(CN) - An investment firm allegedly owed over $18 million after a series of New Jersey real estate deals went bust cannot impose a constructive trust on $8.5 million a project shareholder secured in a recent settlement, a federal judge ruled.
Capital Investment Funding LLC says it loaned more than $18 million to various New Jersey real estate ventures associated with Lancaster Resources Inc. from 2000 to 2007.
But according to a complaint filed in the federal court in Newark, Lancaster caused all but one of the real estate assets in which Capital-loaned funds were invested to become insolvent.
While most of those investments were owned by debtors in a separate bankruptcy action, the only known Capital-funded asset owned by any of the Lancaster affiliates is a 33-acre parcel of undeveloped property in Ridgefield Park, N.J., the complaint states.
Until recently, the parcel was allegedly owned by Pitcairn Skymark LLC, an entity partially-owned by defendant Ridgefield Park Office Complex, in which Wiltshire Properties LLC and Brickhouse Partners LLC each held a 50 percent interest.
Capital says a title search on the property uncovered the presence of an $8.5 million mortgage tied to Stuart Katz, one of Lancaster's first shareholders, who also owns an overwhelming majority interest in Wiltshire.
The mortgage allegedly references an October 2013 settlement agreement and mutual release settling an action in equity that the complex and Brickhouse filed in 2012, under which Katz and Wiltshire would receive $9 million in exchange for their interests in the property.
Katz and Wiltshire were paid $500,000 up front and granted a mortgage on the property for the remaining $8.5 million, which the complex and Brickhouse paid in "early fall" of this year, according to Capital.
Lancaster, through its principles like Katz, allegedly borrowed large sums from Capital under a revolving credit arrangement whereby Lancaster was supposed to collateralize the loans.
Though Lancaster then used the funds to invest in real estate projects, it failed almost entirely to collateralize the debt owed to Capital, the complaint says.
Knowing that the debt was not collateralized, Katz and others allegedly encumbered the properties that were supposed to serve as collateral, directly causing Capital's losses, Capital says.
It further alleges that it extended $2 million worth of loans directly to Wiltshire for the benefit of Katz and other members in 2003.
The firm moved to impose a constructive trust on the $8.5 million in order to protect the firm's ability to collect if it is successful in obtaining a judgment against Katz and/or Wiltshire.
But U.S. District Judge Jose Linares denied the motion Thursday.
"Defendant asserts beyond the inapplicability of a constructive trust, plaintiff has also failed to meet its burden of submitting evidence of a wrongful act or unjust enrichment," the unpublished ruling states. "Because at this stage of the proceedings no party has responded to plaintiff's second amended complaint, plaintiff's allegations are only unsubstantiated allegations, rather than 'clear, definite, unequivocal and satisfactory evidence.'"
The court refused to impose a constructive trust at this time, the ruling states.
"Defendant has not yet answered or otherwise responded to plaintiff's allegation in the complaint," Linares wrote. "Defendant argues that all that is being offered are unsubstantiated allegations, to which defendant has not had an opportunity to respond to. The court agrees. The court finds at this juncture that the statements of evidence offered by plaintiff in its brief in support of its motion do not rise to the level of 'clear, definite, unequivocal and satisfactory evidence' as required by law. Therefore, the court denies plaintiff's motion for imposition of a constructive trust at this time."
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