Red Flags Do Not Automatically Defeat § 548(c) Good Faith; Actual-Notice Service of a Michigan Non-Periodic Garnishment Perfects a Lien Outside the § 547 Preference Period

1. Introduction

In Jeff A. Moyer, Trustee v. Connie Rogers; William Stephen (arising in In re Wedgewood Properties, LLC), the Chapter 7 Trustee sought to claw back money paid to two elderly investors—Connie Rogers and William Stephen—after the collapse of Wedgewood Properties, LLC, a Nevada entity managed by attorney Shawn Weera. Between 2013 and 2016, Rogers and Stephen invested $635,000. After tax surprises and discovery of apparent misuse of funds, they sued Weera and Wedgewood in Michigan state court and settled for $900,000, receiving $550,000 up front plus later amounts including a post-judgment bank-account garnishment of $98,063.15.

The Trustee alleged the payments were avoidable as (i) actual fraudulent transfers under 11 U.S.C. § 548(a)(1)(A) (and related state-law theories), and (ii) a preference under 11 U.S.C. § 547(b) as to the garnishment proceeds. The Bankruptcy Court found Wedgewood was continuously insolvent, commingled funds, and exhibited Ponzi-like features, but held that Rogers and Stephen proved a § 548(c) good-faith/value defense to most transfers, and that the garnishment lien was perfected outside the 90-day preference period because service was effective earlier than the Trustee claimed. The Bankruptcy Appellate Panel (BAP) affirmed.

2. Summary of the Opinion

  • § 548(c) good faith: The BAP held the Bankruptcy Court’s finding that Rogers and Stephen accepted the actually fraudulent transfers in good faith was not clearly erroneous. The presence of “red flags” and even suspicion sufficient to prompt investigation does not, by itself, terminate good faith under Sixth Circuit precedent.
  • § 547 preference timing (Michigan garnishment): The BAP held that service of a non-periodic writ of garnishment that gave the garnishee bank actual notice was effective for lien attachment/perfection purposes under Michigan rules, even though the creditor did not strictly complete all steps in MCR 2.105(D)(2). Because service occurred 93 days before the petition date, the transfer fell outside the 90-day preference period.
  • Result: The Bankruptcy Court’s judgment was AFFIRMED.

3. Analysis

3.1. Precedents Cited

A. Finality, standards of review, and appellate posture

  • Ritzen Grp., Inc. v. Jackson Masonry, LLC and Bullard v. Blue Hills Bank: Used to confirm the BAP’s jurisdiction by explaining bankruptcy finality—orders disposing of a discrete adversary proceeding are final and appealable.
  • Church Joint Venture, L.P. v. Bedwell (In re Blasingame) and Geberegeorgis v. Gammarino (In re Geberegeorgis): Reinforced that adversary-proceeding judgments are final.
  • Kraus Anderson Cap., Inc. v. Bradley (In re Bradley), Miller v. Wylie (In re Wylie), Barclays/Am. Bus. Credit, Inc. v. Adams (In re Adams), United States v. Mathews (In re Mathews), and Anderson v. City of Bessemer City: Provided the controlling “clearly erroneous” standard for factual findings (critical because good faith here was treated as fact-intensive and reviewed deferentially).
  • Whitlock v. FSL Mgmt., LLC, Antioch Co. Litig. Tr. v. Morgan, and Allstate Ins. Co. v. Thrifty Rent-A-Car Sys., Inc.: Framed de novo review of state-law questions and the “predictive” method when a state supreme court has not directly answered an issue.

