In Uncategorized on 09/11/2019 at 21:09

Charles E. Bercy, Deceased, Elaine Bercy, Successor In Interest, And Elaine Bercy, 2019 T. C. Memo. 118, filed 9/11/19, tells the story of the late Charles E. Bercy, before he became the late Charles E. Bercy.

Chas was a hard money lender. This is one who does asset-based lending, free from the strictures of banks and financial institutions. It is the Wild West of lending, where the formalities of applications, loan committees, loan-to-value ratios, priorities of lien, and bushelbaskets of documentation take a second place to rate of return, quick-sale value of assets (whatever they may be), and character and capacity of the borrower.

I represented the heir-apparent to a hard-money dynasty, long ago in a galaxy far away. They’d lend on works of art, real estate, accounts receivable, jewelry, whatever. Paperwork was minimal, but their bankruptcy counsel was the best. And they never, ever took any prisoners.

While Chas wasn’t in their league, he did lend often, individually and through some grantor trusts and S Corps. He syndicated the loan he made individually, which is at issue here. He has a note with all the proper indicia of debt, although the copy proffered at trial was unsigned. Nevertheless, the debtor and Chas’s lawyer testified on the trial, enough to convince Judge Lauber that there was a note. But nobody could produce a UCC-1 for the custom furniture that was the collateral for the loan.

I’ll let you delve into the facts, the loan restructuring and the failed attempt to establish a greater business bad debt loss when the loan went south in the Black ’08, via a discounted present value analysis that showed great ingenuity but no proof. It isn’t enough to plan a structure; you have to build it.

I focus on IRS’ attempt to defeat the business aspect by harping on Chas’ real estate lending, and claiming the furniture lending was a one-off.

Judge Lauber rightly didn’t buy it.

“Respondent concedes that ‘Mr. Bercy was admittedly engaged in the business of real estate lending.’ But respondent contends that making personal property loans was outside the scope of that business. And in respondent’s view, the scale of Mr. Bercy’s non-real-estate lending activity was insufficiently robust to constitute a ‘trade or business’ distinct from his business of real estate lending.

“We are not persuaded to construe the term ‘trade or business’ so narrowly in this context. When previously considering the status of loans as ‘business debts’ under section 166, we have not segmented the taxpayer’s lending business according to the nature of the loan or type of customer. Rather, we have simply asked whether the taxpayer was in the business of lending money, separate and distinct from any other gainful employment he or she may have had.” 2019 T. C. Memo. 118, at pp. 13-14. (Citations and footnote omitted).

Now I never knew of a hard money lender who didn’t file UCC-1s or mortgages or negative pledge agreements. But maybe Judge Lauber gave the late Chas a bye.

Leave a Reply

Please log in using one of these methods to post your comment: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: