Siragusa et al v. Collozo
Filing
16
MEMORANDUM Opinion and Order. The Court affirms the bankruptcy court's judgment. Civil case terminated. Signed by the Honorable Jorge L. Alonso on 5/19/2015. Notice mailed by judge's staff (ntf, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
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,
v.
ARTURO COLLAZO,
Defendant-Appellee
and Cross-Appellant.
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No. 14 C 5008
Judge Jorge L. Alonso
MEMORANDUM OPINION AND ORDER
Plaintiffs-Appellants Robert J. Siragusa M.D. Employee Trust, Dr. Robert J. Siragusa,
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.
BACKGROUND
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.
1
Unless otherwise indicated, the facts of the case are taken from the bankruptcy court’s Findings of Fact. (Opinion
at 2-12.)
2
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 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 (“ArtMan”), 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
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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
4
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 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
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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.
PROCEDURAL HISTORY
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 they had testified, Collazo and Goldman
transferred the units out of the borrower-LLCs to generate additional financing in response to
slow sales, not to carry out a fraudulent design. (Id. at 6-7.)
However, the court found that Collazo obtained the loans to CG Development LLC for
the Arizona project (hereafter, “the Arizona loans”) based on false representations, as Collazo
knew at the time the loans were made, contrary to his representations to Dr. Siragusa, that the
Chicago loans would not be repaid within 30 to 60 days of the sale of the remaining Chicago
units. (Id. at 19-20.) By that time, the properties had been encumbered with vast mortgage debt,
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and Collazo knew or should have known that the sales of the remaining units would not generate
proceeds sufficient to pay the Siragusas in addition to the mortgage lenders, who had superior
rights to repayment. (Id. at 20.) Further, an Eddy unit had already sold by that time, and Collazo
had made no payment on the Eddy notes. (Id.) It was clear he had no intention of doing so, and
all the elements of fraud were met. (Id. at 21-22.)
Nevertheless, the court found that Collazo had a defense to the Arizona fraud claims
because the statute of limitations began to run as to Julie and Dr. Siragusa not in 2009, as the
Siragusas argued, but in July 2007, when Julie called Dr. Siragusa to tell him she had sold
another Eddy unit. (Id. at 16.) By that time, according to the court, Dr. Siragusa and Julie had
information that would motivate a reasonable person to investigate more deeply. (Id.) The
statute of limitations, which is five years under Illinois law, 735 Ill. Comp. Stat. 5/13-205, had
run by the time Collazo filed for bankruptcy in November 2012. (Id. at 18.) The court held that
the claim based on the $800,000 debt to the Plan was dischargeable, but Dana and Robert
Joseph’s claims based on the $200,000 note were non-dischargeable because the statute of
limitations did not begin to run as to them until 2009. (Id. at 22.)
The parties filed post-trial cross-motions to amend the judgment.
The Siragusas
contended that (1) a money judgment should have been entered on the portion of the debt that
was determined to be non-dischargeable, (2) there was sufficient proof that the Chicago loans
were based on a misrepresentation, (3) the statute of limitations should not have been applied to
the Arizona loan, regardless of when it began to run, because Collazo never argued that the
claims based on the Arizona loan were time-barred, and (4) the statute of limitations was
misapplied because the July 2007 conversation with Julie did not give Dr. Siragusa reasonable
notice of wrongdoing that would trigger the statute. Collazo contended that Dana and Robert’s
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claims should also have been time-barred because Dr. Siragusa’s knowledge should have been
imputed to them. The court denied the post-trial motions. (Bankruptcy No. 12 B 44342,
Adversary Proceeding 13 A 000216, Dkt. 105, Order Denying Motions to Amend Order
(“Supplemental Order”).) These cross-appeals followed.
I.
