Lupe Dev. Partners, LLC v. Deutsch (In re Deutsch)

575 B.R. 50

IN RE: Fred DEUTSCH, Debtor.

Lupe Development Partners, LLC and Steven Minn, Plaintiffs,

v.Fred Deutsch, Defendant.

Case No. 15–13369 (MG)

Adv. Pro. No. 16–01216 (MG)

United States Bankruptcy Court, S.D. New York.

Signed October 18, 2017

COZEN O'CONNOR, Attorney for Plaintiffs Lupe Development Partners, LLC and Steven Minn, 33 South Sixth Street, Suite 4640, Minneapolis, MN 55402, By: Thomas G. Wallrich, Esq., Joel D. Nesset, Esq., -and-

277 Park Avenue, New York, NY 10172, By: Frederick E. Schmidt, Jr., Esq.

FRED DEUTSCH, Pro se Defendant

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT AND DENYING A DISCHARGE TO THE DEBTOR UNDER SECTION 523(a)(2)(A) OF THE BANKRUPTCY CODE

MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE

Pending before this Court is the motion for summary judgment filed by Lupe Development Partners, LLC ("Lupe") and Steven Minn ("Minn," together with Lupe, the "Plaintiffs"), the Plaintiffs in the above-captioned adversary proceeding (the "Adversary Proceeding"), seeking a determination that Fred Deutsch's ("Deutsch," or the "Debtor") debts to the Plaintiffs are excepted from discharge under section 523(a)(2)(A) of the Bankruptcy Code (the "Motion," ECF Doc. # 19). The Motion is supported by a declaration by Minn (the "Minn Declaration," ECF Doc. # 19–2),¹ and the Plaintiffs' Statement of Undisputed Facts Pursuant to Local Rule 7056–1 (the "Plaintiffs' SUF," ECF Doc. # 20).

The Adversary Proceeding arises from fraud perpetrated by Deutsch in connectionwith the parties' plan to develop a property in Minneapolis, Minnesota (the "Minnesota Property," or the "Property"). The Plaintiffs initially contracted with Deutsch to assist him to develop the Property, and Minn agreed to personally guaranty a loan to facilitate the purchase of the Property. But as a result of Deutsch's defaults in connection with the development project, the Plaintiffs eventually sued Deutsch for damages (the "Minnesota Action") in Minnesota State Court (the "State Court"). The State Court entered a default judgment (the "Default Judgment") against Deutsch in the amount of $344,363.23 in favor of Lupe and $1,594,633.90 in favor of Minn.

Importantly here, the State Court made findings of fact and conclusions of law in the Default Judgment that Deutsch engaged in fraudulent conduct (the "State Court Findings," ECF Doc. # 19–2 at 18–30). The Plaintiffs thereafter joined in an involuntary petition naming Deutsch as the debtor, and filed this Adversary Proceeding seeking a judgment that Deutsch's debts to the Plaintiffs in the amounts awarded in the Minnesota Action are excepted from discharge under section 523(a)(2)(A), because the debts arose from Deutsch's false representations. The Plaintiffs now argue that Deutsch is collaterally estopped from denying the State Court Findings, which, together with the Plaintiffs' SUF, establish the elements of section 523(a)(2)(A) of the Bankruptcy Code, entitling the Plaintiffs to summary judgment holding that Deutsch's debts to the Plaintiffs are excepted from discharge.

The Court concludes that the State Court Findings and the Plaintiffs' SUF satisfy the elements of a claim under section 523(a)(2)(A). The State Court Findings are given preclusive effect, and the debts, which arose from Deutsch's fraudulent conduct, are not dischargeable. The Plaintiffs' Motion is thus GRANTED.

I. BACKGROUND

A. Factual Findings²

1. The Project

In 2006, Deutsch and Minn negotiated an agreement whereby Lupe would provide real estate pre-development work to Deutsch to assist Deutsch in developing the Minnesota Property for mixed-use development (the "Project"). (Plaintiffs' SUF ¶ 2.) Pursuant to the parties' agreement, Lupe assumed the responsibilities of coordinating governmental approvals, architect and contractor selection, environmental remediation, and financial analysis, and would be compensated $12,500 per month. (Id. ¶¶ 2, 3.) Before committing to the Project, Minn conducted due diligence to ensure Deutsch had the financial wherewithal to undertake the Property development. (Id. ¶ 4.) Minn obtained from Deutsch various financial documents, including Deutsch's and his spouse, Penny Drue Baird's ("Baird"), personal financial statements and 2005 tax returns. (Id. ¶ 5.) According to the Plaintiffs, during 2006 and 2007, Minn made several trips to New York to meet with Deutsch to discuss the Project, and during one of the meetings, Deutsch introduced Minn to Baird, who would be the interior design consultant for the Project. (Minn Declaration ¶ 10.) The woman introduced to Minn as Baird was allegedly present at several additional meetings between Minn and Deutsch. (Id. )

