# Meoli v. Huntington National Bank (In Re Teleservices Group, Inc.)

> United States Bankruptcy Court, W.D. Michigan · March 17, 2011 · 444 B.R. 767

URL: https://www.frixlaw.com/law-library/cases/2199436

## Case

- **Full name:** In Re TELESERVICES GROUP, INC., Debtor. Marcia R. Meoli, Trustee, Plaintiff, v. the Huntington National Bank, Defendant
- **Court:** United States Bankruptcy Court, W.D. Michigan
- **Decided:** March 17, 2011
- **Citations:** 444 B.R. 767; 2011 WL 923242
- **Precedential status:** Published
- **Opinion:** Opinion by Hughes
- **Judges:** Jeffrey R. Hughes
- **Cited by:** 31 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/2199436

## How later opinions describe it (automated extraction)

- holding that Section 548(c) and Section 550(b) good faith is a measure of the recipient’s subjective awareness of the fraud being perpetrated.
- noting that the loan at issue was a “a typical commercial loan, with a revolving line of credit based upon.. .receivables ... [and]... Huntington had intended to monitor those receivables through a lockbox”

## Opinion text

OPINION RE: BIFURCATED ISSUES
JEFFREY R. HUGHES, Bankruptcy Judge.
Trustee Marcia Meoli has sued The Huntington National Bank (“Huntington”) to recover over $73 million
1
in fraudulent transfers Huntington allegedly received either directly from Teleservices Group, Inc. (“Teleservices”) itself or indirectly through a related company, Cyberco Holdings, Inc.
2
This opinion addresses most, but not all, of the remaining factual and legal issues raised in this complicated case.
3
*773
JURISDICTION
The court has jurisdiction to hear this adversary proceeding. 28 U.S.C. §§ 1834 and 157(b)(1).
See also
W.D. Mich. LCivR 83.2. The issue raised is also a core matter. 28 U.S.C. § 157 (b)(2)(H). Therefore, the findings of fact and conclusions of law set forth in this opinion
4
are appealable pursuant to 28 U.S.C. § 158 .
ASSESSING HUNTINGTON’S GOOD FAITH
Although Huntington has raised a number of issues in this adversary proceeding, the mainstay of its defense has been that it received all of the transfers from Teleser-vices in good faith. Indeed, this case presents the odd situation of Huntington asserting its good faith under Section 548(c)
5
with respect to some of the transfers and its good faith under Section 550(b)(1) with respect to other transfers. Therefore, it is appropriate to offer even before a discussion of the underlying facts some insight as to the court’s conclusions concerning this admittedly illusive concept.
Recent case law strongly favors an objective approach to assessing a transferee’s good faith under either section. This court, though, has determined that testing either Section 548(c) or Section 550(b)(1) good faith is in fact subjective, with the focus being upon traditional notions of honesty and integrity. In many ways, this conclusion should seem obvious. If the person accepting the transfer is able to establish his innocence vis-a-vis the debt- or’s fraudulent motives, a trier of fact would be hard pressed to still decide that he had taken in bad faith. If, though, that same person had actually participated in the deception, then it would be just as easy to conclude that his involvement in the transaction had been dishonest — i.e., not in good faith.
However, a transferee’s honesty with respect to the fraud being perpetrated encompasses more than just complicity,
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for the transferee’s mere awareness of the debtor’s fraudulent intent would also cause his taking to be in bad faith. But a transferee is no more likely to admit that he knew of the debtor’s fraudulent purpose at the time of receipt than would the debtor himself admit that he had harbored such designs. Courts have for centuries used the so-called badges of fraud to assess a debtor’s fraudulent intent. Should not, then, the same badges be relevant when the issue turns to determining whether the transferee himself was aware of any fraud?
Unfortunately, while the debtor’s own fraud can be established simply through the existence of enough badges, a transferee’s related good faith is also a function of his awareness of those badges. A question, then, inevitably arises as to what, if any, duty does the transferee have to investigate should some but not enough badges come to his attention at a particular point in time? Moreover, there is also the issue of retroactivity. If, for example, the transferee’s investigation of a particular badge later leads him to the discovery of enough other badges to make him aware of the debtor’s fraudulent intent, should the transfer previously received now be deemed to have been taken in bad faith? This latter question is especially important when the targeted transferee continued to receive transfers after the first suspicion arose, as is the case in this instance.
Questions like these have led this court to the further conclusion that a procedural component must be added to the good faith analysis whenever anything more than the simplest of fraudulent transfers is involved. That is, a court must in many cases assess not only whether the transferee conducted himself honestly and with integrity regarding the receipt of any particular transfer. The court must often assess as well whether the transferee conducted himself honestly and with integrity in addressing the receipt of a series of fraudulent transfers as a succession of badges evidencing that intent came to the transferee’s attention.
And finally, this court recognizes that it is not the trustee who must prove the transferee’s bad faith in accepting the transfer. Instead, it is the transferee who must establish that he had acted in good faith. Should, then, the transferee’s response to suspicions at any time fall short of an honest effort, the transferee would necessarily lose the ability to claim good faith going forward. But it follows as well that such a lapse should not negate what had been up to that point a good faith effort to investigate the recipient’s suspicions concerning transfers already received. In other words, the transferee should be able to keep whatever he has received up to the point in time when either (1) he became aware of (or turned a blind eye to) enough badges of fraud to no longer be in good faith, or (2) his attempts to ferret out additional badges no longer represented an honest effort on his part.
In sum, Huntington’s success in professing its good faith under the facts presented will depend upon whether Huntington has convinced this court that it honestly remained unaware of Teleservices’ fraud for more than a year notwithstanding its growing suspicions. The court will now address those facts.
FACTS
Huntington is a regional bank with its headquarters in Columbus, Ohio. Cyberco, which also went by CyberNET and CyberNET Group, had a short but tumultuous lending relationship with Huntington. It lasted only from September 2002 to October 2004.
Huntington administered the Cyberco loan through its West Michigan offices.
*775
Kelly Hutchings was the account officer and Cal Hekman her immediate boss. Both were members of the region’s commercial lending group. John Irwin was the group’s leader.
Irwin in turn reported to Jim Dunlap, Huntington’s regional president. Other senior members of the West Michigan management team were John Kalb, the region’s credit officer, Steve George, the region’s special assets officer, and Larry Rodriguez, the region’s security officer. And finally, there was Gail White. Although White was not in the commercial lending group, she became intimately involved in the loan because of suspicions she had about both Cyberco and the large transfers it was receiving from another member of the Cyberco family — Teleservices.
Kalb and George each had a counterpart in Columbus. Larry Hoover was the senior credit officer for all of Huntington’s loans. Michael Cross oversaw all of the regional special asset groups. Hoover and Cross, as well as others in Columbus, expected Kalb in particular to keep them informed about Cyberco once it was placed on Huntington’s criticized asset list.
The loan closed in September 2002. It was a typical commercial loan, with a revolving line of credit based upon Cyberco’s receivables, a term note, and some letters of credit. Like many commercial loans, it was collateralized by all of Cyberco’s assets, including Cyberco’s substantial accounts receivable. Huntington had intended to monitor those receivables through a lockbox. However, what Huntington discovered about a year into the relationship was that Cyberco was instead receiving most of its cash through large and regular transfers from Teleservices. No one at Huntington recognized that name. Cyberco answered Huntington’s inquiries by explaining, untruthfully as it turned out, that Teleservices was a related company and that it was merely collecting Cyberco’s own receivables on Cyberco’s behalf. In truth, the transferred funds were actually the proceeds of a fraud that Cyberco and Teleservices together were perpetrating on unsuspecting equipment finance companies.
The Teleservices funds were being deposited into Cyberco’s Huntington accounts. Huntington swept those accounts every day and then replenished them as needed through the line of credit. As a consequence, millions of dollars more than what Huntington was actually owed flowed through its hands. These additional amounts, together with the paydown of Huntington’s own loan, represent what the Teleservices trustee now seeks to recover.
It was White who inadvertently discovered the Teleservices transfers in the fall of 2003. Although Huntington did not learn of the lie until much later, the relationship was already strained enough at that time to convince Huntington that Cyberco should leave the bank. Here is a brief chronology of subsequent events:
January 2004 — Cyberco was asked to find a new lender.
April 2004 — Cyberco was given a second ninety-day extension to accomplish this exit strategy.
Summer 2004 — Cyberco did not find a new lender but instead began paying down the Huntington loan with even more funds received from Teleservices.
Fall 2004 — Huntington was repaid the remaining Cyberco balance with checks from Teleservices made payable directly to it.
This adversary proceeding, then, can be summarized in so many paragraphs. However, the details unfold like a tragic play, with Kalb, White, Rodriguez, and
*776
George each having a part.
6
Through all of them is revealed both Huntington’s good faith and its turning a blind eye. The story also shows how a seemingly insignificant decision can lead to enormous loss. But most of all, it speaks of Huntington’s misplaced trust in an unscrupulous con man — Barton Watson.
The Set-Up
The story is best told by turning first to March-2004. Many months had passed since Gail White had begun investigating Cyberco and the Teleservices transfers.
7
Her previous meetings with Kalb had not met with much success. All he kept telling her was to keep on digging. This time, though, she was sure she could convince him of Cyberco’s fraud.
8
Cyberco had started rather modestly in the late 1980s.
9
However, by 2002, Cyber-co was holding itself out as a fast growing, tech savvy company.
With its world headquarters based in Grand Rapids, Michigan, CyberNET is the internationally recognized front-runner in the design, deployment and operation of information technology infrastructures necessary to put mission-critical corporate data into the hands of users.
Huntington’s 2002 Shareholder Report.
10
Cyberco’s previous lender had been in Chicago. However, according to Cyberco, the relationship soured after a much larger bank had acquired it. Cyberco also wanted a more locally oriented lender.
11
Huntington was ecstatic.
A global technology leader like the CyberNET Group can do business with any bank it chooses. Why it chose Huntington goes to the heart of the essential partnership concept.
Huntington’s 2002 Shareholder Report.
12
Huntington immediately replaced Cy-berco’s existing line of credit with its own line. It then increased the line within months. Huntington also financed various equipment acquisitions and issued letters of credit. By the time of White’s March 2004 meeting with Kalb, Cyberco owed Huntington over $16 million.
13
White had been only vaguely aware of Cyberco prior to September 2003. However, it happened that she alone had the authority late one Friday afternoon to look at a returned check that Cyberco had deposited a few days before. The payor was a company called Teleservices. White had to decide whether to continue crediting Cyberco’s account for the $2.3 million deposit; otherwise, checks that Cyberco itself had written would begin to bounce. White chose not to extend the credit.
14
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This was not the first time that Cyberco had been significantly overdrawn on its accounts. An overdraft had previously occurred in December 2002 and another had occurred in February 2003. Moreover, Cyberco had requested two “hard holds” within the last six months.
15
Therefore, Huntington decided that a meeting with Barton Watson, Cyberco’s chairman and CEO, was in order.
16
Watson was extremely intelligent and well heeled. His office was opulent. He drove exotic cars, drank fine wines, and jetted about the world. Watson even had an exclusive “Black Card.”
17
But Watson was also a bully. He intimidated others with his intellect and lifestyle. And like all bullies, he had a temper. Those who crossed Watson risked incurring his immediate wrath.
18
Huntington and Watson met on October 2, 2003. Kelly Hutchings, the Cyberco account officer, and Cal Hekman, who was Hutchings’ boss, both attended. White was also asked to come along. What had prompted her invitation was White’s discovery that the returned Teleservices check was only the most recent in a series of Teleservices checks, all in large amounts, that Cyberco had begun depositing a few months earlier.
19
Neither Hutchings nor Hekman was aware of any of these transfers. Nor did they know anything about the company. Therefore, Teleservices was added to the agenda and White became involved.
20
Watson explained at the meeting that Teleservices was a new addition to the Cyberco family that was not yet operational. Its purpose, he said, would be to oversee internal finances for all of Cyberco’s far flung operations, including the collection of Cyberco’s receivables. He indicated that Teleservices would be providing help desk services to third party customers as well.
21
Watson’s explanation satisfied Hekman and Hutchings, at least for the moment.
