DECISION ON MOTION OF THE TRUSTEE FOR AN ORDER DENYING DISCHARGE TO THE DEBTOR
This is an adversary proceeding in which Paul I. Krohn, Esq., as the Chapter 7 trustee (the “Trustee”) of the Debtor, Anne
FACTS
On May 11, 1990, the Debtor filed a petition for relief under Chapter 7 of the Bankruptcy Code. Following the filing of the petitiоn, the Trustee examined her during various § 341 meetings. 1 In purporting to comply with the request of the Trustee for the Debtor’s records, she provided him with a morass of records consisting of bills, checks, bank statements and closing statements. However, no books of account were furnishеd to the Trustee. In addition, the Debtor supplied accounting information pertaining to her real estate operations to verify that all closings of sales and real property were properly accounted for and recorded, including worksheets summarizing her real estate closings for the year 1988. Pursuant to the worksheets, the Debtor closed on sales of 14 real properties owned by Glender Enterprises, Ltd. (“Glender”), a subchapter S corporation, of which she is the president and sole shareholder, and received a gross profit in the amount of $190,673 for these properties. The worksheets set forth the following:
Sales $1,710,861
Less: Fees 145,945
Net Sales $1,564,906
Purchases 1,374,233
Gross Profit $ 190,673
In order to verify the information contained in the worksheets, the Trustee examined Glender’s 1988 corporate income tax return which was prepared by the Debtor’s acсountant and signed by the Debtor on June 20, 1990, subsequent to the filing of her petition in bankruptcy on May 11,1990. The corporate tax return for that year reflected the real estate transactions and set forth a gross profit of $302,673 as follows:
Sales $2,619,851
Costs of Goods Sold 2,317,178
Gross Profit ' $ 302,673
The Debtor’s accountant explained, and the Debtor did not dispute, that the discrepancy between the accounting worksheets that had been submitted to the Trustee and the corporation’s tax return, was that the profit reported on the corporation income tax return was false.
Based upon the admittedly false income tax return and the Debtor’s worksheets, on February 7, 1991, the Trustee commenced the present action pursuant to the aforementioned sections of the Bankruptcy Code objecting to the discharge of the Debtor. The Trustee argues thаt the Debtor should be denied her discharge since she failed to keep adequate records from which the Debtor’s financial condition or business transactions could be ascertained and that she knowingly and fraudulently made a false oath or account in connection with the case.
During a hearing before this Court, on June 18, 1992, the Trustee called Ken Weitz (“Weitz”), the Debtor’s accountant, as a witness. Weitz, who is not a certified public accountant, has been the Debtor’s accountant for seven years and has preparеd her books, records and tax returns for such time. The Trustee examined Weitz with respect to the 1988 federal income tax return of Glender. Weitz testi
In addition, Glender’s 1988 corporate income tax return stated gross receipts to be $2,619,851 while the summary worksheets showed gross sales of only $1,710,851, a discrepancy of $909,000. Weitz testified that the discrepancy was purposely made so that Glender would not show a net loss, but instead, would show a profit. By creating these fictional gross sales and profits, the Trustee asserts, the Debtor was able to hide a loss and cover substantial alleged expenses.
DISCUSSION
This Court has previously held that the relief afforded in bankruptcy cases was intended to permit an honest debtor to obtain a fresh start from debt. The “central purpose of the [Bankruptcy] Code is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy ‘a new opportunity in life with a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt....’”
In re Sawyer,
Section 727(a)(3) exempts from discharge any debtor who has
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 asсertained, 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 fundamental policy underlying § 727(a)(3) is to insure that the trustee and the creditors receive sufficient information to effectively enable them “to trace thе debtor's financial history, to ascertain the debtor’s financial condition, and to reconstruct the debtor’s business transactions.”
In re Goldstein,
In In re Underhill, the Second Circuit set forth the standard by which the sufficiency of such records should be determined:
The law is not unqualified in imposing a requirement to keep books or records,and it does not require that if they are kept they shall be kept in any speсial form of accounts. It is a question in each instance of reasonableness in the particular circumstances. Complete disclosure is in every case a condition precedent to the granting of the discharge, and if such a disclosure is not possible without the keeping of books or records, then the absence of such amounts to that failure to which the act applies.
The court has broad discretion in determining whether the records produced by the debtor arе sufficient under the standard set forth in
Underhill. In re Kearns,
In determining the adequacy of a debtor’s financial records, courts have focused on numerous factors. The most significant factors include:
whether a debtor was engaged in business and, if so, the complexity and volume of the business; the amount of the debtor’s obligations; whether the debt- or’s failure to keep or preserve books and records was due to the debtor’s fault; the debtor’s education, business experience and sophistication; the customary business praсtices for record keeping in the debtor’s type of business; the degree of accuracy disclosed by the debtor’s existing books and records; the extent of any egregious conduct on the debtor’s part; and the debtor’s courtroom demeanor.
In re Minesal,
Once it has beеn determined that the records are insufficient to enable the Court, the Trustee or the creditors to determine the financial affairs and business transactions of a debtor, the burden shifts to the debtor to justify any deficiencies.
Pimpinella,
In the case before this Court; the records produced by the Debtor are not
[Hjowever informal the record keeping, the financial history of a debtor must be preserved in enough of a paper trail so that those concerned ... need not be experienced explorers of a rat’s nest of scraps of uncoordinated bits and pieces like parts of some impressionistic puzzle that needs to be solved in order to decipher the financial machinations of the debtor.
Morando,
In addition, the production of the particular types of documents submitted by the Debtor are insufficient to enable the Trustee to determine the Debtor’s financial condition.
Goldstein,
Furthermore, the admittedly false tax return submitted by the Debtor is not sufficient to enable the Trustee to ascertain the reasons behind the demise of the Debtor’s business. Even if the tax returns were acсurate, tax returns “prepared by an accountant from whatever records the accountant can garner from the tax payer, are not a significant indicia of sufficient record keeping. The tax returns themselves clearly do not provide sufficient doсumentation, since they fail to provide itemization of transactions.”
Goldstein,
The Debtor has failed to justify her inability to keep and preserve adequate records and papers from which her financial condition or business transactions might be ascertained. Accordingly, pursuant to § 727(a)(3) of the Bankruptcy Code, the Debtor’s discharge is denied.
Section 727(a)(4)(A) excepts from discharge any debtor who “knowingly and frаudulently, in or in connection with the case ... made a false oath or account.” 11 U.S.C. § 727(a)(4)(A). In order to deny a debtor its discharge pursuant to this section, the objecting creditor must establish the following elements: (1) the debtor made a statement under oath; (2) such statement was fаlse; (3) the debtor knew the statement was false; (4) the debtor made the statement with fraudulent intent; and (5) the statement related materially to the bankruptcy case.
In re Beaubouef,
CONCLUSIONS
1. This Court has jurisdiction over this matter pursuant 28 U.S.C. §§ 1334 and 157(b)(2)(J) as it is a core proceeding concerning an оbjection to the discharge of the Debtor.
2. The discharge of the Debtor is denied pursuant to § 727(a)(3).
SUBMIT AN ORDER CONSISTENT WITH THIS OPINION.
Notes
. Pursuant to § 341 of the Bankruptcy Code, the trustee must convene and preside over a meeting of the debtor’s creditors. Such meeting shall include the examination of the debtor under oath. Fed.R.Bankr.P. 2003(b).