In re Kitts, Bankruptcy Case No. 05-27158 JAB (Bankr.Utah 1/8/2010)
| Decision Date | 08 January 2010 |
| Docket Number | Adversary Proceeding No. 06-2250.,Bankruptcy Case No. 05-27158 JAB. |
| Parties | In re: BRIAN A. KITTS, Chapter 7, Debtor. J. KEVIN BIRD, Trustee, Chapter 7, Plaintiff, v. WINTERFOX, LLC, Defendant. |
| Court | U.S. Bankruptcy Court — District of Utah |
The above captioned adversary proceeding was tried before the Court on December 1, 3, and 7, 2009. The Plaintiff, J. Kevin Bird (Trustee), was represented by Adam Affleck and Aaron Millar. The Defendant, Winterfox, LLC (Winterfox), was represented by Sara E. Bouley and Gary Jubber.
By this proceeding, the Trustee seeks recovery under the Truth in Lending Act (TILA) related to two short-term, high-interest loans that Winterfox made to Brian Kitts (Debtor) prepetition that are secured by property of the estate located in Park City. The Trustee asserts that the estate is entitled to actual damages suffered by the Debtor, statutory damages of up to $4,000 per loan, attorney's fees, and return and invalidation of all finance charges related to the loans. Winterfox raises a number of defenses including that the Debtor has incurred no damages and that TILA does not apply to Winterfox's transactions nor to the loans it made to the Debtor. As to the latter, Winterfox asserts that the real property was not a consumer's personal dwelling but instead a corporate asset owned by the Debtor's business and that the loans that it made to the Debtor were primarily for business purposes.
The Court has now considered the evidence properly before it, assessed the credibility of the witnesses, considered the arguments of counsel, and conducted an independent review of applicable law. Based on the foregoing, the Court makes the following findings of fact and conclusions of law.1
This Court has jurisdiction under 28 U.S.C. §§ 1334 and 157(a), and venue is appropriate under 28 U.S.C. §§ 1408 and 1409. The parties have agreed that this is a core proceeding under 28 U.S.C. §§ 157(b)(2).2
1. *In 1998, the Debtor purchased a property located at 2580 Bear Hollow Drive, Park City, Utah (Residence).3
2. The Debtor lived in the Residence with his wife Laurie Kitts and their children.
3. Since purchasing the Residence in 1998, legal title to the Residence has been held at various times in the names of "Brian Kitts," "Laurie Kitts," "Brian Kitts and Laurie Kitts," and "Sunpeak Holdings, Inc."
4. Sunpeak Holdings, Inc. (Sunpeak) is a Nevada corporation that was, at all times, owned by the Debtor and by his wife, Laurie Kitts.
5. On October 1, 2003, Sunpeak filed a chapter 11 voluntary petition.
6. Sunpeak listed the Residence as an asset on Schedule A of its schedules.
7. The Sunpeak chapter 11 bankruptcy case was dismissed on August 18, 2004.
8. The Residence was encumbered over the years by various loans that were obtained by the Debtor, Laurie Kitts, and/or Sunpeak. Several liens also encumbered the Residence. The various encumbrances are set forth chronologically below, with a finding of whether the character of each encumbrance was either business or personal for the ultimate purpose of determining if TILA applies to Winterfox's loans.
9. In 2001, the Debtor contracted with Ed Ingram (Ingram) to build a three-car garage as an addition to the Residence.
10. Several months after the project began, the Debtor fired Ingram for having poured the foundation incorrectly.
11. *On October 5, 2001, Ingram recorded a Notice of Lien against the Residence for labor, services, and materials supplied to the Residence.
12. *On February 12, 2002, Ingram commenced an action in state court to foreclose his claimed lien and, on March 6, 2002, recorded a Lis Pendens against the Residence.
13. By December 2004, Ingram had threatened to foreclose if the Debtor did not pay off the alleged debt.
14. Because Ingram's lien arose from the building of the three-car garage to the Residence, any payment from the Winterfox loans to Ingram was attributable to personal, family, or household purposes.
15. In November 2001, the Debtor and Laurie Kitts obtained a loan from Washington Mutual Bank (Washington Mutual Loan) in the principal amount of $605,000 secured by a trust deed on the Residence.4
16. In November 2001, the Debtor and Laurie Kitts were spending significant funds to finish the construction of the three-car garage they were constructing at the Residence, and they needed money to cover living expenses and to finish the construction project.
