Fourth Circuit Affirms Bank’s Good Faith Defense To Fraudulent Transfer Claim

The recipient of funds that a trustee seeks to recover by means of a fraudulent transfer claim may avoid liability by establishing that it took "for value and in good faith," under section 548(c) of the Bankruptcy Code. The Bankruptcy Code does not define "good faith," and case law does not provide a clear precedent of what constitutes good faith; rather courts generally consider whether the transferee knew or should have known of the debtor's financial distress at the time of the transfer. In its recent decision in In re Taneja (Gold v. First Tennessee Bank National Association), a divided Fourth Circuit Court of Appeals considered the meaning and proper application of the good faith defense in actions to avoid and recover fraudulent transfers under section 548. No. 13-1058, 743 F.3d 423 (4th Cir. Feb. 21, 2014). The Fourth Circuit's decision in Taneja does not provide a "bright line" legal precedent, but it does appear to lower the bar with respect to a transferee's factual burden. In Taneja, the court held that a transferee need not present evidence that its every action concerning the relevant transfers was objectively reasonable in light of industry standards. Rather, the court's inquiry regarding industry standards serves only to establish the correct context in which to consider what the transferee knew or should have known, and expert testimony is not necessarily required to establish that context.

In Taneja the debtor, Vijay K. Taneja, originated home mortgages through his company Financial Mortgage Inc. ("FMI") and sold them to secondary purchasers who, in turn, aggregated and securitized the loans to create "mortgage-backed securities."1 Taneja and FMI financed these loans by borrowing funds from warehouse mortgage lenders, including the defendant First Tennessee Bank National Association (the "Bank"). Prior to filing for bankruptcy, Taneja and FMI transferred funds to the Bank in repayment of outstanding loans. The bankruptcy trustee for Taneja and FMI brought an action to void and recover the repaid loan amounts as fraudulent transfers under section 548. In response, the Bank asserted a good faith defense under section 548(c). The Bankruptcy Court found that the Bank had accepted the transfers for value and in good faith, and the District Court affirmed.

On the trustee's appeal, the Fourth Circuit considered the proper context in which to evaluate the reasonableness of a transferee in accepting funds later deemed to constitute...