*778
However, White had her doubts. Having the same company provide customer services and also manage funds didn’t seem like a logical fit. Moreover, Watson’s statement that Teleservices was not yet operational was inconsistent with the fact that Teleservices had already been transferring large amounts to Cyberco during the preceding three months. Indeed, the checks Teleservices had delivered to Cy-berco during this interval had been from a sequence of only ten checks. Why wasn’t Teleservices also writing more checks to other members of the Cyberco family?
22
She immediately took her concerns to Kalb. Again, John Kalb was the credit officer for Huntington’s West Michigan operations. Not only did he report directly to Dick Witherow in Columbus; he also reported indirectly to Dunlap, the regional president. Kalb’s responsibilities included both signing off on new loans proposed by the commercial lending group and assisting the group in its management of existing loans as issues arose. He had both an MBA and a law degree. He also had the reputation of being a worrier, which undoubtedly was a good attribute for someone in his position.
23
Although White did not work for Kalb, he had in the past assigned her special projects from time to time.
24
Kalb agreed with White that it was worth learning more about Cyberco and Teleservices. Therefore, he encouraged her to look into it further.
25
White’s immediate concern was that the two companies were kiting checks. However, that fear was quickly allayed when Teleservices began making the transfers by wire.
26
Consequently, White focused more and more of her attention upon the lockbox that the parties had established at the outset of the relationship.
27
Huntington had hoped to use the lockbox to monitor what was without question the largest component of its collateral base. Obviously, that purpose was not served if the receivables were being collected by Teles-ervices instead.
28
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White nonetheless attempted to track Cyberco’s receivables. Unfortunately, White had little to work with apart from the reports that Cyberco itself was providing. In fact, White’s investigation was limited for the most part to collecting whatever data she could from the bank accounts Cyberco maintained at Huntington. All that she was able to prepare from this data was a spreadsheet that charted the many wire transfers in and out of Cyberco’s accounts. Most of the incoming transfers continued to be from Teleser-vices. As for the outgoing transfers, most were to financial institutions that had funded Cyberco’s ongoing purchases of computer equipment either by lease or by loan.
29
What White was able to discern as time progressed was that the transfers in from Teleservices and the transfers out to the financial institutions were both increasing in amount.
30
White’s March 2004 meeting with Kalb was another one of her biweekly updates. She really had not found much to substantiate her suspicions until then. But this was the first time she had a Cyberco receivables aging report and it spoke volumes. Watson had always claimed that Cyberco’s customers simply refused to pay their accounts through the lockbox. However, the aging provided to White revealed a virtual who’s who of Fortune 500 companies — Boeing, Cargill, and Electronic Data Systems were only three of the many named.
31
It made no sense that customers like these would be uncomfortable remitting their payments to a lockbox. Nor could White understand why a large technology provider like Electronic Data Systems would be a substantial customer of Cyberco when EDS itself would presumably be providing the very same services to its own customers. Therefore, White was convinced now more than ever that Cyberco was at the very least defrauding Huntington by overstating its accounts receivables through the inclusion of fictitious customers.
32
Although White may have been frustrated with Kalb’s response up to that point, Kalb had had his own doubts about Cyberco all along. He, as the regional credit officer, had been involved in the decision-making from the very outset. He knew even then that the computer services business was risky and that there was a tendency in the industry to overstate receivables by prematurely reporting uncompleted projects as fully earned. He was also uneasy because Cyberco had not covered the two overdrafts that had occurred earlier as Huntington’s zero tolerance policy required.
33
To the contrary, it
*780
was Huntington that had covered the shortfalls through a further increase in Cyberco’s line of credit.
34
There was also the matter of Cyberco’s audited financial statements. The loan documents required Cyberco to provide audited statements to Huntington within ninety days of Cyberco’s calendar year end. However, it was now March of 2004 and Huntington had yet to receive even Cyberco’s 2002 statements. All that it had was Cyberco’s repeated promises that they would be forthcoming as soon as its auditors could get a sign off with respect to a sale or merger of one of Cyberco’s subsidiaries.
35
Again, Huntington had already told Cy-berco earlier that year that it should find a new bank and Kalb had also been instrumental in that decision. The others involved — i.e., the three commercial loan officers — all attributed the move to Huntington’s inability to fully understand Cy-berco’s business and Huntington’s own limitations as a global financier.
36
Kalb, though, had much deeper concerns. Here is how Kalb himself explained the decision to Jim Dunlap, the regional president, after Dunlap’s return from vacation:
John Irwin, Cal Hekman, Kelly Hutchings and I had a meeting relating to Cyberco and despite the “good numbers” the “red flags” continue. It is our joint conclusion that we should exit the account and I give the team [i.e., the commercial lending group] credit for taking this step despite outward financial performance. If there is one thing that has been clear about recent times it is the heightened risk of financial misinformation (as well as fraud) and we need to be cognizant of that fact as we see these red flags. We will keep you informed as to how we will communicate this exit to the client or if there is another chapter to the saga. Here is hoping we don’t lose money in the process.
Jan. 9, 2004 Email.
37
Kalb referred to these same red flags days later in an email to Witherow, his own boss in Columbus. Particularly telling was Kalb’s final comment — “So we have no ‘demonstrable’ financial reason to be worried but we are anyway.”
38
Kalb, then, was clearly not indifferent to what White had been reporting to him prior to the latest meeting she had scheduled. He too was suspicious of both Cy-berco and Watson; perhaps even more so. The problem, though, was that he had nothing more than his suspicions to act upon. White had certainly not found anything concrete up to that point. Nor had his other efforts to investigate uncovered anything. Kalb himself had called Cyber-co’s attorney after the two overdrafts in early 2003. The attorney’s response was “glowing.”
39
And, after learning of the transfers from Teleservices, Kalb ordered
*781
a personal background check on Watson. That effort likewise came up clean. As Kalb also reported to Witherow in his January email — “Every time we did additional ‘deep dives,’ the people and the company always checked out.”
40
Kalb agreed by the end of their March 2004 meeting that White may have finally found something. The aging report did suggest that Cyberco was committing receivables fraud. Therefore, Kalb had White contact Huntington’s security department, which ultimately led her to Larry Rodriguez, the region’s head of security. Rodriguez was an experienced investigator, having served in that capacity with the Michigan State Police before retiring and joining Huntington. Although he, like Kalb, reported directly to Huntington’s corporate headquarters, he by necessity interacted with the rest of West Michigan’s senior management, including Dunlap and Kalb.
41
Rodriguez immediately reviewed White’s file, including her spreadsheets. He then interviewed her a few weeks later. He also did some investigating on his own. It included going through local court records and speaking with an acquaintance at the FBI. The contact told Rodriguez that Cy-berco and its principals were under investigation. However, Rodriguez was not provided with any details.
42
It took Rodriguez about a month to get to this point. He agreed with White that it was unlikely that Cyberco and Teleser-vices were kiting checks because the transfers were by wire and all in one direction. He had also decided by this time that it really didn’t matter to Huntington whether Cyberco was overstating its receivables or not so long as Cyberco continued with the exit plan of finding a new lender. And finally, Rodriguez figured that the FBI’s own investigation would uncover anything else that might be untoward at Cyberco.
43
Therefore, Rodriguez closed his file, at least until something further turned up. He did report back to Richard Harp, Huntington’s director of security. Beyond that, though, he did little else. In particular, he never spoke with either Kalb or White about what he had discovered in the court records.
44
It was not as though Kalb and White had lost interest. White continued to add to her spreadsheets whatever information she could concerning the Teleservices deposits and Cyberco’s own cash disbursements. She also, with Huntington’s approval, cooperated with the FBI as it later extended its investigation to reviewing Huntington’s files and interviewing bank personnel.
45
As for Kalb, he remained interested in the progress of Cyberco’s anticipated exit.
*782
The failure to provide audited financials for 2002 and now 2003 continued to be a concern even though Kalb, like everyone else, hoped that Cyberco would soon be gone. Questions about Teleservices also remained. James Horton, who was Cyber-co’s second in command, had finally answered an inquiry that Hutchings had made months earlier. Horton’s memo did include some additional information about Teleservices. However, this time Cyber-co’s explanation was that Teleservices was an existing company that Krista Kotlarz, Watson’s wife, had owned some time ago and that Cyberco was now in the process of re-acquiring to provide outsourcing services in the Philippines.
46
But that was it. Still lacking were answers to what had piqued Huntington’s curiosity in the first place — the millions of dollars that Teleservices was continuing to transfer to Cyberco and the related under-utilization of the lockbox. Also lacking was any further information about Teleser-vices becoming Cyberco’s finance arm. To the contrary, Horton mentioned in the same memo that a new holding company was being formed to provide treasury services to Cyberco and its affiliates.
47
Nor was Kalb content to leave the accounts receivable investigation to corporate security. Hutchings and he had both agreed with White’s suggestion that Huntington itself send account verifications to customers selected from the February aging. Therefore, a receivables audit was added as a condition for any further extension of the line of credit, which was now scheduled to expire on April 30, 2004. Watson, however, hit the roof when he learned of this requirement. He made it absolutely clear that no one from Huntington was to speak with any of Cyberco’s customers
48
In Watson’s words, he was “appalled that anyone would even suggest such an action since customers would of course smell a rat of some kind.”
49
Watson did suggest a compromise. What he proposed, and what Huntington ultimately agreed to, was for Grant Thornton, an internationally recognized accounting firm, to conduct an independent audit through its Hong Kong office. Grant Thornton issued its report in early May, which coincided with Rodriguez’s decision to close his investigation. The report indicated that Grant Thornton had received a 100% response to the sampling of customers it had selected from Cyberco’s posted receivables. The report further indicated that all but one response confirmed the balances stated and that the one deviation was insignificant.
50
Kalb also learned at about the same time that the FBI had served the bank with subpoenas as part of its own investigation of Cyberco. Kalb assumed that the investigation involved tax problems, which was not something to get too alarmed about. Nonetheless, he did attempt to follow up with Rodriguez. But Rodriguez was tightlipped. Moreover, when Kalb suggested that Watson himself be confronted, he was persuaded not to on the basis that it would impede the FBI’s investigation. Kalb was instead encouraged to
*783
continue as if all was normal with Cyber-eo.
51
Normal meant that Kalb signed off on another ninety-day extension of Cyberco’s line of credit, this time to August 1. Although finding a new lender continued as the preferred option, Kalb began to prepare for a more aggressive approach. For example, he had already begun speaking with Steve George, the head of the region’s special asset group. As its leader, George would frequently offer advice concerning problem loans and, in appropriate circumstances, his group would actually assume responsibility for a particularly troublesome account. George himself had had considerable experience in both commercial lending and commercial credit before becoming a special assets officer in the late 1980s.
52
Kalb shared with George the same misgivings that he had shared with Dunlap and Witherow months before — that something did not seem quite right about Cy-berco. In particular, he was bothered by Cyberco’s continued inability to provide audited financial statements and the general unfavorable direction in which the account was heading. Kalb, though, conceded once again that he himself had not come across anything to give substance to his suspicions.
53
After looking at the file, George met with both Hutchings and Hekman, the two loan officers most familiar with the account. He spoke with White as well. His reaction to what he found was the same as Rodriguez’s. That is, it was unlikely that there was check kiting because the deposits were by wire and receivables fraud was not a concern so long as Cyberco would be soon ending the relationship. Therefore, George saw no reason not to extend the line of credit another ninety days.
54
George did, though, agree with Kalb that there was enough to Kalb’s concerns to warrant downgrading the credit to “9” so that George and his group could begin monitoring the Cyberco account as well.
55
Although the extension’s purpose was to provide more time to find a new lender, it became clearer and clearer as the new deadline approached that Cyberco was not going to secure replacement financing. In fact, by mid-July Cyberco had already on its own reduced the line of credit from $13 million to $7.5 million. Hutchings also reported on July 28 Horton’s delivery of a $1.5 million Teleservices check made payable directly to Huntington and Horton’s promised delivery of two more checks in short order to cover the rest of what was owed.
56
Huntington welcomed the news. However, George and Kalb had their doubts. George felt that the “sticky” part of the payoff was still to come. As for Kalb, he
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cautioned Cross and Hoover
57
to
“keep
your fingers crossed.”
58
George’s and Kalb’s comments proved prophetic, for Cyberco did not pay down the remaining loan balance by early August as Horton had promised. Instead, the three checks that Huntington did receive from Teleservices in August totalled only $950,000. Of course, by this time the line of credit was well past due and Huntington no longer had any intention of giving Cyberco a further extension. Therefore, on September 2, 2004, Huntington formally demanded that Cyberco repay all amounts then outstanding, which at that point was just over $6 million.
