Maryland Property Associates v. Colombo Bank

UNPUBLISHED

UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 07-1874

In Re: MARYLAND PROPERTY ASSOCIATES, INCORPORATED; MARYLAND
PROPERTY MANAGEMENT, INCORPORATED; MARYLAND PROPERTY GROUP,
INCORPORATED; MARYLAND PROPERTY SYSTEMS, INCORPORATED;
MARYLAND PROPERTY SERVICES, INCORPORATED,

Debtors.

----------------------------------------

CHARLES R. GOLDSTEIN, Trustee,

Plaintiff - Appellee,

v.

COLOMBO BANK, F.S.B.,

Defendant - Appellant.

No. 08-1251

In Re: MARYLAND PROPERTY ASSOCIATES, INCORPORATED; MARYLAND
PROPERTY MANAGEMENT, INCORPORATED; MARYLAND PROPERTY GROUP,
INCORPORATED; MARYLAND PROPERTY SYSTEMS, INCORPORATED;
MARYLAND PROPERTY SERVICES, INCORPORATED,

Debtors.

----------------------------------------

CHARLES R. GOLDSTEIN, Trustee,

Plaintiff - Appellant,
 v.

COLOMBO BANK, F.S.B.,

Defendant - Appellee.

Appeals from the United States District Court for the District
of Maryland, at Baltimore. William D. Quarles, Jr., District
Judge. (1:07-cv-00514-WDQ; AP-00-05578; BK-98-53783-JS)

Argued: December 3, 2008 Decided: January 26, 2009

Before WILLIAMS, Chief Judge, and TRAXLER and KING, Circuit
Judges.

Affirmed in part and reversed in part by unpublished per curiam
opinion.

ARGUED: Stephen Warren Nichols, DECKELBAUM, OGENS & RAFTERY,
CHARTERED, Bethesda, Maryland, for Appellant/Cross-Appellee.
Lisa Bittle Tancredi, VENABLE, L.L.P., Baltimore, Maryland, for
Appellee/Cross-Appellant. ON BRIEF: Nelson Deckelbaum,
DECKELBAUM, OGENS & RAFTERY, CHARTERED, Bethesda, Maryland, for
Appellant/Cross-Appellee. Abby W. Clifton, VENABLE, L.L.P.,
Baltimore, Maryland, for Appellee/Cross-Appellant.

Unpublished opinions are not binding precedent in this circuit.

2
PER CURIAM:

In this case, a bankruptcy trustee seeks to avoid 24

financial transfers made by the bankruptcy debtors to Colombo

Bank, F.S.B. (“the Bank”). The bankruptcy court ruled that the

trustee could avoid the transfers and recover the assets from

the Bank. The Bank now appeals and the trustee cross-appeals

the district court’s order affirming in part, reversing in part,

and modifying the bankruptcy court order. We affirm in part and

reverse in part.

I.

The Bank is a small community savings bank with several

offices in Maryland. Monte Greenbaum is a former shareholder

and director of the Bank and the sole owner of the following

affiliated corporations: The Maryland Property Group, Inc.

(“MPG”), Maryland Property Associates, Inc. (“MPA”), Maryland

Property Management, Inc. (“MPM”), Maryland Group Management,

Inc. (“MGM”), Maryland Property Systems, Inc. (“MPS”), and

Maryland Property Services, Inc. (“MPServ”) (collectively, “the

Debtors”). These corporations were established to manage

housing projects that were located in the greater Baltimore,

Maryland area and owned by separate limited partnerships (“the

Partnerships”). The projects were subsidized by the United

States Department of Housing and Urban Development (“HUD”).

3
 HUD required that the Partnerships maintain tenant security

deposits in accounts. From 1993 to 1998, Greenbaum embezzled

substantial monies from these accounts and from the projects’

operating accounts, moving the funds into his companies and then

disbursing them for, among other things, his own personal

benefit.

The Partnerships maintained separate operating accounts at

several financial institutions, including the Bank. As agent of

the Partnerships and owner of the companies managing their

properties, Greenbaum controlled all transactions with these

institutions. Having used this authority to embezzle the

Partnerships’ money, Greenbaum also used it to disguise the

embezzlement. In this regard, in 1994 he approached Thomas

Knowles, the Bank’s then-current president, about obtaining

loans. Greenbaum proposed that the loans would be secured by

the loan proceeds themselves, which the Bank would hold on

deposit in the Partnerships’ names. Greenbaum also gave Knowles

an instruction that Knowles had never received from another

customer: the accounts were not to bear interest. When Knowles

asked why Greenbaum would want to set up the proposed

arrangement, Greenbaum responded that he needed to “establish a

reserve,” and when Knowles asked how borrowed money could be

used to establish reserves, Greenbaum replied simply that he

could “establish the reserves that way.” J.A. 1394 (internal

4
quotation marks omitted). Knowles questioned Greenbaum no

further and undertook no further investigation.

Greenbaum then proceeded to borrow funds in the

Partnerships’ names (“the share loans”). The proceeds of each

loan were deposited with the Bank in the name of the Partnership

in whose name the loan was taken out, and the Bank placed a

“collateral hold” on each account to secure the loans. J.A.

1499. The existence of these accounts and the funds therein

helped Greenbaum conceal the fact that he had raided the

Partnerships’ other accounts.

Knowles also took several actions that helped Greenbaum

conceal the existence of the share loans, and hence Greenbaum’s

embezzlement. The accounts holding the tenant security deposits

— which Greenbaum had raided — needed to be confirmed for HUD

and the Debtors’ auditor. Customarily, such audit requests

originate from a customer’s accountant and are returned directly

to the accountant, to ensure the veracity of the response.

