Marrow et al v. Zolnosky et al

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
Monte Wayne Zolnosky, and 	No. 7-07-11879 MA
Lois Ann Zolnosky,
Debtors.
_____________________________________________________________________________
Ben and Lara Morrow,
Plaintiffs,
v. 	Adv. No.: 07-1157 M
Monte and Lois Zolnosky,
Defendants.
MEMORANDUM OPINION
THIS MATTER is before the Court on the Complaint Objecting to Discharge and for
Determination of Dischargeability of Debt (the "Complaint") filed by Ben and Lara Morrow
("Plaintiffs"), through their attorneys, White Koch Kelly & McCarthy, PA (Aaron Wolf) against
Monte and Lois Zolnosky, the Debtors ("Defendants"). Defendants are represented by William
F. Davis & Assoc. (Charles Hughson). The Complaint seeks a determination that the debt is
non-dischargeable under 11 U.S.C. § 523(a)(2)(A). A trial was held on July 31, 2008.
Defendants, by oral motion, sought dismissal of the claims of Plaintiff Lara Morrow for failing
to appear at trial. The Court granted Defendants’ Motion and dismissed the claims of Plaintiff
Lara Morrow. At the close of Plaintiff’s case, Defendants, by Motion for Directed Verdict,
moved for the dismissal of Defendants Monte and Lois Zolnosky from the proceeding. The
Court denied the Motion as to Monte Zolnosky, granted the Motion as to Lois Zolnosky and
dismissed the claims against Defendant Lois Zolnosky. The Court took the matter against
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Defendant Monte Zolnosky under advisement. Upon review of the pleadings, evidence, and the
applicable statutory and case law, the Court finds as follows:
FACTS
1. 	Plaintiffs, Ben Morrow and Lara Morrow, are husband and wife, residing in Santa
Fe County, New Mexico.
2. 	Defendants, Monte Wayne Zolnosky and Lois Ann Zolnosky, are individuals who
owned and operated a corporation, Zolnosky Construction, Inc.
3. 	Plaintiff, Ben Morrow, met Monte and Lois Zolnosky over ten years ago through
realtor Peter Hess.
4. 	Plaintiffs sought to make investments in real estate.
5. 	Over the course of several years, Plaintiffs loaned money to Defendants for the
construction of houses.
6. 	Mr. Morrow testified that Mr. Zolnosky would contact him when Zolnosky
became aware of a lot for sale or had purchased a piece of property and needed
money for the construction of a home.
7. 	Mr. Zolnosky would provide Mr. Morrow with a construction mortgage and loan
documents in return for the loan proceeds.
8. 	Mr. Zolnosky would give the documents to the title company to be recorded and
then provided recorded copies to Mr. Morrow between several days to several
months after each loan transaction occurred. Mr. Morrow was never required to
record the loan documents.
9. 	Mr. Morrow testified that he knew the loan documents were recorded because the
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documents had a stamp from some entity located on the construction mortgage
documents. Mr. Morrow introduced Exhibit 5, which was a construction
mortgage executed by the parties on or about January 26, 1999 and recorded in
Santa Fe County.
10. 	After Mr. Zolnosky built and sold each home, Mr. Morrow would be contacted by
either Mr. Zolnosky or the title company.
11. 	Mr. Morrow would receive payment of the principal and interest from the title
company. In some instances, Mr. Morrow would roll the principal into another
loan so Zolnosky could obtain another property and build another home.
12. 	On May 29, 2003, the Morrows loaned the Zolnoskys $170,000.00 for the
construction of a residence on Bishop Lamy Road in Santa Fe County (“Santa Fe
house”). The Morrows and the Zolnoskys, as officers of Zolnosky Constuction,
Inc., executed a Construction Mortgage, Promissory Note and Construction Loan
Agreement (the “2003 loan”).
13. 	Mr. Morrow received a copy of the construction loan documents for the 2003
loan.
14. 	Mr. Morrow testified that he assumed the loan documents for the 2003 loan had
been recorded because the documents had been recorded in all of the previous
loan transactions.
