Schechter v. Hansen (In Re Hansen)Schechter v. Hansen (In Re Hansen)
MEMORANDUM OPINION
In 2001, lawyer and businessman Chris Hansen sold his house. Over the next year and a half, he claims to have frittered away most of the money from the sale on the stock market. He purportedly blew another $100,000 trying to shore up the small, failing oil company where he worked. The rest went to what he called “living expenses.” On the run from his ex-wife who was pressing him to make his delinquent child support payments, in September 2002 Hansen sought relief under chapter 7 of the Bankruptcy Code.
Joel Schechter was appointed trustee in the case. Schechter investigated Hansen’s affairs for nine months and then filed an adversary complaint objecting to Hansen’s discharge under several subsections of section 727(a), 11 U.S.C. § 727(a). On March 25, 2004, the court set the adversary proceeding for trial. Hansen responded by moving to convert his case to one under chapter 13. After an evidentiary hearing, the court denied his motion, finding him ineligible for chapter 13.
See In re Hansen,
The adversary proceeding ultimately went to trial on the trustee’s complaint, which alleged four grounds for denying Hansen’s discharge: (1) that he “concealed, destroyed, mutilated, falsified or failed to keep or preserve” records from which his financial condition might be ascertained, 11 U.S.C. § 727(a)(3); (2) that his misrepresentations and omissions in his petition and schedules constituted a “false oath,” 11 U.S.C. § 727(a)(4)(A); (3) that he knowingly or fraudulently withheld from the trustee information relating to his property or financial affairs, 11 U.S.C. § 727(a)(4)(D); and (4) that he failed to explain satisfactorily a loss or deficiency of assets to meet his liabilities, 11 U.S.C. § 727(a)(5).
For the reasons that follow, the evidence at trial entitles Schechter to judgment on his claims under sections 727(a)(4)(A), 727(a)(3), and 727(a)(5). Hansen will be denied a discharge. 1
The court has subject matter jurisdiction over this case pursuant to 28 U.S.C. §§ 1334(a) and 157(a) and the district court’s Internal Operating Procedure 15(a). This is a core proсeeding. 28 U.S.C. § 157(b)(2)(J).
2. Findings of Fact
a. Hansen and His Employment
Hansen is a University of Michigan graduate who received a law degree from John Marshall Law School in 1978. (Tr. at 10; P.Ex. 9). 2 He was divorced in 1995 and has three children. (P.Ex. 9). Before 1995, Hansen appears to have practiced law full-time. (Tr. at 11). More recently, he has been involved with several small, mostly unsuccessful companies engaged in the compounding and blending of motor oil. (Id. at 24; Dep. Tr. at 14).
The first of these was a corporation called APMC at which Hansen held the position of vice president. (Tr. at 14). Around 2000 or 2001, however, APMC ran into financial trouble and plenty of litigation. (Id. at 17-18; Dep. Tr. at 14). Among the fifteen to twenty-five lawsuits filed against the company was an Illinois state court action that Harris Bank Bar-rington (“Harris Bank”) commenced in October 2001 to foreclose mortgages on APMC’s buildings, buildings securing obligations of $4.1 million. (D.Ex.3). Because he had personally guaranteed those obligations, Hansen was named as a defendant. (Id.). The action was pеnding when Hansen filed his bankruptcy petition (Tr. at 90-91) and is still pending.
In 2002 or so, Hansen began working for another corporation, Alliance Petroleum (“Alliance”), again as vice president. (Id. at 16; Dep. Tr. at 12). During the time he worked there, however, Alliance made no money, and Hansen received no salary or benefits. 3 (Tr. at 14-15; Dep. Tr. at 6, 10). Sometime during 2004, Hansen became employed with still another oil company, American Petroleum (“American”), again as vice president. (Tr. at 11). Toward the end of 2004, Hansen began receiving a salary from American. (Id.).
All three companies for which Hansen worked, American, Alliance, and APMC, were related: they shared the same president (one Richard Stiefel), occupied the same premises, and were engaged in the same business.
