Opinion ID: 3171011
Heading Depth: 2
Heading Rank: 4

Heading: Liability of Midwest

Text: We turn finally to appellee Midwest. As the eventual recipient of the property by way of a transfer from SIPI—the initial transferee—Midwest was the immediate subsequent transferee under § 550(a)(2). A subsequent transferee may present a defense under § 550(b)(a) by showing that it took the property for value, in good faith, and without knowledge of the voidability of the 26 No. 15-1166 transfer. As we explained in Bonded Financial, § 550(b) makes the policy decision to leave “with the initial transferee the burden of inquiry and the risk if the conveyance is fraudulent.” 838 F.2d at 892. The subsequent transferee, conversely, is relieved of the responsibility to affirmatively monitor the initial transfer. For purposes of § 550(b), there is little difference between “good faith” and “without knowledge of the voidability of the transfer.” Id. at 897; 5 Collier on Bankruptcy ¶ 550.03[3], at 550-28 (16th ed.) (noting that knowledge requirement is “surplusage to illustrate a transferee that could not be in good faith”). In combination, the two terms require that when “facts strongly suggest the presence of” other facts demonstrating fraud, “a recipient that closes its eyes to the remaining facts may not deny knowledge.” Bonded Financial, 838 F.2d at 898. To be clear, “this is not the same as a duty to investigate.” Id. Knowledge is a higher bar than inquiry notice. A subsequent transferee need not conduct extensive research into the chain of title of the property or pore through the financial statements of the debtor. Id.; In re Equipment Acquisition Resources, Inc., 803 F.3d 835, 840 (7th Cir. 2015) (“If a reasonable inquiry would not have led to actual knowledge of voidability, a court cannot impute knowledge.”). Section 550(a) places the burden to investigate on the initial transferee. Section 550(b) is designed instead to ensure that a subsequent transferee with affirmative knowledge of a voidable transfer does not then quickly convey that property to an innocent third party to “wash” the transaction. Bonded Financial, 838 F.2d at 897, quoting H.R. Rep. No. 95-595, 95th Cong., 2d Sess. 376 (1978). No. 15-1166 27 Because § 550(b) offers an affirmative defense, Midwest bore the burden of persuasion on the defense. In re Commercial Loan Corp., 396 B.R. 730, 743 (Bankr. N.D. Ill. 2008). The bankruptcy court here determined after a trial that Midwest proved the elements of its defense, particularly that it took in good faith and without knowledge. A determination of good faith in a bankruptcy matter is a finding of fact; we review it only for clear error. See Hower v. Molding Systems Engineering Corp., 445 F.3d 935, 938 (7th Cir. 2006); In re Smith, 286 F.3d 461, 465–66 (7th Cir. 2002). The bankruptcy court did not clearly err in its determination that Midwest proved its good faith and lack of knowledge under § 550(b). For Midwest to have had knowledge of the voidability of the transfer, it needed to have had some knowledge of a potential fraudulent conveyance: either that the Smiths were insolvent, or that the transfer was for less than reasonably equivalent value. The evidence at trial did not require the bankruptcy court to reject the defense. The Smiths filed for bankruptcy well after both the initial transfer to SIPI and the later transfer to Midwest. Upon acquiring the property, Midwest thus had no affirmative knowledge of the insolvency of the Smiths. Nor did the evidence require the bankruptcy court to find that Midwest knew the initial transfer was for less than reasonably equivalent value. At best, it knew that there was a tax deed in the chain of title, but the bankruptcy court did not clearly err by finding that was not enough to defeat Midwest’s defense. As we hope we have made clear, not every tax sale is necessarily for less than reasonably equivalent value. 28 No. 15-1166 Further, the evidence did not compel a finding that Midwest intended in bad faith to collude with SIPI or subsequently to wash the property through a third party. There was evidence at trial that Midwest bought the property in an arm’s length transaction after a lengthy negotiation with SIPI. Midwest bought the parcel as a rental property, not as an opportunity to launder the title quickly through another buyer. There were inspections of the property and review of title and the issuance of a warranty deed from SIPI. And Midwest, at the time of the bankruptcy court’s decision, remained holder of record title. We reject the Smiths’ argument that the bankruptcy court was required to find that Midwest knew the transfer was avoidable simply because of the presence of a tax deed or because this was an occupied residence. We defer for a future case the issue of whether a bankruptcy court could have found knowledge of voidability or bad faith on a similar record.