James L. Snyder v. Daryll DykesJames L. Snyder v. Daryll Dykes
Before LOKEN, GRASZ, and STRAS, Circuit Judges.
Daryll and Sharon Dykes (“Debtors“) filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code, rеporting just under $400,000 in assets, over $5.6 million in liabilities, and a monthly income insufficient to cover expenses. Before the Chapter 7 trustee finished gathering assets and administering the bankruptcy estate, the United States Trustee objected to Debtors’ discharge in bankruptcy. See
I. Background.
On Schedule A/B of their July 2016 Chapter 7 petition, Debtors averred that the only jewelry they owned was a wedding ring worth $35, a wedding band and
In early September, the Trustee notified the court it had “reviewed all materials filed” and determined that the case was “presumed to be an abuse” under
In a status report after a meeting of creditors, the Chapter 7 trustee noted “a potential fraudulent transfer” issue based on the return of “twenty to thirty valuable watches” to Ezra Bekhor of Bellusso Jewеlers in Las Vegas. Bekhor filed a $413,788 unsecured claim. The Chapter 7 trustee also filed a successful motion for turnover, securing various household items including the watch winder.
The Trustee filed its Complaint on February 15, 2017, asserting three grounds for denying Debtors a discharge: under
The Trustee‘s case proceeded to trial on October 13, 2017. Both Debtors testified to events leading up to their bankruptcy.4 About ten years prior, Mr. Dykes was earning “well over a million dollars a year” as an orthopedic surgeon. He holds a medical degree, a Ph.D. in molecular biology, and a law degree. Ms. Dykes holds a medical degree and operated a sоlo practice specializing in colon and rectal surgery, which brought in “several hundred thousand dollars a year.” The couple lived with their five children in a $3 million home, built through financing provided by Alliance Bank and homebuilder Lecy Construction.
Debtors’ fortunes declined during and after the “national foreclosure crisis” in
To collect its judgment, Alliance Bank levied Mr. Dykes‘s interest in his medical practice. He left to form two new groups in late 2011. Initially successful, the new practice struggled after passage of the Affordable Care Act and loss of provider designations with major medical insurers. At the time of trial, Mr. Dykes was serving as a health policy fellow in Washington, D.C. Despite these financial strains, Debtors continued to pay a “significant majority” of their college-age children‘s educational expenses. Mr. Dykes testified those expenses were “absolutely central to [the family‘s] normal business and financial affairs.”
Mr. Dykes testified that he is an avid collector of expensive watches. Invoices admitted at trial showed that, bеtween November 2008 and March 2012, Mr. Dykes purchased twenty-one watches from Ezra Bekhor of Bellusso Jewelers in Las Vegas. Mr. Dykes testified he ultimately acquired 27 watches, as well as the watch winder. He also purchased jewelry. The invoices showed he received a Cartier bracelet worth $4,350, four sets of Kwait earrings collectively worth over $16,000, and a Kwait “Bridal Collection” ring with a 3.15 carat diamond worth over $68,000.
Although every invoice recorded deliveries, few recorded payments. Only five watches purchased in 2008 and valued at $145,650 were marked “paid.” Another invoice documented credit received for returning three of the four sets of Kwait earrings. Mr. Dykes testified that his relationship with Bellusso “became very informal” once he became a regular customer. Bellusso would send him watches; he would keep the ones he liked and return the others, with no paperwork. The arrangement resulted in a “running total” by Bellusso as it charged and credited watches and jewelry Mr. Dykes received and returned. By late 2011, the amount unpaid rose tо $390,700. Unable to pay, Mr. Dykes signed a confession of judgment in that amount.
In February 2013, to partially satisfy that judgment, Mr. Dykes returned twenty-seven watches and the $68,000 bridal collection ring to Bekhor‘s Minneapolis attorney. Mr. Dykes documented the returns with a receipt, listing the make, model, and serial number of each item, but not the value of the items or the balance duе after the returns. Mr. Dykes did not return the “presentation cases” in which Bellusso had delivered the watches, which increases their value. He testified that some cases suffered water damage in his basement, while others were lost in the storage container auction. Of the twenty-one watches appearing on invoices introduced at trial, аt most ten appeared on the list of returned items.
