Robert J. Siragusa M.D. Emp. Trust v. Collazo (In re Collazo)
| Decision Date | 05 March 2014 |
| Docket Number | Case No. 13 A 00216,Case No. 12 B 44342 |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
| Parties | In re: ARTURO COLLAZO, Debtor. ROBERT J. SIRAGUSA M.D. EMPLOYEE TRUST, ROBERT SIRAGUSA, DANA SIRAGUSA, JULIE SIRAGUSA, and ROBERT JOSEPH SIRAGUSA Plaintiffs, v. ARTURO COLLAZO, Defendant. |
This Chapter 7 adversary proceeding comes before the Court for judgment after trial on the question of whether the debtor, Arturo Collazo, committed a fraud that causes certain of his debts to be excepted from his bankruptcy discharge. The plaintiffs are the Robert J. Siragusa M.D. Employee Trust ("the Employee Trust"), Dr. Robert Siragusa, Dana Siragusa, Julie Siragusa, and Robert Joseph Siragusa ("the Siragusas"). The Sira-gusas allege that they made a series of loans to LLCs owned by Collazo in reliance on his false representations. For the reasons stated below, the evidence at trial established that Collazo did indeed obtain one of the loans by fraud, and the resulting debt is nondis-chargeable, but only as to two of the plaintiffs.
In 2001, Julie Siragusa began working as real estate agent at the brokerage firm of Koenig & Strey. There she met Arturo Collazo, a real estate developer who specialized in "flipping" condominium units—that is, purchasing apartment buildings, gutting them, converting their units into condominiums, and selling the converted units. Collazo, together with a colleague, Jon Goldman, sold the converted condo units through Koenig & Strey, and Julie became responsible for marketing some of these units.
Collazo and Goldman's practice was to acquire properties for condo development through separate LLCs formed for the purpose of holding title to the properties. Typically, each LLC was named after the address of the particular property it acquired. For example, the LLC that owned the property on 1210 West Waveland in Chicago, Illinois was named 1210 West Waveland LLC. Collazo and Goldman were the sole members of these LLCs. The LLCs obtained construction loans to acquire the properties and finance their conversion, and the construction lenders were granted mortgages in the condo units. The LLCs hired CG Developments LLC, another Collazo and Goldman-owned entity, to perform the construction work.
At some point in 2002, Julie's father, Dr. Robert Siragusa, became interested in investing in some of Collazo's development projects. Julie conveyed her father's interest to Collazo, and the Collazo discussed with Dr. Siragusa the details of a short-term loan to finance the conversion at 1210 W. Waveland in Chicago. According to Dr. Siragusa, Collazo explained that construction lenders typically required inspection of a project before allowing a draw on the construction loan, and that the purpose of the loan from Dr. Sira-gusa was to provide the liquidity necessary to engage in construction during these periods of delay in construction financing. Collazo expected the conversion and sale process to be complete in about 18 months. Thereafter, the Siragusa loan would be repaid, with 20% interest, from the proceeds of the sale of the converted condo units. Dr. Siragusa understood, however, that the construction lender was to be paid first. Dr. Siragusa also testified that he and Collazo discussed "price points," an optimum range of prices at which Collazo expected to be able to sell the units for a profit.
Collazo denies that he discussed the specifics of the deal with Dr. Siragusa. Collazo stated that once Julie conveyed Dr. Siragusa's interest in investing, he referred Dr. Siragusa to Goldman, who possessed a greater understanding of the financial side of the business, to negotiate the specific terms of the loan. Collazo testified that he and Goldman had strictly delineated roles and that Collazo himself never discussed finances. Rather, he was "the person on the street" overseeing construction and sales.
However, Collazo admitted that he did discuss price points in his limited conversations with Dr. Siragusa. A discussion of price points and potential profits only makes sense in the context of a broader discussion about repayment of the loan. Therefore, although it is possible that Collazo left some technical details of the loans—such as the exact interest rate and maturity date—to Goldman, Dr. Siragusa's testimony that Collazo explained to him that repayment was to come from the net proceeds of the sale of condo units after payment of the construction lender is entirely credible.
On September 10, 2002, Dr. Siragusa loaned $100,000 to 1210 West Waveland LLC.1 Dr. Siragusa also directed the Employee Trust, his pension plan, to make a $200,000 loan. 1210 West Waveland LLC issued promissory notes to Dr. Siragusa and the Employee Trust.
