Douglas v. Kosinski

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UNITED STATES BANKRUPTCY COURT
FOR THE
DISTRICT OF MASSACHUSETTS

OOO OO ODI DN I ieee

In re
ALAN D. KOSINSKI, Chapter 7
Debtor Case No. 06-12691-JNF

OOO OO ODI DN I ieee

STEVEN B. DOUGLAS,

Plaintiff
Vv. Adv. P. No. 06-1400
ALAN D. KOSINSKI,

Defendant

OOO OO OO OOOO I IN ie ey

MEMORANDUM

I. INTRODUCTION

Steven B. Douglas (“Douglas” or the “ Plaintiff”) filed a one-count Complaint against
Alan D. Kosinski (“Kosinski” or the “Debtor’”), seeking a determination that the Debtor
obtained money from him by falsely representing that the financial condition of Boston
Waves, LLC (“Boston Waves”) and Pavilion Realty Trust, two entities for which the Debtor
served as manager and trustee, respectively, “were sound and that the Debtor would use
the money loaned to him in furtherance of their investment agreement and mutual
understanding and subsequently repay Mr. Douglas as well as provide him with a return
on his investment.” In his Complaint, Douglas failed to specify whether he sought to

except the obligation owed to him from discharge under 11 U.S.C. § 523(a)(2)(A) or 11

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

2
U.S.C. § 523(a)(2)(B). Following the trial at which eight witnesses testified and 16 exhibits
were introduced into evidence, Douglas filed a “Motion to Allow Filing of Amended
Complaint for Nondischargeability pursuant to 11 U.S.C. § 523(a)(2)” and an Amended
two-count Complaint in which he sought to except the obligation owed to him by the
Debtor from discharge under both 11 U.S.C. § (a)(2)(A) and (B). The Debtor opposed the
Motion.
The issues arising from the trial and the Motion to Allow Filing of Amended
Complaint include whether the Plaintiff should be permitted to amend his Complaint on
the ground that it conforms to the evidence; whether the Debtor is personally liable for the
debts of Boston Waves, a limited liability company managed by the Debtor and/or
Pavilion Realty Trust, a Massachusetts nominee trust for which the Debtor served as
trustee; and if so, whether any such personal debt owed by the Debtor to Douglas is
nondischargeable. For the reasons set forth below, the Court concludes that Douglas may
amend his Complaint to conform to the evidence and that the debt owed by the Debtor to
Douglas is excepted from discharge under 11 U.S.C. § 523(a)(2)(B).
II. FACTS
The Debtor filed a voluntary Chapter 7 petition on August 11, 2006. He filed his
petition, individually, and as “Trustee of various Trusts including but not limited to
Pavilion Realty Trust, Classic Realty Trust, Diamond Realty Trust, Columbia Realty Trust,
Indian Lakes Realty Trust, First Choice Realty Trust, Eagle Realty Trust, London Bridge
Realty Trust, Eagle Investment Realty Trust, Phoenix Realty Trust, AC Funding Realty
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The Court may take judicial notice of its own records. See In re Hyde, 334 B.R.1
506, 508 n.2 (Bankr. D. Mass. 2005).
On cross-examination, Douglas’ counsel displayed Kosinski’s website for his2
review.
3
Trust, Capri Realty Trust, Fernwood Realty Trust, Guardian Realty Trust, Riverside Realty
Trust, Workplace Realty Trust, [and] Maplewood Realty Trust.” Additionally, the Debtor
listed Douglas as a creditor on Schedule F-Creditors Holding Unsecured Nonpriority
Claims, as well as creditors whose claims, some described as contingent, unliquidated, and
disputed, are held by witnesses who testified at the trial, including Debra Grumbach, Paul
A. Griffin, Fenton Lee, Frank DiNatale, Jr., Harold G. Nabhan, Jr., and Christopher Florek,
the Debtor’s former business partner. 1
The Debtor is a self-proclaimed millionaire, specializing in real estate investing.
Despite filing a Chapter 7 petition in which the Chapter 7 Trustee filed a Report of No
Distribution on June 27, 2007, Kosinski persists in falsely describing himself as a millionaire
on his “ADVENT Wealth Improvement Network” website. 2
In the 1980s and 1990s, Kosinski purchased and sold hundreds of properties, using
borrowed money from “private investors” and nominee realty trusts. In the early 2000s,
he began advertising and conducting seminars and workshops in which he taught those
in attendance about “how to rent a property, landlording [sic] techniques, buy a property,
negotiation, repairs, fix-up, asset protection, [and] stuff like that.” He advocated the use
of trust instruments to prevent lawsuits and protect assets from creditors. Additionally,
on his website, he recommended practicing negotiation techniques for the acquisition of
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properties listed “for sale by owner.” Indeed, he indicated on his website that “If a ‘For
Sale by Owner’ accepts your offer, you’ve probably offered too much,” and you will have
to “Use your Home Inspection Clause or other ‘weasel clauses’ to get out of it [the
contract].”
Kosinski indicated that he had formed over 300 trusts in his career and served as
trustee of approximately 150 to 200 trusts. 	The Pavilion Realty Trust, a Massachusetts
nominee trust, was one of those trusts. It provided in pertinent part the following:
The Trustees shall not be held to any personal liability whatsoever in tort,
contract, for errors of judgment or otherwise in connection with the Trust
property or the affairs of this Trust save only that arising from their own
willful misconduct knowingly and intentionally committed; and all person
shall look solely to the Trust property for satisfaction of claims of any nature
arising in connection with the affairs of this Trust.
The Debtor testified that he found private investors interested in acquiring property by
word of mouth and that many people came to him for the purpose of investing in real
estate based upon his reputation. Additionally, he contacted potential investors directly.
Christopher Florek (“Florek”), who became Kosinski’s partner in a brokerage
franchise known as Exit Realty, testified that the Debtor, in addition to conducting
seminars, was involved in a real estate investors’ group through which he developed
networking opportunities. Florek indicated that the Debtor scheduled monthly meetings
to educate interested parties about “how to invest in real estate and how to find the deal,
how to find money to finance the deal, how to know what is a good deal, what isn’t a good
deal, pretty much anything you would need to know to purchase a property for investment
purposes.” 	Kosinski, who frequently served as moderator, charged an attendance fee of
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See note 1, supra, and note 6, infra.3
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$10 for the monthly meetings and considerably more for the seminars he conducted.
Florek testified that in 2003 he managed the day-to-day operations of the brokerage
business conducted by Exit Realty which had grown substantially from its inception, while
the Debtor pursued investment opportunities in Salisbury, Massachusetts.
In late 2002, the Debtor was approached by an individual named Jack Welch
(“Welch”) who told him about the availability of a lease of property located in Salisbury,
Massachusetts owned by Harold Nabhan (“Nabhan”). 	In the early spring of 2003, the
Debtor inspected the property, a 55,000 square foot building located on pilings on Salisbury
Beach, with an address of 4 Ocean Front Avenue and executed a lease with Nabhan in
March of 2003 at Nabhan’s home in Florida. The lease was a two-year lease with options.
