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In re Taneja

United States Court of Appeals, Fourth Circuit

February 21, 2014

In Re: VIJAY K. TANEJA, Debtor. H. JASON GOLD, Chapter 11 Liquidating Trustee, Plaintiff - Appellant,
v.
FIRST TENNESSEE BANK NATIONAL ASSOCIATION, Defendant - Appellee

Argued: October 29, 2013.

Page 424

Appeal from the United States District Court for the Eastern District of Virginia, at Alexandria. (1:12-cv-01097-AJT-TRJ; 08-13293-RGM; 10-01225-RGM). Anthony J. Trenga, District Judge.

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.

Before KEENAN, WYNN, and THACKER, Circuit Judges. Judge Keenan wrote the opinion, in which Judge Thacker concurred. Judge Wynn wrote a separate dissenting opinion.

OPINION

Page 425

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.

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 resulted in losses of

Page 426

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.

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 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

Page 427

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.

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. 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, (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 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. ...


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