## Facts

- A Chapter 7 trustee sought to recover value of an 11.8-acre Maryland property fraudulently transferred from debtor Walter Nieves.
- Nieves transferred the property to his brother for no consideration; the brother then transferred it to 1st Financial Mortgage Services, LLC for substantially less than market value.
- Capital City Mortgage Corporation (CCM) later loaned $155,000 to 1st Financial and took a deed of trust on the property, which it recorded.
- CCM did not verify that 1st Financial was a valid entity, that the borrower was authorized to act for it, or that 1st Financial owned the property.
- CCM did not conduct a title search, relied on an old appraisal, and failed to obtain a current good-standing certificate near closing.
- The trustee avoided the first two transfers by consent orders; litigation proceeded against CCM as a subsequent transferee asserting a defense under 11 U.S.C. § 550(b)(1).
- The bankruptcy court avoided CCM’s lien and awarded escrowed sale proceeds to the estate; the district court affirmed.

## Issues

1. Whether CCM proved the § 550(b)(1) affirmative defense by showing it took for value, in good faith, and without knowledge of the voidability of the avoided transfers.
2. Whether the bankruptcy court clearly erred in finding CCM lacked good faith and had disqualifying knowledge (including inquiry notice) based on the transaction’s warning signs.

## Decision

- The Fourth Circuit affirmed the judgment for the trustee.
- CCM failed to carry its burden to prove it acted in good faith and without knowledge of the voidability of the avoided transfers under § 550(b)(1).
- The bankruptcy court’s findings on good faith and knowledge were factual and not clearly erroneous given the record and credibility determinations.
- CCM’s deed of trust remained avoided, and the escrowed sale proceeds were properly awarded to the bankruptcy estate.

## Legal Principles

- Under 11 U.S.C. § 550(a), a trustee may recover property (or its value) from a subsequent transferee after an avoidable transfer is established.
- A subsequent transferee bears the burden to prove the § 550(b)(1) defense: taking for value, in good faith, and without knowledge of the voidability of the avoided transfer.
- Good faith and “without knowledge” are assessed largely objectively; a transferee may be charged with knowledge where facts would place a reasonable party on inquiry notice.
- A lender’s failure to investigate obvious irregularities—such as unclear borrower identity, lack of entity documentation, absence of title verification, and deviation from ordinary due diligence—can defeat § 550(b)(1).

## Conclusion

The court held that a subsequent secured lender that disregards clear warning signs and performs minimal verification cannot establish good faith or lack of knowledge under § 550(b)(1), permitting the trustee to recover the value of the avoided lien for the bankruptcy estate.


In re Nieves, 648 F.3d 232 (4th Cir. 2011)