PNC Bank, N.A. v. Leongas (In re Leongas), Bankruptcy Case No. 15 B 27967

• Decision Date: 25 May 2021
• Docket Number: Adversary No. 16 A 00489,Bankruptcy Case No. 15 B 27967
• Parties: IN RE: Paul L. LEONGAS, Debtor. PNC Bank, N.A., Plaintiff, v. Paul L. Leongas, Defendant.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

628 B.R. 71

IN RE: Paul L. LEONGAS, Debtor.PNC Bank, N.A., Plaintiff,

v.Paul L. Leongas, Defendant.

Bankruptcy Case No. 15 B 27967

Adversary No. 16 A 00489

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Signed May 25, 2021

James M. Crowley, Matthew L. Hendricksen, John F. Sullivan, Plunkett Cooney, P.C., Chicago, IL, for Plaintiff.

Konstantine T. Sparagis, Law Offices of Konstantine Sparagis PC, J. Kevin Benjamin, Lou Karnezis, Benjamin Legal Services PLC, Chicago, IL, for Defendant.

MEMORANDUM OPINION

Janet S. Baer, United States Bankruptcy Judge This matter is before the Court on the four-count adversary complaint filed by PNC Bank, N.A. ("PNC") against Paul L. Leongas (the "Debtor"), seeking denial of the Debtor's discharge under 11 U.S.C. §§ 727(a)(2), (a)(3), (a)(4), and (a)(6).¹ Based on the evidence and testimony presented at a two-day trial held in March 2020 and a review of all relevant documents, exhibits, arguments, and case law, and for the reasons set forth below, the Court finds in favor of PNC and against the Debtor on Counts I, II, and III of the complaint.² As such, the Debtor's discharge will be denied.

JURISDICTION

The Court has jurisdiction over 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. This is a core proceeding under 28 U.S.C. § 157(b)(2)(J).

BACKGROUND

The Debtor is a well-educated businessman who has worked as both a real estate developer and a restaurant manager. (Tr. No. 1 at 47:17–18, 88:5–22.³ ) He obtained a college degree in restaurant and hotel management and has worked in the restaurant industry for most of his life. (Dkt. 267 at 7 ¶ 3 & 4;⁴ Tr. No. 1 at 29:23–30:5.) During the relevant time period,⁵ the Debtor and his sisters managed four Irish-themed restaurants and bars (the "Pubs"). (Dkt. 267 at 10–11 ¶¶ 38–40; Dkt. 304 at 3 ¶¶ 24–26; Tr. No. 1 at 50:6–11, 88:5–22; Tr. No. 2 at 72:24–73:2.) Located in Holland, Michigan and Edison Park, Skokie, and Glenview, Illinois, the Pubs were owned by the Debtor and his family members, through various entities. (Dkt. 267 at 8 ¶¶ 7–20; Tr. No. 1 at 30:16–36:11, 38:15–20.)

• The Holland Pub and the Edison Park Pub were owned and operated by an LLC of which the Debtor and his sister Sophia Leongas ("Sophia") were the members. (Dkt. 267 at 8 ¶¶ 8 & 9; Tr. No. 1 at 31:5–16.)

• The property on which the Holland Pub operated was owned, in turn, by an LLC of which both the Debtor and Sophia were the members. (Dkt. 267 at 8–9 ¶¶ 17 & 18; Tr. No. 1 at 31:17–25.) The property on which the Edison Park Pub operated was owned by an LLC of which Sophia was the sole member. (Dkt. 267 at 8 ¶¶ 15 & 16; Tr. No. 1 at 33:7–16.)

• The Skokie Pub was owned and operated by an LLC of which three members each had a one-third interest: (1) an entity related to Glenn Udell, the Debtor's friend and attorney; (2) the Estate of Sheldon Kaufmann; and (3) EGIO Consulting LLC ("EGIO"), of which the only member is a trust whose sole beneficiaries are the Debtor's three children. (Tr. No. 1 at 34:20–35:22.) The property on which the Skokie Pub operated was owned by an LLC with the same three members.⁶ (Dkt. 267 at 9 ¶¶ 19 & 20; Tr. No. 1 at 37:16–38:9.)

• Finally, the Glenview Pub was owned and operated by an LLC of which the Debtor's sister Lydia Leongas was the sole member. (Dkt. 267 at 8 ¶¶ 11 & 12; Tr. No. 1 at 38:15–20.) The property on which that pub operated was leased. (Tr. No. 1 at 38:21–23.)

For purposes of this Memorandum Opinion, all of the various business entities described above will be referred to as the "family businesses."

PNC holds two state-court judgments against the Debtor, entered on July 25, 2013 and October 31, 2014, totaling $9,403,155.49. (Dkt. 36 at 3–4 ¶ 9; Dkt. 175-53;⁷ Dkt. 267 at 7 ¶ 1.) The judgments arose from two loans made by PNC's predecessor, National City Bank, N.A., to PLL, LLC ("PLL") and 9362 Joint Venture, LLC ("9362 Joint Venture"), two limited liability companies of which the Debtor was a member. (Dkt. 36 at 3 ¶ 7; Dkt. 267 at 25 ¶¶ 199 & 200.) The Debtor was the guarantor on both of those loans. (Dkt. 36 at 3 ¶ 8; Dkt. 267 at 25 ¶ 199.) The loan to PLL was made so that it could purchase and improve the property on which the Edison Park Pub operated. (Dkt. 175-3 at 18:1–24; Dkt. 267 at 16–17 ¶ 104.) The loan to 9362 Joint Venture was made for the purpose of land development. (Dkt. 175-3 at 19:10–18.)

