Section 548(c) provides a defense to avoidance of a fraudulent transfer for a “good faith” transferee or obligee who gives “value” in exchange for a transfer or obligation:Įxcept 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. Section 548(a)(1) of the Bankruptcy Code authorizes a trustee or DIP to avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor within the two years preceding a bankruptcy filing if: (i) the transfer was made, or the obligation was incurred, “with actual intent to hinder, delay, or defraud” any creditor or (ii) the debtor received “less than a reasonably equivalent value in exchange for such transfer or obligation” and was, among other things, insolvent, undercapitalized, or unable to pay its debts as such debts matured. Good-Faith Defense to Avoidance of Fraudulent Transfers 21, 2014), a Fourth Circuit panel ruled in a split decision that: (i) the same standard applies in assessing good faith under sections 548(c) and 550(b) of the Bankruptcy Code and (ii) a transferee bank met its burden of demonstrating good faith without introducing evidence of standard practices in the mortgage warehousing industry. Although most courts agree that this test is an objective one, a ruling recently handed down by the Fourth Circuit Court of Appeals may have introduced an element of subjectivity into the analysis. An important defense in litigation brought by a bankruptcy trustee or chapter 11 debtor-in-possession (“DIP”) to avoid a fraudulent transfer is that the recipient provided value in exchange for the transfer and acted in “good faith.” Because the Bankruptcy Code does not define “good faith,” courts assessing the viability of a good-faith defense typically examine whether, on the basis of the specific circumstances, a transferee knew or should have known that a transfer was actually or constructively fraudulent.
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