In re Nieves

• Decision Date: 10 June 2011
• Docket Number: No. 08–2160.,08–2160.
• Citation: 648 F.3d 232,65 Collier Bankr.Cas.2d 1442
• Parties: In re Walter NIEVES, Debtor.Brian A. Goldman, Plaintiff–Appellee,v.Capital City Mortgage Corporation, Defendant–Appellant.
• Court: U.S. Court of Appeals — Fourth Circuit

648 F.3d 232

65 Collier Bankr.Cas.2d 1442

In re Walter NIEVES, Debtor.Brian A. Goldman, Plaintiff–Appellee,

v.Capital City Mortgage Corporation, Defendant–Appellant.

No. 08–2160.

United States Court of Appeals, Fourth Circuit.

Argued: Jan. 27, 2010.Decided: June 10, 2011.

ARGUED: Patricia A. Borenstein, Miles & Stockbridge, PC, Baltimore, Maryland, for Appellant. Evan M. Goldman, Goldman & Goldman, PA, Baltimore, Maryland, for Appellee. ON BRIEF: Richard L. Costella, Miles & Stockbridge, PC, Baltimore, Maryland, for Appellant.Before MICHAEL,¹ MOTZ, and GREGORY, Circuit Judges.Affirmed by published PER CURIAM opinion.

OPINION

PER CURIAM:

Brian A. Goldman, trustee for the Chapter 7 bankruptcy estate of Walter Nieves (Debtor), brought suit against various defendants to avoid a series of transfers of an 11.8 acre parcel of real property in Maryland (the Property) originally owned by the Debtor. By consent orders, the Trustee accomplished avoidance of the Property's initial and second transfers. Trial proceeded against the third transferee, Capital City Mortgage Corporation (CCM). The bankruptcy court entered judgment in favor of the trustee and avoided the transfer, finding that CCM did not show it was “a transferee that takes for value, ... in good faith, and without knowledge of the voidability of the transfer avoided.” 11 U.S.C. § 550(b). CCM appealed to the district court, which affirmed. CCM appeals once more. We affirm.

I.

A.

According to its President, Alan Nash, CCM lends money to “people or institutions that have difficulty getting credit elsewhere.” J.A. 258. Its website advertises that CCM “does not rely on credit scoring and has generous debt to income ratios.” J.A. 257. The website also explains to potential customers that CCM can lend money “[e]ven if you or a client have an existing bankruptcy.” J.A. 257.

On April 8, 2003, Michael Nastasi went to CCM's office and filled out a credit application for 1st Financial Mortgage Services, LLC (“1st Financial”). J.A. 223, 226–27, 229. In applying for a loan for 1st Financial, Nastasi dealt directly with CCM's President, Alan Nash. J.A. 222–23. Nash met with Nastasi for less than an hour. J.A. 256.

Nastasi told Nash that he was the sole member and resident agent of 1st Financial. J.A. 336. However, Nastasi never provided Nash with 1st Financial's articles of organization or operating agreement. Id. CCM never attempted to verify that Nastasi owned 1st Financial or that Nastasi was authorized to take out loans for the company. This failure occurred despite the fact that Nastasi, according to Nash, was “confused about the name of his LLC because I think in some documents he listed F–I–R–S–T and some of them he listed it 1–S–T.” J.A. 321.

In the credit application he filled out for 1st Financial, Nastasi provided only the addresses for 1st Financial and Nastasi, the tax ID number for 1st Financial, and the address of the Property, which was apparently represented as the only property owned by 1st Financial. J.A. 227. The application contained no financial information for 1st Financial. J.A. 228. CCM never obtained any financial information for 1st Financial despite Nash's statement at trial that CCM is “always concerned with the creditworthiness of our borrowers.” J.A. 226, 263.

CCM never viewed 1st Financial's deed for the Property listed in the credit application. J.A. 229. Nastasi provided Nash with only a legal description of the Property and a year-old appraisal valuing the property at $265,000. J.A. 225, 229, 260. The copy of the appraisal noted that it was performed before 1st Financial took title to the Property. J.A. 260.

Nevertheless, CCM decided to make a one year, non-recourse loan to 1st Financial for $155,000, at a rate of 19.75% with two points. J.A. 233–34. The loan was secured by the Property. CCM's only recourse against 1st Financial in the event of default, therefore, was to foreclose on the Property. The bankruptcy court found that CCM “may have anticipated, and even hoped for a payment default.” J.A. 379. In fact, 1st Financial never made a payment on the loan, causing the accrual of large penalties and a default interest rate of 24%. J.A. 234–35, 237. Total payoff for the loan as of November 1, 2006 was $326,512.73. J.A. 338.

Prior to settling the loan on May 29, 2003, CCM obtained a title insurance commitment from Paramount Title & Escrow, LLC (Paramount). Paramount obtained, per CCM's instructions, a certificate of good standing for 1st Financial issued by the Maryland State Department of Assessments and Taxation (SDAT). J.A. 332.