Nabhan testified that the lease contained two, one-year options, while the Debtor testified
that it contained two, two-year options. Under either view, it was not a long-term lease.
The Pavilion Realty Trust executed the lease with Nabhan which provided for an annual
base rent of $75,000. 	Pavilion Realty Trust, in turn, sublet a portion of the building to
Boston Waves for an annual base rent of $90,000. The parties did not submit evidence as
to the named beneficiary or beneficiaries of the Pavilion Realty Trust. Similarly, they did
not specifically identify the members of Boston Waves. Kosinski referred to Florek and
Welch as his partners, and the Court takes judicial notice from the bankruptcy case file of
Boston Waves (Case No. 05-11767-JBR) that Kosinski, Florek and Welch were listed as the
members of that limited liability company. 	The evidence, discussed in detail below,3
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established that, for the most part, Pavilion Realty Trust borrowed money and then
transferred it to Boston Waves.
Nabhan, an attorney who owned and operated several bars in Salisbury Beach,
testified that he had operated a nightclub, called the Beach Club, at 4 Ocean Front Avenue
for a number of years, though the building had been shuttered since 2001. 	Nabhan
employed a full-time manager, but was involved in the day-to-day operation of the club
until it closed. According to Nabhan, the club specialized in banquets, wedding receptions,
and music for dancing for which local band were engaged. He revealed that the “nightclub
did alright during those years, but the business tapered off after about 1997.” He explained
that the nightclub business declined because of the prevalence of national chains in the
region and the vigilance of the Salisbury police in enforcing laws against drunk driving.
Nabhan testified that Kosinski told him that he intended to put “a new face on the
club, to enlarge the market from local to regional band bookings, reaching all the way into
Boston,” adding “he changed the name of the club to Boston Waves and did substantial
promotional, investigation, and administrative work.” Nabhan recognized that Kosinski
made some physical improvements to the building, replacing doors and some windows,
as well as putting in a very expensive light and sound system. 	Nabhan, nevertheless,
stated that the building was “in regular shape to do business” and that extensive plumbing
and electrical work was unneeded.
The Debtor testified that not only did he intend to change the focus of the club, he
formed a development company to investigate “buying and selling and flipping
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properties” in Salisbury. 	Additionally, he testified that the building needed extensive
repairs, requiring hundreds of thousands of dollars worth of work. He testified at length
about work he did on the property, enumerating multiple problems with the structure, as
well as the need for substantial improvements to sound system and stage.
Although the Debtor received progressively higher offers (up to $300,000 per year)
to lease the nightclub portion of the property, he rejected the offers in favor of pursuing his
own development plans for the premises, which included booking all types of bands from
country western to hip hop and advertising events extensively. Admitting that he refused
to meet with the individual making the offer and that he had no experience operating a
nightclub or restaurant, the Debtor testified that the increasingly higher offers reinforced
his notion that the property had great potential as a nightclub. 	He added that the
individual making the offer also wanted a long-term lease, which the Pavilion Realty Trust
did not have.
The Debtor’s grandiose plans to develop the property and buy and sell properties
in Salisbury ran seriously awry from the outset. Boston Waves was unable to secure a
seasonal liquor license for the 2003 season until the end of October of that year, well past
the time vacationers and beachgoers would be expected to travel to Salisbury.
Because it lacked a seasonal liquor license, Boston Waves failed to generate much
income in 2003. Indeed, the receipt ledgers generated by Boston Waves were described by
the Debtor’s personal assistant as “kind of scary.” The ledgers, which were introduced into
evidence, show that Boston Waves generated less that $13,000 in revenue from its
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restaurant for the period between July and December of 2003, and that it generated
approximately $10,000 from it’s “A-Bar 1” for the same period. Although Boston Waves
intermittently obtained temporary licenses to sell beer and wine for a day or for an event
before the end of October, 2003, the absence of a full liquor license deprived it of the ability
to advertise events in advance because issuances of the temporary beer and wine licenses
were never guaranteed by the Salisbury Liquor Commission.
During 2003, the Debtor testified that he obtained money to renovate the premises
and sustain the operations of Boston Waves from private lenders in varying amounts
totaling at least $350,000. For example, the Debtor, in his capacity as manager of Boston
Waves and as trustee of Pavilion Realty Trust, executed short term, unsecured promissory
notes in the spring of 2003 in favor of Debra Grumbach in the sum of $15,000 and Fenton
Lee in the sum of $30,000, among others. Ms. Grumbach’s spouse also invested money
with Kosinski. Ms. Grumbach testified that the couple used money from their IRAs to
obtain funds to lend to Pavilion Realty Trust at Kosinski’s behest.
Fenton Lee, a systems analyst with Fidelity Investments, testified that he became
interested in investing in real estate and, through internet searches, met Kosinski. After
meeting Kosinski and working with an agent from Exit Realty, he stated that he received
a phone call from the Debtor who presented him with preliminary information about the
nightclub project. He met Kosinski in April of 2003 at the Salisbury property and decided
to make a loan to Boston Waves and the Pavilion Realty Trust.
Andrew Griffin, a construction contractor, was also a private investor. He testified
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that he was involved in one of the Debtor’s real estate ventures and knew Kosinski from
attending his real estate investment classes. In the spring of 2003, he lent Kosinski $50,000,
in his capacities as manager of Boston Waves and trustee of Pavilion Realty Trust. Griffin
testified that he “was instructed to move an IRA into a self-directed IRA, and through the
self-directed IRA, the money was moved to him.”
Francis DiNatale, also invested a considerable amount of money with Kosinski’s
entities having met him at a so-called Cashflow game sponsored by Exit Realty. 	He
initially loaned Kosinski, as manager of Boston Waves and as trustee of Pavilion Realty
Trust, $25,000 and then rolled that sum into a $50,000 loan. In addition, he loaned Kosinski
$26,000 from an IRA. He testified that Kosinski repaid him $5,000 in cash and $5,000, in
kind, as a credit for a real estate course. The Grumbachs, Fenton Lee, Andrew Griffin, and
Francis DiNatale, the private investors who testified at trial, were never repaid in full. All
but DiNatale received no payments at all.
Douglas, like many of the other private investors, met Kosinski through events
sponsored or hosted by Exit Realty. 	Douglas, who is employed as a vice-president of
program management at an engineering firm, testified that after his divorce he became
interested in investing in real estate and went to a couple of Cashflow game meetings. He
then started regularly attending the investment club meetings where he met Kosinski. At
one such meeting, held in January of 2004, he picked up a leaflet that caused him to pursue
the opportunity described in it with Kosinski. The leaflet set forth the following:
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Best Investment:
M any people have accounts that are not paying the yields they should. 	Below is a
comparison chart of various investments that are available and how they actually perform.
ING DIRECT was used since they [sic] are one of the highest paying funds available.