59
Huntington thereafter received five more checks from Teleservices over the next two months, with the largest also being the last. That check cleared on October 29, 2004. George, who by then had assumed full responsibility for collection of the Cyberco debt, reported the last check had paid in full all of Cyberco’s direct obligations with Huntington and that only a $600,000 letter of credit remained. Kalb’s response was “All I can say is ‘whew’!!”
60
The Fraud,
The FBI raided Cyberco’s offices later that year. What the FBI had uncovered was a massive fraud that far exceeded anything that White had imagined.
Cyberco had actually started as a legitimate business and Cyberco still had some real customers in 2002 when it lured Huntington into its web. However, by that time, Watson was resorting more and more to fraud to generate Cyberco’s revenues. Indeed, virtually all of its revenue was attributable to fraud when Cyberco finally collapsed in late 2004.
61
Watson’s scheme was as simple as it was brazen.
62
He sought out banks, leasing companies, and other similar institutions on the pretext that Cyberco needed more computer equipment for its rapidly growing global business. However, Cyberco never acquired any of the equipment for which it had received funding. Rather, Watson would represent that Teleservices was Cyberco’s source for the desired equipment and, as a consequence, the finance companies would forward the necessary funds to Teleservices on the mistaken belief that Teleservices had something to sell. Watson would then have Teleservices issue false invoices and other documents to evidence the supposed transaction. As for Cyberco, Watson packed its computer room with both real and fake servers. He then swapped serial numbers among those servers in order to deceive his victims whenever a collateral audit was attempted.
63
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Teleservices, of course, did not keep its ill-gotten gains. Rather, it funneled them back to Cyberco and Cyberco in turn used what it received: (1) to perpetuate the fraud by making payments on the many promissory notes and leases Cyberco had signed in connection with prior nonexistent purchases; and (2) to pay Cyberco’s other operating expenses, including the handsome salaries and expense accounts of Watson and his fellow cheats. Of course, Watson accomplished this by depositing the transfers from Teleservices into Cy-berco’s Huntington accounts and Huntington in turn was regularly sweeping those accounts and the re-advancing as part of the cash management service it provided to Cyberco. Consequently, millions and millions of dollars passed through Huntington even though Cyberco’s actual indebtedness to Huntington was considerably less.
64
Huntington was no less a victim of Watson’s schemes.
65
For example, Watson neglected to mention during the courtship that Cyberco’s prior bank had in fact asked it to leave. Moreover, all of the financial information Cyberco had been providing to it, including the accounts receivable reports, was false. Indeed, Watson duped both Grant Thornton and Huntington in connection with the April 2004 receivables audit by providing Grant Thornton with fake responses prepared by his cohorts.
66
It also turned out that Watson had a past. As already indicated, one of Kalb’s “deep dives” had been to verify Watson’s background. The report had come back clean but only because Watson had provided a false social security number. What Huntington discovered a few months later was that Watson was, among other things, (1) a former stockbroker who had been permanently blacklisted by the National Association of Securities Dealers; (2) someone who had previously confessed to a civil judgment for bank fraud in Michigan and an earlier fraud in California; and (3) a convicted felon who had actually served three years during the 1980s for a fraud-related crime. Moreover, it was Rodriguez, the region’s chief of security, who first discovered that Watson “was not a very trustworthy person.”
67
Remember, as part of his assignment to investigate Cyberco’s possible fraud, Rodriguez had visited the county court in April to examine its files. What he found was pending litigation against Cyberco that both revealed and documented Watson’s fraudulent past.
68
Rodriguez clearly understood the significance of his discovery, for he immediately informed the FBI about what he had
*786
learned.
69
Yet Rodriguez never provided this information to Kalb. Indeed, Kalb recalls Rodriguez as being reluctant to share any information with him when Kalb did make the effort to ask.
70
One, then, can only wonder how Kalb or, for that matter, anyone who was privy to Watson’s recent “clean” background check would have responded in April or any time afterwards had Rodriguez disclosed Watson’s true past. That Watson was an accomplished con man would presumably have been damning in and of itself. However, Rodriguez’s discovery, if it had been shared with Kalb, would have also established without any question that Watson had intentionally deceived Huntington only months before by providing a false social security number in connection with the background check. And with this revelation would presumably have also come the realization that Kalb’s instincts had been correct all along — that there was reason to doubt anything that Watson had been telling Huntington about Cyberco and, just as important, about Teleservices. Put simply, had Rodriguez not withheld from Kalb Watson’s fraudulent past, Kalb and others at Huntington would have undoubtedly concluded that absolutely nothing at Cyberco could be accepted at face value, including the increasingly suspicious story of who Teleservices was and why it was transferring huge amounts of money to Cyberco.
The Bankruptcy Proceedings
Creditors of Cyberco commenced an involuntary Chapter 7 proceeding against it shortly after the FBI’s raid and only days after a state court had ordered a receiver to take control of both entities. The receiver did not oppose the Cyberco petition. Moreover, the receiver himself filed a voluntary Chapter 7 petition on behalf of Teleservices a month later.
Trustee Meoli
71
has commenced this adversary proceeding on the theory that Huntington received millions of dollars in fraudulent transfers from Teleservices. Included are the nine Teleservices checks delivered directly to Huntington during the last half of 2004. Trustee asserts that these transfers, which total $7,395,283.04, were both actually and constructively fraudulent under Section 548. Trustee further contends that the much larger amounts that Teleservices was depositing into Cyberco’s Huntington accounts throughout the entire scam are both avoidable as fraudulent transfers to Cyberco and then recoverable from Huntington as a subsequent transferee under Section 550(a)(2). By Trustee’s current reckoning, these indirect transfers to Huntington total another $65,640,146.53.
72
DISCUSSION
Direct Transfers
— Trustee’s
Prima Facie Case
Section 548 of the Bankruptcy Code empowers the trustee to avoid transfers that have been fraudulently made and Section 550 in turn permits the trustee to recover the avoided transfer from the transferee
*787
when appropriate. Like its counterpart under similar state schemes, Section 548(a) provides that a transfer of the debtor’s property may be avoided if the debtor made it with the actual intent to hinder, delay, or defraud his creditors. 11 U.S.C. § 548 (a)(1)(A). That subsection further provides that a transfer of the debtor’s property may also be avoided if (1) it was made while the debtor was insolvent; and (2) the debtor received less than a reasonably equivalent value in exchange. 11 U.S.C. § 548 (a)(1)(B). Debtors who make fraudulent transfers of the latter type are said to have had a constructive intent to defraud their creditors.
This court reaffirms
73
that the nine checks that Teleservices delivered directly to Huntington between July and October, 2004, are all actually fraudulent transfers under Section 548(a)(1)(A). Granted, Tel-eservices had not legitimately come by any of what it then transferred. Teleservices, in reality, was nothing more than a corporate shell through which the monies fraudulently procured would be then funneled almost immediately to Cyberco or, in these nine instances, to Huntington, Cyberco’s creditor.
74
Teleservices had no officers or employees and its only assets were a few bank accounts.
Nonetheless, Teleservices was at all times a corporation recognized under Delaware law.
75
As such, Teleservices was capable of owning property, including money held on deposit with a bank. Nor does it make a difference that defrauded finance companies were the source of these deposits. Ownership might have been a question had Teleservices taken the money at gunpoint instead. However, in this instance all of the victims’ money had been willingly transferred to Teleservices, albeit under false pretenses. Consequently, Tel-eservices would have obtained under the law a sufficient interest in what it had stolen in order to have made a cognizable Section 548(a) transfer of its property when it then used the purloined funds to pay off the remainder of Cyberco’s debt to Huntington.
Cf. Kitchen v. Boyd (In re Newpower),
233 F.3d 922, 929 (6th Cir. 2000) (“[A]n individual commits the crime of false pretenses when he fraudulently convinces another to part with
both
possession of and title to property. In such a situation, the offender obtains voidable title to the property.”) (emphasis in original).
The court also finds that Teleser-vices intended at the very least to hinder
*788
or delay its own creditors when it made these direct transfers to Huntington. Tel-eservices was, of course, unusual because it had no creditors in the traditional sense. Nonetheless, each of its victims had a right to repayment that arose immediately upon being bilked. Moreover, Teleservices had no other source of revenue. Therefore, Teleservices’ decision to use the funds it had stolen to repay Cyberco’s indebtedness to Huntington would have without question hindered those claimants’ rights.
76
Direct Transfers
— Huntington’s
Section 54.8(c) Value Defense
Huntington has not seriously contested the fraudulent nature of Teleser-vices’ direct transfers to it. Huntington instead has focused on the affirmative defense that Section 548(c) provides.
Except to the extent that a transfer or obligation voidable under this section is voidable under section 544, 545, or 547 of this title, a transferee or obligee of such a transfer or obligation that takes for value and in good faith has a lien on or may retain any interest transferred or may enforce any obligation incurred, as the case may be, to the extent that such transferee or obligee gave value to the debtor in exchange for such transfer or obligation.
11 U.S.C. § 548 (c).
This court has already addressed whether Huntington had given Teleservices “value” within the meaning of this subsection in conjunction with Trustee’s prior motion for summary judgment.
77
Trustee had asserted in her motion that Huntington could not have given value to Teleservices in exchange for the direct transfers it had received from Teleservices because Teles-ervices had no lending relationship with Huntington. If anyone had received value, she argued, it was Cyberco.
“Value,” for purposes of Section 548, means:
[PJroperty, or satisfaction or securing of a present or antecedent debt of the debtor, but does not include an unperformed promise to furnish support to the debtor or to a relative of the debt- or....
11 U.S.C. § 548 (d)(2)(A) (emphasis added). On its face, Teleservices’ payment of a debt other than its own to Huntington does not seem like a way for Huntington to have given value to Teleservices in exchange. However, this court concluded that Teleservices would have also received value if, as Huntington was asserting, Tel-eservices was Cyberco’s alter ego.
78
In other words, if Huntington could establish that Teleservices, as Cyberco’s alter ego, should also be held accountable for Cyber-co’s obligations, then the paydowns by Tel-eservices to Huntington would have provided value to Teleservices as well through the reduction of this corresponding claim against it.
79
*789
Most, but not all, factors support the conclusion that Teleservices was the alter ego or an instrumentality of Cyberco. Again, Teleservices had no officers, directors, or employees and its only apparent assets were some bank accounts. Indeed, Teleservices was able to fulfill its part in Watson’s scheme only through Cyberco’s executives assuming fictitious names and then pretending to speak on Teleservices’ behalf. On the other hand, not all facts favor Huntington. For example, Teleservices’ affairs, as limited and as devious as they may have been, were for the most part distinct from those of Cyberco. This is not a situation where the affairs of Cyberco and Teleservices became so intertwined that it was impossible to distinguish one from the other. Indeed, the scam depended upon Teleservices being perceived as an unrelated vendor of computer equipment. Moreover, whatever Teleservices stole from its victims flowed, for the most part, in a one-way direction from its account to Cyberco’s account, never to return. It was not until the waning months of both Cyberco’s and Teleservices’ existence that Cyberco began to transfer some monies back to Teleservices’ account.
However, even if the court were to conclude that Teleservices was in fact Cy-berco’s alter ego, Michigan law is clear that the doctrine is to be applied only to avoid an injustice.
80
Unfortunately for Huntington, the doctrine’s application in this instance would in fact result in an injustice. Huntington’s problem is that Teleservices’ only source of revenue was the money it was grifting from the various finance companies through sales of nonexistent computer equipment. For Huntington, then, to use this theory to keep what had been stolen from another would not be just. It would be unjust. Therefore, Huntington’s application of the alter ego doctrine to establish value between Teleservices and it under Section 548(c) was suspect.
81
The court, though, granted Trustee’s motion for summary judgment only in part because there remained some tracing issues concerning the Section 548(c) value defense. The court, based upon the uncontested record at that time, was able to conclude that the first check that Huntington received directly from Teleservices was attributable entirely to monies stolen from finance companies. However, the court was unable to reach the same conclusion with respect to the remaining eight checks because either Cyberco or related entities had by then begun redepositing monies into Teleservices’ account. Consequently, there was at least a possibility that some of the amounts Huntington received through the remaining eight checks were traceable to a source other than the victimized finance companies.
