Rushton v. Melilli (In re Melilli)
| Decision Date | 28 January 2022 |
| Docket Number | Bankruptcy Case No. 19-20553,Adversary Proceeding No. 20-2072 |
| Citation | 639 B.R. 635 |
| Parties | IN RE: Kevin MELILLI, Debtor. Kenneth A. Rushton, Trustee of the Bankruptcy Estate of Kevin Melilli, Plaintiff, v. Terri Melilli, Kevin Melilli, Southern Diversion, LLC, Southern Diversion One, LLC, Southern Diversion Two, LLC, Southern Diversion Three, LLC, Southern Diversion Charters, LLC, Defendants. |
| Court | U.S. Bankruptcy Court — District of Utah |
Kenneth Rushton, P.O. Box 212, Lehi, UT 84043, 801-768-8416, Trustee of Kevin Melilli's Bankruptcy Estate.
Terri Melilli, 7751 West Hills Trail, Park City, UT 84098, Defendant.
Thomas H. Curran, Peter Antonelli, Curran Antonelli, LLP, 10 Post Office Square, Suite 800 South, Boston, MA 02109, Counsel for Trustee Rushton.
George B. Hofmann, Jeffrey L. Trousdale, Cohne Kinghorn PC, 111 E. Broadway, 11th Floor, Salt Lake City, UT 84111, Counsel for Terri Melilli, Terri's Entity, and the SD Entities.
Kevin Melilli, 7751 West Hills Trail, Park City, UT 84098, Debtor/Defendant.
Reid W. Lambert, Strong and Hanni P.C., 102 South 200 East, Suite 800, Salt Lake City, UT 84111, Counsel for Kevin Melilli.
JOEL T. MARKER, U.S. Bankruptcy Judge More than 26 years ago, in November 1995, First Union National Bank of Florida (First Union) sued Kevin Melilli and his construction company. In 1999, First Union obtained a $409,565.70 judgment against the defunct company and a $268,954.09 judgment against Kevin personally.1 There's no reason to suspect that the judgment would have been nondischargeable had Kevin filed for bankruptcy all those years ago. But while the world was concerned with the impending doom of Y2K, Kevin was concerned with how to make himself judgment-proof. Over the next two decades, with the support of his wife Terri Melilli, Kevin in his telling did not own or earn anything that could be seized for payment of the debt. Instead, he assisted his wife in her successful mortgage brokering and property rental business ventures. A self-described "gofer," he performed tasks on her behalf and at her direction, patiently waiting for the 20-year lifespan of the Florida judgment to expire.
First Union assigned the judgment to NC Venture I, L.P. (later known as NC Ventures, Inc.) in June 2001, and NC Ventures, Inc. subsequently assigned the judgment to Premier Capital LLC (Premier) in June 2005.2 By all accounts, and the available information on state court dockets, Premier vigorously pursued the judgment. In the original Florida case, Premier served notices of deposition, submitted discovery requests, and filed motions to compel from 2008 through 2018.3 In 2011, Premier domesticated the judgment in Utah and filed no fewer than six applications for writ of garnishment between 2011 and 2014.4 But despite the mounting pressure, Kevin persisted.
The finish line was in sight as the judgment was set to lapse in June of 2019. But then in late 2018, Premier renewed the judgment in Broward County, extending its life for another 20 years. This time around, Kevin was not willing to wait. On January 31, 2019, he filed a Chapter 7 bankruptcy petition in the Bankruptcy Court for the District of Utah, and this adversary proceeding is at least the beginning of the end of this 26-year saga. After a separate adversary proceeding by the U.S. Trustee was dismissed, Kevin received his Chapter 7 discharge, and substantial discovery was conducted by the Chapter 7 Trustee—essentially on Premier's behalf and with the dogged assistance of Premier's former counsel—the Defendants (other than Kevin) moved for summary judgment, and the Court issues this Memorandum Decision to explain why their motions will be granted.
