KEITH E. KIMMONS, CLAIMANT-APPELLANT.
v.
INNOVATIVE SOFTWARE DESIGNS, INC., DEBTOR-APPELLEE.
| [1] | United States Bankruptcy Appellate Panel FOR THE EIGHTH CIRCUIT |
| [2] | No. 00-6059 MN |
| [3] | Keywords: abandon, contract, proof of interest |
| [4] | September 20, 2000 |
| [5] | IN RE: INNOVATIVE SOFTWARE DESIGNS, INC., DEBTOR. KEITH E. KIMMONS, CLAIMANT-APPELLANT. v. INNOVATIVE SOFTWARE DESIGNS, INC., DEBTOR-APPELLEE. |
| [6] | Before William A. Hill, Schermer, and Scott, Bankruptcy Judges. |
| [7] | The opinion of the court was delivered by: William A. Hill, Bankruptcy
Judge. |
| [8] | Appeal from the United States Bankruptcy Court for the District of
Minnesota |
| [9] | Submitted: September 1, 2000 |
| [10] | Keith E. Kimmons appeals from the bankruptcy court's *fn1
order disallowing his proof of interest in the Debtor, Innovative
Software Designs, Inc. We have jurisdiction over this appeal from the
final order of the bankruptcy court. See 28 U.S.C. § 158(b). For the
reasons set forth below, we affirm. |
| [11] | BACKGROUND |
| [12] | Henry F. Camacho Jr. incorporated the Debtor, Innovative Software
Designs, Inc. ("ISD") in Minnesota on June 5, 1990, as a
sideline software design business. In 1992, Camacho met Keith E. Kimmons
at Businessland, a company where they were both employed. |
| [13] | In 1994, Camacho joined Kimmons and another partner, James Bombardo,
to form a new business known as Network Management Services and Systems,
Inc. ("NMS"). At the time NMS was formed, Kimmons, Camacho,
and Bombardo orally agreed to share equal ownership of NMS. Bombardo
incorporated NMS on April 25, 1994. Through NMS, the partners ran
several computer-related businesses. Camacho and ISD focused on
designing software; Bombardo and Excess, Inc. *fn2
("Excess") focused on selling and repairing hardware; and
Kimmons focused on consulting work. The partners did not deal with ISD
and Excess as separate entities. However, there was no formal contract
or documentationsetting forth the structure of NMS, especially with
respect to ownership of ISD and Excess. |
| [14] | In the fall of 1994, Bombardo remarked to Camacho and Kimmons his
belief that as the sole incorporator of NMS, he owned all of NMS. This
sparked a discussion between the partners that resulted in the following
statement being signed by Camacho, Kimmons, and Bombardo on September
16, 1994: |
| [15] | This document states that Network Management Services and Systems
Inc., Excess Inc., and Innovative Software Designs Inc. are equally
owned by the following persons: |
| [16] | James Bombardo |
| [17] | Henry F. Camacho Jr. |
| [18] | Keith E. Kimmons |
| [19] | Significantly, Kimmons never paid for any stock in ISD and never
received any stock certificates. Similarly, there is no evidence that
ISD ever issued any stock to Kimmons. In fact, there are no other
documents or corporate resolutions from any of the three subject
corporations implementing the alleged equal ownership agreement between
Kimmons, Camacho, and Bombardo. |
| [20] | In late 1994, Bombardo expressed a desire to leave the partnership and
take Excess with him. Kimmons, Camacho, and Bombardo then signed an
agreement to implement Bombardo's desire on |
| [21] | December 20, 1994. Bombardo agreed to sell his interests in ISD and
NMS to Kimmons and Camacho. Kimmons and Camacho, in turn, agreed to sell
their interests in Excess to Bombardo. As a result, only Kimmons and
Camacho were left inside the original partnership, each supposedly
owning fifty percent of ISD and NMS. |
| [22] | Meanwhile, Kimmons owed the IRS over $42,000 in unpaid taxes, and the
IRS was pursuing collectionefforts against him. As a result, Kimmons
entered a repayment agreement with the IRS in which he stated that he
had no stocks, bonds, or investments, thereby failing to disclose any
ownership of ISD stock. Kimmons' 1994 tax return lists NMS as his sole
proprietorship and does not indicate that Kimmons owned any stock in ISD.
