Vijay Taneja v. First Tennessee Bank NA

Filing

PUBLISHED AUTHORED OPINION filed. Originating case number: 1:12-cv-01097-AJT-TRJ,08-13293-RGM,10-01225-RGM. [999301180]. [13-1058]

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 1 of 37

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 13-1058

In Re:

VIJAY K. TANEJA,
Debtor.

----------------------H. JASON GOLD, Chapter 11 Liquidating Trustee,
Plaintiff – Appellant,
v.
FIRST TENNESSEE BANK NATIONAL ASSOCIATION,
Defendant - Appellee.

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:

October 29, 2013

Decided:

February 21, 2014

Before KEENAN, WYNN, and THACKER, Circuit Judges.

Affirmed by published opinion. Judge Keenan wrote the opinion,
in which Judge Thacker concurred.
Judge Wynn wrote a separate
dissenting opinion.

ARGUED: Kenneth Oestreicher, WHITEFORD, TAYLOR & PRESTON, LLP,
Baltimore, Maryland, for Appellant.
Clarence A. Wilbon, BASS,
BERRY & SIMS PLC, Memphis, Tennessee, for Appellee.
ON BRIEF:

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 2 of 37

Todd M. Brooks, Baltimore, Maryland, Christopher A. Jones,
WHITEFORD, TAYLOR & PRESTON, LLP, Falls Church, Virginia, for
Appellant. Annie T. Christoff, BASS BERRY & SIMS PLC, Memphis,
Tennessee; Sheila DeLa Cruz, HIRSCHLER FLEISCHER, PC, Richmond,
Virginia, for Appellee.

2

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 3 of 37

BARBARA MILANO KEENAN, Circuit Judge:
In this bankruptcy case, the trustee for the bankruptcy
estates of Vijay K. Taneja and Financial Mortgage, Inc. (FMI)
filed an action to avoid and recover certain payments made by
FMI to First Tennessee Bank, National Association (the bank, or
First Tennessee).

In the complaint, the trustee alleged that

the payments were “fraudulent transfers” under 11 U.S.C. § 548,
and were part of a fraudulent scheme carried out by FMI and
Taneja.

After a trial, the bankruptcy court determined that the

bank proved the affirmative defense of good faith in accordance
with Section 548(c) and dismissed the trustee’s action.

The

district court affirmed that decision, and the trustee appeals.
The primary question presented is whether the bank proved
its

good-faith

employees.

defense

based

on

the

testimony

of

two

bank

Upon our review, we conclude that the bankruptcy

court and the district court correctly applied the objective
good-faith

standard

in

determining

that

the

bank

employees’

testimony provided competent objective evidence that satisfied
the

bank’s

burden

of

proving

its

affirmative

defense

under

Section 548(c).

We further conclude that the bankruptcy court

did

err

not

clearly

in

holding

payments from FMI in good faith.
district court’s judgment.

3

that

the

bank

accepted

the

Accordingly, we affirm the

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 4 of 37

I.
In the 1990’s, 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.

To carry out its business, FMI worked with numerous

financial institutions known as “warehouse lenders.”

Typically,

these lenders extended lines of credit and advanced funds to
FMI, in order that FMI could extend mortgage loans to individual
mortgagees.

The

warehouse

lenders

required

FMI

to

sell

the

mortgage loans to secondary purchasers within a certain time
period.

After the sale, the warehouse lenders’ lines of credit

were “replenished according to the terms of the agreement.”
The record shows that at some point after 1999, FMI and
Taneja had difficulty selling their mortgage loans to secondary
purchasers.

As

a

fraudulent

result,

conduct,

which

FMI

and

included

Taneja
selling

began
the

engaging

same

in

mortgage

loans to several different secondary purchasers and conspiring
with other business entities controlled by Taneja to have them
serve

as

fraudulent

intermediary
conduct

parties

continued

to

during

conceal
2007

the

and

fraud.

2008,

The

when

the

market for “mortgage-backed securities” declined significantly.
Even though FMI and Taneja also continued to conduct certain
legitimate

business

activities,
4

their

fraudulent

conduct

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 5 of 37

resulted in losses of nearly $14 million to warehouse lenders,
and of about $19 million to secondary purchasers. 1
FMI’s
lender,

relationship

began

in

with
when

2007

First
the

Tennessee,

bank

a

received

concerning FMI from another warehouse lender.

warehouse
a

referral

Before extending

FMI a line of credit, the bank analyzed financial statements and
tax

returns

conducted

submitted

research

by

using

FMI
“a

and

Taneja.

private

The

mortgage

bank

also

database”

that

contained various information regarding mortgage irregularities,
reports

of

fraud,

and

material

suspicions

of

fraud.

Additionally, the bank contacted FMI’s references and examined
FMI’s “quality control plan.”
reveal

any

negative

The bank’s investigation did not

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).

However, their lending

relationship

bank

was

short-lived,

and

the

ultimately

made

advances to FMI for a period of only about four months, between
August and early November 2007.

1

These figures represent the losses that Taneja admitted in
connection with his individual criminal conviction arising from
these activities.
5

Appeal: 13-1058

Doc: 29

The

Filed: 02/21/2014

lending

agreement

Pg: 6 of 37

obligated

the

directly to an insured title agent.

bank

to

send

funds

After each mortgage loan

closed, FMI was required to send certain documents to the bank
within two business days, including the mortgagor’s promissory
notes associated with the loans originated by FMI.