Here, however, Greenbaum himself brought the applicable form to

Knowles. Knowles knew that this was highly unusual but

nevertheless signed the form. 1 However, he did not complete the

1
Similar forms in later yearly audits were forged by
Greenbaum and not actually signed by any Bank employee.

5
parts asking for a description of any loans relating to the

accounts. Nor did he complete the section requesting a

description of the collateral for those loans. Moreover,

Knowles returned the form to Greenbaum, in contravention of the

form’s instruction that it should be returned to his accountant.

By his actions, Knowles concealed from the auditors and the

Partnerships the facts that there were outstanding loans to the

Partnerships and that the Bank held security interests in the

funds in the accounts.

Knowles also helped conceal the fact that Greenbaum was

voluntarily declining interest that otherwise would have accrued

on the accounts. When statements were issued that showed

interest accruing, Greenbaum contacted Knowles, and Knowles used

a word processor to produce dummy statements for Greenbaum that

did not show any interest.

Greenbaum used MPA’s operating account to make payments on

the share loans. And, when Greenbaum determined in July 1997

that the loans had served their purpose, he paid their balances

with a $238,751.61 check drawn on MPA’s operating account. The

funds MPA transferred were commingled funds that had been

received from various sources, including a bank in Florida.

MPA’s payment of the Partnerships’ loan obligations extinguished

the Bank’s security interest in the loan proceeds, leaving them

6
unencumbered in the Partnerships’ accounts. In November 1997,

the Bank wired the funds to MPA at MPA’s request.

In March 1998, the Partnerships filed involuntary

bankruptcy petitions against MPA, alleging that it had

misappropriated $790,617.95 in funds belonging to the

Partnerships. Charles Goldstein (“the Trustee”) was appointed

Chapter 7 Trustee. He, in turn, filed involuntary bankruptcy

petitions on MPA’s behalf against MPM, MPG, MGM, MPS, and

MPServ. With the Debtors’ consent, a bankruptcy court entered

Chapter 7 relief orders and ordered that all of the Debtors’

cases be jointly administered under MPA’s case.

In March 1999, Greenbaum was charged, by way of criminal

information, with conspiracy to violate the National Housing

Act, see 12 U.S.C.A. 1701, et seq. (West 2001 & Supp. 2008).

The information alleged that between January 1993 and March

1998, Greenbaum defrauded the federal government by embezzling

funds for his personal benefit from rent escrow accounts when

the housing projects were in a “non-surplus cash position,” J.A.

765 (internal quotation marks omitted); making false statements,

creating false documents, and forging signatures in connection

with the HUD-insured properties; fraudulently concealing

shortages in these accounts by obtaining loans on the

Partnerships’ behalf and placing the proceeds in the

Partnerships’ accounts; failing to report the existence of these

7
loans during audits of the accounts; and misappropriating

substantial portions of the security deposits and rent payments.

Greenbaum pleaded guilty pursuant to a plea agreement to one

count of conspiracy. He was sentenced to 18 months’

imprisonment and ordered to pay $900,000 in restitution to HUD.

The Trustee filed the instant complaint against the Bank in

the bankruptcy court in March 2000, requesting avoidance of 24

transfers made to the Bank, each of which had been accomplished

by checks drawn on MPA, MPG, or MGM’s accounts and signed by

Greenbaum. The transfers fall into three categories: amounts

paid pursuant to the share-loan scheme; amounts paid on loans

secured by a second mortgage on a residence of Greenbaum’s

located in Columbia, Maryland or by a mortgage on a condominium

of Greenbaum’s located in Ocean City, Maryland; and amounts paid

to the Bank for unexplained reasons. Count One sought avoidance

of each of the 24 transfers under the Maryland Uniform

Fraudulent Conveyance Act and a judgment in the amount of

$397,494.77. That amount represented the total amount of the

alleged transfers sought to be avoided, less $100,000. One of

the transfers sought to be avoided was made by check number 784,

which had a face amount of $172,000. The complaint specifically

alleged that “$72,000 was for the benefit not of MPA, but of

Monte Greenbaum.” J.A. 9. Count Two sought avoidance as

fraudulent conveyances of those 15 transfers that allegedly

8
occurred within one year before the filing of the involuntary

bankruptcy petitions, under section 548 of the Bankruptcy Code,

and requested a judgment of $278,768.32. Count Three sought

avoidance and recovery of transfers that were made within 90

days of the filing of the involuntary bankruptcy petitions and

that constituted preferential transfers, pursuant to Section 547

of the Bankruptcy Code, and requested a judgment of $3,597.62.

Before discussing further the proceedings below, we pause

to discuss the applicable statutes. Section 541 of the

Bankruptcy Code provides that a bankruptcy estate consists of

all “interests of the debtor in property.” 11 U.S.C.A. § 541(a)

(West 2004). Further, section 548 allows the bankruptcy trustee

to avoid certain transfers of such interests. See 11 U.S.C.A.

§ 548(a) (West 2004). Section 548 and the Maryland Uniform

Fraudulent Conveyance Act (“UFCA”) both permit avoidance of a

transfer if either (1) the transfer was made with the actual

intent to hinder, delay, or defraud a creditor (an “actually

fraudulent” transfer); or (2) the debtor was insolvent and

received less than reasonably equivalent value in exchange (a

“constructively fraudulent” transfer). See 11 U.S.C.A. § 548(a)

(West 2004); Md. Code Ann., Com. Law §§ 15-204, 15-207 (West

2005). Because the UFCA allows avoidance of transfers that

occurred in the three years preceding the bankruptcy petition,

see Md. Code Ann, Cts. & Jud. Proc. § 5-101 (West 2006), and the

9
version of the federal statute in effect when the petition in

this case was filed allowed avoidance only of transactions

occurring within one year prior to the filing of the petition,

see 11 U.S.C.A. § 548(a)(1), we will review the bankruptcy

court’s decisions under the UFCA, as the district court did.