Example of $10,000 placed with the following One Year returns 	$ C a s h 	r e t u r n 	o n
investment
0.46% 	M oney Markets National Average* 	= 	$46.00
0.50% 	Savings Account* 	= 	$50.00
2.00% 	Variable Savings Account ING DIRECT Orange** 	= 	$200.00
1.67% 	One year CD* 	= 	$167.00
2.18% 	Two year CD* 	= 	$218.00
3.54% 	Five year CD* 	= 	$354.00
8.00% 	Various Trusts secured by real estate mortgages*** 	= 	$800.00
10.00% Various Trusts secured by real estate mortgages*** 	= 	$1,000.00
15% 	M inimum Investment of $10,000*** 	= 	$1,500.00
General Fund One year note (Not Secured)
15.00% Investment of $10,000.00 to $24,999.00*** 	= 	$1,500.00
One Year note secured by hard business assets
20.00% Investment of $25,000.00 to $49.,999.00*** 	= 	$2,000.00
One Year note secured by hard business assets
25.00% Investment of $50,000.00 to $74,999.00*** 	= 	$2,500.00
One Year note secured by hard business assets
30.00% Investment of $75,0000.00 or more*** 	= 	$3,000.00
One Year note secured by hard business assets
Rates are based on Annual Percentage Yields.
Chart based on a deposit of $10,000.00 for one year except where noted.
Sources: * Savings, CD, and money market avg. from Bankrate.com as of 1/8/04
** ING DIRECT savings Rates as of 8/07/03.
*** Funds M anaged by Alan Kosinski (Various Entities) as of 1/8/04
You should have your money making money. If you have money in Savings Accounts,
M oney Market Accounts, Certificate of D eposits, Roth IRA, Regular IRA, and some 401k
Accounts get them to start paying higher yields. 	This is not an offering, but only a
comparison chart. Savings accounts are generally FDIC insured. All other listed investments
are not insured by the FDIC and are subject to investment risks, including the possible loss
of principal amount invested. Invest wisely.
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After reviewing the leaflet, Douglas contacted Kosinski on January 31, 2004. He testified
that “when he saw the interest rates . . . that he was offering here, to me it seemed like a
safe and simple - - or straightforward approach to get in some high returns without having
to understand all the intricacies of the real estate marketplace. . . .” 	He and Kosinski
discussed the Salisbury Beach project, and Douglas made plans to go see the property.
Douglas testified as follows:
We reviewed the interest rates that would be allowed for different levels of
investment. He then went on to discuss the opportunity he was presently
working on in Salisbury Beach.
He mentioned the Boston Waves nightclub, said that he was putting - - you
know, refurbishing it and putting it together. 	He did mention the delay,
thought it was a one-month delay in getting the liquor license, instead of
September it didn’t come in until October of ‘03. 	It didn’t sound like
therefore he had much, much operation in ‘03 but it looked like he was
looking forward to the ‘04 season.
Refreshing his recollection with notes he took of the conversation, Douglas further testified
that the Debtor told him that he and Florek had spent close to a million dollars in cash.
Florek, however, testified that he made no personal loans to Pavilion Realty Trust or
Boston Waves, although he caused Exit Realty or AC Funding Realty Trust to write checks
to Pavilion Realty Trust.
Following one quick trip to Salisbury to look at the property, Douglas met Kosinski
at the Boston Waves club on Thursday, February 12, 2004 and took a tour of the premises.
Before traveling to Salisbury for the tour, Kosinski’s assistant sent Douglas, via an -e-mail
attachment, a profit and loss statement, which forecast the earning capacity of Boston
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Specifically, it showed $1,187,089 in profits broken down as follows: ($45,166)4
for April of 2004, $251,026 for May through August of 2004, and $32,593 for September
of 2004 through March of 2005.
12
Waves. Douglas recounted that at the February 12, 2004 meeting Kosinski explained his
plans for a “high end lounge” for “high rollers,” and a restaurant, as well as “his thoughts
about trying to get accredited investors together to purchase properties within the town
and build up the property values which would then therein [sic] raise the value of the
Boston Waves property and its operations.” Based upon the tour, his discussions with
Kosinski, and the profit and loss statement, Douglas told Kosinski he was willing to invest
in the project. Douglas testified that he reviewed the profit and loss statement as best he
could, determining that “[i]t looked like this was going to be a profitable enterprise,” as it
showed over a million dollars profit at the end of twelve months. 	Additionally, Douglas4
examined the projected expenses as set forth in the forecast, determining that, although
“Loans” appeared as an entry on the profit and loss statement for the period between April
of 2004 and March of 2005, no numbers were inserted for loan repayments. He stated:
“Well, I guess I took this as being accurate and honest and it said to me there were no
loans,” adding that he would not have invested without an accurate profit and loss
statement. Douglas also testified that, although he did not ask Kosinski for supporting
documentation for his projections, he did ask him about the numbers utilized in the profit
and loss statement. 	According to Douglas, Kosinski represented that he obtained the
numbers from speaking with Nabhan who had operated a nightclub at the same location.
Douglas also indicated that he was impressed with Kosinski’s familiarity with Nabhan and
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Kosinki’s representation that the lease was a twenty year lease. Douglas stated:
He - - just as in his other real estate dealings, where he analyzes a deal and
its opportunities, he did the same with this one. He knew of the landlord
and the owner of the building, knew his age, he knew the health of the sister,
he knew all the details of all the nuances.
And just as he taught in some of his classes, he talked about the fact that he
wouldn’t - - he mentioned to me a 20-year lease on the property and said that
he would have control of the property even though he wouldn’t own the
property. . . .
[I]t reinforced and told me that this was a long-term investment for Mr.
Kosinski and Boston Wave, and not a short-term fly-by-night enterprise. It
was one that I felt more comfortable investing, with making my first real
estate investment in.
Douglas also indicated that Kosinski told him his investment would be secured by hard
assets and gave him a list, which, in Douglas’ words, included “chairs, the sound system,
tables, inventory, [and] things like that.” Douglas testified that he failed to obtain security
for his loan, explaining:
I just as well as most of the people that attended the investment club
meetings looked up to Mr. Kosinski. He is basically the teacher where the
students respected him, thought him to be trustworthy, and it was almost -
- would have been an insult, I felt, to have asked him to put something more
in writing than he already had.”
In the evening of February 12, 2004, Douglas delivered a bank treasurer’s check to
Kosinski made payable to the Pavilion Realty Trust in the sum of $75,000. Kosinski, in his
capacities as trustee of Pavilion Realty Trust and manager of Boston Waves, executed a
promissory note to Douglas in which he promised to pay as follows:
the sum of SEVENTY FIVE THOUSAND DOLLARS in One balloon payment
due within TWELVE months from this date, with interest to be paid Monthly
at the rate of THIRTY per cent per annum, during said term, and for such
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further time as said principal sum, or any part thereof shall remain unpaid.
Monthly interest payment of $1,875.00 will be paid by the Fifteenth of each
month.