THE SIRAGUSAS’ APPEAL
A. Whether Money Damages Should Have Been Awarded
The Siragusas claim that the bankruptcy court should have entered a money judgment in
favor of Dana and Robert Joseph. In their post-trial motion, Dana and Robert Joseph sought a
money judgment of $1,076,032.36, the amount due on the November 22, 2005 Arizona note,
which represents the $200,000 principal amount of the note plus accumulated interest, calculated
according to the terms of the note (Plaintiff’s Trial Exhibit 52). In the Siragusas’ view, by
denying Dana and Robert Joseph’s motion for entry of a money judgment, the bankruptcy court
forced Dana and Robert Joseph to litigate a new action in state court in order to obtain damages
on their fraud claim, and this duplication of effort offends notions of fairness and judicial
economy.
Collazo claims that the court properly declined to enter a money judgment because (1) it
had no jurisdiction to do so under Stern v. Marshall, 134 S. Ct. 2594 (2011), which held that
state law claims, even if related to bankruptcy matters, must be adjudicated by an Article III
court, and (2) even if there was jurisdiction, it was not an abuse of discretion to decline to award
money damages.
1. Whether the bankruptcy court erred by declining to enter a money judgment
It is uncertain in this circuit, in the wake of Stern, whether a bankruptcy court has
jurisdiction to enter a money judgment on a state-law claim, such as the Siragusas’ fraud claims,
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in a dischargeability proceeding. The Seventh Circuit stated in an unpublished decision that “it
is unclear whether Stern . . . restricts a bankruptcy court’s power to resolve a creditor’s state-law
claim when the court decides whether that claim is nondischargeable.” Lee v. Christenson, 558
F. App’x 674, 676 (7th Cir. 2014). Some lower courts have concluded that Stern imposes no
such restriction, see In re Boricich, 464 B.R. 335, 337 (Bankr. N.D. Ill. 2011), but others have
concluded that it does, see In re Wood, 503 B.R. 705, 709-10 (Bankr. W.D. Wis. 2013); In re
Strauss, 523 B.R. 614, 624 (Bankr. N.D. Ill. 2014).
In light of this uncertainty, the bankruptcy court decided, in the exercise of its discretion,
not to enter a money judgment that might later be found to have been entered without
jurisdiction. (Supplemental Order at 2-3.) This Court finds nothing improper in this decision.
Even if the bankruptcy court had jurisdiction to enter a money judgment, it was not required to
do so; it was well within the court’s discretion to opt simply to determine that the debt is nondischargeable without entering a money judgment. See Nat’l Bank v. Buckley (In re Buckley),
Bankruptcy No. 08-80409, Adversary Proceeding 08-8063, 2009 WL 400628, at *3 (Bankr. C.D.
Ill. Feb. 17, 2009); see also In re Sasson, 424 F.3d 864, 874-75 (9th Cir. 2005). The bankruptcy
court did not err in this respect.
2. Whether this Court should enter a money judgment itself
The Siragusas further argue, however, citing Executive Benefits Insurance Agency v.
Arkison, 134 S. Ct. 2165 (2014), that even if this Court declines to reverse and remand the case
to the bankruptcy court for entry of a money judgment, this Court can and should enter a money
judgment itself. The bankruptcy court declined to enter a money judgment because it doubted
whether it could constitutionally enter a money judgment on a state-law fraud claim under Stern,
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as explained above, and it doubted whether it had statutory subject matter jurisdiction to enter a
money judgment under the Bankruptcy Code:
[Under 28 U.S.C. § 1334, a] district court has jurisdiction over all proceedings
arising under title 11, or arising in or related to cases under title 11. Nothing in 11
U.S.C. § 523(a)—which limits the scope of a debtor’s discharge—gives the
bankruptcy court the authority to enter money judgments against the debtor,
payable from the debtor’s non-estate assets. Furthermore, because the entry of
monetary judgment against a post-discharge debtor has no effect on distribution
of the bankruptcy estate, it is not related to a case under title 11. Bankruptcy
jurisdiction, the Seventh Circuit has said, “extends no farther than its purpose,”
which is “to provide a single forum for dealing with all claims to the bankrupt’s
assets.” Elscint, Inc. v. First Wis. Fin. Corp. (In re Xonics, Inc.), 813 F.2d 127,
131 (7th Cir. 1987).