In 2007, to facilitate the purchase of the Property by Pacific Flats II, LLC (a limited liability company of which Deutsch was the sole member), Minn agreed to personally guaranty a loan (the "Loan") for the Property from Bridgewater Bank (the "Bank"). Minn specified that his guaranty of the Loan was subject to the conditions that: (i) Deutsch and Baird would be the primary guarantors of the Loan; (ii) Deutsch and Baird would agree to indemnify Minn for any loss arising from Minn's guaranty; and (iii) Deutsch and Baird would provide personal financial statements and tax returns evidencing their financial condition to Minn and the Bank. (Plaintiffs' SUF ¶ 11.) Accordingly, Deutsch provided Minn and the Bank copies of Deutsch's and Baird's 2006 federal tax returns, and personal financial statements representing that, as of December 31, 2006, Deutsch's and Baird's net worths were $34,350,000 and $23,450,000, respectively. (Id. ¶ 12.) Deutsch also provided to Minn an Indemnity and Guaranty Agreement, and represented that Baird would provide the same. (Id. ¶ 13.) Finally, Deutsch delivered to the Bank his own personal guaranty, and a guaranty purportedly executed by Baird (the "Baird Guaranty"), both of which included a notary seal of Deutsch's attorney, Ira B. Stechel. (Id. ¶ 14.) In reliance on these representations, Minn personally guaranteed the Loan. (Id. ¶ 15.)

2. The Minnesota Action

In 2009, the Plaintiffs brought an action in Minnesota State Court against Deutsch,³ styled as Lupe Development Partners, LLC and Steven Minn v. Pacific Flats I, LLC, Pacific Flats II, LLC, Fred Deutsch, and Deutsch Development , Case No. 27–CV–09–30240, alleging that Deutsch defaulted on agreements made with the Plaintiffs in connection with the Project. The Plaintiffs also discovered that Deutsch had made several misrepresentations in connection with the Project. Most importantly here, the Plaintiffs learned—and Deutsch does not dispute—that Baird never executed the personal guaranty delivered to the Bank at the closing of the loan.⁴ (Plaintiffs' SUF ¶ 17.) Deutsch responded to the complaint in the Minnesota Action, but was uncooperative during discovery, refusing to provide documents to the Plaintiffs, failing to attend his own deposition and failing to comply with several discovery orders. (Minn Declaration, Ex. C (State Court Findings) at 18–19.)

Based on the foregoing facts, on December 17, 2010, the Plaintiffs obtained the Default Judgment against Deutsch in the Minnesota Action in the amount of $344,363.23 in favor of Lupe and $1,594,633.90 in favor of Minn. (Plaintiffs' SUF ¶ 19.) The State Court made the following pertinent findings of fact and conclusions of law:

• Minn "agreed to guaranty the [Bridgewater Bank] loan upon the conditions that: a) [Deutsch] and [Baird] would be primary Guarantors of the [Bank's] financing; and b) [Deutsch] and [Baird] would indemnify Minn in connection with the making of any guaranty." (Id. ¶ 18 (quoting the State Court Findings).)

• Deutsch "provided Minn an Indemnity and Guaranty Agreement dated December 19, 2007 and represented that [Baird] would provide a similar document upon her return from Paris, France." (Id. )

• Deutsch's delivery of various documents, including the personal guaranty bearing Baird's forged signature, "operated as a fraud upon Bridgewater Bank and Minn." (Id. )

• The Indemnity and Guaranty Agreement had been triggered by the fraud or material misrepresentations of Deutsch in securing the loan from the Bank and the guaranty of Minn. (Minn Declaration ¶ 29 (citing the State Court Findings).)

B. The Adversary Proceeding

On December 28, 2015, the Plaintiffs joined in an involuntary petition naming Deutsch as the debtor, and on April 26, 2016, the Court entered an order for relief. (ECF Doc. # 1, the "Adversary Complaint," at 2.) On October 10, 2016, the Plaintiffs filed the Adversary Complaint, seeking a judgment that Deutsch's debts to the Plaintiffs in the amounts awarded in the Minnesota Action (plus post-judgment interest) be excepted from discharge. (Id. at 7.) On February 22, 2017, the Plaintiffs made a motion for a default judgment in the Adversary Proceeding because Deutsch failed to timely respond to the Adversary Complaint (the "Motion for Default Judgment," ECF Doc. # 12). On March 16, 2017, this Court issued an order denying the Motion for Default Judgment, and conditionally vacating a certificate of default that had been entered on the docket, provided that Deutsch file an answer to the Adversary Complaint. (ECF Doc. # 14.) On March 27, 2017, Deutsch filed an answer to the Adversary Complaint (the "Answer," ECF Doc # 15).

On May 8, 2017, the Plaintiffs filed the Motion, seeking entry of summary judgment holding that Deutsch's debts to the Plaintiffs are excepted from discharge because the Default Judgment should be given preclusive effect, and, the State Court Findings and Plaintiffs' SUF establish the requisite elements of section 523(a)(2)(A). According to the Plaintiffs, (i) Deutsch's forgery of Baird's signature constitutes a false representation; (ii) Deutsch knew the representation was false when made; (iii) Deutsch made the representation with the intention of deceiving the Plaintiffs; (iv) the Plaintiffs justifiably relied on Deutsch's representation; and (v)...