Krehl, Matter of

• Decision Date: 01 August 1996
• Docket Number: No. 95-2850,95-2850
• Citation: 86 F.3d 737
• Parties: In the Matter of Robert P. KREHL, Debtor-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 737

86 F.3d 737

In the Matter of Robert P. KREHL, Debtor-Appellant.

No. 95-2850.

United States Court of Appeals Seventh Circuit.

Argued Jan. 10, 1996.

Decided June 20, 1996.

Rehearing and Suggestion for Rehearing En Banc Denied Aug. 1, 1996.

Timothy J. Peyton (argued), Kepler & Peyton, Madison, WI, for Appellee.

John C. Widule (argued), Elm Grove, WI, for Debtor-Appellant.

Before WOOD, Jr., CUDAHY and ROVNER, Circuit Judges.

ILANA DIAMOND ROVNER, Circuit Judge.

After a trial, the bankruptcy court (the Hon. Robert D. Martin) denied Robert P. Krehl a discharge of his extensive personal debts pursuant to 11 U.S.C. § 727(a). The court found that a denial of discharge was warranted because Krehl had removed, concealed, and transferred property belonging to the bankruptcy estate of Retro Technologies, Inc. ("RTI") with the intent to hinder, delay or defraud RTI's creditors. See 11 U.S.C. § 727(a)(2)(B). The court also found that Krehl had entered RTI's premises after a receiver had been appointed, disarmed the alarm system, dismantled the company's computer program, and made away with corporate records and financial information. See 11 U.S.C. § 727(a)(3). The court concluded that because Krehl had committed these acts in connection with the bankruptcy of an "insider," he should be denied a discharge in his own bankruptcy. See 11 U.S.C. § 727(a)(7). Krehl appealed that decision to the district court, which affirmed the bankruptcy court's judgment. He now appeals to this court, arguing, inter alia, that the lower courts erred in finding that the insider relationship survived his resignation as a corporate officer and director. He contends that a denial of discharge was not warranted here because he no longer was an insider by the time most of the objectionable conduct occurred. We disagree, however, and thus affirm the judgment below.

I.

After two days of testimony, the bankruptcy court made preliminary oral findings and subsequently issued detailed findings of fact and conclusions of law. Krehl testified at the trial and offered innocent explanations for nearly all of his actions. The bankruptcy court did not credit his explanations, however, but found his testimony incredible on all material issues. We describe the factual background of this case with an eye toward that finding.

Prior to January 3, 1994, Krehl was the president, sole shareholder, and a director of RTI, a company that manufactured and applied synthetic stucco and insulation products. RTI operated out of a building that Krehl owned on Raemisch Road in Waunakee, Wisconsin. The Village of Waunakee (the "Village") is one of Krehl's creditors, as Krehl personally executed a $54,558 note in its favor in November 1989. The Village also holds a $490,000 note executed by RTI in March 1993. Krehl personally guarantied that corporate obligation.

RTI filed a voluntary petition under Chapter 11 of the Bankruptcy Code on October 4, 1993. The corporation was then in default on a loan from its primary lender, Bank One--Beaver Dam. After the bank filed a replevin action in Wisconsin state court, RTI sought to reorganize under the protection of the bankruptcy laws. The corporation ceased doing business, however, on December 31, 1993, and its Chapter 11 proceeding was subsequently converted into a Chapter 7. On January 3, 1994, Krehl resigned as president and a director of RTI, although he remained the company's sole shareholder. Shortly thereafter, David Eisenga, a Bank One vice president, was appointed as the corporation's receiver.

Krehl initiated this personal bankruptcy proceeding on January 18, 1994. The Village subsequently filed an adversary complaint, objecting to a discharge of Krehl's debts under 11 U.S.C. § 727(a)(2)(B) & (a)(7). After a trial on that claim, the Village sought to amend its complaint to conform to the proof at trial by adding an objection to discharge under 11 U.S.C. § 727(a)(3) & (a)(7). The bankruptcy court allowed the amendment and found that the Village had established violations of each of the cited paragraphs. ¹

The court found that Krehl, as an insider of RTI, had violated section 727(a)(2)(B) in a number of ways. First, after RTI filed its chapter 11 petition but while the company was still operating, Krehl and an accomplice loaded four semi-trailers with raw materials, inventory, equipment, and records belonging to RTI and moved the trailers to a location on Hanson Road in Madison, Wisconsin. Neither the court presiding over RTI's bankruptcy nor any of RTI's creditors had knowledge of or consented to the removal of this property.

