## Facts

- Coronet Capital Company, a New York limited partnership, made mortgage loans, including a loan to SSD Properties Corporation secured by real property.
- JIB paid Coronet $500,000 under an agreement styled as an “Assignment Agreement” giving JIB a purported “senior interest” in the SSD mortgage.
- The agreement guaranteed JIB a minimum annual return of 15% regardless of whether SSD made payments.
- The agreement required Coronet, at the SSD loan’s maturity, to repay JIB’s senior interest plus the promised return before Coronet could retain any remaining sums.
- After SSD defaulted, Coronet continued making payments to JIB consistent with the guaranteed-return terms.
- An involuntary bankruptcy case was filed against Coronet, later converted to Chapter 7, and a trustee was appointed; the automatic stay took effect.
- JIB moved for relief from the automatic stay, asserting it owned a participation interest in the SSD mortgage and could proceed directly against the collateral.
- The trustee opposed, arguing the transaction was not a true participation but a secured financing (a disguised loan) and that the SSD mortgage was property of the estate.

## Issues

1. Whether the purported participation/assignment created a true loan participation (sale of an undivided interest in the SSD mortgage) or instead constituted a disguised loan from JIB to Coronet.
2. If the transaction was a disguised loan, whether JIB was merely a creditor subject to the automatic stay, requiring denial of relief from stay.

## Decision

- The court held the alleged participation was, in substance, a disguised loan from JIB to Coronet.
- The court concluded the SSD mortgage remained property of the bankruptcy estate.
- The court denied JIB’s motion for relief from the automatic stay.

## Legal Principles

- Courts determine whether a transaction is a true participation or a loan by examining economic substance rather than contractual labels.
- A true participation generally requires the participant’s returns to depend on the underlying borrower’s performance and for the participant to bear the borrower’s default risk, rather than having recourse to fixed payments from the lead lender.
- A guaranteed rate of return independent of the borrower’s payments and priority repayment terms that insulate the putative participant from loss are strong indicia of a debtor–creditor financing arrangement.
- If the arrangement is a loan to the debtor, the underlying mortgage remains estate property and the counterparty is a creditor whose collection efforts are barred absent relief from the automatic stay.

## Conclusion

Because the agreement shifted SSD’s default risk away from JIB through a guaranteed return and repayment priority, the court treated the transaction as a loan to Coronet, leaving the SSD mortgage in the estate and requiring denial of stay relief.


In re Coronet Cap. Co., 142 B.R. 78 (Bankr. S.D.N.Y. 1992)