*fn3 |
| [23] | In late 1994, Kimmons was experiencing marital problems, and his wife
filed for divorce. On a swornstatement of income, assets, and
liabilities associated with his divorce proceeding, Kimmons claimed no
interest or stock ownership in ISD. Kimmons signed this sworn statement
approximately two months after he, Camacho, and Bombardo signed the
September 14, 1994, statement of mutual ownership regarding NMS, ISD,
and Excess. Kimmons' marriage was dissolved on December 12, 1994. |
| [24] | In late 1994 or early 1995, Kimmons left the partnership to take a job
with Blue Cross and Blue Shield of Minnesota. NMS, which had been the
key corporation through which the partners had been operating, ceased
doing business and was eventually dissolved by the Secretary of State on
September 25, 1998, due to the failure to file annual registration
papers. |
| [25] | After Kimmons went to work for Blue Cross, Camacho began developing
ISD as an internet provider. To raise money, Camacho asked Kimmons to
invest in ISD. However, Kimmons declined, stating that he no longer
wanted anything to do with ISD. Camacho then applied for a loan from the
Small Business Administration. On the loan application, Camacho listed
himself as the sole shareholder of ISD and provided the only personal
guarantee. In addition, ISD's corporate tax returns from 1994 through
1998 list Camacho as ISD's sole shareholder. |
| [26] | In 1997, Blue Cross initiated a criminal investigation against Kimmons,
alleging that Kimmons had submitted fraudulent invoices on behalf of ISD
and another corporation for payment by Blue Cross. Kimmons was fired by
Blue Cross, and criminal charges were filed against Kimmons which are
still pending. In December of 1997, Kimmons commenced a state court
action against Camacho and ISD, asserting an ownership interest in ISD
and seeking dissolution of the company. This lawsuit was quickly
abandoned because Kimmons could not afford to pay an attorney. The
abandoned lawsuit constituted the first time since late 1994 or early
1995 that Kimmons claimed an ownership interest in ISD. |
| [27] | On March 16, 1999, ISD filed a chapter 11 bankruptcy petition. Kimmons
did not appear on ISD's petition and schedules as either a creditor or
an owner of ISD stock. Kimmons nevertheless learned of ISD's bankruptcy
filing during a conversation with Bombardo in late June, 1999. Kimmons
then filed a proof of claim asserting that he owned fifty percent of ISD
and that ISD owed him $150,000 for two years of unpaid salary. ISD
objected to Kimmons' proof of claim and an evidentiary hearing was held
on December 13 and 14, 1999. After the hearing, the bankruptcy court
ruled that it was improper to resolve the issue of Kimmons' ownership
interest in ISD because the bankruptcy court had not yet ordered the
filing of proofs of interest. In addition, the bankruptcy court
disallowed Kimmons' proof of claim for $150,000 in unpaid salary, ruling
that ISD had introduced sufficient evidence to rebut the proof of claim
and that Kimmons had subsequently failed to carry his burden of proof as
to the claim's validity. |
| [28] | Subsequently, Kimmons moved the bankruptcy court for an order allowing
him to file a proof of interest, and the motion was granted. Kimmons
then filed a proof of interest in ISD, asserting that he owned fifty
percent of ISD based largely on the alleged mutual ownership agreement
between the parties, as evidenced by the signed statement of September
14, 1994. ISD objected to Kimmons' proof of interest, and the parties
agreed to submit the issue to the bankruptcy court largely on the basis
of the evidence and exhibits introduced at the prior evidentiary hearing
of December 13 and 14, 1999. By the order dated May 15, 2000, the
bankruptcy court found that ISD had produced sufficient evidence to
rebut Kimmons' proof of interest, thereby shifting the burden of proof
back to Kimmons. The bankruptcy court then found that Kimmons had not
sufficiently proven the validity of his proof of interest. Specifically,
the bankruptcycourt ruled that even if there had been an enforceable
mutual ownership agreement, it had been abandoned by the parties several
years earlier. The bankruptcy court then sustained ISD's objection and
disallowed Kimmons' proof of interest. |
| [29] | Kimmons appeals from the bankruptcy court's order disallowing his
proof of interest, arguing that the bankruptcy court clearly erred in
finding that the parties had abandoned their mutual ownership agreement
several years before ISD filed its bankruptcy petition. In addition,
Kimmons argues that he owns stock in ISD that he has not abandoned. |
| [30] | STANDARD OF REVIEW |
| [31] | On appeal, we review the bankruptcy court's findings offact for clear
error and its conclusions of law de novo. Fed. R. Bankr. P. 8013;
Hatcher v. U. S. Trustee (In re Hatcher), 218 B.R. 441, 445 (B.A.P. 8th
Cir. 1998) (citations omitted);Gourley v. Usery (In re Usery), 123 F.3d
1089, 1093 (8th Cir. 1997); O'Neal v. Southwest Mo. Bank (In re
Broadview Lumber Co.), 118 F.3d 1246, 1250 (8th Cir. 1997). A fact
finding is clearly erroneous when the reviewing court, based on the
entire evidence, is left with a definite and firm conviction that a
mistake has been committed. Hatcher, 218 B.R. at 445-46 (citations
omitted). |
| [32] | DISCUSSION |
| [33] | An equity security holder may file a proof of interest. 11 U.S.C. §
501(a). "A claim or interest, proof of which is filed under section
501 of this title, is deemed allowed, unless a party in interest . . .
