Court Opinion

ID: 2654093
Source: CourtListenerOpinion
Date Created: 2014-02-22 01:00:43.918452+00
Date Added: 2024-06-11T12:55:18.723958
License: Public Domain

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; 10-01225-
RGM)

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:
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
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      defense       based   on        the   testimony     of    two   bank

employees.      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   not   clearly    err     in    holding      that      the   bank    accepted     the

payments from FMI in good faith.                       Accordingly, we affirm the

district court’s judgment.

                                            3
                                         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   result,     FMI    and    Taneja    began      engaging     in

fraudulent     conduct,    which     included       selling    the      same    mortgage

loans to several different secondary purchasers and conspiring

with other business entities controlled by Taneja to have them

serve   as    intermediary     parties        to    conceal    the      fraud.        The

fraudulent     conduct     continued    during       2007   and    2008,       when   the

market for “mortgage-backed securities” declined significantly.

Even though FMI and Taneja also continued to conduct certain

legitimate      business      activities,           their     fraudulent         conduct

                                         4
resulted in losses of nearly $14 million to warehouse lenders,

and of about $19 million to secondary purchasers. 1

      FMI’s        relationship     with       First       Tennessee,       a        warehouse

lender,     began     in    2007    when       the       bank    received       a     referral

concerning FMI from another warehouse lender.                          Before extending

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

tax   returns       submitted      by    FMI       and    Taneja.       The         bank    also

conducted     research      using       “a    private      mortgage     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.”                  The bank’s investigation did not

reveal    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).                         However, their lending

relationship        was    short-lived,        and       the    bank   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
     The    lending    agreement     obligated     the    bank    to    send    funds

directly to an insured title agent.                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     November    1,   2007,      Robert   A.      Garrett,      the     bank’s

executive    vice   president      of   mortgage      warehouse     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
unexpected departure of one of FMI’s loan processors.                                     In the

absence     of     such     mortgage          loan    documentation,           a     secondary

purchaser        would      not         purchase      the        mortgage      obligations,

especially        during    the     difficult         market      conditions         in    2007.

      After      this     meeting,        Garrett      further      investigated           FMI’s

“dragging” mortgage loan sales by contacting a representative of

Wells Fargo, FMI’s chief customer and secondary purchaser, to

inquire     about       FMI’s      unsold      loans.        Garrett        reviewed        each

outstanding        loan     with        the   Wells     Fargo      representative,           who

informed        Garrett    that     Wells      Fargo       had    not   purchased          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   Daugherty      planned       to     obtain     the    files    from      FMI    for    its

unsold mortgage loans to sell the loans directly to secondary

purchasers.        However, Taneja proposed that the parties engage in

a   “collateral         swap,”     in    which     Taneja    would      sell       other    real

estate     to    “pay     the    bank     off.”       Taneja      represented        that    the

mortgage loans had lost value, and that Taneja did not want to

sell them until their value increased.

                                               7
     During the January 2008 meeting, Taneja’s attorney informed

Garrett,    “You     don’t   want     these   loans.”         Garrett      immediately

asked    Taneja’s     attorney      whether    FMI’s    loans       were   valid,     and

whether     there     was    “any     fraud     involved      in      these     loans.”

Taneja’s attorney assured Garrett that there was “no problem,”

and that the mortgage loans were “good” and represented “arms-

length 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     on   those     properties.         After       reviewing    these

materials,     Garrett       and    Daugherty        again    met     with    Taneja’s

attorney and reiterated the importance of confirming that the

mortgage loans were “real.”             Taneja’s attorney represented that

“there    is   not    a   problem.”      The    bank     ultimately        approved    a

forbearance     agreement      with    FMI,     in    which     Taneja       agreed   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
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).                                  He received a

sentence      of     84    months’     imprisonment           and    was     ordered      to    pay

restitution in the amount of $33,162,291.                                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        2008,     Taneja       and     his       corporate        affiliates,

including      FMI,        filed     voluntary          petitions         for    relief        under

Chapter 11 of the Bankruptcy Code.                             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    received       the

payments from FMI for value and in good faith.                                   In accordance

with   11     U.S.C.       § 548(c),      the     bank       pleaded      good    faith    as    an

                                                  9
affirmative     defense.            The    case     proceeded         to     trial     in    the

bankruptcy court.

