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Robert J. Siragusa Employee Trust v. Collazo

United States District Court, N.D. Illinois, Eastern Division

May 19, 2015

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-Appellants and Cross-Appellees,
ARTURO COLLAZO, Defendant-Appellee and Cross-Appellant

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          For Robert J Siragusa, Dana Siragusa, Julie Siragusa, Robert Joseph Siragusa, Appellants: Edward J. Whalen, Hedberg, Tobin, Flaherty & Whalen, P.C., Chicago, IL.

         For Arturo Collozo, Appellee: David R. Herzog, Herzog & Schwartz, P.C., Chicago, IL.

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         HON. JORGE L. ALONSO, United States District Judge.

         Plaintiffs-Appellants Robert J. Siragusa M.D. Employee Trust, Dr. Robert J. Siragusa,

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Dana Siragusa and Robert Joseph Siragusa (collectively, " the Siragusas" ) appeal to this Court, pursuant to 28 U.S.C. § 158(a)(1), from a decision of the United States Bankruptcy Court holding that certain fraud claims the Siragusas may have against defendant-appellee Arturo Collazo based on debts he owes to them are not excepted from discharge under 11 U.S.C. § 523(a)(2)(A) in Collazo's bankruptcy proceedings. Collazo cross-appeals from the same decision, which held that certain other of the Siragusas' potential fraud claims are excepted from discharge. See Siragusa v. Collazo (In re Collazo), Bankruptcy No. 12 B 44342, Adversary Proceeding 13 A 000216, (Bankr. N.D.Ill. Mar. 5, 2014) (" Opinion" ). For the reasons stated below, the bankruptcy court's decision is affirmed.


         This case stems from numerous loans made by Dr. Robert Siragusa, his practice's pension plan and his children to business entities controlled by Arturo Collazo, the debtor in these bankruptcy proceedings. The Court adopts the relevant facts as set forth by the bankruptcy court in its March 5, 2014 Opinion.[1] See Fed. R. Bankr. P. 8013 (" Findings of facts, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous." ).

         Julie Siragusa, one of Dr. Siragusa's daughters, was a real estate agent who worked with Collazo. Collazo was in the business of converting apartment buildings to condominiums and selling the converted units. Collazo and his business partner, Jon Goldman, would acquire an apartment building in the name of an LLC formed for the purpose of holding title to the various condominium units that would eventually be created from the apartments. Generally, each such LLC took the apartment building's address for its name. Collazo and Goldman were the sole members. They would obtain construction loans to finance the conversion of the buildings, and in return they would grant the lenders mortgages in the resulting condo units.

         In 2002, Julie introduced her father to Collazo, and Dr. Siragusa sought to invest in some of Collazo's development projects. According to Dr. Siragusa, Collazo explained that he sometimes needed short-term financing to prevent construction delays because his principal construction lender often required an inspection of the premises before allowing him to draw on the construction loan. Dr. Siragusa's loans would provide this short-term financing, and Collazo agreed to pay Dr. Siragusa back, with 20% interest, from the sale of the converted condo units, after he repaid the construction lender.

         On September 10, 2002, Dr. Siragusa loaned $100,000 to 1210 West Waveland LLC. He also directed the Robert J. Siragusa M.D. Employee Trust, his pension plan (" Plan" ), to lend $200,000 to the same entity. 1210 West Waveland LLC issued promissory notes to Dr. Siragusa and the Plan. The notes required the LLC 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.

         On September 26, 2002, Dr. Siragusa made a $60,000 loan and the Plan a $140,000 loan to 2801 Seminary LLC. On June 3, 2003, Dr. Siragusa made a $50,000 loan and the Plan a $145,000 loan to 643

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          Barry LLC. On November 12, 2003, Dr. Siragusa made a $50,000 loan and the Plan a $65,000 loan to 1300 Eddy LLC. Dana Siragusa, Dr. Siragusa's older daughter, made a $20,000 loan to 1300 Eddy LLC. These LLCs all issued promissory notes in substantially the same form as the Waveland notes.

         In late 2003, Collazo and Goldman began to transfer unsold condo units out of the borrower-LLCs into other LLCs they owned, and they granted new mortgages on the transferred units to new lenders. On December 4, 2003, 1210 West Waveland LLC transferred the three remaining unsold units in the Waveland development to Art--Man Investments LLC (" Art-Man" ), of which Collazo and Goldman were the sole members. On April 19, 2004, 643 Barry LLC transferred three unsold units in the Barry development to Art--Man. 2801 Seminary LLC transferred its interest in an unsold unit to GoCo Investments LLC (" GoCo" ) on September 24, 2004. Art-Man and GoCo granted new mortgages on the units to Cole Taylor Bank and Rainbo Assets in exchange for additional loans.