(See id.
at 13,15, 24; Dep. Tr. at 8-10). Despite his position as an officer, however, Hansen professed ignorance of the most basic corporate information. He was unable or unwilling, for example, to say when the companies were incorporated, began operating, or ceased operating (Tr. at 12 (American); Tr. at 13, Dep. Tr. at 7 (Alliance); Tr. at 14 (APMC)); who the shareholders were (Tr. at 12 (American); Dep. Tr. at 7-8 (Alliance)); or who the officers or directors were other than Stiefel and himself (Tr. at 12 (American);
id.
at 13 (Alliance);
id.
at 15 (APMC)). He claimed not to know Stiefel’s address or telephone number (Dep. Tr. at 9) and was vague even about
b. Hansen’s Residences and the Gavin Court Sale
Hansen currently resides in Bannock-burn, Illinois, moving there in January 2002, nine months before filing bankruptcy. (Tr. at 8). Hansen does not hold title to the Bannockburn property himself; the property is owned jointly by Hansen’s mother, Virginia Gefvert, and Nancy Ved-ral, a woman with whom Hansen is involved. (Tr. at 43, 52; Dep. Tr. at 11, 49, 51).
Hansen had previously spent short stints in other Chicago suburbs, living on Church Road in Lake Forest for less than a year and in Highland Park for “a couple of months.” (Tr. at 8-9). Before Highland Park, he lived on Gavin Court in Lake Forest in a house he owned jointly with Vedral. (Id. at 9). In June 2001, about a year before he filed bankruptcy, Hansen and Vedral sold the Gavin Court property for $1.3 million. (Id. at 38-39; P.Ex. 8). Of the $362,464 in net proceeds from the sale, Hansen received $270,469 and Vedral the other $91,995. (Id.).
c. Hansen’s Fidelity Account and the Missing $270,000
Hansen maintained a brokerage account with Fidelity Investments. Sometime in 2001, he deposited the entire $270,469. from the Gavin Court sale into the account. (Tr. at 83; Dep. Tr. at 48; P.Ex. 7; D. Ex. 10). Hansen then proceeded to invest heavily in technology stocks, even trading daily in those stocks on margin. (Tr. at 84, 88). His timing was unfortunate: as he put it, this was “absolutely the top of the bubble^that was about to burst.” {Id. at 83). By December 31, 2002, the Fidelity account’s balance had been reduced to $291.
Where the money went is unclear. The Fidelity tax statements for Hansen’s account suggest trading losses of $152,756 in 2001 and $61,509 in 2002. (P. Exs. 4, 6; see Tr. at 87-88). The investment report from Fidelity, on the other hand, shows a net short-term loss of $272,421 in 2002. (P.Ex. 5). For reasons that were not explained, at trial Hansen ignored the $152,756 figure and instead combined the $272,421 figure from 2001 (which he mistakenly said was $267,000 (Tr. at 87-88)) with the $61,509 figure from 2002 to get a total loss of roughly $325,000. 4 {Id. at 84-88; see also id. at 96-97 (stating that his losses amounted to “$326,000”)).
The 2001 and 2002 Fidelity investment reports also reflect $202,665 withdrawn from the account: $102,403 in 2001 and $100,262 in 2002. (P. Exs. 5, 7; see also Tr. at 36). Of those amounts, the 2001 report shows $70,000 in checking activity and $25,000 in “other withdrawals.” (P.Ex. 5). (How the other $7,403 was withdrawn is not explained.) The 2002 report similarly shows $69,611.89 in checking activity and $30,650.29 in “other withdrawals.” (P.Ex. 7).
According to Hansen, he made the withdrawals for two purposes. First, he said that near the end of 2001 he withdrew $100,000 from the Fidelity account and loaned the money to APMC.