      During        a    three-day      trial,      the     bankruptcy         court        heard

testimony      and        received        substantial          documentary           evidence

regarding      the      fraudulent        conduct      of     FMI     and     Taneja.          In

asserting      its       good-faith       defense,      the     bank        relied     on    the

testimony of Garrett and Daugherty.                       Although the bank did not

seek to qualify these witnesses as experts, both Garrett and

Daugherty     were       permitted      without      objection        to     testify        about

their   knowledge          of     the     warehouse         lending        industry         based

primarily      on       their    long     careers      with     the     bank     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.”                                He explained

                                             10
that at the end of July 2007, “the secondary market for non-

agency 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    this    period,      secondary     purchasers         began      “constricting

their    underwriting        criteria.”           According      to     Garrett,       these

narrowed     criteria        created       more     restrictive         standards          for

mortgage bankers to meet.               Garrett testified that during the

“market     meltdown,”       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.                              During the

relevant    period      in   2007    and    2008,    he    served       as      the   bank’s

primary    contact      with    FMI.       Daugherty       testified         that     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.          He   also    stated       that   during       the      “market

meltdown,”       more    loans      remained       outstanding        on      the     bank’s

warehouse    lines      of     credit   than      ever    had    been      the      case    in

previous years.

                                            11
       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
      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.        In re Alvarez, 733 F.3d 136, 140

(4th Cir. 2013).     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.               See

                                     13
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               548(c).       The        trustee        asserts       two    related

arguments:     (1)        that     the     court       erred    as     a    matter    of    law    by

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

court   clearly           erred       in   concluding          that    the     bank       presented

sufficient     objective           evidence        to    prove       that     it    accepted      the

relevant payments in good faith.                        We address these arguments in

turn.

     Under     Section 548(a),              a     bankruptcy          trustee       can    avoid   a

transfer     of       a       debtor’s     property       if     the       debtor     “made    such

transfer   .      .       .    with     intent     to    hinder,           delay,    or    defraud”

creditors.        11 U.S.C. § 548(a)(1)(A).                      However, Section 548(c)

provides that:

                                                  14
     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).                That section provides a good

faith-defense     permitting    a     transferee    to   bar    a    trustee    from

recovering      funds    involving    transfers     that      have   been   deemed

avoidable under Section 548 or certain other provisions of the

Bankruptcy Code.         11 U.S.C. § 550(a), (b)(1); see In re Nieves,
648 F.3d at 237.          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
faith, and without knowledge of the voidability of the transfer

avoided.”

       In our decision in In re Nieves, we determined that the

proper      focus   in       evaluating   good          faith    in    the       context       of    a

bankruptcy       avoidance       action    requires         that      a     court       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    establishment               of    a    good-faith

defense under Section 548(c).                 Therefore, in evaluating whether

a     transferee       has     established         an    affirmative            defense        under

                                              16
Section 548(c),         a    court     is    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    FMI       and    Taneja,     “taking    into     consideration       the

customary        practices        of   the    industry        in   which   the    [bank]

operates.”       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.        We   disagree     with   the

trustee’s arguments.

                                              17
     While    the   trustee       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      was    objectively          reasonable   in    light   of

industry    standards.       Instead,       our    inquiry    regarding     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    inflexible      rule    that    expert     testimony    must   be

presented     in    every     case    to        prove     a   good-faith     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
such evidence.         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     about     these   circumstances        were   bank    employees,    the

bank’s      evidence    of   good     faith      constituted    purely     subjective

evidence.      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
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      objective         evidence   of     the    state     of    the    warehouse

lending       industry      during    that     period.          In       light   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
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,         because   “different    warehouse

       4
       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
lenders require[d] different items.”                        Critically, the evidence

showed that the bank always received from FMI the most vital

document,     the       original        promissory      note      that    perfected      the

holder’s security interest.                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.                              Both

Garrett      and        Daugherty        testified          extensively       about      the

“extraordinary          time”    that    the    warehouse      lending      industry     was

experiencing       during       2007    and    2008.        Not    only   did    Daugherty

explain   that      a    borrower’s       failure      to   sell     mortgage    loans   to

secondary    purchasers          is    “part    of    the    business”      of   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
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     should    have    known      about      FMI’s     and    Taneja’s

fraudulent         conduct        because       FMI,      rather         than     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.                            And, notably, the

trustee’s        key    witness,       Robert   Patrick,       who    was       retained   to

investigate            FMI’s     financial        affairs,        acknowledged           FMI’s

repayment        obligation      and     testified     that      FMI’s    actions    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       that    one     of     FMI’s    loan

       5
       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
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        conduct    when      the   evidence    established      that

secondary    purchasers       had    tightened        their    standards     for   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        unsold    because     the   loan

documentation was incomplete.                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.                       The bankruptcy court

rejected    the         trustee’s     assertion        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
that    the     value     of     the        mortgage        obligations        had    been

significantly        impaired.         The        record    demonstrated       that    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    bank    should     have       known     about    FMI’s     and    Taneja’s

fraudulent     conduct    based        on    the     conversation       with    Taneja’s

attorney at the January 2008 meeting.                       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          in     their     testimony    about      the

warehouse lending industry.                 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      court      made      credibility

                                             25
determinations.”        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.                   See