B. Fraudulent transfer recovery and “good faith” under § 548(c)

  • Meoli v. Huntington Nat'l Bank: The decision’s centerpiece. The BAP treated Meoli as binding Sixth Circuit authority on how to assess “good faith” in fraudulent transfer litigation. It adopted Meoli’s practical question: whether the transferee ever reached the point where it could no longer “legitimately cling to its belief” that it was receiving transfers in good faith. Meoli was also used to reject the Trustee’s proposed rule that inquiry notice/red flags alone defeat good faith.
  • First Indep. Cap. Corp. v. Merrill Lynch Bus. Fin. Servs. Inc. (In re First Indep. Cap. Corp.): Cited via Meoli to show courts “struggle” with defining good faith and to situate the Sixth Circuit’s holistic approach.
  • Bash v. Textron Fin. Corp. and Tabor v. Kelly (In re Davis): Authorities for the “hybrid” good-faith test (subjective intent evaluated against objective red flags/inquiry notice). The BAP approved the Bankruptcy Court’s use of this framework as consistent with Meoli’s approach.
  • Bonded Fin. Servs., Inc. v. European Am. Bank: Supported the “mere conduit” doctrine and the “initial transferee” concept—relevant because § 548(c) applies to initial transferees like Rogers and Stephen.
  • Law v. Siegel: Used to reject an equitable rebalancing argument; courts cannot rewrite the statutory tradeoff embodied in § 548(c) merely because innocent creditors may be treated unevenly.

C. Imputation of attorney knowledge to client

  • Katz v. Kowalsky: Supplied the Michigan rule that an attorney’s knowledge within the scope of representation is imputed to the client. The Trustee relied on this concept to argue that attorney Foster’s “Ponzi scheme” allegations should defeat the clients’ good faith; the courts rejected that leap on the facts.
  • Restatement (Third) of Agency, § 5.03 (2006): Reinforced the general imputation principle.

D. Preference timing, “transfer,” “perfection,” and garnishment

  • Barnhill v. Johnson: Established that federal law governs when a transfer is complete, while state law helps define property interests and perfection mechanics.
  • Fidelity Fin. Servs., Inc. v. Fink: Emphasized perfection occurs only when the creditor has done the acts required to perfect—thus the need to identify what Michigan requires for garnishment perfection.
  • Battery One-Stop, Ltd. v. Atari Corp. (In re Battery One-Stop, Ltd.): The operative Sixth Circuit garnishment rule: a bank-account garnishment transfer is perfected upon service and notice to the garnishee because the funds become “bound,” preventing later judicial liens from priming the garnishment lien.
  • Mich. Tractor & Mach. Co. v. Elsey and Mary v. Lewis: Michigan authority for the “general rule” that a garnishment lien attaches upon service of the writ.
  • Bleau v. First of Am. Bank-Cent. (In re Arnold), In re Collier, and In re Piccard: Additional Michigan bankruptcy decisions aligning with the proposition that garnishment is perfected when served.
  • Freedom Grp., Inc. v. Lapham-Hickey Steel Corp. (In re Freedom Grp., Inc.): Noted as the minority approach (transfer at final order), but the BAP adhered to Sixth Circuit majority doctrine.
  • McKnight v. General Retirement System of City of Detroit and Laborers Pension Trust Fund Detroit & Vicinity v. H & H Constructors, Inc.: Supported treating technically imperfect service as nonfatal where actual notice occurred, especially in the garnishment/default context, relying on MCR 2.105(K)(3).
  • Hairston v. LKU: A recent Michigan Supreme Court decision stressing that garnishment statutes are strictly construed and garnishment jurisdiction must stay within Michigan Court Rules. The BAP treated Hairston as compatible with (not defeating) the actual-notice analysis because MCR 2.105(K)(3) itself is a mandatory rule limiting dismissal for improper service when notice was achieved.
  • Krakowsky v. Margolis: Cited via Hairston for strict construction of garnishment statutes.
  • Ally Financial, Inc. v. Ellis: Distinguished as a periodic-garnishment case tied to MCLA § 600.4012’s strict service requirement, underscoring the opinion’s key statutory distinction between periodic and non-periodic garnishments.