15. 	In fact, the construction mortgage from the 2003 loan was not recorded.
16. 	Mr. Morrow testified that he contacted Mr. Zolnosky in March 2004 about
making another loan because he had some additional funds available for
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investment.
17. 	Mr. Morrow testified that at the time he contacted Mr. Zolnosky in March 2004,
he believed that the Santa Fe house has not been sold based on representations by
Mr. Zolnosky. Mr. Morrow testified that Mr. Zolnosky told Mr. Morrow that the
Santa Fe house was taking longer to sell because he made a mistake by using
materials that were “too fancy.”
18. 	On March 29, 2004, the Morrows loaned the Zolnoskys additional funds in the
amount of $210,000.00 for the construction of a residence in Placitas, New
Mexico (“Placitas house.”). The Morrows and the Zolnoskys, as officers of
Zolnosky Constuction, Inc., executed a Construction Mortgage, Promissory Note
and Construction Loan Agreement (the “2004 loan”).
19. 	Mr. Morrow testified that he received copies of the loan documents from the 2004
loan.
20. 	Mr. Morrow testified that he believed the loan documents from the 2004 loan had
been recorded because of a handwritten notation containing four numbers at the
top of the first page of the Construction Mortgage.
21. 	The construction mortgage from the 2004 loan was not recorded.
22. 	Mr. Morrow testified that he and Mrs. Morrow became concerned in 2006
because they had not received their money, had not heard from Mr. Zolnosky, and
could not find a contact number for him.
23. 	In September 2006, the Morrows went to see the Santa Fe house to determine the
progress of the sale and discovered the house had been sold.
24. 	Thereafter, Plaintiff, Ben Morrow, called and confronted Mr. Zolnosky about the
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sale of the Santa Fe home. Mr. Zolnosky admitted that he was unable to repay
both loans and promised to pay the loans.
25. 	Mr. Morrow asked Mr. Zolnosky why he did not record the mortgages from the
2003 loan and the 2004 loan and did not get a response.
26. 	Mr. Morrow testified that he received two payments of $20,000.00 each, for a
total of $40,000.00 in connection with the 2003 loan and the 2004 loan , but that
he lost a total of $340,000.00 on these two loans.
27. 	Mr. Morrow testified that the payments were received from Defendants between
2004 and 2006 but prior to the discovery that the two homes were sold. Mr.
Morrow testified that at the time each payment was made Mr. Zolnosky told him
that these were interest payments since the homes had not been sold.
28. 	Mr. Morrow testified that he would not have made the 2003 loan or the 2004 loan
if he had known Mr. Zolnosky was not going to record the mortgage documents
related to these loans.
CONCLUSIONS OF LAW
Plaintiff asks this court to deny discharge of the debt resulting from the 2003 loan and
2004 loan pursuant to 11 U.S.C.§523(a)(2)(A). Under §523(a)(2)(A) a court may deny a
discharge of a debt for money, property, services, or an extension, renewal, or refinancing of
credit to the extent obtained by false pretenses, a false representation, or actual fraud, other than
a statement respecting the debtor’s or an insider’s financial condition. 11 U.S.C.§ 523(a)(2)(A).
Under this subsection the creditor must show by a preponderance of evidence that: the debtor
made a misrepresentation; the debtor made the misrepresentation with the intent to deceive; the
creditor justifiably relied on the misrepresentation; and that the misrepresentation caused the
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1 See Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1373 (10 th Cir. 1996)(setting
forth the requirements for a 523(a)(2)(A) claim); Field v. Mans, 516 U.S. 59, 74-75, 116 S.Ct.
437, 133 L.Ed.2d 351(1995) (establishing “justifiable” standard of reliance); Grogan v. Garner,
498 U.S. 279, 291, 111 S.Ct. 657, 112 L.Ed.2d 755 (1991)(establishin preponderance of
evidence standard of proof for dischargeability actions.)
2 See Bellco First Fed. Cr. Union v. Kaspar ( In re Kaspar), 125 F.3d 1358, 1361 (10th
Cir.1997).
3 In re Audley, 268 B.R. 279, (Bankr.D.Kan.,2001.)
4 In re Lang, 293 B.R. 501, 514 (10th Cir.BAP (Utah),2003)(citing Driggs v. Black (In re
Black), 787 F.2d 503, 506 (10th Cir.1986), abrogated in part on other grounds, Grogan v.
