
In April 2008,
the bank learned that the deeds of trust securing the mortgage
notes held by the bank were not valid and had been falsified.
of
84
months
imprisonment
and
was
He received a
ordered
to
pay
Bank, FSB, No. 1:12-cv-264, 2012 U.S. Dist. LEXIS 109337 (E.D.
Va. July 3, 2012).
In
June
including
2008,
FMI,
Taneja
filed
and
voluntary
his
corporate
petitions
for
affiliates,
relief
under
with
11
U.S.C.
548(a)
and
550(a).
In
the
FMI
transmitted
to
the
bank
in
the
twelve
payments
response,
the
bank
contended
that
it
11
U.S.C.
548(c),
the
bank
pleaded
good
received
the
In accordance
faith
as
an
affirmative
defense.
The
case
proceeded
to
trial
in
the
bankruptcy court.
During
testimony
three-day
and
trial,
received
the
bankruptcy
substantial
regarding
the
fraudulent
conduct
asserting
its
good-faith
defense,
documentary
of
FMI
the
court
and
bank
heard
evidence
Taneja.
relied
on
In
the
were
permitted
knowledge
primarily
on
of
their
the
long
without
objection
warehouse
careers
to
lending
with
the
testify
industry
bank
about
based
and
other
institutions.
Garrett, who had worked for the bank for 14 years, and had
worked in the banking business for about 30 years, testified
about his experience initiating warehouse lending groups at
the bank and at two other financial institutions.
Garrett also
other
lending
institutions
to
manage
and
operate
their
regard
to
the
warehouse
lending
industry,
Garrett
He explained
that at the end of July 2007, the secondary market for nonagency mortgage-backed securities came back no bid, which meant
that if you owned a mortgage-backed security you didnt have a
market on which to sell it.
during
purchasers
this
their
period,
underwriting
narrowed
criteria
secondary
criteria.
created
meltdown,
According
more
began
to
constricting
Garrett,
restrictive
these
standards
for
successful
sales
of
loans
to
secondary
period
contact
in
2007
with
and
FMI.
2008,
he
Daugherty
served
During the
as
testified
the
that
banks
he
was
instruments.
meltdown,
warehouse
more
lines
He
loans
of
also
stated
remained
credit
than
previous years.
11
that
during
outstanding
ever
had
on
been
the
market
the
banks
the
case
in
The
reasonably
thought
that
the
lagging
secondary
mortgage
banks
warehouse
lending
and
transactions
with
FMI,
but
II.
We review de novo the legal conclusions of the bankruptcy
court and the district court.
(4th Cir. 2013).
Id.
13
See
Under
Section
arguments:
(1)
548(c).
that
The
the
trustee
court
erred
asserts
as
two
matter
related
of
law
by
clearly
sufficient
erred
objective
in
concluding
evidence
to
that
prove
the
that
bank
it
presented
accepted
the
turn.
Under
Section 548(a),
transfer
of
transfer
creditors.
a
.
debtors
.
with
bankruptcy
property
intent
to
if
provides that:
14
the
hinder,
11 U.S.C. 548(a)(1)(A).
trustee
debtor
delay,
can
avoid
made
or
such
defraud
the
bank
satisfied
its
burden
of
proving
that
it
permitting
funds
involving
transferee
transfers
to
bar
that
have
trustee
been
from
deemed
15
focus
bankruptcy
in
evaluating
avoidance
good
action
faith
requires
in
the
that
context
court
of
determine
We
law
aided
our
refinement
of
this
term
in
the
subjective
(honesty
in
fact)
and
[2]
objective
at
239.
We
articulated
the
standard
for
good-faith
is
applicable
to
the
transferee
has
establishment
of
good-faith
established
an
16
affirmative
defense
under
Section 548(c),
court
is
required
to
consider
whether
the
that
the
transferor-debtor
intended
to
hinder,
In the present case, the trustee does not assert that the
bank actually knew about FMIs and Tanejas fraudulent conduct
before April 2008.
issue whether the bank should have known about the fraudulent
conduct
of
customary
FMI
and
practices
operates.
Taneja,
of
the
taking
into
industry
in
consideration
which
the
the
[bank]
of
third-party
expert
testimony.
trustees arguments.
17
We
disagree
with
the
While
the
trustee
correctly
observes
that
the
objective
See id.
We decline to adopt
transfers
industry
standards.
was
objectively
Instead,
our
reasonable
inquiry
in
regarding
light
of
industry
Although
an
presented
in
inflexible
every
rule
case
that
to
expert
prove
testimony
good-faith
must
be
defense
such evidence.
285 F.3d 1092, 1096 (8th Cir. 2002) (no precise definition for
good
faith,
which
should
be
decided
based
on
case-by-case
basis); Consove v. Cohen (In re Roco Corp.), 701 F.2d 978, 984
(1st Cir. 1983) (same).
next
address
the
trustees
argument
that
the
bank
The
about
evidence
evidence.
these
of
circumstances
good
faith
were
bank
constituted
employees,
purely
the
subjective
19
Garrett
and
Daugherty
had
extensive
knowledge
of
loans
in
the
secondary
market
in
timely
manner.
objective
industry
evidence
during
of
that
the
state
period.
of
In
the
light
warehouse
of
their
of
the
particular
events
at
issue,
Garretts
and
required
on
the
objective
component
of
the
good-faith
defense.
