Aрpellant Herman Jacobowitz (the “debtor”) appeals to this Court from an Order and a Memorandum and Decision,
Cadle Co. v. Jacobowitz (In re Jacobowitz),
BACKGROUND
Unless otherwise noted, the following-facts are undisputed. On May 24, 1990, the debtor, a shareholder and officer of Prime Products, Inc. (“Prime Products” or “the company”), a company the debtor had purchased through a leveraged buyout, personally guaranteed a $1.5 million loan to the company made by First New York Bank (the “Bank”). (Jacobowitz Affm. ¶ 3.) Subsequently, the debtor personally guaranteed more loans to the company. (Id.) Sometime in 1991, the debtor left Prime Products after a dispute with his business partner that appears to have centered around a transfer of assets from Prime Products to an entity named Chester Automotive. (Id. ¶ 4; Jacobowitz Dep. at 144-45.) According to the debtor, when the Bank discovered that Prime Products had disposed of its assets, it assigned guards to monitor Prime Product’s warehouse. (Jacobowitz Dep. at 145.) The debtor left the company the day the guards were assigned. (Id. at 146.) On December 2, 1994, Cadle, a successor in interest to the Bank, obtained a $1.9 million judgment against the debtor. (Jaco-bowitz Affm. ¶ 5.) The debtor has not retained any records relating to Prime Products or his tenure with the company. (Jacobowitz Dep. at 116, 136.)
The debtor claims to have lived “hand to mouth” since he left Prime Products. (Ja-cobowitz Affm. ¶ 7.) Sometime after leaving the company, the debtor obtained a license to sell insurance in New York State and embarked on a career as an insurance salеsman in order to support his wife and seven of his children.
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The debt- or was employed for four years by Met-Life, but appears to have operated a business independent of MetLife during his tenure with the company because he reported business income while he was employed there. After the debtor left that company in 2001, he continued to operate his own business, working as an independent contractor for I. Levine Insurance Co. (“I. Levine”). On his 1999, 2000 and 2001 tax returns the debtor reported gross income of $25,485, $32,760 and $10,419 respectively. On each return, the debtor declared a profit from business and toоk business deductions that reduced the debt- or’s gross business income by approximately 40-50%. (R. Appeal at 277, 287.) Although he claims never to have owned a vehicle during the relevant period (Rule 7056-1 Stmt. ¶ 29), each year the debtor took a substantial business deduction, typically equal to 20-25% of gross receipts, for car and truck expenses. (R. Appeal at 277, 287, 293.) The debtor explained that during the relevant period, he used vehicles made available to him by his synagogue or friends (Jacobowitz Dep. at 38) and that he paid the synagogue for this
On June 18, 2002, the debtor filed a Chapter 7 petition (the “bankruptcy petition”) wherein he reported income of $8,000 a month. When asked to supply documentation of his income for the six months preceding his bankruptcy petition, the debtor stated that he would supply Cadle with a 1099 Form or other record of his business income from I. Levine. (Jaco-bowitz Dep. at 54-55.) He has failed to do so despite being given several opportunities, the most recent of which occurred on June 27, 2008, a date when income information concerning 2002 should have been readily available. (Hr’g Tr. at 58-59, 89-90.) The petition also reflected monthly business expenses of $3,000 and monthly personal expenses of approximately $2,650 during the same period. The debtor admitted that he had no record of the business expenses he declared on his bankruptcy petition. (Hr’g Tr. 89-92.)
The debtor provided Cadle with copies of his 1999, 2000 and 2001 tax returns, but he did not submit any record of the business expenses he reported on the returns. 5 The debtor contends that he cannot provide a record of his expenses because he paid for everything in cash and never kept receipts and he has no checking account or credit cards. When I. Levine or another party remitted a сheck to the debtor, the debtor cashed the check through a free loan service offered by his synagogue called a g’mach. No record of any of these check transactions is available from the g’mach. (Id. at 100.)
The debtor claims that he has never owned any real property. Although title to a home in Monroe, New York, was in his name at one time, the debtor explains that he allowed an Israeli rabbi to put it in his name to allow the rabbi to circumvent federal immigration laws.
(Id.
at 85.) Title was transferred to a third party after the debtor advised them that Prime Product’s creditors would, in all likelihood, soon be lеvying upon any property that appeared to be the debtor’s.
(Id.
at 85-86.) The debtor rents his home in Monroe from his cousin who does not provide a receipt when the debtor pays the rent.
(Id.
27-
On August 22, 2002, Cadle deposed the debtor and repeatedly requested documents from him. (Jacobowitz Dep. at 10, 55, 60, 68, 86, 125.) Notably, Cadle requested records of the business income that the debtor admittedly received from I. Levine during the first half of 2002. (Id. at 55.) The debtor conceded that he could request these documents from I. Levine. (Id.) The debtor failed to produce the requested documents (Hr’g Tr. 89-92) and Cadle commenced this adversary proceeding on October 30, 2002, seeking a denial of the debtor’s discharge pursuant to 11 U.S.C. § 727(a)(3) for failure to keep adequate records.
