In re Auricchio
| Decision Date | 06 June 1996 |
| Docket Number | Bankruptcy No. 94-36171. Adv. No. 95-3064TS. |
| Parties | In re Neil A. AURICCHIO, Debtor. Martin DALY and Virginia Daly, Plaintiffs, v. Neil A. AURICCHIO, Defendant. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
COPYRIGHT MATERIAL OMITTED
Christine Cline, Drobenko & Piddoubny, Astoria, New York, for Martin and Virginia Daly.
Michael Schwartzberg, Law Offices of Harvey Schwartzberg, Elizabeth, New Jersey, for Neil A. Auricchio.
AMENDED MEMORANDUM OPINION*
This is the court's decision on an adversary proceeding to determine the dischargeability of debts under section 523(a)(2), (4) and (6) of title 11, United States Code (hereinafter "Bankruptcy Code" or "Code"). This court has subject matter jurisdiction under 28 U.S.C. § 1334(b), 151 and 157(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(I). The court's findings of fact and conclusions of law are as follows.
On August 22nd and 23rd, 1992, Martin and Virginia Daly, the plaintiffs, attended a seminar conducted by Mr. Dave Del Dotto at the Crowne Plaza Hotel in New York City.1 At the seminar, the defendant, Neil Auricchio (hereinafter "Auricchio") was a speaker who discussed potential investments in properties located in New Jersey, including Newark and Elizabeth. The focus of Auricchio's lecture was financing techniques for purchasing and refurbishing properties in low income areas which could generate substantial returns on investment. The techniques discussed by Auricchio were based on two principal means of financing: government grants and "203K"2 loans, which were low interest government loans.
After Auricchio presented his lecture at the Crowne Plaza, he invited participants to view certain properties on one of three buses headed to either New York or New Jersey. Mr. Daly joined the bus headed to New York while Auricchio led a bus to New Jersey. After the so-called "bus tours" were complete, Auricchio fielded questions from participants and then invited investors to form partnerships with him for the purpose of purchasing properties.
Before discussing the partnerships, Auricchio described certain parcels of real property which were available. The Dalys expressed an interest in two Newark properties, one of which was a 3-family burnt-out dwelling located at 690 South 20th Street and the other a dwelling in move-in condition at 453 South 18th Street. Auricchio indicated that the purchase price for the 690 South 20th Street property was $30,000 plus closing costs of $7,000 and a finder's fee of $2,500. In addition, Auricchio stated that the total construction cost to refurbish the building was $90,000, which would be funded by $25,500 in grant money which had already been "lined up" and with a $64,500 construction loan. Therefore, the total cost to the Dalys of purchasing and refurbishing 690 South 20th Street would be $104,000.
After learning more about the two properties, the Dalys decided to purchase both in partnership with Auricchio. At the end of the meeting, the Dalys exchanged phone numbers with Auricchio and provided him with a check in the amount of $2,500 as down-payment for the South 18th Street property.
The following day, Auricchio phoned Virginia Daly and described the proposed partnership for the South 20th Street property, in which the Dalys were to contribute cash for the downpayment and their credit towards the financing of the balance of the purchase price and the rehabilitation of the property. For his part, Auricchio promised that East Coast Properties, Inc., a company owned and operated by Auricchio, would handle all communications and negotiations with the seller of the property and contribute his expertise in guiding the Dalys in financing, rehabilitating and renting the property. Auricchio assured Mrs. Daly that he would provide them with the necessary contacts to accomplish these goals. Auricchio also stated that the proposed partnership would provide that the net profits and losses would be shared equally by the partners.
After discussing the proposed partnership, Auricchio reiterated that as part of their responsibilities under the proposed partnership the Dalys would have to contribute the down payment and the closing costs. The Dalys were told to provide a check in the amount of $9,000 to the law firm of Lynch Martin & Philibosian for the South 20th Street property and a check in the amount of $8,700 for the balance on the South 18th Street property. The Dalys submitted the two checks on August 28, 1992. It is important to note that at no time did Auricchio tell Virginia Daly that they would have to take any affirmative action in an effort to obtain the $25,500 in grant money. In fact, Auricchio led Mrs. Daly to believe that the grant money had already been allocated for the property.