objects." 11 U.S.C. § 502(a). Since a properly filed proof of
claim, which includes supporting documents, is entitled to prima facie
evidentiary effect, a proof of interest which similarly includes
supporting documentation should also be given prima facie evidentiary
effect. See Fed. R. Bankr. P. 3001(a), (f); Official Bankruptcy Form 10:
Proof of Claim; 4 Lawrence P. King et al., Collier on Bankruptcy ¶
502.02[1], at 502-10 (15th ed. rev. 2000) ("[U]nder section 502(a),
a proof of claim or proof of interest which was properly filed pursuant
to section 501(a) constitutes prima facie evidence . . ."). Thus,
if an objection is filed, the "objecting party must then produce
evidence rebutting" the proof of interest or it will be allowed.
See Granv. Internal Revenue Service (In re Gran), 964 F.2d 822, 827 (8th
Cir. 1992) (citing California State Board of Equalization v. Official
Unsecured Creditors' Committee (In re Fidelity Holding Co.), 837 F.2d
696, 698 (5th Cir. 1988)). "If, however, evidence rebutting the
[proof of interest] is brought forth, then the claimant must produce
additional evidence to prove the validity of the [claimed interest] by a
preponderance of the evidence." Id. (internal quotation marks
omitted; citation omitted). |
| [34] | A. Abandonment of Contract |
| [35] | Kimmons argues that the bankruptcy court clearly erred in finding that
the parties abandoned their alleged mutual ownership agreement regarding
NMS and ISD. "Ordinarily, the abandonment of a contract is a
question of fact and will not be set aside on appeal unless clearly
erroneous." S. S. Silberblatt, Inc. v. Seaboard Surety Co., 417
F.2d 1043, 1054 (8th Cir. 1969) (citing Steele v. McCargo, 260 F.2d 753,
759 (8th Cir. 1958)). A party seeking to prove abandonment of a contract
must present clear and convincing evidence of an intention by the other
party to abandon its rights. Republic Nat'l Life Ins. Co. v. Marquette
Bank & Trust Co. of Rochester, 295 N.W.2d 89, 93 (Minn. 1980).
Intent to abandon may be ascertained from facts and circumstances
surrounding the transaction and may be implied from acts of the parties.
Id.; Buresh v. Mullen, 207 N.W.2d 279, 281 (Minn. 1973); Ahlstrand v.
McPherson, 173 N.W.2d 330, 333 (Minn. 1969). Conduct of the parties that
is positive, unequivocal, and inconsistent with the existence of a
contract is sufficient to support a mutual abandonment of contract.
Desnick v. Mast, 249 N.W.2d 878, 884 (Minn. 1980); Country Club Oil Co.
v. Lee, 58 N.W.2d 247, 251 (Minn. 1953). Where acts of one party
inconsistent with existence of a contract are acquiesced in by the other
party to the contract, the contract will be treated as abandoned. Lee,
58 N.W.2d at 251. |
| [36] | Assuming that there was in fact an enforceable agreement between the
parties as to equal ownership ofthesubjectcorporations, *fn4
there is sufficient evidence to support the bankruptcy court's finding
that the agreement had been abandoned. As we discuss more fully below,
the parties never implemented the alleged equal ownership agreement by
exchanging stock in the subject corporations. Moreover, by late 1994,
the partners began to go their separate ways. Bombardo left NMS, taking
Excess with him. Kimmons left NMS for a job at Blue Cross and Blue
Shield of Minnesota. NMS, the key enterprise through which all the
partners had been conducting business, ceased to operate and was
eventually dissolved by the Secretary of State. In addition, there is
sufficient evidence to support the inference that both Kimmons and
Camacho believed the mutual ownership agreement was no longer in effect.
Kimmons did not claim to own any stock in ISD when asked to disclose
such interests in both his IRS repayment agreement and in the course of
his divorce proceeding. Furthermore, Kimmons listed NMS as his sole
proprietorship on his 1994 income tax return, thereby indicating that
Camacho had no ownership in NMS. Similarly, ISD's corporate tax returns
from 1994 through 1998 list Camacho as the sole shareholder and 100
percent owner of ISD. In applying for a loan from the Small Business
Administration on behalf of ISD, Camacho gave the only personal
guarantee and again listed himself as the sole shareholder and owner of
ISD. These actions by both parties are clearly inconsistent with any
agreement that they would continue to share equal ownership of NMS and
ISD. |
| [37] | Finally, the bankruptcy court refused to credit Kimmons' testimony
that he always thought of himself as an owner of ISD and that he had
always remained involved in ISD's operations behind the scenes. The
bankruptcy court specifically stated that Kimmons was badly impeached
several times and that his testimony simply was not credible.
