Bankr. E.D.N.C.: In re Somerset Properties SPE- Trust or Debtor-Creditor Relationship

Summary:

MGHC filed a Proof of Claim, which was allowed as late-filed for $6 million, arising from lawsuit over a failed land development in New Jersey, where MGHC had provided funding to Mill Ridge Farms, whose principal, Kevin Wilk is is the managing member of Somerset Properties. MGHC had sued Mill Ridge Farms, Kevin Wilks and Somerset Properties alleging a civil conspiracy to convert property of and defraud MGHC, using funds intended for a New Jersey development project to finance the purchase of property in North Carolina for Wilk. Somerset Properties, however, asserted that liability should not be imputed to it merely because it has common ownership with other corporate defendants in the New Jersey Litigation, and also by denying that it used any of MGHC’s advances.

The initial question addressed was whether the funds supplied to the original borrower created a debtor-creditor relationship or, as the funds were limited to construction purposes, instead gave rise to a trust, in which case if the funds were used for any other purpose, and could be traced, then they could be recoverable from a third party, i.e. Somerset Properties. Applying New Jersey law, the bankruptcy court held that the most important factor for determining whether a debtor-creditor or informal trust relationship exists relates to the payment or nonpayment of interest, State v. Atlantic City Elec. Co., 128 A.2d 861, 866 (N.J. 1957), and here the interest weighed against finding a trust. Further, a debtor-creditor relationship was indicated as nothing prohibited either commingling of the funds once received and also because MGHC took a security interest in the property to be purchased. Absent a trust, the original borrower did not owe MGHC a fiduciary duty regarding the funds and MGHC could not seek to trace the funds to Somerset Properties.

Nor could MGHC raise the tort of conversion or unjust enrichment, where the only relationship was as debtor and creditor and no direct relationship existed between MGHC and Somerset Properties. The bankruptcy court also rejected the contention that the transfers between Mill Ridge Farms and Somerset Properties were fraudulent conveyances, finding that “reasonable equivalency of the value of the transfers among these parties in connection with the development of the New Jersey Property.”

For a copy of the opinion, please see:

Somerset Properties SPE- Trust or Debtor-Creditor Relationship.pdf

About

1. Bachelor of Arts degree in English Literature from Washington University, 1993. 2. Juris Doctor degree from George Washington University, 1996. Admissions to Practice of Law: North Carolina Bar, 1996. Federal District Courts for the Eastern and Middle Districts of North Carolina. Specialty Certification: North Carolina State Bar: Certified as a Specialist in Consumer Bankruptcy. Areas of Practice: Practice limited to consumer and business debtor bankruptcy law, 1998 to present. Memberships: National Association of Consumer Bankruptcy Attorneys (NACBA). North Carolina Academy of Trial Lawyers (NCATL). North Carolina Bar Association, Bankruptcy Section. Lectures prepared and presented: North Carolina Academy of Trial Lawyers seminar on bankruptcy; Topic: Counseling the Consumer Debtor Prior to Court - C.Y.A. Forms to Help 'Gird They Loins'; 2001. Middle District Bankruptcy Seminar; Topic: Preparing Chapter 13 Plans; 2002. NACBA National Convention; Topic: Efficient Office Practices; 2003. NACBA National Convention; Topic: Chapter 7 vs. Chapter 13 Debates; 2004. Middle District Bankruptcy Seminar; Topic: Chapter 7 & 13 Hot Issues; 2004. Positions held: NACBA National Convention; Convention Chair; 2008. NACBA National Convention; Panel Moderator: Topic: Basic Bankruptcy Issues; 2008. NACBA National Convention; Panel Moderator; Topic: Chapter 13-Disposable Income and Other Issues; 2007. NACBA National Convention; Panel Moderator; Topic: Representing Members of the Military and Their Families; 2007. NACBA, Member of National Board of Directors, 2006 to present. NCATL, Chair of the Bankruptcy Section, 2003 to 2007. NACBA, Chair of the North Carolina Section, 2003 to 2007. NC Bar Association, Bankruptcy Section, Bankruptcy Council Member, 2004 to present.

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