Bankruptcy Court Avoids Loan Obligation as Fraudulent Transfer and Orders Reimbursement of Prejudgment Payments and Interest | King and Spalding
[co-author: Brennan Cox]
On April 29, 2022, the United States Bankruptcy Court for the District of New Jersey avoided a debtor’s $2 million loan obligation and repaid $592,875.03 in repayments on that loan – with interest before and after. judgment – to the debtor’s estate. In November 2007, Latoc, Inc. loaned $2 million to The Mall at Galaxy, Inc., which both parties understood to be a loan that would be immediately transferred to PermaLife, LLC, an entity in need of funds at the following a fire. PermaLife and Latoc had discussed possible financing, but PermaLife’s board of directors turned down the loan due to a dispute with Latoc’s president. The mall was insolvent at the time of the loan; however, he immediately transferred the loan proceeds to PermaLife, and over the next two years the mall repaid Latoc $592,875.03 of the outstanding loan balance. When the mall filed for bankruptcy in January 2010, Latoc sought to collect the $1.8 million outstanding loan balance. The Chapter 7 trustee then sued to avoid the loan obligation and recover the pre-petition loan payments as fraudulent conveyances.
In finding that the loan obligation and payments were alleged fraudulent transfers, the court focused on the value received by the debtor in exchange for agreeing to repay the loan. Under 11 USC § 548, a payment or obligation may be avoided if (i) the debtor received in exchange less than the reasonably equivalent value and (ii) the debtor was insolvent at the time of the transfer. The Court found that the mall was merely a “mere conduit” for Latoc’s loan to PermaLife and, therefore, the mall did not receive reasonably equivalent value in exchange for its obligation to repay the loan. Therefore, the Court (i) consolidated the two transactions into one, a loan from Latoc to PermaLife, (ii) avoided both the loan obligation and the loan payments as fraudulent transfers and (iii ) ordered Latoc to return loan payments to the mall’s bankruptcy estate with prejudgment interest dating back to a lawsuit filed by the trustee ten years prior.
The case is Kartzman vs. Latoc, Inc. (In re Mall at the Galaxy, Inc.), No. 12-ap-1769 (Bankr. DNJ April 29, 2022). The Trustee is represented by Mellinger, Sanders & Kartzman, LLC. Latoc is represented by Peter A. Ouda, Esq. Order is available here.