The notes were not well drafted. November 31, 2003 is the maturity date of each note. Because there are only 30 days in November, the parties likely intended either November 30 or December 1, 2003 to be the maturity date. The note also lacks a clear repayment provision. Paragraph 5, titled "Payments," provides that after the sale of each unit, the "borrower shall repay be paid [sic] installments as follows," and subparagraph 5(a) provides that the borrower will pay to the lender after the sale of each condo unit an amount equal to the number listed as the "Balance Due Seller" on each Seller's Settlement Statement. "Borrower" is defined in Paragraph 1 as 1210 West Waveland LLC. "Lender," however, is an undefined term. The only sensible interpretation is that "lender" means the "holder" of the note, which is defined in Paragraph 1 as the Employee Trust and Dr. Siragusa, not the construction lender as Goldman argued at trial. The balance due seller is the net proceeds realized by the seller from the sale after deducting payments due to mortgage holders, taxes, and brokers from the gross amount due seller. Therefore, subparagraph 5(a) effectively provides for payment of the construction loan ahead of the note. This is supported by Paragraph 16, which provides for subordination of the holder's right to payment to the rights of the construction lender. Subparagraph 5(b) states that "in all events" the principal and all unpaid and accrued interest shall be payable on the maturity date. Takentogether, the note creates an obligation of repayment periodically from the net proceeds of the sale of the condo units, with a final maturity date independent of the sales.
Dr. Siragusa and the Employee Trust made additional loans to finance three other Collazo developments in Chicago during 2002 and 2003. Dr. Siragusa testified that he and Collazo discussed the price points and repayment of these new loans from the sale of the condo unite-as they had prior to the Waveland loan- before each of these loans. Collazo again denied discussing financial details, but he admitted to speaking with Dr. Siragusa about price points. Again, Dr. Siragusa's testimony is more credible.
On September 26, 2002, Dr. Siragusa made a $60,000 loan and the Employee Trust a $140,000 loan to 2801 Seminary LLC to finance the acquisition of the development located at that address. 2801 Seminary LLC issued two promissory notes in substantially the same form as the Waveland notes.
On June 2, 2003, Dr. Siragusa made a $50,000 loan and the Employee Trust a $145,000 loan to 643 Barry LLC. 643 Barry LLC issued two promissory notes to Dr. Siragusa and the Employee Trust. Again, these notes were in substantially the same form as the Waveland and Seminary notes.
Finally, on November 12, 2003, Dr. Siragusa made a $50,000 loan and the Employee Trust a $65,000 loan to 1300 Eddy LLC. Dana Siragusa, Dr. Siragusa's older daughter and a practicing real estate attorney, made a $20,000 loan as part of this investment. Dana was living in Italy at the time, and she decided to make the loan after discussing the investment with Dr. Siragusa. She did not review the note itself. 1300 Eddy LLC issued three notes that were in substantially the same form as the prior notes.
Soon after the last of these notes was issued, Collazo and Goldman began transferring unsold units out from the borrower-LLCs to other LLCs that they owned and granting new mortgages on the transferred units. On December 4, 2003, 1210 West Waveland LLC transferred title of the three remaining unsold units in the Waveland development by quitclaim deed to an entity called Art-Man Investments LLC, whose sole members were Collazo and Goldman. At the same time, Art-Man granted a mortgage lien on the units to Private Bank, the construction lender on the Waveland development. On April 19, 2004, 643 Barry LLC transferred three unsold units in the Barry development to Art-Man. On August 6, 2004, Art-Man granted a subordinated mortgage lien on the three units to Rainbo Asset Management Fund to secure an $800,000 note issued by 548 Deming LLC, another Collazo and Goldman-owned entity. Finally, 2801 Seminary LLC transferred its interest in one unsold unit in the Seminary development to GoCo Investments LLC on September 24, 2004.
The purpose of these transfers was to shift assets to LLCs with clean balance sheets and to shelter the condo units from the claims of any creditors other than construction lenders, thus preserving the ability of Collazo and Goldman to later leverage the units to generate what Goldman called a "liquidity event." In other words, the transfers allowed the condo units to be used at a later date as collateral for additional financing, in case the original construction loans were insufficient to cover costs, or to obtain new financing for other development projects. Collazo testified that he did not intend to transfer unsold unitsat the time the loans were initially made. This is credible, given that it was a strategy formulated in response to slow sales and the need for additional...
To continue reading
Request your trial