Phlamm v. Mukenschnabl (In re Mukenschnabl)

Decision Date08 September 2022
Docket NumberBankruptcy No. 20 B 13380,Adversary No. 20 A 00346
Parties IN RE: Matthew T. MUKENSCHNABL and Kandy J. Mukenschnabl, Debtors. Kenneth Phlamm, in his individual capacity and on behalf of Travel Express Aviation Maintenance, Inc., Plaintiff, v. Matthew T. Mukenschnabl, Defendant, and Travel Express Aviation Maintenance, Inc., Nominal Defendant.
CourtUnited States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

643 B.R. 218

IN RE: Matthew T. MUKENSCHNABL and Kandy J. Mukenschnabl, Debtors.

Kenneth Phlamm, in his individual capacity and on behalf of Travel Express Aviation Maintenance, Inc., Plaintiff,
v.
Matthew T. Mukenschnabl, Defendant,
and
Travel Express Aviation Maintenance, Inc., Nominal Defendant.

Bankruptcy No. 20 B 13380
Adversary No. 20 A 00346

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

Signed September 8, 2022


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Stephanie E. Kopalski, Kevin M. Lyons, Lyons Law Group, LLC, Downers Grove, IL, for Plaintiff.

Springer Larsen Greene, LLC, Springer Brown, Wheaton, IL, Richard G. Larsen, Springer Larsen Greene, LLC, Wheaton, IL, for Defendant.

MEMORANDUM OPINION

Janet S. Baer, United States Bankruptcy Judge

Kenneth Phlamm (the "Plaintiff"), both in his individual capacity and on behalf of Travel Express Aviation Maintenance, Inc. ("TEAM"), filed an adversary complaint against debtor-defendant Matthew T. Mukenschnabl (the "Debtor"), seeking a determination that a judgment debt owed to him and TEAM by the Debtor is not dischargeable pursuant to 11 U.S.C. §§ 523(a)(2)(A), (a)(4), and (a)(6).1 The matter is now before the Court on the Plaintiff's motion for summary judgment on the claims in Counts I, III, and V of the complaint.2 For the reasons set forth below, the Court finds that there are no genuine issues of material fact and that the Plaintiff is entitled to judgment as a matter of law on all three counts. As such, the Plaintiff's motion will be granted, and judgment will be entered in his favor on Counts I, III, and V.

BACKGROUND

The material facts in this case are gleaned from the docket, the pleadings, and the summary judgment statements and responses, as well as the exhibits attached thereto. Among those exhibits are a ruling on the Plaintiff's emergency petition

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for the purchase of his shares in TEAM by the Debtor (the "Share Purchase Motion"), entered in the Plaintiff's favor and against the Debtor by the Circuit Court of DuPage County (the "state court") after conducting a three-day evidentiary hearing; the three transcripts from that evidentiary hearing; two related rulings subsequently issued by the state court, one determining the valuation of TEAM and the other awarding the Plaintiff prejudgment interest; and the state court's order directing the Debtor to both purchase all of the Plaintiff's shares in TEAM and pay for the Plaintiff's attorneys’ fees and costs. (See Adv. No. 20 A 00346, Dkt. 1, Exs. D-1, E(1)–(3), F–J.3 ) Many of the facts that follow are drawn from these and other exhibits in the state court record.4

This matter arose from a shareholder dispute between the Plaintiff and the Debtor in connection with TEAM, an Illinois company incorporated by the Plaintiff in 2003, which was in the business of maintaining, repairing, and operating various aircraft on behalf of its customers. (Dkt. 11 ¶¶ 14, 16; Dkt. 46-2 at 1.) In 2006, the Plaintiff offered the Debtor a 50% interest in TEAM in exchange for the Debtor's participation in the corporation as director, general manager, and head mechanic. (Dkt. 11 ¶¶ 17, 18.) In addition to these roles, the Debtor served as the president of the company; the Plaintiff—the other director and 50% shareholder of TEAM—functioned as the corporation's vice president and secretary. (Id. ¶¶ 13, 15; Dkt. 45 ¶¶ 17, 18.) In his capacity as general manager and president, the Debtor was responsible for the daily operations of TEAM, the services provided to its clients, and the management of its employees. (Dkt. 11 ¶ 20; Dkt. 45 ¶¶ 18, 21.) He also had complete control and authority over TEAM's financials, records, and accounts.5 (Dkt. 45 ¶¶ 21, 24.)

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As to the parties’ involvement in the business, the Debtor testified that he dedicated much of his time to TEAM, while the plaintiff committed little to no time to the company. (Tr. at 40:13–41:236 ("Q: So is it your position that you put ... 100 percent of your time in for [TEAM] while [the Plaintiff] put in zero percent of his time? A: I think that's accurate.").) Correspondingly, from 2006 to 2018, the Debtor received $1,053,298.72 as compensation for his services to TEAM. (Dkt. 11 ¶ 36.) In contrast, the Plaintiff alleges that he received a distribution of only $147,138.96 over that period in order to cover his shareholder tax liabilities. (Dkt. 1 ¶ 37.)

