1756 W. Lake St LLC v. American Chartered Bank and Scherston Real Estate Investments, LLC

Summarized by Kurt Carlson , Carlson Dash LLC
10 years 9 months ago

Citation:

1756 W. Lake Street LLC v. American Chartered Bank and Scherston Real Estate Investments, LLC, Court of Appeals, 7th Circuit (May 15, 2015)

Tag(s):

Ruling:

Value derived from several forbearance agreements and related concessions from a creditor satisfies the reasonable equivalence test in the face of an avoidance action brought by the debtor where the equity in the property is eaten up by the value of the bank’s concessions which kept debtor in business for four years beyond the time the property was deeded to the bank in relation to the financial accommodation.

Procedural context:

Initially, on a strict procedural note, the appeal was challenged as defective by virtue of the fact that the notice of appeal failed to correctly identify the proper party. The court noted that the notice of appeal “is a mess”, and then proceeded to identify multiple violations of the federal rules, but holding that each were harmless to the purpose of the notice of appeal. The jurisdictional issue of naming the wrong party in the notice of appeal is cured, the court held, by reason that “an appeal must not be dismissed…for failure to name a party whose intent to appeal is otherwise clear from the notice.” Substantively, 1756 W. Lake Street LLC (“Lake Street”) filed for Chapter 11 bankruptcy while holding a $1.5 million debt to American Chartered Bank (“Bank”). Lake Street brought an adversary proceeding in the form of an avoidance action to set aside a transaction whereby the Bank took a deed to the debtor’s property, alleging that the property had $200,000 in equity as supported by an appraisal. The Bank claimed that it had an appraisal of a lower value, and that in any event the forbearances provided reasonably equivalent value that would otherwise make up the difference. The district court granted summary judgment in favor of the Bank and the plaintiff appealed. The appellate court affirmed the judgment in favor of the Bank, ruling that the value of forbearances given by the Bank to Lake Street far outweighed the alleged discrepancy in value between the mortgage owed to the Bank and the deed turned over to the Bank after Lake Street’s default.

Facts:

Lake Street was obligated to repay the Bank a $1.5 million loan, which was secured by a mortgage on real estate with a claimed value of $1.7 million, according to the plaintiff. When Lake Street was unable to repay the loan, they negotiated several forbearance agreements with the Bank, one of which saw Lake Street turning over the deed to the mortgaged property in question to an escrow agent. When Lake Street defaulted, the deed was turned over and Lake Street then claimed the property was worth $200,000 more than the value of the mortgage. The Bank offered three arguments to support its claim that it was entitled to keep the value of the transaction, the most effective of which was that the Bank had prolonged the life of the LLC by up to four years by approving no less than eleven forbearances and claimed that those accommodations had a value of at least $200,000. The burden of proof in the fraudulent transfer claim was on Lake Street and they offered no proof except for an appraisal conducted by a party of their own choosing. After adding up the gross income of Lake Street over the four years that the LLC’s life was extended, the Court found the total to be far in excess of the $200,000 discrepancy, though not by an order of magnitude (which is a multiple of ten, in the event of slow moment at a cocktail party).

Judge(s):

Posner, Sykes, Simon

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