82
*790
Both parties offered expert testimony concerning the tracing issue at the ensuing trial. Moreover, this court has already evaluated that testimony in conjunction with deciding Huntington’s motions for substantive consolidation which were tried at the same time. Its conclusion was that all of the amounts associated with the eight remaining checks were attributable to only monies that had been stolen from various equipment finance companies.
Cyberco,
431 B.R. at 434-35.
Therefore, for these reasons, the court now makes the final determination that Huntington’s alter ego argument must fail with respect to all nine of the checks it received from Teleservices because of the resulting injustice that would be wrought. Consequently, Huntington’s Section 548(c) defense to Trustee’s avoidance of the nine direct transfers as fraudulent under Section 548(a) must fail because the transfers received were not in exchange for value given to Teleservices.
83
Direct Transfers
— Huntington’s
Section 548(c) Good Faith Defense
The court is not required to make any further determination with respect to Huntington’s Section 548(c) defense because its two elements are in the disjunctive. Nonetheless, the court concludes that Huntington has also failed to establish its good faith regarding the receipt of the nine Teleservices checks. The court, though, will defer giving its reasons until later in this opinion when it also considers Huntington’s good faith under Section 550(b)(1).
84
Direct Transfers
— Huntington’s
Section 550(a)(1) Liability
Section 548 provides only for the avoidance of the targeted transfer and, in some situations, avoidance is enough.
Suhar v. Burns (In re Burns),
322 F.3d 421, 427-28 (6th Cir.2003). If, for example, the fraudulent transfer had been a mortgage, avoidance of the lien would be sufficient. If, though, the transfer had been jewelry, Section 550 complements the avoidance by also providing for the ordered return of the jewelry or, when appropriate, the payment of its value.
85
Section 550(b), like Section 548(c), provides an affirmative defense. However, that defense is not available to initial transferees and Huntington was clearly the initial transferee of the nine Teleservices checks.
Cf.
11 U.S.C. § 550 (b). Therefore, Huntington must account to Trustee for the $7,395,283.04 it received as a result of these now avoided transfers.
Indirect Transfers
— Cyberco
as a Necessary Party
The indirect transfers that Trustee also wishes to avoid and recover adds another $65,640,146.53 to her claim.
86
As
*791
just noted, Section 548 and Section 550 are separate Code provisions that provide different forms of relief. Indeed, the relief afforded by Section 550 is available only if the pertinent transfer is first avoided under Section 548 or one of the other avoidance sections it references.
87
Huntington focused upon this distinction in a prior motion for summary judgment. It argued that Trustee’s attempt to recover the indirect transfers to Huntington as a subsequent transferee under Section 550 was procedurally deficient because Trustee had failed first to avoid under Sections 548 or 544(b) the initial transfers from Teleservices to Cybereo. Moreover, Huntington contended that Trastee was no longer capable of avoiding these underlying transfers because the applicable statute of limitations under Section 546 had already run for bringing this separate action against Cybereo.
This court, though, did not grant Huntington’s motion.
88
It agreed with Huntington that the initial transfers from Teleser-vices to Cybereo had to be first avoided before any recovery could be had against it under Section 550(a). However, the court further determined that Trustee could accomplish that avoidance with Huntington as the named defendant as opposed to Cybereo. In other words, Huntington was just as capable as Cybereo in asserting under Section 548 that the transfers Cy-berco had received from Teleservices were not actually or constructively fraudulent.
89
Moreover, this court was satisfied that Trustee’s amended complaint was sufficiently pled to put Huntington on notice that she was seeking as relief not only a recovery from Huntington under Section 550 but also an avoidance of the underlying transfers from Teleservices to Cybereo under Sections 548(a) and 544(b).
Indirect Transfers
— Section
518(a) Avoidance of Underlying Transfers
Whether Teleservices had the requisite intent, either actual or constructive, under Section 548(a) was not specifically at issue in connection with this portion of the bifurcated trial concerning the indirect transfers. Therefore, a further evidentiary hearing may be required before this court can make final findings as to this aspect of Trustee’s indirect transfer claims against Huntington.
90
Nonetheless, it is fair to say at this point in time that the proofs already offered overwhelmingly support the conclusion that all of the underlying transfers by Teleservices to Cyberco’s
*792
Huntington accounts were made with both the actual and the constructive intent to defraud required under Section 548(a).
91
Indirect Transfers
— Section
511(b) Avoidance of Underlying Transfers
As with the direct transfers, Trustee has offered the alternative theory that the underlying transfers from Teleservices to Cyberco are avoidable under Section 544(b) and its incorporation of Michigan’s own fraudulent transfer laws. Although most of the indirect transfers that Trustee seeks to recover fall within the one year avoidance period then permitted by Section 548,
92
some do not.
93
Therefore, Trustee must rely on this alternative theory with respect to these few remaining transfers. Moreover, the court will not make a final determination as to whether these transfers are avoidable under this theory until that issue is properly before it at some later date. However, the court does note at this point that the requirements for avoiding fraudulent transfers under Michigan’s version of the Uniform Fraudulent Transfer Act
94
are similar to the requirements of Section 548(a). As such, the proofs already offered strongly suggest that the few transfers to Cyberco that Trustee will have to avoid under Section 544(b) were fraudulent as well.
95
Indirect Transfers
— Cyberco’s
Section 518(c) and MCL Section 566.38 Defenses
It does not appear that Section 548(c) is available to a subsequent transferee like Huntington when defending against a recovery under Section 550(a).
96
In any event, the proofs offered to date overwhelmingly suggest that Cyberco neither gave value in exchange nor was Cyberco in good faith with respect to the fraudulent transfers that Cyberco itself was receiving from Teleservices. The same is true with respect to the defense that would be afforded to Cyberco under Mioh. Comp. Laws § 566.38(1)
97
vis-a-vis the few indirect
*793
transfers that would have to be avoided under Section 544(b) and Michigan’s fraudulent transfer laws. Nonetheless, the court will not at this time make a final determination on these issues since they too were to be deferred to a later date under the order to bifurcate the trial.
Indirect Transfers
— Section
550(a) Recovery
— Initial
or Subsequent
Transferee
98
Trustee argued in opposition to Huntington’s unsuccessful motion for summary judgment that Huntington, not Cy-berco, was in fact the initial transferee of even the indirect transfers. She based her contention upon Huntington, as Cyberco’s depository bank, being the entity that actually received each wire transfer that Tel-eservices initiated. Of course, treating Huntington as the initial transferee would have eliminated its eligibility for the Section 550(b)(1) defense and would have brought Section 548(c) into play instead.
99
The court at this time reaffirms its rejection of this argument.
100
Suffice it to say here that as tempting as it may be to treat wire transfers and cheeks as the transfer being avoided, wire transfers and checks are simply devices to facilitate the actual transfer — that is, whatever the debtor desires the intended recipient to receive. Or, to put it differently, if, as clearly was the case, Teleservices intended to transfer value to Cyberco, it should make no difference under either Section 548 or Section 550 whether Teleservices fulfilled that intention by wire transfer, check, or bales of one dollar bills delivered in a dump truck. In every event, Cyberco, as opposed to the facilitating entities, should be treated as the initial recipient of the transfer to be avoided.
101
Indirect Transfers
— Tracing
Issues
Tracing of the indirect transfers is another issue not yet addressed. While Huntington concedes that whatever Teles-ervices transferred into Cyberco’s accounts was subject to setoff, Huntington does not agree that all such deposits were in fact then setoff. Huntington contends instead that at least some of these amounts were spent by Cyberco before any setoff took place.
102
As with other issues remaining to be tried, the court will defer decision on the tracing issue at this time. However, the
*794
court will note at this juncture that Trustee may not in the end have to trace these deposits because the deposits themselves may have constituted the actual transfers to Huntington. Consider a slightly different scenario of the initial transferee receiving the fraudulent transfer in cash and then depositing that cash with its bank. In concept, the deposit is a second transfer. That is, the initial transferee would have relinquished both possession and ownership of the cash to another party, albeit the other party here would also be bound with respect to that transfer to honor the terms of the agreement previously reached concerning the administration of such deposits.
If, though, deposited cash constitutes a second transfer, the analysis should be no different if the same result is accomplished through a check or a wire transfer. Consequently, it would certainly appear that the proper approach whenever checks or wire transfers are involved is to treat whoever is intended by the debtor to actually receive the value of whatever the debtor has to transfer as the initial transferee and to then treat the depositing bank as a subsequent transferee. The depositing bank in turn would presumably be protected in most, but not all instances, by the Section 550(b)(1) defense.
103
However, the court, in making this observation, has tread into a very confusing area concerning the interpretation of Section 550(a).
104
Moreover, neither Trustee nor Huntington has had an opportunity to brief this particular issue. Therefore, the court leaves the matter open for further consideration whenever tracing is formally presented for final disposition by this court.
Indirect Transfers
— Huntington’s
Section 550(b)(1) Value Defense
As already discussed, Section 550(b) shields subsequent recipients of an avoided fraudulent transfer in a manner that is similar to the protection Section 548(c) affords to the initial transferee of the same avoided transfer. Specifically, Section 550(b)(1) offers an absolute defense to any subsequent transferee provided he took the transfer (1) for value, including satisfaction of antecedent debt; (2) in good faith; and (3) without knowledge of the voidability of the transfer avoided. 11 U.S.C. § 550 (b)(1).
105
With respect to value, the court finds that Huntington did give value in exchange for whatever setoffs it took against the deposits in Cyberco’s accounts. Granted, the value given in each instance was the reduction of antecedent debt owed to
*795
Huntington by Cyberco, not Teleservices. However, unlike the comparable definition given for “value” in Section 548(d)(2)(A), Section 550(b)(1) “value” is indifferent as to the recipient of the value. Indeed, the Section 550(b)(1) defense would only rarely be available if value had to be exchanged with the debtor given that the subsequent transfer likely would not have involved him.
Bonded Fin. Servs., Inc. v. European Am. Bank,
838 F.2d 890, 897 (7th Cir. 1988); 5
Collier on Bankruptcy
¶ 550.03[1] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. rev. 2010).
Direct and Indirect Transfers
— The
Section 518(c) and Section 550(b) Good Faith Defense
Most courts begin their discussion concerning Section 548(c) or Section 550(b) good faith with the observation that it is a vague concept that defies precise definition.
106
Almost as many courts have also said that good faith must be decided on a case-by-case basis.
107
Nonetheless, the clear trend since the Code’s adoption has been towards an objective interpretation of good faith.
108
M & L Business
Machine
109
is illustrative:
*796
[G]ood faith under § 548(c) should be measured objectively and that “if the circumstances would place a reasonable person on inquiry of a debtor’s fraudulent purpose, and a
diligent
inquiry would have discovered the fraudulent purpose, then the transfer is fraudulent.”
84 F.3d at 1338 (citations omitted) (emphasis in original).
110
An objective approach, though, draws attention away from what has traditionally distinguished good faith from bad faith. For example, in
Bayou Group,
111
the court recognized that good faith has customarily involved a moral judgment. “In common parlance,”
Bayou Group
observed “ ‘good faith’ ... denotes a conformity with accepted standards of integrity, trust and good conduct....” 396 B.R. at 847. On
*797
the other hand, it noted that bad faith implies conduct that typically would be described as “wrongful, improper or legally or ethically deplorable.... ”
Id.
The court also offered “dishonesty,” “deceit,” and “intent to harm” as additional terms an ordinary person might use to describe bad faith.
Id.
But with this said,
Bayou Group
declared that Section 548(c) good faith is “somewhat different” from a layman’s understanding. 896 B.R. at 847. According to it, Section 548(c) “is not a punitive provision designed to punish the transferee, but is instead an equitable provision that places the transferee in the same position as other similarly situated creditors who did not receive fraudulent conveyances.”
Id.
at 827.
Bayou Group
reasoned, then, that a transferee’s lack of Section 548(c) good faith “does not necessarily entail a finding ... that he was guilty of any sort of
mala fides
or otherwise deserving of opprobrium.”
Id.
at 848. Rather, the test of a transferee’s Section 548(c) good faith is to be an objective one based upon inquiry notice.
Thus, it is important for the trier of fact to understand that the test for good faith under Section 548(c) is not whether the defendant was guilty of any sort of bad faith in requesting and receiving the transfer. The test is whether the defendant requested redemption after learning of a “red flag” which, under an “objective” standard, should have put the defendant on “inquiry notice” of some infirmity in Bayou or the integrity of its management.