(Supplemental Order at 2.) The Siragusas contend that the bankruptcy court’s Stern concerns,
even if valid, are not applicable in this Article III court. Further, unlike the bankruptcy court,
this Court can exercise supplemental jurisdiction over claims factually related to the nondischargeability claim and enter a money judgment on them, even if such claims are not “related
to” the bankruptcy case in the sense that they might have some effect on the distribution of the
bankruptcy estate. See Rahl v. Bande, 316 B.R. 127, 132 (S.D.N.Y. 2004); In re Ha-Lo Indus.,
Inc., 330 B.R. 663, 672-73 (Bankr. N.D. Ill. 2005); In re Conseco, Inc., 305 B.R. 281, 286
(Bankr. N.D. Ill. 2004) (citing Wieboldt Stores, Inc. ex. rel. Raleigh v. Schottenstein, 111 B.R.
162, 166-67 (N.D. Ill. 1990)). 2
Collazo contends in response that the bankruptcy court did not make sufficient findings
to liquidate Dana and Robert Joseph’s claims:
2
These cases notwithstanding, one commentator has argued, in a seminal article, that district courts have no
supplemental jurisdiction in bankruptcy cases, see Susan Block-Lieb, The Case Against Supplemental Bankruptcy
Jurisdiction: A Constitutional, Statutory and Policy Analysis, 62 Fordham L. Rev. 721 (1994), and some courts, all
citing Block-Lieb’s article, have recognized the uncertainty surrounding the issue, see Chapman v. Currie Motors,
Inc., 65 F.3d 78 (7th Cir. 1995); In re Walker, 51 F.3d 562, 572-73 (5th Cir. 1995); Conseco, 305 B.R. at 28. Most
courts, however, have held that district courts can exercise supplemental jurisdiction in bankruptcy cases, see Rhiel
v. Cent. Mortg. Co. (In re Kebe), 444 B.R. 871, 879-80 (Bankr. S.D. Ohio 2011) (citing cases), and this Court will
follow these decisions.
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The debt owed to Dana and Robert Joseph is evidenced by a promissory note
dated November 22, 2005 made . . . to Dana, Julie, and Robert Joseph Siragusa in
the amount of $200,000. The Bankruptcy Court found that the debt owed to Julie
was barred by the applicable statute of limitations and Julie has not appealed that
ruling. Accordingly, [a] court will have to determine the actual dollar amount of
loans made by Dana and Robert Joseph which are evidenced by this $200,000
note. The Plaintiffs neither introduced evidence at trial as to the amounts which
were purportedly loaned by Dana and Robert Joseph nor did the Bankruptcy
Court make a determination as to what portion of the $200,000 was actually
loaned by these individuals.
(Br. and Arg. of Appellee and Cross-Appellant at 6.) It is true that the record was not developed
to support a money judgment, 3 and this Court agrees with Collazo that the record is presently
inadequate to liquidate Dana and Robert Joseph’s state-law fraud claims. It is unclear what
amounts Dana, Julie and Robert Joseph each contributed to the $200,000 loan, 4 and it is
therefore impossible, on the present record, to determine how to calculate damages.
If, in the present action, the Siragusas were suing to enforce the note itself, perhaps the
$1,076,032.36 figure that they submit, based on the amounts due on the note in principal and
interest, would be the proper measure of damages. However, the claims presently at issue are
Dana and Robert Joseph’s claims that Collazo committed fraud by making false representations
that induced them to make a loan, evidenced by the note, to Collazo’s business entity. In Illinois,
damages for fraud are limited to the out-of-pocket loss to the plaintiff, based on the rationale that
the plaintiff is entitled to be placed in the same financial position he would have been if he had
not been defrauded. Martin v. Allstate Ins. Co., 416 N.E.2d 347, 352 (Ill. App. Ct. 1981).
Before the Court can enter a money judgment in favor of Dana and Robert Joseph, it must
3
The bankruptcy court stated explicitly in its Opinion that “[t]his adversary proceeding is limited to the
determination of dischargeability. It does not implicate Stern v. Marshall.” (Opinion at 13.) In other words, the
bankruptcy court tried the case under the impression that no state-law claims were directly at issue because this case
was purely an adversary proceeding to determine whether certain debts were non-dischargeable under §
523(a)(2)(A).