E. Concurring opinion’s doctrinal thread (good faith across § 548(c) and § 550(b)(1))

  • Picard v. Citibank, N.A. (In re Bernard L. Madoff Inv. Sec. LLC) and Meoli v. Huntington Nat'l Bank (In re Teleservices Grp., Inc.): Invoked to argue the “without knowledge of the voidability of the transfer” language in § 550(b)(1) may be redundant or illustrative of good faith rather than a separate standard.
  • IRS v. Nordic Village, Inc. (In re Nordic Village, Inc.) and First Independence Capital Corp. v. Merrill Lynch Bus. Fin. Servs. Inc. (In re First Independence Capital Corp.): Cited as foundational Sixth Circuit authorities that “invite a holistic factual determination” of inquiry notice/voidability—guidance the concurrence urged courts to apply explicitly even in § 548(c) cases.

3.2. Legal Reasoning

A. § 548(c) good faith: inquiry notice is relevant but not dispositive

The BAP accepted (as undisputed) that the settlement-related transfers were actually fraudulent and presumptively avoidable. The case therefore turned on the transferees’ affirmative defense: whether Rogers and Stephen took in good faith and gave value under § 548(c).

The Trustee’s core legal push was to convert “red flags” into an automatic good-faith defeat. The BAP rejected that move as inconsistent with Meoli v. Huntington Nat'l Bank. In Meoli, even a financially sophisticated bank that detected serious red flags and undertook investigation retained good faith until an investigation yielded decisive information (Watson’s fraud history) such that the bank could no longer “legitimately cling” to its benign belief. Applying that logic, the BAP concluded that the Bankruptcy Court permissibly found that Rogers’ and Stephen’s post-investment concerns suggested (at most) Weera’s incompetence or misconduct toward them—not necessarily knowledge (or unavoidable inference) of a broader debtor-wide fraudulent scheme.

The BAP also deferred to the Bankruptcy Court’s trial-level fact finding: Rogers was found credible and sharp; Stephen was honest but cognitively limited. Given the “clearly erroneous” standard, the BAP emphasized that even if it might have weighed the facts differently, it could not reverse where the Bankruptcy Court’s account was plausible.

B. Imputed knowledge through counsel: allegations are not the same as knowledge

The Trustee argued that attorney Foster’s discovery (offshore transfers, suspicious transactions) and his pleading of “Ponzi scheme” language should be imputed to the clients under Katz v. Kowalsky. The BAP accepted the general imputation principle but agreed with the Bankruptcy Court’s factual conclusion: the record did not show Foster actually knew Wedgewood was operating as a Ponzi scheme; he testified he used the label for litigation leverage and the case settled quickly.

Crucially, the BAP treated the “knowledge” question as fact-bound and compared Foster’s information set to (i) LARA’s regulatory action, which did not uncover or treat Wedgewood as a Ponzi scheme, and (ii) the Trustee’s forensic accountant, whose deeper reconstruction did. That comparative context supported the trial court’s finding that the “tipping point” in Meoli terms was not proven here.

C. Preference timing: actual-notice service can perfect a non-periodic garnishment lien

For the garnishment preference claim, the only dispute was timing: whether the “transfer” (the creation/perfection of a garnishment lien) occurred within 90 days of bankruptcy.

The BAP applied federal timing rules (e.g., Barnhill v. Johnson) and looked to Michigan law to determine when perfection occurred (Battery One-Stop, Ltd. v. Atari Corp. (In re Battery One-Stop, Ltd.)). Under Michigan’s general rule, a garnishment lien attaches upon service (Mary v. Lewis), and no later creditor can obtain a superior lien once the garnishment binds the account.

Although Foster did not strictly comply with MCR 2.105(D)(2) (he served a person in charge at a branch but did not send registered mail to the principal office), Michigan’s MCR 2.105(K)(3) states an action “shall not be dismissed for improper service” if service actually informed the defendant in time. The Bankruptcy Court found, and the BAP agreed, that the bank was in fact informed on August 14 (when branch management received it), not August 17 (when an internal garnishment department logged it). Because the writ was non-periodic and Michigan statutes impose stricter service validity language on periodic garnishments (MCLA § 600.4012) than on non-periodic garnishments (MCLA § 600.4011), the BAP concluded that actual notice prevented invalidation, and the lien/perfected transfer occurred 93 days prepetition—outside the preference period.