On July 1, 2009, after the loans had been called, PNC began foreclosure proceedings against the Edison Park property. (Dkt. 267 at 16–17 ¶ 104.) In April 2013, PNC served a citation to discover assets on the Debtor in connection with his obligations on the loans. (Dkt. 1 at 2 ¶ 10; Dkt. 267 at 9 ¶ 24.) Thus began a flurry of discovery litigation between the parties that spanned a period of years. At one point during that time, the Debtor responded to the citation, indicating that he did not have any income or assets; in his response, he did not list any support payments or loans from family members.⁸ (Dkt. 1 at 2 ¶ 12 & Ex. A; Dkt. 175-1; Dkt. 267 at 9 ¶¶ 25 & 27.) The citation remained pending on August 16, 2015, the date on which the Debtor filed his voluntary petition for relief under chapter 7. (Dkt. 1 at 3 ¶ 17.)

The Debtor's Compensation

Although the Debtor had consulted for and/or managed the four Pubs on a full-time basis since at least 2009, he did not receive a "traditional salary" for the work that he performed. (Dkt. 267 at 10–11 ¶¶ 35 & 38–40; Dkt. 304 at 3 ¶¶ 24–27; Tr. No. 1 at 88:5–89:3.) Specifically, the Debtor testified, since 2009, he had never received income as either a W-2 employee or an independent contractor. (Tr. No. 1 at 46:18–47:15.) Rather, the family businesses had supported the Debtor by directly paying his living expenses, as well as those of his family. (Dkt. 1 at 3 ¶ 13 & 5–6 ¶¶ 25–27; Dkt. 267 at 24 ¶¶ 185 & 186; Dkt. 304 at 10 ¶¶ 107 & 108; Tr. No. 1 at 49:17–21, 72:24–73:10, 138:17–22, 141:7–10, 161:2–162:13, 165:24–166:2, 233:14–20.) According to the Debtor, this arrangement was consistent with the way the family businesses had always compensated him. (Tr. No. 1 at 49:17–52:11.) The arrangement was particularly necessary from 2009 going forward, the Debtor said, because the businesses could not afford to pay him a W-2 salary. (Id. at 50:15–20.) They were, however, able to pay the Debtor's wife Sharise Leongas ("Sharise") such a salary in the amount of $75,000 per year, at least in 2014 and 2015. (Bankr. Dkt. 16 at 18;⁹ Bankr. Dkt. 18 at 3–4; Tr. No. 1 at 60:2–61:4.) Other than Sharise's paychecks, the Debtor maintained that the only source of support for him and his family came from monetary assistance from the family businesses. (Dkt. 267 at 24 ¶¶ 185 & 186.)

To further explain why he was working for the Pubs without receiving a salary, the Debtor testified that his parents and sisters had invested hundreds of thousands of dollars with him in various real estate ventures, much of which was lost as a result of the 2009 financial crisis. (Tr. No. 1 at 48:25–49:8.) The Debtor also said that his father, who had been instrumental in running the family businesses, had suffered a debilitating stroke in 2008. (Id. at 49:8–13.) Accordingly, the Debtor felt "obligated" to work for his family by managing the Pubs on a full-time basis, both to repay his family for the investments that they had made with him and to help his sisters operate the businesses. (Id. at 48:25–49:15.)

As to the payments made by the family businesses to cover the Debtor's living expenses, the Debtor testified that he considered those payments to be loans that he planned to pay back. (Dkt. 267 at 24 ¶¶ 185 & 186; Tr. No. 1 at 48:23–50:1, 51:24–52:11, 143:6–8.) As discussed in more detail below, some of the payments were actually booked as "loans"—and classified as "accounts receivable"—in the books and records of the businesses. (Dkt. 267 at 24 ¶¶ 185 & 187; Dkt. 318–321; Tr. No. 1 at 52:9–11, 132:23–134:20, 144:3–150:3.) The figures reflected in the books and records, however, were significantly less than the amounts paid by the family businesses for the Debtor's living expenses. (See Dkt. 318–321; see also Tr. No. 1 at 144:3–150:3.)

And, despite the Debtor's characterization of the payments as loans, there were no promissory notes executed, no interest charged, no collateral provided, no installment payments due, and no maturity date or other deadline set for repayment of the advances. (Tr. No. 1 at 142:12–143:3; Tr. No. 2 at 13:1–12.) At the time of the trial, the Debtor had not paid back any of the "loans." (Tr. No. 1 at 142:9–11.)

The Debtor's Residence

The Debtor and his family have lived at 921 Broadway Avenue in Park Ridge, Illinois (the "Residence") since 2009. (Dkt. 267 at 7 ¶ 6 & 13 ¶ 70.) Until 2011, the Debtor and his wife Sharise owned the Residence as tenants by the entirety. (Tr. No. 1 at 66:8–11, 83:14–23.) In 2011, when the house was about to go into foreclosure, Jody Libman, the Debtor's childhood friend, purchased the Residence from the lender, Bank of America, in a short-sale transaction in which the house, on which there was a $1.6 million mortgage, was sold to Libman for $840,000. (Id. at 67:24–69:6; Dkt. 267 at 27 ¶ 218.) In order to effectuate that purchase, Libman obtained a first mortgage from Bridgeview Bank, taking title in his own name. (Tr. No. 1 at 69:23–70:7.) The Debtor and Libman had agreed that as long as the Debtor, or someone on his behalf, paid all of the expenses in connection with the Residence, including the mortgage, real estate taxes, insurance, and utilities, Libman would purchase the Residence to save it from foreclosure and the Debtor and his family could continue to live there. (Id. at 70:8–71:13.)

In addition to Libman's first mortgage, Bridgeview Bank held a junior mortgage secured by the Residence related to a home equity line of credit (the "HELOC") extended to the...