Siragusa v. Collazo (In re Collazo)
| Decision Date | 20 February 2020 |
| Docket Number | Bankruptcy Case No. 12 B 44342,District Court Case No. 19 C 5151,Adversary Proceeding No. 13-216 |
| Parties | In re: ARTURO COLLAZO, Debtor. ROBERT J. SIRAGUSA M.D. EMPLOYEE TRUST (formerly known as Dermatology Association of Bay County, PA, Defined Benefit Plan), ROBERT J. SIRAGUSA, individually, DANA SIRAGUSA, and ROBERT JOSEPH SIRAGUSA, Plaintiffs, v. ARTURO COLLAZO, Defendant. |
| Court | U.S. District Court — Northern District of Illinois |
MEMORANDUM OPINION AND ORDER ADOPTING BANKRUTPCY COURT'S FINDINGS OF FACTS AND CONCLUSIONS OF LAW
Plaintiffs, Robert J. Siragusa M.D. Employee Trust, Dr. Robert J. Siragusa, Dana Siragusa and Robert Joseph Siragusa, filed this adversary proceeding in the bankruptcy case of defendant-debtor Arturo Collazo, claiming that he had defrauded them. The bankruptcy court has submitted proposed findings of fact and conclusions of law to support the entry of a money judgment against Collazo on Dana and Robert Joseph's state-law fraud claims. For the reasons stated below, the Court adopts the proposed findings of fact and conclusions of law and enters judgment in favor of Dana and Robert Joseph and against Collazo.
This case stems from numerous loans made by Dr. Robert Siragusa, his practice's pension plan, and his children to business entities owned in part by Arturo Collazo, the debtor in these bankruptcy proceedings. The Court sets forth certain relevant facts below.1
Collazo and a partner, Jon Goldman, were in the business of converting apartment buildings to condominiums and selling the converted units. They sometimes needed short-term financing to prevent construction delays while waiting for the principal construction lender to inspect the premises, which it insisted on doing before they could draw on the construction loan. In 2002 and 2003, Dr. Siragusa, his practice's pension plan, and his older daughter Dana provided numerous short-term loans to Collazo and Goldman's business entities, which issued promissory notes in exchange. The notes required the borrowing entities to make payments periodically from the net proceeds of the sale of the condo units, after the construction lender was repaid, with a final maturity date independent of the sales. As the Siragusas later learned, however, in late 2003, Collazo and Goldman began transferring the condo units from the borrowing entities to other business entities with clean balance sheets so that they could take out new loans, using the transferred condo units as collateral. This practice of stripping the borrowing entities of assets made the notes essentially uncollectible because the issuing entities were judgment-proof.
In 2004, Collazo and Goldman made a number of payments to the Siragusas, but these payments were late and some were partial, and much of the debt that the Siragusas held remained unpaid. In the summer of 2005, a Collazo/Goldman entity that had issued notes to Dana and Dr.Siragusa transferred three more condo units in a building at 1300 Eddy Street to another Collazo/Goldman business entity, which granted a mortgage on them to a new lender. Upon completion of these transfers, all of the unsold units in the buildings in which the Siragusas had invested had been transferred to business entities that owed no legal obligations to the Siragusas.
In the fall of 2005, Collazo sought new loans from the Siragusas to finance a development in Arizona. He assured Dr. Siragusa that all outstanding loans would be repaid after the remaining condo units sold, which he said he expected to happen in the next thirty to sixty days, but he did not reveal that these units had been transferred out of the business entities that had issued the notes, that these units were encumbered by new mortgages, or that units in certain of the projects the Siragusas had invested in (including the Eddy Street building) had already been sold, without any of the proceeds having been applied toward payment of the Siragusas' notes. On November 22, 2005, CG Development LLC, one of Collazo and Goldman's business entities, issued an $800,000 note to Dr. Siragusa's pension plan and a $200,000 note to three of his children—Dana, his son Robert Joseph, and his younger daughter Julie—in exchange for investments in those amounts. Both notes promised an annual rate of 20% interest, and 25% after default.
In July 2007, Julie, who worked with Collazo as a real estate agent, called Dr. Siragusa to celebrate selling the last unit in the Eddy Street building. Irritated that he had not received any payments based on proceeds from the sale of the other Eddy units or even known they were sold, Dr. Siragusa told Julie that he had invested in the building and needed to know when its units sold.
