Goldman v. Capital City Mortgage Corp. (In re Nieves)

Summarized by Brooke Schumm , Daneker, McIntire, Schumm, et al.
14 years 8 months ago

Citation:

not yet available

Tag(s):

4th Circuit

Ruling:

In a seminal ruling on section 550(b)(1) in the Fourth Circuit, the Court addressed the voidability of the third transfer in a series of transfers that began with a voidable no-consideration deed. The third transfer was a deed of trust in consideration of a loan of $155,000. The Court held that the burden of proving a section 550(b)(1) defense is on the defendant/lender. Addressing knowledge, the Court ruled that "knowledge" is not limited to "actual notice", but includes knowledge that arises from actual knowledge of "facts that would lead a reasonable person to believe that the [transfer of the] transferred property was voidable." The Court held that good faith is to be determined based on an objective good faith analysis, akin to the Uniform Commercial Code test of "honesty in fact and observance of reasonable commercial standards of fair dealing in the trade." The Fourth Circuit found there was no knowledge on the part of the lender because it did not run a title search, and reversed the lower court finding on the knowledge point, but found that the lender had not met the good faith test and, accordingly, the lender had not established the three necessary elements of the section 550(b) defense.

Procedural context:

The Fourth Circuit affirmed the U.S. District Court for the District of Maryland, which affirmed the ruling in favor of the Trustee by the Bankruptcy Court.

Facts:

The debtor's assets were frozen by the Department of Labor in 2002, and shortly thereafter, the Debtor and his son transferred an 11.3 acre parcel of real property to the Debtor's brother (Edgardo) for no consideration (the first transfer). Two months or so later, the Debtor and son agreed to a $2.8 million consent judgment with the Department of Labor. The Debtor filed its bankruptcy petition in March 2003. The Debtor's brother Edgardo transferred the property in April, 2003 to 1st Financial (apparently an LLC) (the second transfer). 1st Financial, by one Nastasi (a friend of the debtor and Edgardo), arranged a non-recourse one-year loan a subprime lender at a rate of 19.75%. The arrangements were made between Nastasi and the President of the lender, Nash. The lender advertised that it "lends money 'to people or institutions that have difficulty getting credit elsewhere' [and] does 'not rely on credit scoring and has generous debt to income ratios.'" The lender lent $155,000 to 1st Financial and received a deed of trust (the third transfer) which the trustee sought to avoid. The deed of trust was fraught with problems of compliance with formalities, including signature, acknowledgment and notarization problems. An expert testified that the deed of trust did not comport with reasonable standards. There was a certificate of good standing for 1st Financial, whose charter had been previously revoked, but the reinstatement was later revoked because the check bounced. The Bankruptcy Court found knowledge of voidability and lack of good faith. The first two transfers were voided by consent orders. The case turned on facts involving the third transfer and whether the defendant lender took the deed of trust in good faith without knowledge of the voidability of the transfer.

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