JACQUELINE P. COX, Bankruptcy Judge.
This matter comes before the court on the adversary complaint (the "Complaint") of 4100 West Grand LLC, debtor in possession (the "Debtor") against TY Grand LLC
The jurisdiction of bankruptcy courts is limited. Bankruptcy courts have statutory authority to "hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) ..., and may enter appropriate orders and judgments, subject to review under section 158 of this title." 28 U.S.C. § 157(b)(1). Core proceedings include proceedings to determine, avoid, or recover fraudulent conveyances. 28 U.S. § 157(b)(2)(H).
"Arising under" jurisdiction connotes authority to adjudicate proceedings arising under title 11, such as matters under which a claim is made based on a provision
28 U.S.C. § 1334(a) provides that federal district courts have "original and exclusive jurisdiction" of all cases under title 11 of the United States Code, the Bankruptcy Code. 28 U.S.C. § 157(a) allows the district courts to refer cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 to the bankruptcy judges for the district. The authority to determine core proceedings arising in or arising under title 11, subject to review under section 158 of title 28, allows bankruptcy judges to enter final judgment on those matters subject to review in the district court. 28 U.S.C. §§ 157(b)(1) and 158(a).
In Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) the Supreme Court ruled that 28 U.S.C. § 157(c)(2) was unconstitutional. That section provided that estate counterclaims brought in response to claims filed against the bankruptcy estate were core proceedings, over which a bankruptcy judge had authority to enter final judgments. The Supreme Court held that Congress went too far in allowing bankruptcy judges to enter final judgment on state law counterclaims that are not resolved in the process of ruling on a creditor's proof of claim. 131 S.Ct. at 2620.
The Defendant, Creditor TY Grand LLC, filed several proofs of claim herein. As fully explained herein at Section D, 1, each proof of claim asserts TY Grand's claims in the alternative, the resolution of which would be determined by the outcome of the adversary proceeding. In proof of claim 3-1 TY Grand asserted that it had a secured claim if the Debtor prevailed on its fraudulent conveyance claim, but if TY Grand prevailed, its claim would be unsecured. Exhibit A attached to proof of claim 3-3 asserts at paragraph 7 that "[d]epending on the outcome of the litigation, there are two different amounts of TYG's claim. The first amount is if TYG prevails in the litigation ($2,262,170.34), and the second amount is if TYG does not prevail in the litigation ($2,722,-170.34)...." While the claims being advanced in this adversary proceeding are not counterclaims, their resolution implicates the process of ruling on the creditor's proof of claim as proof of claim 3-3 makes clear that TY Grand's claim depends on the outcome of the fraudulent conveyance claim. TY Grand's proofs of claim 3-4 and 3-5 also assert TY Grand's claims in the alternative.
In Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 64, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989), the Supreme Court held that a person who has not submitted a claim against a bankruptcy estate has a right to a jury trial when sued in bankruptcy to recover an allegedly fraudulent transfer, notwithstanding Congress' designation of fraudulent conveyances as core proceedings. The Stern decision implicated Granfinanciera because it makes clear that the filing of a claim by a creditor does not give a bankruptcy court authority to enter a final judgment on a fraudulent conveyance claim. The bankruptcy court's
The Seventh Circuit has ruled that non-Article III judges may hear cases when the claim arises as part of the process of allowance and disallowance of claims or when the claim becomes integral to the restructuring of the debtor-creditor relationship. In re Ortiz, 665 F.3d 906, 914 (7th Cir.2011).
28 U.S.C. § 157(c)(1) provides that a bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. The bankruptcy judge has to submit proposed findings of fact and conclusions of law to the district court, which would enter a final judgment after de novo review. Should a reviewing court find that this court lacks authority to enter a final order herein, this memorandum opinion may serve as its proposed findings of fact and conclusions of law under section 157(c)(1).
