Article Courtesy of Michael Robson (Greenberg Traurig)
Peterson v. Colony American Finance Lender LLC, et al. (In re Mack Industries Ltd., et al.), 71 BCD 42, 2021 WL 6015700 (Bankr. N.D. Ill. 2021)
U.S. Bankruptcy Judge Carol A. Doyle of the Northern District of Illinois (the “Court”) partially granted a motion to dismiss in a case relating to an attempt to avoid transfers of real property from certain debtors that Ronald Peterson, serving as the Chapter 7 Trustee (the “Trustee”), contends were part of a scheme to deplete the debtor’s assets. The Trustee sought to unravel a series of pre-petition transactions that resulted in a lender acquiring about 170 of the property management company’s former properties in advance of the bankruptcy proceedings.
Mack Industries Ltd. (“Mack”), a suburban Chicago property management company, along with three of its subsidiaries, (i) Mack Industries II LLC, (ii) Mack Industries V LLC and (iii) Mack Industries VI LLC (collectively with Mack, the “Debtors”), filed for Chapter 7 liquidation in March 2017. The Debtors managed 500 single-family residential units for American Residential Leasing Co. (“American”) and were responsible for leasing services, maintenance and the payment of property taxes. Mack informed American that it was unable to perform under the existing financial terms and sought to renegotiate the business arrangement. As part of those negotiations, a senior representative of Mack informed American that Mack would deplete its assets in the event the negotiations were not satisfactorily concluded in favor of Mack.
Mack then sought to secure financing from Colony American Finance Lender LLC (“Colony”) for approximately 170 properties. Colony agreed to provide financing up to a specific amount of the value of each property and to pay off existing mortgages (the “Colony Financing”) on certain other properties up to approximately $30,000,000. The Colony Financing was completed over a series of funding draws through which properties were added at each draw based on the current valuation of such property. Colony required that all properties subject to the Colony Financing be held in a single entity and Mack formed Mack LOC I LLC (“Mack LOC”) to accomplish this structure. As collateral, Colony received liens against both the properties held by Mack LOC and the membership interests in Mack LOC, which was owned by Mack LOC III, LLC, another entity under the Mack corporate umbrella. After Mack LOC defaulted on the Colony Financing, Colony foreclosed on its lien against the Mack LOC ownership interest and formed another entity, CAF-REO-1 LLC (“CAF”) to hold those interests. CAF then caused Mack LOC to sell all the properties in a bulk sale at valuations that were far less than the original valuations used in connection with the Colony Financing due diligence review and as valued at each funding draw.
The Trustee alleged that the transactions resulted in Colony and CAF receiving about $12,000,000 in equity in the properties without adequate return or consideration. The Trustee (i) argued that the transfers were constructively or actually fraudulent and sought to avoid them for the benefit of the bankruptcy estate and (ii) sought to pierce the corporate veils of Mack LOC and CAF to recover the value of the transfers from Colony.
11 U.S. Code § 550(a) provides that a trustee who avoids a transfer under Section 544 or 548 may recover the transferred assets from an “initial transferee” or a party who receives the assets from the initial transferee. Under Section 550(b), a subsequent transferee from the initial transferee may defend against a recovery action on the grounds that it received the asset for value and in good faith.
The Court held that the Trustee’s complaint fell short of stating a viable fraudulent transfer claim against Colony. The Court found that Colony never became a “transferee” of the properties under Section 550(a) because it never received title to the properties as the transfers in question were from the Debtors to Mack LOC. Additionally, the Court rejected the Trustee’s position that the substance of the transactions rendered Colony an initial transferee, since Colony eventually received the benefit of the equity in the properties rather than serving as a transferee. The Court also found that the Trustee had failed to allege sufficient grounds for the claims to pierce the corporate veils of Mack LOC and CAF in order to recover the transfers as the complaint alleged unity of ownership and management which are insufficient under Delaware law, rather than the traditional causes of action relating to undercapitalization, lack of corporate formalities, or a showing of corporate sham to commit fraud. However, the Court denied the motion to dismiss with respect to certain claims to proceed as the Court found that the Trustee’s complaint alleged sufficient facts to support the claim that the initial transfer from Mack to Mack LOC qualified as fraudulent.