4
Julie may have been a lender in name only. She testified at trial that, at least originally, her brother and sister made
her contribution for her, at their father’s direction, but counsel interrupted her before she finished her answer, and it
remains unclear whether she ever paid them back. (Trial Tr. at 362.)
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determine what amounts they actually paid; if Julie contributed some portion of the loan, and the
Court enters a money judgment on the entire $200,000, plus interest, without making any
adjustment to account for the fact that Julie’s share is not recoverable because her claim is barred
by the statute of limitations, Dana and Robert Joseph will receive a windfall.
Further, in a case in which the plaintiff was fraudulently induced to make a loan,
damages for the out-of-pocket loss may be increased by the amount of interest that the plaintiff
may have been able to earn from an “alternative use” of the money. Fed. Deposit Ins. Corp. v.
W.R. Grace & Co., 877 F.2d 614, 623 (7th Cir. 1989); see also Commercial Nat. Bank of Peoria
v. Fed. Deposit Ins. Corp., 476 N.E.2d 809, 815 (Ill. App. Ct. 1985). The $1,076,032.36 figure
the Siragusas have proposed, based on a principal amount of only $200,000, has apparently been
calculated based on the exorbitant 20% and, after default, 25% rates of interest dictated by the
terms of the note, which allowed enormous amounts of interest to accumulate over years of
default. Other investments may have yielded lesser, more reasonable rates of return, so Dana
and Robert Joseph’s proposed damages, even assuming that they actually paid the whole
$200,000 principal amount themselves, may not put Dana and Robert Joseph in the position they
would be in if they had made an “alternative use” of the money.
In short, to enter a correct and proper money judgment on Dana and Robert Joseph’s
claims, this Court would have to hold further proceedings to receive new evidence and argument,
or remand to the bankruptcy court so that it might hold further proceedings and submit proposed
findings of fact and conclusions of law to this Court.
But Collazo’s bankruptcy proceedings are otherwise completely and entirely concluded,
and, as the bankruptcy court stated in its Supplemental Order, there is no pending claim with
independent federal jurisdiction. The bankruptcy court had jurisdiction of this case under 11
12
U.S.C. § 1334, which gives district courts (and by reference, bankruptcy courts) jurisdiction over
all proceedings arising under title 11, or arising in or related to cases under title 11.
(Supplemental Order at 2.) A district court has jurisdiction over core bankruptcy proceedings,
such as this adversary proceeding to determine non-dischargeability under 523(a), because it
“arises under” title 11, and it may have jurisdiction over state-law claims, such as a state-law
fraud claim, that are “related to” the bankruptcy case, but “because the entry of monetary
judgment against a post-discharge debtor has no effect on distribution of the bankruptcy estate, it
is not related to a case under title 11.” (Supplemental Order at 2 (citing Elscint, Inc., 813 F.2d at
131). Thus, this Court has jurisdiction to enter a money judgment only if it exercises its
supplemental jurisdiction under 28 U.S.C. § 1367.
However, a case in which “the federal claim is resolved one way or another while the
supplemental state-law claims are pending, unresolved,” is “an attractive case for the court, in
the exercise of discretion conferred by section 1367, to relinquish its jurisdiction over them to the
state courts, especially if the federal claim has . . . been resolved without a trial.”
See
Townsquare Media, Inc. v. Brill, 652 F.3d 767, 772 (7th Cir. 2011). In this case, the federal
claim was not resolved “without a trial,” but, because the Court needs to receive additional
evidence and perhaps briefing to proceed, this case is the functional equivalent of a case in which
the federal claims were dismissed or resolved prior to trial, not a case that has “proceeded
through one court system and is almost finished with there.” Chapman v. Currie Motors, Inc.,
65 F.3d 78, 81 (7th Cir. 1995).
In Shapiro v. United States (In re Shapiro), 188 B.R. 140, 148-49 (Bankr. E.D. Pa. 1995),
the court made a similar analogy and reached a similar conclusion when, in a post-discharge
adversary proceeding stemming from a no-asset Chapter 7 bankruptcy, like this proceeding, it
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declined to liquidate the debtor’s non-dischargeable tax debt and opted instead to relinquish
jurisdiction because only non-bankruptcy law issues remained in the case.
