Zutrau v. Zutrau (In re Zutrau)

563 B.R. 431

IN RE Eric ZUTRAU, Debtor.

Leilani Zutrau, Plaintiff–Appellee,

v.Eric Zutrau, Defendant–Appellant.

BAP NO. MB 16–029

Bankruptcy Case No. 11–11815–FJB

Adversary Proceeding No. 11–01183–FJB

United States Bankruptcy Appellate Panel of the First Circuit.

February 16, 2017

Eric Zutrau, Pro Se, on brief for Defendant–Appellant.

Dmitry Lev, Esq., for Plaintiff–Appellee.

Before Deasy, Tester, and Finkle, United States Bankruptcy Appellate Panel Judges.

Tester, U.S. Bankruptcy Appellate Panel Judge.

Eric Zutrau (the "Debtor") appeals pro se¹ from the bankruptcy court's amended judgment determining that certain debts he owed to his sister, Leilani Zutrau (the "Appellee"), were nondischargeable pursuant to § 523(a)(2)(A) and (a)(6).² For the reasons set forth below, we AFFIRM.

BACKGROUND

I. Adversary Proceeding

Three months after the Debtor filed his chapter 7 petition, the Appellee filed a timely complaint seeking a determination that his debts to her in the total amount of $427,522.90 were nondischargeable under § 523(a)(2)(A) as debts arising from false representations, and under § 523(a)(6) as debts for willful and malicious injury. After the Debtor answered the complaint, the Appellee filed an amended complaint to allege additional facts to support her § 523(a)(2)(A) and (a)(6) counts and to object to the Debtor's discharge under § 727(a)(2)–(4).

On August 16, 2011, despite the existence of the amended complaint which included a count objecting to the Debtor's discharge, the bankruptcy court entered an order discharging the Debtor.³

Thereafter, the bankruptcy court held a hearing on the Debtor's motion to dismiss the complaint, the Appellee's motion for leave to amend further the complaint (to add additional facts to support her objections to discharge under § 727(a)(2)–(4)), and the Debtor's opposition to the motion for leave to amend (in which he argued that the proposed amendment was futile as the court had already entered his discharge). Subsequently, the court dismissed the Appellee's objections to discharge under § 727(a)(2)–(4), but allowed the Appellee to assert a revocation of discharge count under § 727(d). The court also denied the Debtor's request to dismiss the § 523(a)(2)(A) and (a)(6) counts.

In January 2014, the Debtor filed a motion for summary judgment as to the remaining counts under § 523(a)(2)(A), § 523(a)(6), and § 727(d), all of which the Appellee opposed. After a hearing, the bankruptcy court granted summary judgment in favor of the Debtor as to the count under § 727(d) for revocation of discharge and denied summary judgment as to the nondischargeability counts under § 523(a)(2)(A) and (a)(6). Although the Appellee moved for reconsideration and sought leave to file a third amended complaint, the bankruptcy court denied the motions after holding a hearing. As a result, only the nondischargeability counts under § 523(a)(2)(A) and (a)(6) remained for adjudication in the adversary proceeding.

In September 2014, the bankruptcy court held a five-day trial, at which both the Appellee and the Debtor testified. After the trial, the parties submitted proposed findings of facts and conclusions of law. On March 16, 2015, the bankruptcy court heard the parties' closing arguments, and took the matter under advisement.

II. The Bankruptcy Court's Decision

On February 24, 2016, the bankruptcy court entered a judgment ("Judgment") in favor of the Appellee ruling that $193,000 of the debt the Debtor owed the Appellee, plus applicable interest thereon, was excepted from discharge, and the balance of the debt was dischargeable. In its accompanying memorandum of decision, the bankruptcy court specified that $193,000, plus all applicable interest, was excepted from discharge under § 523(a)(2)(A), and of that amount, $80,000, plus all applicable interest, was also excepted from discharge under § 523(a)(6).See Zutrau v. Zutrau (In re Zutrau), 546 B.R. 239, 241 (Bankr. D. Mass. 2016).⁴ In its decision, the bankruptcy court made thorough and detailed factual findings and legal conclusions based on the record, and the testimonial and documentary evidence presented at the trial.

A. Bankruptcy Court's Findings of Fact

The Debtor was a self-employed contractor. The Appellee was employed as an executive at a financial services firm until June 2007; thereafter, she was self-employed performing "accounting work."

