Opinion ID: 2278904
Heading Depth: 1
Heading Rank: 5

Heading: Diversion Of Rents ($633,000)

Text: The failure of Diamond Point to make its November, 2002 mortgage payment by November 5 constituted, effective November 6, an Event of Default under the restated mortgage. On November 22, 2002  the very day that Wells Fargo accelerated the loan  Diamond Point transferred $633,000 to MCK, indicating on its ledger that the transfer was an advance. Wells Fargo claimed that the transfer constituted a misappropriation of rents and a fraudulent transfer, for which the Konover defendants were personally liable. The Circuit Court found that to be the case. Those defendants complain that the contractual provisions relating to the assignment of rents do not apply to rents collected prior to an Event of Default, that no evidence was presented that any part of the $633,000 constituted rents collected after November 6, and that the Circuit Court erred in finding that the $633,000 went to Konover personally. As noted, under Article 7 of the restated mortgage, Diamond Point unconditionally assigned to the mortgagee its right, title, and interest in all current and future Leases and Rents, it being intended by Mortgagor that this assignment constitutes a present, absolute assignment and not an assignment for additional security only. Article 7 contained a revocable license for Diamond Point to collect the rents and to hold them in trust for the Mortgagee but expressly provided that [u]pon an Event of Default, the license granted to Mortgagor herein shall be automatically revoked and Mortgagee shall immediately be entitled to possession of all Rents and that [a]ny Rents collected after the revocation of the license herein granted may be applied toward payment of the Debt in such priority and proportion as Mortgagee in its discretion shall deem proper. (Emphasis added). Similar provisions, in virtually identical language, appear in the contemporaneously executed Assignment of Leases and Rents. The Assignment includes within the definition of Rents all accounts, deposits, rents, income, issues, revenues, receipts, insurance proceeds, and profits arising from the Leases. The carve out provision in Article 55 of the restated mortgage excepts from the non-recourse nature of the loan, in addition to fraud and intentional misrepresentation the misapplication or conversion by Mortgagor of . . . Rents following an Event of Default and the [f]ailure [of Mortgagor] to maintain its status as a single purpose entity. Article 56 of the restated mortgage deals more specifically with the single purpose entity requirement. Among other things, it prohibits the Mortgagor from (1) commingling its assets with the assets of any general partner, affiliate, principal, or other person, (2) entering into any agreement with such a person except on terms that are intrinsically fair and substantially similar to those that would be available on an arms length basis with third parties other than such persons, and (3) making any loan to any third party. The Circuit Court found that the $633,000 transferred by Diamond Point constituted rent, that the transfer, made after an Event of Default, was therefore in violation of Article 7 of the restated mortgage and the Assignment of Leases and Rents, and that, under Article 55 of the restated mortgage, such a transfer constituted an exception to the non-recourse provision. Alternatively, the court determined that, as the transfer was regarded by Diamond Point as an advance to MCK, it constituted a prohibited loan to a third party, and, as there was no accompanying note expressing clear repayment terms, it constituted as well an agreement with a general partner or affiliate on terms that were not intrinsically fair and would not be available on an arms length basis with a third party. The Diamond Point ledger showed the advance being made to MCK, and a dispute arose whether that was MCK, Inc. or Michael C. Konover personally. The court concluded that the funds were partially repaid to Diamond Point but that $486,500 of the funds were then distributed to the partners of Diamond Point, $243,500 to Oriole and $243,000 to American Way. The court made two relevant findings in this regard. It concluded first that the transfer actually was made to Konover personally and not to MCK, Inc. In reaching that conclusion, the court expressly declared that the testimony of the principal Konover witness on that point, James Ainsworth, was not credible. [5] Alternatively, the court found that, even if the initial transfer was to MCK, Inc., Konover was the beneficiary of it. At least $487,000 was returned to Diamond Point and then distributed to Oriole and American Way. Because Konover was an 86% owner of Oriole and a 100% owner of American Way, the court declared the entire scheme to be a fraudulent transfer, structured on the books as an advance but in fact a transfer to Konover for the purpose of deceiving creditors, including Wells Fargo. We have no difficulty affirming the Circuit Court's various and alternative rulings. As noted, the term rents, for purposes of the Assignment, is broad. It includes all accounts, revenues, receipts, and profits arising from the lease. That would include funds collected at any time from the tenants. The fact that Diamond Point chose to retain funds previously collected from the tenants in its accounts does not withdraw them from the scope of the Assignment. Those funds were held in trust for Wells Fargo, and, immediately upon the Event of Default, Diamond Point's control over them terminated. The sweep of those funds on November 22, the effect of which was to leave Diamond Point insolvent, constituted a clear violation of the restated mortgage and Assignment and therefore fell squarely within the exception to the non-recourse provision for misapplication or conversion by Mortgagor of . . . any Rents following an Event of Default. Disbelief of Mr. Ainsworth's testimony allowed the Circuit Court to reject as well the convoluted paper trail of the $633,000 and see the transaction for what it was  the fraudulent transfer of those funds from the reach of the creditors of Diamond Point to Konover. The court was fully justified, as an alternative, in accepting the entry on Diamond Point's ledger that the transfer was an advance, for which there was no repayment obligation, and thus to treat it as an unauthorized loan and unfair transfer, both of which would violate the single purpose entity provision of the restated mortgage and independently give rise to personal liability.