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In Re Global Outreach, S.A v. Global Outreach

June 6, 2011


The opinion of the court was delivered by: Linares, District Judge.



This matter comes before the Court on the appeal of YA Global Investments, L.P. ("YA") and the cross appeal of the Official Committee of Unsecured Creditors of Global Outreach, S.A. (the "Committee") from the Order of the Honorable Donald H. Steckroth of the United States Bankruptcy Court, District of New Jersey, entered on October 6, 2010, granting summary judgment*fn1 in favor of Global Outreach, S.A. (the "Debtor") and the Committee. The Court held oral argument on May 10, 2011 and has considered the parties' oral and written arguments. For the reasons set forth below, the decision of the Bankruptcy Court is affirmed in part and reversed in part, and will be remanded for further proceedings.


A. Factual and Procedural History

The background of this dispute has been set forth in detail by the Bankruptcy Court. See In re Global Outreach, S.A., Bankr. No. 09-15985, 2010 WL 3957501 (Bankr. D.N.J. Oct. 6, 2010) (hereinafter "Op."). Accordingly, this Court sets forth only those facts that are relevant to this appeal.

In 2004, the Debtor, a Costa Rican corporation,*fn2 through its president, Anil Kothari ("Kothari"), began a project to develop a resort property in Guanacaste, Costa Rica, acquiring certain parcels of land and options to purchase others. The project was to comprise a 550-acre property containing a hotel, a golf course, and condominiums. Beginning in 2005 and continuing in 2006, the Debtor raised capital for the project by issuing promissory notes and by selling option agreements to investors, which included options to acquire condominiums to be built at the resort and "option/note agreements" that permitted an investor to choose between acquiring a condominium or recovering his investment as a loan. A number of these agreements contained provisions that triggered default if the Debtor transferred its interest in the underlying property. Throughout this time, the Debtor also sought financing in the approximate amount of $85 million to construct the hotel, golf course, and initial condominiums.

By early 2007, the Debtor's land options were nearing expiration, and in April of that year the Debtor was introduced to YA, seeking an initial loan of $35--$38 million. The Debtor made two presentations to YA, and afterward Kothari was asked to complete a due diligence questionnaire. Kothari made various misrepresentations and omissions in the questionnaire, including failing to disclose the existence of the option agreements and promissory notes, falsely stating that he had no previous bankruptcy filings, and failing to disclose a previous conviction for real estate fraud. While YA contends that it did not become aware of many of these misrepresentations and omissions until after it had completed the transaction with the Debtor, YA does state that at the time of the loan it had learned, through its own independent investigation, of Kothari's fraud conviction and of Kothari and his wife's personal bankruptcies.

On April 30, 2007, YA made an initial loan to the Debtor in the amount of $3.725 million. In connection with this loan, the Debtor, Kothari, and Purple Skies Business Sociedad de Responsabilidad Limitada ("Purple Skies")-a wholly owned subsidiary of the Debtor-entered into an agreement with YA and Interlex Fideicomisos, S.A. ("Interlex"), a Costa Rican corporation. Pursuant to this agreement, the Azulera Project Guarantee Trust Agreement (the "Trust Agreement"), the Debtor first transferred to Purple Skies, then to Interlex, as trustee, its title to the resort properties. The Trust Agreement states that its purpose is "to retain the Properties free of any mortgages, liens, encumbrances, attachments or other right in favor of a third party, and with all taxes paid up to date, as security for the recovery of all obligations owed to [YA] . . . ." (R. at 1370 (Trust Agreement § 10.1).) The Trust Agreement also provides that the Debtor "shall remain in possession of the Properties throughout the term . . . and shall have all necessary power to use, administer, operate, develop and manage the Properties." (Id. at 1371 (Trust Agreement § 11.1).) The agreement further provides that the trustee could "cause such Properties to be mortgaged in favor of [YA] at the request of [YA], to secure the rights of [YA] made under the Loan Documents." (Id. at 1367 (Trust Agreement §1.3).)

Between April 30, 2007 and July 2007, YA made three additional loans to the Debtor, and on July 19, all of the Debtor's outstanding loans from YA were refinanced by a loan in the principal amount of $41 million. The loan was documented by a promissory note (the "Note"), a "Note Purchase Agreement," and other ancillary documents, and the Trust Agreement was amended to reflect the new principal amount. The Note matured on January 1, 2010 and carries a stated interest rate of 18% per annum, with a 5% increase upon default. The Note contains the following usury savings clause:

13. Usury Savings Provision. This Note is subject to the express condition that, at no time shall Borrower be obligated or required to pay interest at a rate that could subject Lender to either civil or criminal liability, or that could adversely affect the rights of Lender hereunder, as a result of such rate exceeding the maximum rate that Borrower is permitted by law to contract to agree to pay. If, by the terms of this Note or any other instrument, Borrower is at any time required or obligated to pay interest at a rate exceeding such maximum rate, interest payable hereunder shall be computed (or recomputed) at such maximum rate, and the portion of all prior interest payments exceeding such maximum shall be applied to payment of principal hereunder.

(R. at 1283 (Note § 13).)

The Note Purchase Agreement provides for the Debtor to pay a non-refundable origination fee in the amount of $2,050,000, as well as certain "equity participation payments," which total approximately $38 million. The agreement provides:

7.2 Equity Participation. (a) Phase I Payment. The Company [Debtor] shall cause completion of Phase I of the Project to be completed by February 1, 2009. Upon the earlier of the maturity date of the Note or the completion of Phase I of the Project, the Company shall pay to the Investor [YA] cash in the amount equal to the greater of (x)

U.S. $22,050,000, and (y) fifteen percent (15%) of (i) the Appraised Value of the Project as of the completion of Phase I minus (ii) the sum of the outstanding senior indebtedness of the Company with respect to the Project at such time, the outstanding indebtedness of the Company to the Investor under the Note at such time, and the total cash equity contributed by Kothari to the project with respect to Phase I as of such time.

