Opinion ID: 3010690
Heading Depth: 2
Heading Rank: 3

Heading: The Mortgage Transactions

Text: The representatives, including those who served as officers and directors of Berkley and BOP, met on 5 September 5, 1984, regarding Berkley's and BOP's condominium development ventures, including ventures known as La Playa and Blue Grass. The representatives determined that because a financing arrangement for the La Playa condominium development had fallen through, it was necessary for the trusts to sell their municipal bonds and transfer the proceeds to Berkley and BOP. The bonds were sold for a capital loss of approximately $100,000 and the proceeds were used to satisfy the margin debt owed to E.F. Hutton. According to the memorandum of the September 5 meeting, the remaining proceeds from the sale of the bonds were transferred to La Playa as a down payment for the purchase of all new first mortgages . . . on the La Playa units. App. at 135a-b. A memorandum dated February 4, 1985, indicated that the trusts had acquired the La Playa mortgages, although Berkley would hold the title to them. The memorandum stated that, the prior action[s] taken with regard to Trust A, B and C . . . were confirmed . . . . Approximately $2,000,000 in first mortgages at LaPlaya have been bought outright by the Trust . . . . Title to the mortgages[was] taken in the name of Berkley Mortgage Corp. as collection agent for the Trust . . . . The balance of Trust assets for approximately $1,000,000 has been used to buy mortgages from BOP, Inc. which were also taken in Berkley's name as collection agent. App. at 135c. The trusts' books did not reflect a purchase of the mortgages corresponding to the transaction described in the February 4, 1985 memorandum. However, adjusting journal entries recorded on June 11, 1985, after the trusts' tax year ended on February 28, 1985, indicated that the trusts had received $2,029,390 in La Playa condominium mortgages from the estate as a partial debt settlement. Supp. app. at 40.3 A document entitled Berkley Mortgage Corp. Accrued Interest and Principal Collections set forth cumulative _________________________________________________________________ 3. The estate's tax year ended March 31 while the trusts' ended February 28. 6 totals of the principal and interest which Berkley received on the La Playa and Blue Grass mortgages for the tax year ended February 28, 1985, and for the Ten Months Ended 12/31/85. The document indicated that Berkley had collected $90,595.81 in payments on mortgages at the La Playa and Blue Grass developments, and attributed these amounts to the trusts. See supp. app. at 39. One of the representatives testified that the document was prepared no earlier than December 31, 1985, ten months after the end of the tax year. See supp. app. at 33. Berkley intermittently transferred funds to the trusts as follows: Oct. 17, 1984 $12,000 Nov. 9, 1984 $ 5,000 Jan. 4, 1985 $25,000 Jan. 29, 1985 $ 1,000 Feb. 5, 1985 $14,000 Feb. 14, 1985 $ 1,000 Feb. 20, 1985 $ 1,000 ____________________________________ Total $59,000.4 The trusts recorded their receipt of these transfers under an account entitled Berkley Mtg. Co. App. at 384-85. On June 16, 1985, Berkley assigned the La Playa and Blue Grass mortgages to Ohio Savings Bank to secure a $1.8 million loan to Berkley and BOP. Berkley represented that it was the sole and lawful owner of the mortgages free and clear of any and all claims and liens, and that it possessed the full right and lawful authority to deliver, pledge, assign, grant, convey and transfer the mortgages as security for the loan. App. at 390. On July 30, 1986, Ohio Savings Bank reassigned the mortgages to Berkley, and on August 15, 1986, Berkley sold the mortgages to Horowitz Finance Corporation and _________________________________________________________________ 4. In the computerized general ledger the first two payments of $12,000 and $5,000, which were recorded separately in the handwritten journal, were consolidated into one $17,000 payment. An additional $10,000 payment was recorded and then reversed, as it occurred after the end of the fiscal year. See app. at 382-88. 7 Fleet National Bank. The closing documents identify Berkley and BOP as the sellers and Horowitz and Fleet as the purchasers. Berkley and BOP used the proceeds of the sale to satisfy the prior loan from Ohio Savings Bank. See app. at 398-407; 73. In December 1987 the estate formally exercised its right to recall the assets it had conveyed to the trusts, and eventually recalled all trust assets due to the estate's poor cash position. See app. at 135g-i.