Although FMI

periodically did not meet this two-day timeline, FMI eventually
provided to the bank the original promissory note for each loan,
which was the most critical security document underlying each
transaction.
In September 2007, FMI submitted three repayments to the
bank, totaling about $1 million.

However, by mid-October 2007,

FMI owed about $12 million of funds advanced on its line of
credit with the bank.

Thereafter, the bank suspended payment of

any additional advances to FMI.
On
executive

November
vice

1,

2007,

president

of

Robert

A.

mortgage

Garrett,
warehouse

the

bank’s

lending,

and

Benjamin Gaither Daugherty, III, the bank’s vice president and
relationship manager of the bank’s warehouse lending group, met
with Taneja at FMI’s place of business.

Garrett and Daugherty

explained to Taneja that FMI needed to sell its mortgage loans
to secondary purchasers and “clear” the line of credit.

In

response, Taneja informed the bank’s representatives that FMI’s
failure to produce timely, adequate documentation to complete
mortgage loans sales to secondary purchasers was caused by the
6

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 7 of 37

unexpected departure of one of FMI’s loan processors.
absence

of

such

mortgage

loan

would

not

purchase

especially

during

the

documentation,

difficult

this

meeting,

a

the

purchaser

After

In the

obligations,

mortgage

market

Garrett

secondary

conditions

2007.

investigated

further

in

FMI’s

“dragging” mortgage loan sales by contacting a representative of
Wells Fargo, FMI’s chief customer and secondary purchaser, to
inquire

about

outstanding

FMI’s

unsold

with

the

Garrett

informed

loan

that

loans.
Wells

Wells

Garrett
Fargo

Fargo

had

reviewed

each

representative,
not

purchased

who
FMI’s

outstanding loans because the supporting documentation had not
been provided.
In

November

and

December

2007,

FMI

made

six

principal

payments and one interest payment to the bank, in the total
amount of about $2.8 million.

In January 2008, Garrett and

Daugherty met again with Taneja at FMI’s office to address the
outstanding balance of advanced funds.

According to Garrett, he

and

files

Daugherty

planned

to

obtain

the

from

FMI

for

its

unsold mortgage loans to sell the loans directly to secondary
purchasers.
a

However, Taneja proposed that the parties engage in

“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

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 8 of 37

During the January 2008 meeting, Taneja’s attorney informed
Garrett,
asked

“You

Taneja’s

whether

there

don’t

want

attorney
was

these

loans.”

whether

“any

FMI’s

fraud

Garrett
loans

involved

were

in

immediately
valid,

these

and

loans.”

Taneja’s attorney assured Garrett that there was “no problem,”
and that the mortgage loans were “good” and represented “armslength transactions.”
After this meeting, Garrett and Daugherty visited numerous
properties that served as security for FMI’s mortgage loans.
They also reviewed appraisals for some of the properties, and
confirmed that FMI was listed as the mortgagor on the deeds of
trust

placed

materials,

on

those

Garrett

and

properties.
Daugherty

After
again

reviewing

met

with

these

Taneja’s

attorney and reiterated the importance of confirming that the
mortgage loans were “real.”
“there

is

forbearance

not

a

problem.”

agreement

with

Taneja’s attorney represented that
The
FMI,

bank
in

ultimately

which

Taneja

approved
agreed

a
to

provide additional collateral to secure the bank’s interests.
In February and March 2008, FMI transferred to the bank two
interest payments, in the total amount of about $76,000, which
were the final payments at issue in this appeal.

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.

8

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 9 of 37

The bank immediately declared FMI in default under the lending
agreement.
As a result of the bank’s relationship with FMI and Taneja,
the bank lost more than $5.6 million.

Taneja’s conduct later

resulted in his conviction for conspiracy to engage in money
laundering in violation of 18 U.S.C. § 1956(h).
sentence

of

84

months’

imprisonment

and

was

restitution in the amount of $33,162,291.

He received a
ordered

to

pay

See Gold v. Gateway

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

Chapter 11 of the Bankruptcy Code.

for

affiliates,
relief

under

H. Jason Gold, who was

appointed as the trustee for the debtors (the trustee), filed an
adversary proceeding in the bankruptcy court against the bank in
accordance

with

11

U.S.C.

§§

548(a)

and

550(a).

In

the

complaint, the trustee sought to avoid and recover the funds
that

FMI

transmitted

to

the

bank

in

the

twelve

payments

described above, which totaled nearly $4 million, on the ground
that the funds were conveyed fraudulently.
In

response,

the

bank

contended

that

it

payments from FMI for value and in good faith.
with

11

U.S.C.

§ 548(c),

the

bank

9

pleaded

good

received

the

In accordance
faith

as

an

Appeal: 13-1058

Doc: 29

affirmative

Filed: 02/21/2014

defense.

The

Pg: 10 of 37

case

proceeded

to

trial

in

the

bankruptcy court.
During
testimony

a

three-day

and

trial,

received

the

bankruptcy

substantial

regarding

the

fraudulent

conduct

asserting

its

good-faith

defense,

documentary

of

FMI

the

testimony of Garrett and Daugherty.

court

and

bank

heard

evidence

Taneja.
relied

on

In
the

Although the bank did not

seek to qualify these witnesses as experts, both Garrett and
Daugherty
their

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

testified about his work developing software used by the bank
and

other

lending

institutions

to

manage

and

operate

their

warehouse lending businesses.
With

regard

to

the

warehouse

lending

industry,

Garrett

stated that as part of his responsibilities at the bank, he
monitors industry publications and often serves as a speaker at
industry conferences.

