Source: http://me.findacase.com/research/wfrmDocViewer.aspx/xq/fac.20170216_0000326.C01.htm/qx
Timestamp: 2019-04-24 09:18:13+00:00

Document:
Eric Zutrau, Pro Se, on brief for Defendant-Appellant.
Dmitry Lev, Esq., for Plaintiff-Appellee.
Before Deasy, Tester, and Finkle, United States Bankruptcy Appellate Panel Judges.
Tester, U.S. Bankruptcy Appellate Panel Judge.
Eric Zutrau (the "Debtor") appeals pro se from the bankruptcy court's amended judgment determining that certain debts he owed to his sister, Leilani Zutrau (the "Appellee"), were nondischargeable pursuant to § 523(a)(2)(A) and (a)(6). For the reasons set forth below, we AFFIRM.
Three months after the Debtor filed his chapter 7 petition, the Appellee filed a timely complaint seeking a determination that his debts to her in the total amount of $427, 522.90 were nondischargeable under § 523(a)(2)(A) as debts arising from false representations, and under § 523(a)(6) as debts for willful and malicious injury. After the Debtor answered the complaint, the Appellee filed an amended complaint to allege additional facts to support her § 523(a)(2)(A) and (a)(6) counts and to object to the Debtor's discharge under § 727(a)(2)-(4).
On August 16, 2011, despite the existence of the amended complaint which included a count objecting to the Debtor's discharge, the bankruptcy court entered an order discharging the Debtor.
Thereafter, the bankruptcy court held a hearing on the Debtorʼs motion to dismiss the complaint, the Appelleeʼs motion for leave to amend further the complaint (to add additional facts to support her objections to discharge under § 727(a)(2)-(4)), and the Debtorʼs opposition to the motion for leave to amend (in which he argued that the proposed amendment was futile as the court had already entered his discharge). Subsequently, the court dismissed the Appellee's objections to discharge under § 727(a)(2)-(4), but allowed the Appellee to assert a revocation of discharge count under § 727(d). The court also denied the Debtor's request to dismiss the § 523(a)(2)(A) and (a)(6) counts.
In January 2014, the Debtor filed a motion for summary judgment as to the remaining counts under § 523(a)(2)(A), § 523(a)(6), and § 727(d), all of which the Appellee opposed. After a hearing, the bankruptcy court granted summary judgment in favor of the Debtor as to the count under § 727(d) for revocation of discharge and denied summary judgment as to the nondischargeability counts under § 523(a)(2)(A) and (a)(6). Although the Appellee moved for reconsideration and sought leave to file a third amended complaint, the bankruptcy court denied the motions after holding a hearing. As a result, only the nondischargeability counts under § 523(a)(2)(A) and (a)(6) remained for adjudication in the adversary proceeding.
In September 2014, the bankruptcy court held a five-day trial, at which both the Appellee and the Debtor testified. After the trial, the parties submitted proposed findings of facts and conclusions of law. On March 16, 2015, the bankruptcy court heard the parties' closing arguments, and took the matter under advisement.
On February 24, 2016, the bankruptcy court entered a judgment ("Judgment") in favor of the Appellee ruling that $193, 000 of the debt the Debtor owed the Appellee, plus applicable interest thereon, was excepted from discharge, and the balance of the debt was dischargeable. In its accompanying memorandum of decision, the bankruptcy court specified that $193, 000, plus all applicable interest, was excepted from discharge under § 523(a)(2)(A), and of that amount, $80, 000, plus all applicable interest, was also excepted from discharge under § 523(a)(6). See Zutrau v. Zutrau (In re Zutrau), 546 B.R. 239, 241 (Bankr. D. Mass. 2016).In its decision, the bankruptcy court made thorough and detailed factual findings and legal conclusions based on the record, and the testimonial and documentary evidence presented at the trial.
The Debtor was a self-employed contractor. The Appellee was employed as an executive at a financial services firm until June 2007; thereafter, she was self-employed performing "accounting work."
In 2002, the Debtor and the Appellee agreed to combine their resources and abilities to build a single family house on land the Debtor owned in Oak Bluffs, Massachusetts (the "Oak Bluffs Property"). The Debtor subsequently conveyed 50% of his interest in the Oak Bluffs Property to the Appellee, and they became tenants in common. In exchange for this conveyance, the Appellee agreed to contribute funds toward the construction project. The parties agreed that after the Appellee had contributed sufficient funds as consideration for her 50% interest, they would evenly split the expenses of the construction project. The parties obtained a $200, 000 construction loan, and building began with the Debtor supervising the construction of the house. The house was completed in 2010.
