Gould v. Wisniewski (In re Wisniewski)
| Decision Date | 05 May 2014 |
| Docket Number | Adv. No. 2:12-ap-01213-EWH,Case No. 2:12-bk-07266-EWH |
| Parties | In re: JASON PAUL WISNIEWSKI and CHRISTINE PATRICIA WISNIEWSKI, Debtors, SCOTT A. GOULD and KATHERINE M. GOULD, Plaintiffs, v. JASON PAUL WISNIEWSKI and CHRISTINE PATRICIA WISNIEWSKI, Defendants. |
| Court | U.S. Bankruptcy Court — District of Arizona |
ORDERED.
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MEMORANDUM DECISION
Scott Gould and Katherine Gould ("Plaintiffs" or "Goulds") seek to have a debt against Jason ("Jay") Wisniewski and Christine Wisniewski (together "Debtors") declared nondischargeable under Bankruptcy Code 11 U.S.C. §§ 523(a)(2) and (a)(6). Plaintiffs' claim arose from their $250,000 loan made to permit Debtors to build out and make other improvements to space they used to open a restaurant in Mesa, AZ. For the reasons explained in the balance of this decision, which constitute the Court's findingsof fact and conclusions of law, Plaintiffs will be awarded a nondischargeable judgment in the principal amount of $100,000.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334(b) and 157(a). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I).
Plaintiffs and Debtors live in the same Phoenix neighborhood. Christine Wisniewski ("Christine") and Katherine Gould ("Katherine") socialized as members of a cinema club.
Among their assets, Debtors own a million-dollar home in Phoenix ("Phoenix Residence").1 Christine owns a vacation home in her native Croatia overlooking the Adriatic Sea ("Croatian Residence"). (Exh. 10; Tr. (March 13, 2014) ("Tr. #1"), at 106:7-9; Tr. (April 7, 2014) ("Tr. #2"), at 106:21-25). Christine purchased the Croatian Residence in 2001 for approximately $35,000. (Tr. #1 at 62:2-10).
The Croatian Residence is surrounded by adjoining properties. Debtors' only access to the house is on a walking path. Debtors do not have an easement, but have verbal permission from their neighbors to use the path. (Id. at 81:8-19; 82:15-16.) In addition, in 2010, when Christine attempted to list the Croatian Residence for sale, the Debtors learned that there was a dispute over its property lines. (Exh. G, at 17; Tr. #1 at 63:20-25-64:1-6; Tr. #2 at 136:1-3. At trial, Christine testified that resolution of the easement and the property line dispute required the Debtors to retain a lawyer in Croatia, and that litigation was likely. (Tr. #2 at 136.)
Debtors are college graduates and professionals: Jay has experience as an investment banker and Christine has a BFA degree and has worked on restaurant design. Debtors, through Caffe Boa, Inc. ("Caffe Boa"), own a restaurant which has successfully operated in Tempe, AZ. Prior to 2009, Debtors opened and operated two other restaurants in the Phoenix metropolitan area, both of which were successful and sold to third parties. (Tr. #2 at 112-113.) In 2009, Debtors decided to open another restaurant in Mesa, AZ—Cafe Boa Bistro ("Bistro"). They needed money to proceed with the build-out. Christine asked Katherine if they could meet with her husband, Scott, a self-described "secured equity lender" to discuss obtaining a loan. (Tr. #1 at 93:22-23.)
In August, 2009, Debtors and Plaintiffs met and discussed a $250,000 loan ("Loan") from Plaintiffs to fund the improvements for Bistro. Scott testified that he was wary of restaurant investments. Nonetheless, he and Katherine, who would be using some of her own money to make the Loan, wanted to help Debtors because of Katherine and Christine's friendship. Katherine testified that she considered Christine to be a good friend, socially and professionally. (Id. at 32:21-22.)
On August 29, 2009, the two couples met again. Katherine claimed Debtors told her that Caffe Boa was "hugely successful" and could carry Bistro for several years. (Id. at 29:8-12.) Debtors also told Plaintiffs that they would grant Plaintiffs security interests in all of their assets, including the Phoenix Residence.
Plaintiffs testified that Debtors represented that there were two prior liens on the Phoenix Residence. Debtors deny making that representation. In fact, there was a third lien on the Phoenix Residence in favor of Alliance Bank as a result of a Small Business Administration loan made to help with the operation of Cafe Boa. Notwithstanding theirextensive experience in successfully operating and financing restaurants, Debtors testified that they were completely unaware of the third lien until their bankruptcy counsel discovered it shortly before the filing of Debtors' bankruptcy petition. (Tr. #2 at 48:5-20.)
