In re Brown

• Decision Date: 04 January 2011
• Docket Number: Bankruptcy No. 09–60375.,Adversary No. 09–05276–PJS.
• Citation: 442 B.R. 585
• Parties: In re Jeffrey Howard BROWN, Debtor.JGR Associates, LLC, Stoneleigh Development Corporation, Richard M. Lewiston, Jason P. Lewiston, Leslie Lewiston Etterbeek, and Daniel J. Smith, Plaintiffs,v.Jeffrey Howard Brown, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

442 B.R. 585

In re Jeffrey Howard BROWN, Debtor.JGR Associates, LLC, Stoneleigh Development Corporation, Richard M. Lewiston, Jason P. Lewiston, Leslie Lewiston Etterbeek, and Daniel J. Smith, Plaintiffs,

v.Jeffrey Howard Brown, Defendant.

Bankruptcy No. 09–60375.

Adversary No. 09–05276–PJS.

United States Bankruptcy Court, E.D. Michigan, Southern Division,

Jan. 4, 2011.

Alicia S. Schehr, David W. Williams, Jonathan C. Myers, Louis P. Rochkind, Michael F. Jacobson, Eric David Novetsky, Southfield, MI, for Plaintiffs.Daniel E. Harold, Birmingham, MI, Wallace M. Handler, Sullivan, Ward, Asher & Patton, P.C., Southfield, MI, for Defendant.

Opinion Dismissing Complaint After Trial

PHILLIP J. SHEFFERLY, Bankruptcy Judge.

Introduction

Jeffrey Howard Brown is the Debtor in this bankruptcy case. The Plaintiffs brought this adversary proceeding against him seeking a determination of the non-dischargeability of debts alleged to be owed by the Debtor to them under § 523(a)(2)(A), (4), and (6) of the Bankruptcy Code. By stipulation of the parties, memorialized in the joint final pre-trial order (docket entry no. 102), the Plaintiffs are only requesting the Court to determine that the alleged debts are non-dischargeable, and are not requesting that the Court liquidate the amount of any alleged debts, which will be decided, if at all, in a pending arbitration proceeding between the Plaintiffs and the Debtor. The trial in this adversary proceeding took place over five days, beginning on July 14, 2010 and concluding on August 19, 2010. During the trial, the Court heard live testimony from six separate witnesses, reviewed deposition testimony of one additional witness, and received into evidence joint exhibits 1 through 52, 58, 68, 70, 73 through 79, 81, 87, 89, 92 through 95, 98, 109, 110, 114, and 138 through 140. The Court has reviewed the joint final pretrial statement, the parties' trial briefs, and all of the testimony and exhibits admitted during the trial. This adversary proceeding is a core proceeding under 28 U.S.C. § 157(b)(2)(I). The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(a) and 28 U.S.C. § 157(a). After carefully reviewing and weighing all of the evidence in the record, the Court concludes that both of the Debtor's pending motions to dismiss must be denied, but that judgment should be entered in favor of the Debtor and against the Plaintiffs, because the Plaintiffs have failed to meet their burden to prove by a preponderance of the evidence that the debts alleged to be owed by the Debtor to the Plaintiffs are excepted from the Debtor's discharge under § 523(a)(2)(A), (4), or (6) of the Bankruptcy Code. The following constitutes the Court's findings of fact and conclusions of law pursuant to Fed. R. Bankr.P. 7052.

Facts

Jeffrey Howard Brown is a licensed attorney who is engaged in the real estate development business. Brown first became involved in that business when he went to work for Richard Lewiston (“Lewiston”), one of the Plaintiffs, in 1988. Lewiston, also an attorney, has been involved in the real estate development business since 1964. Lewiston has extensive real estate development experience in his career. Lewiston has built many residential projects, both single-family and multifamily. He has also been extensively involved in the acquisition and development of properties, and the construction and management of income producing properties. Brown worked on many projects with Lewiston, and essentially learned the real estate development business from Lewiston. Brown eventually left his employment with Lewiston, but continued in the real estate development business. In 1996, Brown formed his own real estate management company, Brown Properties Corporation (“BPC”). Brown also has interests in various other real estate related business entities.

Beginning in the late 1990s, Brown became involved in the formation of four separate business entities, each of which was formed to develop a particular parcel of real estate. Brown invited Lewiston to participate in each of these entities. These four entities are central to the issues in this adversary proceeding.