In 2006, the Debtor identified a property in Brookline, Massachusetts (the "Brookline Property") that he believed would be a profitable condominium conversion venture, and he approached the Appellee for funding. In March 2006, the Appellee loaned the Debtor $123, 000 for him to use as a down payment to purchase the Brookline Property. The Appellee borrowed the funds from her line of credit with Chase Bank which was secured by her personal residence in New York ("Chase LOCˮ). On March 24, 2006, the Debtor executed a promissory note in which he agreed to repay the Appellee $123, 000, with interest at a yearly rate of 7%, on or before September 24, 2006. The note contained a security clause providing that the principal and interest owed under the note would be secured by the Debtor's interest in the Oak Bluffs Property.
Using the $123, 000 from the Appellee as a down payment, the Debtor purchased the Brookline Property in April 2006 for $825, 000. The Debtor financed the balance of the purchase price by borrowing $618, 750 from Taylor, Bean & Whitaker Mortgage Corp. and $122, 901 from National City Bank, secured by first and second mortgages, respectively, on the Brookline Property.
In late March 2006, with the Debtor's consent, the Appellee obtained a $400, 000 line of credit from Citibank ("Citibank LOC") secured by the Oak Bluffs Property. The Appellee was the sole obligor on the underlying promissory note. The parties had initially intended to apply for this line of credit together, but the Debtor's poor credit score dissuaded them from adding the Debtor's name to the application.
In April 2006, with the Debtor's consent, the Appellee used $123, 000 drawn from the Citibank LOC to satisfy in full the Chase LOC, in effect, transferring the Chase LOC to the Citibank LOC. Thereafter, the Appellee drew additional funds from the Citibank LOC to fund the still ongoing Oak Bluffs Property construction and to pay for a portion of the Debtor's personal expenses. The parties agreed to share equally the cost of the interest payments on the Citibank LOC.
By September 2006, the Appellee had contributed sufficient funds toward the Oak Bluffs Property to more than satisfy her 50% interest in the property. At this time, the Debtor acknowledged that in addition to owing the Appellee the $123, 000 he borrowed to purchase the Brookline Property, he owed the Appellee $77, 000 for his share of the expenses for the Oak Bluffs Property.
In September 2006, rather than repaying the $123, 000, plus interest, due under the promissory note as he had agreed, the Debtor asked the Appellee to loan him an additional $100, 000 to continue the conversion of the Brookline Property into condominiums. He also asked the Appellee to "cover" his portion of the interest payments owed on the Citibank LOC for the duration of the loan. The Debtor promised to repay the full amount he owed the Appellee, from the sale proceeds of the Brookline Property condominiums, immediately after he satisfied the bank mortgages. In an e-mail dated September 11, 2006, the Debtor stated, "When I s[ell] the [Brookline Property], which I aim to do this fall, you will be right behind the bank, before anyone private I owe." In another e-mail dated September 16, 2006, the Debtor stated he intended to "repay . . . upon sale [of the Brookline Property] . . . even if I don't get to condo it." The two e-mails are referred to collectively as the "September 2006 E-mails."
On September 22, 2006, the Appellee loaned the Debtor the additional $100, 000 using funds she borrowed from the Citibank LOC. The Appellee also agreed to temporarily "cover" $13, 000 of the Debtor's portion of the upcoming interest payments on the Citibank LOC. The bankruptcy court found that, when making this loan, the Appellee relied on the Debtor's representation that after he satisfied his bank debts he would pay her in full using the sale proceeds of the Brookline Property condominiums.
On September 22, 2006, the Debtor executed a promissory note ("Note A") in which he agreed to repay the Appellee a total of $241, 000 on or before April 22, 2007. The amount was comprised of the original $123, 000 loan for the purchase of the Brookline Property; the new $100, 000 loan; $13, 000 for the Debtor's share of interest payments on the Citibank LOC; and $5, 000 the Debtor owed the Appellee from a separate transaction. Note A contained a security clause which provided that "until the principal and interest owed under this promissory note are paid in full, this note will be secured by the mortgage covering [the Oak Bluffs Property]." Note A did not contain a separate provision for the payment of interest, but it did contemplate the accrual of interest, providing that the Debtor would make a lump-sum payment for the entire balance of "accrued principal & interest, " and that payments would be applied "first to interest and then to principal." Note A also contained a "Collection of Costs" provision which provided: "If [the Appellee] prevails in a lawsuit to collect on this note, [the Debtor] will pay [the Appellee]'s costs and lawyer's fees in an amount the court finds to be reasonable."