11 U.S.C. § 544 allows a trustee or debtor in possession to avoid transfers or obligations that are avoidable under state law. It "vests the trustee with the ability of a judgment lien creditor to attach or seize both tangible and intangible property transferred by the debtor to a third party prior to filing for bankruptcy...." Alberts v. Tuft (In re Greater Southeast Community Hosp. Corp.), 333 B.R. 506, 520 (Bankr.D.D.C.2005). 11 U.S.C. § 1107 gives debtors in possession the rights of a trustee, including the right to avoid fraudulent transfers. 7 COLLIER ON BANKRUPTCY ¶ 1107.03 (Alan N. Resnick & Henry J. Sommer eds. 16th ed.). The Debtor, 4100 West Grand LLC, exercised the authority of a trustee under section 548 of the Bankruptcy Code to avoid the September 30, 2011 recording of a deed in lieu of foreclosure as a fraudulent transfer.
TY Grand LLC, the Defendant herein, is an Illinois limited liability company, engaged in the business of making loans on real estate. It acquired the note secured by real estate that was owned by the Debtor. TY Grand conducts its business in Chicago, Illinois.
Matthew Brotschul ("Brotschul") is an attorney licensed to practice law in Illinois; he is TY Grand's representative. Brotschul was involved in the formation of TY Grand. See July 10-11, 2012 Trial Transcript on Adversary Proceeding 11-02278, at 69 ("Trial Tr.").
Ruben Ybarra is a real estate investor and Manager of TY Grand. (Trial Tr. at 184; Plaintiff's Exhibit 16, Affidavit of Ruben Ybarra).
Bruce Teitelbaum and Yolanda Ybarra are the owners of TY Grand. (Trial Tr. at 68-69, 182-183).
Ljubomir Sopcic is a member of the Debtor. (Trial Tr. at 293).
On September 20, 2007, Charter One Bank made a loan to the Debtor in the amount of $2,100,000 (the "Loan"). The Loan was secured by commercial real estate located at 4100 West Grand Avenue,
On or before December 31, 2010, the Debtor defaulted on the Loan (the last payment was made in September, 2009). (Joint Stipulation, ¶ 9, dkt. no. 73. See also Trial Tr. at 206, 249). On March 29, 2011, the Royal Bank of Scotland, successor in interest to Charter One Bank, assigned the Loan Documents to TY Grand. The Loan Documents were purchased by TY Grand for $515,000. The Debtor contributed $110,000 of the sale price to TY Grand. (Trial Tr. at 76). The remaining $405,000 was paid by TY Grand. The Debtor was then liable on the $2.5 million debt to TY Grand.
Prior to March 29, 2011, the Debtor and one or more of the principals of TY Grand were introduced, and commenced negotiations regarding the purchase of the Loan Documents. (Complaint, ¶¶ 13, 18). Contemporaneous with the purchase of the Loan Documents, TY Grand and the Debtor entered into a Forbearance and Loan Modification Agreement ("Forbearance Agreement") wherein the TY Grand agreed to forbear pursuing its remedies in connection with existing defaults under the Loan Documents. (Plaintiff's Exhibit 11). Execution of the Forbearance Agreement was contingent upon the consummation of the note purchase by TY Grand.
Pursuant to its terms, TY Grand agreed to reduce the $2.1 million original loan balance to $865,000
The salient terms of the Forbearance Agreement are as follows:
See Forbearance and Loan Modification Agreement, Plaintiff's Ex. 11.
As described above, the $710,000 reduced payoff amount was not a permanent reduction of the principal loan balance. Rather, the parties agreed that if this amount was paid by a certain date, it would be accepted in full satisfaction of the loan balance, provided that the $15,000 monthly payments were made. (Trial Tr. at 93, 95). The Debtor did not make the final payment of $710,000.
