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In Re Global Outreach, S.A.

2010 WL 3957501 (Bkrtcy. Ct. D. N.J. 2010) (Unpublished)

BANKRUPTCY; MORTGAGES — A mortgage lender who is involved in a structure designed to defraud creditors is not treated as a good faith transferee under the bankruptcy law and therefore its mortgage will not be protected in bankruptcy and the mortgaged property will be returned to the bankruptcy estate free and clear of the lender’s liens.

A company had hoped to acquire land for development as a luxury resort. It assembled over 550 acres of land by acquiring entities that held parcels of land and acquiring options to acquire others. The developer’s president began seeking additional financing to supplement the funds it had advanced to his company. The developer issued option-note agreements, each of which gave the holder an option to buy a condominium at a discount or recover the principal plus interest on 15 days’ notice. Each of these agreements provided that the developer would be in default if it transferred its interest in the real property. The company issued at least six promissory notes. It also sought construction financing. The president was introduced to a lender. The president failed to disclose the existence of the option agreements or the promissory notes. He also did not reveal his convictions for real estate fraud or numerous judgments against him. The lender discovered the convictions and judgments, but still made a loan. In connection with the loan, the developer executed a trust agreement and transferred its properties to a trustee. Despite it being an event of default under the option agreements, the transfer of the properties to the trust was not disclosed to the option holders. The stated purpose of the trust agreement was to keep the properties free of encumbrances in favor of third parties, and it empowered the trustee to cause the properties to be mortgaged in favor of the lender.

All of the developer’s outstanding debts were soon refinanced by a loan from the lender in a stated principal amount of $41 million. The note required phased payments to the lender based upon the degree of development of the resort. Eventually, the lender became aware of the option-notes and sent a default notice to its borrower. The lender then filed suit against the developer, and exercised its rights under the trust agreement to obtain a mortgage on the real property. The developer then sought protection in bankruptcy court as a debtor.

Upon motion, the Court ruled that the lender had obtained its mortgage from the trust with knowledge of the avoidability of the transfer; that is the developer sought to fraudulently transfer and shield its assets from good faith creditors. The developer retained possession and control of the property even though it had transferred legal title to a trust. Further, the transfer was concealed from the option holders, as existing creditors, since the transfers would have been an event of default under those debt instruments. Additionally, the trust’s own language indicated that the transfer was intended to place the assets beyond the reach of those creditors.

The Court concluded that the lender, having full knowledge of the trust, was not a good faith transferee. The transfer to the trust was accomplished as a means to protect and secure the loans made by that lender, and the lender was the party for whose benefit the transfer was performed. Therefore, it could not receive protection in bankruptcy as a good faith transferee, and the assets held by the trust had to be returned to the bankruptcy estate free and clear of the liens of this lender. The lender also was aware of the president’s checkered history; and such awareness of facts would have caused a reasonable person to further investigate the potential voidability of the eventual transfer.


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