17. In accordance with this purpose, the Washington Mutual Loan was used to (1) pay off three existing liens on the Residence, (2) bring property taxes on the Residence current, and (3) provide the Kitts with additional cash of $75,454.87.5
18. Two of the existing liens paid by the proceeds of the Washington Mutual Loan were attributable to secured business-related debts totaling $234,030.98.
19. The third lien paid off by the Washington Mutual Loan was a loan Laurie Kitts obtained in January 2001 from Crescent Mortgage for approximately $275,000 that was secured with a mortgage on the Residence.
20. Laurie Kitts obtained the $275,000 loan to purchase a home for her mother in the Park City area so that her mother could be closer to her, the Debtor, and their children.
21. Neither Laurie Kitts nor her mother viewed this purchase as a business investment.
22. Crescent Mortgage transferred the mortgage note to Provident Funding Associates, LP in or around February 2001 (Provident Funding Loan).
23. Laurie Kitts and her mother were title owners of the property, but both understood that the house was her mother's.
24. Laurie Kitts' mother decided to move to Salt Lake City and sold the property in March 2004.6
25. The Provident Funding Loan remained secured by the Residence until it was refinanced and paid off by the Washington Mutual Loan. The payoff amount for this loan according to the settlement statement was $277,327.49.
26. Property taxes in the amount of $9,566.30 paid off by the Washington Mutual Loan were incurred and paid for the purpose of maintaining the Residence.
27. A portion of the $75,454.87 in proceeds from the Washington Mutual Loan were used by the Debtor to continue to fund the construction of the three-car garage addition to the Residence.
28. The Debtor testified and provided summaries showing that portions of the $75,454.87 were used for other personal items, investments, expenses and purchases.
29. The aforementioned facts establish that the majority of the Washington Mutual Loan proceeds were used for personal, family or household purposes.7
30. In July 2002, Laurie Kitts obtained a line of credit secured by a trust deed on the Residence from Wells Fargo Bank (Wells Fargo Loan).
31. Laurie Kitts obtained the Wells Fargo Loan to pay family living expenses and to complete the three-car garage addition to the Residence.
32. Laurie Kitts borrowed approximately $307,977.67 on the Wells Fargo Loan.
33. The funds from the Wells Fargo Loan was used primarily for materials and labor for the three-car garage addition, medical payments, recreation, home utilities and repair, gifts, food and clothing for the Kitts family, and other household expenses.
34. Additionally, some of these loan funds were used to add a bonus room above the three-car garage which contained a gym with high-end exercise equipment.
35. Laurie Kitts was employed as a personal trainer beginning sometime around 2004 and she used the gym in the Residence from time to time to train her clients.
36. The evidence provided at trial did not establish that the gym was used exclusively for Laurie Kitts' personal training sessions.
37. The Debtor's primary business office has been located at the Residence since at least 2004.
38. The testimony and evidence presented at trial establish that a majority of the Wells Fargo Loan proceeds were used for personal, family, or household purposes.8
39. In the fall>04, the Debtor was facing foreclosure of the Residence as a result of the following encumbrances: Ingram's lien (for which an action for foreclosure was pending); the Wells Fargo Loan (for which a September 20, 2004 notice of default was recorded); and the Washington Mutual Loan (for which a November 5, 2004 notice of default was recorded).
40. To prevent the loss of the Residence, the Debtor sought a new loan to pay off these foreclosing liens.
41. The Debtor employed Michael Falk (Falk) to find a lender to provide him with financing to pay off existing encumbrances on the Residence.
42. The Debtor and Falk had worked together on various transactions prior to the fall of 2004.
43. Falk had attempted to get conventional financing for the Debtor so that he could refinance the Residence before November 2004, but he was unsuccessful. In November or December 2004, Falk contacted Aaron Olivarez (Olivarez) to determine whether Olivarez worked with a lender that could give the Debtor a loan.
44. During this time, Olivarez was employed as a loan officer for Citiwide Mortgage Services and was actively soliciting or originating loans for that company.
45. Olivarez was also providing consulting and loan advice to Winterfox at this time.
46. Winterfox was a hard money lender.
47. Falk provided a packet of information concerning the Debtor and the Residence to Olivarez, including (to the best of Olivarez's memory) a title report, a credit report, an appraisal, and a uniform loan application that the Debtor had already filled out.
48. The packet and the information included in it assisted Olivarez in determining whether he should recommend that Winterfox give the Debtor a loan.
49. Neither one of the parties were able to produce this packet at...
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