Garner, 498 U.S. 279, 283, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
5 In re McGuire, 284 B.R. 481, 488 (Bankr.D.Colo.,2002)(citing Restatement (Second) of
Torts § 525 (1976)); In re Chivers, 275 B.R. 606(Bankr.D.Utah,2002);
6 In re Baines, 337 B.R. 392, 399 (Bankr. D.N.M.,2006)(quoting Fowler Bros., 91 F.3d at
1375 (“[T]he debtor's intent to deceive the creditor in making false representations to the
creditor, may be inferred from the ‘totality of the circumstances.”))
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creditor to sustain damages.1 Discharge provisions will be strictly construed against the creditor
and liberally construed in favor of the debtor.2
The first element under §523(a)(2)(A) requires a showing of actual fraud or false
pretenses or false representation or willful misrepresentation. 3 “False pretenses” or
“representations” are representations knowingly and fraudulently made that give rise to the debt. 4
Courts have defined “fraudulent misrepresentation” as: “one who fraudulently makes a
misrepresentation of fact, opinion, intention or law for the purpose of inducing another to act or
to refrain from action in reliance upon it, is subject to liability to the other in deceit for pecuniary
loss caused to him by his justifiable reliance upon the misrepresentation.”5
The second element under §523(a)(2)(A), intent to deceive, is a question of fact which
can be inferred based on the totality of circumstances. 6 Because a debtor rarely admits an intent
to defraud, a Plaintiff can satisfy the scienter element through circumstantial evidence from
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7 Young at 1375.
8 Id.
9 Hill v. Horst (In re Horst), 151 B.R. 563, 568 (Bankr.D.Kan. 1993)
10 In re Chivers, 275 B.R. 606, 622 (Bankr.D.Utah 2002)(A party may justifiably rely on
a misrepresentation even when he could have ascertained its falsity by conducting an
investigation.)
11 Id. at 621-622
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which the Court may infer the requisite intent to defraud.7 The Court must consider the totality
of the circumstances as of the time the representation was made to determine whether a debtor
had a subjective intent to defraud the creditor.8 The Court may logically infer an intent to
deceive if the debtor knowingly or recklessly makes a false representation that the debtor knew
or should have known would induce another to act.9
In order to satisfy the reliance element of 523(a)(2)(A), a party need only have justifiably
relied on the misrepresentation. Justifiable reliance does not require that the creditor prove that
he acted consistent with ordinary prudence and care. 10
The final element of 523(a)(2)(A) requires the creditor to establish the harm caused by
the debtor’s fraudulent misrepresentations.11
Plaintiff, Ben Morrow alleges that Defendant, Monte Zolnosky committed fraud when he
obtained the 2003 loan and the 2004 loan. At trial, Mr. Morrow testified about the prior course
of dealings between the parties. Specifically, Mr. Morrow testified that there had been at least
eight or nine successful loan transactions in the ten years prior to the 2003 loan. He testified that
for each of these previous transactions Defendant provided Plaintiff with copies of recorded
construction mortgages after the construction loan documents were executed and the money was
received by the Defendant. Mr. Morrow would receive the recorded documents between a few
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days to several months following each transaction. Mr. Morrow testified that he knew the
construction mortgages had been recorded because of the stamp from some entity affixed to the
documents. 	Mr. Morrow further testified that when the 2003 loan was made he assumed that
loan documents would be recorded in conformity with prior transactions. Under direct
examination by Plaintiff, Mr. Zolnosky testified that he did not record any of the loan
documents. To show the history of the prior transactions between the parties, Mr. Morrow
introduced a copy of a construction mortgage from 1999, admitted as Exhibit 5, that was
recorded in the Office of the County Clerk of Santa Fe County.
Upon review of Exhibit 5 and further questioning, Mr. Zolnosky admitted that in the
prior transactions he gave the loan documents to the title company to be recorded. He also
admitted that he did not give the 2003 loan or 2004 loan documents to the title company as he
had done in all past transactions. It is evident, from the previous course of dealing, that Mr.