Shapiro cited
Chapman v. Currie Motors, Inc., 65 F.3d 78, 82 (7th Cir. 1995), in which the Court held that,
“the bankruptcy proceeding having ended, the adversary proceeding became a dispute of no
interest to anyone except the two adversaries, and their dispute revolved entirely around [an issue
of state law]. There was not even a remote federal interest.”
As in Chapman and Shapiro, the interests of bankruptcy law are not served by the
exercise of supplemental jurisdiction over the state-law fraud claim because the outcome of the
proceeding will not affect the distribution of property in the bankruptcy estate. (Supplemental
Order at 2.) Collazo’s bankruptcy was a no-asset Chapter 7 case; i.e., the trustee reported that he
made no distributions to creditors on behalf of the estate because he found no non-exempt
property to distribute. (In re Collazo, Bankruptcy No. 12 B 44342, Ch. 7 Trustee’s Report of No
Distribution, Dkt. No. 59 (Bankr. N.D. Ill. Dec. 20, 2013).) Under such circumstances, any postdischarge liquidation of a non-dischargeable debt can affect only assets of Collazo that were
exempt from the bankruptcy estate by law or were acquired post-bankruptcy. There is simply no
federal interest dictating that this Court should exercise jurisdiction over Collazo’s disposition of
these assets, and that makes this “an attractive case for the court to relinquish its jurisdiction to
the state courts.” Townsquare Media, 652 F.3d at 772; see Shapiro, 188 B.R. at 148; Buckley,
2009 WL 400628, at *3-4.
To be sure, the parties’ interests in judicial economy and fairness deserve consideration.
However, considering that further proceedings will be necessary to liquidate Dana and Robert
Joseph’s fraud claims whether this Court takes on that task or leaves it to a state court, any time
that may be saved by holding further proceedings here rather than in state court is slight, and in
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the circumstances of this case, the interest of judicial economy does not outweigh the interest in
leaving questions of state law to the state courts. Like the bankruptcy court, this Court declines
to enter a money judgment in favor of Dana and Robert Joseph.
B. Whether The Chicago Loans Were Based On Fraudulent Representations
The Siragusas next contend that the bankruptcy court erred by finding that the Chicago
loans
were
not
based
on
a
fraudulent
representation
because
Collazo’s
alleged
misrepresentation—that he would pay the notes with the proceeds from the sale of the condo
units after he had repaid the construction lender, without mention of the fact that the remaining
condo units would be transferred and mortgaged—was not false at the time it was made.
According to the Siragusas, Collazo’s very act of transferring the units out of the borrower-LLCs
and mortgaging them again revealed his misrepresentations to be part of a fraudulent scheme.
According to Collazo, the bankruptcy court correctly found that Collazo’s conduct after the
Chicago loans were made was merely an attempt to generate additional financing in response to
slow sales, not evidence of a fraudulent design or scheme.
The bankruptcy court’s finding was not clearly erroneous. As the bankruptcy court
explained in its Opinion, Collazo paid the Waveland notes in full several months after he had
already made the 1210 West Waveland LLC judgment-proof by transferring the remaining
unsold condos out of the borrower-LLC. (Opinion at 7.) This conduct was strong evidence that
Collazo borrowed money from the Siragusas in good faith, with the intent to repay the loans, and
where he failed to do so, it was only because his condos did not sell as well and as fast as he had
anticipated. The bankruptcy court did not err and its decision is affirmed in this respect.
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C. Whether Statute of Limitations Had Run as to Arizona Loan
The Siragusas contend that the bankruptcy court erred by holding that the statute of
limitations had run as to Dr. Siragusa’s claim arising out of the Arizona loan because Dr.
Siragusa’s conversation with Julie in July 2007 would not have alerted a reasonable person to the
possibility of fraud. Collazo had made late payments before, on the Waveland and Seminary
notes, and, according to the Siragusas, the mere fact that Collazo did not pay promptly after
some of the Eddy units sold would not necessarily have indicated to a reasonable person in Dr.
