In re Hanson, Bankruptcy No. 09 B 04820

• Decision Date: 10 May 2010
• Docket Number: Adversary No. 09 A 00447,Bankruptcy No. 09 B 04820
• Citation: 428 B.R. 475
• Court: U.S. Bankruptcy Court — Northern District of Illinois
• Parties: In re Stuart M. HANSON, d/b/a Hanson & White, LLC, Debtor. 6050 Grant, LLC, Plaintiff, v. Stuart M. Hanson, Defendant.

428 B.R. 475

In re Stuart M. HANSON, d/b/a Hanson & White, LLC, Debtor.

6050 Grant, LLC, Plaintiff,

v.Stuart M. Hanson, Defendant.

Bankruptcy No. 09 B 04820.

Adversary No. 09 A 00447.

United States Bankruptcy Court,

N.D. Illinois,

Eastern Division.

May 10, 2010.

Robert R. Benjamin, Querrey & Harrow, LTD, Chicago, IL, for debtor.

William T. Neary, Office of the U.S. Trustee, Region 11, Chicago, IL, for U.S. Trustee.

Gina B. Krol, Chicago, IL, for Trustee.

MEMORANDUM OPINION

JOHN H. SQUIRES, Bankruptcy Judge.

This matter comes before the Court on the complaint objecting to the discharge of a debt, pursuant to 11 U.S.C. § 523(a)(2)(A), which was filed by 6050 Grant, LLC ("6050 Grant") against the debtor, Stuart M. Hanson (the "Debtor"). For the reasons set forth herein, the Court enters judgment in favor of 6050 Grant and against the Debtor in the sum of $93,461.29 and finds that this debt is not dischargeable under § 523(a)(2)(A).

I. JURISDICTION AND PROCEDURE

The Court has jurisdiction to entertain this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. It is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (I), and (O).

II. FACTS AND BACKGROUND

Most of the facts in this matter are not in dispute. In Spring 2008, Mark O'Gorman had discussions with the Debtor regarding the retention of the Debtor's firm, Hanson & White, LLC ("H & W"), to design and build a home for Mark O'Gorman and his wife, Jennifer (collectively the "O'Gormans"). The Debtor was a member of H & W, an Illinois limited liability company, that was in the business of building custom and "spec" homes in the suburbs of Chicago. Mark O'Gorman is a commodities trader who is self-employed.

The O'Gormans enlisted H & W, by and through the Debtor, to locate land upon which they could build a custom home. After looking at several possible locations for their new home, the O'Gormans decided to purchase an existing home located at 6050 Grant in Burr Ridge, Illinois (the "Property"). Their intention was to tear down the home located on the Property and build a new home.

The plaintiff in this matter, 6050 Grant, was created by the Debtor in April of 2008, as the legal entity to purchase and hold title to the Property. The Debtor was the initial sole member of 6050 Grant, an Illinois limited liability company. The Court took judicial notice of certain documents from the Illinois Secretary of State.¹ Those documents revealed the following information regarding 6050 Grant. On May 9, 2008, Mark O'Gorman was admitted as a new member of 6050 Grant and the Debtor withdrew as a member. Thereafter, on April 20, 2009, the Mark J. O'Gorman Trust and the Jennifer M. O'Gorman Trust were admitted as new members and Mark O'Gorman withdrew as a member. Presently, the Mark J. O'Gorman Trust and the Jennifer M. O'Gorman Trust are the existing members of 6050 Grant.

On April 16, 2008, without a contract, 6050 Grant, through the O'Gormans, deposited $275,000 with H & W. (6050 Grant Ex. No. 1.) From this amount, as noted on that exhibit, $150,000 was used to pay the earnest money for the purchase of the Property; $15,250 was paid to H & W as a finder's fee (one percent of the purchase price) for locating the Property; $75,000 was applied as a non-refundable deposit; and $34,750 was applied as an expense advance. ( Id.) On that same date, the Debtor deposited $109,750 ² into the operating account of H & W at State Bank of Countryside. (6050 Grant Ex. No. 2.) At the time the deposit was made, the balance in H & W's operating account was $5,221.47. (6050 Grant Group Ex. No. 20 at p. 2.) The Debtor testified that he did not segregate the $109,750 received from the O'Gormans from other monies held by H & W. Rather, he commingled that money with other funds held in H & W's operating account. The Debtor testified that he utilized the H & W operating account to pay common expenses of H & W, including interest payments on mortgages of other properties that H & W owned but had not sold.

The Property was purchased by 6050 Grant for $1,525,000, and the sale closed on May 2, 2008. (6050 Grant Ex. No. 3.) Mark O'Gorman wire transferred $1,397,500 for the purchase to close. (6050 Grant Ex. No. 4.) After all amounts and adjustment were made, 6050 Grant paid $1,375,694.13 at the closing. (6050 Grant Ex. No. 3.) Because Mark O'Gorman had transferred $1,397,500, there was an excess of $21,805.87 at closing. The Debtor again deducted another finder's fee from this sum ($15,250), and credited the excess funds from closing to 6050 Grant. (6050 Grant Ex. No. 8; Debtor Ex. No. 4.)