The title commitment from Paramount insured title for $170,000. J.A. 229. It identified 1st Financial and CCM as parties to the deed of trust, listed the Property description, and committed to insure fee simple title. J.A. 374. It did not indicate that any records search was undertaken by Paramount, nor did it provide the results of any such search. Id. The bankruptcy court found no evidence that CCM requested any title or record search. Id. It did not perform one itself.

The title commitment was issued on April 24, 2003 at eight a.m. J.A. 230. 1st Financial did not record its deed to the Property until later that same day. J.A. 30, 260. Therefore, Paramount insured title before it could confirm that 1st Financial actually owned the Property. All of the foregoing facts led the bankruptcy court to find that “little, or no effective records search was undertaken.” J.A. 374.

The certificate of good standing was obtained on April 30, 2003. J.A. 326. Nash could not recall whether he inspected the good standing certificate prior to closing the loan on May 29, 2003. J.A. 334. The trustee's expert on real estate transfers and closings testified that a month-old certificate of good standing is not satisfactory and would require updating “within a week of closing.” J.A. 277, 280. Indeed, CCM conceded at the hearing before the district court that it “had at least been aware before closing on the Property that 1st Financial's legal status was uncertain, but had nonetheless relied on the April 30 certificate of good standing.” J.A. 415.

The loan closed on May 29, 2003. The deed of trust states that the grantor is “First Financial Mortgage Services, LLC.” J.A. 166. The signature page, however, contains an illegible signature from a “Manager” for “1st Financial Mtg Svce, LLC.” J.A. 172. The trustee's expert testified that a manager may not sign on behalf of an LLC unless authorized by the operating agreement. J.A. 278. The trustee also testified that “critical parts of the notary [were] left out” because it failed to identify the individual who appeared and signed the deed on behalf of 1st Financial, rendering the deed invalid. J.A. 279, 300. Similarly, the deed of trust note states that the maker is “First Financial Mortgage Services, LLC.” J.A. 178. The signature page contains an illegible signature for the maker and gives no indication as to who signed it or with what authority. J.A. 188. CCM recorded the deed of trust on June 30, 2003. J.A. 373. The expert also testified that in his “customary approach,” he would not have accepted the deed that 1st Financial took on the property because the deed was not notarized, was not acknowledged, and did not comport with the loan documents. J.A. 287–91. These deficiencies impair the ability of the person on the deed to borrow money on the property. J.A. 287–89.

B.

Two years before the CCM loan closed, the Debtor's assets were frozen as a result of a Department of Labor investigation into the Debtor's company. J.A. 407. Prior to August 8, 2002, the Debtor had owned the Property with his son, Michael Nieves. J.A. 371. On August 8, 2002, the Debtor and his son transferred the Property to Edgardo Nieves (Edgardo), the Debtor's brother, for zero consideration (the initial transfer). J.A. 25, 371. The deed identifies the initial transferee as “Edgardo Nieves, his brother” and states “NO CONSIDERATION TAX,” and “NO TITLE EXAMINATION.” J.A. 25. Two months later, on October 21, 2002, the Debtor and his son entered into a consent judgment with the Secretary of Labor in the amount of $2,800,000. J.A. 121–40.

On March 19, 2003, two months before the CCM loan closed, the Debtor filed for bankruptcy under Chapter 13. While the Debtor's Chapter 13 petition was pending, Edgardo transferred the Property to 1st Financial on April 24, 2003, by deed dated April 10, 2003 (the second transfer). J.A. 371. 1st Financial was owned by Nastasi, a friend of the Debtor and Edgardo. J.A. 372. This deed was recorded on April 24, 2003 at 2:05 p.m. J.A. 371–72. The deed recited an alleged consideration of $18,000. J.A. 372. It was not notarized. J.A. 372.

At the time of the second transfer, 1st Financial was not a valid entity; its charter had been forfeited on October 5, 2001. Id. Articles of Reinstatement for 1st Financial were filed with SDAT on April 30, 2003, causing it to regain temporarily good standing. Id. However, the Articles of Reinstatement were voided by SDAT on May 7, 2003, retroactive to April 30, 2003, because the proper fees were not paid by 1st Financial. Id. The check 1st Financial submitted with its Articles of Reinstatement had bounced. J.A. 160. The bankruptcy court found “that at all times relevant to the matter before the court, 1st Financial was not a legal entity.” J.A. 372.

As explained above, 1st Financial later received $155,000 from CCM, secured with a deed of trust to the Property, on May 29, 2003. CCM recorded the deed of trust on June 30, 2003. J.A. 373.

The Debtor's Chapter 13 petition was dismissed on August 8, 2003 and the Debtor filed the instant Chapter 7 petition on October 14, 2003. J.A. 371. On December 17, 2003, the Debtor's bankruptcy trustee commenced adversary proceedings against Edgardo and 1st Financial in the United States Bankruptcy Court for the District of Maryland to avoid the fraudulent transfers and recover the Property, pursuant to 11...