At the same time the Debtor worked for TEAM, he was also involved in other business endeavors. Specifically, the Debtor worked as a maintenance manager at Tuthill Corporation, one of TEAM's customers that manufactures water pumps, meters, vacuum systems, and blowers and also maintains a fleet of aircraft, both for its corporate business and for use by its officers and directors. (Id. , Ex. B ¶ 47; Dkt. 11 ¶ 21; Tr. at 284:10–22.) In addition, the Debtor was a 50% shareholder of Aviation International Affiliates, Inc. ("AIA"), an Illinois corporation which buys, sells, and maintains aircraft and trains and certifies customers in connection with those aircraft. (Dkt. 11 ¶ 23; Dkt. 1, Ex. B ¶¶ 16, 18, 19.)

The parties provide little to no information about TEAM's financial condition during the first twelve years of their business relationship. The Plaintiff asserts only that TEAM's gross income increased year after year during that period of time. (Dkt. 1 ¶ 32.) In contrast, the Debtor claims that TEAM faced financial challenges over those years and that he brought his concerns to the Plaintiff during the course of their professional relationship. (Dkt. 11 ¶ 27.)

On September 28, 2018, after the Debtor had reported to the Plaintiff that TEAM was struggling financially, the Plaintiff, his wife, the Debtor, and TEAM's accountant met to discuss the future of the company. (Id. ¶ 31.) The Plaintiff alleges that after the meeting, he began reviewing TEAM's QuickBooks accounts in order to address concerns about the company's financial health and stability. (Dkt. 1 ¶ 33.) According to the Plaintiff, that review revealed numerous "improper" expenses incurred primarily from 2013 to 2018, by or for the benefit of the Debtor, totaling more than $295,000. (Id. ¶¶ 34, 35.) Among those expenses were $27,969.53 for salaries for the Debtor's children from 2015 to 2018, even though they were not employed by TEAM; $8,046.83 for custom cabinetry in the Debtor's condominium; $1,500 to open AIA; over $6,000 for smoothies from 2014 to 2018; and $5,971.98 for various family vacations. (Id. at ¶¶ 34(a), (g), (k), (p), (ee), (hh), (ii).) The Debtor denies that any of the expenses were "improper" and asserts, rather, that he "operated TEAM consistent with his business judgment."7 (Dkt. 11 ¶ 34.)

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After the Plaintiff's discovery of these alleged expenses, both the situation at TEAM and the parties’ professional relationship began to unravel. On October 22, 2018, the Plaintiff filed a complaint against the Debtor in state court, in which he alleged conversion, fraud, and breach of fiduciary duty, among other causes of action, and sought a temporary restraining order ("TRO") against the Debtor, enjoining him from using TEAM assets for purposes unrelated to the company. (Dkt. 45 ¶¶ 29, 30; Dkt. 11 ¶ 41.) The following day, the state court entered a TRO in order to maintain the status quo; that order, among other things, enjoined the Debtor from using TEAM's assets, including the company's employees, customers, vendors, premises, and monies, for "non-TEAM business purposes." (Dkt. 45 ¶ 31; Dkt. 30, Ex. K; see also id. , Ex. L at 26:4–5.)

Subsequently, the Debtor took various actions in violation of the TRO. On December 10, 2018, he unilaterally decided to file suit against a number of TEAM customers that had been referred to TEAM by Travel Express Aviation, LLC ("TEA"), an Illinois company co-owned by the Plaintiff and his wife that rents, charters, manages, and trains its customers in connection with various aircraft.8 (Dkt. 45 ¶ 35; Dkt. 11 ¶ 49; Dkt. 1, Ex. B ¶¶ 11, 12, 14, 15, 42.) At the same time, the Debtor was giving "credits" to the customers that he had brought to TEAM. (Dkt. 45 ¶ 35.) He also made the unilateral decision to stop all compensation payments to the Plaintiff through the corporation. (Id. ¶ 39.) Thereafter, he unilaterally cancelled the life, health, and disability insurance that TEAM had been providing to the Plaintiff. (Id. ¶ 36; Dkt. 11 ¶¶ 53, 57, 63.)

On February 19, 2019, the Plaintiff filed an amended complaint against the Debtor and others in the state court litigation. (Dkt. 1, Ex. B; Dkt. 11 ¶ 68.) The twenty-four count complaint alleges numerous causes of action against the Debtor, including fraud, fraudulent concealment, conversion, embezzlement, breach of fiduciary duty, usurpation of corporate opportunity, and civil conspiracy. (Dkt. 1, Ex. B; Dkt. 11 ¶ 69.) In Count 18, the Plaintiff alleges that the Debtor violated § 12.56 of the Illinois Business Corporation Act (the "IBCA"), 805 ILCS 5/12.56 ("Shareholder remedies: non-public corporations"). Under that count, the Plaintiff contends that the Debtor refused to produce TEAM's accounts and records, misappropriated TEAM's assets for the establishment and operation of AIA, and "acted fraudulently, vexatiously, or otherwise not in good faith with respect to the Plaintiff." (Dkt. 1, Ex. B ¶¶ 523–533.)

Also on February 19, 2019, the state court granted the Plaintiff's emergency motion to expand the original TRO, mandating that the Debtor reinstate all of the Plaintiff's insurance policies that he had cancelled, requiring him to return all property removed from the lease space, and preventing him from entering into another lease on behalf of TEAM or moving TEAM's operations from the leased premises. (Dkt. 30, Exs. J & L; Dkt. 45 ¶ 40.) According to the TRO, "[t]he status quo as to TEAM's operations prior to October 23, 2018" was to "remain in full force and

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effect." (Dkt. 30, Ex. J; see also Dkt. 45 ¶ 40.)

Notwithstanding the directives in the expanded TRO, the...

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