On May 8, 2008, the Debtor, on behalf of 6050 Grant,³ entered into a contract with CaprioPrisby Architectural Design, P.C. ("CaprioPrisby") for CaprioPrisby to perform architectural services in connection with the design and construction of the O'Gormans' home. (6050 Grant Ex. No. 6; Debtor Ex. No. 3.) James C. Prisby("James Prisby"), an architect, and one of the owners of CaprioPrisby, was the individual from the firm who performed most of the work with respect to designing the proposed home. He testified that he had worked with the Debtor on other projects similar to the O'Gormans' project.

On June 16, 2008, 6050 Grant and H & W entered into a "Custom Home—Design/Build Construction Agreement" (the "Design/Build Agreement") for the purpose of designing "a custom residence for [the O'Gormans] in accordance with their needs, design input, and selections." (6050 Grant Ex. No. 7 at p. 1; Debtor Ex. No. 2 at p. 1.) Mark O'Gorman signed this document as the sole member of 6050 Grant, and the Debtor signed it as the managing member of H & W. ( Id. at p. 14.) The Design/Build Agreement stated that H & W provided 6050 Grant "with an original total design & build cost estimate of $1,650,000-2,000,000 based on initial target of finished above ground square footage of 5,500 SF, plus finished basement. This cost is planned to include all architectural, demolition, permitting, and hard construction costs, as well as builder fee." ( Id. at p. 3.)

The Design/Build Agreement also provided that H & W would receive a builder's fee in the amount of fifteen percent of the total costs of design and construction, including, but not limited to, all design costs, soft project costs, and hard construction costs, including materials, supplies, and sub-contractor services. ( Id. at p. 4.) Additionally, the document stated that H & W had already been paid an initial deposit of $75,000 for the builder's fee. ( Id.) The $75,000 was paid from the $275,000 that 6050 Grant, through the O'Gormans, advanced on April 16, 2008, and was a portion of the $109,750 that the Debtor deposited into H & W's account on that same date. The Design/Build Agreement also stated that 6050 would "pay expenses incurred by [H & W], as incurred and to be presented on a monthly basis." ( Id.) The contract noted that 6050 Grant had paid an expense advance of $50,000. ( Id.) The $50,000 was paid from the $275,000 that 6050 Grant advanced on April 16, 2008, and was a portion of the $109,750 that the Debtor deposited into H & W's account. The Debtor, however, reduced this $50,00 expense advance by the $15,250 finder's fee for locating the Property, thereby leaving the sum of $34,750.

Subsequent to entering into the contract with the Debtor, James Prisby stated that he began to design the floor plans for the O'Gormans' home. According to James Prisby, typically, he would submit the floor plans to the client and the builder. They, in turn, would review the plans, make changes, and ask him to redesign the plans based on those changes until there was a completed set of floor plans. James Prisby testified that this was the process he utilized with respect to this project. He initially met with the Debtor and Mark O'Gorman to discuss the project. He was told that the O'Gormans wanted him to design a 5,500 square foot home with a finished basement, attic, and enclosed pool. In August 2008, the Debtor, Mark O'Gorman, and James Prisby met to discuss the project costs. James Prisby testified that based on the square footage and the described amenities, the total project cost was approximately $2,300,000-2,400,000. Mark O'Gorman was concerned about the high cost of the project and wanted to bring the price down to approximately $2,000,000. The three men met the following day to make changes to the design and to strategize regarding the ways to reduce the overall cost of the project.

James Prisby testified that he continued to work on the design plans for the home through September. At that time, he completedhis work and delivered the plans to the Debtor on October 1, 2008. During the design phase of the project, he submitted monthly invoices to H & W to reflect the work performed by CaprioPrisby. (6050 Grant Ex. No. 9.)

On May 19, 2008, during the design phase, CaprioPrisby sent an invoice in the sum of $4,225 to H & W for work performed on the O'Gorman project. ( Id. at p. 1.) That invoice was paid by H & W. Thereafter, on June 17, 2008, CaprioPrisby sent another invoice for services in the amount of $8,465.29. ( Id. at p. 2.) H & W paid that invoice. On July 10, 2008 and August 11, 2008, CaprioPrisby sent H & W invoices in the amounts of $8,506.01 and $8,490.39, respectively. ( Id. at pp. 3 & 4.) Both of those invoices were paid. On September 23, 2008, CaprioPrisby sent H & W an invoice in the sum of $21,241.13. ( Id. at p. 5.) H & W did not pay that invoice. Shortly thereafter, on October 14, 2008, CaprioPrisby sent H & W two more invoices—one in the amount of $38,707 and one in the sum of $62,965. ( Id. at pp. 6 & 7; Def. Ex. Nos. 9 & 10.) According to James Prisby, he received a call from the Debtor who asked him to reduce the amount of CaprioPrisby's fees. Because he wanted to continue his working relationship with the Debtor, James Prisby testified that he agreed to reduce the October invoices to...