The UFCA provides that a fraudulent conveyance may be set

aside, as is relevant here, “against any person except a

purchaser for fair consideration without knowledge of the fraud

at the time of the purchase.” Md. Code Ann., Com. Law § 15-209

(West 2005). Maryland courts, therefore, have held that to set

aside a conveyance as actually fraudulent, the party challenging

the conveyance must demonstrate that the grantor’s fraud was

known or participated in by the grantee. See Oles Envelope

Corp. v. Oles, 65 A.2d 899, 903 (Md. 1949). Proving a

transferee’s constructive knowledge of the transferor’s

fraudulent intent is sufficient in this regard. See Fick v.

Perpetual Title Co., 694 A.2d 138, 146 (Md. Ct. Spec. App.

1997). Having set out the applicable legal framework, we now

return to a description of the proceedings below, beginning with

the trial in bankruptcy court.

During his opening statement, counsel for the Trustee

acknowledged that his complaint sought the return of only

$72,000 of the $172,000 transfer made by check 784. He

explained that when he drafted the complaint, he did not believe

10
he was entitled to recover more. However, the Trustee stated

that following discovery and his requests for documents or an

explanation of how the Bank applied the funds transferred by

this check, he had come to doubt whether the Bank could

establish that more than $52,963.88 of the check was applied to

debts for which MPA could be liable. 2 Accordingly, the Trustee

reserved the right to conform his pleadings to the evidence

produced at trial, in the event that the Bank did not offer

adequate proof.

The Bank objected, arguing that even the Trustee’s pretrial

statement, filed two weeks before the trial, did not notify the

Bank that the Trustee would seek recovery of this additional

amount. The Bank argued that it was not prepared to defend

against a claim for such a recovery. The Trustee responded that

he had been exchanging documents with the Bank regarding check

784 until the week prior to trial, but that the Trustee had only

recently concluded that only $52,963.88 was applied to a loan

guaranteed by MPA whereas the Trustee earlier had believed the

amount to be $100,000.

Following the close of testimony, the Trustee argued that

his complaint as drafted sought avoidance of the entire transfer

2
Documents produced by the Bank indicated that $52,963.88
was applied to a loan that MPA had guaranteed.

11
effected by check 784. He nevertheless moved to amend his

complaint to the extent that he needed to do so to seek recovery

of $119,036.12 of that transfer. The bankruptcy court granted

the motion to amend over a renewed objection by the Bank. In so

doing, the court noted that the complaint, even as originally

drafted, sought to avoid the entire transfer as a fraudulent

conveyance, and therefore would have allowed suit for the entire

$172,000.

The bankruptcy court also allowed the Trustee to testify as

an expert witness on the issue of the Debtors’ insolvency during

the relevant time periods, as a forensic expert, and as an

expert on fraudulent conveyance issues. The Bank unsuccessfully

objected to the testimony on the ground that the Trustee was

neither listed as an expert in his initial disclosures pursuant

to Bankruptcy Rule 7026(a)(2) nor identified in response to an

interrogatory from the Bank seeking the identification of

experts.

Following the trial, the bankruptcy court found that the

other Debtors were merely alter egos of MPA and that MPA was

insolvent at all times from 1995 through the filing of the

bankruptcy petition. The court further found that the transfers

made during the 90 days prior to the filing of the petition

enabled the Bank to receive more than it would have received in

bankruptcy had the transfer not been made. Accordingly, the

12
court determined that those transfers were avoidable as

preferences.

The bankruptcy court also found that MPA had made the

challenged payments to hinder, delay, or defraud its creditors,

and that the Bank knew or should have known of the fraud.

Specifically, the court reasoned that the payments were made

with the intent to conceal from the Partnerships and HUD that

Greenbaum had misappropriated the funds from the escrow

accounts. The court found that the amounts transferred did not

constitute money stolen or fraudulently taken from the housing

project accounts and that even if they did, MPA continued to

retain an interest in it. The court also concluded that the

funds, even if stolen from the project accounts, were not

subject to a constructive trust because they had been commingled

with other funds.

The court also determined that the Bank did not apply the

funds transferred with check 784 to the share loans. The

bankruptcy court found that $52,963.88 of the funds had been

applied to a loan that MPA had guaranteed. Although John Lane,

the Bank president at the time of trial, had testified that the

remaining portion of check 784 — $119,036.12 — was applied to

the share loans, the court drew a negative inference against the

Bank from the Bank’s failure to produce supporting documentary

evidence. Thus, the court found that MPA received no fair

13
consideration for $119,036.12 of the transfer effected by check

784.

On this basis, the bankruptcy court entered an order and

judgment in favor of the Trustee against the Bank for

$444,523.89, plus pre-judgment interest from the date the

complaint was filed, with post-judgment interest allowed at the

federal rate.

The Bank appealed to the district court, arguing that the

bankruptcy court erred in permitting the Trustee to amend his

complaint at trial and to testify as an expert witness. The

Bank also argued that the court’s decision was not supported by

the evidence.

The district court ruled that the bankruptcy court did not

abuse its discretion in allowing the Trustee to amend his

pleadings to conform to the evidence at trial, reasoning that

the Bank was on notice at all times that the Trustee was seeking

to avoid all transfers made to the Bank within the relevant time

period. The court also ruled that the bankruptcy court was

within its discretion in allowing the Trustee to testify as an

expert. The court noted that the Bank neither disputed the

Trustee’s qualification to be an expert nor offered evidence

that MPA was solvent. The court also concluded that the Trustee

knew of MPA’s insolvency based on his examination of MPA’s books

and records and therefore could have testified as a mere fact

14
witness regarding insolvency regardless of whether he testified

as an expert. Thus, the court reasoned that any error in the

Trustee’s admission as an expert was harmless.

