Korrub v. Cohn (In re Cohn)

561 B.R. 476

In re: Edward T. Cohn, Debtor.

Aliza Korrub, Plaintiff,

v.Edward T. Cohn, Defendant.

Case No. 09 B 38337

Adversary Pro. No. 10 A 1735

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

Signed November 15, 2016

Joel A. Schechter, Esq., Law Offices of Joel Schechter, Chicago, IL, for Plaintiff.

Neil P. Gantz, Neil Gantz Law Offices, Chicago, IL, for Defendant.

MEMORANDUM OPINION

PAMELA S. MOLLIS, United States Bankruptcy Judge

This matter comes before the court following trial on the complaint brought by Plaintiff Aliza Korrub against Defendant Edward T. Cohn, seeking a finding that the debt Cohn owes to Korrub is nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A), (a)(4) and (a)(6), and that Cohn's discharge should be denied pursuant to 11 U.S.C. § 727(a)(3), (a)(4)(A) and (a)(6)(A). Korrub also requested an award of attorney's fees and costs. Having heard the testimony of Korrub and Cohn, reviewed the admitted exhibits, and read the post-trial memoranda of law, the court will enter judgment for Cohn on all counts except Count V. Judgment will be entered for Korrub on Count V and Cohn's discharge will be denied.

JURISDICTION

Under 28 U.S.C. § 1334, district courts have original and exclusive jurisdiction of all cases under Title 11. The underlying bankruptcy case was automatically referred to this court pursuant to Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois, as authorized by 28 U.S.C. § 157(a).

This adversary proceeding, filed within the bankruptcy case, seeks a finding that Cohn's debt to Korrub is nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A), (a)(4) and (a)(6). The complaint also seeks a finding that Cohn's discharge should be denied pursuant to 11 U.S.C. § 727(a)(3), (a)(4)(A) and (a)(6)(A).

This adversary is a core proceeding under 28 U.S.C. § 157(b)(2)(I) and (J). Since a proceeding to determine dischargeability and to deny discharge "stems from the bankruptcy itself," Stern v. Marshall, 564 U.S. 462, 499, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), this court has both the statutory and the constitutional authority to enter final judgment on the complaint.

FINDINGS OF FACT

Cohn and Korrub Meet and Decide to Build a Spec House Together

Sometime in late 2003, Edward Cohn walked into the Koenig & Strey real estate brokerage in Wilmette. Tr. at 36; 148. He was looking to see if there was any land available for building a single family home. Tr. at 36–37; 148. Aliza Korrub, who worked in the office as a licensed agent, approached Cohn to see if she could help. Tr. at 40.

Korrub and Cohn eventually agreed to build a "spec" home together at 21 Brookhill Drive in Northfield (the "Brookhill Property"). Tr. at 40–41. They formed a limited liability company named 21 Brookhill Drive, LLC. Tr. at 41; Pl. Ex. 8. Korrub and Cohn (as president of Concept Design Construction, Inc.) were both members and managers of 21 Brookhill Drive, LLC. Tr. at 42; Pl. Ex. 8.

Cohn had formed Concept Design in 1997, the year he started working as a contractor. Tr. at 37, 107. Through Concept Design he did remodeling, renovations, additions, and new home construction. Tr. at 37–38. Cohn, the sole employee and shareholder, operated Concept Design as a general contractor, and hired subcontractors to do the physical labor on his construction projects, Tr. at 38. Over the years he built about a dozen houses as a general contractor. Tr. at 107.

The agreement between Korrub and Cohn basically provided that she would purchase the raw land, and Concept Design would secure construction financing as well as serve as the general contractor in connection with construction of the house. Tr. at 42–43, 108; Pl. Ex. 8 . Cohn originally had another investor lined up to purchase the land, but when that funding fell through, Korrub said "well, I'd buy the land, and we'll work together on the project. And that's how that happened." Tr. at 149, lines 16–17.

Korrub purchased the real property for $ 285,000, which she financed through a home equity loan on her residence. Tr. at 149–50. When it came time to sell the Brookhill Property, Korrub would be reimbursed for her $ 285,000 outlay, and the profits would be split 60% to Concept Design and 40% to Korrub. Tr. at 43–44, 150; Pl. Ex. 8 .

A portion of Concept Design's share of the profits would be distributed to Cohn's investors, who had not given Cohn any funds but had arranged for and guaranteed the construction loan from American Chartered Bank. Tr. at 44–45, 47; Pl. Ex. 9 . Cohn admitted that "I had—I didn't have very good credit. There was no way I was getting—I was able to get a loan." Tr. at 124, lines 10–12. Korrub knew that Cohn had investors on board. Tr. at 124. She did not know much more than that. "[T]hat was not my job. I did the land, and he prepared the investors in the construction loan." Tr. at 163, lines 22–24.