Siragusa’s position that no payment was forthcoming because Collazo had defrauded him.
This argument twists the facts. In the fall of 2005, in pitching the Arizona loan to Dr.
Siragusa, Collazo specifically stated that he expected the remaining Chicago units to sell in 30 to
60 days, with payment to follow soon after. While it is true that the Waveland notes were paid
eight months after they matured, and the partial payment on the Seminary notes was eight
months late as well, the Eddy notes had been in default for more than two years in July 2007. A
reasonable person learning in July 2007 that the last Eddy unit had just sold (Trial Tr. at 342-43),
when he had been given assurances that all units would have been sold a year and a half ago and
that he would be paid promptly from the proceeds of each sale, as the terms of the notes required,
would have been on notice that something was amiss. The bankruptcy court did not clearly err,
and its decision is affirmed in this respect.
II.
COLLAZO’S CROSS-APPEAL
A. Whether the Court Erred in Imputing Knowledge to Dana and Robert
Joseph
On cross-appeal, defendant contends that neither Dana nor Robert Joseph had any valid
fraud claim against Collazo based on the Arizona loan because the evidence did not show that
either attended the November 2005 meeting or heard the misrepresentations Collazo allegedly
16
made; rather, Collazo made the alleged misrepresentations to Dr. Siragusa, who asked if his
children could invest in the Arizona project with him. According to Collazo, the bankruptcy
court’s ruling must necessarily have been based on an implicit finding that Dr. Siragusa acted as
Dana and Robert Joseph’s agent by investing in the Arizona development for them, and as their
agent, his knowledge was imputed to them for purposes of their fraud claim.
It would follow, Collazo argues, that if Dr. Siragusa’s knowledge could be imputed to
Dana and Robert Joseph for purposes of their fraud claims against Collazo, the knowledge Dr.
Siragusa acquired during his July 2007 phone call with Julie must also be imputed to them.
When he learned facts that would have spurred a reasonable person to investigate the possibility
of fraud and the statute of limitations began to run as to him, the statute of limitations must also
have begun to run as to Dana and Robert Joseph, and, consequently, it must have expired before
Collazo filed for bankruptcy. Collazo submits that the bankruptcy court must have erred either
in imputing knowledge of Dr. Siragusa’s November 2005 conversations with Collazo to Dana
and Robert Joseph, or it erred in failing to impute knowledge of Dr. Siragusa’s July 2007
conversation with Julie to Dana and Robert Joseph; the bankruptcy court cannot have been
correct in both instances.
The Siragusas respond that the premise for Collazo’s argument is incorrect: the
bankruptcy court did not rely on any implicit finding of agency, nor did its decision require any
such finding, because Collazo expected his representations to reach Dana and Robert Joseph and
influence their decision-making. The Court agrees. Fraudulent representations extend not only
to people to whom they were made directly, but also to any person they might reasonably have
been expected to reach, so long as the misrepresentations actually reach the person and influence
his action. St. Joseph Hosp. v. Corbetta Constr. Co., Inc., 316 N.E.2d 51, 72 (Ill. App. Ct. 1974).
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Dr. Siragusa specifically asked Collazo whether his children could invest in the Arizona project,
and Collazo assented; Collazo could certainly have reasonably expected his representations to
reach the Siragusa children. Dana testified that she invested in the project after speaking with
her father and she would not have invested if she had known what Collazo failed to tell her
father: that the Chicago properties had been transferred out of the borrower-LLCs and mortgaged
so that there would be no proceeds left for the Siragusas after repaying the mortgage lenders.
(Trial Tr. 106-07.) His misrepresentations demonstrably did extend to her. See St. Joseph
Hosp., 316 N.E.2d at 72, Hirsch v. Optima, Inc., 920 N.E.2d 547, 562-63 (Ill. App. Ct. 2009).
