No. of Recommendations: 1

You wrote, His analogy was incorrect. It may be that two LLCs loosely connected to a parent company can transfer funds legally, but that is not the same an individual refinancing the house and buying a new property. Here financing was given to one LLC with what apparently was a belief that the money would be used for the specific project. It is unclear to me that they would have any right to foreclose on the other, but that's way over my head. I remember Ira from long ago and he helped me with tax stuff, but I think he misunderstood the issue.

I think in general one LLC could transfer funds to another LLC through several legal means. One would be a promissory note; another would be an equity purchase; another might be issuing a special dividend to the parent company with the proceeds sent to the other LLC as part of a capital injection. Funds get transferred between subsidiaries of conglomerates using mechanisms like these all the time.

However, the terms of the Mezzanine financing might call for the funds to be used for a specific purpose or for the LLC to maintain certain capital levels. I don't know if there are any laws broken here; but from the financier's viewpoint, that may not matter. What matters is if financier believes the funds were misappropriated or if they were used in a way that violates the terms of their agreement.

Given the personal guarantee you had previously mention, I suspect the financier knew what the money was being used for. By requiring the personal guarantee, it gives the financier the right to pursue both the owner and all of his LLCs' assets - not just the one with this property.

If you want make sure nothing funny is going on here, call the financier, tell them you are investigating this guy and ask them if they were aware of what you've found...

- Joel
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