Appeal from the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division Bankr. No. 08 B 33896 Adversary Proceeding No. 09 A 00392 Bankruptcy Judge Carol A. Doyle
The opinion of the court was delivered by: District Judge Robert M. Dow, Jr.
MEMORANDUM OPINION AND ORDER ON APPEAL
Plaintiffs Cantwell & Cantwell and Leland E. Shalgos timely filed this appeal from a final order of the bankruptcy court entering judgment in favor of Defendant Alanna C. Vicario in an adversary proceeding. This Court has jurisdiction pursuant to 28 U.S.C. § 158(a)(1). See In re Teknek, LLC, 512 F.3d 342, 345 (7th Cir. 2007). For the reasons explained below, the Court affirms the bankruptcy court's judgment.
Before Alanna Vicario and her husband John Vicario filed for bankruptcy, John, who is a carpenter by trade, owned his own home building business. Doing business as JMV Builders, Inc., John built homes in Illinois, Indiana, and Michigan. Alanna listed her profession as "homemaker" on the couple's bankruptcy filings, but she also did some informal paperwork and banking for JMV Builders, Inc.
Until approximately 2006, JMV Builders, Inc was a relatively successful company. In 2006, however, Harbor Dunes, LLC, a housing development group in New Buffalo, Michigan for which John had been building homes since late 2003 or early 2004, stopped paying John's invoices. This led to a serious shortage in working capital for John's ongoing projects, including his work on a large home that he was building for resale ("the big house") on property located at 113 Upland Drive in Michigan City, Indiana (the "Upland property"). Knowing that John was in need of money, John's former friend, Daniel Abraham, known as "Danny," arranged for John to borrow $200,000 from Danny's parents, Paul and Catherine Abraham. Under the terms of the loan, John was to repay the principal and $12,000 in total interest on or before November 5, 2006. On May 5, 2006, John signed a promissory note memorializing the loan and his promise to repay Paul and Catherine Abraham. Alanna Vicario did not sign the note.
Although the promissory note stated that John was to use the $200,000 loan to complete work on the big house, he used the funds as working capital on all of his projects and, as a result, John did not complete work on the big house in time to repay his loan to Paul and Catherine Abraham.
In December of 2007, still desperately short on capital and being pestered by Danny about his parents' loan, John sold the Upland property to Joni Elliott, the wife of John's third cousin. Although the terms were not reduced to writing or recorded, John and Joni Elliott agreed that John would perform the work and finish building the big house, Joni Elliott would pay for the materials that John needed to complete the work, and, at closing on the sale, Joni Elliott would pay John for his work on the house. John and Joni Elliott also agreed that they would split any profits resulting from the sale of the house. After he sold the Upland property to Joni Elliott, John retained control of the property and performed work on the big house. He referred to the property as his own and signed a mortgage on September 6, 2008 to a lumber company, verifying that he was the owner of the property.
John also sought to alleviate his financial troubles by transferring the interest that he owned in a development group called Westcott Woods, LLC. In 2004 or 2005, John and Phil Hamilton -- who was also the driving force behind the Harbor Dunes project -- had decided to invest in and develop another piece of property known as Westcott Woods. In August of 2004, Hamilton bought two parcels of land from Mrs. Westcott: (1) a single-family home located at 724 Eastwood Place in Michigan City, Indiana, known as "the little house," and (2) twenty-four acres of undeveloped property. In September of 2005, Hamilton signed a quitclaim deed transferring title of the little house from himself to himself and John as tenants in common. Hamilton and John also both initially held a twenty-five percent interest in Westcott Woods, LLC, which planned to develop the remaining twenty-four acres.
In March of 2006, John sold ten percent of his interest in the LLC to Alfonso D'Amico, one of the other investors in Westcott Woods, LLC, who already held a ten percent interest. On July 28, 2006, John transferred the remaining fifteen percent of his ownership interest in Westcott Woods, LLC to Danny Abraham in exchange for a reduction by $75,000 of the amount that John owed to Danny's parents. Despite these transfers, John retained his interest in the little house with Hamilton as tenants in common.
Shortly thereafter, John and Alanna Vicario signed a promissory note on behalf themselves and JMV Builders, Inc. in favor of Harbor Dunes, LLC for $87,615. John also signed a related security agreement on behalf of JMV Builders, Inc. purporting to convey a security interest to Harbor Dunes, LLC in John's supposed twenty percent interest in Westcott Woods, LLC, and all real property owned by Westcott Woods, LLC. Thus, less than three weeks after transferring his remaining interest in Westcott Woods, LLC to Danny Abraham, John signed a security agreement that placed a lien on his former ownership interest.