The Arizona notes matured in November 2007, but no payments were made. The Arizona development failed following the collapse of the real estate market there in 2008, and Collazo's construction lender ultimately accepted a deed in lieu of foreclosure. Dana, a practicing attorney, began to negotiate a settlement with Collazo, and he made a settlement proposal in January 2009.Dana was alarmed to discover that the proposal referred to units in buildings the Siragusas had not invested in. She looked into the matter more deeply and learned that the entities that had issued the notes to the Siragusas had transferred all of their units to other entities, which had sold them.
Before the parties could reach any settlement agreement, Collazo filed a Chapter 7 bankruptcy petition in 2012, and the Siragusas filed proofs of claim for fraud and contractual debts under the promissory notes. The Siragusas then filed this adversary proceeding, asserting that their claims were non-dischargeable under 11 U.S.C. § 523(a)(2)(A) because they were based on debts for money obtained by false pretenses, false representation or fraud. The bankruptcy trustee filed a report of no distribution, and the bankruptcy case was closed on December 20, 2013, although the bankruptcy court had not yet issued a ruling in the Siragusas' adversary proceeding.
The bankruptcy court held a trial in this adversary proceeding in October 2013, and it rendered its decision in a written opinion on March 5, 2014. The court determined that the claims based on notes issued prior to 2004 were dischargeable because there was no evidence that Collazo had any fraudulent intent at that time. The claims stemming from the 2005 Arizona notes were non-dischargeable because Collazo knew that, contrary to what he had told Dr. Siragusa, the outstanding loans to the Siragusas would not be repaid within sixty days, given the priority of the vast mortgage debt Collazo's business entities had incurred. The court found that Dr. Siragusa and Julie's claims were time-barred based on their July 2007 conversation, in which each of them learned facts from the other that should have put them on notice of something fishy. As for Dana and Robert Joseph, the court found that their fraud claims were viable because the applicable five-year statute of limitations period, see 735 ILCS 5/13-205, did not begin running until 2009, when Dana received the settlement proposal from Collazo and learned that the units had all been transferred and sold.
The bankruptcy court did not enter a money judgment, uncertain whether it had the constitutional or statutory authority to do so. In particular, the bankruptcy court explained, it doubted its constitutional authority under Stern v. Marshall, 564 U.S. 462 (2011), which had held that a bankruptcy judge lacked authority under Article III of the United States Constitution to enter final judgment on the debtor's state law counterclaim against a creditor, and which some courts had interpreted to bar bankruptcy courts from "resolv[ing] a creditor's state-law claim when the court decides whether that claim is nondischargeable." See Lee v. Christenson, 558 F. App'x 674, 676 (7th Cir. 2014). Additionally, it doubted its statutory authority under 28 U.S.C. § 1334, which gives federal courts jurisdiction to adjudicate claims "related to" a bankruptcy case. "Because," the court reasoned, "the entry of monetary judgment against a post-discharge debtor has no effect on distribution of the bankruptcy estate, it is not related to" the bankruptcy case. See Collazo, 549 B.R. at 700 .
The Siragusas appealed to this Court pursuant to 28 U.S.C. § 158(a)(1), arguing that the bankruptcy court had erred and, in the alternative, this Court should enter the money judgment itself. Unlike the bankruptcy court, this Court is empowered under Article III to decide cases governed by state law, and, the Siragusas argued, it can exercise supplemental jurisdiction over their fraud claims under 28 U.S.C. § 1367, even if those claims are not "related to" the bankruptcy in the sense that they might have an effect on distribution of the bankruptcy estate, given that Collazo's bankruptcy case is closed and there is nothing left to distribute.
This Court declined to enter a money judgment, instead deciding to relinquish jurisdiction because, with the bankruptcy case closed, the remaining federal interest was remote. Further, thisCourt reasoned, the present record was not sufficiently well-developed to liquidate the fraud claim, and if further proceedings were necessary even in federal court, then any interest in "judicial economy" served by retaining the case was slight and did not "outweigh the interest in leaving questions of state law to the state courts." Collazo, 549 B.R. at 703.
The Siragusas appealed again, and the Seventh Circuit affirmed, except as to Dana's claim that Collazo's transfer of condo units from the borrower entities to judgment-proof entities was itself...
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