In re Kitchin

• Decision Date: 25 July 2005
• Docket Number: Bankruptcy No. 01 B 17814.,Adversary No. 03 A 01204.
• Citation: 327 B.R. 337
• Parties: In re Peter KITCHIN, Debtor. Robert Troost, et al., Plaintiffs v. Peter Kitchin, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

327 B.R. 337

In re Peter KITCHIN, Debtor Robert Troost, et al., Plaintiffs v. Peter Kitchin, Defendant.

Bankruptcy No. 01 B 17814.

Adversary No. 03 A 01204.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

July 25, 2005.

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Jared M. Wayne, Shefsky & Froelich, Ltd., Chicago, IL, Bruce L. Wald, Tishler

& Wald, Chicago, IL, Attorney for Movant or Plaintiff.

Howard L. Adelman, Esq., Adelman, Gettleman, Merens, Berish & Carter, Chicago, IL, Attorney for Respondent or Defendant.

Ronald R. Peterson, Jenner & Block, LLC, Chicago, IL, David P. Leibowitz, Steven R. Rappin, Hauselman & Rappin, Ltd., Chicago, IL, Patrick J. Sherlock, Law Office of Patrick J. Sherlock, Chicago, IL, Office of the U.S. Trustee, Trustee or Other Attorneys.

FINDINGS OF FACT AND CONCLUSIONS OF LAW ON DEFENDANT'S MOTION FOR SANCTIONS

JACK B. SCHMETTERER, Bankruptcy Judge.

This Adversary proceeding relates to the Chapter 7 Bankruptcy case filed by Peter T. Kitchin who was sued herein ("Debtor" or "Defendant"). The Adversary was filed March 28, 2002. On December 1, 2003, Plaintiffs Robert Troost ("Troost"), Mount Hope Cemetery Association, Inc. ("Mount Hope"), and Hope Carmel L.L.C. (the "LLC") filed their Second Amended Complaint herein seeking to determine dischargeability of an alleged debt pursuant to 11 U.S.C. § 523 and also objecting to the Debtor's discharge pursuant to 11 U.S.C. § 727. During the course of discovery and on the eve of trial, Plaintiffs voluntarily dismissed their Second Amended Complaint with prejudice, but jurisdiction was reserved over the pending motions of Defendant for sanctions.

The Debtor/Defendant moved for sanctions and related relief pursuant to Fed. R. Bankr.P. 9011, 28 U.S.C. § 1927, and 11 U.S.C. § 105. He contends that Plaintiffs filed this Adversary proceeding for an improper purpose, namely to delay the Debtor's bankruptcy case; and also that factual contentions in paragraphs 16, 17, and 26 through 30 of the Second Amended Complaint lacked evidentiary support and contained legal contentions unwarranted by existing law. Debtor further asserts that these same issues, and also the extended and hard-fought prosecution of this suit for 27 months until dismissal by Plaintiffs on eve of trial, further support an award of fees and costs under 28 U.S.C. § 1927 and 11 U.S.C. § 105.

For reasons stated below, the Debtor's motion for sanctions under Fed. R. Bankr.P. 9011 is denied. The Debtor has, however, demonstrated sufficient facts to establish possible right to award sanctions under 28 U.S.C. § 1927, or alternatively under 11 U.S.C. § 105, contingent on the opportunity of both sides to offer further evidence and argument. This matter will be set for a further hearing to establish in detail the amount of movants' claim for sanctions under § 1927, and then to allow responsive evidence and argument from Plaintiffs on these matters.

BACKGROUND AND PROCEDURAL HISTORY

Debtor Peter T. Kitchin and Plaintiff Robert Troost are sophisticated businessmen active in the real estate market. The Debtor is a contractor, developer, and owns several subchapter S corporations that provide contracting services. Troost operates cemeteries, owns several pieces of real estate, and is the principal of Plaintiff Mount Hope Cemetery Association.

From 1994 to 1999, Troost and the Debtor participated in a number of real estate ventures. The Debtor functioned as a type of real estate broker; he would find potentially lucrative pieces of real estate to purchase and receive a commission. Troost would provide investment funds.

In 1998, the Debtor notified Troost of an investment opportunity in certain real property in Mokena, Illinois, consisting of a shopping plaza and an office building. Troost, Mount Hope and the Debtor's wife, Carmel Kitchin, an entity controlled by Carmel Kitchin, Carmel Investments, Inc. ("CII") formed Plaintiff Hope Carmel L.L.C. to purchase these properties. Mount Hope, the entity controlled by Troost, held a fifty percent interest in the LLC. CII, controlled by Carmel Kitchin, also held a fifty percent interest. The Debtor managed the properties and provided contracting services. Troost handled the financial affairs.

By 1999, the relationship between the Debtor and Troost deteriorated, and the parties sought to sell their interests in the Mokena properties. Buyers were located, contracts to sell were executed and earnest money deposited but the parties disagreed as to the purchase price, terms of the sale, and the buyer. They eventually resolved their differences in a Settlement Meeting held August 30th, 2000. The parties agreed to consummate the sale of the Plaza and Office Building. The Plaza was sold but the Office Building was not, prompting the would be buyer to file suit in state court to enforce the sales contract.