At the time Douglas delivered the check to Pavilion Realty Trust, Kosinski was unsure of
whether Boston Waves had obtained 	a 	full seasonal liquor license, although he
acknowledged that insurance on the property had been canceled. Kosinski represented
that it was his belief that if Boston Waves did not have a seasonal all alcohol license in
February, he anticipated obtaining one for Boston Waves. In a letter dated April 1, 2004
to the Salisbury Liquor Commission, suggesting that the liquor license was obtained
around that time, Kosinski, on behalf of Boston Waves, thanked the Commission for the
issuance of a license and disclosed Boston Waves’ hours of operation. For April, beginning
on the 16 	of the month through May of 2004, the hours were 7:00 p.m. to 1:00 a.m., threeth
days per week, namely Thursday through Saturday.
Kosinski testified that he did not prevent Douglas from conducting due diligence
with respect to his $75,000 investment and that he never told Douglas that Pavilion Realty
Trust had a twenty year lease with Nabhan. He further testified that the profit and loss
forecast was a work in progress and that multiple versions existed. 	Notably, Kosinski
submitted no exhibits to support his assertion that the profit and loss statement was, in fact,
a work in progress. He stated that the figures used in the profit and loss statement came
from bills and cost analyses of food and drink. He admitted, however that “some were
made up because we didn’t know the numbers.”
Douglas received several erratic payments from Kosinski, but they stopped after
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Douglas kept a record of payments, but did not specify whether the payments5
were made in cash or by checks from Pavilion Realty Trust, Boston Waves, or Kosinski.
Douglas recognized that the repayment dates listed for August 24, 2005 and6
September 23, 2005 were incorrect and should have been listed as received in 2004, not
2005.
15
September of 2004. Douglas prepared a Repayment Log showing receipt of two payments5
on April 10, 2004 and two payments on August 24, 2004, as well as payments on May 26,
2004, July 10, 2004, and September 23, 2004. 	He calculated that he was owed $169,849 as6
of November 8, 2008, with simple interest. 	The note was never secured with assets
belonging to either Boston Waves or Pavilion Realty Trust. Douglas, however, did send
letters to the Attorney General for the Commonwealth of Massachusetts registering his
loan pursuant to the provisions of Mass. Gen. Laws ch. 271, § 49(d).
Nabhan, with whom Kosinki represented he consulted in the preparation of the
profit and loss statement, reviewed the statement. He described the numbers utilized by
Kosinski as “grossly exaggerated.” Additionally, he testified that the wholesale purchase
price of liquor was “way out of line” with the gross revenue that its sale would produce,
that tax liabilities were seriously understated, and that the income from the parking lot was
seriously overstated. He also testified that he forgave a portion of the rent, that Pavilion
Realty Trust was about $25,000 behind in its rent payments in 2003 and that Pavilion Realty
Trust failed to make all its rent payments in 2004. He added that Kosinski “vacated the
premises on September 9 	of 2004 in the morning hours in the dark of night and took withth
him as much personal property as he could move into [sic] with two trucks,” leaving the
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premises in a disordered state with papers strewn everywhere. Kosinski did not dispute
that he operated Boston Waves until September 9, 2004 when he vacated the premises,
taking with him the sound system and all personal property, including two valuable
paintings which Nabhan claimed was his.
Kosinski testified to a legion of problems, including the disaffection of his business
partner, Jack Welch, whom Kosinski claimed undermined his authority with employees
and caused trouble with officials in the Town of Salisbury. According to Kosinski, Welch
ceased to be involved with Boston Waves in the fall of 2003. 	Kosinski recounted the
negative public perception from lack of a full liquor license in 2003. He also detailed a
disastrous evening in July or August of 2004 involving a scheduled performance by the rap
artist Snoop Dogg. The scheduled performance precipitated a substantial police presence
in the form of SWAT teams from Lawrence and Lowell, Massachusetts, in addition to
police from Salisbury. 	The performance failed to take place as planned, resulting in a
disgruntled and riotous audience, some of whom had expended $100 to be in a VIP section
with Snoop Dogg and his entourage, as well as extensive negative publicity in Salisbury
and elsewhere. According to Kosinski, Snoop Dogg arrived over three hours late, caused
smoke detectors to go off when he lit a marijuana cigarette, and left without ever
performing.
According to Kosinski, he realized that there was no recovering from the expensive
debacle involving Snoop Dogg. He indicated that he had no choice but to close Boston
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The Court takes judicial notice that Boston Waves filed a voluntary Chapter 77
petition on March 11, 2005. The Chapter 7 trustee filed a Report of No Distribution on
January 7, 2008. The case is now closed. The trustee commenced an action against
Calvin Broadus a/k/a Snoop Dogg, which he settled for payment of $12,000, which
sum was distributed to a secured creditor.
17
Waves, which Kosinski testified subsequently filed a voluntary Chapter 7 petition. 7
III. DISCUSSION
A. The Motion to Allow Filing of Amended Complaint
In his Complaint, Douglas alleged that Kosinski was personally liable for the monies
he lent Pavilion Realty Trust and Boston Waves “because he deliberately and intentionally
misrepresented the financial condition of Boston Waves” at the time he solicited funds
from him. He added that “the pro forma forecast Mr. Kosinski provided to Mr. Douglas
was deliberately false, misleading and deceptive and that it was created by Mr. Kosinski
for the purpose of inducing Mr. Douglas to lend money.” Douglas further alleged that had
know the true financial condition of Boston Waves and Pavilion Realty Trust he would not
have loaned Pavilion $75,000; that Kosinski made repeated representations about the
financial condition of Boston Waves to persuade him to loan money to it, and that he
reasonably relied upon Kosinski’s representations to his detriment. Because of his repeated
reference to the financial condition of Boston Waves and the reference to a pro forma, the
Court finds that Douglas sets forth a cause of action under 11 U.S.C. § 523(a)(2)(B) in his
original Complaint.
In his Amended Complaint, Douglas added allegations that Kosinski made both
express and implied representations that he had the ability to repay him upon the terms
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set forth in the promissory note “when he was well aware he could not do so;” that the
money was going to be used for the nightclub when in fact it was going to be diverted to
other business interests; and “that he had a twenty year lease on the premises where the
nightclub was located.” Douglas further amended his Complaint to aver that he justifiably
relied upon those representations.
Federal Rule of Civil Procedure 15(b), made applicable to this proceeding by Fed.
R. Bankr. P. 7015(b), allows amendment of pleadings to conform to the evidence if issues
which are not raised in the original pleadings are raised at trial by the express or implied
consent of the parties. At trial, both parties offered evidence relevant to claims under both
section 523(a)(2)(B) and section 523(a)(2)(A). The Debtor did not object to evidence tending
to establish Douglas’s entitlement to relief under section 523(a)(2)(A). More importantly,
the Debtor was not unfairly prejudiced by the submission of evidence in support of a claim
under section 523(a)(2)(A) as that evidence was in the form of Douglas’s testimony. Not
only was Kosinski’s counsel able to cross-examine Douglas, Kosinski was able to testify in
rebuttal. See Matter of Beaubouef, 966 F.2d 174, 177 (5th Cir. 1992)( “[e]ven where there is
no consent, and objection is made at trial that evidence is outside the scope of the pretrial
order, amendment may still be allowed unless the objecting party satisfies the court that
he would be prejudiced by the amendment.” Hardin v. Manitowoc-Forsythe Corp., 691
F.2d 449, 457 (10th Cir.1982). “In the absence of a showing of prejudice, the objecting
party’s only remedy is a continuance to enable him to meet the new evidence.” Id.). See also
Tower Credit, Inc. v. Touchet (In re Touchet), 394 B.R. 418, 422 (Bankr. M.D. La. 2008).