Bayou Group,
396 B.R. at 848.
112
This same reasoning — i.e., that Section 548(c) is “somewhat different”
113
— underlies the many other recent decisions that have strayed from traditional notions of good faith in interpreting Section 548(c) and the related Section 550(b).
114
*798
Convention, then, would have this court also abandon familiar good faith concepts like “honesty” and “integrity”
115
for the new, morally indifferent standard that
Bayou Group
and other courts have embraced. However, the court submits that this objective approach is not well grounded in the law. Rather, its current popularity reflects only the inertia of a seminal
case
— In
re Agricultural Research
116
— that has been cited again and again without the benefit of reflection.
117
What is lacking in
*799
the recent case law is any critical analysis of
Agricultural Research,
the Code, or the former Act. Also absent is consideration of three important but uniformly ignored Supreme Court
cases
— Coder,
Van Ider-stine,
and
Dean.
118
Agricultural Research
Bayou Group
and every other court that has recognized the objective approach to establishing Section 548(c) or Section 550(b) good faith cite
M & L Business Machine,
119
Sherman,
120
or
Agricultural Research
121
as controlling.
M & L Business Machine
and
Sherman
in turn incorporate this quote from
Agricultural Research
into their own reasons for adopting the approach:
[Cjourts look to what the transferee objectively ‘knew or should have known’ in questions of good faith, rather than examining what the transferee actually knew from a subjective standpoint.
Agri. Research,
916 F.2d at 535-36.
122
Therefore, it is fair to treat
Agricultural Research
as the authoritative source for this relatively recent departure from traditional notions of good faith.
123
However,
*800
Agricultural Research
itself offers just four short paragraphs as explanation. Indeed, neither Section 548(c) nor Section 550(b) was even at issue. Rather, the court there was analyzing Hawaii’s own fraudulent transfer laws and Section 548 came up only by analogy.
As for the limited analysis
Agricultural Research
does provide, one would have expected references to recent case law or treatises calling for a break with tradition. But there are none. Rather, the two “pronouncements”
Agricultural Research
relied upon come from Supreme Court cases decided way back in the
1800s
— Shauer
v. Alterton,
151 U.S. 607 , 14 S.Ct. 442 , 38 L.Ed. 286 (1894) and
Harrell v. Beall,
84 U.S. (17 Wall) 590, 21 L.Ed. 692 (1873). In particular,
Agricultural Research
lifted this quote from
Shauer :
“[A transferee’s] knowledge or actual notice of circumstances sufficient to put him, as a prudent man, upon inquiry as to whether his brother intended to delay or defraud his creditors ... should be deemed to have notice ... as would invalidate the sale to him.”
Agri. Research,
916 F.2d at 535 (citing
Shauer,
151 U.S. at 621 , 14 S.Ct. at 446 ).
Shauer ,
though, was no more a bankruptcy case than was
Agricultural Research.
Rather, the Court in that instance was reviewing a fraudulent conveyance under the laws of what was then the Dakota territory.
Granted, the other case cited,
Harrell v. Beall,
did involve fraud in the bankruptcy context. But the entire opinion in
Harrell
is barely more than a page. Moreover,
Harrell
speaks only of the debtor’s “barefaced fraud,” the transferee’s “intentionally shut ... eyes to the truth,” and the absence of even the “slightest effort” by the transferee to make an inquiry. 84 U.S. (17 Wall) at 591. As such, it is difficult to characterize
Harrell
as having established a standard where the transferee’s good faith is to be tested by the inquiries of a reasonably prudent man as opposed to the transferee’s own honesty and integrity. To the contrary,
Harrell
seems to be more a harbinger of what is now known as “willful blindness” — i.e., inexcusable avoidance of the obvious.
124
Coder, Van Iderstine, and Dean
Agricultural Research’s
reliance upon
Shauer
and
Harrell
is also suspect because the Supreme Court issued three later opinions that offer considerably more insight as to the role good faith is to play in evaluating a bankruptcy trustee’s right to recover transfers once they have been avoided. Each involved allegedly fraudulent transfers made under Section 67e of the former Bankruptcy Act.
125
The first is
Coder v. Arts,
213 U.S. 223 , 29 S.Ct. 436 , 53 L.Ed. 772 (1909). Arts, a banker, was owed a considerable amount of money by the debtor. The debtor in turn granted Arts a mortgage in a large tract of land approximately three months before he was adjudicated a bankrupt. Coder, the bankruptcy trustee, later challenged the mortgage as both a preference and a fraudulent transfer.
The second,
Van Iderstine v. Nat’l Disc. Co.,
227 U.S. 575 , 33 S.Ct. 343 , 57 L.Ed. 652 (1913), also involved a transfer claimed to be both a preference and a
*801
fraudulent conveyance. In that instance, National Discount had received various accounts from the debtor as collateral for an advance made only days before the bankruptcy petition. The trustee, Van Iderstine, asserted that the debtor had intended either to prefer or to defraud his creditors because the proceeds had been used to pay a bank note that the owner’s son-in-law had endorsed.
The final case is
Dean v. Davis,
242 U.S. 438 , 37 S.Ct. 130 , 61 L.Ed. 419 (1917). As in
Coder ,
a debtor farmer owed money to the bank. However, in this case, the debt- or’s brother-in-law, Dean, rescued him with a loan that debtor secured with both his farm and a country store that he also owned. An involuntary petition was then filed and the trustee ultimately avoided Dean’s mortgage as a preference. However, the Court chose instead to consider Dean’s appeal on the alternative theory that he had received a fraudulent transfer.
These three cases are instructive because they illustrate during the early development of the bankruptcy laws the fundamental difference between preferences and fraudulent transfers. Indeed, a considerable portion of
Coder
is directed to explaining that difference. It begins with these general observations:
A consideration of the provisions of the bankruptcy law as to preferences and conveyances shows that there is a wide difference between the two, notwithstanding they are sometimes spoken of in such a way as to confuse the one with the other. A preference, if it have the effect prescribed in § 60, enabling one creditor to obtain a greater portion of the estate than others of the same class, is not necessarily fraudulent.... [sic]
In Re Maher,
144 F. 503 -505, it was well said by the district court of Massachusetts:
Tn a preferential transfer the fraud is constructive or technical, consisting in the infraction of that rule of equal distribution among all creditors which it is the policy of the law to enforce when all cannot be fully paid. In a fraudulent transfer the fraud is actual, — the bankrupt has secured an advantage for himself out of what in law should belong to his creditors, and not to him.’
Coder,
213 U.S. at 241 , 29 S.Ct. at 443 .
Coder
then observed that the notion of the debtor intending to hinder, delay, or defraud his creditors, which distinguished a fraudulent conveyance from a preference, had to be actual. Moreover, it noted that the concept was not new.
What is meant when it is required that such conveyances, in order to be set aside, shall be made with the intent on the bankrupt’s part to hinder, delay, or defraud creditors? This form of expression is familiar to the law of fraudulent conveyances, and was used at the common law, and in the statute of Elizabeth, and has always been held to require, in order to invalidate a conveyance, that there shall be actual fraud; and it makes no difference that the conveyance was made upon a valuable consideration, if made for the purpose of hindering, delaying, or defrauding creditors. The question of fraud depends upon the motive. The mere fact that one creditor was preferred over another, or that the conveyance might have the effect to secure one creditor and deprive others of the means of obtaining payment, was not sufficient to avoid a conveyance; but it was uniformly recognized that, acting in good faith, a debtor might thus prefer one or more creditors.
Coder,
213 U.S. at 242 , 29 S.Ct. at 443-44 (citations omitted).
Van Iderstine
also recognized the difference. It said:
*802
The statute recognizes the difference between the intent to defraud and the intent to prefer, and also the difference between a fraudulent and a preferential conveyance. One is inherently and always vicious; the other innocent and valid, except when made in violation of the express provisions of a statute. One is
malum per se
and the other
malum prohibitum,
— and then only to the extent that it is forbidden. A fraudulent conveyance is void regardless of its date; a preference is valid unless made within the prohibited period. It is therefore not in itself unlawful to prefer, nor fraudulent for one, though insolvent, to borrow in order to use the money in making a preference.
227 U.S. at 582 , 33 S.Ct. at 345 .
126
There was, then, an early recognition in both the bankruptcy laws and by the Court that fraudulent transfers should be recovered because the debtor had engaged in a wrongful act whereas preferences were to be recovered simply as a matter of statutory policy — in this case, the legislative desire to treat similarly situated creditors equally. Moreover, this same distinction is evident in the modern Code. On the one hand, Section 548(a)(1)(A) renders voidable any transfer made by the debtor “with actual intent to hinder, delay, or defraud” a creditor. It makes no difference whether value is exchanged or whether the debt- or is insolvent. The debtor’s intent alone makes the act
“malum per se.” Van Iderstine,
227 U.S. at 582 , 33 S.Ct. at 345 .
On the other hand, the debtor’s intent is completely irrelevant to whether a transfer is avoided under Section 547(b) as a preference. More important to that consideration is the question of whether the creditor receiving the transfer gained an advantage over others.
See, e.g.,
11 U.S.C. § 547 (b)(5). Indeed, the only consideration given to the debtor himself is whether he was insolvent or not at the time the transfer was made. 11 U.S.C. § 547 (b)(3).
127
However, it is the transferee, not the debtor, who is ultimately the target whenever a trustee in fact seeks the recovery of either a fraudulent or a preferential transfer. Consequently, the focus must inevitably turn upon the circumstances under which the recipient of the avoided transfer should return it. What
Coder, Van Iderstine,
and
Dean
establish is that when an actually fraudulent transfer is at issue, the
*803
recipient’s accountability to the estate is to be gauged based upon the same notion that a transfer of this type is
malum per se.
For example, in
Van Iderstine ,
the Court concluded that National Discount could retain its interest in the assigned accounts because it did not have the requisite awareness of the debtor’s fraudulent intent.
The transfer, therefore, was not a preference to the Discount Company, and could not be set aside without proof that it knew that Fellerman [the debtor] not only intended to pay some of his creditors, but to defraud others.
Van Iderstine,
227 U.S. at 583 , 33 S.Ct. at 345 .
128
But in
Dean ,
the Court affirmed the lower court’s avoidance of the mortgage granted because the debtor in that instance had intended to defraud his creditors and Dean, the recipient, had been a knowing participant. Indeed,
Dean
equated the absence of such knowledge with good faith.
The lower courts were justified in concluding that he intended the necessary consequences of his act; that he willingly sacrificed his property and his other creditors to avert a threatened criminal prosecution; and that Dean, who, knowing the facts, cooperated in the bankrupt’s fraudulent purpose, lacked the saving good faith.
Dean,
242 U.S. at 445 , 37 S.Ct. at 132 (emphasis added).
In sum, then, these three Supreme Court decisions laid out a fundamental distinction between the recovery of actually fraudulent transfers on the one hand and the recovering of other avoidable transfers on the other hand. The former is
malum per se;
the latter only
malum prohibitum.
Moreover, in drawing this distinction, the Court recognized that the transferee’s good faith — i.e., his own behavior regarding the fraud being perpetrated — would be dispositive of whether he would have to return a transfer by the debtor that had been fraudulently intended.
Or, to put it differently, these three cases all stand for the proposition that the
malum per se/malum prohibitum
dichotomy that distinguishes an actually fraudulent transfer from one that is merely preferential carries over to the recipient of the transfer as well. Consequently, the estate’s recovery of a preferential transfer has no moral undertones — whether the transferee must return the property received is simply a function of whatever Congress has decided is appropriate. However, when an inherently vicious act like an actually fraudulent transfer is involved
(cf. Van Iderstine,
227 U.S. at 582 , 33 S.Ct. at 345 ), then whether the recipient knew of the fraud or not becomes crucial, for that knowledge reflects his own honesty and integrity — i.e., his good faith.
Good Faith Under Former Section 67
Coder, Van Iderstine,
and
Dean
all interpreted an early version of former Section 67. At that time, the Bankruptcy Act did not include what is commonly known today as a “constructively” fraudulent transfer — i.e., a transfer that can be avoided without a showing of actual intent, provided the transfer was made while the debtor was insolvent and without reasonable consideration being received in ex
*804
change.
Cf.
