Reed v. Zak (In re Zak)

Decision Date12 July 2017
Docket NumberAdv. P. No. 15–1064,Case No. 15–10098–JNF
Citation573 B.R. 13
Parties IN RE David ZAK, Debtor Lisa Reed, Plaintiff v. David Zak, Defendant
CourtU.S. Bankruptcy Court — District of Massachusetts

Sean P. Gleason, Gleason Law Offices, P.C., Haverhill, MA, for Plaintiff.

Isaac H. Peres, Law Office of Isaac H. Peres, Cambridge, MA, Gregory M. Sullivan, Malden, MA, for Defendant.

MEMORANDUM

Joan N. Feeney, United States Bankruptcy Judge

I. INTRODUCTION

The matter before the Court is the four-count Amended Complaint filed by Lisa Reed ("Reed" or the "Plaintiff")1 against David Zak ("Zak," the "Defendant," or the "Debtor"). The Plaintiff seeks to except obligations she alleges are owed to her by the Defendant from discharge pursuant to 11 U.S.C. § 523(a)(2)(A), (4), and (6).2 The Court conducted a two-day trial commencing on March 28, 2017 at which three witnesses testified and 33 exhibits were introduced into evidence by agreement.

The issues presented include whether the Plaintiff has established that the Defendant is obligated to her for monies owed arising out of the involuntary dissolution of a partnership she had with a corporation known as Loan Modification Group, Inc. ("LMG"), an entity solely owned and controlled by the Defendant, and, if so, whether she has sustained her burden of establishing that any such obligations are excepted from the Debtor's discharge.

For the reasons set forth below, the Court concludes the Plaintiff has sustained her burden of proof under both 11 U.S.C. § 523(a)(4), and (a)(6) as the Defendant was the alter ego of LMG and is personally liable for torts he committed in his capacity as sole officer, director, and shareholder of LMG.

II. FACTS3

Reed testified that she first became acquainted with Zak in 2008 or early 2009 when he contacted her to collect monies she owed to Jonathan Friedmann, Esq. ("Attorney Friedmann") who together with Zak had represented her in conjunction with her real estate business, which she referred to as Mass Lending, as well as with respect to legal problems associated with a scheme she engineered to defraud mortgage lenders.4 She testified that she was "working for a loan modification company on the side" and asked Zak if he would be "interested in doing a loan modification on his condo in Cambridge." According to Reed, she raised the subject of a loan modification business. Zak indicated to her that he was very interested in such a venture, particularly when she informed him that "it was a lucrative business that could explode." Reed further testified that she and Zak agreed to work together. At trial, she testified about their venture as follows:

Well, me and David had nothing at the time. It was just me and him and so any profits that we did make we would be splitting 50/50. At that time we didn't have very much to split, so we just agreed on maybe a per file fee that he was paying me because, like I said, we didn't have a lot coming in at that time. And then, you know, every decision that the business was going under we would do it together. Any decisions we—any hirings that we did, any decisions as to how we would proceed moving forward with the business, it was always me and him together.

In February of 2009, Zak incorporated LMG, identifying himself as president, treasurer, secretary, director and sole shareholder in the Articles of Organization. At the time, Zak was operating Zak Law Offices, P.C. ("ZLO"), a professional corporation he incorporated in 2007. Reed took credit for naming LMG, stating "I actually came up with the name and it was a company formed based off of our advisor, Jonathan Friedmann, who was always—he was an advisor on board for us telling us that we needed a company to [sic], under ZLO's umbrella, so we can take payments for loan modification clients."

Reed testified about the trajectory of the business:

At the beginning of the year, it was really slow. We were just starting out. We were going through my client files. We were hiring small amounts of staff here and there in what we called agents, our independent contractors that brought in customers from different ethnic backgrounds. Most likely the Hispanic community and the Haitian community were the ones that were hit more so that [sic] any other communities, so we brought in agents that knew that community very well. And once we did that our business almost tripled or quadrupled. But of course, it took time but it went pretty quickly. And then David started doing radio advertisements, which then escalated the business even more so. So at that time the profits started rolling in and David and I are making decisions together, like we normally did, decided that I should be paid a split profit of the company since it was doing that well. And we decided once the business was up and running, we never thought it would actually get to that extent until a few months into the business and we saw what was happening. And it was per David's suggestion that I get paid the 50 percent of the business at that time because I was equal partner. I was doing all the hiring. I was doing all the analysis. I was running all the employees. David's job was—basically was more so a radio personality at that point. I was taking care of all the loan modifications coming in and out of the company.