3.3. Impact

A. Fraudulent transfer litigation in the Sixth Circuit: “red flags” are evidence, not a switch

The decision reinforces a Sixth Circuit-centered, fact-intensive approach to good faith: “inquiry notice” and red flags matter, but they do not automatically end § 548(c) protection. Trustees will likely need to prove a more definite “tipping point” showing the transferee could no longer legitimately maintain an innocent explanation—particularly when the transferee is unsophisticated.

B. Settlement clawbacks and “value” dynamics

Although much of the opinion focuses on good faith, its practical effect is to protect certain settlement recoveries where the recipients can plausibly show they were simply attempting to recover their own losses without understanding they were being paid from commingled or later investor funds. That can reduce estate recoveries in fraud-collapse cases, intensifying the bankruptcy policy tension between equal distribution and statutory defenses.

C. Michigan garnishment practice: preference timing can turn on actual-notice service

For non-periodic garnishments of bank accounts in Michigan, the ruling signals that technical service defects may not postpone lien attachment/perfection if the garnishee had timely actual notice and could not obtain dismissal under MCR 2.105(K)(3). Bankruptcy preference exposure can therefore hinge on the earliest defensible “service/notice” date—often the branch-level receipt, not internal processing dates.

D. Doctrinal development: convergence of § 548(c) and § 550(b)(1)

Judge Gustafson’s concurrence highlights an unresolved interpretive question in Sixth Circuit practice: whether the “without knowledge of the voidability of the transfer” clause in § 550(b)(1) is functionally distinct from “good faith” or largely redundant. While not a holding, the concurrence may influence how future courts structure “inquiry notice” findings and may encourage more explicit use of the specific investigative questions Meoli “encouraged.”

4. Complex Concepts Simplified

  • Actual fraudulent transfer (§ 548(a)(1)(A)): A transfer made with intent to hinder, delay, or defraud creditors. In “Ponzi-like” cases, courts often infer intent because the business model depends on paying some investors with others’ money.
  • § 548(c) defense (good faith + value): Even if the transfer is fraudulent, an initial recipient can keep it (to the extent of value given) if the recipient took in good faith. “Good faith” is not defined; here it was evaluated holistically.
  • Inquiry notice / red flags: Facts that would make a reasonable person suspect something is wrong and consider investigating. This case holds that suspicion alone does not automatically kill good faith; the question is when suspicion becomes incompatible with continuing to believe the transfers are legitimate.
  • Initial transferee vs. mere conduit: An “initial transferee” receives the money for its own benefit; a “mere conduit” briefly holds or passes it along without control for its own benefit (e.g., a lawyer’s trust account). That distinction determines which defenses apply.
  • Preference (§ 547): A payment or lien that unfairly improves one creditor’s position shortly before bankruptcy (typically within 90 days). Timing depends on when the transfer is “perfected.”
  • Perfection (garnishment lien): The point at which the creditor’s lien becomes enforceable against third parties such that another creditor cannot obtain a superior lien. For Michigan bank-account garnishments, that generally occurs upon service of the writ.

5. Conclusion

The BAP’s affirmance in In re Wedgewood Properties, LLC solidifies two practical rules for Sixth Circuit bankruptcy litigation: (1) under Meoli v. Huntington Nat'l Bank, “red flags” and even investigative suspicion do not automatically defeat § 548(c) good faith; courts look for the point when a transferee can no longer legitimately maintain a benign belief; and (2) in Michigan, a non-periodic garnishment lien may attach and be treated as perfected for preference purposes upon service that gives the garnishee actual notice, notwithstanding technical defects that would not support dismissal under MCR 2.105(K)(3). The decision thus favors fact-intensive protection of certain innocent transferees while clarifying how garnishment service dates can control preference exposure.