On September 22, 2006, pursuant to the terms of Note A, the Debtor recorded a mortgage he had executed in favor of the Appellee on the Oak Bluffs Property in the amount of $241, 000.
In December 2006, the Debtor approached the Appellee about borrowing an additional $30, 000 to continue developing the Brookline Property. On December 18, 2006, the Debtor executed a promissory note ("Note B") in which he agreed to repay the Appellee $30, 000, plus interest at a yearly rate of 7.75%, on or before February 18, 2007. Note B contained a security clause which provided that "until the principal and interest owed under this promissory note are paid in full, this note will be secured by a mortgage covering the [Brookline Property]." The Debtor orally promised the Appellee that he would execute and record a separate mortgage on the Brookline Property to secure the debt embodied by Note B. The bankruptcy court found that the Appellee, who lived in New York and traveled extensively, trusted the Debtor, who lived in Massachusetts, to both execute and record the mortgage securing Note B.
The Appellee loaned the Debtor the $30, 000 identified in Note B in December 2006. The bankruptcy court found that, in making this loan, the Appellee relied on the Debtor's representation that he intended to execute and record a mortgage securing this debt, and the representations contained within Note B. Additionally, the bankruptcy court found that the Appellee continued to rely on the Debtor's promise in his September 2006 E-mails that he would pay the Appellee in full from the sale proceeds of the Brookline Property condominiums after he had paid off his existing bank debts.
The Debtor did not execute or record a mortgage on the Brookline Property securing Note B.
In January 2007, the Debtor asked the Appellee to loan him an additional $30, 000 for the development of the Brookline Property. On January 9, 2007, the Debtor executed a promissory note ("Note C") in which he promised to repay the Appellee $30, 000, plus interest at a yearly rate of 7.75%, on or before February 18, 2007. Note C contained a security clause (identical to that of Note B) stating that Note C would be secured by a mortgage covering the Brookline Property, and a Collection of Costs provision (identical to that of Note A) providing for attorney's fees and costs. Pursuant to Note C, the Debtor executed a mortgage on the Brookline Property to secure the debt embodied by Note C. The Debtor orally promised but failed to record this mortgage.
The Appellee loaned the Debtor the $30, 000 identified in Note C in January 2007. The bankruptcy court found that, in making this loan, the Appellee not only relied on the Debtor's representation that he intended to record the mortgage, but also the representations contained within Note C. Additionally, the bankruptcy court found the Appellee continued to rely on the Debtor's promise in the September 2006 E-mails that he would pay her in full from the sale proceeds of Brookline Property condominiums after he paid off his existing bank debts.
On February 14, 2007, the Debtor refinanced the National City Bank second mortgage and executed and recorded new mortgage in favor of National City Bank in the amount of $250, 000. The Debtor did not tell the Appellee about the new mortgage.
In February and March 2007, the Debtor repaid the Appellee a total of $30, 000 which represented the principal he owed on Note B (the "$30, 000 Repayment").
In April 2007, the Debtor again approached the Appellee for an additional $30, 000 to finance the Brookline Property project. At this time, Note C was overdue. The Debtor, however, assured the Appellee "that he would protect [her] interests and that he was actively trying to finish the project and sell the [Brookline Property] as soon as he could and that it was going to happen quickly and, therefore, [the Appellee] shouldn't worry, that he would repay [her] everything." The bankruptcy court found the Appellee took assurance in the fact that the Debtor had paid off Note B, and in her belief that the Debtor had done as he had promised and recorded a mortgage on the Oak Bluffs Property with respect to Note A and recorded a mortgage on the Brookline Property with respect to Notes B and C. In reality, however, the Debtor had only recorded the Oak Bluffs Property mortgage securing Note A.
On April 23, 2007, the Debtor executed a promissory note ("Note D") in which he promised to repay $30, 000, plus interest at a yearly rate of 7.75%, on or before June 14, 2007. Note D contained a security clause (identical to the security clauses in Notes B and C) stating that Note D would be secured by a mortgage on the Brookline Property. The Debtor orally promised the Appellee that he would execute and record a mortgage on the Brookline Property to secure the debt embodied by Note D. Note D also contained a Collection of Costs provision (identical to that of the prior notes) providing for attorney's fees and costs.

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