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Woodbridge Noteholders Seek Role in Bankruptcy Restructuring

money backing hard money real estate dealAs we have detailed in numerous blog posts, the Woodbridge Group of Companies, LLC (“Woodbridge”) and certain of its affiliated entities filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware (Case No. 17-12560-KJC) on December 4, 2017.  From the outset of this Chapter 11 proceeding, investors in Woodbridge Notes (“Noteholders”) have taken the position that they hold secured, perfected liens in various real estate deals.

By way of background, beginning as early as July 2012, Woodbridge and its affiliates offered securities nationwide to investors in at least two forms: (1) subscription agreements for the purchase of equity interests or units in one of Woodbridge’s seven Delaware limited liability companies (“Units”); and, (2) lending agreements, some of which were referred to as “First Position Commercial Mortgage Notes,” “mezzanine loans,” “construction loans,” and “Co-Lending Opportunities” (collectively, “FPCMs”).

On March 27, 2018, the Debtors, the Unsecured Creditors Committee and the Ad Hoc Noteholders Committee all agreed on a plan of reorganization that was encapsulated in a Term Sheet filed with the Bankruptcy Court.  However, the Term Sheet failed to address whether or not Woodbridge Noteholders who invested in FPCMs do, in fact, hold secured, perfected liens.  Accordingly, on March 27th a Woodbridge FPCM investor – retired 85 year old attorney Lisa La Rochelle – filed an adversary proceeding (the “Owlwood Complaint”) in an effort to resolve the looming question of whether some $800 million in FPCMs should be treated as secured debt for purposes of disposition of the Chapter 11 proceeding.

In opposition to the Debtors and Creditors’ Committees’ stance that Noteholders are unsecured because they neither hold the original promissory note on their collateral, nor do they possess filed UCC-1 financing statements, Ms. La Rochelle has argued that a California statute offers protection to Noteholders.  Specifically, the Owlwood Complaint relies upon Section 10233.2 of the California Business and Professional Code, as interpreted by the 9th Circuit Court of Appeals in In Re: First T.D. Investment, Inc., 253 F.3d 520 (9th Cir. 2001).  Under the holding of In Re FTD, Section 10233.2 is recognized as a consumer protection statute that enumerates certain requirements that will establish perfection, absent holding the underlying note or a filed UCC-1, as is the case with numerous Woodbridge Noteholders.

To begin, the borrower needs to be acting as a broker within the meaning of Section 10131 or 10131.1 of the California Business and Professional Code.  Pursuant to 10131.1, the term real estate broker is defined as “a person who engages as a principal in the business of making loans or buying from, selling to, or exchanging with the public, real property sales contracts or promissory notes secured directly or collaterally by liens on real property, or who makes agreements with the public for the collection of payments or for the performance of services in connection with real property sales contracts or promissory notes secured directly or collaterally by liens on real property.”

Second, the statute mandates that the real estate broker has to have “…arranged a loan or sold a promissory note or any interest therein, and thereafter undertakes to service the promissory note on behalf of the lender or purchaser in accordance with Section 10233…”  It is worth noting that the Ninth Circuit in In Re FTD used a very broad definition of “sold.”  Third, the statute contemplates that the real estate broker undertakes to service the promissory note on behalf of the lender.  In the Owlwood Complaint, Ms. La Rochelle has argued that Woodbridge was clearly servicing the note between the respective investment fund and the property company within the meaning of Section 10233.  The Secured Noteholders received direct communications and checks from the Woodbridge Group.  Further, the Secured Noteholders received monthly interest payments and statements from the Debtors.

Through Ms. La Rochelle’s Motion papers and the supporting Owlwood Complaint, Woodbridge Noteholders seek to terminate the Debtors’ exclusive period and be afforded the right to file their own completing plan of reorganization.  As argued by Ms. La Rochelle:

“… this Court should allow the Secured Noteholders to explore filing their own plan.  It is clear that certain California properties such as Owlwood hold the greatest value in this case and may provide a basis for significant recovery.  To deny California noteholders the right to realize on their specific collateral, which they relied on at the outset when making the investment decision, would be a miscarriage of justice.”

Investors in Woodbridge FPCMs, Units and other securities may be able to recover investment losses through arbitration or litigation.  Investors may contact a securities arbitration attorney at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or for a no-cost, confidential consultation.

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