5
(Tr. at 37, 84;
The other $100,000, Hansen said, was withdrawn from the Fidelity account in 2002 to pay his “living expenses.” (Tr. at 37, 84). Hansen did not elaborate on what these living expenses might have been or when or to whom they might have been paid, and his testimony on the subject as a whole was less than straightforward: he also said variously that his mother paid his living expenses (Dep. Tr. at 10-11), that his mother merely contributed to payment of his living expenses (Tr. at 37-38), and that Vedral paid part of his living expenses (Dep. Tr. at 12).
d. Miscellaneous Hansen Financial Matters
Several other financial matters deserve mention.
1. At some point, Hansen borrowed $400,000 or $450,000 from his mother. (Tr. at 53; P.Ex. 1, Sched. F). Whether the loan was for living expenses or some other purpose was never clarified. The loan was evidenced by a promissory note. (Tr. at 43, 66; Dep. Tr. at 44).
2. At some point, Hansen had a certificate of deposit (“CD”) with Harris Bank and used it to secure a $150,000 loan from Harris. (Tr. at 20). Apparently Hansen defaulted on the loan, because Harris seized the CD to pay off the loan balance in the summer of 2002. (Id.). Hansen claimed at trial that he never had a copy of the CD, that it was always in the bank’s possession. (Id. at 43). At his deposition, however, he testified that he in fact once had a copy of the CD but no longer did. (Dep. Tr. at 44).
3. In a pre-hearing memorandum filed in June 2002 with the Illinois state court in his divorce case, Hansen listed as an asset 400 shares of Nextel stock. (P.Ex. 9). At trial, Hansen claimed not to recall ever owning any Nextel stock (Tr. at 40), but both the 2001 and 2002 Fidelity investment reports list several transactions involving Nextel stock (P. Exs.5, 7).
4. Hansen owned two oriental rugs he valued at “several thousand dollars each” that he said had been ruined in the summer of 2002 when the basement of the Bannockburn house flooded during a storm. (Tr. at 40^41). The damage rendered the rugs worthless. (Id. at 42). Hansen submitted a claim to his insurance carrier for the loss. (Id. at 41).
5. Hansen was the obligor on a student loan for his eldest son, a loan payable to the U.S. Department of Education. (Id. at 21; Dep. Tr. at 20; P.Ex. 1, Sched. F). In the June 2002 prehearing memorandum in the divorce case, he listed the loan balance as $100,000. (P.Ex. 9). At trial and at his deposition, however, Hansen said the balance as of September 2002 was actually somewhere in the region of $38,000 to $40,000. (Tr. at 21, 51-52; Dep. Tr. at 21).
6. Hansen filed a federal income tax return for 2000. (Tr. at 26; P.Ex. 2). On the 2000 return, he reported $89,725 in wages, as well as $3,023 in interest from the Harris account and $985 in dividends and interest from his Fidelity account.
(Id.).
Hansen also filed a federal income tax return for 2001. (Tr. at 27; P.Ex. 3). On the 2001 return, he reported $30,000 in wages and $3,064 in interest from an unnamed source.
(Id.).
There is no dispute
Whether Hansen filed a return for 2002, on the other hand, is unclear: at his deposition he testified that he had (Dep. Tr. at 12-13), that he had not (id. at 42), and that he could not remember (id.). He maintained without contradiction, however, that he had no income after March 2001. (Tr. at 91).
7. Under his divorce judgment and settlement, Hansen was obligated to pay his ex-wife $3,000 per month in maintеnance and child support. (Id. at 91; Dep. Tr. at 20-21). He was also obligated to make monthly payments of $1,000 for her mortgage (Tr. at 91; but see Dep. Tr. at 20 (“$800 a month”)), and $400 for his children’s medical insurance (Tr. at 91). The June 2002 prehearing memorandum in the divorce action was filed in support of a motion to modify the judgment and settlement, presumably to reduce the amount of his payments. (See P.Ex. 9).
e. Hansen’s Petition and Schedules
Hansen’s effort in the circuit court to have his payments reduced evidently proved unsuccessful, because his ex-wife moved to have him held in contempt for failing to pay child support. (Tr. at 94). Her motion was scheduled to be heard September 5, 2002. (Id. at 94). Concerned about a contempt citation (to say nothing of possible jail time), and facing Harris Bank’s summary judgment motion in the foreclosure action (id. at 90-91, 94), Hansen filed a petition for relief under chapter 7 on September 4, 2002 (see P.Ex. 1). His schedules were filed with the petition. (Id.).