Zolnosky misrepresented that the documents would be recorded. The Court is persuaded that
there was an ongoing, implied promise that the loan documents would be recorded for each
transaction. Unfortunately, Plaintiff did not elicit any testimony or provide any evidence to
show why Mr. Zolnosky did not follow the same procedure as in the prior transactions or that his
intent at the time of the 2003 loan was to not have the loan documents recorded. Mr. Morrow
testified that had he known the documents would not be recorded he would not have made the
loans. The Court finds that at the time of the 2003 loan transaction Mr. Morrow justifiably relied
on the course of conduct from the prior transactions. But because Mr. Morrow failed to
introduce any evidence that the Defendant did not intend to have the loan documents recorded,
Mr. Morrow failed to meet his burden to establish Defendant’s fraudulent intent at the time the
loan proceeds from the 2003 loan were received.
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In sum, for the 2003 loan Mr. Morrow established that a misrepresentation occurred, that
he justifiably relied on the misrepresentation and that he was harmed by the misrepresentation
but failed to prove intent. 	For the 2004 loan, Plaintiff also fails to meet his burden to establish
all of the requisite elements to allow the Court to determine the debt non-dischargeable.
Mr. Morrow testified that, at the time of the 2004 loan, he approached Mr. Zolnosky
about making that loan because he had additional funds available for investment. Mr. Morrow
testified that Mr. Zolnosky indicated that there were lots available to build in Placitas and he
could use as much money as Mr. Morrow had available to lend in order to build another house.
At this time, Mr. Zolnosky informed Mr. Morrow that the Santa Fe house was not sold and was
taking longer to sell because Mr. Zolnosky had made a mistake in using more expensive
materials thereby increasing the price per square foot. Mr. Zolnosky never indicated that he
would have any trouble repaying the loans. Mr. Morrow further testified that Mr. Zolnosky
failed to disclose his financial condition. Mr. Morrow testified that because of the prior
transactions and a handwritten notation at the top of the Construction Mortgage he expected Mr.
Zolnosky to have the loan documents recorded. Mr. Zolnosky’s pattern of conduct of not
recording the 2003 loan and 2004 loan, despite the ongoing, implied promise to record loan
documents, from the prior course of dealings, suggests fraudulent intent. These actions
compounded with Mr. Zolnosky’s testimony, specifically, his initial testimony that he did not
record the mortgages and then, after further questioning admitted that he would give the loan
documents to the title company for recording further supports the Court’s belief that there was
fraudulent intent. Regardless, at the time of the 2004 loan transaction, Mr. Morrow had copies of
the 2003 loan documents that on their face were not recorded. As discussed above, Mr. Morrow
testified that in the prior successful loan transactions, he knew when loan documents were
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12 Mr. Morrow introduced Exhibit 5, the loan document from a 1999 loan which was
recorded and contained the stamp.
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recorded by the stamp on the construction mortgages. 12 Based on Exhibit 5 and Mr. Morrow’s
testimony, the Court finds that Mr. Morrow’s reliance that Mr. Zolnosky would record the
documents from the 2004 loan was not justifiable. In issuing this memorandum the Court in no
way condones the behavior of Mr. Zolnosky. He has deprived the Plaintiffs of a significant
portion of their retirement assets and caused them great financial distress.
However, having determined that Plaintiff has not shown all of the required elements of
11 U.S.C. §523(a)(2)(A) for either loan transaction, the Court must deny the relief sought.
CONCLUSION
Based on the foregoing, the Court concludes that the debts at issue in this adversary
proceeding are dischargeable under 11 U.S.C. §523(a)(2)(A). The Court will enter a judgment
consistent with this Memorandum Opinion.
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_____________________________
MARK B. McFEELEY
United States Bankruptcy Judge
Entered on Docket Date: August 28, 2008
Copy to:
Aaron J. Wolf
White, Koch, Kelly & McCarthy, P.A.
P.O. Box 787
Santa Fe, NM 87504-0787
Charles R. Hughson
William F. Davis & Assoc. P.C.
6709 Academy Road, NE, Suite A
Albuquerque, NM 87109
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