Prior to LMG's incorporation, Reed solicited homeowners in financial distress who were either having difficulty paying their mortgages or facing foreclosure. ZLO paid her a referral fee of $1,000 for each client that she referred to the law firm. In June of 2009, once the business became established, Reed's arrangements with LMG and ZLO changed and she began receiving, primarily through her nominees (her nephew and a company she owned and controlled), 50% of the profits of the loan modification business. ZLO's payments to Reed's nominees were the result of her legal and financial problems.

According to Reed,

Well, loan modification [LMG] basically took in the clients and analyzed all the paperwork that came in for that loan modification to see if it was a viable client to begin with. And when we found that it was a viable client, meaning if their payments were too high that we can actually make some reduction to that payment, then we would proceed to taking the client in and taking in payments and doing all the analyzing paperwork and the predatory lending letters.
Well, they [ZLO] were doing the—the whole predatory lending side of it. So we would take in a file and then analyze the paperwork and then ZLO would do the violations of the client's home and we would write the 93(a) letter for that client.

In furtherance of that business model, LMG and ZLO required the execution of fee agreements by clients that typically required them to make an advanced payment of $2,500. LMG was described in those contracts in different ways. For example, a form fee agreement executed on April 9, 2009 by Jose Vasquez, and David Zak, as President of LMG, referred to LMG as a wholly owned subsidiary of ZLO. The fee agreement provided in pertinent part the following:

2. Legal Services to be Provided....
? LOAN MODIFICATION [ONE MORTGAGE]":
The services to be provided by LMG, its attorneys, affiliates, agents and associates working in concert with it either directly or indirectly to the Client shall be the :
1) Preparation and processing of loan modification application documents and disclosures;
2) Analysis and preparation of comprehensive Forensic Loan File Analysis;
3) Negotiation of loan modification with borrower's respective lender or mortgage servicing company.
FOR LOAN MODIFICATION SERVICES IN CONNECTION ONE [sic] MORTGAGE LOAN, CLIENT SHALL REMIT TWO CONSECUTIVE MONTHLY PAYMENTS OF $2,500 OR ONE PAYMENT OF $5,000. THE SECOND PAYMENT SHALL BE DUE WITHIN THIRTY DAYS OF RECEIPT OF RECEIPT [sic] OF THE FIRST PAYMENT....
3. FEES. Client will pay to LMG a flat fee to be assessed as stated above. Payment of said fee shall be made in either one payment or two payments as the borrower prefers. In the event that two payments are made, the first payment shall be made upon the signing of this agreement and the second payment shall be due thirty (30) days from that date....
In the event that two payments are made, the first payment shall be applied solely to the processing, analysis and production of a forensic audit of the loan file which shall include all applicable state and federal violations and the production of a Lender–Benefit Analysis. This payment shall be non-refundable upon the completion of these services.
The second payment shall be applied solely to the correspondence and negotiation with the respective lender's attorneys and/or loss mitigation departments. This payment shall be non-refundable upon the completion of these services.

(emphasis in original).

Fee agreements executed by homeowner Yanko Matias on October 5, 2009 and by homeowner Dayanet Aviles on November 28, 2009, differentiated the services to be provided by ZLO and LMG, now referred to as Loan Modification Group of Massachusetts ("LMGM"), and described LMGM in the document as "an analytic consulting company supervised and managed" by ZLO. For LMGM's services the clients agreed to pay a $2,500 fee as reflected in the following form of agreement:

For the completion of the above analytic research services LMGM shall collect a fee ... in the amount of $2,500.00. SAID FEE SHALL BE DEPOSITED UPON THE COMPLETION OF SERVICES 1 AND 2 REFERENCED–ABOVE WITH SERVICE 3 TO BE PERFORMED WITHIN SEVEN (7) BUSINESS DAYS OF PAYMENT RECEIPT UNLESS OTHERWISE AGREED TO BY THE CLIENT.
Should the client elect to obtain representation by legal counsel in the advocacy of client's loan modification petition with client's lender or mortgage servicing company, LMGM shall refer the matter to Zak Law Offices, PC, which shall coordinate and/or reserve the right to outsource the legal representation of said loan modification work to another law firm which shall represent client in a legal capacity.

Zak executed the...

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