Court Opinion

ID: 3003545
Source: CourtListenerOpinion
Date Created: 2015-09-24 22:28:49.40379+00
Date Added: 2024-06-11T18:02:05.732445
License: Public Domain

NONPRECEDENTIAL DISPOSITION
                          To be cited only in accordance with
                                  Fed. R. App. P. 32.1

         United States Court of Appeals
                               For the Seventh Circuit
                               Chicago, Illinois 60604

                               Submitted June 2, 2009
                              Decided August 17, 2009

                                       Before

                         RICHARD A. POSNER, Circuit Judge

                         KENNETH F. RIPPLE, Circuit Judge

                         MICHAEL S. KANNE, Circuit Judge

Nos. 08-2433, 08-2439

IN RE:                                          Appeals from the United States
   BRETT J. KITSON,                             District Court for the Central District
                                                of Illinois.
      Debtor.
                                                No. 07 C 3313
DALE ALLEMAN and
ILLECTRONICS, INC.,                             Jeanne E. Scott, Judge.

      Appellants,
                         v.

BRETT J. KITSON,

      Appellee.
Nos. 08-2433, 08-2439                                                                  Page 2

                                           ORDER

        On November 11, 2004, Brett J. Kitson and his wife, Courtney, filed a joint Chapter 7
bankruptcy petition in the Bankruptcy Court for the Central District of Illinois. Dale
Alleman commenced an adversary proceeding on behalf of himself and his company,
Illectronics, Inc., which previously had employed Mr. Kitson.1 Mr. Alleman opposed the
discharge of Mr. Kitson’s debts; he argued that Mr. Kitson was ineligible for discharge
under 11 U.S.C. § 727 because his bankruptcy petition and supporting documents
contained various false statements and omissions and because Mr. Kitson allegedly had
destroyed relevant documents. Mr. Alleman also claimed that Mr. Kitson owed him two
debts that were nondischargeable under 11 U.S.C. § 523(a).

       On July 7, 2007, the bankruptcy court conducted a trial in which Mr. Kitson and Mr.
Alleman both participated. Mr. Alleman presented evidence in support of his claim that
Mr. Kitson owed two debts to him and his company: a $15,000 loan and $27,000 in
reimbursement for merchandise that Mr. Kitson allegedly stole from Illectronics while he
was employed there. After the trial, the bankruptcy court granted Mr. Kitson’s petition for
Chapter 7 discharge of all of his non-secured debts. The court began by noting that it
found neither Mr. Kitson nor Mr. Alleman to be a particularly credible witness. The court
then concluded that Mr. Alleman had not carried his burden of proving that Mr. Kitson
had stolen anything from Illectronics; accordingly, it rejected Mr. Alleman’s claim for
$27,000 in restitution. The court found that Mr. Kitson did owe the balance on a $15,000
loan that he had received from Mr. Alleman, but found this debt eligible for discharge
along with Mr. Kitson’s other outstanding debts.

        The bankruptcy court also rejected Mr. Alleman’s argument that Mr. Kitson was
ineligible for bankruptcy discharge under section 727(a) of the Bankruptcy Code, which
prohibits discharge when the debtor has “concealed, destroyed, mutilated, falsified, or
failed to keep or preserve” records relevant to the petition, 11 U.S.C. § 727(a)(3), or
“knowingly and fraudulently . . . made a false oath or account” in connection with the
petition, 11 U.S.C. § 727(a)(4). The court concluded that Mr. Alleman had not proved that
Mr. Kitson concealed or destroyed any documents material to his bankruptcy petition, or
made any material false statement in connection with it. Accordingly, the bankruptcy
court concluded that Mr. Kitson was eligible for discharge of all of his non-secured debts.
The court further found that Mr. Kitson had no nonexempt assets with which to pay any of
the debts; accordingly, it granted Mr. Kitson’s petition for bankruptcy discharge. Mr.
Alleman appealed the decision to the district court, which affirmed. He now appeals to
this court.

       1
           We shall refer to the appellants collectively as “Mr. Alleman.”
Nos. 08-2433, 08-2439                                                                      Page 3

        “We review a district court's decision to affirm the bankruptcy court de novo, which
allows us to ‘assess the bankruptcy court's judgment anew, employing the same standard
of review the district court itself used.’” In re Boone County Utils., LLC, 506 F.3d 541, 542 (7th
Cir. 2007) (citation omitted). This court reviews the bankruptcy court’s findings of fact for
clear error and its conclusions of law de novo. In re Frain, 230 F.3d 1014, 1017 (7th Cir.
2000).