We also observe that the bankruptcy court explicitly stated
that
it
considered
the
fact
that
Garrett
and
Daugherty
were
bank,
did
not
provide
competent
evidence
regarding
the
therefore
turn
to
discuss
the
evidence
cited
by
the
However,
documents
was
common
and
was
consistent
with
the
Also, Daugherty
lending
relationships,
because
different
warehouse
showed that the bank always received from FMI the most vital
document,
the
original
promissory
note
that
perfected
the
the bank should have known that the notes were fraudulent simply
because
they
were
not
submitted
within
the
two-day
timeline
warehouse
lender
of
fraudulent
conduct.
However,
and
extraordinary
experiencing
explain
that
secondary
Daugherty
testified
time
the
during
that
2007
and
borrowers
purchasers
is
warehouse
2008.
failure
part
extensively
of
lending
Not
to
the
sell
only
about
the
industry
was
did
mortgage
business
Both
of
Daugherty
loans
to
warehouse
decline.
Therefore,
we
conclude
that
the
record
22
testimony
concerning
the
curtailed
market
for
the
bank
fraudulent
should
conduct
have
known
because
about
FMI,
FMIs
rather
and
than
Tanejas
secondary
the
terms
of
FMIs
agreement
with
the
bank,
FMI
was
required to repay the bank regardless whether FMI had sold the
loan obligations to secondary purchasers.
trustees
key
investigate
repayment
witness,
FMIs
obligation
Robert
Patrick,
financial
and
who
affairs,
testified
that
was
retained
acknowledged
FMIs
actions
to
FMIs
making
loans,
Taneja
explained
that
one
of
FMIs
loan
Contrary
fraudulent
secondary
conduct
purchasers
had
when
the
tightened
evidence
their
established
standards
for
that
loan
mortgage
loans
remained
unsold
because
the
loan
the
meeting
that
occurred
in
January
2008,
when
the
trustees
assertion
that
this
conversation
demonstrated that the bank should have known about the ongoing
fraud.
The
court
determined
instead
that
Garrett
properly
that
the
value
significantly
of
the
impaired.
mortgage
The
record
obligations
had
demonstrated
that
been
the
Moreover,
the
fraudulent
bank
should
conduct
have
based
known
on
the
about
FMIs
conversation
and
Tanejas
with
Tanejas
The
knowledgeable
witnesses
in
their
testimony
about
the
payments
by
FMI
were
made.
Deference
to
the
testified
and
the
25
court
made
credibility
determinations.
See
did not clearly err in concluding that the bank accepted the
relevant transfers from FMI in good faith and without knowledge
of facts that should have alerted the bank that the transfers
were part of a fraudulent scheme. 6
238.
III.
In
sum,
we
conclude
that
the
district
court
and
the
We
also conclude that the bankruptcy court did not clearly err in
determining
that
the
bank
satisfied
its
burden
of
proving
Accordingly, we affirm
Code
Section
548(c)
provides
an
affirmative
Importantly,
To
succeed with its good faith defense, First Tennessee Bank had to
prove
both
proffer
any
aspects
of
evidence
good
to
faith.
support
But
here,
finding
it
that
failed
it
to
received
court
to
make
unsupported
finding
that
First
I.
We review a district court finding of good faith for clear
error.
record supports it . . . .
United Mine Workers of Am., 48 F.3d 125, 128 (4th Cir. 1995).
Thus, we reverse findings of fact that lack evidentiary support
and that is, in my view, what must be done here.
28
II.
Under Bankruptcy Code Section 548(a), a bankruptcy trustee
can avoid fraudulent transfers occurring within the two years
prior to a bankruptcy petitions filing if those transfers were
made
with
intent
consideration.
to
defraud
or
for
11 U.S.C. 548(a).
less
than
reasonable
Nevertheless, a recipient
11 U.S.C. 548(c).
notes,
that
to
to
show
we
transferee
held
needs
establish
both
the
good
subjective
As the majority
faith
and
defense,
objective
good
faith:
Good
faith
thus
contains
both
subjective
(honesty in fact) and objective (observance of
reasonable commercial standards) components. Under
the subjective prong, a court looks to the honesty
and state of mind of the party acquiring the
property.
Under the objective prong, a party acts
without good faith by failing to abide by routine
business practices.
We therefore arrive at the
conclusion that the objective good-faith standard
probes what the transferee knew or should have known,
taking into consideration the customary practices of
the industry in which the transferee operates.
Id. at 239-40 (citations and footnotes omitted).