11 U.S.C. § 548 (a)(1)(B). Rather, Section 67 at that time required the trustee to establish in all instances that the transfer was made “with the intent and purpose on his part to hinder, delay, or defraud his creditors.” Bankruptcy Act 1898, § 67e. In turn, the same subsection excepted from recovery of an actually fraudulent transfer “purchasers in good faith and for a present fair consideration.”
129
It is easy, then, to see in this early effort to codify the bankruptcy laws the same notion of
malum per se
that the Court discerned in
Coder, Van Iderstine,
and
Dean .
The recipient of an actually fraudulent transfer had nothing to fear provided he had paid fair consideration and he had taken in good faith. If, though, he had taken with knowledge of the debtor’s intent to defraud his creditors, then it made no difference what he had paid, for he was just as culpable as the debtor himself. Or, as the Court concluded in
Dean ,
he would have “lacked the saving good faith.”
130
Therefore, not only would a transferee taking in bad faith have to return the fraudulently transferred property, he would also forfeit the consideration he had paid.
131
As stated in
Coder :
[I]t makes no difference that the conveyance was made upon a valuable consideration, if made for the purpose of hindering, delaying, or defrauding creditors. The question of fraud depends upon motive.
213 U.S. at 242 , 29 S.Ct. at 443-44 .
However, the 1938 Chandler Act, among many other things, amended former Section 67e (which then became Section 67d) to add constructive fraud as an alternative means for avoiding transfers under that section.
132
It also overhauled the corresponding defenses. The revised provision continued to protect a good faith purchaser who had paid fair consideration, albeit “bona fide” and “present fair equivalent value” replaced the former terms. Chandler Act 1938 at § 67d(6). More significant, though, was the addition of a new defense for the transferee who had paid something short of the property’s fair equivalent value but who was nonetheless in good faith. What is interesting is that Congress did not use “good faith” to describe this second requirement. It chose the absence of “actual fraudulent intent” instead. M
133
The question, of course, is why?
*805
This court submits that it was the addition of constructive fraud as an alternative to actual fraud that prompted the change. As already noted, only actual fraudulent transfers were avoidable under former Section 67e prior to the Chandler Act. Therefore, recovering a fraudulent transfer was a relatively straight forward issue. Either the transferee was aware of the debtor’s fraud and, as a result, took in bad faith, or he was not aware of the fraud, and took in good faith. If it also happened that the bad faith transferee had given consideration as well, that was just too bad. The law had no sympathy for conduct that was
malum per se.
A constructively fraudulent transfer, though, is not
malum per se
because, by definition, it does not require the debtor to have engaged in what
Van Iderstine
early on described as inherently vicious behavior. 227 U.S. at 582 , 33 S.Ct. at 345 . Indeed, a constructively fraudulent transfer involves no ill will on the part of the debtor. All that is required is the debtor’s insolvency and an absence of reasonably equivalent consideration in exchange. Such a transfer, then, is more akin to a preference, which, again, is
malum prohi-bitum.
In other words, constructively fraudulent transfers, like preferences, are not avoidable because they are inherently bad. Rather, they are avoidable only because Congress has prohibited them in order to accomplish a fairer distribution of the debtor’s assets.
134
However, the morally neutral character of this new avoidance power created a problem whenever the consideration paid by the transferee fell short of a reasonably equivalent amount. While a transferee with knowledge of an actually fraudulent transfer might not deserve credit for whatever he had paid to the debtor as part of that fraud, it did not follow that the recipient of a constructively fraudulent transfer should likewise forfeit whatever he had given in exchange to the debtor. Therefore, at the same time Congress expanded the trustee’s avoidance powers to include constructively fraudulent transfers it added the proviso that a recipient of such a transfer who gave less than fair consideration would nonetheless receive credit for that consideration provided that the trans
*806
feree himself was “without actual fraudulent intent.”
135
In other words, if the avoided transfer was actually fraudulent (i.e.,
malum per
se) and the transferee was aware of its fraudulent purpose, then it continued to make no difference whether the recipient paid all or a portion of the property’s fair value in exchange. It was forfeited.
136
However, if the transferee was not himself tainted with dishonesty— which might be the case if the debtor’s own fraudulent intent was actual but would always be the case if the debtor’s fraudulent intent was only constructive — then the transferee would be protected to the extent of the consideration paid.
Section 5Jp8(c) Good Faith
No further changes were made to the two separate Section 67d defenses until Congress replaced the former Act altogether with the Bankruptcy Code. Current Section 548(c) is different. For example, it no longer includes a provision for transferees who paid a “present fair equivalent value” and another provision for purchasers who had given “consideration less than fair.” Rather, Section 548(c) combines the two into the single concept of “value.” Similarly, Section 548(c) has eliminated the requirements of “bona fide purchaser” and “without actual fraudulent intent” that had also appeared in former Section 67d, replacing them instead with “good faith” once again.
However, apart from such streamlining, Section 548(c) affords the same protections as its predecessor. For instance, it continues to assure recipients of constructively fraudulent transfers that they will be credited for whatever consideration may have passed in exchange. Conversely, Section 548(c) includes the same risk of forfeiture in the event the transferee took in bad faith. In short, the
malum per se/malwm prohibitum
distinction embodied in former Section 67d(6) continues in Section 548(c).
These last observations, though, assume that Congress, in enacting Section 548(c), intended good faith to still have the same meaning as it did under the former Act. Such an assumption certainly seems warranted. After all, Section 548(c) is not
tabula rasa.
It instead finds roots not only in former Section 67e but also in the early Supreme Court decisions of
Coder, Van Iderstine,
and
Dean .
Moreover, that same Supreme Court now instructs the lower courts again and again to interpret the current Code in a manner that is consistent with prior bankruptcy practice unless Congress has expressly indicated a different intent.
137
*807
Yet
Bayou Group
and other recent decisions claim that Section 548(c) now reflects a modern approach that replaces the traditional notions of honesty and integrity with a new standard involving the objective evaluation of imposed duties of reasonable inquiry. 396 B.R. at 847-48. It is appropriate, then, to look closer at the avoidance powers now granted under the Code to see whether Congress in fact has manifested such an intent. Otherwise, justification for taking this “somewhat different”
138
approach is lacking.
Actually Fraudulent Transfers, Constructively Fratidulent Transfers, and Section 5Jp7 Preferences
Comparing Section 548(c) with its counterpart, Section 547(c), provides insight. As the Court observed in
Van Iderstine ,
preferences are only
malum prohibitum.
227 U.S. at 582 , 33 S.Ct. at 345 . Consequently, no moral agenda drives the rationale for recovering a preference. Rather, the requirements for recovery simply reflect whatever else Congress intended to accomplish through Section 547’s enactment.
It should come as no surprise, then, that the Section 547(c) defenses give scant attention to the recipient’s good faith.
139
After all, the underlying purpose of a preferential recovery is to ensure a more equitable distribution. Consequently, preference law is indifferent to whether the recipient of the preference was aware or not of the inequity created when the preference was made. The value exchanged, though — whether contemporaneous, in the ordinary course, or in the future — is critical.
Consider, now, a constructively fraudulent transfer. It too is
malum prohibitum
— i.e., the debtor’s intent is just as irrelevant in determining whether a constructively fraudulent transfer is avoided as it is in determining whether a preferential transfer should be avoided. Consequently, it follows that the recipient’s awareness of the debtor’s intent should also be irrelevant whenever avoidance is sought under this theory.
Conversely, whether the recipient of a constructively fraudulent transfer gave value should be very relevant, for the underlying purpose of recovering a constructively fraudulent transfer is also to accomplish a more equitable distribution among creditors.
140
Indeed, given the similarities between preferences and constructively fraudulent transfers, the recipient of a constructively fraudulent transfer who gave value should be no less entitled to an offset than should the recipient of a preferential transfer who gave value. The difference between the two defenses lies only in the nature of the value recognized, with Section 548(a)(1)(B) recognizing the satisfac
*808
tion of antecedent debt as well.
Cf.
11 U.S.C. § 548 (d)(2)(A).
However, while a court will be indifferent to the debtor’s intent when only a constructively fraudulent transfer is involved, that is clearly not the case when the debtor is accused under Section 548(a)(1)(A) of actual fraud vis-a-vis his creditors. Indeed, as
Dean
points out, what otherwise might be subject to avoidance as a preference (and, by analogy, a constructively fraudulent transfer) could also be subject to avoidance as an actually fraudulent transfer if the debtor had the requisite fraudulent intent.
141
Adding consideration of the debtor’s intent, though, also results in the focus under Section 548(c) shifting away from value exchanged and more towards the recipient’s own awareness of the fraud being perpetrated — i.e., the recipient’s good faith. If the recipient was aware of the fraud, his bad faith would result in not only the return of the property received, but also the forfeiture of any consideration paid. However, if he was in good faith, then he will be protected from the trustee’s avoidance powers under both Sections 548(a)(1)(A) and (B) to the extent value was exchanged. But even then the recipient might still be vulnerable to the transfer’s avoidance as a preference if (1) it was made within ninety days; and (2) the value exchanged did not fall within the more restrictive provisions of Section 547(c).
See
11 U.S.C. § 548 (c) (“Except to the extent that a transfer ... voidable under this section is voidable under section 544, 545, or 547....”).
In summary, Sections 548(c) and 547(c) still reflect the same
malum per se/malum prohibitum
dichotomy that the Supreme Court long ago observed in
Coder, Van Idersüne,
and
Dean .
The recipient’s good faith is irrelevant when the avoidance is based upon preferential treatment or constructive fraud. If, though, the debtor intended to actually defraud his creditors in making that transfer, then it is the recipient’s own honesty and integrity — i.e., his good or bad faith — that will determine how he will fare with the estate.
Unauthorized Postpetition Transfers and Section 54.9(c) Good Faith
Section 549(c) is equally instructive, for, unlike Section 547(c), the defense it provides does require the transferee’s good faith. Courts often comment that good faith appears throughout the Code in many different contexts; as such, no precise meaning is possible.
142
Nonetheless, the presumption remains that a word or phrase that appears more than once in a statute is to have the same meaning.
143
Therefore, absent compelling evidence to the contrary, one would expect that Section 548(c) good faith and Section 549(c) good faith should have the same meaning, no matter how imprecise, given that the
*809
two subsections are both designed to place limits upon the trustee’s avoidance powers.
Section 549, of course, permits the avoidance of certain postpetition transfers. Like a preference and a constructively fraudulent transfer, avoiding a postpetition transfer is morally neutral. All that is relevant is (1) the time of the transfer relative to the petition date; and (2) whether the transfer was authorized or not. A classic example of an avoidable Section 549 transfer is the debtor’s postpe-tition gift of a valuable painting notwithstanding his duty to turn it over to the estate.
144
What is immediately striking about Section 549(c) is that it apparently protects only those transferees who received a post-petition transfer of real property.
The trustee may not avoid under subsection (a) of this section a transfer of an interest in real property to a good faith purchaser without knowledge of the commencement of the case and for present fair equivalent value....
11 U.S.C. § 549 (c).
145
The relative who received the painting would have no defense regardless of whether he was aware of the debtor’s bankruptcy. Nor would it make any difference whether the relative had given something to the debtor in exchange. The painting would still have to be returned and no credit would be given.
146
Perhaps this is harsh. However, it is consistent with the notion that the recovery of transfers that are only
malum prohibitum
is left entirely to legislative discretion.
But Section 549(c) is just as remarkable because of what it does require in order for the transferee of the real property to prevail. As might be expected, Section 549(c) requires the transferee to have given value — i.e., that he be a purchaser— just as preferences and constructively fraudulent transfers, which are also
ma-lum prohibitum,
require the exchange of value for a successful defense. Section 549(c), though, also requires the purchaser to be in good faith, where, as also just shown, it is only a factor under Section 548(c) when the transfer is
malum per se
— i.e., when the debtor actually intended to defraud his creditors — and it is for all practical purposes no factor at all under Section 547(c).
147
However, even more surprising is that Section 549(c) adds yet a third requirement — that the transferee must have also taken “without knowledge of the commencement of the case.” 11 U.S.C. § 549 (c).
What, then, is meant by good faith under Section 549(c) when that subsection, unlike Section 548(c), addresses the transferee’s knowledge as a separate element of the defense? As with the rest of the Code, Section 549 provides no definition of good faith. However, the additional require
*810
ment that the transferee also have no knowledge of the case’s commencement narrows the possibilities considerably. One possibility would be to focus only upon the transferee’s awareness of whether the transfer received was authorized or not. For example, if the transferee knew, or even suspected, that the debtor was in bankruptcy when the transfer was made, then he, under this definition, would be in bad faith. Of course, the problem with this approach is that Section 549(c) already requires the transferee to be ignorant of the bankruptcy’s commencement. It would indeed be a rare circumstance where the transferee would not be aware of the debtor’s case yet still be cognizant of the transfer violating bankruptcy law.