Regarding the bankruptcy court’s ruling that the transfers

made within 90 days before the petition could be avoided as

preferences, the district court concluded that the ruling could

not be affirmed because the bankruptcy court had not found that

the challenged payments were for an obligation of the Debtors’.

As for the avoidance of the share-loan payments as fraudulent

conveyances, the district court initially ruled that the

bankruptcy court erred in failing to credit the Bank for

payments that had the effect of discharging the Partnerships’

liability to the Bank for the share loans. It therefore

initially reversed the bankruptcy court ruling allowing

avoidance of payments attributable to the share-loan principal

and affirmed as to payments attributable to the share-loan

interest.

The court also vacated the bankruptcy court judgment as it

related to the non-share-loan payments. The district court

concluded that avoidance of these transfers could not be

affirmed under an actual-fraud theory because the bankruptcy

court had not found that Greenbaum actually intended to defraud

the Debtors’ creditors with these payments, nor had it found

that the Bank knew or should have known of such fraud. The

15
district court also ruled that avoidance could not be affirmed

under a constructive-fraud theory because the bankruptcy court

had not found that the non-share-loan transfers were made

without fair consideration.

The district court therefore affirmed the bankruptcy-court

judgment in the amount of the share-loan interest payments,

reversed the judgment in the amount of the share-loan principal

payments, vacated the remainder, and remanded to the bankruptcy

court for further proceedings.

Subsequently, however, the district court granted a request

by the Trustee for rehearing. Recognizing that MPA in fact did

have creditors besides the Partnerships, and that these other

creditors did not directly benefit from the share-loan principal

payments, the court concluded that the share-loan payments

actually did prejudice other creditors of MPA. 3 Thus,

reconsidering its initial ruling, the district court affirmed

the bankruptcy court’s judgment with respect to the share-loan

payments.

The Bank next appealed to this court. We dismissed the

appeal on the basis that the bankruptcy court judgment had been

3
The Trustee testified that the total amount of claims
against the bankruptcy estate is approximately $1.7 million,
$1.2 or $1.3 million of which was claimed by the Partnerships.
He testified that the size of the estate would be approximately
$1 million.

16
vacated and thus was not a final judgment from which appeal

could be taken. See In re Md. Prop. Assocs., Inc., 116 F. App’x

442 (4th Cir. 2004) (per curiam).

On remand, the bankruptcy court determined that each of the

challenged transfers was avoidable both as an actually

fraudulent conveyance and as a constructively fraudulent

conveyance. In support of this conclusion, the court found that

MPA, through Greenbaum, intended to defraud MPA’s creditors with

the non-share-loan payments; that the Bank knew or should have

known that the non-share-loan payments were actually fraudulent;

and that MPA did not receive fair consideration for the non-

share-loan payments.

The bankruptcy court also made more detailed findings

regarding the Bank’s culpability with respect to the share

loans. Whereas in its first opinion the bankruptcy court had

found that the Bank merely knew or should have known about

Greenbaum’s fraudulent share-loan scheme, in its opinion on

remand the bankruptcy court found that the Bank actually knew of

Greenbaum’s fraud and knowingly assisted him in it. The

bankruptcy court noted that Knowles “agreed to make unusual

loans, sign and deliver official documents in a fraudulent

manner[,] and conceal the nature of the share loans by creating

misleading interest statements.” J.A. 2082. The court also

17
found that Joel Fernebok, who was the Bank’s chairman, Knowles’s

superior, and Greenbaum’s friend, knew about the scheme.

The bankruptcy court further found that Greenbaum made the

non-share-loan transfers with the intent to hinder, delay, or

defraud the Debtors’ creditors and that the Bank knew or should

have known of that intent. The court noted that the Debtors’

insolvency, the lack of consideration for the transfers, the

Bank and the Debtors’ secrecy and concealment, and their

departures from usual business methods all demonstrated

Greenbaum’s intent. The court determined that the Bank knew of

or should have known of Greenbaum’s fraudulent intent regarding

the non-share-loan payments for several reasons. First, it was

aware of Greenbaum’s fraud with regard to the share-loan scheme.

Second, the checks given to the Bank for Greenbaum’s personal

obligations did not indicate that they were compensation to

Greenbaum for services rendered or otherwise for the benefit of

the Debtors. The bankruptcy court determined that these facts

put the Bank on constructive notice that Greenbaum was making

the transfers to thwart the Debtors’ creditors. The court

concluded that this notice precluded a finding that the Bank was

a good-faith transferee, and the court therefore allowed the

Trustee to avoid the payments under a theory of actual fraud.

The bankruptcy court further found that the Debtors had not

been obligated to make any payments to the Bank on the loan

18
secured by Greenbaum’s Ocean City condominium or the loan

secured by his Columbia residence. Because those loans were

personal obligations of Greenbaum, the court found that the

Debtors received no consideration in exchange for those

transfers, and the transfers could therefore be avoided under a

constructive-fraud theory as well.

The bankruptcy court also found two other of the transfers

— those made with checks 784 and 1254 — could be avoided under

this same theory. John Lane, the president of the Bank at the

time of trial, had testified that his investigation indicated

that $100,000 of the funds transferred with check 784 had been

applied to principal and interest on a share loan. The

bankruptcy court discredited this testimony because Lane did not

have first-hand knowledge and could not produce supporting

documentation. Thus, the court could not determine what the

funds transferred by check 784 were applied to, and it

determined that the Bank failed to prove that the funds were

transferred in exchange for fair consideration. The bankruptcy

court found that the transfer made with check 1254 was avoidable

as well. The court found that the Bank applied those funds to a

personal obligation of Greenbaum’s rather than to an obligation

of MPA’s.

