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Adas v. Rutkowski

United States District Court, Seventh Circuit

December 30, 2013

JERZY ADAS and ADAS CONSTRUCTION INC, Debtor-Appellants,
v.
ZENON RUTKOWSKI, Plaintiff-Appellee.

MEMORANDUM OPINION AND ORDER

VIRGINIA M. KENDALL, District Judge.

Debtor-Appellants Jerzy Adas and Adas Construction Inc. appeal to this Court, which has jurisdiction to hear the appeal pursuant to 28 U.S.C. § 158(a)(1), from a decision of the United States Bankruptcy Court holding that Adas's debt to Zenon Rutkowski arising from their construction partnership is nondischargeable in bankruptcy under 11 U.S.C. § 523(a)(4) because Adas owed Rutkowski a fiduciary duty. See In re Adas, 488 B.R. 358 (Bankr. N.D.Ill. 2013). Bankruptcy plaintiff and appellant Rutkowski filed a cross-appeal arguing that the bankruptcy court erred in finding that no express trust existed between Adas and Rutkowski and in declining to award Rutkowski damages. For the reasons stated below, the bankruptcy court's decision is affirmed in part, reversed in part, and remanded in part.

FACTUAL AND PROCEDURAL BACKGROUND

The Court adopts the relevant facts as set forth by the bankruptcy court. See Fed.R.Bankr.P. 8013 ("Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous...."). The facts summarized below were discussed in depth by the bankruptcy court and are not disputed by the parties. Adas, 488 B.R. at 362-70.

Adas left Poland in 1992 with several years of construction experience under his belt. In 1995, he and a partner founded A&L Construction, a business focused on remodeling, painting, and constructing additions to buildings and homes. He became the sole owner of the business in 1997 and changed the name to Adas Construction. In 1998, Adas expanded into home building when he constructed his own house in Glenview, Illinois. He built two more houses between 2000 and 2003.

Adas and Rutkowski met in 2003 or 2004 at the school their children attended. They became close social friends, spending holidays and vacations together. Rutkowski was also an immigrant from Poland and held jobs in the United States as a security guard, a machine operator, and a tool and die designer. Rutkowski had no background in construction. Adas and Rutkowski began discussing real estate investment in 2005. Although Rutkowski had no experience in construction or real estate (aside from selling his own condominium and buying a house), he did have money available to invest. Rutkowski testified before the bankruptcy court that:

What I recall, for example, is that in [Adas's] house-and the neighbor was actually building a house. He [Adas] took me over. There was only-basically a-you know, the foundation was only there.
He [Adas] explain to me everything, what's about, where supposed to-you know, what kind-what kind of wall supposed to go, where would be the brick laid out, and what's, you know, the excavation and so about-so he knew the, you know, construction of the houses very well. I was actually surprised at that time that he knew it that well, and I was really reassured.

Adas was looking to begin construction on two more houses at around that time and was considering potential locations in Lake Bluff, Illinois. Adas did some independent research and took Rutkowski to view some properties on two occasions; Rutkowski had never heard of Lake Bluff before these trips.

Adas eventually settled on two properties, one on Plaister Street that he eventually bought with an individual named Andrzejuk, and another on Safford Place. Adas pitched the Safford property to Rutkowski as a potential site for an investment house, stating that it would be a good deal at any price below $300, 000. They purchased the property on August 26, 2005 for $280, 000. Their plan was to tear down the house that was currently located on the property and build a new one. Adas would do all the building and construction without charging a general contractor fee, as well as contribute half of the $50, 000 required for the down payent. Rutkowski would pay whatever was needed for construction, which he assumed would be approximately $150, 000. They would then split whatever profit they made once the house was sold, which Adas expected to be between $100, 000 and $150, 000 in total. Both Adas and Rutkowski were listed as buyers on the contract, but because Adas "had a lot of debt, " Rutkowski was listed as the sole owner of the house and would be responsible for the mortgage. Adas negotiated the purchase price for the house and arranged for the mortgage from Fifth Third Bank.

Adas believed he and Rutkowski were partners. They shook hands on the deal, but no written partnership agreement was signed. Adas then began construction on the house on Safford Street, and at the same time began construction on his other project on Plaister Street. Rutkowski knew Adas was running both projects at the same time. Adas and Rutkowski soon realized they would need more money for construction, so Adas set up a meeting with a mortgage broker, Paul Darski, with whom Adas had worked on other projects. Darski estimated that construction would cost $400, 000 and take one year, and that Adas and Rutkowski would also need $224, 000 to pay off the mortgage with Fifth Third Bank. Darski eventually helped them obtain a $440, 500 construction loan from Delaware Place Bank, which closed on November 10, 2006. Adas did not explain the $440, 500 figure to Rutkowski, and Darski was not called to testify in the bankruptcy court's trial.

According to Adas, the size of construction loan was meant to cover the cost of the work Adas said he had already done on the Safford house. In conjunction with obtaining the loan, he submitted a "Sworn Statement for Contractor and Subcontractor to Owner & Chicago Title" (the "Sworn Statement") stating that $440, 500 had been furnished for construction. The Sworn Statement also itemized those expenses. The notary public who signed the Sworn Statement was Darski, Adas's mortgage broker. At trial, Adas admitted that many of the amounts in the Sworn Statement were inflated or exaggerated:

Type of Work Cost on Sworn Statement Actual Cost Demolition $36, 000 $4, 400 Waste Removal $24, 000 $9, 500 Carpentry $99, 000 Per his trial testimony, Adas "did not" pay anyone individually or in total this amount for carpentry Excavation $38, 000 $8, 000 Foundation $79, 000 $30, 000 or $34, 000 Lumber $48, 000 Per Adas's trial testimony, "Not close" to this amount Roofing $36, 000 $7, 000 Windows $55, 000 $21, 300 or $21, 400 Plans $10, 000 $6, 000

Excluding Carpentry and Lumber (because Adas did not testify as to definitive figures for these types of work), Adas estimated the amount he spent on construction at $278, 000, while the actual cost was closer to $90, 300-a difference of $187, 700. The $440, 500 construction loan was in Rutkowski's name.

Adas agreed that the money from this loan and the money provided by Rutkowsi would be used exclusively for the Safford house, and not on his other projects or his personal mortgage and expenses. He testified:

Q: You told [Rutkowski], didn't you, that you would use that money just for the construction of Safford; isn't that right?
A: Yes.
Q: That you wouldn't take any contractor's fee?
A: Yes.
Q: You wouldn't use it for your family expenses?
A: Yes.
Q: You wouldn't use it to pay your home mortgage?
A: Yes.
Q: And was the same true with the money that [Rutkoswki] was investing?
A: Yes.
Q: So every penny you received was to be used for the construction of ...

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