Determinations as to the credibility of witnesses are uniquely within
the province of the trier of fact. Estate of Davis by Ostenfeld v. Delo,
115 F.3d 1388, 1394 (8th Cir. 1997) (citing Andersonv. City of Bessemer,
470 U.S. 564, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985)). Accordingly, we
must give deference to the bankruptcy court's determination as to
Kimmons' credibility. Based on the entire evidence, we are not left with
a definite and firm conviction that a mistake has been committed, and we
affirm the bankruptcy court's finding that any mutual ownership
agreement between Kimmons and Camacho regarding NMS and ISD had been
abandoned by late 1994 or early 1995. |
| [38] | B. Abandonment of ISD Stock |
| [39] | Kimmons also argues that he did not abandon or transfer any ofhis
stock in ISD. *fn5 However, the record
does not indicate that Kimmons ever acquired any shares of ISD stock in
the first place. Shares ofstock may be acquired by issuance or transfer.
A Minnesota corporation may issue securities only when authorized by the
board of directors. Minn. Stat. § 302A.401, subd. 1. Transfer of a
security requires delivery with intent to change ownership. DLH, Inc. v.
Russ, 566 N.W.2d 60, 72 (Minn. 1997). A certificated security is
represented by a certificate, and delivery occurs when the purchaser
acquires possession of the certificate. See Minn. Stat. §
336.8-102(a)(4); Minn. Stat. § 336.8-301(a)(1). An uncertificated
security is not represented by a certificate. Minn. Stat. §
336.8-102(a)(18). Only a corporate resolution by the board of directors
may establish that some or all of a corporation's shares of stock will
be uncertificated. Minn. Stat. § 302A.417, subd. 7. Delivery of an
uncertificated security occurs when the issuer registers the purchaser
as the registered owner. Minn. Stat. § 336.8-301(b)(1). |
| [40] | In this case, there is no evidence that any shares of ISD stock were
ever issued to Kimmons. Specifically, there is no evidence that any
corporate resolution was ever passed involving the issuance of ISD stock
to Kimmons; nor is there any corporate documentation of any kind
indicating that shares of ISD stock had been issued to Kimmons. Clearly,
Kimmons did not acquire any shares of ISD stock by direct issuance from
ISD. |
| [41] | Similarly, there is no evidence that Kimmons acquired any ISD stock by
transfer. Kimmons acknowledges that he never received any ISD stock
certificates. Nevertheless, he argues that uncertificated shares of ISD
stock were transferred to him by operation of the September 14, 1994,
statement of mutual ownership signed by the partners. However, the
statement Kimmons relies on does not purport to create uncertificated
shares of ISD stock; nor does it purport to register any uncertificated
shares in Kimmons' name. It merely reflects the partners' assumption,
albeit a false one, that they enjoyed equal ownership of the subject
corporations even though no shares of stock had ever changed hands.
Since there are no other documents, corporate or otherwise, establishing
uncertificated shares of ISD stock or registering Kimmons as the owner
of such shares, there is no evidence that Kimmons received delivery of
any uncertificated shares of ISD stock. Thus, no valid transfer of any
such shares to Kimmons has been established. Accordingly, Kimmons never
had any stock to abandon, and his argument must fail. |
| [42] | CONCLUSION |
| [43] | Based on the foregoing, we affirm the bankruptcy court's decision
sustaining ISD's objection and disallowing Kimmons' proof of interest. |
| [44] | A true copy. |
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| Opinion Footnotes | |
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| [45] | *fn1 The Honorable Nancy C. Dreher,
United States Bankruptcy Judge for the District of Minnesota. |
| [46] | *fn2 Excess, Inc. was not formally
incorporated until January of 1995. |
| [47] | *fn3 Kimmons' 1998 tax return also
fails to indicate any ownership interest in ISD. |
| [48] | *fn4 The bankruptcy court made no
express ruling as to the enforceability of this alleged agreement, and
neither do we. |
| [49] | *fn5 Kimmons' argument on this point
is based, in part, on Minnesota's Uniform Disposition of Unclaimed
Property Act. See Minn. Stat. §§ 345.31-345.60. Since this statutory
argument was not raised before the bankruptcy court, we will not
consider it for the first time on appeal. See Norwest Bank of North
Dakota, N. A. v. Doth, 159 F.3d 328, 334 (8th Cir. 1998). Moreover, our
ruling on this point has little bearing on the outcome of the case given
the lack of evidence that Kimmons ever acquired ISD stock to begin with. |