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In Re Dwek

2011 WL 1300188 (Bkrtcy. D. N.J. 2011) (Unpublished)

FRAUDULENT TRANSFERS — Even though an individual debtor intended to hinder or defraud creditors, if the transaction in question was between the company owned by the debtor and a third party, the debtor’s objective intent is immaterial when determining whether a fraudulent transfer had taken place.

An individual debtor, who had sought protection in bankruptcy, had created a limited liability company in the hope of acquiring property that would then be leased to a third party to operate a drug store. His company ultimately entered into a ground lease with a tenant drug store. Several months later, the company’s certificate of formation was amended to say that a businessman, rather than the debtor, had a 50% membership interest. Also, in the same month, his company purchased two adjacent lots and financed the purchase with a mortgage loan. Both the debtor and other businessman personally guaranteed the note. Subsequently, the company refinanced the loan, paying off the original mortgage. Two days later, the businessman transferred his 50% interest in the company back to the debtor in exchange for $1,096,770 of the loan proceeds. The bankruptcy trustee ultimately sold the property four years later for $3,400,309.

In the bankruptcy, the trustee sought to avoid the original transfer of the 50% membership interest to the businessman, and then to avoid the subsequent buyback of that businessman’s membership interest. The Bankruptcy Court addressed the merits of the trustee’s action upon a motion for summary judgment filed by the businessman.

The Court first noted that when a 50% membership interest was transferred to the businessman, the debtor was the sole member of the limited liability company. Therefore, the first transfer was between the debtor and businessman. Though the debtor had testified that he had made the transfer to the businessman with the intent to delay, hinder, and defraud creditors, the court questioned why the debtor requested, and stringently negotiated for, a capital contribution from the businessman in exchange for the 50% interest. Therefore, the Court found the debtor’s intent as to this transfer was at issue and could not be decided on a summary judgment motion.

As to the redemption of the businessman’s interest in the company, the Court said the funds came from a refinancing of the original mortgage loan. It was undisputed that the limited liability company was the sole obligor on the refinancing loan. The debtor did not even guarantee this loan. In fact, the refinancing eliminated his personal guaranty of the earlier loan. To the Court, it followed that once the company, and not the debtor, was the relevant debtor it was immaterial whether the individual debtor intended to hinder or defraud creditors. It concluded that the record before it at this stage was insufficient to conclude that the company harbored an actual intent to defraud its two creditors, as the first loan was paid off in full, and the refinancing lender was a sophisticated commercial party. Further, the record supported an interpretation that the company received adequate consideration for the transfer because the company’s value at the time the businessman redeemed his membership interest was supported by a monetary appraisal of $4,101,639, representing a more lucrative real estate market than at the time the trustee sold the company’s sole asset for less money. As a result, the Court granted summary judgment dismissing the trustee’s claims as to this particular transfer.


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