Although the petition and schedules were prepared with the assistance оf counsel (Tr. at 95; see P.Ex. 1 at 2), they contained a large number of errors and omissions:
a. On Schedule B, Hansen listed as personal property the CD securing the Harris loan, stating that the CD was in his possession. (P.Ex. 1, Sched. B at 1). In fact, the CD was no longer an asset by the time Hansen filed his petition (Tr. at 20), and he testified at trial that he never had a copy of the CD (id. at 43).
b. Schedule B required Hansen to disclose “financial accounts ... in ... brokerage houses.” (P.Ex. 1, Sched.B). Hansen failed to list the Fidelity account, although he still had an interest in that account when he filed his petition. (Tr. at 20).
c. Schedule B called for a listing of “household goods and furnishings,” as well as a listing of “art objects.” Hansen listed only books, failing to mention his two oriental rugs. (P.Ex. 1, Sched. B at 1; see Tr. at 41-42). Hansen’s statement of financial affairs (“SOFA”) required him to list “all losses from fire, theft, other casualty or gambling.” (P.Ex. 1, SOFA at 3). Hansen checked “none” (id.), although Hansen said the rugs had been ruined in a flood earlier that summer, and he had filed an insurance claim (Tr. at 41).
d. Schedule B required Hansen to list “stock and interests in incorporated and unincorporated businesses.” (P.Ex. 1, Sched. B at 2). Hansen checked “none.” (Id.). In fact, according to the pre-hearing memorandum he filed three months earlier in his divorce case, he owned 400 shares of Nextel stock. (P.Ex. 9).
e. On Schedule F, Hansen listed the balance of his son’s student loan as $100,000 (P.Ex. 1, Sched. F at 2), the same figure he used in the divorce case (P.Ex. 9). In fact, Hansen admitted, the balance was between $38,000 and $40,000. (Tr. at 21, 51-52; Dep. Tr. at 21).
f. On Schedule J, Hansen gave “$0.00” as his current expenditure for “alimony, maintenance, and support paid to others.”
g. Hansen’s SOFA required him to report prior addresses if he had moved in the two years before filing bankruptcy. (P.Ex. 1, SOFA at 3). Hansen checked “none” (id.), although he had at least three prior addresses during that time, two in Lake Forest and one in Highland Park. (Tr. at 8-9).
h. The SOFA demanded information about businesses in which Hansen had been a corporate officer during the preceding six years, including the nature of the businesses, their names, addresses, taxpayer identification numbers, and beginning and ending dates. (P.Ex. 1, SOFA at 4). Hansen checked “none” (id.), although during that period he had served as vice president both of APMC and of Alliance, and was still serving as vice president of Alliance (albeit without pay) when he filed his petition. (Tr. at 14,16).
i. The SOFA required Hansen to state his gross income from employment during the two years immediately preсeding the calendar year in which the case was filed. (P.Ex. 1, SOFA at 1). In Hansen’s case, that meant reporting income for the years 2001 and 2000. Hansen checked “none,” although he had income from his employment during both years. (Tr. at 26-27; P. Exs. 2, 3; D. Ex. 19 at 2). His income in 2000 was almost $90,000. (Tr. at 26; P.Ex. 2).
j. The very next SOFA question asked about income other than from employment during the two years before the bankruptcy. (P.Ex. 1, SOFA at 1). Again, Hansen checked “none.” (Id.). On his tax returns, however, he reported dividend and interest income for 2000 and interest income for 2001. (Tr. at 26-27; P. Exs. 2, 3).