The Second Amended Complaint alleged that the Debtor engaged in a scheme to defraud Troost in the sale of the Mokena Properties. Specifically, it alleged that (1) Debtor orally misrepresented to Troost at the Settlement Meeting that the Office Building was worth $4 million, with the intent of inducing Troost, Mount Hope, and the LLC into accepting Gateway's offer to purchase the Office Building at below market value; and (2) Debtor committed embezzlement, defalcation, and fraud in his capacity as a fiduciary of the Mokena Properties by fraudulently converting earnest money for his own use.

The parties commenced discovery. On the eve of trial Plaintiffs moved to dismiss the Second Amended Complaint with prejudice, prompting the Debtor to file the instant sanctions motion. Debtor moves for sanctions based on paragraph 16 and paragraphs 26 through 30 of the Second Amended Adversarial Complaint. Paragraph 16 related to a purported oral representation made by the Debtor as to the value of an Office Building and paragraphs 26 through 30 related to the Debtor's alleged misappropriation of earnest money paid in connection with sale of the Mokena Properties.

Paragraph 16 stated:

16. On August 30, 2000, the Debtor, as Troost's business partner and the person to whom Troost entrusted the management and sale of the Mokena Properties, orally misrepresented to Troost that the Office Building was worth $4 million with the intent of inducing Troost, Mt. Hope, and Hope Carmel into accepting a proposal by Gateway to purchase the Office Building at the below-market price of $4 million. The representation that the Office Building was worth $4 million, made by the Debtor to his business partner, was false and the Debtor knew it was false at the time it was made because the Debtor knew at that time that the Office Building was actually worth far in excess of $4 million, although the exact value of the Office Building in August of 2000 is not presently known as discovery has not been completed in his case and expert opinions have yet to be elicited or disclosed on the subject of the historical value of the Office Building.

Paragraphs 26-30 stated:

26. In January 2000, the Debtor arranged a purported agreement for the purchase of the Plaza which required payment by the prospective purchasers of $100,000.00 in earnest money to Hope Carmel.

27. In January 2000, Troost, Mt. Hope, and Hope Carmel relied on the Debtor in his position of trust as manager of the Mokena Properties in the Hope Carmel venture by entrusting the Debtor with the $100,000 earnest money payment from the prospective purchasers of the Plaza.

28. In January 2000, the Debtor, while managing and holding the Mokena Properties in trust for Hope Carmel and holding the $200,000 in earnest money in trust in his capacity as manager of the Mokena Properties, fraudulently converted $50,000 of the $100,000 earnest funds for his own use.

29. The diversion of $50,000 of the earnest money funds was not disclosed to Hope Carmel, Troost, or Mt. Hope and was made strictly for Debtor's personal benefit.

30. As a direct and proximate result of the Debtor's defalcation while acting in a fiduciary capacity and embezzlement of $50,000 of the earnest money funds, Troost, Mt. Hope, and Hope Carmel were damaged in the amount of $50,000.

Evidence was taken on the sanction motion as to Paragraphs 16 and 26 through 30 of the Second Amended Complaint, and the history of this Adversary was reviewed. Following trial on the sanction motion, closing arguments were submitted in writing. Based on the pleadings and admissions, court records as to history of this Adversary proceeding, submissions of the parties and evidence adduced at trial of the sanction motion, it is found and concluded for reasons stated below that the Debtor's sanction motion under Fed. R. Bankr.P. 9011 should be denied but relief may yet be considered pursuant to 11 U.S.C. § 1927 or alternatively 11 U.S.C. § 105.

FINDINGS OF FACT

Troost's and Kitchin's Relationship

1. Robert Troost ("Troost") is a cemeterian and real estate owner. He owns approximately eight cemeteries and five monument/memorial businesses, including approximately sixteen outlets. (Def.'s Ex. 26; Troost Tr. 11/30/04 at 69-70.)¹ Troost also owns, personally or through various entities, an industrial building in Villa Park, Illinois, a condominium in Florida and shopping plazas in Schaumburg and La Grange Park, Illinois. (Def.'s Ex. 26 at 8; 9-12; Troost Tr. 11/30/04 at 69-70.)

2. Peter Kitchin is a real estate developer, general contractor and holds interests in entities that provide contracting services. (P. Kitchin Tr. 11/29/04 at 90; Def.'s Ex. 3; Second Am. Compl. ¶ 5; Answ. ¶ 5.)

3. Kitchin first met Troost in 1994 and from 1994 to 1999 they were involved in a number of real estate ventures whereby Kitchin would locate real estate and offer Troost an opportunity to invest. (P. Kitchin Tr. 11/29/04 at 147-148, 168; Second Am. Compl. ¶ 6; Answ. ¶ 6.) During this period, Kitchin and Troost acquired...