Cohn and Korrub, as managers of 21 Brookhill Drive, LLC, signed a promissory note evidencing the $ 631,000 construction loan on May 20, 2004. Tr. at 45–46; Pl. Ex. 9.

They also signed a construction loan agreement on the same day. A budget is attached as Exhibit A to the construction loan agreement. Pl. Ex. 9. Cohn prepared the budget, which estimated the total cost of construction at $ 945,200, including $ 285,000 for the land purchase. Tr. at 47–49; Pl. Ex. 9.

Korrub never reviewed the construction budget, although she initialed it. Tr. at 161. "I didn't know where money was going for or anything. There was a construction loan, which was going to be used to build a house. What was going for what, I never knew." Tr. at 150, line 23—p. 151, line 2, At the time they started the project, Cohn and Korrub estimated their profit on the project would be between $ 300,000 and $ 400,000. Tr. at 151.

The Spec House is Built at a Cost Nearly 50% Higher Than Originally Budgeted

The amount of the construction loan was increased several times, eventually ending with a principal amount of $ 977,000. Pl. Ex. 9. According to Cohn, each of the increases were due to upgrades in the construction of the home. Tr. at 58–59. "[A]nd on every upgrade, as you can see, it was discussed with Aliza, because every upgrade has her sig—every time we increased it, it has to have her signature on there....". Tr. at 56, lines 5–9; Tr. at 125. Korrub denied agreeing to the upgrades: "Any upgrade he did on his own. He never consulted me." Tr. at 154, lines 11–12.

According to Korrub, she did not sign the loan increases "willingly."

They were brought to my office, usually with no notice, with very little notice, usually by someone who worked for him by the name of Matt. And I was told I had to sign them while he waited for them mostly.

Tr. at 152, lines 14–18. At one point a loan guarantor told Korrub that if she didn't "sign by the end of the day, he'll foreclose on the house, and then he'll go and he'll put the whole thing in his wife's name. Those are the kind of phone calls I had with these people, okay?" Tr. at 166, lines 4–8.

[E]very time I asked for an accounting for the extra money and why he needed an increase in the construction loan," Korrub testified, "I never got anything." Tr. at 155, lines 9–12. Korrub's lawyer told her that "we'll have to deal with all this after closing." Tr. at 152, line 20.

Since she was the land owner, Korrub paid the utility bills associated with the project. "Even after closing, I was being chased for the water bills." Tr. at 153, lines 5–6. She also paid the real estate taxes that accrued during the building process. Tr. at 153.

Korrub occasionally visited the building site as the house was being constructed. Tr. at 157. She "would park in the commercial parking lot next door and walk the property once in awhile." Tr. at 157, lines 16–17.

The construction loan agreement required submission of lien waivers from all subcontractors to be attached to each request for disbursement of funds, and numerous waivers were submitted throughout the construction process. Pl. Ex. 9; Pl. Ex. 10. While some of the lien waivers were submitted directly from Cohn's subcontractors, he prepared and signed others himself. Cohn testified that he paid the subcontractors directly when he submitted these lien waivers. Tr. at 116.

When asked why he paid the subcontractors and then submitted the lien waivers himself, Cohn testified that "[a] lot of times in the beginning of doing this for a saving [sic], you're not—you don't—you're not 100 percent sure who you're going to use for—whether it's for, you know, electrical fixtures—you know, you're always changing things." Tr. at 118, lines 15–19.

For example, according to the final waiver of lien, Cohn received $ 42,000 for carpentry labor done by independent contractors. Tr. at 70–71; Pl. Ex. 10. When asked at trial whether he had evidence that the laborers had been paid S42,000, Cohn demurred. "I could assure you the house was not built, you know, for—you know, free. I had to pay somebody to build this house." Tr. at 71, lines 23–25. As another example, Cohn received $ 10,000 in late 2004 as reimbursement for the construction permit. One of his investors had fronted the money and Cohn repaid him. Tr. at 94–95. When asked if he knew how much the total cost of the permit was, Cohn replied: "If I requested $ 10,000, it was $ 10,000." Tr. at 95, line 6. Yet Cohn received another $ 5,000 on December 28, 2004, for the permit. Tr. at 99. Someone named Gerald Lakin wrote a check to the Village of Northfield for $ 13,596. Pl. Ex. 11. When asked whether "all $ 15,000 that you withdrew, paid to you by the title company went to Lakin?", Cohn could not recall. Tr. at 99–100. As a final example, it was unclear exactly how much Cohn paid for insurance premiums, whether it was $ 1,250 or $ 1,750. Tr. at 100–101. On December 28, 2004, however, Cohn received $ 10,000 as reimbursement for insurance. Tr. at 101; Pl. Ex. 10 . No documentary evidence was introduced to support Cohn's testimony that each of these...