Although, unlike Dana, Robert Joseph did not testify, this Court does not find the
bankruptcy court’s inference that Collazo’s misrepresentations similarly extended to Robert
Joseph to have been clearly erroneous. See Kramer v. Am. Bank & Tr. Co., N.A., 989 F. Supp.
2d 709 (N.D. Ill. 2013) (“Neither juries nor judges are required to divorce themselves of
common sense, but rather should apply to facts which they find proven such reasonable
inferences as are justified in light of their experience as to the natural inclinations of human
beings.”); Yamada v. Hilton Hotel Corp., 376 N.E.2d 227 (Ill. App. Ct. 1977) (“Only when there
is a complete absence of probative facts supporting an inference can it be said that such inference
is clearly unreasonable.”). The Siragusas proved that Collazo induced Dr. Siragusa to invest in
the Arizona project by telling him that the past-due Chicago loans would be repaid within 30 to
60 days, without telling him that the units in the Chicago developments had been mortgaged so
heavily that the sales of these units could not have generated enough money to pay the mortgage
lenders as well as Dr. Siragusa. Dr. Siragusa specifically asked Collazo if his children could
invest in the Arizona development as well. (Trial Tr. at 44.) Dana testified that she invested
18
based on her conversation with her father. 5 (Id. at 126.) Julie testified that Robert Joseph paid a
portion of her share of the loan, at their father’s direction. (Trial Tr. at 362.) From these facts
flows the clear inference that Robert Joseph, like Dana, invested based on the recommendation
of his father, and his father’s recommendation was influenced by Collazo’s fraudulent
misrepresentations and omissions to him. There is no failure of proof of fraud under these
circumstances. See Edalatdju v. Guaranteed Rate, Inc., 748 F. Supp. 2d 860, 864-66 (N.D. Ill.
2010); Zivitz v. Greenburg, No. 98 C 5350, 1999 WL 984397, at *8-9 (N.D. Ill. Oct. 25, 1999)
(both recognizing possibility of inferring plaintiff’s reliance on defendant’s misrepresentations).
Finding that Dana and Robert Joseph had valid fraud claims against Collazo did not
require any implicit finding that Dr. Siragusa was their agent, nor is there any other basis in the
record for any conclusion that Dr. Siragusa was Robert Joseph and Dana’s agent. There is no
basis for imputing to Dana and Robert Joseph the knowledge that triggered the running of the
statute of limitations as to Dr. Siragusa. Collazo’s contentions are without merit, and the
bankruptcy court did not err.
B. Whether The Agency Issue Was Properly Raised In Collazo’s Post-Trial
Motion
Even if Collazo were correct that the bankruptcy court erred either in imputing Dr.
Siragusa’s knowledge to Dana and Robert Joseph or in failing to apply the statute of limitations
to them because Dr. Siragusa was their agent, the bankruptcy court did not err in refusing to
consider Collazo’s agency argument, which was first raised in a post-trial motion. Collazo
contends that it could not possibly have raised the argument earlier because it was prompted by
what he views as an internal inconsistency in the bankruptcy court’s ruling, as described above.
5
Dana’s conversations with her father were so influential that she did not even bother to read some of the
documents she signed in connection with the loan; she testified that she merely relied on the representations made to
her father. (Trial Tr. at 126.)
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Again, as explained above, there is no inconsistency in the bankruptcy court’s ruling.
Even if there were, this Court fails to see why Collazo could not have raised this argument
earlier. As the Siragusas state in their brief, “Collazo argued in the Bankruptcy Court that the
Statute of Limitations applied to Dr. Siragusa’s loans. He could have but did not make the
agency argument as to Dana and Robert Joseph’s loans.” (Reply Br. of Pls.-Appellants at 6.)
The Court agrees. That it merely did not occur to Collazo to raise the argument until after he
saw the bankruptcy court’s order does not mean that he could not have made the argument before
seeing the order. The bankruptcy court did not err in declining to address a new legal issue not
raised until after trial.
CONCLUSION
For the reasons set forth above, the Court affirms the bankruptcy court’s judgment.
SO ORDERED.
ENTERED: May 19, 2015
______________________
HON. JORGE L. ALONSO
United States District Judge
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