19
 For all of these reasons, the court ordered the recovery of

$444,523.89 from the Bank. 4

Again, the Bank appealed the bankruptcy court’s decision to

the district court, which affirmed in part and reversed in part.

Regarding the share-loan transfers, the district court

rejected an assertion by the Bank that the bankruptcy court’s

finding that the Bank had actual knowledge of Greenbaum’s

fraudulent intentions regarding the share-loan transfers

exceeded the scope of findings authorized by the remand. The

court also rejected an argument by the Bank that the bankruptcy

court erred in not giving the Bank credit for the loan proceeds

it released once the share loans were repaid. In this regard,

the district court reasoned that the loan proceeds, held in the

Partnerships’ names on deposit at the Bank, were the

Partnerships’ property. The court concluded that the Bank

should not receive a credit simply for wiring account holders

their funds. The court further noted that the fact the Bank’s

loans were the original source of these funds was immaterial.

4
This total included certain credits and deductions that
are not relevant here.

The bankruptcy court also determined, in contravention of
its earlier opinion, that because none of the challenged
payments were in payment of any antecedent debt owed by the
Debtors, none of the challenged payments could be avoided as
preferential transfers.

20
 The district court then turned to the other challenged

transfers. The court ruled that avoidance of these transfers

could not be affirmed under an actual-fraud theory because the

evidence was not sufficient to support the bankruptcy court’s

finding that MPA made the non-share-loan-related transfers with

the actual intent to defraud. Addressing the theory of

constructive fraud, the district court ruled that the bankruptcy

court had improperly shifted the burden to the Bank to prove

that there was fair consideration for those payments. The court

concluded, however, that had the bankruptcy court placed the

burden on the Trustee to prove there was no fair consideration

for all of the non-share-loan payments, a finding that the

Trustee met that burden would not have been clearly erroneous

with regard to any of the transfers except the one made with

check 784. On this basis, the district court affirmed the

bankruptcy court’s ruling that these payments could be avoided

under a constructive-fraud theory. However, the district court

reversed the bankruptcy court’s ruling that the Trustee could

avoid $119,036.12 of the transfer accomplished with check 784,

concluding that no evidence would have supported a finding that

the Trustee proved that transfer was not made for fair

consideration.

21
 The Bank now appeals and the Trustee cross-appeals from the

district court’s decision. 5

II.

The Bank contends that the district court erred in

affirming the bankruptcy court’s ruling allowing the Trustee to

avoid the share-loan payments on the basis of fraud. We

disagree.

Because the district court “act[ed] in its capacity as a

bankruptcy appellate court, we review the bankruptcy court’s

decision independently.” Banks v. Sallie Mae Servicing Corp.

(In re Banks), 299 F.3d 296, 300 (4th Cir. 2002). We review the

bankruptcy court’s factual findings for clear error and its

legal conclusions de novo. See Kielisch v. Educ. Credit Mgmt.

Corp. (In re Kielisch), 258 F.3d 315, 319 (4th Cir. 2001). “A

5
In its opinion on remand, the bankruptcy court had ordered
payment of 6.2% pre-judgment interest from the date of the
complaint and 5.1% post-judgment interest from the date of
issuance of the bankruptcy court opinion, January 31, 2007. The
district court modified this order to award pre-judgment
interest at 6.18% on the portion of the bankruptcy court’s
judgment that the district court affirmed in the first appeal,
post-judgment interest of 1.59% on that same portion from the
date of the first bankruptcy court judgment, 6.18% pre-judgment
interest on the affirmed portion of the second bankruptcy court
judgment up to the date of that judgment, and post-judgment
interest of 5.10% on that same portion from the date of the
second judgment. The Trustee cross-appeals the district court’s
modification of the bankruptcy court’s interest awards. We find
no reversible error and therefore affirm the modification.

22
finding is ‘clearly erroneous’ when although there is evidence

to support it, the reviewing court on the entire evidence is

left with the definite and firm conviction that a mistake has

been committed.” United States v. United States Gypsum Co., 333

U.S. 364, 395 (1948).

A.

The Bank submits that because the sole purpose of

fraudulent conveyance law is to restore the transferor’s estate

to the condition in which it existed prior to the transfer, no

cause of action exists for a transfer that caused no prejudice

to the estate’s creditors. See, e.g., United States v.

Johnston, 245 F. Supp. 433, 440 (W.D. Ark. 1965) (explaining

that transfer will not be set aside as fraudulent conveyance if

it “does not operate to the prejudice of creditors’ rights”).

It contends that MPA’s use of its funds to repay the principal

amount of the share loans caused no prejudice to its creditors

because the payments reduced the liability MPA had to the

Partnerships, and because the Partnerships benefited from the

repayment of their loan obligations. The Bank also argues that

the bankruptcy court erred in failing to give it credit for

money that it paid to MPA after MPA paid off the Partnerships’

loans. We disagree with both arguments.