       In this appeal, Mr. Alleman challenges the bankruptcy court’s determination that he
had not proved facts sufficient to support his theory that discharge was barred under
section 727(a). He also takes issue with the bankruptcy court’s finding that he had not
proved that Mr. Kitson stole a JVC television from Illectronics.2

        Turning first to Mr. Alleman’s arguments under section 727(a), we do not believe
that the bankruptcy court erred in concluding that Mr. Alleman failed to prove that Mr.
Kitson was ineligible for discharge. Section 727(a)(3) forbids discharge where the debtor
has “concealed, destroyed, mutilated, falsified, or failed to keep or preserve” records “from
which the debtor’s financial condition or business transactions might be ascertained, unless
such act or failure to act was justified under all of the circumstances of the case.” 11 U.S.C.
§ 727(a)(3). Mr. Alleman argues that Mr. Kitson ran afoul of this prohibition by failing to
retain business records for Kitson Enterprises, a corporation of which Mr. Kitson was the
sole shareholder. The bankruptcy court found that these records were not material to Mr.
Kitson’s financial condition. First of all, we note that although Mr. Kitson disposed of his
personal copies of the corporation’s business records, his accountant retained a copy of
those records. Mr. Kitson testified--unrebutted--that he had instructed his accountant to
make those records available to Mr. Alleman. Mr. Alleman never asked for them, however,
even though Mr. Alleman and Mr. Kitson both used the services of the same accountant.
Furthermore, even if Mr. Kitson had destroyed the records, their destruction was
irrelevant. The bankruptcy court found that Kitson Enterprises had no assets at the time of
the bankruptcy petition--a finding that Mr. Alleman does not dispute. Thus, the
corporation’s financial status had no bearing on Mr. Kitson’s bankruptcy estate. Mr.
Alleman argues that the records were relevant because the corporation’s tax returns
indicate that the corporation earned roughly $50,000 in gross income in the two years prior
to Mr. Kitson’s bankruptcy filing. The same returns also make clear, however, that this
gross income was offset by business expenses incurred by the corporation. Thus, there was
no net income that could have been disbursed to Mr. Kitson as a shareholder, and indeed
his personal tax returns reflect no such disbursements from the corporation. Thus, the
bankruptcy court was correct to conclude that the records were immaterial.

       2
         Mr. Alleman does not challenge the bankruptcy court’s findings as to the rest of
the $27,000 worth of property that he alleged Mr. Kitson had stolen.
Nos. 08-2433, 08-2439                                                                  Page 4

       Mr. Alleman also submits that the bankruptcy court should not have granted Mr.
Kitson a discharge because he made a number of misstatements and omissions on the
bankruptcy statement and schedules. Section 727(a)(4) forbids discharge where the debtor
“knowingly and fraudulently . . . made a false oath or account.” 11 U.S.C. § 727(a)(4). The
bankruptcy court found that Mr. Kitson’s bankruptcy filing did contain several
misstatements and omissions, but concluded that they did not run afoul of Section 727(a)
because none of them were material to the bankruptcy petition. We agree.

        Mr. Alleman claims that Mr. Kitson improperly failed to list income from his
corporation, Kitson Enterprises. As we have already discussed, however, that
corporation’s revenues were immaterial to Mr. Kitson’s personal bankruptcy petition. Mr.
Alleman submits that under In re Cox, 93 B.R. 625 (Bankr. S.D. Ill. 1988), corporate income
earned by a corporation owned by a bankruptcy petitioner must be disclosed. As the
district court recognized, however, Cox involved a Subchapter S corporation, the income
from which is treated as income of the shareholders. Kitson Enterprises is not an S
corporation; it is, apparently, a Subchapter C corporation. Income earned by C
corporations does not become income of the shareholders until the corporation makes a
distribution, and the record here indicates that Kitson Enterprises never made such a
distribution; thus, Mr. Kitson had no income from the business. Cox, therefore, is
inapposite, and the bankruptcy court was correct to determine that the corporation’s
income was not income to Mr. Kitson.

        Mr. Alleman also claims that Mr. Kitson ran afoul of section 727(a)(4) because his
filings identified the corporation as “BK Motorsports” rather than its official name, Kitson
Enterprises. Mr. Kitson also failed to list the Employer Identification Number for that
business. The bankruptcy court found that this misstatement and omission were
immaterial. We agree. Although there might be cases in which misstatement of a
corporate name and omission of an EIN would hinder creditors or the court in their
attempts to ascertain the extent of the debtor’s assets, this was not such a case. Mr.
Alleman and the court were aware of the corporation’s true name. And, in any event, the
court found that his ownership of the corporation was not an asset to Mr. Kitson’s
bankruptcy estate.