         As Goldman explained at trial, the purpose of these transfers was to create a " liquidity event." Once the condos were transferred to entities with clean balance sheets, Collazo and Goldman could take out new loans, using the transferred condo units as collateral, in order to make payments to investors as they came due or pay off any outstanding construction debts that might prevent units from being sold. (Trial Tr. at 238-40.) Collazo testified that he never had any intention, at the time the notes held by the Siragusas were made, to transfer unsold units to other entities in order to generate additional financing.

         On June 30, 2004, 1210 West Waveland LLC fully paid its notes to Dr. Siragusa and the Plan, eight months past due. On December 11, 2004, 2801 Seminary LLC made a partial payment of $110,000 on its notes, also eight months past due. When, in early 2005, with the Seminary notes still only partially paid and the Barry and Eddy notes in default, Dr. Siragusa sought an update from Collazo, Collazo told him that the developments had encountered construction delays.

         On May 16, 2005, one of the Eddy units sold (unbeknownst to Dr. Siragusa), but none of the proceeds were applied to the Eddy notes. On July 1, 2005, 1300 Eddy LLC transferred three unsold Eddy units to PRJ Properties (" PRJ" ), another Collazo and Goldman entity, and PRJ granted a new mortgage to Cole Taylor Bank. By July 2005, 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, and Collazo and Goldman had mortgaged the units to obtain additional loans.

         In the fall of 2005, Collazo and Goldman spoke with Dr. Siragusa about loans for a new development in Arizona. (Trial Tr. at 42.) According to Dr. Siragusa, Collazo and Goldman stated that the outstanding loans related to the Chicago properties would be repaid after the remaining condo units were sold, and they expected all remaining units to sell in the next 30 to 60 days. They did not disclose that the remaining units had been transferred to entities that owed no debt to the Siragusas, that these units were still encumbered by mortgages, or that proceeds from the sales of some units had been diverted to other investments rather than used to make payments on the Siragusas' notes. Dr. Siragusa asked if some of his children could invest in the project, and Collazo assented. ( Id. at 44-45.) On November 22, 2005, CG Development LLC, another Collazo/Goldman

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entity, issued an $800,000 note to the Plan and a $200,000 note to Dana, Julie and their brother, Robert Joseph, in exchange for loans to finance the Arizona project. Both notes promised 20% interest and matured in November 2007.

         Over the next several years, Collazo sold off the remaining Chicago condo units, but, due to the vast mortgage debt that had accumulated, the sales yielded either no net proceeds or only a fraction of what the Siragusas were owed, and no payments were made to the Siragusas. Julie testified that she brokered the sale of the last of the Eddy units in July 2007, and she called her father to celebrate. Dr. Siragusa, however, seemed irritated by the news, telling Julie that he was invested in that building and she needed to tell him when the Eddy units were sold.

         The Arizona notes matured on November 27, 2007, but no payment was made. The following summer, Dana, a practicing attorney, began communicating directly with Collazo and Goldman regarding repayment of the outstanding debts. In January 2009, Dana received a settlement proposal that provided for payments from the sale of condo units. Dana was alarmed to discover that the proposal referred to units in buildings the Siragusas had not invested in. Looking into the matter more deeply, Dana discovered that the borrower-LLCs had transferred all their units to other entities and the units had already been sold.

         The Siragusas continued to pursue a settlement with Collazo, and they attempted to negotiate a forbearance and tolling agreement with him, but they never entered into any such agreement. Collazo filed for Chapter 7 bankruptcy on November 7, 2012, and the Siragusas filed proofs of claim for fraud and contractual debts under the promissory notes. The Siragusas then filed this adversary proceeding to determine whether 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 on the Siragusas' adversary proceeding.


         The bankruptcy court held a trial in this adversary proceeding in October 2013, and it issued an order on March 5, 2014. The court determined that the claims related to the loans to the Seminary, Barry and Eddy LLCs (hereafter, " the Chicago loans" ) were dischargeable because, at the time the loans were made, Collazo had no intent to transfer the units out of the borrower entities or take any other action to prevent the Siragusas from collecting on the notes, and his representations to Dr. Siragusa were therefore not false or fraudulent. (Opinion at 6-7, 19.) The court observed that Collazo paid the Waveland notes even after all remaining Waveland units had been transferred out of the 1210 West Waveland LLC, rendering the entity judgment-proof. ( Id. at 7.) The court concluded that, as ...

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