The other section 727(a)(2)(B) violations all relate to Retro Tek I, Inc. ("RTI I"), a company incorporated in the State of Wisconsin on January 4, 1994. RTI I purported to operate a business similar to that of RTI, and it initially was located at the same Raemisch Road location in Waunakee as RTI. After January 8, 1994, however, RTI I moved its corporate headquarters to Krehl's personal residence in Madison. Although RTI I was incorporated by Steven Arwady, the bankruptcy court found that Krehl controlled that corporation and directed its actions at all material times. On December 31, 1993, for example, Krehl caused RTI I to purchase certain property from RTI, including equipment, supplies, raw materials, trailers, orders, checks, and check proceeds. RTI sold this property without the prior approval of the court presiding over its bankruptcy or of the corporation's creditors. The bankruptcy court found that the purported sale was not in the ordinary course of RTI's business and that it was not a sale at all, but merely a way of "papering over [a] transfer of assets." (Dec. 9, 1994 Tr. at 90.)

Subsequent to the purported asset sale, Krehl received more than $8,000 in checks from RTI customers for work performed or materials supplied by RTI prior to December 31, 1993. Krehl endorsed the checks in the name of RTI I and had them deposited into that corporation's account. Krehl also directed RTI I to fill orders accepted but not yet filled by RTI when that corporation closed its doors on December 31. Although RTI I retained all proceeds from these orders, it did not purchase the orders or otherwise compensate RTI. In filling the orders, moreover, RTI I used materials, supplies, and equipment owned by RTI's bankruptcy estate.

The bankruptcy court also found that Krehl had attempted to divert to the successor corporation materials previously ordered and paid for by RTI. In December 1993, RTI paid $6,000 for materials on order from Ropek Central, Inc. ("Ropek"). Ropek was subsequently told to redesignate the purchaser of those materials as RTI I, and Ropek issued an invoice to that effect. The invoice showed that the materials were to be delivered to the same Hanson Road location in Madison where Krehl had parked the four semi-trailers. After a Ropek driver was unable to find the Hanson Road location, however, and spoke to the receiver at RTI's Waunakee headquarters, Krehl apparently redirected the delivery to RTI.

The bankruptcy court found that Krehl also had violated section 727(a)(3) by breaking into RTI's building after the receiver's appointment, disarming the alarm system, and then removing records and other materials belonging to RTI's estate. The court found that while in the building, Krehl also had downloaded information from RTI's computers and dismantled the computer program to prevent further access. Although the Village had not alleged a section 727(a)(3) violation in its adversary complaint, the bankruptcy court permitted the Village to amend its pleading to conform to the proof at trial. The court then relied on this violation as an additional basis for denying Krehl's discharge.

II.

Krehl's primary argument on appeal is that he no longer was an insider once he resigned as president and a director of RTI on January 3, 1994, and once Eisenga was appointed as receiver and locked him out of RTI's premises on January 13. Under Krehl's view, then, much of the objectionable conduct occurred after the insider relationship had ended, rendering section 727(a)(7) inapplicable to that conduct. Although Krehl concedes that he was an insider when the four semi-trailers were moved to Madison, and when RTI purported to sell a substantial portion of its assets to RTI I on December 31, 1993, he nonetheless argues that the judgment below cannot stand because it was derived from the erroneous conclusion that he remained an insider at all material times.

A.

Section 727(a)(7) authorizes a denial of discharge in the debtor's personal bankruptcy if the debtor committed any act specified in paragraph (a)(2) through (a)(6) of that section in connection with another bankruptcy case "concerning an insider." 11 U.S.C. § 727(a)(7). Because of the profound personal implications of a violation, section 727(a)(7) should have the effect, according to Collier, of "induc[ing] the cooperation of individuals in related bankruptcy cases." 4 Collier on Bankruptcy para. 727.10, at 727-85 (15 ed. 1995). The provision thereby serves to protect the integrity of the system as a whole by defeating the discharge of those who are shown to have engaged in improper conduct in an earlier, related case. See In re Weber, 99 B.R. 1001, 1015 (Bankr.D.Utah 1989). But section 727(a)(7) applies only if the debtor in the earlier case was an insider of the present debtor when the relevant conduct occurred. ²

The term "insider" under the Bankruptcy Code is defined at 11 U.S.C. § 101(31). Because the debtor here is an individual, the term "includes" a:

(i) relative of the debtor or of a general partner of the debtor;

(ii) partnership in which the debtor is a general partner;

(iii) general partner of the debtor; or

(iv) corporation of which the debtor is a director, officer, or person in control.

11 U.S.C. § 101(31) (emphasis added). By virtue of the nonlimiting term "includes," the above definition is intended to be...