1. The Properties

(a) The Oak Bluffs Property

In 2002, the Debtor and the Appellee agreed to combine their resources and abilities to build a single family house on land the Debtor owned in Oak Bluffs, Massachusetts (the "Oak Bluffs Property"). The Debtor subsequently conveyed 50% of his interest in the Oak Bluffs Property to the Appellee, and they became tenants in common. In exchange for this conveyance, the Appellee agreed to contribute funds toward the construction project. The parties agreed that after the Appellee had contributed sufficient funds as consideration for her 50% interest, they would evenly split the expenses of the construction project. The parties obtained a $200,000 construction loan, and building began with the Debtor supervising the construction of the house. The house was completed in 2010.

(b) The Brookline Property

In 2006, the Debtor identified a property in Brookline, Massachusetts (the "Brookline Property") that he believed would be a profitable condominium conversion venture, and he approached the Appellee for funding. In March 2006, the Appellee loaned the Debtor $123,000 for him to use as a down payment to purchase the Brookline Property. The Appellee borrowed the funds from her line of credit with Chase Bank which was secured by her personal residence in New York ("Chase LOC").

On March 24, 2006, the Debtor executed a promissory note in which he agreed to repay the Appellee $123,000, with interest at a yearly rate of 7%, on or before September 24, 2006. The note contained a security clause providing that the principal and interest owed under the note would be secured by the Debtor's interest in the Oak Bluffs Property.

Using the $123,000 from the Appellee as a down payment, the Debtor purchased the Brookline Property in April 2006 for $825,000. The Debtor financed the balance of the purchase price by borrowing $618,750 from Taylor, Bean & Whitaker Mortgage Corp. and $122,901 from National City Bank, secured by first and second mortgages, respectively, on the Brookline Property.

2. The Citibank Line of Credit

In late March 2006, with the Debtor's consent, the Appellee obtained a $400,000 line of credit from Citibank ("Citibank LOC") secured by the Oak Bluffs Property. The Appellee was the sole obligor on the underlying promissory note. The parties had initially intended to apply for this line of credit together, but the Debtor's poor credit score dissuaded them from adding the Debtor's name to the application.

In April 2006, with the Debtor's consent, the Appellee used $123,000 drawn from the Citibank LOC to satisfy in full the Chase LOC, in effect, transferring the Chase LOC to the Citibank LOC. Thereafter, the Appellee drew additional funds from the Citibank LOC to fund the still ongoing Oak Bluffs Property construction and to pay for a portion of the Debtor's personal expenses. The parties agreed to share equally the cost of the interest payments on the Citibank LOC.

3. Note A

By September 2006, the Appellee had contributed sufficient funds toward the Oak Bluffs Property to more than satisfy her 50% interest in the property. At this time, the Debtor acknowledged that in addition to owing the Appellee the $123,000 he borrowed to purchase the Brookline Property, he owed the Appellee $77,000 for his share of the expenses for the Oak Bluffs Property.

In September 2006, rather than repaying the $123,000, plus interest, due under the promissory note as he had agreed, the Debtor asked the Appellee to loan him an additional $100,000 to continue the conversion of the Brookline Property into condominiums. He also asked the Appellee to "cover" his portion of the interest payments owed on the Citibank LOC for the duration of the loan. The Debtor promised to repay the full amount he owed the Appellee, from the sale proceeds of the Brookline Property condominiums, immediately after he satisfied the bank mortgages. In an e-mail dated September 11, 2006, the Debtor stated, "When I s[ell] the [Brookline Property], which I aim to do this fall, you will be right behind the bank, before anyone private I owe." In another e-mail dated September 16, 2006, the Debtor stated he intended to "repay ... upon sale [of the Brookline Property] ... even if I don't get to condo it." The two e-mails are referred to collectively as the "September 2006 E-mails."

On September 22, 2006, the Appellee loaned the Debtor the additional $100,000 using funds she borrowed from the Citibank LOC. The Appellee also agreed to temporarily "cover" $13,000 of the Debtor's portion of the upcoming interest payments on the Citibank LOC. The bankruptcy court found that, when making this loan, the Appellee relied on the Debtor's representation that after he satisfied his bank debts he would pay her in full using the sale proceeds of the Brookline Property condominiums.

On September 22, 2006, the Debtor executed a promissory note ("Note A") in which he agreed to repay the Appellee a total of $241,000 on or before April 22, 2007. The amount was comprised of the original $123,000 loan for the purchase of the Brookline Property; the new $100,000 loan; $13,000 for the Debtor's share of interest payments on the Citibank LOC; and $5,000 the Debtor owed the Appellee from a separate transaction. Note A contained a security clause which provided that "until the principal and interest owed under this promissory note are paid in full, this note will be secured by the mortgage covering [the Oak Bluffs Property]." Note A did not contain a separate provision for the payment of interest, but it did contemplate the accrual of interest, providing that the Debtor would make...