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In Re: Stuart M. Hanson v. Stuart Hanson

March 19, 2012


Appeal from the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division Bankr. No. 09 B 4820 Adversary No. 09-AP-00457 Hon. John H. Squires

The opinion of the court was delivered by: Hon. Robert M. Dow, Jr.


Defendant-Appellant Stuart M. Hanson, individually and d/b/a Hanson & White, LLC ("Hanson"), timely filed this appeal from a final order of the bankruptcy court entering judgment in favor of Plaintiff-Appellee Michael Deady and against Hanson. Following a trial, on July 13, 2010, the bankruptcy court found that Deady had demonstrated that the loans of $350,000 and $49,000 (less a $9,000 payment) that he made to Hanson were non-dischargeable under 11 U.S.C. § 523(a)(2)(A). On October 14, 2010, the bankruptcy court denied Hanson's motion to alter or amend. This Court has jurisdiction pursuant to 28 U.S.C. § 158(a). In considering a bankruptcy appeal, the Court reviews factual findings for clear error, while conclusions of law are reviewed de novo. See In re Midway Airlines, 383 F.3d 663, 668 (7th Cir. 2003); In re Frain, 230 F.3d 1014, 1017 (7th Cir. 2000). As explained below, finding no error of fact or law in the decision of the bankruptcy court, this Court affirms the bankruptcy court's judgment.

I. Background

Michael Deady is the owner of Deady Roofing and Construction, Inc. ("Deady Roofing"), an Illinois corporation. Since 1985, Deady Roofing has been in the business of roofing commercial and residential real property. Stuart Hanson was a member and the manager of H&W, an Illinois limited liability company that was in the business of building custom and "spec" homes in the suburbs of Chicago. Hanson was involved in the day-to-day operations of H&W and in the dealings between Deady Roofing and H&W.

In 2005, H&W hired Deady Roofing to provide labor and materials for several construction projects on which H&W was the general contractor. In late 2006, Hanson and Deady discussed the prospect of Deady becoming involved in H&W's construction projects. Deady suggested to Hanson that he become involved with a project that H&W was completing on Colfax Street in Clarendon Hills, Illinois. However, Hanson informed Deady that the project was almost complete and that H&W was not interested in and had no need for Deady's financial participation in that project.

On October 27, 2006, Hanson and Deady met and discussed Deady's participation in other H&W construction projects. At this meeting, Hanson and Deady discussed a project located at 262 South Prospect in Clarendon Hills, which involved the construction of a high-end custom home. Id. 75. Hanson took notes during the meeting. His notes reveal that Hanson and Deady discussed the 262 South Prospect project and that the sum of $250,000 to $350,000 was mentioned in connection with the project. According to Hanson's notes, they also discussed other H&W projects located at Colfax and Ruby Streets in Clarendon Hills. Hanson wrote question marks next to the notes on the Colfax and Ruby projects. Underneath the reference to the Ruby and Colfax projects, he wrote "Balance of $500K."

At or about the same time as the October 2006 meeting, Hanson told Deady that he was in the process of forming a new entity to be known as HW Development LLC. According to Hanson, at some point in the future, Deady would have the option of converting his financial participation in H&W into some form of membership interest in HW Development. However, HW Development was never formed. In his statement of facts, Hanson makes no distinction between H&W and HW Development. However, the evidence presented during trial was that Deady's checks were written to H&W (not HW Development), that HW Development never got off the ground, and that Deady never received an interest in HW Development.

After the October 27, 2006 meeting, Deady loaned H&W $350,000. Deady maintains that he and Hanson agreed that these funds would be used solely for the 262 South Prospect project. According to Deady's testimony at trial, Hanson represented that Deady's funds would be used solely for the 262 South Prospect project and he and Hanson did not discuss using this money for any other project. Deady also testified that he would not have loaned the money to H&W if he had known the funds would be used for projects other than 262 South Prospect.

In his testimony, Hanson disputed Deady's testimony that all the loan proceeds were to be utilized solely for the 262 South Prospect project. Rather, Hanson testified that he told Deady that some of the monies would be invested in 262 South Prospect and some would be invested in other ongoing H&W projects. Hanson testified that, even though Deady's checks were made payable to H&W, Deady was really making a "mezzanine" investment in HW Development. In its opinion, the bankruptcy court identified this conflict in the testimony between Hanson and Deady concerning the use of the funds that Deady loaned to H&W as the principal dispute in the matter.

Deady lent $350,000 to H&W in three installments: (1) $100,000 on November 15, 2006; (2) $150,000 on December 18, 2006; and (3) $100,000 on January 18, 2007. These checks were deposited into H&W's operating account as they were received. In January 2007, when Deady tendered the last installment on the $350,000 loan, Hanson gave Deady two documents. The first document was a promissory note dated January 13, 2007, for $350,000 that was signed by Hanson as the managing member of H&W. The note stated that the principal amount of "$350,000, plus 20% of the net project profit on underlying investment projects; relating to the construction project specified, and as defined, in the Venture Agreement [discussed infra] * * * shall be due and payable on the day of closing of the sale of the single-family residence specified in the Venture Agreement * * *." Under the terms of the promissory note, H&W was obligated to repay Deady $350,000 and any other amounts that had accrued by or before December 31, 2008. While the promissory note was in effect, H&W also was required to provide Deady with periodic updates and business reviews, including financial documentation as requested.

The second document that Hanson gave to Deady in January 2007 was a venture agreement dated January 13, 2007, which was to govern the agreement between the parties regarding the acquisition and development of real estate. The venture agreement provided that the $350,000 given by Deady would "be used to acquire and enhance real estate projects as discussed."The agreement also addressed how Deady's $350,000 could be converted into a membership interest in HW Development, which had not yet been formed. Until the new entity was formed, the promissory note would remain in effect. The venture agreement defined the term "net project profit" as used in the promissory note to mean "all gross profits and receipts derived by H&W in conjunction with the Construction Projects, less usual and customary costs and expenses incurred and paid in the construction and sale of the aforesaid single-family residence * * *." The venture agreement did not define the terms "Construction Projects" or "aforesaid single-family residence."

In December 2007 or January 2008, Hanson told Deady that H&W did not have enough funds to complete the 262 South Prospect project. Deady testified that he questioned Hanson about the $350,000 that Deady had loaned to H&W. According to Deady, Hanson assured him that those monies went into 262 South Prospect. Deady further testified that he asked Hanson to provide him with H&W's checking account records to show where Deady's funds went, but that he never received those records until after he filed the underlying adversary proceeding.

Despite the lack of records, Deady loaned H&W additional funds totaling $49,000, in the following installments: (1) $22,000 on January 22, 2008; (2) $13,500 on March 7, 2008; (3) $5,500 on April 3, 2008; and (4) $8,000 on April 3, 2008. After the last installment was paid, Hanson gave Deady a second promissory note in the sum of $49,000. The note was dated April 4, 2008, and had a maturity date of March 31, 2009. It was entitled "PROMISSORY NOTE-- Operating Capital." Hanson signed the document as managing ...

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