Garrett stated that, in 2007 and 2008,

the secondary mortgage market was “imploding.”
10

He explained

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 11 of 37

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 didn’t have a
market on which to sell it.”

Garrett further explained that

during

purchasers

this

their

period,

underwriting

narrowed

criteria

secondary
criteria.”
created

mortgage bankers to meet.
“market

meltdown,”

According

more

began
to

“constricting

Garrett,

restrictive

these

standards

for

Garrett testified that during the

successful

sales

of

loans

to

secondary

purchasers depended on the effective “build[ing] [of] a loan
file,” and on finding parties to purchase the mortgage loans.
Daugherty began working for the bank in 1988.
relevant
primary

period
contact

in

2007

with

and

FMI.

2008,

he

Daugherty

served

During the

as

testified

the
that

bank’s
he

was

familiar with the general practices of the warehouse lending
industry, and with the particular market turmoil of 2007 and
2008.

Daugherty stated that, during this period, it was common

for a secondary purchaser to spend additional time determining
whether to buy various mortgage loans, and that this additional
review process increased the time required to complete a sale of
those

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

bank’s

the

case

in

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 12 of 37

After trial, the bankruptcy court issued a comprehensive
memorandum opinion, concluding that even if the trustee could
establish that the payments at issue were fraudulent, the bank
had shown that it accepted the payments in good faith. 2

The

bankruptcy court determined that although the bank was concerned
about FMI’s failure to sell its loans quickly in late 2007, the
bank

reasonably

thought

that

the

lagging

secondary

mortgage

market, rather than any inappropriate conduct by FMI and Taneja,
was the cause of the delayed sales.
The bankruptcy court also addressed many other details of
the relationship between the bank and FMI, and concluded that
the bank “did not have any information that would [reasonably]
have led it to investigate further, and the bank’s actions were
in accord with the bank’s and the industry’s usual practices.”
With regard to the bank’s witnesses, Garrett and Daugherty, the
bankruptcy court stated that they were
knowledgeable in the bank’s practices, the bank’s
relationship with FMI, the transactions in issue and
the mortgage warehouse industry.
[Garrett’s and
Daugherty’s] testimony was credible that at the time
of each transfer, the bank did not have any actual
knowledge of the fraud Taneja was perpetrating on it
and others, did not have any information that would
[reasonably] have led it to investigate further, and
2

The bankruptcy court also determined that the trustee was
not entitled to a “Ponzi scheme presumption,” which would have
relieved the trustee of the burden of proving that each
transaction was made with the intention to hinder, delay, or
defraud creditors.
12

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 13 of 37

the bank’s actions were in accord with the bank’s and
the industry’s usual practices.
In reaching this conclusion, the bankruptcy court acknowledged
that Garrett and Daugherty were the employees responsible for
the

bank’s

warehouse

lending

and

transactions

with

FMI,

but

stated that the court had considered these factors in assessing
whether their employment and job conduct may have affected their
credibility.

The court concluded that the testimony of Garrett

and Daugherty sufficiently established the required components
of the bank’s good-faith defense.
Having concluded that the bank established its good-faith
affirmative defense under Section 548(c), the bankruptcy court
dismissed the trustee’s adversary action.

The district court

affirmed that decision, and the trustee filed a timely appeal in
this Court.

II.
We review de novo the legal conclusions of the bankruptcy
court and the district court.
(4th Cir. 2013).

In re Alvarez, 733 F.3d 136, 140

Like the district court, we review for clear

error the factual findings of the bankruptcy court.

Id.

A bankruptcy court’s decision that a defendant has met its
burden of proving a good-faith defense is primarily a factual
determination, which is subject to review for clear error.

13

See

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 14 of 37

In re Armstrong, 285 F.3d 1092, 1096 (8th Cir. 2002).

Under

this standard, we will not reverse a bankruptcy court’s factual
finding that is supported by the evidence unless that finding is
clearly wrong.

In re ESA Envtl. Specialists, Inc., 709 F.3d

388, 399 (4th Cir. 2013).

We will conclude that a finding is

clearly erroneous only if, after reviewing the record, we are
left with “a firm and definite conviction that a mistake has
been committed.”

Klein v. PepsiCo, Inc., 845 F.2d 76, 79 (4th

Cir. 1988) (citation omitted).
On appeal, the trustee challenges the bankruptcy court’s
determination that the bank established its good-faith defense
under

Section

arguments:

(1)

548(c).
that

The

the

trustee

court

erred

asserts

as

a

two

matter

related

of

law

by

misapplying the objective good-faith standard; and (2) that the
court

clearly

sufficient

erred

objective

in

concluding

evidence

to

relevant payments in good faith.

that

prove

the

that

bank
it

presented

accepted

the

We address these arguments in

turn.
Under

Section 548(a),

transfer

of

transfer

.

creditors.

a
.

debtor’s
.

with

a

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

a

such

defraud”

However, Section 548(c)

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 15 of 37

a transferee . . . of such a transfer . . . that takes
for value and in good faith . . . may retain any
interest transferred . . . to the extent that such
transferee or obligee gave value to the debtor in
exchange for such transfer or obligation.
This provision provides a transferee with an affirmative defense
to the trustee’s avoidance action if the transferee meets its
burden to show that it accepted the transfers “for value and in
good faith.”

11 U.S.C. § 548(c); see Perkins v. Haines, 661

F.3d 623, 626 (11th Cir. 2011).

