BMO Harris Bank N.A. v. Brahos (In re Brahos)

589 B.R. 381

IN RE: Charles A. BRAHOS, Debtor.

BMO Harris Bank N.A., f/k/a Harris N.A., as assignee of the Federal Deposit Insurance Corp. as receiver for Amcore Bank, N.A. Plaintiff,

v.Charles A. Brahos, Defendant.

No. 16 B 2160

No. 16 A 358

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Signed August 7, 2018

Attorneys for plaintiff BMO Harris Bank N.A.: Kurt M. Carlson, Jeffrey E. Altshul, C. Douglas Moran, Steven D. Mroczkowski, Carlson Dash LLC, Chicago, IL

Attorney for defendant Charles A. Brahos: Scott J. Kofkin, KofkinLaw, Roselle, IL

AMENDED MEMORANDUM OPINION ¹

A. Benjamin Goldgar, United States Bankruptcy JudgeThis matter is before the court for ruling after a trial on the adversary complaint of BMO Harris Bank N.A. ("BMO") objecting to the discharge of chapter 7 debtor Charles A. Brahos. BMO contends that within one year of his bankruptcy case, Brahos transferred to his wife his interest in property the couple owned jointly in Skokie, Illinois, and that he did so intending to hinder, delay, or defraud creditors. BMO also contends that Brahos then made false oaths in the schedules and statement of financial affairs he filed with his bankruptcy petition, false oaths about (among other things) the assignment. For these reasons, BMO says, Brahos should be denied a discharge under sections 727(a)(2)(A) and (4)(A) of the Bankruptcy Code, 11 U.S.C. §§ 727(a)(2)(A), (4)(A).

What follows are the court's findings of fact and conclusions of law in accordance with Rule 52(a)(1) of the Federal Rules of Civil Procedure, Fed. R. Civ. P. 52(a)(1) (made applicable by Fed. R. Bankr. P. 7052 ). For the reasons discussed below, judgment will be entered in favor of BMO and against Brahos on both of the bank's claims. Brahos's discharge will be denied.

1. Jurisdiction

The court has subject matter jurisdiction under 28 U.S.C. § 1334(a) and the district court's Internal Operating Procedure 15(a). This is a core proceeding. 28 U.S.C. § 157(b)(2)(J). The court may therefore enter a final judgment. In re Smith , 848 F.2d 813, 816 (7th Cir. 1988) ; Monty Titling Trust I v. Granrath (In re Granrath) , 560 B.R. 515, 518 (Bankr. N.D. Ill. 2016).

2. Findings of Fact

a. The Brahoses and the Kirk Street Property

Charles Brahos ("Charles") is a businessman with a B.Ed. from the University of Colorado. (Tr. 231-32).² He has been a licensed real estate broker in Illinois since 1979 and operates his own real estate company, The Brahos Group, where he is engaged in real estate sales and consulting. (Id. at 26). His wife Sharon Brahos ("Sharon") holds a B.B.A. from Western Illinois University. (Id. at 178). For more than twenty years, she was the director of administration at a small exterminating company where, among other things, she supervised the company's accounting. (Id. at 177). For the past four years, she has worked in banking: at PNC Bank training tellers and at a Chase Bank automated bank center instructing customers about online banking, mobile banking, and the like. (Id. at 175-76).

Beginning in the 1950s, Charles's parents owned a residence at 4219 Kirk Street in Skokie, Illinois (the "Kirk Street property"). (Tr. at 27). In 1999, his mother sold the Kirk Street property to a Richard Jennings, transferring the property to a land trust with Chicago Title Land Trust Co. ("Chicago Title") as trustee and Jennings as the holder of the beneficial interest. (Tr. at 34-36, 154-55; Ex. 9). Later that year, Jennings sold the property to Charles and Sharon, assigning his beneficial interest to them as tenants by the entirety. (Tr. at 37-38; Ex. 12).

The Kirk Street property was encumbered with two mortgages, both in favor of Bank of America: a first mortgage securing a $300,000 loan, and a second mortgage securing a $294,000 home equity loan. (Id. at 59-60, 214-15).

The Brahoses lived at the Kirk Street property until 2005, when they moved to a new residence Charles had purchased in Highland Park, Illinois (the "Highland Park property"). (Id. at 209-10). But the Brahoses moved without selling the Kirk Street property. They had been trying to sell it since 2001 and had been unable to. (Id. at 210).