(b) Phase II Payment. The Company shall make a cash payment to the Investor in respect of Phase II of the Project as such payment shall be U.S. $15,890,000; and if such payment is not made in full prior to April 1, 2011, such payment shall be the greater of (x) U.S. $15,890,000, and (y) four percent (4%) of (i) the sum of the outstanding senior indebtedness of the Company with respect to the Project and the outstanding indebtedness of the Company to the Investor under the Note at such time. If such payment is not made prior to April 1, 2011, then the timing of such payment shall be on the third or fourth anniversary of the Closing Date, at the Investor's election. In accordance with Section 7.3 hereto, fifty percent (50%) of the Monitoring Expenses shall be recoverable by the Company as an offset to the Phase II payment due Investor under this Section.

(R. at 1305 (Note Purchase Agreement § 7.2).)

In late 2007 or early 2008, YA became aware of the holders of the options and promissory notes and sent a default notice to the Debtor on April 3, 2008. On April 16, 2008, YA commenced an action against the Debtor in the Superior Court of New Jersey, Chancery Division, Hudson County, Docket No. HUD--C--60--08. In August 2008, YA exercised its right under the Trust Agreement to obtain a mortgage on all of the Debtor's real property in Costa Rica. On March 12, 2009, the Debtor filed for Chapter 11 bankruptcy, and the state court action was removed to this District. On March 20, the Debtor commenced an adversary proceeding against YA, and on August 17, 2009, the Bankruptcy Court permitted the Committee to intervene in that proceeding. Thereafter, the Bankruptcy Court entered an Order authorizing the Committee to assert the rights of the Debtor's estate on its behalf. On September 16, 2009, the Bankruptcy Court consolidated the adversary proceeding and YA's removed state court action.

B. Ruling of the Bankruptcy Court

On October, 6, 2010, the Bankruptcy Court granted summary judgment in favor of the Committee and the Debtor on various counts of the relevant complaints. See Op. at *21. The Bankruptcy Court held that the transfer of the Debtor's title to the properties by way of the Trust Agreement was an avoidable fraudulent transfer under 11 U.S.C. § 548(a)(1)(A) and N.J.S.A. 25:2--26, and that YA was not entitled to retain the fraudulently transferred properties under 11 U.S.C. § 550(b). The Bankruptcy Court further held the equity participation payments provided in the Note Purchase Agreement violated the New Jersey criminal usury statute, characterizing those payments as debt, declining to apply the usury savings clause contained in the Note, and fixing YA's claim at $38.95 million, the principal amount lent to the Debtor, less the origination fee. On November 30, 2010, the Bankruptcy Court entered final judgment.


The Court has jurisdiction pursuant to 28 U.S.C. § 158(a)(1). Under Rule 8013 of the Federal Rules of Bankruptcy Procedure, a district court may "affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings." In bankruptcy cases, the district court serves an appellate function. Thus, the Court reviews findings of fact under a clearly erroneous standard and legal conclusions under a denovo standard. Fed. R. Bankr. P. 8013; In re Sharon Steel Corp., 871 F.2d 1217, 1223 (3d Cir. 1989). A factual finding is clearly erroneous when "the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." In re Cellnet Data Systems, Inc., 327 F.3d 242, 244 (3d Cir. 2003) (citing United States v. United States Gypsum Co., 333 U.S. 364, 395 (1948)). "Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses." Fed. R. Bankr. P. 8013.

Legal conclusions of the bankruptcy court are subject to de novo review. J.P. Fyfe, Inc. of Florida v. Bradco Supply Corp, 891 F.2d 66, 69 (3d Cir. 1989); Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 102 (3d Cir. 1981). For determinations that involve mixed questions of law and fact, a district court must apply a mixed standard of review. Mellon Bank, N.A. v. Metro Commc'n, Inc., 945 F.2d 635, 642 (3d Cir. 1991). This Court must accept the Bankruptcy Court's findings of historical or narrative facts unless clearly erroneous, but exercises "plenary review of the trial court's choice and interpretation of legal precepts and its application of those precepts to the historical facts." Universal Minerals, 669 F.2d at 103. Additionally, the bankruptcy court's exercises of discretion are reviewed for abuse thereof. Kool, Mann, Coffee & Co. v. Coffey, 300 F.3d 340, 353 (3d Cir. 2002).


YA appeals, challenging a number of its underlying rulings regarding (A) fraudulent transfer and (B) usury. The Committee and the Debtor oppose YA's appeal, and the Committee and the Debtor cross appeal, arguing that the Bankruptcy Court (C) abused its discretion in failing to apply the doctrine of unclean hands to subordinate YA's claims.*fn3

A. Fraudulent Transfer

The Bankruptcy Court held that (1) the Debtor's transfer of title to the Costa Rican properties to Interlex, by way of the Trust Agreement, was an avoidable fraudulent transfer under 11 U.S.C. § 548(a)(1)(A) and N.J.S.A. 25:2--26, and that (2) YA was not entitled to retain the fraudulently transferred properties under 11 U.S.C. § 550(b). The Court addresses those rulings in turn.

1. The Bankruptcy Court's Finding of Fraudulent Intent While the Bankruptcy Court found that the Debtor's transfer of properties violated both federal and state law, it focused its analysis on state law. The New Jersey Uniform Fraudulent Conveyance Act provides, in relevant part:

A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

a) With actual intent to hinder, delay, or defraud any creditor of the debtor; or

b) Without receiving a reasonably equivalent value in exchange for the transfer ...

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