Because the “for value” element

is not at issue in the present case, we focus only on the issue
whether

the

bank

satisfied

its

burden

of

proving

that

it

accepted the transfers in good faith.
Although the Bankruptcy Code does not define the term “good
faith,” this Court recently interpreted the term in the context
of an affirmative defense asserted under 11 U.S.C. § 550(b)(1).
See Goldman v. City Capital Mortg. Corp. (In re Nieves), 648
F.3d 232, 237 (4th Cir. 2011).
faith-defense
recovering

permitting

funds

a

involving

That section provides a good

transferee
transfers

to

bar

that

a

have

trustee
been

from

deemed

avoidable under Section 548 or certain other provisions of the
Bankruptcy Code.
648 F.3d at 237.

11 U.S.C. § 550(a), (b)(1); see In re Nieves,
In material part, Section 550(b)(1) states

that an affirmative defense is established when a transferee of
avoidable property takes the transfer “for value . . . in good

15

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 16 of 37

faith, and without knowledge of the voidability of the transfer
avoided.”
In our decision in In re Nieves, we determined that the
proper

focus

bankruptcy

in

evaluating

avoidance

good

action

faith

requires

in

the

that

a

context

court

of

a

determine

“what the transferee [actually] knew or should have known” when
it accepted the transfers.

Id. at 238 (citation omitted).

We

observed that general principles of good faith in other areas of
commercial

law

aided

our

refinement

of

this

term

in

the

bankruptcy context, and we concluded that “good faith” has both
“[1]

subjective

(‘honesty

in

fact’)

and

[2]

objective

(‘observance of reasonable commercial standards’) components.”
Id.

at

239.

We

articulated

the

standard

for

a

good-faith

defense in that bankruptcy proceeding as follows:
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 omitted).
We conclude that the good-faith standard adopted in In re
Nieves

is

applicable

to

the

defense under Section 548(c).
a

transferee

has

establishment

of

a

good-faith

Therefore, in evaluating whether

established

an
16

affirmative

defense

under

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Section 548(c),

a

court

is

Pg: 17 of 37

required

to

consider

whether

the

transferee actually was aware or should have been aware, at the
time of the transfers and in accordance with routine business
practices,

that

the

transferor-debtor

intended

to

“hinder,

delay, or defraud any entity to which the debtor was or became .
. . indebted.”

See id. at 238; 11 U.S.C. § 548(a)(1)(A).

In the present case, the trustee does not assert that the
bank actually knew about FMI’s and Taneja’s fraudulent conduct
before April 2008.

Thus, we confine our consideration to the

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]

See In re Nieves, 648 F.3d at 240.

Both the bankruptcy court and the district court in the
present case applied the good-faith standard from In re Nieves
in conducting their analyses.

The trustee contends, however,

that those courts erred in applying that standard, and asserts
that the bank, as a matter of law, was unable to prove good
faith without showing that “each and every act taken and belief
held” by the bank constituted “reasonably prudent conduct by a
mortgage warehouse lender.”

Additionally, the trustee asserts

that such evidence “likely” should have been presented in the
form

of

third-party

expert

testimony.

trustee’s arguments.
17

We

disagree

with

the

Appeal: 13-1058

Doc: 29

While

the

Filed: 02/21/2014

trustee

Pg: 18 of 37

correctly

observes

that

the

objective

good-faith standard requires consideration of routine business
practices, the trustee’s position well exceeds the requirement
that a court consider “the customary practices of the industry
in which the transferee operates.”

See id.

We decline to adopt

a bright-line rule requiring that a party asserting a good-faith
defense present evidence that his every action concerning the
relevant

transfers

industry

standards.

was

objectively

Instead,

our

reasonable
inquiry

in

regarding

light

of

industry

standards serves to establish the correct context in which to
consider what the transferee knew or should have known. 3
In addition, we decline to hold that a defendant asserting
a good-faith defense must present third-party expert testimony
in order to establish prevailing industry standards.

Although

certain cases may warrant, or even require, such specialized
testimony,

an

presented

in

inflexible
every

rule

case

that

to

expert

prove

a

testimony
good-faith

must

be

defense

unreasonably would restrict the presentation of a defense that
ordinarily is based on the facts and circumstances of each case
and on a particular witness’ knowledge of the significance of
3

In asserting that the bankruptcy court and district court
misapplied the objective good-faith standard, the trustee relies
heavily on the standard as articulated in Christian Brothers
High School Endowment v. Bayou No. Leverage Fund, LLC (In re
Bayou Group), 439 B.R. 284 (S.D.N.Y. 2010), an out-of-circuit
district court opinion that has no precedential value here.
18

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

such evidence.

Pg: 19 of 37

See Meeks v. Red River Entm’t (In re Armstrong),

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).

Accordingly, we decline to consider the

trustee’s argument further and hold that the bankruptcy court
and the district courts applied the correct legal standard in
evaluating whether the bank proved its good-faith defense.
We

next

address

the

trustee’s

argument

that

the

bank

presented insufficient objective evidence to negate a finding
that, when the bank accepted FMI’s payments, the bank “should
have known” about FMI’s and Taneja’s fraudulent conduct.

The

trustee points to several circumstances that it submits should
have alerted the bank to FMI’s and Taneja’s fraudulent conduct.
The trustee also contends that because the bank’s witnesses who
testified
bank’s

about

evidence

evidence.

these
of

circumstances

good

faith

were

bank

constituted

employees,

purely

the

subjective

We disagree with the trustee’s arguments.