The debtor filed an Answer and Cadle moved for summary judgment on February 12, 2003. The debtor responded to the motion but did not provide any additional documentation. On May 14, 2003, oral argument was held before the Bankruptcy Court. At oral argument, the Bankruptcy Judge scheduled an evidentiary hearing to provide the debtor with another opportunity to provide adequate records or to raise a genuine issue of material fact as to whether his failure to do so was justified. (Hr’g Tr. at 11.) The evidentiary hearing was held on June 27, 2003. The debtor testified that he had no records to support the information he provided on his petition or tax returns. At the time of the hearing, the debtor claimed that he had no income “as of this moment.” (Id. at 18). He conceded that I. Levine provided him a 1099 Form each year, but did not explain his failure to provide a record of his business income that he received during the first half of 2002. (Id. at 58-59, 89-90.) When asked whether the debtor had begun to save receipts and other pertinent documents concerning his business expenses subsequent to Cadle’s request for these records, the debtor frankly admitted that he had continued to discard them. (Id. at 62.)
In his papers opposing Cadle’s motion and at the evidentiary hearing on the matter, the debtor attempted to justify his failure to keep adequate records by claiming that he and his family lived in poverty and depended upon charity. The debtor offered census statistics that he contends establish that a family of nine with an income of $30,000 is living at or below the poverty level. He also offered a witness who testified that during the previous year the debtor’s family had received food donations from a charitable organization. 6 After combing the fully developed factual record the Bankruptcy Court concluded that Cadle had offered evidence tending to show that the debtor’s records were inadequate as a matter of law and that the debtor had failed to raise a genuine issue of material fact on the issue. Furthermore, the Bankruptcy Court held that the debtor’s proffered justifications for his failure to keep records were also insufficient as a matter of law. Accordingly, summary judgment was entered in favor of Cadle denying the debtor discharge under § 727(a)(3).
I. Standard of Review
On an appeal from the bankruptcy court, the district court cannot set aside the bankruptcy court’s findings of fact unless those findings are clearly erroneous.
See
Fed. R. Bank. P. 8018;
In re Dawnwood Props./78,
Summary judgment may be granted where there are no genuine issues of material fact and the movant is entitled to judgment as a matter of law.
See
Fed. R. Civ. P. 56(c); Fed. R. Bank. P. 7056;
Anderson v. Liberty Lobby,
II. Denial of Discharge Under § 727(a)(3)
Chapter 7 of the Bankruptcy Code (the “Code”) affords powerful relief to individuals saddled with oppressive debt by granting honest debtors a discharge from their dischargeable debts. This relief does not come without a price. Each individual debtor must liquidate his estate, allowing his creditors to reach a pro rata share of the debtor’s non-exempt property. The debtor’s crеditors are entitled to fair treatment during this liquidation process and the longstanding rule in bankruptcy that “[cjomplete disclosure by the debtor is a quid pro quo for discharge of debts” stems from this duty of fair treatment. Norton Bankr. Law & Prac. § 74:9 (2d. Ed.2003);
see also In re Underhill,
the debtor has concealed, destroyed,' mutilated, falsified, or failed to keep orpreserve any recorded information, including books, documents, records, and papers, from which the debtor’s finаncial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case ....
11 U.S.C. § 727(a)(3). “The purpose of this section is to provide creditors and the court ‘complete and accurate information concerning the status of the debtor’s affairs and to test the completeness of the disclosure relevant to discharge,’ ”
Nof v. Gannon (In re Gannon),
This provision does not require that a debtor maintain a bank account or “an impeccable system of bookkeeping.”
Meridian Bank,
A. Whether Cadle Satisfied Its Burden Under § 727(a)(3)
A party objecting to dischаrge under § 727(a)(3) must show: (1) that the debtor failed to keep or preserve adequate records; and (2) “that such failure makes it impossible to ascertain the debtor’s financial condition and material business transactions.”
Meridian Bank,
The debtor’s 1999-2001 tax returns do not allow the debtor’s creditors to ascertain the debtor’s financial condition or reconstruct his business transactions. The debtor reported that he had substantial business income and expenses during the first half of 2002. The tax returns the debtor proffered contained no information regarding his finances for this period. This information was particularly relevant because from the information that the debtor provided on his bankruptcy petition, it was apparent that 2002 was proving to be a much more profitable year than 2001; the debtor’s gross business income, which was only $16,582 for the entire year of 2001, had apparently spiked to $48,000 during the first half of 2002. However, the tax returns reflect only the debtor’s reported annual revenues and business expenses, not his assets or net worth, and there is no assurance of their accuracy without supporting records.