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Thus, the evidence adduced at trial amended Douglas’s Complaint to include a cause of
action under 11 U.S.C. § 523(a)(2)(A). Accordingly, the Court shall enter an order granting
the Motion to Allow Filing of Amended Complaint, although for the reasons set forth
below, the Court need not determine whether Douglas established the existence of a
nondischargeable debt under section 523(a)(2)(A).
B. Is Kosinski personally liable for the obligations of Pavilion Realty Trust or Boston
Waves?
In Kveraga-Olson v. Sternberg, 7 Mass. L. Rptr. 49 (Mass. Super. 1997), the court
summarized the law applicable to the potential liability of trustees of nominee realty trusts.
It stated:
The trend in Massachusetts is to view the trustees of a nominee trust as
agents for the principals’ convenience rather than as trustees in the more
traditional fiduciary sense. Apahouser Lock & Security Corporation v.
Carvelli, 26 Mass.App.Ct. 385, 388, 528 N.E.2d 133, rev. den., 403 Mass. 1104,
530 N.E.2d 797 (1988). Thus, the courts have concluded that the protection
from individual liability afforded trustees by G.L. c. 203, § 14A does not
encompass the trustees of nominee and business trusts. First Eastern Bank,
N.A. v. Jones, 413 Mass. 654, 661, 602 N.E.2d 211 (1992); Apahouser Lock &
Security Corporation v. Carvelli, supra at 388, 528 N.E.2d 133; North Shore
Protective Patrol & Detective Agency, Inc. v. Baldwin, 1991 Mass.App. Div.
61, 64.
Id. at *9 (footnote omitted). In a footnote, the court observed that “Chapter 203, section
14A provides that a trustee is personally liable on contracts entered into in a fiduciary
capacity only if he failed to reveal his representative capacity and identify the trust estate
in the contract, and is personally liable for torts committed in the administration of the
trust estate only if he was personally at fault. G.L. c. 203, § 14A (1981).” The court further
determined that “under common law principles of agency, the trustees of a nominee trust
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may be held individually liable for torts committed in the administration of a trust,
whether or not they are personally at fault.” Sternberg, 7 Mass. L. Rptr at *10 (citing Larson
v. Sylvester, 282 Mass. 352, 357-358, 185 N.E. 44 (1933), and First Eastern Bank, N.A. v.
Jones, 413 Mass. at 659); see also In re Lebner, 197 B.R. 180, 192 (Bankr. D. Mass. 1996).
Additionally, to the extent Kosinski may be a beneficiary of the Pavilion Realty Trust, “‘[i]n
the case of nominee trusts, liability has been imposed directly upon the beneficiaries, the
theory being that the relationship created by such an instrument is in the nature of a
partnership and not a trust, or that the trustees were merely the agents ‘for the principals’
convenience.’”See F.D.I.C. v. Porter, 46 Mass. App. Ct. 241, 704 N.E.2d 1203, 1205
(1999)(citations omitted).
The Court finds that under Massachusetts law, as set forth above, Kosinski is not
shielded from liability for a nondischargeable debt based upon his status as a trustee or as
a beneficiary of a Massachusetts nominee trust. 	Additionally, although the language
utilized in the Pavilion Realty Trust purports to preclude the imposition of personal
liability on the trustee, there is an exception for “willful misconduct knowingly and
intentionally committed.” 	Thus, even were Kosinski shielded from liability under
Massachusetts law, under the trust instrument, he could still be held liable for willful and
intentional misconduct in his capacity as trustee.
The Pavilion Realty Trust was the signatory to the lease with Nabhan and, based
upon the evidence presented, the lease was its only asset. 	The Pavilion Realty Trust
borrowed money from private investors and funneled the borrowed funds to Boston
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Waves. Kosinki executed promissory notes, as trustee, intending that the funds would be
used to fund the operations of Boston Waves. At the time he executed the promissory note
in favor of Douglas, on February 12, 2004, he intended and so advised Douglas that the
funds would be transferred to and used by Boston Waves. From the evidence presented,
the Court infers that in February of 2004, Boston Waves likely was insolvent, a condition
noted by Florek who indicated that neither Boston Waves’ financial statements or its
financial health was ever good. Notably, the value of its assets, comprised of a short term
lease with the Pavilion Realty Trust requiring annual rent of $90,000, an installed sound
and light system, tables and chairs, liquor inventory, and miscellaneous restaurant and bar
equipment, was probably worth less than the $350,000 or more Kosinski borrowed from
private investors. 	Kosinski’s conduct in procuring additional funds from Douglas for
Boston Waves’ operations must be considered in the context of Boston Waves’ likely
insolvency. 	Thus, Kosinski’s action, as trustee of Pavilion Realty Trust, in borrowing
money from Douglas for an insolvent entity can be considered willful and intentional
misconduct, exposing him to personal liability under the provisions of the trust instrument.
Finally, the Court finds that the Debtor is estopped from asserting that he is immune
from liability as trustee of the Pavilion Realty Trust in view of his bankruptcy petition
which he filed both individually and as trustee of numerous realty trusts, including the
Pavilion Realty Trust. By listing various trust entities and debts incurred by those entities,
the Debtor intended or at least hoped to discharge those debts. Accordingly, the Debtor
cannot complain when a trust creditor, such as Douglas, filed an objection to the
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dischargeability of the obligation incurred by Kosinski as trustee of the Pavilion Realty
Trust. 	By listing the various trusts for which he served as trustee on his petition, the
Debtor all but admitted that he was liable for those obligations.
Similarly, the Court finds that under Massachusetts law, Kosinski as the manager
of Boston Waves, can be held liable for the debts of that limited liability company. 	As
noted by the United States Bankruptcy Appellate Panel for First Circuit, in Aoki v. Atto
Corp. (In re Aoki), 323 B.R. 803 (1st Cir. 2005),
In Massachusetts, corporations and their shareholders are generally deemed
to be distinct legal entities. See Berger v. H.P. Hood, Inc., 416 Mass. 652, 624
N.E.2d 947, 950 (1993). However, under unusual circumstances, a court may
disregard the corporate form, particularly to defeat fraud or remedy an
injury. See id.; see also In re Plantation Realty Trust, 232 B.R. 279, 282 (Bankr.