We observe, in accordance with our holding above, that the
objective component of the good-faith defense may be established
by lay or expert testimony, or both, depending on the nature of
the evidence at issue.

Here, the parties’ dispute centered on

the general practices in the warehouse lending industry and the

19

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 20 of 37

indicators of fraudulent conduct, if any, that were apparent
from the particular facts known to the bank’s officials.
Both

Garrett

and

Daugherty

had

extensive

knowledge

of

industry practices, including the common practices involved in
warehouse lender-borrower relationships, and both were able to
explain their reasons why FMI’s and Taneja’s conduct did not
raise indications of fraud despite FMI’s failure to sell their
mortgage

loans

in

the

secondary

market

in

a

timely

manner.

Their testimony also described the severe decline in the market
for mortgage-backed securities in 2007 and 2008, which provided
additional
lending

objective

industry

evidence

during

of

that

the

state

period.

of

In

the

light

warehouse
of

their

extensive experience in the warehouse lending industry and their
knowledge

of

the

particular

events

at

issue,

Garrett’s

and

Daugherty’s employment status did not affect the admissibility
of their testimony or otherwise indicate that expert testimony
was

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

employed by the bank in assessing the weight to be given their
testimony.

Additionally, and significantly, the trustee did not

object to the testimony by Garrett and Daugherty relating to the
warehouse lending industry or the conditions in the market for
20

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 21 of 37

mortgage-backed securities in 2007 and 2008. 4

See Fed. R. Evid.

103 (a party may not claim error regarding admitted evidence if
he fails timely to object, unless the court plainly erred in
admitting the evidence).

Thus, we reject the trustee’s argument

that Garrett and Daugherty, by virtue of their employment with
the

bank,

did

not

provide

competent

evidence

regarding

the

objective component of the bank’s good-faith defense.
We

therefore

turn

to

discuss

the

evidence

cited

by

the

trustee, which he alleges should have signaled to the bank that
FMI and Taneja were engaged in a fraudulent scheme, and consider
whether the bank presented sufficient objective evidence of good
faith with regard to these circumstances.

The trustee first

points to FMI’s delay in providing collateral documents to the
bank in connection with some of FMI’s mortgage loans.

However,

Garrett testified that a new borrower’s untimely delivery of
such

documents

was

“common”

and

was

“consistent”

with

the

practices of other investors and warehouse lending customers at
the inception of their business relationship.

Also, Daugherty

stated that borrowers typically had difficulty adjusting to new
warehouse

lending

relationships,

4

because

“different

warehouse

Although the trustee raised objections regarding certain
aspects
of
Garrett’s
and
Daugherty’s
testimony
regarding
secondary purchasers and the marketability of unsold loans, the
trustee did not object to their general testimony regarding
industry standards or the conditions in the market in 2007 and
2008.
21

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 22 of 37

lenders require[d] different items.”

Critically, the evidence

showed that the bank always received from FMI the most vital
document,

the

original

promissory

holder’s security interest.

note

that

perfected

the

Thus, the record did not show that

the bank should have known that the notes were fraudulent simply
because

they

were

not

submitted

within

the

two-day

timeline

required by the parties’ lending agreement.
The trustee also submits that FMI’s failure to sell many of
its mortgage loans in the secondary market should have alerted a
reasonable

warehouse

lender

of

fraudulent

conduct.

However,

substantial evidence in the record refutes this argument.
Garrett

and

Daugherty
time”

“extraordinary
experiencing
explain

that

secondary

testified
the

during

that

a

2007

and

borrower’s

purchasers

is

warehouse
2008.

failure

“part

extensively

of

to
the

about

sell

only

the

industry

lending

Not

Both

was

did

mortgage

business”

of

Daugherty
loans

to

warehouse

lending generally, but he also stated that this was particularly
true during 2007 and 2008 when FMI was unable to sell many of
its loans.

Moreover, Garrett explained that it was common for

mortgage bankers intentionally to delay selling their mortgage
loans during this time, because they expected only a temporary
market

decline.

Therefore,

we

conclude

that

the

record

contained sufficient objective evidence that FMI’s failure to

22

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 23 of 37

sell its loans to secondary purchasers did not serve as a signal
to the bank that FMI was engaging in fraudulent conduct.
This

testimony

concerning

the

curtailed

market

for

mortgage-backed securities also refutes the trustee’s argument
that

the

bank

fraudulent

should

conduct

have

known

because

about

FMI,

FMI’s

rather

and

than

Taneja’s
secondary

purchasers, directly made payments to the bank on certain loans.
Under

the

terms

of

FMI’s

agreement

with

the

bank,

FMI

was

required to repay the bank regardless whether FMI had sold the
loan obligations to secondary purchasers.
trustee’s

key

investigate
repayment

witness,
FMI’s

obligation

Robert

Patrick,

financial
and

who

affairs,

testified

And, notably, the

that

was

retained

acknowledged
FMI’s

actions

to

FMI’s
making

direct payments to the bank were not an indication of fraudulent
conduct.
The final two circumstances cited by the trustee arose from
conversations that Garrett and Daugherty had with Taneja and his
attorney during their October 2007 and January 2008 meetings. 5
During the first meeting, in which the parties discussed FMI’s
outstanding

loans,

Taneja

explained

5

that

one

of

FMI’s

loan

We do not address the trustee’s assertion that the bank
should have known about the fraud when the bank discovered FMI’s
fraudulent notes in April 2008.
The transfers in question in
this case occurred before April 2008; therefore, what the bank
should have known, beginning in April 2008, is not relevant to
our inquiry.
23

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 24 of 37

processors had left FMI unexpectedly, resulting in delays in
FMI’s production of its mortgage loan documentation.