Heron Ridge Associates, LLC (“Heron Ridge”) was a multi-member limited liability company formed in 1997 for the purpose of developing 222.3 acres in Canton Township, Michigan. According to its operating agreement (Exhibit 2), there were six members in Heron Ridge. Neither Brown nor Lewiston individually were members of Heron Ridge, but each of them indirectly held an interest in it. One of the members of Heron Ridge was Stoneleigh Development Corporation (“Stoneleigh”), which held a 25% membership interest in Heron Ridge. Although the record is not entirely clear, it appears that Stoneleigh was owned by Lewiston, in combination with two of the other Plaintiffs in this adversary proceeding, Daniel Smith and Leslie Lewiston Etterbeek, and that Stoneleigh invested $425,000 in Heron Ridge. Brown's indirect interest in Heron Ridge is twofold. He held a 50% ownership in Canton Six Associates, LLC, which in turn held a 24% membership interest in Heron Ridge. Brown was also the sole owner of Wittlesey Associates, Inc. (“Wittlesey”), a corporation that was identified in the operating agreement as the managing member of Heron Ridge. Wittlesey also held a 1% interest in Heron Ridge.

Section 5.1 of the operating agreement for Heron Ridge stated that Heron Ridge would be “exclusively managed by the Managing Member,” and provided that the managing member had the power to manage, control and make all decisions affecting the business and the assets of Heron Ridge “in the Managing Member's full and exclusive discretion,” without the consent of the other members of Heron Ridge. However, section 5.2 of the operating agreement limited the managing member's powers by providing that certain actions required the unanimous consent of the other members, including entering into “a transaction involving an actual or potential conflict of interest between the Managing Member and/or a Member and the Company.” Section 5.8(a) of the operating agreement provided that the managing member was entitled to receive a “developer's fee” of $2,000.00 per unit within the Heron Ridge development, to be paid to the managing member prior to any distribution of net cash proceeds to the members of Heron Ridge. Section 5.8(b) of the operating agreement provided that the managing member was also entitled to receive an “acreage fee” equal to 10% of the sales price for any sale of acreage by Heron Ridge, again paid prior to any distribution of net cash proceeds to members of Heron Ridge. Section 5.9 of the operating agreement stated that except for the developer's fee and acreage fee provided by section 5.8, the members would not receive compensation for rendering services to Heron Ridge “in their capacity as Members.” However, that same section 5.9 also provided that the managing member would be reimbursed in full for “[a]ll reasonable expenses incurred ... in connection with the operation of the Company's business....” Section 5.10 of the operating agreement provided that the “Managing Member shall devote such time and effort as may be reasonably required to conduct the [ ] business” of Heron Ridge. Heron Ridge developed and sold home sites for a number of years. According to its federal income tax returns from 1997 through 2007 (Exhibit 24), Heron Ridge had aggregate sales of over $15 million during those years.

The second of the four development entities was Tremont Park Associates, LLC (“Tremont Park”), a limited liability company formed in 1998 to develop 188 home sites in Ypsilanti Township, Michigan. According to the operating agreement (Exhibit 3), neither Lewiston nor Brown individually held an interest in Tremont Park. However, like Heron Ridge, both Lewiston and Brown indirectly held substantial interests in Tremont Park through other entities that they owned. JGR Associates, LLC (“JGR”), a limited liability company, and also one of the Plaintiffs, is shown in the operating agreement as holding a 50% interest in Tremont Park. The record is again somewhat unclear, but JGR appears to have been owned by Lewiston, together with his son, Jason Lewiston, another Plaintiff, and certain other individuals that are not parties to this lawsuit. JGR invested approximately $1,250,000.00 in Tremont Park. Martz Road Associates, LLC (“Martz Road”) is shown as holding a 49% interest. Martz Road was owned entirely by Brown. Like Heron Ridge, Wittlesey was the managing partner for Tremont Park, and held a 1% interest in it.

Tremont Park's operating agreement is similar to Heron Ridge's operating agreement. Tremont Park's operating agreement did not provide for a fee for the managing member, but did provide in section 5.9 that the managing member would be reimbursed for “[a]ll reasonable expenses incurred ... in connection with the operation of the Company's business.” Like Heron Ridge's operating agreement, section 5.10 of Tremont Park's operating agreement also required the managing member to “devote such time and effort as may be reasonably required to conduct the business” of Tremont Park. There was one significant difference between the two operating agreements—Tremont Park did not provide for a developer's fee or an acreage fee. Tremont Park developed and sold home sites for a number of years. According to its federal income tax returns for the years 1998 through 2007 (Exhibit 26), Tremont Park had sales during those years in excess of $8.5 million.

The third of the four entities was Wellesley Building Company, LLC (“Wellesley Building”), formed in 2000 to develop land in Pittsfield Township, Michigan. The development consisted of 209 units in phase 1, construction management for 217 units in phase 2, and the completion of 206 units of vertical construction. According to Wellesley Building's operating agreement (Exhibit 1), its members were...