Terri and Kevin Melilli met in 1992.6 Before then, Terri had dropped out of college after finding success as a salesperson and continued in that role until becoming an insurance agent around 1987.7 Terri purchased a condo in Florida around 1988 or 1989 with income she received from her employment.8 Terri earned a substantial income as an insurance agent and founded her own mortgage brokerage company, First Fidelity Financial Corp. (First Fidelity), in 1997.9 All the loans that were brokered by First Fidelity were brokered under Terri's Correspondent Mortgage Lender's License,10 and the company experienced several years of success before finally closing during the 2008 recession.11
Kevin, on the other hand, did not experience as much success in his early business ventures. After dropping out of high school in his sophomore year, Kevin went to work for his father in the construction industry. He eventually began his own construction company, Melilli International, Inc. (MII), presumably sometime in the late 1980s. After MII experienced some initial success, he also started a fast-food franchise with Kenny Rogers Roasters around 1992 or 1993.12 Both of the companies began to decline in 1995. MII was involved in a dispute regarding a construction contract, and Kevin's relationship with the fast-food franchisor began to deteriorate, with Kenny Rogers Roasters filing for bankruptcy in 1998. MII eventually defaulted on a loan it owed to First Union, and First Union obtained a judgment against MII for $409,565.70, and against Kevin personally for $268,954.09.13 In addition, Kevin was personally obligated for $497,890.83 in unpaid payroll taxes from his fast-food franchise.14 Although Terri eventually paid off the payroll taxes and additional amounts that Kevin negotiated with several of his other creditors,15 First Union's personal judgment against Kevin ballooned into the $791,087.87 claim by Premier that prompted Kevin's bankruptcy.
Terri and Kevin married in 1994.16 At that time, they were living in a home purchased by Terri's parents on Terri's behalf located in Lighthouse Point, Florida.17 While Kevin's businesses were in decline, Terri's work as an insurance agent, and later the income generated by First Fidelity, was enough to support them and their twin sons.18 After refinancing and then selling the Lighthouse Point property, Terri purchased a property in Pompano Beach, Florida in 2002 for approximately $1.3m.19 A year later, Terri refinanced the Pompano Beach house which allowed her to profit no less than $605,000 in equity from the property.20 In 2003, Terri used the Pompano Beach equity to purchase property in Islamorada, Florida for approximately $2.2m.21
Terri purchased, refinanced, and sold several more properties from 2002 to 2006 (with Terri as the sole obligor22 ) before eventually purchasing the couples’ Park City home in 2006 for $2.7m.23 The Park City home requires the Melillis to be members of the Promontory Club, which includes a golf course, gym, and other amenities.24 The Park City property was purchased using a $1.755m mortgage, a $250,000 second mortgage, approximately $25,000 in credit card charges, and personal funds.25
In 2008, First Fidelity closed its doors, and Terri began defaulting on various mortgage and property tax obligations.26 Terri started renting out the Islamorada property to help pay for living expenses, doing business as "Southern Diversion."27 Shortly after moving into the Park City home, Terri befriended Jim Moore, another member of the Promontory Club. Terri mentioned the Southern Diversion rental business to Jim, and she eventually presented a property rental business plan to Jim around February or March of 2013.28 Jim discussed the plan with his children, Jeffrey Moore, Ryan Moore, and Lori Walsh (the Moore Children). Jim and the Moore Children decided to invest in the business plan, which included various partnership and lending arrangements with Terri and Terri's wholly-owned entity, Southern Diversion, LLC (Terri's Entity), as well as four other newly-formed entities: Southern Diversion One, LLC (SD1); Southern Diversion Two, LLC (SD2); Southern Diversion Three, LLC (SD3); and Southern Diversion Charters, LLC (SDC) (together, these subsidiaries are the SD Entities or the Entities). Terri's Entity holds a 50% ownership in each SD Entity, while the Moore Children hold the remaining 50%, in even shares.29
Each Entity is subject to its own operating agreement, holds title to real property,30 and is engaged in short-term property rentals. Pursuant to the SD1 Operating Agreement, Terri deeded the Islamorada property to SD1, and on or about October 31, 2013, the Moore Children paid $2.2m to third-party mortgagors, relieving SD1 of its external debt obligations.31 On or about May 23, 2013, SD2 purchased property located in Marathon, Florida using a loan from the Moore Children in the amount of approximately $2.76m.32 On or about August 1, 2014, SD3 purchased property in Key Largo, Florida using a loan from the Karen E. Moore Living Trust U/A/D December 9, 1997 in the amount of $2.1m.33 And around January 23, 2015, SDC purchased a boat using a $200,000 loan from the Moore Children.34
The SD Entities’ Operating Agreements designate Terri as the "Operations Manager,"35 and her listed powers and duties include hiring and firing contractors, subcontractors, and property managers; entering into contracts in connection with the SD Entities’ businesses and properties; and being responsible for the rentals and concessions at the SD Entities’ properties, among other things.36 Each Entity maintains separate books and records through bookkeeper Monica Rodriguez and accountant Carol Sokolow,37 each Entity files separate tax returns,38 and each Entity maintains a separate bank account.39 Kevin is not a listed member or equity owner in the Entities.40 Although he's not a formal owner or employee of the Entities, Kevin regularly performs tasks on his wife's behalf. He communicates with Joe Oliveira, the property manager for the SD Entities (and Kevin's long-time friend), regarding day-to-day property maintenance; interacts with guests; communicates with certain vendors and third par...
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