Overview: 

The Borrower’s deliberate omission of critical financial information significantly complicated the loan underwriting process and increased the lender’s risk exposure.  This case highlights the importance of thorough due diligence and professional oversight in complex transactions. The increased risk exposure was primarily due to the potential for future legal entanglements and the risk of insolvency without the resolution of outstanding obligations.

The Borrower’s spouse was kept in the dark about the financial issues until subpoenaed in connection with equipment loan defaults.  This lack of transparency led to personal conflict and further underscored the need for more thorough due diligence.

Due to the transaction’s complexity, an experienced mortgage broker was required to assess the implications for future loan servicing. The Borrower’s conduct—marked by evasiveness and dishonesty—highlighted the necessity of professional oversight in such transactions.

A detailed investigation revealed extensive financial obligations, including:

• Over $2 million in personal state and federal tax arrears and judgments.
• There are multiple civil judgments and liens against both the Borrower and its operating company.
• Defaults on equipment leases personally guaranteed by the Borrower.
• Recorded Lis Pendens on several properties, restricting new financing options.
• A pattern of unpaid vendor obligations resulting in litigation.

The Borrower operates both individually and through corporate entities, which are legally distinct from one another. However, the Borrower’s strategy involved transferring business operations to a newly formed company—run by a close relative—while leaving liabilities with the original entity.  This maneuver, commonly known as a ‘phoenix company’ strategy, appeared designed to evade creditors without formal bankruptcy proceedings. It is a controversial and often illegal practice that involves liquidating a company to avoid paying its debts and then starting a new company to continue the business.

Despite the Borrower's significant real estate equity, their financial behavior raised serious ethical and legal concerns.  The lender declined the loan request due to:

• The Borrower’s history of defaults and litigation.
• The potential for future legal entanglements is tied to personal guarantees.
• The risk of insolvency without resolution of outstanding obligations.

Conclusion:

This case serves as a cautionary example of the risks posed by borrowers who fail to disclose material facts.  It reinforces the necessity of rigorous due diligence and ethical scrutiny in loan transactions.  Lenders must remain vigilant and prepared to reject proposals that compromise financial integrity.