Contrary

to the trustee’s position, this explanation by Taneja did not
signal

fraudulent

secondary

conduct

purchasers

had

when

the

tightened

evidence
their

established

standards

for

that
loan

documentation in 2007 and 2008, and that such purchasers would
not purchase mortgage obligations with incomplete documentation.
Additionally, Garrett confirmed with a representative of FMI’s
regular client and secondary purchaser, Wells Fargo, that the
outstanding

mortgage

loans

remained

documentation was incomplete.

unsold

because

the

loan

Thus, the bankruptcy court did

not clearly err in concluding that the circumstances surrounding
the October 2007 meeting did not show that the bank should have
known about the fraudulent conduct.
During

the

meeting

that

occurred

in

January

2008,

when

Garrett asked Taneja’s attorney whether FMI’s unsold loans were
fraudulent, the attorney responded that the loans were valid and
executed in “arms-length” transactions.
rejected

the

trustee’s

assertion

The bankruptcy court

that

this

conversation

demonstrated that the bank should have known about the ongoing
fraud.

The

court

determined

instead

that

Garrett

properly

accepted the attorney’s response in light of the fact that the
parties were attempting to “work out the problem of the unpaid
advances on the line of credit,” and that the bank was aware
24

Appeal: 13-1058

that

Doc: 29

the

Filed: 02/21/2014

value

significantly

of

the

Pg: 25 of 37

impaired.

mortgage
The

record

obligations

had

demonstrated

that

been
the

decrease in the market value of mortgage loans in the secondary
market was an industry-wide problem in 2007 and 2008.

Moreover,

after the January 2008 meeting, Garrett and Daugherty conducted
additional investigation into the collateral securing some of
FMI’s loans and did not discover any problems at that time.
Based on this evidence, we conclude that the bankruptcy
court did not clearly err in rejecting the trustee’s position
that

the

fraudulent

bank

should

conduct

have

based

known

on

the

about

FMI’s

conversation

attorney at the January 2008 meeting.

and

Taneja’s

with

Taneja’s

Rather, when considered

as a whole, the circumstances relied on by the trustee indicated
only that FMI had financial difficulties, which was not uncommon
in the warehouse lending industry during 2007 and 2008.

The

bankruptcy court found that Garrett and Daugherty were credible
and

knowledgeable

witnesses

warehouse lending industry.

in

their

testimony

about

the

Accordingly, the bankruptcy court

accepted their testimony regarding the devastating conditions of
the mortgage-backed security market in 2007 and 2008, when the
relevant

payments

by

FMI

were

made.

“Deference

to

the

bankruptcy court’s findings is particularly appropriate when, as
here, the bankruptcy court presided over a bench trial in which
witnesses

testified

and

the
25

court

made

credibility

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

determinations.”

Pg: 26 of 37

Fairchild Dornier GmbH v. Official Comm. of

Unsecured Creditors (In re Dornier Aviation), 453 F.3d 225, 235
(4th Cir. 2006).
On this record, we are not left with a firm or definite
conviction that the bankruptcy court erred in finding that the
bank presented sufficient objective evidence of good faith.
Klein, 845 F.2d at 79.

See

Thus, we hold that the bankruptcy court

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

See In re Nieves, 648 F.3d at

238.

III.
In

sum,

we

conclude

that

the

district

court

and

the

bankruptcy court applied the correct legal principles relevant
to evaluating the bank’s good-faith affirmative defense.

We

also conclude that the bankruptcy court did not clearly err in
determining

that

the

bank

satisfied

6

its

burden

of

proving

a

We find no merit in the trustee’s assertion that the
bankruptcy court erroneously imposed on the trustee the burden
to disprove the bank’s affirmative defense. The court properly
weighed the entirety of the evidence and rendered its decision
accordingly.
26

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 27 of 37

good-faith defense under Section 548(c). 7

Accordingly, we affirm

the district court’s decision upholding the bankruptcy court’s
dismissal of the trustee’s adversary action.
AFFIRMED

7

Because we conclude that the bankruptcy court did not
clearly err in accepting the bank’s affirmative defense of good
faith, we need not reach the trustee’s argument regarding
whether the trustee was entitled to a “Ponzi scheme presumption”
of fraudulent conveyances.
27

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 28 of 37

WYNN, Circuit Judge, dissenting:
Bankruptcy

Code

Section

548(c)

provides

an

defense to transferees who take in good faith.

affirmative
Importantly,

good faith has not just a subjective, but also an objective
“observance of reasonable commercial standards” component.

To

succeed with its good faith defense, First Tennessee Bank had to
prove

both

proffer

any

aspects

of

evidence

good
to

faith.

support

a

But

here,

finding

it

that

failed

it

to

received

transfers from FMI with objective good faith in the face of
several alleged red flags.
district

court

to

make

Because it was clear error for the
the

unsupported

finding

that

First

Tennessee Bank received transfers from FMI with objective good
faith, I must respectively dissent from the contrary view of my
colleagues in the majority.

I.
We review a district court finding of good faith for clear
error.

“A finding is clearly erroneous if no evidence in the

record supports it . . . .”