Shortly thereafter, the Dalys viewed the 690 South 20th Street property, signed the partnership agreement and met with two representatives of Auricchio, Jeff Meiser and Jack Wynn, to apply for a 203K loan. The Dalys then received a copy of the contract of sale for the property which indicated that the seller was Henry Zulferino and the purchaser was Glen Ledig. Attached to the contract of sale was an assignment from Glen Ledig to the Dalys of the right to purchase the South 20th Street property. The contract provided that Henry Zulferino would take back a mortgage in the amount of $24,000 with payments to begin five months after the closing.
Prior to closing on the property, Auricchio provided a "qualifying sheet" to the Dalys. The qualifying sheet was a detailed financial analysis of the total cost, appraisal and the projected monthly and annual return on the property. The projected net monthly return was $1,178.33, of which the Dalys' share would be $589.16 a month pursuant to the partnership agreement.
Based on information in the "qualifying sheets" and the assurances of Auricchio that he would guide the Dalys through every step of the purchase, financing, rehabilitation and rental of the property, the Dalys closed on it on November 10, 1992. Title to the property was taken in the names of the Dalys, and they executed a mortgage in favor of Henry Zulferino in the amount of $24,000.
After the closing, the Dalys discovered that their 203K loan application was never submitted by Jeff Meiser. Mr. Meiser submitted the application shortly thereafter. In March, 1993, the Dalys received a letter from Atlantic Coast Mortgage, Inc. (ACM), the institution which was to provide the 203K loan, and two truth-in-lending disclosure statements. The disclosure statements indicated that two loan applications had been submitted for the principal amounts of $149,860.16 and $147,585.77, respectively. The Dalys were shocked by the amount of the loans because Auricchio had consistently stated that the loan amount would only be $88,500 which consisted of the $24,000 mortgage to Henry Zulferino and the $64,500 needed to rehabilitate the property.
The Dalys then met with Jeff Meiser to discuss the 203K loan. At this meeting, the Dalys received a copy of their 203K loan application for the first time. The application indicated that the total cost to repair the South 20th Street property was estimated at $131,554 by Bruce Bannon of A.C.E. Construction and Urban Renewal, Inc. This amount exceeded the $64,500 that Auricchio represented at the seminar and in the "qualifying sheet" by $67,054.00.
By April 1993 the Dalys had become very concerned about their investments. They had not received any of the grant money that Auricchio had indicated was already allocated to the South 20th Street property, and the rehabilitation costs were much higher than Auricchio had stated. The Dalys tried to contact Auricchio on numerous occasions to discuss the matters, but he simply ignored their letters and calls. The Dalys then contacted an attorney to secure the return of their investment in the 453 South 18th Street property. In addition, the Dalys took it upon themselves to try to secure grant money to rehabilitate the South 20th Street property. However, they were informed by the City of Newark and the Department of Housing and Urban Development that the property was not eligible for any program because the property was not in a targeted area and no funds had been allocated.
On April 28, 1993 Auricchio personally contacted the Dalys for the first time since the closing, and only after receiving correspondence from the Dalys' attorney. Auricchio reassured the Dalys that they would receive a return on their investment in the South 18th Street property. With respect to the South 20th Street property, Auricchio represented that he would reimburse the Dalys for one half of their expenses associated with maintaining the property including the taxes and insurance, and that he would secure a moratorium on the mortgage payments to Henry Zulferino which were about to come due. In addition, Auricchio assured the Dalys that he would be able to get grant money for 690 South 20th Street and that Henry Zulferino, who had become associated with Auricchio, had the grant "lined up." Finally, Auricchio agreed to meet the Dalys to discuss the rehabilitation estimates. At the meeting, the Dalys provided Auricchio with all the documents regarding the 203K loan. Auricchio stated that he was appalled by the contractor's estimate and claimed that he could get the rehabilitation done more cheaply. Mr. Daly requested that Auricchio provide him with two additional estimates, which Auricchio agreed to furnish.
Auricchio thereafter provided the Dalys with one verbal estimate of the construction costs. Moreover, he never reimbursed the Dalys for his share of the maintenance expenses on the South 20th Street property. Auricchio did, however, convince Henry Zulferino to grant the Dalys a moratorium on the mortgage payments.
On or about June 10, 1993, the Dalys received additional correspondence from ACM...
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