[co-author: Brennan Cox]
On April 29, 2022, the U.S. Bankruptcy Court for the District of New Jersey avoided a debtor’s $2 million loan obligation and returned $592,875.03 in repayments on that loan—with pre- and post-judgment interest—to the debtor’s estate. In November 2007, Latoc, Inc. loaned $2 million to The Mall at Galaxy, Inc., which both parties understood as a loan that would be immediately transferred to PermaLife, LLC, an entity needing funds following a building fire. PermaLife and Latoc had discussed a possible financing, but PermaLife’s board declined the loan because of a conflict with the Latoc’s president. The Mall was insolvent at that time of the loan; however, it 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 recover the loan’s $1.8 million outstanding balance. The Chapter 7 Trustee then sued to avoid the loan obligation and recover the pre-petition loan payments as fraudulent transfers.
In concluding that the loan obligation and payments were constructive fraudulent transfers, the court focused on the value received by the debtor in exchange for the agreement to repay the loan. Under 11 U.S.C. § 548, a payment or obligation may be avoided if (i) the debtor received less than reasonably equivalent value in exchange and (ii) the debtor was insolvent when the transfer was made. The Court found that the Mall was a “mere conduit” for the loan made by Latoc to PermaLife and, therefore, the Mall did not receive reasonably equivalent value in return for its obligation to repay the loan. Therefore, the Court (i) collapsed 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 the loan payments to the Mall’s bankruptcy estate with pre-judgment interest dating back to a lawsuit brought by the trustee ten years prior.
The case is Kartzman v. Latoc, Inc. (In re Mall at the Galaxy, Inc.), No. 12-ap-1769 (Bankr. D.N.J. Apr. 29, 2022). The trustee is represented by Mellinger, Sanders & Kartzman, LLC. Latoc is represented by Peter A. Ouda, Esq. The order is available here.