Consol. Coal Co. v. Local 1643,

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

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 29 of 37

II.
Under Bankruptcy Code Section 548(a), a bankruptcy trustee
can avoid fraudulent transfers occurring within the two years
prior to a bankruptcy petition’s 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

of transferred property can keep the property if it is able to
establish the elements of the good faith defense embodied in
Section 548(c).

11 U.S.C. § 548(c).

In In re Nieves, this Circuit put contours on the good
faith defense.

648 F.3d 232 (4th Cir. 2011).

notes,

that

to

to

show

we

transferee

held
needs

establish
both

the

good

subjective

As the majority
faith

and

defense,

objective

a

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,

transferees may not bury their heads in the sand, “willfully
turn[]

a

blind

eye

to

a

suspicious

29

transaction[,]”

and

then

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 30 of 37

expect to reap the benefits of the good faith defense.
242

(quotation

ignoran[t]

in

marks
the

omitted).
face

of

A

Id. at

transferee

“wil[l]ful[ly]

which

out

facts

cried

investigation . . . cannot have taken in good faith.”

for

Id. at

241.
Importantly, it is the transferee who bears the burden of
proof on the good faith defense.

As this Court has stated, “we

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.”

Id. at 237 n.2 (citing In re Smoot,

265

E.D.

B.R.

128,

140

(Bankr.

Va.

1999)

(collecting

cases

holding that the burden of proof rests on the transferee)).
In

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

Thus, First Tennessee Bank bore the
its

conduct

comported

with

routine

practices in its industry and that its response to potential
“red

flags”

about

FMI’s

fraud

comported

objectively reasonable warehouse lender.

with

that

of

an

The record before us

shows that First Tennessee Bank failed to carry its burden.

III.
Preliminarily, I must address several general points that
the majority makes, and with which I take issue, regarding the
30

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 31 of 37

nature of the evidence required in cases such as this one and
the nature of the evidence actually proffered here.
First, I agree with the majority that First Tennessee Bank
could meet its burden as to the objective component of its good
faith defense without presenting expert testimony on prevailing
industry standards.
evidence

would

To be sure, such objective, third-party

almost

industry standards.

certainly

be

helpful

in

establishing

And one cannot help but wonder why it was

not proffered here.
Regardless,

fact

witness

testimony

could

suffice.

For

example, a fact witness could testify that he attended industry
conferences and drafted the pertinent bank’s policies based on,
and

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.

8

Instead, it relied on

That being said, I find the suggestion that expert
testimony might somehow bungle “the presentation of a defense
that ordinarily is based on the facts and circumstances of each
case and on a particular witness’ [sic] knowledge of the
significance of such evidence[,]” ante at 18-19, troubling.
Indeed, that suggestion seems to fly in the face of the very
point of the good faith defense’s objective component—which is
based not on case-specific facts or fact witness views, but
rather on what the transferee knew or should have known, “taking
into consideration the customary practices of the industry in
which the transferee operates.” In re Nieves, 648 F.3d at 240.
31

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 32 of 37

generalities from those witnesses such as having read the Wall
Street Journal and having worked in the industry for many years.
Further, an executive’s extensive knowledge of an industry
does

not

necessarily

industry standards.

mean

that

his

business

comports

with

Indeed, that very knowledge might be used

effectively for ill, enabling the executive to conceive of and
perpetuate
heads.

a

scheme

that

turns

industry

standards

on

their

Industry knowledge and experience thus shed little light

on whether an executive or his business acted with objective
good faith.
Moreover,

it

is

common

knowledge

that

the

economy,

including the mortgage-backed securities industry—was in turmoil
in

2007

and

example,

2008.

whether

But

that

First

fact

Tennessee

does

not

Bank’s

illuminate,

attributing

for

FMI’s

problematic conduct to the slowdown was reasonable in light of
industry standards.

For it is also common knowledge that frauds

such as Ponzi schemes are particularly vulnerable to implosion
during economic downturns.

That FMI’s troubles coincided with

an economic downturn thus does not resolve objective good faith
questions.

Objective good faith cannot simply be assumed in

tough times; it remains an affirmative defense that must always
be proven.
Here,

Garrett

and

Daugherty

may

have

explained

reasons” why FMI’s conduct did not suggest fraud.
32

“their

Ante at 20.

Appeal: 13-1058

But

Doc: 29

“their”

faith—not

Filed: 02/21/2014

reasons

of

are

objective

Pg: 33 of 37

evidence

good

of

faith,

“their”

taking

subjective

into

good

consideration

industry standards.
Finally, I agree with the majority opinion that Garrett’s
and Daugherty’s employment with First Tennessee Bank did not
affect

the

admissibility

incompetent.

of

their

testimony

or

render

it

But the record is irreconcilable with the majority

opinion’s

assertion

Garrett’s

and

that

the

Daugherty’s

Trustee

“general

failed

to

testimony”

object

regarding

to
the

industry or economic conditions in 2007 and 2008.

Ante at 20-

21.

objected

On

the

contrary,

the

Trustee

repeatedly

to

Garrett’s and Daugherty’s attempts at “general testimony,” on
the bases that the testimony was overbroad, that neither witness
was tendered as an expert, and that the testimony should be
tethered specifically to First Tennessee Bank, for which both
men were testifying strictly as fact witnesses.
1376, 1379, 1383, 1512, 1517.
First

Tennessee

Bank

See, e.g., J.A.