Scott testified that he was nervous about the economy and concerned about the equity in the Phoenix Residence, due to the falling real estate market. (Tr. #1 at 105:1-8.) Debtors also offered to pledge the personal property at the restaurants, but Scott testified that he "had no desire for any of the collateral on the restaurants." (Id. at 151:6-7.)
The only collateral that seemed valuable to Scott was the Croatian Residence. While Debtors denied putting a value on the Croatian Residence during the Loan negotiations, (see Tr. #2 at 26:14-16), the Court finds Scott's testimony credible that Debtors told him it was worth $800,000 to $1,000,000 and was "free and clear."2 (Tr. #1 at 106:2-5.) Scott's testimony is also bolstered by the fact that Debtors made a similar representation about the value of the Croatian Residence to another creditor. See infra p. 8. Debtors stated they would sell the Croatian Residence, if necessary, to repay the Loan. (Tr. #1 at 30:19-22.) According to Scott: "Christine looked us right in the eye and said don't worry, we will not default on the loan ..." (Id. at 113:16-18.) "[T]hat's what turned me around from hating restaurants to saying I'm willing to make a loan," Scott stated. (Id. at 106:19-21.)
Debtors never disclosed to Plaintiffs, however, that there was an easement issue with the Croatian Residence. Debtors knew about the easement problem well before2009 because Christine testified that all of the furnishings for the Croatian Residence had to be carried up the path to the house with the oral permission of the neighbors. (Id. at 81-82). During the pendency of the Chapter 11 case, Debtors asserted that the easement issue, the property line issue, and a Croatian law provision which limited ownership of property3, all negatively impacted the value of the Croatian Residence. During their 2009 discussions with the Plaintiffs, Debtors did not mention the easement issue or the ownership limitation of Croatian law. Ultimately, Debtors asserted that those two issues and the property line issue made it impossible for them to sell the Croatian Residence to satisfy their obligations to Plaintiffs. The Croatian Residence was eventually taken off the market, but it is still owned by Christine. (Id. at 65:1-5.)
A couple of days after the August 29, 2009 meeting, and before anything had been finalized or loan documents prepared, Jay pressed Plaintiffs for a $100,000 advance in order to meet contractor deposit demands. Plaintiffs agreed to make an initial $100,000 advance on September 2, 2009 ("First Advance"). Sixty thousand dollars was advanced by Scott, and Katherine advanced $40,000. On September 2, Debtors executed a "Promissory Note" dated September 2, 2009 ("Note") in the sum of $250,000 payable to Plaintiffs: 60% to Scott as his sole and separate property, and 40% payable to Katherine as her sole and separate property. Scott prepared the Note. Debtors also personally guaranteed the Note.
The Loan terms call for 18% per annum interest-only monthly payments commencing October 2, 2009, with a balloon payment on September 2, 2010. The default interest rate is 29.0% per annum. The Loan allows for separate advances. Scottlikened it to a construction loan with cash advances made according to construction progress. (Id. at 56:15-18.)
On September 22, a deed of trust on the Phoenix Residence, prepared by Scott, was recorded. Scott did not conduct a title search before preparing any of the Loan documents or recording the deed of trust.
The Note grants Plaintiffs a security interest in the Croatian Residence. Scott testified that he expected Christine to "help" with "making sure there was a recorded lien against" the Croatian Residence, while, on the other hand, Christine testified that Scott was handling all of the loan documentation, including doing whatever was necessary to have the Goulds' security interest perfected4 under Croatian law. (Id. at 63:9-17; 106:11-15; 114:12-15; 114:24-25; 158:14-18.)
Scott testified that, because Debtors represented to him on a number of occasions that they would sell the Croatian Residence to pay the Note, he was not that concerned about perfecting the lien on the Croatian Residence as he would be in a normal business transaction. See, e.g., Id. at 117:20-25 - 118:1-5; 159:22-25-160:1. Scott testified that he did not follow his ordinary business practices as a lender, in part, based on the friendship relationship between Katherine and Christine. (Id. at 101:22-25; 110:16-19; 156:4-7; 159:12-17). Indeed, after the First Advance, the Goulds were among the few non-family members invited to attend Christine's 40th birthday party in Las Vegas, held in late September of 2009. (Tr. #2 at 100-101.)
On September 29, 2009, there was a second $100,000 advance ("Second Advance"). Prior to making the Second Advance, Scott was provided a copy of thecontractor's spreadsheet/budget, which convinced him that Debtors were "still in the money," i.e. within the $250,000 budget for improvements on Bistro.5 (Tr. #1 at 121:1.) However, Scott also testified that he became "concerned," at the time of the Second Advance, when Jay told him Debtors were "fully maxed out on their credit" and asked that the check be made out to him personally. Scott declined. (Id. at 134:7-13.)6 A final $50,000 advance was made on ...
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