D. Mass.1999). “The incidents of common ownership and management,
standing alone, are not enough to pierce the corporate veil.” Plantation
Realty, 232 B.R. at 282. However, “shareholders may be held liable where
they control the operation of the corporation and run it for their personal
benefit, and where justice requires that the separate existence of the
corporation be ignored.” Pepsi-Cola Metro. Bottling Co., Inc. v. Checkers,
Inc., 754 F.2d 10, 15 (1st Cir.1985) (“ Pepsi-Cola”).
323 B.R. at 811. The panel added:
The Massachusetts Supreme Judicial Court has described two situations
when piercing the corporate veil is appropriate: “(1) when there is active and
direct participation by the representatives of one corporation, apparently
exercising some form of pervasive control, in the activities of another and
there is some fraudulent or injurious consequence of the intercorporate
relationship, or (2) when there is a confused intermingling of activity of two
or more corporations engaged in a common enterprise with substantial
disregard of the separate nature of the corporate entities, or serious
ambiguity about the manner and capacity in which the various corporations
and their respective representatives are acting.” My Bread Baking Co. v.
Cumberland Farms, Inc., 353 Mass. 614, 233 N.E.2d 748, 752 (1968) (“ My
Bread”).
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Adopting the My Bread standard, the Court of Appeals for the First Circuit
set forth twelve factors to consider when deciding whether to pierce the
corporate veil:
(1) common ownership;
(2) pervasive control;
(3) confused intermingling of business activity, assets, or management;
(4) thin capitalization;
(5) nonobservance of corporate formalities;
(6) absence of corporate records;
(7) no payment of dividends;
(8) insolvency at the time of the litigated transaction;
(9) siphoning away of corporate assets by the dominant shareholders;
(10) nonfunctioning of officers and directors;
(11) use of the corporation for transactions of the dominant shareholders; and
(12) use of the corporation in promoting fraud.
Pepsi-Cola, 754 F.2d at 16; see also Evans v. Multicon Constr. Corp., 30
Mass.App.Ct. 728, 574 N.E.2d 395, 398 (1991) (applying the Pepsi-Cola
factors); The George Hyman Constr. Co. v. Gateman, 16 F.Supp.2d 129, 151
(D. Mass.1998) (same). Generally, in Massachusetts, My Bread sets the
standard for deciding when to pierce the corporate veil, and Pepsi-Cola
identifies a non-exclusive list of factors to be considered when engaging in
a My Bread analysis. See, e.g., Birbara v. Locke, 99 F.3d 1233, 1238 (1st
Cir.1996). This analysis is also applicable in the bankruptcy context. See
MacDonald, 114 B.R. at 331 (the equitable powers of the bankruptcy court
enable them to apply the My Bread and Pepsi-Cola analysis to pierce the
corporate veil in order to attribute a non-debtor corporation’s assets or
liabilities to the shareholders of the corporation) (citation omitted).
Aoki, 323 B.R. at 811-12. The Court observes that, with respect to Boston Waves, many of
the factors listed by the panel in Aoki are present, including Kosinski’s pervasive control
of Boston Waves, the absence of corporate records, and thin capitalization or insolvency,
as well use of the limited liability company to promote fraud.
In view of the foregoing provisions of Massachusetts law, Kosinski cannot escape
liability under Massachusetts law applicable to nominee trusts and piercing the corporate
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veil. The questions then becomes whether Douglas can satisfy all the required elements
for an exceptions to discharge under either section 523(a)(2)(B) or section 523(a)(2)(A).
C. Applicable Law under Section 523(a)(2)
Both section 523(a)(2)(A) and 523(a)(2)(B) refer to “the debtor’s or an insider’s
financial condition.” Section 523(a)(2)(A) carves out an exception for statements respecting
a debtor’s or an insider’s financial condition, while section 523(a)(2)(B) requires such
statements to be in writing. Tension exists as to the proper interpretation of the phrase.
In Schneiderman v. Bogdanovich (In re Bogdanovich), 292 F.3d 2d 104, 112-113 (2d Cir.
2002), the Second Circuit observed:
In determining whether a statement relates to a debtor’s financial condition,
courts agree the term is not limited to formal financial statements. See
Norcross v. Ransford (In re Ransford), 202 B.R. 1, 4 (Bankr. D. Mass. 1996).
Two views have emerged over how to interpret the scope of § 523(a)(2)(A)’s
exception. A broad interpretation would include any statement that reflects
the financial condition of the debtor. Id. On the other hand, a narrow
interpretation would find that a statement relates to financial condition only
when it provides information “as to [a debtor’s] overall financial health.” Id.
292 F.3d at 112. See also Buckeye Retirement Co., LLC, Ltd. v. Kakde (In re Kakde), 382 B.R.
411, 421-22 (Bankr. S.D. Ohio 2008). 	Judge Boroff explained the rationale behind the
approaches in Norcross v. Ransford (In re Ransford), 202 B.R. 1 (Bankr. D. Mass. 1996). He
stated:
[T]he liberal interpretation would assign to the term any statement which
applies 	to 	the 	financial 	condition 	of 	the 	debtor, 	while 	the 	narrow
interpretation would limit the term to statements as to the Debtor’s overall
financial health. Id. The effect of the categorization is profound. Where the
interpretation of the term is liberal, the subject misstatement is likely
precluded as the basis of nondischargeability under § 523(a)(2)(A), and,
absent a writing, has no place under § 523(a)(2)(B). Where the interpretation
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of the term is narrow, a nondischargeability claim is more likely to be
sustained under § 523(a)(2)(A).
202 B.R. at 4. He concluded that the proper approach was to examine the purpose of the
statement, relying upon the approach in Jokay Co. v. Mercado (In re Mercado), 144 B.R. 879
(Bankr. C.D. Cal. 1992). 	He concluded: “In focusing upon the purpose for which the
statement was made, Judge Ryan [in Mercado] provided a framework for better
distinguishing between a statement which implicates a debtor’s financial condition from
one that does so only incidentally.” 202 B.R. at 5.
In Middlesex Sav. Bank v. Flaherty (In re Flaherty), 335 B.R. 481 (Bankr. D. Mass.
2005), this Court set forth a narrow interpretation of section 523(a)(2)A) in reviewing the
law applicable to 11 U.S.C. § 523(a)(2)(B). While noting that exceptions to discharge under
section 523(a)(2) require proof of each and every element by a preponderance of the
evidence, Grogan v. Garner, 498 U.S. 279, 286 (1991), this Court stated:
The exception to discharge under § 523(a)(2)(A) does not deal with deception
by means of a statement relating to the debtor’s or an insider’s financial
condition, which is the subject of section 523(a)(2)(B). Section 523(a)(2)(B)
provides that a “discharge under section . . . 727 . . . of this title does not
discharge an individual debtor from any debt for money, property, services,
or an extension, renewal, or refinancing of credit, to the extent obtained, by
use of a statement in writing that is materially false; respecting the debtor’s
or an insider’s financial condition; on which the creditor to whom the debtor
is liable for such money, property, services, or credit reasonably relied; and
that the debtor caused to be made or published with intent to deceive.” 11
U.S.C. § 523(a)(2)(B) (emphasis added). See In re Coughlin, 27 B.R. 632, 635-36
(1st Cir. BAP 1983).