A more sensible approach is to simply give Section 549(c) good faith the same meaning as it has for Section 548(c). That is, a transferee will be in bad faith under either Section 548(c) or Section 549(c) if, in connection with receiving the transfer, he was aware that the debtor’s purpose was all along to hinder, delay, or defraud his creditors. As already discussed, an unauthorized postpetition transfer, like a preference or a constructively fraudulent transfer, is
malum prohibitum,
not
ma-lum per se.
However, constructively fraudulent transfers, or even preferences,
148
are capable of being actually fraudulent and, therefore,
malum per se,
if the debtor actually intended the transfer to be a fraud upon his creditors as well. Moreover, should the challenged transfer have this additional element, then the transferee’s own ignorance of that fraudulent intent — i.e., his good faith — predominates any further consideration of his accountability to the estate for what had been transferred.
The obvious question, then, is: What makes voidable postpetition transfers any different? After all, the Code makes no distinction between pre- and postpetition transfers when the honesty and integrity being tested is not the recipient’s, but the debtor’s. Specifically, Section 727(a)(2) not only denies the discharge of a debtor who defrauds his creditors through prepetition transfers of his assets; it also denies the debtor his discharge when such transfers occur postpetition. 11 U.S.C. § 727 (a)(2)(A) and (B). Put simply, the Code is indifferent to when fraud occurs. It is wrong no matter when it arises and no matter who is involved. Moreover, the Code is even handed in its punishment of the same. Debtors lose their discharge regardless of whether their petitions precede or follow their fraud. It is just as true that prepetition recipients of such transfers who are aware of the fraud — i.e., those who are in bad faith — forfeit under Section 548(c). Does it not follow, then, that recipients of just as fraudulent post-petition transfers should not forfeit as well under the same good faith requirement of Section 549(c)?
In sum, this court concludes that the same
malum per se/malum prohibi-tum
dichotomy that the Supreme Court recognized many years ago in
Coder, Van Iderstine,
and
Dean
and that is clearly evident in former Section 67 continues to manifest itself in the defenses afforded to the recipients of the various pre- and post-petition transfers now avoidable under the Code. A transferee’s good faith — i.e., his honesty and integrity vis-a-vis the transfer made — is not relevant so long as the only purpose served by avoiding the transfer is to ensure equality of distribution. It makes no difference whether the transfer
*811
avoided was a preference, a constructively fraudulent transfer, or an unauthorized postpetition transfer. However, if it was the debtor’s fraud that motivated the transfer, whether pre- or postpetition, then its inherent viciousness, as the Court in
Van Iderstine
put it, is just as much a factor today as it was then. Therefore, in these instances, the recipient’s own honesty and integrity in accepting that transfer — i.e., his good faith — must be put to the test.
Section 550(b) Good Faith
Section 550 incorporates into a single section the remedial relief that had been provided separately in former Sections 60 and 67. Nonetheless, there remains a clear relationship between that section and the many avoidance powers it now supports. Courts often say that the initial recipient of an avoided transfer is strictly liable for the transfer made given that the protections afforded by Section 550(b) are not available to him.
149
Yet Sections 547, 548, and 549 each offers to the initial transferee its own defense that may well affect any later recovery under Section 550. Or, to put it differently, a recovery under Section 550(a) is possible only “to the extent that a transfer is [first] avoided under section ... 547, 548, 540.... ” (emphasis added). It is better, then, to view the defense that Section 550(b) itself provides to subsequent recipients of all transfers, no matter how avoided, as simply a one-size-fits-all substitution for what the former Act had previously provided through the individual avoidance sections themselves.
The court makes this observation because good faith also appears as a requirement for subsequent transfers under both subsections (1) and (2) of Section 550(b)
150
and for any transfer under subsection (e).
151
Again, the rules of statutory construction presume that when a term like good faith appears more than once in a statute, it is to have the same meaning throughout.
152
Therefore, while giving good faith definition is a challenge, it is still fair to say that Congress had at least the same concept in mind when it used that term repeatedly in Section 550.
153
It is also appropriate to consider whether Section 550 good faith is the equivalent of the good faith required under Sections 548(c) and 549(c) given that these subsections also relate to the estate’s recovery of an avoided transfer vis-a-vis the transfer’s initial recipient.
With this in mind, the court submits that the same notions of honesty and integrity underlying Section 548(c) and 549(c) good faith underlies Section 550 good faith. Consider Section 550 itself. As a general proposition, the subsequent
*812
transferee is entitled to a complete defense only if he also received the transfer for value and without knowledge of the transfer’s avoidability. Good faith is simply not enough. 11 U.S.C. § 550 (b)(1). But good faith alone would be sufficient if the transferee had taken from someone other than the debtor and that other person (1) had also taken in good faith; and (2) had complied as well with the other two Section 550(b)(1) requirements. 11 U.S.C. § 550 (b)(2). In other words, so long as someone in the chain of title had all three of these attributes, all that is required of any person thereafter is his good faith. Similarly, Section 550(e) indicates that value and knowledge of avoidability are irrelevant with respect to any transferee, including even an initial transferee, with respect to improvements to the property transferred. All that is required of the transferee in that circumstance is, again, that he be in good faith.
Logic, then, certainly leads to the conclusion that good faith under Section 550 means something different from both taking for value and, more importantly, taking without knowledge. Indeed, if one compares this subsection with the specific defenses offered to initial transferees under Sections 547(c), 548(c), and 549(c), Section 550(b)(1) most resembles Section 549(c), since that subsection also requires value, good faith, and lack of knowledge. But with that comparison must also come the recognition that the same
malum per se/malum prohibitum
distinction made in
Coder, Van Iderstine,
and
Dean
is also at play here. In other words, knowledge of the avoidability of the transfer under Section 550(b) is just another criterium established by Congress to distinguish when a transfer or its equivalent is to be returned to the estate under Section 550. There is no more moral connotation to it here than there is to the recipient of a postpetition transfer having knowledge (or not) of the debtor’s petition under Section 549(c) or the recipient of a preference or constructively fraudulent transfer giving value (or not) under Sections 547(c) or 548(c).
154
On the other hand, the inherent viciousness that
Van Iderstine
associated with a debtor’s actually fraudulent transfer overrides consideration of all else, thereby leaving ANY recipient who is aware of the debtor’s fraud ineligible for ANY protection afforded by Section 550. For instance, it makes no difference that a recipient took from someone who himself was a Section 550(b)(1) good faith purchaser without knowledge if that recipient was himself aware of the debtor’s fraud (i.e., if he was in bad faith). The Section 550(b)(2) defense is not available. Similarly, it makes no difference that such a recipient made a valuable improvement to the property transferred. A bad faith recipient is never entitled to the compensatory lien that Section 550(e) otherwise provides to all transferees. Put simply, the interspersion of the good faith requirement throughout Section 550 confirms what
Coder, Van Iderstine,
and
Dean
established a century before — that a recipient of an actually fraudulent transfer who himself is aware of the fraud (i.e., in bad faith) is no less reprehensible than the fraudulent debtor himself. Nor is such transferee any more deserving of the Code’s protections whether offered under
*813
Section 550 or otherwise.
155
Proving Section 54-8(c) and 550(b)(1) Good Faith
Although both Section 548(c) and Section 550(b) are silent, courts have uniformly treated each as providing an affirmative defense.
156
Huntington, then, must bear the ultimate burden of establishing its good faith in accepting whatever fraudulent transfers Teleservices made to it either directly or indirectly. How, though, does one go about proving ignorance of another’s fraud?
Debtors seldom admit that they intended to defraud their creditors. Consequently, courts have relied upon circumstantial evidence, often referred to as “badges of fraud,” to establish the requisite intent.
157
The use of such badges dates back to the Statute of Elizabeth.
158
Indeed, the Uniform Fraudulent Transfer Act, which Michigan and other states have adopted, incorporates many of the more common badges into its provisions.
(2) In determining actual intent ... consideration may be given, among other factors, to whether 1 or more of the following occurred:
(a)The transfer or obligation was to an insider.
(b) The debtor retained possession or control of the property transferred after the transfer.
(c) The transfer or obligation was disclosed or concealed.
(d) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit.
(e) The transfer was of substantially all of the debtor’s assets.
(f) The debtor absconded.
(g) The debtor removed or concealed assets.
(h) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred.
(i) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.
(j) The transfer occurred shortly before or shortly after a substantial debt was incurred.
(k) The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.
MiCH. Comp. Laws § 566.34(2).
159
This court concludes that the same badges may also be used to assess
*814
the recipient’s own culpability. If, for instance, the threat of an impending judgment is indicative of the debtor’s fraud in making the transfer, awareness of that same threat should be a factor as well in determining the transferee’s corresponding good faith in accepting the same. Or, as the Court observed in
Dean ,
a lender’s awareness that the loan made to an insolvent debtor was to prefer one creditor over the rest would be probative of the lender’s own good faith vis-a-vis any mortgage taken.
The mortgage may be made in the expectation that thereby the debtor will extricate himself from a particular difficulty and be enabled to promote the interest of all other creditors by continuing his business. The lender who makes an advance for that purpose with full knowledge of the facts may be acting in perfect ‘good faith.’ But where the advance is made to enable the debtor to make a preferential payment with bankruptcy in contemplation, the transaction presents an element upon which fraud may be predicated....
242 U.S. at 444 , 37 S.Ct. at 132 .
160
Unfortunately, predicating the transferee’s liability upon merely his awareness of such factors complicates the analysis, for a transferee is no more likely to admit his actual knowledge than is a debtor likely to admit his actual intent. Therefore, courts have also long recognized that something short of admitted knowledge will suffice. Willful blindness is the term often used to describe this alternate state of awareness. In fact,
Harrell v. Beall,
the early Supreme Court case cited in
Agricultural Research,
is an excellent example of the concept’s application in the context of fraudulent transfers.
It must suffice to say that we are convinced that the sale to Echols was a barefaced fraud, and that if the appellee did not know it when he purchased of Echols it was because he intentionally shut his eyes to the truth, and that he had such notice and information as made it his duty to inquire further, and that the slightest effort by him in that direction would have discovered the whole fraud.
84 U.S. (17 Wall) at 591.
And the court in
Bayou Group
made the same point much more recently.
It is well settled that a transferee may not remain willfully ignorant of facts that would cause it to be on notice of a debtor’s fraudulent purpose and then put on blinders prior to entering into a transaction with the debtor and claim the benefit of Section 548(c)’s good faith defense.
396 B.R. at 884 (citations omitted).
161
Including willful blindness as a substitute for actual knowledge, though, adds a
*815
temporal aspect to the analysis. For example, the recognition that some duty of inquiry is imposed upon the transferee inevitably leads to an evaluation of what the transferee did (or, as is often the case, did not do) when one badge of possible fraud was apparent and other badges were discoverable. There is also the corollary question of whether the transferee’s failure to satisfactorily pursue such badges should result in a retroactive application of bad faith to when the first badge was obvious or whether the transferee should be charged with bad faith only from the point when the appropriate inquiry ceased.
162
These additional considerations have led this court to the further conclusion that a transferee cannot successfully assert good faith under either Section 548(c) or Section 550(b) without also establishing that he conducted himself appropriately as various badges of fraud came to his attention. In fact, it is this aspect of the analysis that lies at the heart of Trustee’s insistence that Huntington’s good faith must be measured objectively. As Trustee herself states:
[T]his Court must find that Huntington was on inquiry notice of fraudulent activity, and subsequently did not ever conduct a diligent investigation of its suspicions.
Trustee’s Post-Tr. Brief, 49 [DN 311].
Trustee’s sweep, though, is much too broad, for it undermines the traditional notions of honesty and integrity that have been associated with the recovery of fraudulent transfers since
Coder, Van Iderstine,
and
Dean .
Trustee has, in many ways, tried this matter as if Huntington should be assessed damages for its negligence. However, the subjective nature of good faith allows for conduct that falls short of what prudence or accepted norm might otherwise expect. The test is not, as Trustee would have it, how well Huntington measured up against what others in the community might have done in its stead. Rather, Huntington’s conduct is to be tested based upon its own honesty and integrity — i.e., its good faith — as it became aware of more and more indicators of Teleservices’ fraud upon its creditors.