The Debtor's failure to remit the final payment led to the execution of an Amendment to the Forbearance Agreement on June 29, 2011, which extended the maturity date through September 29, 2011 and allowed the Debtor more time to perform under the agreement and still take advantage of a reduced payoff amount. See Plaintiffs Ex. 12, Amendment to Forbearance and Loan Modification Agreement ("Amendment to the Forbearance Agreement"); Second Amended Joint List of Stipulated Facts, ¶ 11, Adversary Proceeding 11-2278, dkt. No. 73. In order to receive the new reduced payoff amount of $460,000, the Amendment to the Forbearance Agreement required the Debtor to pay three extension payments in the amount $100,000 ($50,000 of which was considered to be a non-refundable fee for the amendment). See Paragraph 2, pg. 2 of the Amendment to Forbearance and Loan Modification Agreement. In sum, the Debtor paid $300,000 to obtain a credit in the amount of $250,000 which lowered the reduced payoff amount from $710,000 to $460,000. (Trial Tr. at 96). Each extension payment was made. See Defendant's Answers to Requests to Admit, Plaintiff's Trial Ex. 19, p. 10.
The Amendment to the Forbearance Agreement reduced the monthly payments from $15,000 to $10,000 and provided for a balloon payment of $460,000 to be made on or before September 29, 2011. Exclusive of payment defaults, or misrepresentations under the warranties provision, the reduced payoff amount of $460,000 would have been accepted in full satisfaction of the loan balance, which as of the Transfer date, was approximately $2,278,118. See also Plaintiff's Ex. 18, June 29, 2011 Payoff Letter; Plaintiff's Ex. 12, Amendment to Forbearance and Loan Modification Agreement, ¶ 2.
On September 29, 2011, the Debtor failed to pay the $460,000 reduced payoff amount. On September 30, 2011, as required by the provisions of the Forbearance Agreement, as amended, TY Grand recorded the deed in lieu of foreclosure and took title and possession of the Property.
A review of the payment history, reproduced below, reveals that between March 23, 2011 and September 29, 2011, the Debtor paid TY Grand $485,000 under the terms of the Forbearance Agreement and the Amendment to the Forbearance Agreement:
Earnest Money $ 10,000.00 3/29/2011
Forbearance Down Payment $100,000.00 3/29/2011 April Payment $ 15,000.00 4/15/2011 May Payment $ 15,000.00 5/15/2011 June Payment $ 15,000.00 6/15/2011 1st Extension $100,000.00 7/1/2011 2nd Extension $100,000.00 7/15/2011 July Payment $ 10,000.00 7/15/2011 3rd Extension $100,000.00 7/22/2011 August Payment $ 10,000.00 8/15/2011 September Payment $ 10,000.00 9/15/2011 Total Payments: $485,000.00
See Defendant's Response to Plaintiffs First Request to Admit Facts and Genuineness of Documents, Plaintiffs Trial Ex. 19, p. 28.
Five days after the deed was recorded, on October 22, 2011, the Debtor filed a petition for relief pursuant to Chapter 11 of the Bankruptcy Code. Bankruptcy Case No. 11-428732, dkt. no. 1. On October 27, 2011, the Debtor filed the instant adversary proceeding to avoid and recover an alleged fraudulent transfer pursuant to 11 U.S.C. §§ 544(b) and 548(a)(1)(B) of the Bankruptcy Code and 740 ILCS §§ 160/5 and 160/6. Adversary Case No. 11-02278, dkt. no. 1. Under Section 548(a)(1)(B) of the Code, a trustee can avoid a transfer made for less than reasonably equivalent value if the debtor was insolvent at the time of the transfer or became insolvent as a result of the transfer. This is the Code's constructive fraudulent transfer provision. This cause of action is referred to as "constructive fraud" because it omits any element of intent. In re FBN Food Services, Inc., 82 F.3d 1387, 1394 (7th Cir.1996).
