Legal Question in Bankruptcy in California

''Debtor-in-Possession'' Financing

In 2006, we made a first deed of trust secured loan to the Debtor-in-Possession in Chapter 11. This loan was approved by the Court.

However, now we have discovered that the appraisal was grossly inflated (prepared by the same firm his wife works for). He gave us a false financial statement of a straw co-borrower, and lied on his own financial statement.

There is insufficient collateral to back this loan, and the debtor stopped making payments after the final discharge from the Court.

Didn't the DIP have a fiduciary duty to act in good faith, and not engage in self-dealing and self-interest?

What would be the best recourse now: civil? criminal? The debtor does not appear to have other assets. The appraiser may have an E&O policy.

Some of the investors in this loan are quite elderly (Elder Abuse?) and did not do enough due diligence, but instead relied on the borrower, the appraiser, mortgage broker, and supervision of the Court. The Debtor claimed that ''the Court ordered the appraisal.''

The amount of this loan is approximately $3 million. The value of the property is maybe $2 million. The appraisal was $4.6 million.


Asked on 3/28/08, 3:58 pm

1 Answer from Attorneys
DAVID BURKENROAD LAW OFFICES OF DAVID BURKENROAD

Re: ''Debtor-in-Possession'' Financing

3/28/08 I can of course help you. I need a few more facts from you, and it seems to me that a civil lawsuit against the appraiser, if you can prove he inflated the value of the property, might result in settlement or judgment. I look forward to hearing from you. David Burkenroad

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Answered on 3/28/08, 7:23 pm


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