In essence,
blind
eye
to
suspicious
29
transaction[,]
and
then
(quotation
ignoran[t]
in
marks
the
omitted).
face
of
Id. at
transferee
wil[l]ful[ly]
which
out
facts
cried
for
Id. at
241.
Importantly, it is the transferee who bears the burden of
proof on the good faith defense.
agree with the weight of authority holding that [the good faith
defense is] a defense to an avoidance action which defendant
bears the burden to prove.
265
E.D.
B.R.
128,
140
(Bankr.
Va.
1999)
(collecting
cases
sum,
to
establish
the
good
faith
defense,
First
Tennessee Bank needed to show not only subjective good faith but
also objective good faith.
burden
of
showing
that
conduct
comported
with
routine
flags
about
FMIs
fraud
comported
with
that
of
an
III.
Preliminarily, I must address several general points that
the majority makes, and with which I take issue, regarding the
30
would
almost
industry standards.
certainly
be
helpful
in
establishing
fact
witness
testimony
could
suffice.
For
in
accordance
with,
best
practice
materials
received
at
those conferences. 8
The problem here is that First Tennessee Bank, which bore
the burden of proving its good faith defense, failed to elicit
such testimony from its fact witnesses.
Instead, it relied on
not
necessarily
industry standards.
mean
that
his
business
comports
with
scheme
that
turns
industry
standards
on
their
it
is
common
knowledge
that
the
economy,
2007
and
example,
2008.
whether
But
that
First
fact
Tennessee
does
not
Banks
illuminate,
attributing
for
FMIs
Garrett
and
Daugherty
may
have
explained
their
Ante at 20.
But
their
faithnot
reasons
of
are
objective
evidence
good
of
faith,
their
taking
subjective
into
good
consideration
industry standards.
Finally, I agree with the majority opinion that Garretts
and Daughertys employment with First Tennessee Bank did not
affect
the
admissibility
incompetent.
of
their
testimony
or
render
it
opinions
assertion
Garretts
and
that
the
Daughertys
Trustee
general
failed
to
testimony
object
regarding
to
the
Ante at 20-
21.
objected
On
the
contrary,
the
Trustee
repeatedly
to
Tennessee
Bank
reiterated
that
[i]ts
just
background
33
More
importantly,
objections
aside,
looking
to
the
bankruptcy
Specifically,
asserting
flags
lender.
the
that
failed
courts
to
objective
Trustee
First
identified
Tennessee
comport
good
with
Banks
that
of
faith
multiple
response
a
finding.
red
to
flags,
those
reasonable
red
warehouse
carry its burden of proof and that the bankruptcy court erred in
finding that the banks actions were in accord with . . . the
industrys usual practices.
After
practices
are,
let
alone
find
evidence
that
First
counsel,
loans
were
Mr.
Garrett
fraudulent.
Mr.
specifically
Garrett
asked
then
whether
testified
FMIs
that
in
response, FMIs counsel indicated that the loans were valid, and
that First Tennessee Bank relied on the statement and followed
up by look[ing] at property, pull[ing] appraisals, [and] saw
FMI listed as the mortgagor on some of them.
J.A. 1489.
What
other
words,
the
bankruptcy
court
had
no
support
for
in
not
only
subjective,
but
also
objective,
good
faith.
A
second
belatedly
transmit.
example:
delivered
The
Trustee
collateral
highlighted
documents
it
was
that
FMI
required
to
and
was
consistent
with
the
practices
of
other
Ante at 21.
centered
on
Bankscustomers,
all
J.A.
experience . . . .
of
1506,
youri.e.,
and
was
J.A. 1491.
First
[b]ased
The
Tennessee
on
your
the
industry
record
practices
is
and
objective
how
FMIs
evidence
delays
regarding
and
First
Missing
standard
Tennessee
third
example:
The
Trustee
asserted
that
FMIs
to
bankruptcy
suspect
court
Taneja,
2012
offered
no
WL
that
it
was
called
the
3073175,
at
evidence
about
not
the
explanation
*13.
how
Yet
truth.
Even
unusual.
First
reasonable
the
In
Tennessee
warehouse
re
Bank
lender
various
red
flags
the
Trustee
raised,
the
majority
opinion ascribes much to the fact that the lending and mortgage
industries were in turmoil in 2007 and 2008.
Surely no one
time.
But
that
fact
tells
us
little
about
whether
time
of
standards.
crisis,
comported
with
industry
practices
and
short
of
ignoran[t]
in
industry
the
standards
face
of
but
facts
rather
which
wil[l]ful[ly]
cried
out
for
36
law.
IV.
In sum, I agree with the majority that [d]eference to the
bankruptcy courts findings is particularly appropriate when . .
. the bankruptcy court presided over a bench trial in which
witnesses
testified
determinations.
and
the
court
made
credibility
2006)).
bankruptcy
But
court
the
issue
assessed
here
is
not
credibility
or
that,
or
weighed
how,
the
testimony.
FMI
with
objective
good
It did.
faith
in
the
face
of
certain
the
unsupported
objective
good
faith
finding,
37