First, even if MPA’s payment of the Partnerships’ loans did

not prejudice the Partnerships, it prejudiced MPA’s other

23
creditors. That is so because the claims against MPA’s estate

exceeded the estate’s assets, so that less than 100% of each

claim would be paid. Even if MPA reduced its liability to the

Partnerships in the very amount that MPA paid off the share-loan

principal, those payments allowed the Partnerships to receive

100% payment for that liability. Had those funds remained

within MPA’s estate, it would have been available to pay the

claims arising from that liability at a less than 100% rate,

with a balance left over to pay more of the other claims. 6

6
The Bank argues that the prejudice to non-Partnership
creditors cannot be considered because the Trustee did not prove
that any non-Partnership creditors existed at the time of the
challenged transactions. Because this argument is raised for
the first time on appeal, it has been waived. See Muth v.
United States, 1 F.3d 246, 250 (4th Cir. 1993). In any event,
it is without merit as section 15-207 makes every conveyance
effected with the intent to hinder, delay, or defraud “present
or future creditors . . . fraudulent as to both present and
future creditors.” Md. Code Ann., Com. Law § 15-207 (emphasis
added).

The Bank also claims that the transfer made with check 1359
— the check that paid off the share loans — did not prejudice
MPA’s creditors because the transferred funds could not have
been subject to claims from MPA’s creditors even had those funds
not been used to pay off the Partnerships’ loans. The Bank
argues that the funds were stolen, and thus would have been
subject to a constructive trust, which would have put them out
of the reach of MPA’s creditors. This argument, however, is at
odds with an unchallenged finding of the bankruptcy court that
the funds could be reached by MPA’s creditors because they “came
from other sources as well [as the thefts from the
Partnerships], including the transfer from [a] bank in Florida
where there were no properties being managed by the debtor.”
J.A. 1247. Since the funds were commingled and could not be
traced, the bankruptcy court concluded, no constructive trust
(Continued)
24
 Nor do we agree with the Bank that it is entitled to a

credit for wiring MPA the funds the Partnerships had on deposit

at the Bank. The Bank argues that, by wiring these funds “it in

effect gave back the principal portion of check 1359” — the

check that paid off the share loans. Brief of Appellant at 31.

The Bank contends that the district court was incorrect to

characterize that transaction as involving the Partnerships’

funds because MPA would have had no obligation to release the

wired funds to the Partnerships. It is the Bank’s position,

however, that is flawed. Once the share loans were paid off in

July 1997, the Partnerships owned — free of any security

interest — the funds that the Partnerships had borrowed and that

were held in their names on deposit at the Bank. The Bank’s

wiring of the Partnerships’ funds to their agent, MPA, did not

somehow divest the Partnerships of entitlement to their funds

and grant MPA an ownership interest in them. Thus, the Bank’s

argument that wiring the Partnerships’ funds to MPA made MPA

whole for MPA’s repayment of the share-loan principal — and

therefore entitled the Bank to a credit — is incorrect.

could be imposed. Because the Bank does not even acknowledge,
let alone challenge, this analysis, there is nothing for us to
review concerning this argument.

25
 B.

As we have noted, the bankruptcy court found that Greenbaum

paid off the share loans to conceal his embezzlement. The Bank

challenges this finding, contending that even if Greenbaum’s

taking out the loans on the Partnerships’ behalf was fraudulent,

his repayment of them was not. The Bank notes that Greenbaum

testified that he was not yet under investigation at the time he

decided to pay off the loans. We conclude, however, that the

bankruptcy court’s finding was not clearly erroneous.

Greenbaum surely knew that if the existence of the share

loans were discovered by HUD or the Partnerships, his

embezzlement scheme — and MPA’s corresponding liability for the

embezzlement — might be uncovered. It was therefore reasonable

to infer that Greenbaum had MPA pay off the Partnerships’ loans

so that the loans would not be discovered and so that the

embezzlement would remain concealed.

C.

The Bank next argues that regardless of what Greenbaum’s

state of mind was regarding the repayment of the share loans,

the bankruptcy court clearly erred in finding that the Bank knew

of Greenbaum’s fraudulent intent, as the Bank contends was

required to support avoidance of the share-loan payments under

an actual-fraud theory. See Berger v. Hi-Gear Tire & Auto

Supply, Inc., 263 A.2d 507, 510 (Md. 1970) (holding that

26
grantor’s fraudulent intent “will not vitiate or impair a

conveyance unless the grantee participates in the fraudulent

intent”). 7 We hold that proof of the Bank’s constructive

knowledge of Greenbaum’s fraudulent intent was all that was

required. Alternatively, we conclude that the finding that the

Bank actually knew of Greenbaum’s fraud was not clearly

erroneous.

1.

The Bank first contends that the district court and the

bankruptcy court both erred in concluding that proof of

constructive knowledge by the Bank of Greenbaum’s fraudulent

intent would be sufficient to allow the Trustee to avoid the

share-loan transfers under an actual-fraud theory. In essence,

7
The Bank also argues that the bankruptcy court improperly
deviated from the district court’s mandate in finding on remand
that the Bank had actual knowledge of Greenbaum’s fraudulent
intent regarding the share-loan-related transfers. This
argument is curious because the Bank takes the position that
such a finding would be necessary to sustain the bankruptcy
court’s decision. Even if we agreed with the Bank that the
bankruptcy court exceeded the district court’s mandate in
finding that the Bank actually knew of Greenbaum’s fraud
regarding the share-loan payments, it would serve no purpose to
vacate the judgment and then return the case to the bankruptcy
court to consider the very factual issue that it had already
resolved. In any event, the fact that the Bank actually knew
about the share-loan scheme was relevant to the issue of whether
the Bank had constructive knowledge of Greenbaum’s fraudulent
intent regarding the non-share-loan payments, a subject clearly
within the scope of the remand.

27
the Bank maintains that the Maryland Court of Appeals would not

follow Fick, on which the lower courts relied. We disagree.

