Crocker v. Stiff (In re Stiff)Crocker v. Stiff (In re Stiff)
MEMORANDUM OPINION
In this Chapter 7 case, the United States Trustee seeks to deny the Debtor’s discharge under 11 U.S.C. §§ 727(a)(3) and 727(a)(5) because of the Debtor’s failure to keep records detailing the disposition of certain assets, and his failure to explain the loss of those assets. Those assets include large withdrawn sums of
Debtor moves for summary judgment, arguing that the assets on which the U.S. Trustee’s action is premised, which were acquired three to ten years before Debtor’s bankruptcy case, date back too far to be the basis for the denial of his discharge. Whether an unaccounted transaction is too old to be the subject of a § 727 action is a question of fact, not a question of whether those transactions occurred within an inflexible two-year look-back period, as Debtor urges. In a § 727(a)(3) (recordkeeping) action, whether a transaction is too old to justify denial of a discharge will depend on its materiality to the debtor’s financial condition, and on whether the debtor’s failure to keep records of a certain age is reasonable given the nature of the debtor’s business, his financial sophistication, and other related factors. In a § 727(a)(5) (failure to explain the loss of аssets) action, whether a transaction is too old to justify denial of a discharge will depend on its materiality. Debtor has pointed to no evidence, in support of his request for summary judgment, on either the materiality of the transactions on which the U.S. Trustee relies, nor on the reasonableness of his recordkeeping practices. The Court therefore denies Debtor’s motion for summary judgment.
I. Facts and Procedural History.
Debtor filed a Chapter 7 petition for bankruptcy on Decеmber 7, 2012. [Bk. Doc. 1.]
Debtor moved for summary judgment. [AP Doc. 23.] In his response to Debtor’s motion and exhibits thereto [AP Doc. 26], the U.S. Trustee provided the following facts, none of which Debtor disputes. Pri- or to the filing of his case, Debtor was a self-employed horseman and bloodstock agent who did business as, inter alia, Bay Bloodstock. Bay Bloodstock had a bank account at Central Bank, on which Sheila Bayes, a friend of the Debtor, was the only signatory. The Debtor, apparently with Ms. Bayes’s permission, signed Ms. Bayes’s name to checks payable to himself. From May 17, 2002 to November 21, 2006, Debtor wrote checks totaling $407,395 to himself from the Bay Bloodstock account, $291,965 of which he deposited into his personal account at Citizens Commerce National Bank. The remaining $115,430 is unaccounted for.
The U.S. Trustee also points to gaps in Debtor’s business records. In 2003, Debtor syndicated a stallion, Equality, into 40 fractional shares, 26 of which Debtor sold from 2003 to 2004. The Debtor’s records are silent on the disposition of the 14 remaining shares, while Debtor’s tax returns are silent on the sale of 28 of these shares. In 2004 and 2005, Debtor solicited funds to purchase stallion seasons and broodmare prospects; a prospectus declared Debtor’s intention to raise $200,000 to purchase the former. The solicited funds were deposited into Bay Bloodstock’s account, but Debtor could not produce to the U.S. Trustee an accounting of how the funds were spent, or of how much he solicited. Finally, the Debtor provided the U.S. Trustee with two notes payable, one dated August 2004 for $55,000, and the other dated December 4, 2006 for $35,000. Debtor, however, provided no records regarding the disposition of these funds, nor could the U.S. Trustee’s accountant locate them in the bank accounts Debtor controlled.
Debtor replied to the U.S. Trustee’s response to his motion for summary judgment, continuing to press his argument that the transactions on which the U.S. Trustee relies are too stale to ground the U.S. Trustee’s action. [AP Doс. 27.] In support of his motion, Debtor attached to his reply an affidavit, stating that Bay Bloodstock was never incorporated nor registered as an LLC, that it never had any employees, that Debtor’s highest degree is a high school diploma, and that he has always used cash to pay for “a lot” of his living expenses. [Id. at 13.] Debtor also attached his individual tax returns from 2002 to 2012. [AP Doc. 27-1.] The Court heard Debtor’s summary judgment motion on December 4, 2013.
II. Analysis
A. Jurisdiction and Summary Judgment Standard.
This Court has jurisdiction of this matter pursuаnt to 28 U.S.C. § 1334(b) and this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(J).
