In re Nieves

In August 2002, Walter Nieves (debtor) transferred a Maryland property to his brother, Edgardo, for zero consideration. In March 2003, Nieves filed for Chapter 13 bankruptcy. Soon after, Edgardo transferred the property to 1st Financial Mortgage Services, LLC (1st Financial), a company owned by Nieves’s friend Michael Nastasi, for well below market value. 1st Financial was not a valid legal entity. Nevertheless, a few days earlier, Nastasi had gone to Capital City Mortgage Corporation (CCM) and applied for a loan for 1st Financial. When Nastasi met with CCM’s president, Nastasi seemed confused about 1st Financial’s name and gave only minimal information about 1st Financial. Nastasi’s application identified the Maryland property as 1st Financial’s property, and Nastasi gave CCM a legal description of the property and an old appraisal. CCM never performed a record search, examined the prior deeds, or verified any of Nastasi’s information to confirm that 1st Financial was a valid entity or that it owned the property. CCM still loaned 1st Financial $155,000, secured by a deed of trust on the property. The loan closed in May 2003, and CCM recorded the deed of trust. In a departure from standard industry practices, CCM did not obtain an updated certificate of good standing to verify 1st Financial’s legal status within a week of the closing. Nieves’s Chapter 13 petition was subsequently dismissed, and Nieves filed for Chapter 7 bankruptcy. The bankruptcy trustee brought adversary proceedings against Edgardo, 1st Financial, and CCM to avoid the property transfers as fraudulent and recover the property for the estate. The trustee subsequently sold the property with CCM’s consent and placed the sale proceeds in escrow. The Edgardo and 1st Financial transfers were avoided by consent orders. Because CCM was a subsequent transferee from those voidable transfers, the trustee had a right to recover the property or the property’s value from CCM under 11 U.S.C. § 550(a)(1). However, CCM claimed that recovery was inappropriate under 11 U.S.C. § 550(b)(1) because CCM had taken the property for value, in good faith, and without knowledge of the earlier transfer’s voidability. The bankruptcy court rejected CCM’s defense, avoided the transfer, and awarded the property-sale proceeds to the estate. The district court affirmed, and CCM appealed.