In Fick, the Maryland Court of Special Appeals confronted

the question of whether a grantee of property who gives fair

consideration must be shown to have actual, as opposed to

constructive, knowledge of the grantor’s fraudulent intent in

order for a party to successfully set aside the conveyance under

the UFCA. See Fick, 694 A.2d at 140. The court noted that

although some courts have required actual notice by the grantee,

most have held that constructive notice is sufficient. See id.

at 145. The court acknowledged that some language in certain

Maryland cases indicated that Maryland followed the minority

rule requiring actual knowledge. See id. at 145-46. The court

did not find those cases dispositive, however, explaining that

none “concerned an allegation by a creditor that a grantee had

constructive, as opposed to actual, knowledge of the grantor’s

fraud.” Id. at 146. And, the court cited older Maryland cases

that explicitly held that constructive knowledge by the grantee

was sufficient. See id. Although the court noted that these

cases were decided prior to the UFCA, it explained that the UFCA

was declaratory of the common law and of the Statute of

Elizabeth. See id. Thus, the court found the older cases

applicable. See id.

28
 The Bank, relying primarily on the cases Fick explicitly

distinguished, argues that the Maryland Court of Appeals would

not follow Fick. Alternatively, the Bank argues that Fick does

not apply in a case in which constructive fraud was not

specifically alleged in the complaint. We disagree with both

arguments.

When predicting how a state’s highest court would decide a

legal issue, we view decisions of the state’s intermediate

appellate court as the best indication, other than decisions of

the highest court itself, of how the highest court would rule.

See Private Mort. Inv. Servs. v. Hotel and Club Assocs., Inc.,

296 F.3d 308, 312 (4th Cir. 2002). It is undisputed that the

cases on which the Bank relies for support were, unlike Fick,

cases in which a theory of constructive knowledge was not

asserted. The significance of that point is not that Fick

decided that constructive knowledge must be pleaded explicitly

in order to charge the grantee with knowledge under that theory.

Rather, it is that language in those other cases stating the

requirement that a grantee know of a grantor’s fraud should not

be read to exclude the possibility that the grantee would be

charged with such knowledge because he was on inquiry notice.

2.

Even if the Trustee were required to prove that the Bank

had actual knowledge of Greenbaum’s fraudulent intent regarding

29
the share-loan payments, we conclude that the bankruptcy court’s

finding of such knowledge was not clearly erroneous.

Greenbaum’s prior relationship with the Bank, Knowles’s failure

to make any significant investigation despite the obviously

unusual nature of the share loans, his participation in creating

misleading audit documents, and his production of dummy account

statements, taken together, are powerful evidence that the Bank

was aware of the share-loan scheme. The Bank concedes that this

evidence “might support a finding that Knowles knowingly

participated in the share loan scheme” were it not for other

facts that the Bank argues the bankruptcy court did not

explicitly consider. Brief of Appellant, at 44. In particular,

the Bank points out that Knowles and Greenbaum had not known

each other prior to the making of these loans; Knowles and

Greenbaum both testified that no Bank employee knew about

Greenbaum’s scheme; there was no evidence presented that any

bribes were paid to anyone connected with the Bank or that the

Bank or Knowles profited from the share loans other than the

interest that they generated; bank examiners concluded there was

nothing illegal about the loans; neither Knowles nor any Bank

employee was charged with any crime related to the share loans;

and although Knowles signed some of the account confirmations

early in the scheme, Greenbaum later forged Knowles’ signature

on some account confirmations.

30
 In the end, the Bank argues that the only reasonable

inference to be drawn from the evidence as a whole was that

Knowles was not actually aware of Greenbaum’s scheme, but merely

“incredibly stupid.” Id. at 44. We do not agree that the

evidence compelled that conclusion. The lack of evidence of any

financial motive on the part of anyone at the Bank to help

Greenbaum execute his fraud and the lack of evidence of any

previous relationship between Greenbaum and Knowles might have

been more persuasive in the absence of the evidence that

Greenbaum was a former director and shareholder of the Bank.

That relationship certainly raised the possibility that Bank

employees might be sympathetic, or might be urged by their

superiors to be sympathetic, to assisting Greenbaum in his

fraudulent activities. And, the fact that various government

entities did not bring criminal proceedings against Bank

employees does not excuse the bankruptcy court from deciding for

itself, by a preponderance of the evidence, whether the Bank was

aware of Greenbaum’s fraudulent scheme. Finally, it is hard to

see the relevance of the fact that Greenbaum forged Knowles’s

signature on some account confirmations, in light of the fact

that Knowles willingly signed others. We therefore conclude

that the bankruptcy court’s finding that the Bank had actual

knowledge of Greenbaum’s fraudulent intent was not clearly

erroneous.

31
 In sum, for all of the reasons discussed, we hold that the

district court properly affirmed the bankruptcy court’s ruling

allowing the Trustee to avoid and recover the share-loan

payments.

III.

The Bank also contends that the bankruptcy court abused its

discretion by permitting the Trustee to testify as an expert

witness in the areas of fraud examination, fraud transfer

analysis, and solvency analysis, given that the Bank had no

notice prior to trial that he might be testifying as an expert

in those areas. The Bank argues that without this expert

testimony, the Trustee would have been unable to establish MPA’s

insolvency, and any attempt by the Trustee to avoid and recover

the non-share loan payments under a constructive-fraud theory

would have failed. We find no abuse of discretion.

Bankruptcy Procedure Rule 7037, which provides that Rule 37

of the Federal Rules of Civil Procedure applies in adversary

proceedings, see Fed. R. Bankr. P. 7037, requires the exclusion

of any witness not disclosed as required by Rule 26 of the

Federal Rules of Civil Procedure unless the failure to disclose

is “substantially justifi[ed]” or “harmless,” Fed. R. Civ. P.

