Forced Response: Creditors Use Involuntary Bankruptcy To Expose Developer’s Fraud

Horry County State Bank foreclosed on nine building lots owned by Legacy Development SC Group LLC and is still $1 million short. The Bank could sue for the deficiency and then depose Legacy to try and enforce the judgment.  Instead, the Bank teamed with two other creditors and forced Legacy into an involuntary bankruptcy “because that will force Legacy to disclose its assets under oath to a bankruptcy trustee” according to this article. If so, Bank’s actions make little sense.

In a deposition in aid of enforcement of a judgment, a creditor may compel testimony under oath, obtain documents and keep that information confidential for its own benefit. If there are assets to be recovered a creditor may pursue them to pay down their own debt and not share the assets with other creditors.

Once the debtor is in bankruptcy, however, the appointed trustee will pursue recovery of assets for the benefit of all creditors. While creditors will be able to obtain information about the debtor from a number of sources, no single creditor moves to the front of the line but must stand shoulder to shoulder with other creditors.

For this reason, the logic is not immediately apparent behind the Bank’s decision to force the debtor into bankruptcy. If the point of the action was to obtain information under oath, mechanisms exist under both state law and bankruptcy law for the purpose. Of course, if other creditors are further ahead in their efforts to locate assets from this failed development then the Bank may prefer to put all creditors on equal footing.

Perhaps the real motivation behind the involuntary bankruptcy lies in the creditors’ collective mistrust of the debtor’s management. The debtor’s principals include Ronald LeGrand and Ken Gwynn. LeGrand and Gwynn are well known for promoting expensive seminars called “Fast Track to Wealth”. The seminars promised that investors could make millions from buying and selling flipped properties.

Another aggrieved lender, Flagstar Bank, claims in a separate lawsuit that LeGrand and Gwynn used the seminars to recruit straw purchasers to buy Legacy’s lots by “obtaining loans based on inflated appraisals and misleading financial statements. When the loans went into foreclosure, [Flagstar] claims LeGrand repurchased the lots in short sales for a fraction of the mortgage amount.” Flagstar says it lost $4.1 million on the loans.

Forcing the debtor to disclose financial information under oath may be the stated reason behind this involuntary bankruptcy, but given creditor distrust of debtor’s management it seems more likely that Horry County State Bank and the other petitioning creditors hope the bankruptcy trustee will unveil secret transfers, hidden assets and other possible sources of recovery to pay their claims.

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