Stoughton Lumber Company, Inco v. Peter SveumStoughton Lumber Company, Inco v. Peter Sveum
scheme enabled the election of Walston and Lopez.
III. Conclusion
For the foregoing reasons, we AFFIRM the judgment of the district court.
On remand (and this is a critical fact that Bania seemed not to fully appreciate at oral argument in this case), the government remained steadfast in its position that the defendants caused the Unity Slate‘s election by virtue of their misconduct surrounding the October election. Yet, in an exercise of prosecutorial discretion, the government recommended that Rodriguez‘s new restitution order be limited to the amount which he had already paid—$3,217.80. In the government‘s view, this reduction—from his original restitution order of $864,924—was appropriate, among other reasons, because of Rodriguez‘s minimal role in the scheme. The court adopted the government‘s position and issued the new order.
All of this is to say that the reduction in Rodriguez‘s restitution order does not support Bania‘s view that his conduct did not cause the election of Walston and Lopez. The government‘s position all along has been that Bania and his co-defendants enabled the Unity Slate‘s victory. It only recommended a restitution reduction for Rodriguez because of his minor role in the fraud—a role so minor with respect to the October election, we note, that his initial restitution order (unlike Bania‘s) did not include the cost to the union of re-running the election. Different from Rodriguez, Bania was one of the scheme‘s kingpins, whose personal actions prompted the Board to halt the vote count, vacate the results, and conduct the re-run that ordained the Unity Slate‘s victory. For that reason, Bania‘s position that he did not divert enough votes in the December re-run to dictate the result of that election would not carry the day, even if the merits were within our purview.
Timothy J. Peyton, Attorney, Kepler & Peyton, Madison, WI, for Defendant-Appellant.
Before POSNER and WILLIAMS, Circuit Judges, and WOOD, District Judge.*
POSNER, Circuit Judge.
Peter Sveum and his wife declared bankruptcy under Chapter 7 of the Bankruptcy Code. Sveum had since 1989 owned with his brother a home-building company in Wisconsin named Kegonsa Builders, Inc. One of Kegonsa‘s creditors, Stoughton Lumber Company, had sued Sveum along with his brother and their company under Wisconsin law, alleging breach of contract and theft by contractors. The suit had been settled for approximately $650,000 (plus some other consideration, which however we can ignore). Sveum violated the settlement agreement and Stoughton sued again and this time obtained a default judgment for $589,638.10. Unable (we assume) to pay the judgment, Sveum filed for bankruptcy, and asked the bankruptcy judge to discharge his debts, including the debt to Stoughton, on the ground that he lacked the wherewithal to pay them. Stoughton responded by filing an adversary proceeding in the Sveums’ Chapter 7 bankruptcy, claiming that Sveum‘s debt to Stoughton was not dischargeable. The bankruptcy judge agreed and denied discharge, and was affirmed by the district court, from which Sveum appeals to us.
The Bankruptcy Code forbids discharge of a debt “for fraud or defalcation while [the person or firm committing it is] acting in a fiduciary capacity [in
The specific wrong, which is both fraud and defalcation, alleged by Stoughton is what Wisconsin law calls “theft by contractors.”
Between 2008 and 2011 Kegonsa bought hundreds of thousands of dollars’ worth of building materials from Stoughton, on credit, for 34 homes that Kegonsa built and sold. A portion of the money received for those sales became by operation of the Wisconsin statute that we just quoted a trust fund that though administered by Kegonsa could be used only to pay for materials used in the construction of the homes, such as the building materials bought from Stoughton on credit. Rather than segregating the revenues held in trust, Kegonsa deposited all its revenues in a single bank account from which it paid all its bills. Segregation of the trust funds was not required either by the statute or, as far as we‘re aware, the case law; but while Kegonsa was therefore free to commingle the funds with other moneys, it had to preserve intact the assets of the trust fund for Stoughton. It didn‘t.
Sveum argues that he committed an innocent mistake by failing to pay Stoughton what Kegonsa owed it—that although he was aware of the statute he didn‘t know about its provision for a trust fund, and acting as he did out of ignorance did not commit fraud or defalcation and therefore should not have been denied his discharge. The bankruptcy judge who presided at Stoughton‘s adversary proceeding didn‘t believe Sveum‘s protestations of innocence. An educated person with a college degree in business administration, Sveum had been in the building business for forty years and had supervised the construction and sale of hundreds of homes. Evidence presented in the adversary proceeding indicated that
It‘s not just that Sveum should have known that Kegonsa as a prime contractor in the construction and sale of homes was required to hold its revenues from sales of the homes in trust until the firm‘s subcontractors, such as Stoughton, were paid; it was a permissible inference that he did know, or at the least that he was playing ostrich—that is, that he suspected that he was violating the law but avoided confirming his suspicion in order to preserve a patina of innocence. That is what is sometimes called—besides “playing ostrich“—“conscious disregard” of risk, “willful blindness,” or “gross recklessness,” Bullock v. BankChampaign, N.A., supra, 133 S.Ct. at 1759, but is more perspicuously understood as knowing that there is a risk of serious harm and that it can be averted at reasonable cost, yet failing to act on that knowledge. Recklessness as we have just defined it is a mental state on which a finding of fraud can be based. Id. at 1759-60; SEC v. Lyttle, 538 F.3d 601, 603 (7th Cir. 2008); Kaloti Enterprises, Inc. v. Kellogg Sales Co., 283 Wis.2d 555, 699 N.W.2d 205, 211 (2005).
Evidence of Sveum‘s recklessness abounds. Stoughton had first sued him for theft by contractor in January 2011. Sveum admitted making no effort to apprise himself of the obligations imposed by the statute until July or August of the following year even though he was represented by counsel in the litigation. And he represented on owner affidavits that all his subcontractors had been paid in full. An owner‘s affidavit is a sworn statement by a seller of real estate (Sveum) concerning the property being sold. Sveum swore in these statements that all subcontractors who had supplied materials to construct a building on the property had been paid in full. (Title companies generally require owners’ affidavits because they‘re ensuring the home buyer against the risk that someone else owns the property, and subcontractors who aren‘t paid in full may have liens on the property, which impair its value to its buyer.) Sveum knew he was swearing falsely.
He also submitted draw requests (requests for partial prepayment from home buyers or the buyers’ mortgagees) in which he said that the subcontractors who had supplied materials for a building project would be paid a specified amount from each draw. That was another false representation.
AFFIRMED