32
37(c)(1). 8 Although the Bank argues that the failure to disclose

cannot be considered harmless because the expert testimony

helped the Trustee’s case and harmed the Bank’s, that argument

is misplaced. The critical inquiry under Rule 7037 concerns the

prejudicial effect of the Trustee’s failure to disclose that he

might be providing the expert testimony, not of the testimony

itself, and the Bank offers no argument regarding how timely

disclosure would have made any difference.

IV.

On cross-appeal, the Trustee argues that the district court

erred in reversing the bankruptcy court’s ruling allowing the

Trustee to avoid and recover $119,036.12 of the transfer made

with check 784. We agree.

The bankruptcy court found that the evidence did not

establish how the Bank applied $119,036.12 of the funds

transferred by that check, and thus the court found that MPA did

not receive fair consideration for it. The president of the

Bank at the time of trial, John Lane, testified that his

investigation had indicated that $119,036.12 of the funds had

8
Bankruptcy Procedure Rule 7026 provides that Rule 26 of
the Federal Rules of Civil Procedure applies in adversary
proceedings. See Fed. Bankr. Rule 7026.

33
been applied to share loans. 9 The bankruptcy court discredited

this testimony because Lane did not have first-hand knowledge

and could not produce supporting documentation. The court also

inferred from the fact that the Bank did not produce the records

that MPA did not receive fair consideration for $119,036.12 of

the transfer. 10

The district court ruled that the bankruptcy court erred in

shifting the burden to the Bank to prove that MPA received fair

consideration for the transfer. The district court ruled that,

had the bankruptcy court realized that the Trustee bore the

burden, it could only have found that the Trustee failed to meet

his burden with regard to check number 784. The district court

therefore reversed the bankruptcy court decision to the extent

it allowed the Trustee to avoid and recover $119,036.12 of the

payment. The Trustee argues that the district court erred

regarding the constructive-fraud theory. 11

9
Of course, had the bankruptcy court credited Lane’s
testimony that the funds had been applied to the share loans,
the court would have ruled that the transfer could be avoided.
10
The court inferred that $119,036.12 of the transfer was
“part of the fraudulent scheme in which [the Bank] participated
with Greenbaum.” J.A. 2112.
11
Because we conclude that the bankruptcy court’s ruling
should have been affirmed under a constructive-fraud theory, we
do not address the viability of the Trustee’s actual-fraud
theory.

34
 A.

The Trustee argues that the district court erred in

concluding that the bankruptcy court improperly shifted the

burden of proof to the Bank regarding this transfer. We agree.

A party seeking to set aside a conveyance as fraudulent

initially bears the burden of proving the fraud. See Sullivan

v. Dixon, 373 A.2d 1245, 1248 (Md. 1977). “It is well

established . . . that facts and circumstances may be such as to

shift the burden to the grantee to establish the bona fides of

the transaction.” Berger, 263 A.2d at 510. The presence of

several badges of fraud are “facts and circumstances” sufficient

to shift the burden regarding consideration. See Wellcraft

Marine Corp. v. Roeder, 550 A.2d 377, 379 (Md. 1988) (internal

quotation marks omitted). Such badges can include, inter alia,

the grantor’s insolvency, the relationship between the grantor

and the grantee, and departure from the normal course of

business. See id.

Here, the relationship between Greenbaum and the Bank bears

special attention not only because Greenbaum was a former

director and stockholder, but also because the two were already

engaged in fraudulent activities regarding the share loans that

represented a departure from the Bank’s normal course of

business. In light of this relationship and MPA’s insolvency,

the bankruptcy court’s decision to shift the burden to the Bank

35
to show that MPA received fair consideration for check 784 was

well founded.

B.

The Bank maintains that even if the transfer made by check

784 was otherwise avoidable, the bankruptcy court abused its

discretion in allowing the Trustee to amend his complaint to

seek recovery of more than $72,000 of that transfer. We

disagree.

Federal Rule of Bankruptcy Procedure 7015, providing that

Rule 15 of the Federal Rules of Civil Procedure applies in

adversary proceedings, see Fed. R. Bankr. P. 15, allows

pleadings to be amended with leave of the court, see Fed. R.

Civ. P. 15(a). Leave to amend “shall be freely given when

justice so requires.” Id. We review the grant of a motion to

amend the pleadings for abuse of discretion. See Lone Star

Steakhouse & Saloon, Inc. v. Alpha of Va., Inc., 43 F.3d 922,

940 (4th Cir. 1995). We find no abuse of discretion here.

Counsel for the Trustee represented to the bankruptcy court

that the parties had been exchanging documents regarding check

784 until the week before trial and that the Trustee had only

recently determined that he was entitled to recover more than

$72,000 of the transfer. As the Bank did not dispute counsel’s

account, the bankruptcy court had no reason to believe that the

36
Trustee had delayed unreasonably in notifying the Bank that he

was seeking recovery of a greater amount.

Furthermore, the Bank did not demonstrate to the bankruptcy

court how it would be prejudiced by the “late” amendment.

Whether the Trustee was seeking recovery of $72,000 or

$119,036.12 of the $172,000 transfer, the Bank had reason to

show that it had given MPA more than the $52,963.88 worth of

consideration that it could prove. As it failed even to prove

consideration valued at $72,000, there is no reason to believe

that its evidence would have been any different had the initial

complaint sought recovery of the additional $47,036.12.

V.

In sum, we reverse the district court’s reversal of the

bankruptcy court’s ruling that the Trustee could avoid and

recover the challenged portion of the transfer accomplished by

check number 784. Otherwise, we affirm.

AFFIRMED IN PART AND REVERSED IN PART

37