In response to these objections,

reiterated

that

“[i]t’s

just

background

information[,]” and that it was “not trying to establish what
every [actor] does[,]” and limited lines of inquiry to First
Tennessee Bank specifically.
1517.

See, e.g., J.A. 1376, 1384, 1512,

The majority opinion’s suggestion that challenges to any

broad, industry-level testimony were waived is thus misplaced.

33

Appeal: 13-1058

Doc: 29

More

Filed: 02/21/2014

importantly,

Pg: 34 of 37

objections

aside,

looking

to

the

testimony that First Tennessee Bank proffered on objective good
faith, I must conclude that the scant evidence fails to support
the

bankruptcy

Specifically,
asserting
flags

lender.

the

that

failed

court’s

to

objective

Trustee

First

identified

Tennessee

comport

good

with

Bank’s
that

of

faith

multiple
response
a

finding.

red
to

flags,

those

reasonable

red

warehouse

The Trustee argues that First Tennessee Bank failed to

carry its burden of proof and that the bankruptcy court erred in
finding that “the bank’s actions were in accord with . . . the
industry’s usual practices.”

In re Taneja, 08-13293-RGM, 2012

WL 3073175, at *15 (Bankr. E.D. Va. July 30, 2012).

After

carefully reviewing the record, I cannot even discern what those
industry

practices

are,

let

alone

find

evidence

that

First

Tennessee Bank’s actions comported with them.
Turning to some of these red flags, the Trustee asserted,
for example, that at a meeting between First Tennessee Bank and
FMI’s

counsel,

loans

were

Mr.

Garrett

fraudulent.

Mr.

specifically
Garrett

asked

then

whether

testified

FMI’s

that

in

response, FMI’s 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

is missing from the record is any shred of evidence that First
34

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

Pg: 35 of 37

Tennessee Bank’s reliance and investigation comported with those
of a reasonable warehouse lender in light of industry standards.
In

other

words,

the

bankruptcy

court

had

no

support

for

a

finding that despite First Tennessee Bank’s own concerns that
FMI’s loans might be fraudulent, it received all the relevant
transfers

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

As the majority opinion notes, “Garrett testified

that a new borrower’s untimely delivery of such documents was
‘common’

and

was

‘consistent’

with

the

practices

of

other

investors and warehouse lending customers at the inception of
their business relationship.”

Ante at 21.

But that experience

was “common” and “consistent” only with First Tennessee Bank’s
customers and “what we’re dealing with . . . .”
testimony

centered

on

Bank’s—“customers,”

“all

J.A.

experience . . . .”

of

1506,

your”—i.e.,
and

was

J.A. 1491.
First

“[b]ased

The

Tennessee
on

your

Id.; see also, e.g., J.A. 1543 (Q: “Mr.

Daugherty, do most of your customers get you the full collateral
package within two days?” A: “No.” (emphasis added)).
from

the

industry

record
practices

is
and

objective
how

FMI’s

evidence
delays

regarding
and

First

Missing
standard
Tennessee

Bank’s response to those compared to those industry practices.
35

Appeal: 13-1058

Doc: 29

A

Filed: 02/21/2014

third

example:

Pg: 36 of 37

The

Trustee

asserted

that

FMI’s

attributing its failure to sell loans to an employee’s having
gone on vacation and then not returning constituted a red flag.
Mr. Daugherty testified that he believed this excuse and had no
reason

to

bankruptcy

suspect
court

Taneja,

2012

offered

no

that

it

was

called
3073175,

WL

the
at

evidence

about

not

the

explanation
*13.

how

a

Yet

truth.

Even

“unusual.”
First

reasonable

the

In

Tennessee

warehouse

re
Bank

lender

would have responded or whether its response comported with that
industry standard.
For

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

doubts that the entire economy was in a state of upheaval during
that

time.

But

that

fact

tells

us

little

about

whether

a

business’s conduct in the face of alleged red flags, even if in
a

time

of

standards.

crisis,

comported

with

industry

practices

and

If economic turmoil gives businesses a free pass on

needing to prove objective good faith, even businesses falling
far

short

of

ignoran[t]

in

industry
the

standards

face

of

but

facts

rather
which

“wil[l]ful[ly]
cried

out

for

investigation[,]” In re Nieves, 648 F.3d at 241, could succeed
with a good faith defense so long as their implosion coincided

36

Appeal: 13-1058

Doc: 29

Filed: 02/21/2014

with an economic downtown.

Pg: 37 of 37

This is not, and should not be, the

law.

IV.
In sum, I agree with the majority that “‘[d]eference to the
bankruptcy court’s findings is particularly appropriate when . .
. the bankruptcy court presided over a bench trial in which
witnesses

testified

determinations.’”

and

the

court

made

credibility

Ante at 25-26 (quoting Fairchild Dornier GmbH

v. Official Comm. of Unsecured Creditors, 453 F.3d 225, 235 (4th
Cir.

2006)).

bankruptcy

But

court

the

issue

is

not

credibility

assessed

here

or

that,

or

weighed

how,

the

testimony.

Instead, the issue is whether First Tennessee Bank, which bore
the burden of proof, failed to proffer any evidence or elicit
any testimony to support a finding that it received transfers
from

FMI

with

objective

alleged red flags.

good

It did.

faith

in

the

face

of

certain

And because findings unsupported by

the record must be overturned on clear error review, I would
reverse

the

unsupported

objective

good

faith

finding,

a

necessary component of First Tennessee Bank’s good faith defense
under 11 U.S.C. § 548(c).

Accordingly, I respectfully dissent.

37