Summary judgment is appropriate if “there is no genuine issue as to any material fact” and “the movant is entitled to judgment as a matter of law.” Fed. R. Bankr.P. 7056 (incorporating by reference Fed.R.Civ.P. 56 in adversary proceedings). The movant bears the burden of showing that no genuine issues of material fact are in dispute, and the evidence, together with all inferences that can permissibly be drawn therefrom, must be read in the light most favorable to the party opposing the motion. See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp.,
The movant may support a motion for summary judgment with affidavits or other proof or by exposing the lack of evidence on an issue for which the nonmoving party will bear the burden of proof at trial. Celotex Corp. v. Catrett,
B. § 727(a)(3)
The U.S. Trustee objects to Debtor’s dischargе under 11 U.S.C. § 727(a)(3). Section 727(a)(3) provides that the Court shall not grant a debtor a discharge if:
the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case.
Courts аpplying § 727(a)(3) have uniformly held that it contemplates a burden-shifting framework. See, e.g., Strzesynski v. Devaul (In re Devaul),
Debtor argues that the U.S. Trustee’s § 727(a)(3) action fails because all of the transactions on which the U.S. Trustee relies predate Debtor’s bankruptcy case by more than two years. Initially, it is unclear to which of the steps of the § 727(a)(3) burden-shifting framework this argument is directed. Debtor could be arguing that records more than two years old are not, as a matter of law, records “from which the debtor’s financial condition or business transactions might be ascertained.” 11 U.S.C. § 727(a)(3). Alternatively, Debtor may be arguing that, as a matter of law, his failure to keeр records more than two years old is “justified under all the circumstances of the case.” Id. Debtor’s motion for summary judgment and reply to the Trustee’s response do not
The ambiguity of Debtor’s pleadings notwithstanding, the Court thinks it tolerably clear that Debtor is making the latter argument — that it is per se reasonable to not keep records more than two years old. First, the cases on which Debtor relies for the two-year look-back period hold that two years is a rеasonable period for which to keep records, not that records older than two years are irrelevant to a debtor’s financial condition or business transactions. For example, Debtor cites In re Michael,
Old records are often destroyed. With this reality, § 727(a)(3) does not impose upon a debtor an obligation to keep and preserve financial records forever. Instead, § 727(a)(3) only imposes upon a debtor a duty to keep and preserve financial records for a reasonable period of time, with two years having been used as a minimum point of reference.
In re Michael,
Second, while the Court does not rule at this time on whether the missing rеcords the U.S. Trustee has pointed to are sufficiently material to Debtor’s financial condition or business transactions, see ante at 897 n.2, it would be difficult at best for Debtor to argue, on the basis of age alone, that the records all fall outside the ambit of § 727(a)(3). For example, the fact that Debtor borrowed $55,000 eight years before the filing of his bankruptcy, and $35,000 six years before the filing of his bankruptcy, hardly makes the disposition of those funds — were they spent, retained, invested, and if the latter, profitably or unprofitably? — immaterial to Debtor’s present-day financial condition. Similarly, while the age of the Equality syndication agreement may ultimately bear on the materiality of the missing shares, e.g. if Equality were dead and shares of his proceeds rendered valueless, its age alone does not mean that whether Debtor retained or disposed of the missing shares is immaterial to his financial condition. Therefore, the Court will take Debtor to be mаking the more reasonable argument — one supported, at least partly, by caselaw — that it is reasonable to fail to keep records of more than two years of age, whether material or not.
Though more reasonable than the alternative construction of Debtor’s argument, this argument fails. Section 727(a)(3) does not contain a statute of limitations, and the courts that have written of a two-year look-back period have all been careful to provide that such a period is not a hard- and-fast rule, and only applies, if at all, in the ordinary consumer case. Michael, already cited, refers to two years as a “minimum point of reference” in the context of an ordinary consumer case. In re Michael,
More importantly, in cases involving self-employed debtors who fail to keep records material to their business dealings, courts have not applied a two-year look-back period. Instead, they have looked to reasonable recordkeeping practices in the business in which the debtor is self-employed, on the theory that “[d]ebtors have a duty to preserve those records that others in like circumstances would ordinarily keep.” State Bank of India v. Sethi (In re Sethi),
Needless to say, no analogous record concerning the recordkeeping practices of bloodstock agents has been developed in this case. Nor has any record been made on the complexity of Debtor’s business, or his sophistication, both of which were disputed by the parties at the hearing on Debtor’s motion for summary judgment.