Sometime after the instant adversary proceeding was filed, TY Grand learned that the Debtor breached certain non-monetary warranties and representations made in the Forbearance Agreement, as amended. In particular, TY Grand discovered that at the time the parties entered into the Forbearance Agreement, the City of Chicago had issued several building code citations relating to the Property and that the Debtor had not paid real estate taxes due and owing for the years 2008, 2009 and 2010. See 4100 West Grand, LLC Answers to TY Grand LLC's First Request To Admit Facts and Genuineness of Documents, TY Grand Ex. 15, ¶¶ 25-33; Second Amended Joint List of Stipulated Facts, ¶¶ 15-16, Adversary Proceeding 11-2278, dkt. no. 73).
TY Grand claims that on the September 30, 2011 Transfer date, it did not know about the Debtor's non-monetary defaults. Therefore, after the deed was recorded, it did not intend to pursue its remedies under section 2.5(b) of the Forbearance Agreement which allows TY Grand to sue for misrepresentations regarding the real estate taxes and the City of Chicago code citations. (Trial Tr. at 208, 217, 231 and 315).
During TY Grand's due diligence investigation prior to purchasing the Loan Documents, Mr. Brotschul ordered a Title Commitment from the Chicago Title Insurance Company. (Plaintiff's Ex. 10, Trial Tr. at 82-83). However, that search did not reflect the status of the real estate taxes because the closing was scheduled to occur within a short time frame. (Trial Tr. at 82-83). TY Grand relied on the representations made in section 1.2 of the Forbearance Agreement, and of the Guarantors that the taxes were paid. (Trial Tr. at 82-83, 172, 208). In its discovery responses, the Debtor admitted that as of the date the Forbearance Agreement was signed, it was not current on all real estate taxes due and owing, and it knew that the City of Chicago had issued building code citations relative to the Property. See Defendant's Ex. 15, 4100 West Grand, LLC Answers to TY Grand LLC's First Request to Admit Facts and Genuineness of Documents.
A breach of contract claim is currently pending in the Circuit Court of Cook
A review of the claims registry in the bankruptcy case reveals that TY Grand filed several proofs of claims pertaining to the alleged breaches of the Forbearance Agreement.
On January 31, 2012, TY Grand filed proof of claim no. 3-1 in the amount of $2,125,655.74 which represented principal, interest and other charges due under the Loan Documents. The claim also noted that TY Grand's claim would be secured by the Property if the Debtor prevailed in the litigation but that if TY Grand prevailed in the litigation, its claim would be unsecured. Bankruptcy Case No. 11-42873, Claim 3-1.
On February 1, 2012, TY Grand filed proof of claim no. 3-2 in the amount of $2,125,655.74. A comparison of proofs of claim nos. 3-1 and 3-2 reveals no substantive variation. Bankruptcy Case No. 11-42873, Claim 3-2.
On May 24, 2012, TY Grand filed proof of claim no. 3-3 in the amount of $2,262,170.34. In its exhibit to the claim, Defendant noted that depending on the outcome of the litigation, there were two different amounts of its claim. If TY Grand prevailed in the litigation, its claim would be $2,262,170.34 and if TY Grand did not prevail in the litigation, its claim would be $2,722,170.34. The testimony at trial revealed that claim no. 3-3 was filed to correct an error made elsewhere. (Trial Tr. at 278). Bankruptcy Case No. 11-42873, Claim 3-3.
On July 2, 2012, TY Grand filed proof of claim no. 3-4. As amended, the claim stated that if the Debtor prevailed in the litigation, TY Grand's secured claim would be $2, 722,170.34. If TY Grand prevailed in the litigation, TY Grand would have no claim against the Debtor. Bankruptcy Case No. 11-42873, Claim No. 3-4.
Proof of claim no. 3-5 was also filed on July 2, 2012. It provided that if TY Grand does not prevail in the litigation, its secured claim will be $2, 722,170.34. If TY Grand prevailed in the litigation, it will have no claim against the Debtor.