All the while, Danny was calling and sending e-mails to John seeking payment on his parents' loan. Many of these requests for payment were made by e-mail to both John and Alanna's e-mail accounts and they included a discussion of the future sale of the Upland property, John's lien on Danny's interest in Westcott Woods, LLC, and the legal title that John still held in the little house. For example, John made clear in his conversations and e-mails to Danny that he expected to make a significant amount of money when his work on the big house was finished and the Upland property was sold, and that he would repay the Abrahams with that money. In one e-mail, written on September 20, 2008, John wrote to Danny that he could "do a payoff once the house closes. Would you agree to 160,000 at close? Let me know." (Tr. 778:13-17.) In another, written on November 23, 2008, John wrote to Danny that the big house would be done in January and that Danny would get his money. In this e-mail, John stated, "I'm lucky my cousin bailed me out on this house or my line of credit would have foreclosed on it a year and a half ago. That's all that's left for both of us to get any money." (Tr. 779:2-6.) A number of John's e-mails also evidenced the intent to hide assets and creditors -- particularly Paul and Catherine Abraham -- from his bankruptcy filings.
While Alanna Vicario was carbon copied on many of Danny Abraham's e-mails to John, John never copied her on his e-mails back to Danny. On at least two occasions, John wrote to Danny about the Abrahams' loan using Alanna's e-mail account.
B. Bankruptcy Proceedings
On December 11, 2008, the Vicarios filed a joint voluntary Chapter 7 Bankruptcy Petition, requesting the discharge of their debts. Along with their petition, the Vicarios filed: (1) a creditor matrix listing the names and addresses of their creditors; (2) schedules of their assets, liabilities, income, and expenditures; and (3) a statement of financial affairs. The Vicarios also filed declarations that the information provided in these filings was true and correct to the best of their knowledge.
The Vicarios made a number of omissions or misstatements in their bankruptcy filings, which led the Abraham family to bring this adversary proceeding against the Vicarios. In their five-count complaint, the Abrahams objected to the discharge of the Vicarios' debts under 11 U.S.C. § 727(a)(4)(A), (a)(2), (a)(4)(D), and (a)(3); and sought a denial of the particular debt that the Vicarios owed to Paul and Catherine Abraham under 11 U.S.C. § 523(a)(2)(A). The Abrahams alleged that a denial of discharge was warranted in this case because the Vicarios: (1) failed to list the Abrahams and other creditors on their creditor matrix; (2) failed to list the Abrahams as creditors on their schedules; (3) failed to report John's interest in the little house; (4) failed to list the Vicarios' continued interest in the Upland property; and (5) failed to list John's transfer of his interest in Westcott Woods, LLC in their statement of financial affairs. The bankruptcy court dismissed the Abrahams' claim under § 523(a)(2)(A) as to Alanna Vicario and the Vicarios answered the remaining claims against them.
On November 19, 2009, lacking the financial resources necessary to prosecute the case, the Abrahams moved to dismiss their complaint against the Vicarios. In accordance with Local Rule 7041-1, the bankruptcy court issued an order stating that any party that wished to substitute as the plaintiff in this adversary case must move to do so on or before January 14, 2010. On January 12, 2010 and January 13, 2010, respectively, Plaintiffs Leland Shalgos and Cantwell & Cantwell moved to substitute as plaintiffs. The bankruptcy court granted their motions and the Abrahams' motion to dismiss and ordered the new plaintiffs ("Plaintiffs") to file an amended complaint. Because the bankruptcy court intended for Plaintiffs to amend the complaint simply to reflect the fact that they had substituted into the case as plaintiffs, not to add new claims, the court did not set a date by which the Vicarios were to answer the amended complaint.
The first four claims in Plaintiffs' amended complaint were substantially similar to the first four claims in the Abrahams' complaint -- that is, claims under § 727(a)(4)(A), (a)(2),
(a)(4)(D), and (a)(3) objecting to the discharge of the Vicarios' debts.*fn1 Notwithstanding their role in the case as substitute plaintiffs, Plaintiffs also added a fifth count under § 727(a)(5) to their amended complaint. Plaintiffs brought this count in lieu of the Abrahams' claim under § 523(a)(2)(A), which sought a determination about the debt owed particularly to the Abrahams and thus could not be prosecuted on the Abrahams' behalf. The Vicarios did not answer the amended complaint.
Plaintiffs' case against the Vicarios proceeded to trial before the bankruptcy court. In their case-in-chief, Plaintiffs called two witnesses: Telly Stefaneas, an attorney from Cantwell & Cantwell who had performed legal work for John Vicario in the past, and Danny Abraham.*fn2 At the close of Plaintiffs' case, the Vicarios made an oral motion under Federal Rule of Civil Procedure 52(c)*fn3 for a judgment on partial findings in their favor. The court immediately denied the motion as to John Vicario, ruling that Plaintiffs had established a prima facie case with respect to him that supported a denial of discharge under the provisions of § 727(a). However, the court expressed the doubts that it had about the ...