561 B.R. 476
Bankr. N.D. Ill.2016Background
- Korrub and Cohn formed 21 Brookhill Drive, LLC to build and sell a spec home; Korrub bought the land ($285,000) and Cohn (Concept Design) was general contractor and arranged construction financing.
- Construction loan increases raised the loan from $631,000 to $977,000; Cohn prepared the budget and handled many draws/lien waivers while recordkeeping was poor or incomplete.
- The house sold for $1.125 million; Korrub received $64,000 and Concept Design received nothing at closing; Korrub sued in state court and obtained a default judgment for $250,000.
- Cohn filed personal Chapter 7 bankruptcy; his schedules/Statement of Financial Affairs omitted dependents, certain creditors (family and others), and a pending divorce; he produced limited documents after a court order.
- Korrub sued in the bankruptcy adversary seeking nondischargeability under §523(a)(2),(a)(4),(a)(6) and denial of discharge under §727(a)(3),(a)(4)(A),(a)(6)(A).
- After trial the bankruptcy court rejected Korrub’s §523 claims and most §727 claims but found Cohn made knowingly false, fraudulent statements in his schedules (§727(a)(4)(A)) and denied his discharge on that basis.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| §523(a)(2)(A) — fraud/false representation | Cohn orchestrated loan increases, obtained draws without proper lien waivers, and withheld an accounting to defraud Korrub | Increases reflected upgrades, incompetence and poor recordkeeping, not intent to deceive | Judgment for Cohn — plaintiff failed to prove actual fraud by preponderance |
| §523(a)(4) — fiduciary defalcation | Cohn’s position and control created a fiduciary duty; his mismanagement was a defalcation | No express trust or narrow fiduciary relationship existed between equals in a joint venture | Judgment for Cohn — no fiduciary capacity shown |
| §523(a)(6) — willful and malicious injury | Loan increases and draws foreseeably injured Korrub’s interest in profit; thus intentional injury | Conduct was negligent/reckless and reduced both parties’ profits; no intent to injure | Judgment for Cohn — no willful and malicious intent proved |
| §727(a)(3) — failure to keep records | Korrub: missing Brookhill records prevented tracing project funds | Cohn: project ended years before bankruptcy; trustee administered estate; records loss was sloppy, not obstructive | Judgment for Cohn — records omission not shown to frustrate estate administration |
| §727(a)(4)(A) — false oath in schedules/SOFA | Korrub: Cohn omitted dependents, creditors (family, Camp Merimeta), and a pending divorce from sworn filings | Cohn blamed counsel or memory lapses; characterized some advances as gifts | Judgment for Korrub — court found false statements, knowledge, materiality and fraudulent intent; discharge denied |
| §727(a)(6)(A) — refusal to obey court order to produce documents | Korrub: Cohn failed to comply with an order compelling production of records | Cohn produced a limited invoice and testified he had poor records; court found evidence of loss, not willful refusal | Judgment for Cohn — no refusal to obey order proved |
Key Cases Cited
- Grogan v. Garner, 498 U.S. 279 (standard: creditor must prove nondischargeability by preponderance)
- Husky Int’l Elecs., Inc. v. Ritz, 136 S. Ct. 1581 (U.S. 2016) (definition of "actual fraud")
- Kawaauhau v. Geiger, 523 U.S. 57 (intent requirement for §523(a)(6) willful and malicious injury)
- Stamat v. Neary, 635 F.3d 974 (7th Cir. 2011) (elements and materiality for §727(a)(4)(A))
- Village of San Jose v. McWilliams, 284 F.3d 785 (7th Cir. 2002) (badges of fraud for inferring fraudulent intent)
- Jendusa-Nicolai v. Larsen, 677 F.3d 320 (7th Cir. 2012) (definition of willful and malicious under §523(a)(6))
- In re Scott, 172 F.3d 959 (7th Cir. 1999) (§727(a)(3) recordkeeping expectations and burden)