Plaintiff has not filed an objection to any of TY Grand's proofs of claim.
No claims bar date has been set in the Debtor's bankruptcy case.
Count I of the Complaint asserts a claim for avoidance of an alleged fraudulent transfer pursuant to section 548(a)(1)(B) of the Bankruptcy Code. That section provides as follows:
(a)(1) The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily —
11 U.S.C. § 548(a)(1)(B).
To establish a constructive fraudulent transfer claim, a trustee must prove the following elements: (1) a transfer of the debtor's property; (2) made within two years of the filing of the bankruptcy petition; (3) for which the debtor received less than a reasonably equivalent value in exchange for the transfer; and (4) the debtor was insolvent at the time of the transfer. Grochocinski v. Reliant Interactive Media Corp. (In re General Search.com), 322 B.R. 836, 842 (Bankr.N.D.Ill.2005); 11 U.S.C. § 548(a)(1)(B).
As noted above, the Debtor has standing to bring this adversary proceeding pursuant to Code section 1107(a), which vests in a debtor-in-possession the same rights, powers and duties of a trustee serving in a case under chapter 11. 11 U.S.C. § 1107(a).
The Parties have stipulated and the Court finds that the September 30, 2011 recording of the deed was a transfer pursuant to section 548(a)(1). See Adversary Proceeding 11-02278, Addendum to Second Amended Joint List of Stipulated Facts, dkt. no. 90, ¶ 40. The Court also finds that the September 30, 2011 Transfer occurred within two years of the October 22, 2011 Petition Date. See Adversary Proceeding 11-2278, dkt. no. 73, ¶ 39.
The Parties' joint stipulation of facts states that on the date of the Transfer, the Debtor was insolvent or became insolvent as a result of the transfer. See Adversary Proceeding 11-02278, Addendum to Second Amended Joint List of Stipulated Facts, dkt. no. 90. Accordingly, the Court finds that on the date of the Transfer, the Debtor was insolvent or became insolvent as a result of the Transfer.
The only issue for determination is whether the Debtor received reasonably equivalent value in exchange for the September 30, 2011 Transfer.
Determination of reasonably equivalent value is a two-step inquiry. General Search.com, 322 B.R. at 844. First, the court must "determine whether the debtor received value, and then examine whether the value is reasonably equivalent to what the debtor gave up." Id. at 844. See also Barber v. Golden Seed Co., Inc., 129 F.3d 382, 387 (7th Cir.1997) ("The test used to determine reasonably equivalent value in the context of a fraudulent conveyance requires the court to determine the value of what was transferred and compare it to what was received."). "Whether value has been given for a transfer depends on all of the circumstances surrounding the transaction." Scherer v. Quality Communications, Inc. (In re Quality Communications, Inc.), 347 B.R. 227, 234 (Bankr.W.D.Ky.2006).
The Seventh Circuit has held that there is no fixed mathematical formula for determining reasonably equivalent
First, the Court must determine whether the Debtor received value in exchange for the recordation of the deed. For section 548 purposes, value is defined as "property, or satisfaction of a present or antecedent debt of the debtor...." See 11 U.S.C. § 548(d)(2)(A). The bankruptcy court decision in In re Stipetich is instructive on this issue. Stipetich v. First Mount Vernon Industrial Loan Association (In re Stipetich), 294 B.R. 635 (Bankr. W.D.Pa.2003).