After trial, the bankruptcy court denied discharge. It rejected the Trustee‘s claims under
[I]f only for insurance purposes, a jeweler would want to make sure that a valuable item was received by a customer and would issue a receipt. Similarly, a sophisticated collеctor and customer would want documentation regarding a return.
The court concluded that Debtors’ failure to document purchases and returns of hundreds of thousands of dollars in watches and jewelry “makes it impossible to ascertain [their] financial condition and material transactions.” It “defies logic that [Debtors] did not receive or keеp documents indicating the value of the returns to be deducted from the balance owing on the Confession of Judgment.” Though Mr. Dykes testified additional records were in the forfeited storage containers, Debtors failed to provide any accounting of the personal property they lost in the auction.
The bankruptcy court also denied discharge under
On appeal, the BAP in a thorough opinion аgreed with the bankruptcy court‘s determination that Debtors failed to maintain adequate records of valuable watch transactions and failed to meet their burden to justify this lack of adequate records. Accordingly, the BAP affirmed the denial of discharge under
II. Discussion.
A. Chapter 7 of the Bankruptcy Code allows debtors to discharge their debts by liquidating assets to pay creditors. See
Section 727(a)(3) authorizes denial of discharge if “the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or prеserve 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.” This provision “make[s] the privilege of discharge dependent on a truе presentation of the debtor‘s financial affairs.” In re Cacioli, 463 F.3d 229, 234 (2d Cir. 2006) (quotation omitted). Although this court has never addressed
To present a prima facie case under
B. We agree with the BAP that the Trustee met its initial burden because Debtors’ failure to keep adequate records left the bankruptcy court “without a way to determine the exact transactions between the Debtors and the jeweler.” We do not agree with the Trustee that Debtors had the same “duty to create and preserve records” of their watch and jewelry transactions as a Chapter 7 debtor operating a business with substantial assets that is the focus of the bankruptcy case. But even in a consumer bankruptcy, the dеbtor has a greater duty to keep records of “a sudden and large dissipation of assets.” 6 Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy ¶ 727.03[3][g] at 727-34 (16th ed. 2019).
Mr. Dykes‘s return of twenty-seven valuable watches and the Kwait bridal collection ring to Bekhor, a judgment creditor, was such a “sudden and large dissipation of assets.” See, e.g., In re Buzzelli, 246 B.R. 75, 113-14 (W.D. Pa. 2000) ($190,000 art and wine collections). Nor was Mr. Dykes a typical consumer debtor. He was a sophisticated collector of highly valuable watches and jewelry, and his purchase and return transactions had a significant impact on Debtors’ financial condition. The transactions also impacted the legitimacy of the jeweler‘s bankruptcy claim for the completе Confession of Judgment, despite Mr. Dykes‘s testimony that he returned the watches to partially satisfy that judgment. The only record of the returns was a receipt that utterly failed to substantiate the financial effect of the transaction. This was sufficient evidence to shift the burden of production to Debtors to justify their lack of adequate records.
C. In determining whether a debtor‘s record keeping was justified, the Bankruptcy Code “requires the trier of fact to make a determination based on all the circumstances of the case.” Meridian Bank, 958 F.2d at 1231. The inquiry turns on factors such as the education, experience, and sophistication of the debtor; the volume and complexity of the transactions; and “аny other circumstances that should be considered in the interest of justice.” Id. (quotation omitted). For this inquiry, “the trial court must first determine what records someone in like circumstances to [the Debtor] would keep.” In re Sendecky, 283 B.R. 760, 764 (B.A.P. 8th Cir. 2002).
Debtors arguе that Mr. Dykes had no way of knowing the fair market value of the watches at the time of their return. That may be true. But he could have matched each watch with an invoice in his possession, noted the purchase price charged by Bellusso, and demanded that Bekhor document the amount each returned watch would reduce his unpaid judgment. This informаtion would have permitted Mr. Dykes at the time, and the Chapter 7 trustee after the petition was filed, to challenge Bekhor‘s unsecured claim for the full amount of his confession of judgment.6 Instead, Debtors provided no records supporting the valuation of the returned watches. Moreover, the mismatches between the watches listed on the rеceipt and the invoices introduced at trial created serious, unanswered questions as to the whereabouts of many of these assets as well as the legitimacy of Bekhor‘s bankruptcy claim.
III. Conclusion.
For these reasons, we agree with the BAP that the bankruptcy court did not err in denying Debtors a discharge in bankruptcy under