Klein, 845 F.2d at 79.         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     its   burden   of   proving    a

       6
       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
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
WYNN, Circuit Judge, dissenting:

     Bankruptcy      Code    Section         548(c)    provides      an     affirmative

defense to transferees who take in good faith.                            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    aspects    of    good      faith.     But   here,     it      failed   to

proffer    any    evidence       to   support    a    finding   that      it    received

transfers from FMI with objective good faith in the face of

several alleged red flags.               Because it was clear error for the

district    court    to     make      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
                                                 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        to    defraud           or   for   less     than    reasonable

consideration.          11 U.S.C. § 548(a).                   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).                      As the majority

notes,    we     held    that       to       establish      the   good   faith    defense,   a

transferee       needs    to    show          both     subjective    and    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,

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

turn[]    a     blind    eye    to       a    suspicious      transaction[,]”       and   then

                                                  29
expect to reap the benefits of the good faith defense.                                Id. at

242    (quotation        marks   omitted).            A     transferee       “wil[l]ful[ly]

ignoran[t]        in     the     face     of        facts     which     cried       out    for

investigation . . . cannot have taken in good faith.”                                 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 B.R. 128,   140    (Bankr.    E.D.       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.                Thus, First Tennessee Bank bore the

burden      of    showing      that     its    conduct       comported       with    routine

practices in its industry and that its response to potential

“red     flags”      about     FMI’s     fraud       comported        with    that    of    an

objectively reasonable warehouse lender.                        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
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.        To be sure, such objective, third-party

evidence    would   almost    certainly     be   helpful    in   establishing

industry standards.      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.             Instead, it relied on

      8
        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
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          mean    that     his    business     comports    with

industry standards.            Indeed, that very knowledge might be used

effectively for ill, enabling the executive to conceive of and

perpetuate      a    scheme    that        turns    industry    standards      on   their

heads.      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    2008.     But     that    fact     does    not    illuminate,     for

example,       whether       First     Tennessee       Bank’s      attributing       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     “their

reasons” why FMI’s conduct did not suggest fraud.                          Ante at 20.

                                              32
But   “their”      reasons    are    evidence     of     “their”     subjective       good

faith—not     of    objective    good      faith,   taking     into    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      of    their       testimony     or     render    it

incompetent.        But the record is irreconcilable with the majority

opinion’s       assertion     that    the    Trustee       failed     to     object    to

Garrett’s     and    Daugherty’s       “general         testimony”    regarding       the

industry or economic conditions in 2007 and 2008.                           Ante at 20-

21.      On   the    contrary,       the    Trustee       repeatedly       objected    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.                      See, e.g., J.A.

1376, 1379, 1383, 1512, 1517.               In response to these objections,

First    Tennessee     Bank   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.               See, e.g., J.A. 1376, 1384, 1512,

1517.    The majority opinion’s suggestion that challenges to any

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

                                            33
      More     importantly,        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         court’s      objective          good     faith            finding.

Specifically,        the    Trustee        identified          multiple        red     flags,

asserting     that    First    Tennessee         Bank’s    response       to    those       red

flags   failed   to    comport       with   that     of    a    reasonable       warehouse

lender.      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,      Mr.     Garrett      specifically         asked     whether         FMI’s

loans   were    fraudulent.          Mr.    Garrett       then    testified          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
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       example:         The     Trustee           highlighted         that     FMI

belatedly         delivered        collateral          documents       it     was    required        to

transmit.          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 . . . .”                                  J.A. 1491.       The

testimony         centered     on         “all    of     your”—i.e.,             First   Tennessee

Bank’s—“customers,”                J.A.     1506,        and     was        “[b]ased     on     your

experience . . . .”                 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)).                                         Missing

from       the    record      is     objective           evidence          regarding      standard

industry         practices     and    how        FMI’s    delays       and       First   Tennessee

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

                                                  35
       A     third           example:       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    suspect         that     it     was         not    the    truth.         Even    the

bankruptcy         court       called       the       explanation           “unusual.”         In     re

Taneja,      2012 WL 3073175,       at       *13.         Yet    First    Tennessee        Bank

offered      no    evidence          about       how       a   reasonable      warehouse       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     crisis,          comported            with      industry       practices       and

standards.         If economic turmoil gives businesses a free pass on

needing to prove objective good faith, even businesses falling

far    short       of        industry     standards             but      rather     “wil[l]ful[ly]

ignoran[t]         in        the     face        of        facts      which       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
with an economic downtown.               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       and        the      court        made      credibility

determinations.’”           Ante at 25-26 (quoting Fairchild Dornier GmbH

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

Cir.   2006)).        But    the   issue      here   is    not      that,    or    how,   the

bankruptcy     court        assessed     credibility           or   weighed       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        good    faith      in    the   face    of    certain

alleged red flags.           It did.      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