Section 523(a)(2)(B) pertains to a specific type of financial statement, “one
that specifically states a debtor’s or insider’s net worth”. City Fed. Savs. Bank
v. Seaborne (In re Seaborne), 106 B.R. 711, 713 (Bankr.M.D.Fla.1989)(citing
Brigadier Homes & U.S. Home Acceptance Corp. v. Hert, 81 B.R. 638 (Bankr.
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The requirement that the statement be in writing “is an evidentiary protection8
for a defendant/debtor because it requires the plaintiff/creditor to prove fraud based
on misrepresentations of financial condition using the more rigorous reasonable
reliance standard.” McCrary v. Barrack (In re Barrack), 217 B.R. 598, 605 (B.A.P. 9th Cir.
1998) (citing Field v. Mans, 516 U.S. 59, 72-77 (1995)). The terms used in section
523(a)(2)(A) are common-law terms requiring only “justifiable” reliance. Id.
26
N.D. Fla. 1987)). . . .
In re Flaherty, 335 B.R. at 490. 	Although use of labels such as broad and liberal may
facilitate analysis in some circumstances, the Court finds Judge Boroff’s approach in
Ransford compelling. Thus, in addition to focusing on each and every element of section
523(a)(2)(B), an analysis of the purpose of a statement as to the debtor’s or an insider’s8
financial condition also is warranted.
In Flaherty, this Court also addressed section 523(a)(2)(B)’s reasonable reliance
element. It stated;
A determination of whether a creditor’s reliance was reasonable is a factual
determination to be made in light of the totality of the circumstances. Lease
Corp. 	of 	Amer. 	v. 	Harloff 	(In 	re 	Harloff), 	272 	B.R. 	496, 	500
(Bankr.M.D.Fla.2001). According to the court, in Harloff,
[a]mong the circumstances that might affect the reasonableness
of a creditor’s reliance are (1) whether the creditor had a close
personal 	relationship 	or 	friendship 	with 	the 	debtor; 	(2)
whether there had been previous business dealings with the
debtor that gave rise to a relationship of trust; (3) whether the
debt was incurred for personal or commercial reasons; (4)
whether there were any “red flags” that would have alerted an
ordinarily 	prudent 	lender 	to 	the 	possibility 	that 	the
representations relied upon were not accurate; and (5) whether
even 	minimal 	investigation 	would 	have 	revealed 	the
inaccuracy of the debtor’s representations.
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Id. (citing BancBoston Mortgage Corp. v. Ledford (In re Ledford), 970 F.2d
1556, 1560 (6th Cir.1992), cert. denied, 507 U.S. 916, 113 S.Ct. 1272, 122 L.Ed.2d
667 (1993), and Martin v. Bank of Germantown (In re Martin), 761 F.2d 1163,
1166-67 (6th Cir.1985)).
In re Flaherty, 335 B.R. at 490-91.
D. Does the profit and loss statement of Boston Waves qualify as a statement of an
insider’s financial condition and was it materially false?
The profit and loss statement prepared by Kosinski was intended to induce Douglas
to invest in Boston Waves, although Douglas wrote a check in the amount of $75,000 to
Pavilion Realty Trust. Boston Waves was an “insider” of the Debtor. Although 11 U.S.C.
§ 101(31) does not specifically list limited liability companies, which have incidents of both
corporations and partnerships, there can be no question that Kosinski, as the manager of
Boston Waves, was in a position analogous to either a general partner in a partnership
comprised of the members of Boston Waves or a corporate officer or person in control of
Boston Waves.
Consistent with the analysis used by the courts in Ransford and Mercado, the Court
finds that the profit and loss statement was intended to show that Boston Waves had the
capacity to generate income to repay Douglas’s investment. See In re Delano, 50 B.R. 613,
617 (Bankr. D. Mass. 1985)(“It is well-settled that where the debtor is an officer and
shareholder of a corporation and he uses a false financial statement to induce a creditor to
extend credit to the corporation, the individual debtor is considered to have obtained
money within the meaning of § 523(a)(2)(B).”). While not a statement of net worth, per se,
a profit and loss statement is a statement of financial condition. Bal-Ross Grocers, Inc. v.
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Sansoucy (In re Sansoucy), 136 B.R. 20, 23 (Bankr. D. N.H. 1992). In Sansoucy, the court,
adopting a narrow construction of the term “financial condition,” stated: “a ‘statement of
a debtor’s or insider’s financial condition’ as used in § 523(a)(2)(A) and (B) means a balance
sheet and/or profit and loss statement or other accounting of an entity’s overall financial
health and not a mere statement as to a single assert or liability.” 	See also Cadwell v.
Joelson (In re Joelson), 427 F.3d 700, 714 (10th Cir. 2005), cert. denied, 547 U.S. 1163 (2005)
(“false statements are those that purport to present a picture of the debtor’s overall
financial health,” including “those analogous to balance sheets, income statements,
statements of changes in overall financial position, or income and debt statements that
present the debtor or insider’s net worth, overall financial health, or equation of assets and
liabilities. . . . What is important is not the formality of the statement, but the information
contained within it-information as to the debtor’s or insider’s overall net worth or overall
income flow.”); Fairfax State Savs. Bank v. McCleary (In re McCleary), 284 B.R. 876, 884
(Bankr. N.D. Iowa 2002)(finding that profit and loss statement qualified as a statement of
the debtor’s financial condition); Skull Valley Bank of Goshute Indians v. Chivers (In re
Chivers), 275 B.R. 606, 615-16 (Bankr. D. Utah 2002); Weiss v. Alicea (In re Alicea), 230 B.R.
492, 502-04 (Bankr. S.D. N.Y. 1999); but see Engler v. Van Steinburg (In re Van Steinburg),
744 F.2d 1060, 1061 (4th Cir. 1984)(“A debtor’s assertion that he owns certain property free
and clear of other liens is a statement respecting his financial condition. Indeed, whether
his assets are encumbered may be the most significant information about his financial
condition.”).
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The Court finds that the profit and loss statement sent to Douglas at Kosinski’s
direction constitutes a statement of an insider’s financial condition for purposes of section
523(a)(2)(B) as it contained a representation of the ability of Boston Waves to generate
income. Moreover, the Court finds that the statement was materially false. “A materially
false statement is one which paints a substantially untruthful picture of a financial
condition by misrepresenting information of the type which would normally affect the
decision to grant credit.” Merchant’s Nat’l Bank v. Denenberg (In re Denenberg), 37 B.R.
267, 271 (Bankr. D. Mass. 1983) (citing Heinold Commodities & Securities, Inc. v. Hunt (In
re Hunt), 30 B.R. 425, 440 (Bankr. M.D. Tenn. 1983)). “The question of materiality should
be judged not on the basis of the size or seriousness of the error, but by a comparison of the
debtor’s actual financial condition with the picture he paints of it.” Id. (citing First Safety
Fund Nat’l Bank v. Valley (In Re Valley), 21 B.R. 674 (Bankr. D. Mass. 1982)).
