Imagine: you are a lender that has loaned substantial sums of money to an individual, secured by real property owned by the borrower. After the borrower defaults and negotiations fail, you seek and obtain the appointment of a receiver. But now litigation ensues—about the loan documents, about contract defaults, about interest rates, about foreign law. After a substantial investment of time and money, your trial date draws closer. At some point during this odyssey, your borrower secretly transfers the real property collateral to a newly-created, single-member LLC. And then the really bad news comes: the LLC has filed for chapter 11, and your collateral is claimed as “estate property”. So now, you are both litigating against the borrower in state court, and being dragged neck-deep into a bankruptcy case in order to somehow recover your security. This scenario, or something close to it, plays out regularly in bankruptcy courts across the country. And while the Bankruptcy Code has provisions designed to assist in these situations (think bad faith filings, dismissals and stay relief), the time and expense inherent in getting the “right” result can be prohibitive.
But don’t lose all hope just yet. The Bankruptcy Court for the Central District of California recently considered a factual scenario much like the one noted above in the case of In re Domum Locis LLC, Case No. 14-23301-RK, and its memorandum decision entered on November 17, 2014 [Docket No. 21] should make it easier for lenders...
