April 29, 2022, New Jersey – Steven P. Kartzman, the chapter 7 trustee of The Mall at the Galaxy, Inc. (the Debtor) had filed an adversary complaint against Latoc, Inc. to avoid a promissory note for $2 million loan from Latoc to the debtor.
In his complaint, Kartzman alleged that the debtor was “constructively fraudulent” as the debtor “did not receive reasonably equivalent value” in exchange for the loan or for its partial repayment to Latoc. By way of evidence, Kartzman argued that the debtor was a mere indirect pass-through for the loan, which was immediately advanced to other entities, which resulted in “substantial detriment” to the debtor and its creditors. Latoc argued that it placed no restrictions on the Debtor’s use of the loan proceeds and that the Debtor reasonably and legitimately used those proceeds to invest in its alleged subsidiaries.
On remand after trial, the Bankruptcy Court for New Jersey ruled in favor of Kartzman holding that the stipulated facts showed that the debtor acted as a mere conduit for the loan so that the loaner could do indirectly what it was not able to do directly, make a loan to the entities, and at the time the debtor obtained the loan, it was insolvent, and the entities to which it immediately transferred the loan were in dire and deteriorating financial condition.