See Malloy v. Goldstein (In re Goldstein),
The debtor contends that his income is inconsequential when compared to his $3 million debt and, therefore, the tax returns provide his creditors with all they need to know about the debtor’s financial condition. (Appellant Reply Br. at 3.) Assuming that a debtor who establishes a similar ineome-to-debt ratio is automatically entitled to a dischargе, the debtor in this case has failed to produce records from which either his income or his business expenses could be determined. Thus, it is impossible to ascertain whether his debt is so large compared to his income or business assets that any objection to discharge would be futile.
Cadle identified specific documents that would allow it to ascertain the debtor’s financial condition and requested those records. Although he conceded that he could obtain records documenting his business income, the debtor declined to provide the records after repeated requests and оpportunities to do so.
See Turoczy Bonding Co. v. Strbac (In re Strbac),
Because the debtor was involved in the business of selling insurance he was under a duty to maintain records to allow his creditors to ascertain his financial condition and recent business transactions. It is undisputed that the only records that the debtor has provided are his 1999-2001 tax returns. As discussed previously, these records are inadequate as a matter of law. Furthermore, Cadle has demonstrated that it is unable to ascertain the debtor’s financial condition — the debtor reported income of $8,000 a month from business on his bankruptcy petition but has provided no record of this income or of the business expenses he allegedly incurred. Accordingly, Cadle has demonstrated that no genuine issue of material fаct exists with respect to the adequacy of the debtor’s records or its ability to ascertain the debtor’s financial condition and business transactions from the proffered records.
B. Whether the Debtor’s Failure to Keep Adequate Records Was Jus-tifíed
Even where an objecting party makes out a prima facie case for denial of discharge under § 727(a)(3), discharge should still be granted if the debtor establishes that his failure to keep records was justified.
Meridian Bank,
According to the debtor, his failure to keep records was justified under the circumstances because his “resources were depleted by meeting ordinary living expenses” and that he and his family live at or below poverty level. This argument conveniently ignores the fact that on the debtor’s bankruptcy petition he declared income of $8,000 a month. While such an income would not put the debtor in the wealthy clаss, especially considering the size of the debtor’s family, neither would it place him among the destitute. The debt- or testified that his family relies on charity for some of its clothing, food and housing needs. A representative of a charitable organization affiliated with the debtor’s religious community testified that the organization provided some food to the debtor’s family on a regular basis since the debtor filed for bankruptcy protection. (Hr’g Tr. at 105-06.) This testimony is insufficient to justify the debtor’s failure to provide adequate records as a matter of law. Even if the debtor’s income was at or below the poverty level
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and his family relies in part upon charity, the debtor is not relieved of his responsibility to respond to reasonable requests from his creditors for records.
See Meridian Bank,
Similarly, the debtor’s contention that he is unsophisticated and uneducated does not justify his failure to provide any records besides his 1999-2001 tax returns. It is undisputed that the debtor was sophisti
C. The Absence of Allegations of Fraudulent Intent
Finally, the debtor argues that discharge should be denied under § 727(a)(3) only when there is some evidence of fraudulent intent. We disagree. A party objecting to discharge under § 727(a)(3) is required to show only that the debtor’s records are not reasonable in light of the circumstances, not that the debtor failed to keep records in order to deceive his creditors.
See Goldstein,
D. The Bankruptcy Court’s Order is Affirmed
We conclude that Cadle has offered evidence tеnding to show that the records offered by the debtor are inadequate because the debtor was under a duty to maintain records appropriate to his business and from the records provided it is impossible to ascertain the debtor’s financial condition or reconstruct the debtor’s recent business transactions. The debtor has failed to present any evidence sufficient to raise a genuine issue of material fact on this issue and his proffered justifications for his failure to provide records are insufficient as a matter of law. Therefore, the Order denying the debtor’s discharge under § 727(a)(3) is аffirmed.
For the reasons stated herein the April 11, 2003, Order and Memorandum and Decision of the Bankruptcy Court is affirmed.
SO ORDERED.
Notes
. We have jurisdiction pursuant to 11 U.S.C. 158(a)(1).
. The debtor declared six dependent children on his tax returns but has testified that he actually supports seven of his children.
. All references to the "Hr’g Tr.” are to the transcript of the evidentiary hearing held in the Bankruptcy Court on June 27, 2003.
. The debtor’s office is located in his home.
.The record does not reflect whether the debtor submitted any documents verifying the income figures he reported on his tax returns.
. The debtor also claims that he made charitable contributions of fifty dollars per month but he has provided no documentation of this. (Jacobowitz Dep. at 63.)
. As the Bankruptcy Court noted, the debtor was not a "casual laborer.” Jacobowitz, 296 B.R. at 672.
. The debtor claims that
In re Dennis,
. Whether the debtor's income at the time of filing was at or below the poverty level is impossible to determine because the debtor failed to produce any record of what his income was at that time.
. The debtor contends that the Bankruptcy Judge's ruling showed a lack of compassion. We disagree. The Bankruptcy Judge gave the debtor numerous opportunities to provide some record of his financial condition and recent business transactions or justify his failure to do so.