In the profit and loss statement forwarded to Douglas, Kosinski grossly overstated
the ability of Boston Waves to generate income and omitted any reference to loan
repayments, although he had caused Boston Waves and Pavilion Realty Trust to execute
numerous promissory notes in the spring of 2003 that were in default at the time the
statement was prepared. 	Nabhan testified as to the unrealistic and inflated revenue
amounts set forth in the statement. 	By listing an expense category for loans and then
omitting any loan payments, Kosinski also created the false impression that, aside from
normal 	operating 	expenses, 	there 	were 	no 	liens 	or 	other 	forms 	of 	indebtedness
encumbering the assets of Boston Waves or requiring payments which could eliminate or
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jeopardize its projected profits. 	The Court finds that, under either a narrow or broad
construction of “financial condition,” Kosinski’s written representations in the profit and
loss statement that Boston Waves would have more than sufficient income to repay
Douglas’ investment and that it had no outstanding loans to jeopardize its profits were
statements of its financial conditions. See, inter alia, In re Joelson, 427 F.3d at 713-14; see also
In re Van Steinburg, 744 F.2d at 1061.
F. Did Douglas rely on the profit and loss statement and was his reliance reasonable?
Douglas testified that he relied upon the profit and loss statement and that he would
not have made the $75,000 loan to the Pavilion Realty Trust had he not received it. The
critical question is whether his reliance was reasonable. See 11 U.S.C. § 523(a)(2)(B).
According to the United States Bankruptcy Appellate Panel for the First Circuit,
Once reliance on the financial statement is established, most courts have held
that a showing of partial reliance is sufficient: the creditor need not
demonstrate that it was motivated solely by the false financial information.
Lincoln First Bank v. Tomei (In re Tomei), 24 B.R. 204, 9 B.C.D. 1166, 1167
(D.Ct.W.D.N.Y.1982). Contra Thomson-MacConnell Cadillac, Inc. v. Isaacs (In
re Isaacs), 15 B.R. 210, 210 (Bkrtcy.S.D.Ohio 1981) (financial statement must
be “backbone of the issuance of credit”). All that is required is that the
financial statement was a “‘contributory cause of the extension of credit.’”
American Bank & Trust v. Drewett (In re Drewett), 13 B.R. 877, 880 (Bkrtcy.
E.D.Pa. 1981) (quoting State Employees Credit Union of Md., Inc. v. Shipley
(In re Shipley), 1 B.R. 85, 90 (Bkrtcy. D. Md. 1979)). . . .
In re Coughlin, 27 B.R. 632, 637 (B.A.P. 1st Cir. 1983). See also Teachers Credit Union v.
Johnson (In re Johnson), 131 B.R. 848, 854-55 (W.D. Mo. 1991); Lyndon Property Ins. Co. v.
Adams (In re Adams), 312 B.R. 576, 585 (Bankr. M.D.N.C. 2004).
The profit and loss statement was the lynchpin of written and oral representations
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made by Kosinski to Douglas to obtain an extension of credit. 	Kosinski, the teacher,
solicited investments from his students. He targeted his students for investment
opportunities and encouraged them to utilize their retirement savings. He left pamphlets
and fliers at meeting sites to advertise investment opportunities. In his “Best Investment”
document, which Douglas picked up after a meeting, he compared cash returns on
investments in his enterprises with those obtainable from certificates of deposits. 	He
represented that investments in “Funds Managed by Alan Kosinski” would yield interests
between 15% and 30% and that they would be “secured on hard business assets.” The
advertisement had the desired effect and prompted Douglas to contact Kosinski who
proposed a tour of the Boston Waves property. Prior to the tour, Kosinski caused the profit
and loss statement to be sent to Douglas. During the tour, Kosinski touted Boston Waves’
potential and represented that it had a twenty-year lease on the property, embroidering
his evaluation of the investment opportunity with details about Nabhan and his sister.
Although Douglas and Kosinski did not have a close personal relationship or friendship,
Kosinski held a position of trust and had an elevated stature in Douglas’s eyes as a
millionaire real estate investment guru. Douglas accepted his representations as true and
hesitated to question him about the security for the loan for fear of insulting him. Douglas
testified that he was nervous because this was his first investment. The Court finds that
Kosinski’s assurances caused him to overlook “red flags” that may have alerted a more
savvy lender to the possibility that the representations in the profit and loss statement were
inaccurate. Although Douglas had the opportunity to perform additional investigations
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as to the accuracy of the profit and loss statement, he clearly failed to recognize that
Kosinski was a predator and the numbers set forth in the profit and loss statement were
grossly inflated. Moreover, Kosinski described his vision for the nightclub, setting forth
his plans to book well-known acts and sponsor other events, which would produce income
over and above daily operations. Douglas drove to Salisbury to see the property before
taking a tour with Kosinski and he demanded to know the source of the numbers set forth
in the profit and loss statement. Kosinski informed him, untruthfully, that he spoke with
Nabhan in formulating the projections set forth in the profit and loss statement. The Court
finds that under the totality of the circumstances, Douglas’s reliance on the profit and loss
statement was reasonable. Kosinski had crafted a routine to obtain funds by giving his
private investors tours of the Boson Waves nightclub and elaborating on his vision of
developing the Salisbury beach area. Under the practiced influence of Kosinski, Douglas’s
naivety cannot be said to negate the element of reasonable reliance.
G. Did Kosinski intend to deceive Douglas?
For the reasons set forth above, the Court finds that Kosinski, in fact, intended to
deceive Douglas. Without further investment, Boston Waves was in jeopardy of closing.
Florek testified as to Kosinski’s repeated requests for money to keep the business afloat.
In January of 2004, Kosinski’s need for cash to operate Boston Waves caused him to
advertise rates of return for funds he managed at usurious rates. Had Kosinski informed
Douglas that Boston Waves had just a two year lease with options, a track record of making
less than $30,000 in 2003, and a canceled insurance policy, instead of the potential to earn
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over one million dollars, the Court finds that Douglas would not have invested in Pavilion
Realty Trust.
The Court further finds that Kosinski is personally liable for both Pavilion Realty
Trust’s debt to Douglas and Boston Wave’s debt to Douglas for the reasons set forth above.
H. Count II of the Amended Complaint Is Moot
Because the Court has found that Douglas satisfied the required elements of a cause
of action under section 523(a)(2)(B), the Court need not address Count II of his Amended
Complaint.
IV. CONCLUSION
In view of the foregoing, the Court shall enter a judgment in favor of the Plaintiff
and against he Defendant on Count I of the Plaintiff’s Amended Complaint. The Debtor’s
obligation to Douglas is excepted to discharge pursuant to 11 U.S.C. § 523(a)(2)(B). Count
II of the Amended Complaint is moot.
By the Court,
Joan N. Feeney
United States Bankruptcy Judge
Dated: February 4, 2009
cc: Jenny l. Redden, Esq., William F. Spallina, Esq.
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