In Stipetich, a chapter 11 debtor filed an adversary proceeding to set aside a transfer pursuant to Code section 548(a)(1)(B). The debtor alleged that the recording of a deed, which operated to convey title, was constructively fraudulent under section 548 and Maryland's fraudulent conveyance statute. In support of her position, the debtor argued that the subject property was worth $1.1 million on the date of the transfer, and that the value she received in return for the deed "was not worth anywhere near $1.1 million." The deed was accepted by the lender in full satisfaction of debtor's obligation on the loan. Id. at 648-49. In ruling on the parties' cross motions for summary judgment, the court held that the debtor received value equal to the amount of debtor's outstanding indebtedness on the loan as of the transfer date. For purposes of deciding reasonably equivalent value, the court determined the value to be measured against the value of the real property conveyed to be $740,000, which represented the amount contractually due and owing on the debtor's loan. Id. at 649. See BFP v. Resolution Trust Corp., 511 U.S. at 535, 114 S.Ct. 1757 ("[V]alue means, for purposes of § 548, property, or satisfaction or securing of a... debt of the debtor."); Carmel v. Orr (In re Lakeside Community Hospital), 200 B.R. 853, 857 (Bankr.N.D.Ill.1996) ("Satisfaction
The same holds true herein. The court finds that the release of the Debtor's indebtedness (as well as the debt of its guarantors) of over $2 million under the Loan Documents was value for purposes of section 548. On the transfer date, the balance due under the Loan Documents was approximately $2,278,118. See Plaintiff's Ex. 17, Affidavit of Ruben Ybarra, ¶ 6. The unrebutted testimony of Mr. Ybarra and Mr. Brotschul, TY Grand's Managers, was that on September 30, 2011, TY Grand was not aware of the misrepresentation defaults, and did not intend to pursue any claims it may have had against the Debtor and its guarantors under the Forbearance Agreement, as amended, and under the underlying Loan Documents. Accordingly, pursuant to section 2.5(a), the provision governing payment defaults, the court determines that the value conveyed to the Debtor by virtue of the release of its indebtedness, to be at least $2,278,118. The Debtor also received value from the Transfer when, according to the Forbearance Agreement, TY Grand waived its right to pursue non-monetary damages for any deficiency owed under section 2.5(b) of the Forbearance Agreement; recovery therein was limited to $710,000. See Cuevas v. Hudson United Bank (In re M. Silverman Laces, Inc.), No. 01-6209, 2002 WL 31412465, at *5-6 (S.D.N.Y. Oct. 24, 2002) (recognizing that a lender's waiver of its right to pursue default remedies is value for purposes of determining reasonably equivalent value).
Having determined that the Debtor received value, the court must evaluate whether the value conveyed to the Debtor by virtue of the release of the indebtedness was reasonably equivalent to the value TY Grand received. The Parties stipulated that the real estate was worth $1,115,000 on the transfer date. Second Amended Joint List of Stipulated Facts, ¶ 23, Adversary Proceeding 11-2278, dkt. no. 73. The court must also consider the $485,000 cash TY Grand received over the course of the forbearance period.
The Debtor argues that it did not receive reasonably equivalent value in exchange for the Transfer because pursuant to section 2.5(b) of the Forbearance Agreement, the Debtor received only a $460,000 contractual set off amount in exchange for the Property worth $1,115,000. (Trial Tr. at 221-22). In further support, the Debtor relies on TY Grand's amended proofs of claim nos. 3-2 and 3-3 as an admission that only a value of $460,000 was given as a credit for the Property. See Plaintiffs Trial Brief, Adversary Proceeding 11-02278, dkt. no. 63, at p. 8. To the contrary, the Debtor received a release of a deficiency claim stipulated to be north of $2,000,000. In any event, the court is not bound by what TY Grand represents to be the amount of a credit. As instructed by the General Search.com ruling, the determination of reasonably equivalent value is a question of fact that depends on the circumstances surrounding the transaction. General Search.com, 322 B.R. at 844
The Debtor's reliance on the $460,000 amount is misplaced. The uncontested evidence at trial reveals that on September 30, 2011, section 2.5(b) was not in effect as the alleged misrepresentation breaches under the Forbearance Agreement were not known by TY Grand at that time. (Trial Tr. at 161). The Debtor's failure to make the final payment in the amount of $460,000 led to the recordation of the Return Deed that is the subject of this litigation. Indeed, Mr. Ybarra, TY Grand's
TY Grand argues that the Forbearance Agreement mandates that the Return Deed be recorded as a deed in lieu of foreclosure in the event of a payment default
Section 2.5(a) of the Forbearance Agreement provides that TY Grand waived the right to go after the Debtor for any deficiency due under the Forbearance Agreement and the Loan Documents. In other words, on September 30, 2011, by recording the deed, TY Grand waived and released all causes of action it may have had for monetary defaults under the Agreement and the Loan Documents.