C. § 727(a)(5)
The U.S. Trustee also objects to Debt- or’s discharge under § 727(a)(5), which provides that the Court shall not grant a discharge if “the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor’s liabilities.” 11 U.S.C. § 727(a)(5). The U.S. Trustee relies on
Section 727(a)(5), like § 727(a)(3), contemplates a burden-shifting framework. Initially, the plaintiff in a § 727(a)(5) action has the burden to identify assets which the debtor at one time owned and claims, in his schedules, to no longer possess. See PNC Bank v. Buzzelli (In re Buzzelli),
As with the Trustee’s § 727(a)(3) count, Debtor argues that the assets in question were acquired too long before the filing of his bankruptcy case for their unexplained loss to be the grounds of a denial of discharge. Here too, Debtor contends that a two-year look-back period is appropriate, and here too, that position is not entirely unsupported by caselaw. Yet, here too, none of the cases which support Debtor’s position adopt the absolute rule Debtor argues for. One such case notes that, “as [a] factual matter, a focus on the two years prior to the debtor’s petition filing is common, but inquiries extending beyond two years certainly occur when warranted.” First Commercial Fin. Group v. Hermanson,
While caselaw acknowledges both that a two-year look-back period in § 727(a)(5) actions is tyрical and that circumstances may warrant a longer look-back period, courts are virtually silent on what circumstances warrant such an extension. That said, a look at the cases that do extend the look-back period past two years reveal, unsurprisingly, a common factor: lost assets of substantial value relative to debtors’ liabilities. See Blackwell Oil Co. v. Potts (In re Potts),
In this case, as the U.S. Trustee wisely emphasizes, Debtor’s schedules reflect only $14,000 in assets to meet unsecured claims of over $700,000. The U.S. Trustee points to lost assets of approximately $284,000 in cash and notes payable, in addition to the untold value of the missing Equality shares, and the unknown amounts of funds Debtor solicited to purchase stallion seasons and broodmare prospects. As to Debtor’s unaccounted cash withdrawals of $194,000, the Court holds that the amount is substantial enough, relative both to Debtor’s liabilities and the small amount of assets listed on Debtor’s schedules, to justify extending the look-back period to three to ten years prior to Debtor’s bankruptcy case, which is when Debtor withdrew the cash. The Court holds the same of the $90,000 in notes payable, borrowed six to eight years prior to Debtor’s bankruptcy case. Debt- or will be required to provide some explanation of the disposition of these assets at trial. As to the shares of Equality and investments in stallion season and broodmare prospect investment pools, the record is silent as to the value of the shares and the amounts invested in the investment pools (with the exception of Debtor’s stated intention to raise $200,000, a substantial sum, to purchase stallion sеasons). Whether these assets are sufficiently material to justify extending the look-back period to seven to nine years prior to Debtor’s bankruptcy case, when these assets were acquired, will depend in large part on evidence as to their value. Given the uncertainty as to the value of these assets, summary judgment in Debtor’s favor as to these assets is not appropriate.
III. Conclusion
The Debtor’s motion for summary judgment on the U.S. Trustee’s § 727(a)(3) claim is denied. The Debtor’s motion for summary judgment on the U.S. Trustee’s § 727(a)(5) claim is denied as well.
Notes
. References to the docket in Debtor's main bankruptcy case appear as [Bk. Doc. -]. References to the docket in the adversary proceeding appear as [AP Doc. —].
. A question the Court does not reach at this time is what records § 727(a)(3) requires. Many courts, following a case of the Third Circuit, hold that a creditor must show that the debtor has failed to keep records the absence of which "makes it impossible to ascertain the debtor’s financial condition and material business transactions.” Meridian Bank v. Alten,
. Debtor has testified, in his affidavit, that he only has a high-school education. AP Doc. 27 at 13. Eduсational attainment, however, is only one factor in assessing a debtor’s sophistication for purposes of adjudicating the reasonableness of his record-keeping; more important is a debtor’s financial sophistication, whether acquired by higher education or by other means.
. The Court's denial of summary judgment rests solely on Debtor’s missing business records. A § 727(a)(3) action resting solely on Debtor’s missing records of cash expenditures dating back three to ten years prior to bankruptcy would present decidedly different issues, not decided here.