        Mr. Alleman further points out that Mr. Kitson failed to disclose a $6,300 loan from
his parents, as well as several lawsuits in which he was a defendant. The bankruptcy court
concluded that omission of the parental loan was not material because Mr. Kitson’s estate
had no remaining assets with which to pay unsecured creditors; thus, the omission had no
effect on whether any of the unsecured creditors, including Mr. Alleman, would receive
any distribution from the estate. Likewise, the omitted lawsuits were, if anything, potential
unsecured liabilities. Their omission was immaterial for the same reason. Thus, we see no
Nos. 08-2433, 08-2439                                                                 Page 5

error in the bankruptcy court’s rejection of Mr. Alleman’s arguments.

       Finally, Mr. Alleman submits that discharge was improper because Mr. Kitson
represented in his bankruptcy statement that he had no records related to Kitson
Enterprises. This representation was false; Mr. Kitson admitted at trial that he had
possessed such records at the time of the bankruptcy filing and subsequently had disposed
of them. This omission also was immaterial, however, because the bankruptcy court found
that the corporation’s records were unrelated to Mr. Kitson’s personal bankruptcy.
Moreover, Mr. Alleman did not explain how he, any other creditor, or the court was
hindered in any material way by the misrepresentation. Thus, the court did not err in
finding that this misrepresentation did not trigger section 727(a)(4).

        We turn at last to Mr. Alleman’s contention that the bankruptcy court erred in
finding that he had failed to prove that Mr. Kitson had stolen a JVC television set from
Illectronics while he was an employee there. Mr. Alleman testified at the bankruptcy trial
that, while Mr. Kitson was working at Illectronics, Mr. Alleman began to suspect that he
was stealing products from the company’s inventory and selling them via the Internet. One
day, Mr. Alleman saw an Internet auction listing for a JVC television, the serial number of
which was a match to one of the televisions in Illectronics’ inventory. Mr. Alleman then
decided to set up a “sting” operation in an attempt to catch the thief. First, he “marked”
the television by drawing a red “X” on the side of the box holding it. He then had a friend
place the winning bid in the auction. The Internet seller collected payment and shipped the
television; when it arrived, the carton bore the same red “X” and the serial number
matched the television from Illectronics’ inventory. The e-mail address associated with the
seller’s account was “execfitness@aol.com”; Mr. Alleman testified at trial that this was an
address used by Mr. Kitson.

        Mr. Kitson denied having stolen the television. He testified that he had sold
Illectronics products via the Internet, but had always done so at Mr. Alleman’s behest.
According to Mr. Kitson, and another Illectronics employee who testified at the trial, Mr.
Alleman sometimes directed the company’s employees to make such sales through their
personal accounts in order to evade restrictions in Illectronics’ sales agreements with
equipment vendors, which forbade the sale of merchandise outside of the company’s
geographic area.

        After hearing all of the evidence at trial, the bankruptcy court found that Mr.
Alleman had not proved that Mr. Kitson stole the television. This conclusion was not
clearly erroneous. As we already have mentioned, the bankruptcy court found Mr.
Alleman not to be a credible witness. Deference to a bankruptcy court’s factual findings is
“particularly appropriate” when they are based on credibility determinations. In re Krehl,
Nos. 08-2433, 08-2439                                                                    Page 6

86 F.3d 737, 743 (7th Cir. 1996). Furthermore, it is significant that Mr. Alleman did not fire
Mr. Kitson or discipline him in any way after the “sting.” In fact, Mr. Alleman took no
action related to the alleged theft until several months later and only after Mr. Kitson had
filed for bankruptcy and had given Mr. Alleman notice that he wished to end his
employment with Illectronics. It was only on Mr. Kitson’s last day of work that Mr.
Alleman took action: He had Mr. Kitson arrested for theft.3 This inaction is difficult to
reconcile with Mr. Alleman’s claim that the sting proved Mr. Kitson’s culpability. Under
the circumstances, there is ample support for the bankruptcy court’s finding that Mr.
Alleman failed to prove that Mr. Kitson was responsible for theft of the television.

                                                                                   AFFIRMED

         3
             State prosecutors ultimately decided not to prosecute Mr. Kitson for the alleged
theft.