The Debtor devoted much time in its pleadings and at trial on the contention that on September 30, 2011, TY Grand had the right to go after the Debtor for the total balance due on the Loan because of the additional defaults under the loan documents, namely, the failure to disclose the unpaid real estate taxes, and the City of Chicago violations.
Section 2.5(b), which gave TY Grand the right to sue for the non-monetary defaults, limited its recovery thereunder to a deficiency based on the property being valued at the reduced payoff amount, which was $710,000 at the time.
The Debtor argues that because TY Grand purchased the Loan Documents for $515,000, received $485,000 from the Debtor during the forbearance period, and has been collecting $20,000 in rent from the Property, the transaction lacked reasonably equivalent value because the note cost TY Grand only $30,000. The Debtor cannot assert that the transfer between the Royal Bank of Scotland and TY Grand was avoidable as a fraudulent conveyance because the Property transferred therein was not the Debtor's; it was the property of the Royal Bank of Scotland. That transaction has no relevance to the September 30, 2011 transfer in issue herein. The Debtor again ignores the realities of its bargain with TY Grand, the language of the forbearance agreements and the economic realities of the transaction. By virtue of the forgiveness of debt, TY Grand gave up the right to go after the Debtor for the unpaid loan balance, which as explained above exceeded $2 million and constitutes value for section 548 purposes. Justice Scalia's comment, in BFP, 511 U.S. at 538, 114 S.Ct. 1757, that fair market value would not be the only criterion of equivalence is relevant herein. There, he noted that gross inequivalence was nonetheless reasonable equivalence. While TY Grand paid only $515,000 for an opportunity to obtain real estate of greater value, here too, the court finds that a limited comparison of the dollar amounts that changed hands does not reflect the totality of the economic realities of the September 30, 2011 Transfer.
Defendant TY Grand received $485,000 before September 29, 2011, and property worth $1,115,000 on September 30, 2011. TY Grand received value of $1,600,000 (which amount represents the $1,115,000 value of the real estate plus $485,000 in payments made), whereas the Debtor received a release of a $2.5 million debt under the Loan Documents pursuant to section 2.5(a) of the Forbearance Agreement. Fraudulent transfer liability is triggered when a plaintiff receives less than what was transferred to a defendant, which is not the case here. The Debtor received more than what was transferred to TY Grand.
When the court considers the transaction in light of section 2.5(b) of the Forbearance Agreement which covered TY Grand's right to sue for non-monetary defaults, the court finds that in addition to receiving $1,600,000 under section 2.5(a) on the transfer date, TY Grand also then gained a claim under section 2.5(b) worth up to $710,000. When that amount is added to the $1,600,000 amount noted above, TY Grand got $2,310,000 on the date of the transfer whereas the Debtor got a release of $2,510,123.90, the amount noted in paragraph 1.2(a) of the parties' Forbearance Agreement as the amount due on January 20, 2011. Again, the Debtor got more out of this transaction than TY Grand.