Adjacent to the Highland Park property were two vacant lots that Charles also owned, lots he hoped to develop and sell. (Id. at 233-34).

b. The North Shore Auto Group Venture and the BMO Loans

Real estate development was not Charles's only venture. In 2006, he and some others invested in North Shore Auto Group, a car dealership. (Id. at 206-07). To make the investment, Charles borrowed $750,000 from BMO.³ The BMO loan was secured with a second mortgage on the Highland Park property. (Id. ). In 2007, Charles invested another $1 million in the dealership. Again, he turned to BMO, obtaining a second loan, this one secured by a mortgage on one of the two vacant lots. (Tr. at 207-08).⁴

The car dealership venture turned out to be a bust. Charles had a falling out of some kind with his partners, and in September 2009 he brought an action against them in Illinois state court. The action went to trial, and in March 2011 he obtained a favorable judgment and a damage award of more than $2 million.⁵ (Stip. ¶ 20; Tr. at 40). In November 2011, he received $1,563,582.89 in partial satisfaction of the judgment. (Stip. ¶ 21).

c. The Commonwealth Financial Network Accounts and the Promissory Note

On November 16, 2011, the payment on the judgment was wired to a joint account Charles and Sharon had opened at Commonwealth Financial Network ("CFN") just twelve days before. (Tr. at 49-53, 55, 239; Ex. 32 at CW1, CW9-10, CW40). The payment constituted the only funds in the account. (Tr. at 53, 55-56, 163-64).

On January 11, 2012, Sharon opened an account in her own name at CFN. (Tr. at 158-59; Ex. 32 at 462-63). Two days later, she and Charles transferred $500,000 from the joint CFN account to Sharon's new account. (Tr. at 56, 159; Ex. 32 at CW2, CW23; Ex. 33 at CW641). Twelve days after that, Sharon used $300,000 of the $500,000 to pay off the Bank of America first mortgage on the Kirk Street property. (Tr. at 47-48, 60, 161, 168).

Although the $300,000 came from the damage award in the car dealership action and so was originally Charles's money, Charles signed and gave Sharon a promissory note for $300,000. (Tr. at 47; Ex. 29). When Charles gave her the note is unclear, but the note is dated January 12 (Ex. 29) – the day after Sharon opened her CFN account, the day before she and Charles transferred the $500,000 to that account, and ten days before she paid off the mortgage.

The Brahoses were never able to offer a plausible reason for the note's execution. Initially, they sought to link the note to the mortgage payoff. Charles at first testified that he did not know where the money to pay the mortgage had come from, but he "assume[d]" it came from Sharon. (Tr. at 48). Then he claimed she had paid off the Bank of America mortgage with "separate funds" unrelated to the transfer from the CFN account. (Id. at 58-59). And then he asserted she had "leveraged her stock portfolio" to pay off the mortgage – meaning she had taken out a loan, borrowing against investments she owned in her own right. (Id. at 215).⁶ But Charles could not identify the institution that made the alleged loan to Sharon (id. at 216-17), and no documentation of such a loan was introduced.

Sharon likewise said at first that Charles gave her the note "[b]ecause he owed me money," and he owed her money because she "was paying off a mortgage on the [Kirk Street] house." (Id. at 155-56). Later, though, her testimony changed. She claimed she had demanded the note because of expenses for the Kirk Street property she had paid over the years. (Id. at 185-86, 188). But no evidence was introduced documenting the expenses Sharon said she paid, corroborating her payment of them, or connecting them with the $300,000 note (which did not mention them).

When pressed, both Brahoses admitted the money to pay off the mortgage had originated with Charles, not Sharon. (See id. at 159-61, 168, 236). The Brahoses' shifting and contradictory statements made their explanations of the note's origins incredible.⁷

The $300,000 transfer to Sharon was not the only transfer of funds from the judgment in the car dealership action. On December 5, 2011, the Brahoses transferred $135,000 to their joint account at Bank of America. (Tr. at 245-46; Ex. 32 at CW6). The next week, the Brahoses transferred another $150,000 to the same account. (Tr. at 245-46; Ex. 32 at CW3). All of the money was used to pay creditors. (Tr. at 245-46).

d. The BMO Foreclosure Action

Meanwhile, Charles had long since defaulted on the second BMO loan, and in 2009 BMO's predecessor, Amcore Bank, brought an action against him in Illinois state court (the "BMO action") to recover on the note and foreclose on the mortgage. (Stip. ¶ 4; Tr. at 43).⁸ Charles contested the action and also filed a counterclaim. (Tr. at 43).

From the start of the action through mid-2014, Charles was represented by counsel from the Miller Canfield firm. (Id. at 98, 221). In June or July 2014, his Miller Canfield counsel withdrew, and Charles retained Donald Morrison in their place. (Id. at 98-99, 221, 250).

Trial in the BMO action began in December 2014 and, the state court's docket shows, continued into March 2015, when the court heard closing arguments. (Id. at 43-44, 97). On July 1, 2015, the state court issued an opinion finding in favor of BMO and against Charles on both the complaint and the counterclaim. (Id. at 44-45, 67, 219).

After the state court issued its opinion, Charles began considering bankruptcy. He met with bankruptcy counsel in July to discuss the possibility of filing a bankruptcy case. (Id. at 68). Part of their discussion concerned the Kirk Street property. (Id. ).

On December 10, 2015, the state court entered a judgment of foreclosure and sale in the BMO action that included an award of $1,753,055.89 in damages against Charles for breach of the note. (Stip. ¶¶ 5-6). His...