Field v.
Mans
163
is instructive. At issue there was the level of reliance required under subpart (A) of Section 523(a)(2). That subsection excepts from discharge claims arising from the procurement of money through “false pretenses, a false representation, or actual fraud.” 11 U.S.C. § 523 (a)(2)(A). Although subpart (B), its counterpart, specifically states that the victim’s reliance must be reasonable when written misrepresentations regarding the debtor’s financial condition are involved, Section 523(a)(2)(A) is silent. The Court, therefore, was called upon to decide whether the reliance on the other types of misrepresentations covered by subpart (A) also had to be reasonable.
*816
The Court determined that justifiable reliance would suffice for purposes of that subsection notwithstanding the stricter standard of reasonableness under subpart (B). As authority, the Court drew upon the common law to explain the difference between reasonable reliance and reliance that is only justifiable. For example, it quoted this passage from the Restatement of Torts.
“Although the plaintiffs reliance on the misrepresentation must be justifiable ... this does not mean that his conduct must conform to the standard of the reasonable man. Justification is a matter of the qualities and characteristics of the particular plaintiff, and the circumstances of the particular case, rather than of the application of a community standard of conduct to all cases.”
Mans,
516 U.S. at 70-71, 116 S.Ct. at 444 (quoting Restatement (Seoond) op ToRts § 545A, comment b (1976)).
The Court also observed that:
Prosser represents common-law authority as rejecting the reasonable person standard here, stating that “the matter seems to turn upon an individual standard of the plaintiffs own capacity and the knowledge which he has, or which may fairly be charged against him from the facts within his observation in the light of his individual case.” Prosser,
supra,
§ 108, at 717.
Id.
at 72, 116 S.Ct. at 444 (quoting W. ProsseR, Law of Torts § 108, at 717 (4th ed. 1971)).
Granted, the issue here is good faith, not justifiable reliance, and the fraud here arises under a statute as opposed to the common law. Nevertheless,
Mans
teaches that when actual fraud is involved, parties affected by that fraud are not to be tested by the standards of the community unless Congress otherwise says so, as it did in Section 523(a)(2)(B). The test instead is a subjective one, with the focus being upon the particulars at hand. Therefore, it is only Huntington’s own behavior that is under scrutiny, and then only to the extent needed to compare it to much less demanding good faith standards like “integrity, trust, and good conduct.”
164
Retroactivity
Trastee takes the position that a transfer is avoidable as fraudulent unless the transferee first conducts a diligent investigation to satisfactorily resolve any suspicion that there may be. Moreover, no time limit seems to be placed upon the investigation’s duration. It could be a week, a month, or even a year. Such uncertainty may be tolerable when only a single transfer is at issue. However, a problem does arise when the transferee continues to receive transfers during the pending investigation, for it stands to reason that those transfers must also be returned under Trustee’s approach should the investigation finally uncover something untoward.
Although such dragnetting may square with the objective model employed in
Bay
*817
ou Group,
it is at odds with the subjective model that this court concludes must be used instead. Consider, for example, a transferee who starts out honestly enough with his investigation but then later falls short. The transferee without question would cease being in good faith at the moment of 'his lapse. This court, though, sees no reason why the transferee’s presumably good behavior up to that point should also be deemed now in bad faith. Accordingly, this court will not relate back any adverse finding concerning either Section 548(c) or Section 550(b)(1) good faith to an earlier date. Rather, any such finding against Huntington will apply only with respect to transfers received thereafter.
Assessing Huntington’s Section 5^8 (c) and Section 550(b)(1) Good Faith
Trustee’s focus at trial was upon what Huntington did not do as more and more “red flags” appeared. Trustee explained through her expert how a responsible bank would have reacted.
165
She then contrasted that with what she contends was Huntington’s failure to follow not only the law but also its own policies and procedures.
166
Trustee even went so far as to accuse Huntington of joining in a silent conspiracy with Cyberco so as to mutually profit at others’ expense.
However, this is not a lender liability case. Nor is Huntington before this court to account to others for injuries arising from its alleged misconduct or negligence. And Huntington is most certainly not on trial for its supposed disregard of either the regulatory authorities or its own policies and procedures.
To the contrary, Huntington and Trustee are at odds only because Trustee seeks to recover fraudulent transfers from a transferee who happens to object. As for its good faith defense, Huntington relies largely upon the undeserved trust it placed in Watson during the many months the transfers were being made. Watson, Huntington claims, misled it into believing throughout that time that the suspicious transfers were nothing more than the proceeds of receivables collected by Teleser
*818
vices on Cyberco’s behalf. Or, in Huntington’s own words:
Horton and Watson had successfully conned the bank into believing that Teleservices was a cash management affiliate of Cyberco. As a result the transfers from Teleservices no longer seemed suspicious, even to Gail White: “[I]t appeared they were intercompany deposits and we see that sort of thing all the time.”
Huntington Post-Tr. Memo., 84.
167
Consequently, the question of Huntington’s good faith boils down to simply this: Did Huntington ever reach the point where it could no longer legitimately cling to its belief that the Teleservices transfers were only Cyberco’s collected receivables? If the answer is no, then Huntington will have established its Section 550(b)(1) good faith. But, if the answer is yes, then it is difficult to comprehend how Huntington could have ever accepted any subsequent transfer from Teleservices without also suspecting with good reason that Teleser-vices was perpetrating a fraud upon its creditors. Again, Huntington had no lending relationship with Teleservices. Consequently, the transfers from Teleservices to pay Cyberco’s debt should have been suspicious from the beginning.
Nordic Village,
915 F.2d at 1056.
168
Moreover, Watson’s explanations had always been vague and even contradictory. Therefore, if the point ever came where Huntington could no longer believe even what Watson was telling it about Teleservices, Huntington could not have continued accepting transfers from Teleservices without also being in bad faith.
As just indicated, Huntington should have been harboring at least some doubts about both Cyberco and Teleservices as early as October 2003. After all, its expectation was that all customer remittances would be deposited into a secure lockbox. But, in less than a year, Cyberco had unilaterally altered that arrangement to one where Huntington had absolutely no ability to monitor receivables. Moreover, Cyberco had not even bothered to inform Huntington of the change. Huntington instead learned of it only because an uncollected Teleservices check caused Cyberco to be overdrawn on its accounts yet again. And finally, when Huntington did confront Watson, his explanation that Teleservices was not yet operational didn’t square with the fact that Teleservices had been already transferring substantial amounts to Cyberco for nearly three months.
Would another bank have responded differently? Perhaps. However, this court finds nothing dishonest in how Huntington in fact reacted when White discovered the substantial transfers being deposited from Teleservices. Granted, Huntington had no explanation for why Hutchings or someone else in its lending group failed to detect the transfers earlier. However, once Hutchings did become aware of them, she, along with Hekman, her boss, immediately met with Watson and Watson was quick with an explanation. But even then, Huntington was not satisfied. Rather, Hutchings asked for more information not only about Teleservices, but also about many other matters that concerned her. Moreover, she ordered, at Kalb’s suggestion, a background check on Watson.
*819
Huntington’s response was by no means perfect. For instance, Watson and his cohorts managed to stall Huntington for months before finally responding to Hutchings’ and others’ inquiries. Nor were the oft promised audited financials ever produced. However, this court cannot find at any time during the interval between October 2003 and the spring of 2004 that Kalb, for example, ever knew of the fraud actually being perpetrated by Teleservices upon its creditors or that Kalb was otherwise turning a blind eye. In short, nothing in Huntington’s conduct during this first interval of roughly six months suggests that Huntington’s belief regarding the continuing transfers from Teleservices to Cyberco were anything but the honest belief that they represented the collected proceeds of Cyberco receivables.
This court has picked Kalb for assessing Huntington’s good faith under Section 548(c) and Section 550(b)(1) because of his seniority, his experience, and his involvement with the Cyberco account from beginning to end. As already indicated, Kalb had both an MBA and a law degree. He had thirty years of banking experience and he was the region’s credit officer. Moreover, when senior management in Columbus began expressing its own concerns about Cyberco, Kalb was involved in keeping it informed.
169
Indeed, Hoover, who was the credit officer for all of Huntington, expected Kalb to have come to him personally had Kalb ever thought there was a problem with the Teleservices payments.
170
As for his involvement in the loan’s administration, Kalb reviewed the lending package at the outset of the relationship and he participated in the discussions leading up to Huntington’s request that Cyber-co leave. He signed off as well on the two ninety-day extensions then given Cyberco to find a new lender and he was instrumental in getting George, a loan workout specialist, involved during the final months. And finally, it was Kalb who steered White to corporate security and, in particular, Rodriguez, when White did find something that suggested fraud.
171
Trustee insists that Kalb was not in good faith because he allowed the relationship with Cyberco to continue notwithstanding the reports he was receiving during his regular meetings with White. Trustee, though, places too much weight upon the information that White was providing, for as White herself admitted, she had little more to go on than her own intuition. Indeed, her first hunch — that Cyberco and Teleservices were kiting checks — proved wrong as soon as Teleservices began making the transfers to Cyberco by wire instead. Likewise, she had little support for her theory that Cyberco was inflating its accounts before White
*820
received the receivables aging report in March. Up to then, all that she had were her spreadsheets.
172
It is true that Kalb and others gave scant attention to what White had compiled. Her spreadsheets, though, were hardly remarkable, for they revealed only that the transfers Cyberco was receiving from Teleservices and the payments Cy-berco was making to equipment finance companies were both growing as each month progressed. This, of course, seemed suspicious to White. However, White never established through her investigation that Teleservices was in fact defrauding the equipment financing companies. Nor is there any evidence that White communicated even a suspicion of such fraud to Kalb. To the contrary, White’s focus was always on Cyberco and the possible overstatement of its receivables.
173
Perhaps Kalb could have himself put two and two together had he heeded White’s suspicions and pursued Cyberco more aggressively. Perhaps, though, is the operative word, for Watson was doing his best to mislead Huntington. Kalb may have had his doubts about him. However, as Kalb confessed to Witherow in early January, his efforts to learn more about Watson, including a background check undertaken only a month before, had come back clean.
174
It is easy for Trustee to claim in hindsight that Kalb should have acted more decisively; that he and others at Huntington should have called the loan as early as January. Calling the loan, though, had its own risks, not least of which was the possibility of a lawsuit by Watson, a person who had already established himself early on as both smart and contentious. It appears, then, that Kalb and others at Huntington conducted themselves during this time frame just as the court would have expected under such circumstances. Huntington had a difficult customer about whom it had unproven suspicions. Therefore, it is not surprising that Huntington chose the middle ground of ending its relationship with Cyberco but also giving time for Cyberco to find a new lender.
175
The court is just as satisfied that Kalb also continued to administer the Cyberco credit until the end of July without ever having substantial reason to suspect that the transfers from Teleservices were fraudulent. Granted, evidence continued to mount that something was amiss. For example, there was the news that spring that the FBI was investigating Cyberco and Watson. But there is also no evidence that Huntington ever turned a blind eye during this interval. Kalb, for instance, continued to express concern over the lack of audited financials. He also encouraged White to continue with her investigation. In fact, when White discovered enough to suggest that Cyberco was overstating its receivables, Kalb directed her to contact Rodriguez. He also added a receivables audit to the conditions Cyberco would have
*821
to meet in order to obtain a further extension beyond April.
176
White herself may have dismissed as “bogus” the written report that Grant Thornton issued in May after its audit.
177
On the other hand, Kalb and others certainly had reason, at least from a subjective point of view, to once again let their guard down. Huntington, at its request, now had in hand a report from a well respected accounting firm that Cyberco’s receivables were exactly as Cyberco reported them to be. Consequently, the court finds nothing devious in Huntington’s decision at that time to give Cyberco another ninety days to exit the lending relationship on amicable terms.
178
However, Huntington’s mood changed as the new deadline neared that summer. A quiet exit from the relationship was no longer likely. Huntington instead was facing a difficult and expensive recovery from a customer that it now knew was under an active criminal investigation.
179
And, if that was not enough, there was the distinct possibility that Huntington would suffer a substantial loss. An earlier estimate had the bank underwater by as much as $4.6 million.
180
George described the situation as “sti

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/2199436. Public record. Not legal advice.