The court also rejects the contention that the transaction lacked reasonably equivalent value because the parties' agreement was not an arm's length deal, but rather a distress situation. The evidence adduced at trial suggests otherwise. Both Mr. Brotschul and Mr. Ybarra testified that prior to the execution of the Forbearance Agreement, there were several meetings, telephone calls, and email exchanges during which the terms of the
Moreover, the court does not believe Mr. Sopcic's testimony that neither he, nor the other principals of the Debtor read the Forbearance Agreement, especially since they had three months to read the initial agreement entered into in March, 2011 before they executed the Amendment to the Forbearance Agreement on June 29, 2011. Given Mr. Sopcic's testimony about his vast experience in real estate matters, the court finds it unlikely that he would enter into such an agreement without reading it. (Trial Tr. at 305, 316, 340). In any event, Mr. Sopcic was represented by counsel during the negotiation and execution of the agreements. (Trial Tr. at 303-07). The Debtor's suggestion that this was a distressed transaction is not supported by the facts.
Finally, the Debtor points to TY Grand's knowledge of the Debtor's default under the Loan Documents as indicia of bad faith. The fact that TY Grand was aware of the Debtor's default under the Loan Agreements is not sufficient to support a finding that TY Grand did not act in good faith, especially in light of the circumstances leading up to the execution of the Forbearance Agreement and the amendment thereto. According to the testimony at trial, the transaction could have resulted in an equity cushion for the Debtor. (Trial Tr. 255). TY Grand maintains that the Debtor had been underwater by approximately $1.4 million in that the Debtor's debt was $2,500,000 on a property valued at $1,115,000. (Trial Tr. at 254-255). TY Grand's manager, Mr. Ybarra, testified that had the Debtor taken advantage of the reduced payoff amount of $710,000, the Debtor would have ended up with $300,000 in equity in the Property. (Trial Tr. at 254-255).
The evidence also reveals that around the time the June payment of $710,000 became due, TY Grand agreed to amend the terms of the Forbearance Agreement to allow the Debtor more time to take advantage of a reduced payoff amount to receive a release of the principal balance. No request was made by the Debtor for an additional extension when it became apparent that the payment due on September 29, 2011 would not be made. (Trial Tr. at 261-262).
The court finds that the Debtor has not proved, by a preponderance of the evidence, that it received less than reasonably equivalent value in exchange for the Transfer.
In Count II of the Complaint, the Debtor asserts a claim for the avoidance and recovery of transfers pursuant to Illinois law. See 740 ILCS §§ 160/5 and 160/6. 11 U.S.C. § 544(b) allows a trustee to avoid transfers under applicable state law. The requirements of 11 U.S.C. 548 and sections 5 and 6 of the Illinois Uniform Fraudulent Transfer Act are analogous. Solow v. Reinhardt (In re First Commercial Mgmt. Group, Inc.), 279 B.R. 230, 240 (Bankr.N.D.Ill.2002) ("Except for different statutes of limitations, the state and federal statutes are functional equivalents, and the analysis applicable to the first count is also applicable to the second."). Accordingly, for the reasons noted herein as to Count I, the Court finds against the Debtor, 4100 West Grand LLC, the Plaintiff, on Count II. The court rules in favor of the Defendant, TY Grand LLC on Count II of the Complaint.
Because the court finds for TY Grand on Counts I and II of the Complaint, disallowing the Debtor's avoidance claims, the court need not address the merits of the Debtor's Section 550 claim in Count III. Section 550 of the Code allows a trustee to recover avoided fraudulent transfers. Because the Transfer herein will not be avoided, the Debtor will not be allowed to recover the Property. The court rules against the Debtor, 4100 West Grand LLC, the Plaintiff, on Count III The court rules in favor of the Defendant, TY Grand, LLC on Count III.
For the foregoing reasons, the Court finds for the Defendant on Counts I, II and III of the Complaint. The Plaintiff has not sustained its burden of proving that the Plaintiff did not receive reasonably equivalent value in exchange for the September 30, 2011 Transfer.
This memorandum opinion constitutes the Court's Findings of Fact and Conclusions of Law pursuant to Federal Rule of Bankruptcy Procedure 7052. A separate judgment order will issue.
BFP v. Resolution Trust Corp., 511 U.S. 531, 538, n. 4, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994).