k. The SOFA required a list from Hansen of all property transferred outside the ordinary course of his business or financial affairs within a year of the bankruptcy. (P.Ex. 1, SOFA at 3). Hansen checked “none,” declining to reveal the $100,000 he says he loaned APMC at the end of 2001. (Tr. at 37, 84; Dep. Tr. at 24, 26-28, 50).
l. The SOFA sought a list of all suits and administrative proceedings to which Hansen was a party in the year preceding the bankruptcy. (P.Ex. 1, SOFA at 2). In response, Hansen disclosed his divоrce case, but he omitted the Harris Bank foreclosure action (id.; Tr. at 106) in which he was potentially liable for more than $4 million (D.Ex.3). Hansen managed to overlook the foreclosure action although, like his obligations to his ex-wife and children, the action was allegedly one of the forces driving his decision to seek bankruptcy protection. (Tr. at 90).
Despite these errors, on September 3, 2002, Hansen signed the petition and schedules, declaring under penalty that he had read the schedules and that the information in them was “true and correct.” (P.Ex. 1 at 2, Declaration Concerning Debtor’s Schedules; Tr. at 19). He made the same declaration about the information in the SOFA. (P.Ex. 1, SOFA at 5; Tr. at 19). These declarations were false. Hansen may or may not have read the schedules and SOFA (he never said), but information in them was not true and correct. Nor were the schedules and SOFA ever
Hansen tried to explain away a few of thе deficiencies. Harris seized the CD, he said, “almost in conjunction with” the bankruptcy, and the CD appeared in Hansen’s schedules (even though he no longer owned it) to “put the trustee on notice that there was an asset that he might want to look at.” (Id. at 98). The missing interest and dividend income was so minimal that he did not consider it income (Dep. Tr. at 47), and he termed its omission an “oversight” (Tr. at 96). The oriental rugs were not listed because the flood had rendered them “worthless.” {Id. at 41-42). The Nextel stock Hansen said he did not even recall having owned. {Id. at 40). And the prior addresses he simply “missed” when he reviewed the schedules before signing them. (Dep. Tr. at 35).
Mostly, though, Hansen attributed the errors and omissions in the schedules and SOFA to the “hurried, frenzied state” in which everything was filed. (Tr. at 96). He had “a matter of hours” to stop the state court contempt proceedings, he said, and he was “literally giving answers over the telephone” to his lawyer as he was driving to the lawyer’s suburban office to get the petition, copy it, and take it to Chicago to be filed. {Id. at 95). “I came up with the answers all off the top of my head,” he admitted. {Id.). “I did not review any of my financial documents in reference to coming up with the answers.” {Id.). Given his “distressed ... mental state,” Hansen said, the resulting errors were entirely innocent. {Id. at 94-95).
Once the bankruptcy halted both the contempt proceeding and the Harris foreclosure action, there was time to amend the schedules and SOFA. Hansen, however, never amended them. {Id. at 104, 107; Dep. Tr. at 6). In fact, more than three years after the bankruptcy began, the original, error-ridden schedules and SOFA still had not been amended. (Tr. at 104). This seems to have been a conscious decision: Hansen said his lawyer told him there was “a case called Bailey ” making it “irrelevant whether you amended them or not.” {Id. at 107).
f. Hansen’s Records
On January 9, 2003, Schechter convened the meeting of creditors. {Id. at 50, 79). At the meeting, Hansen produced records relating to his financial conditiоn and affairs, and at trial he insisted that his production was voluminous: he asserted that he brought “three briefcases of documents” to the meeting, enough to fill “a box 10 x 12.” {Id. at 79). Despite this allegedly voluminous production, over the next several months Schechter found it necessary to ask Hansen repeatedly for additional records. {See D. Ex. 17).
Some records, however, were never produced, and it appears Hansen had either failed to retain them or had not maintained them in the first place. Hansen did not retain complete and accurate copies of his 2000 and 2001 tax returns. The 2000 return produced to Schechter had no -W-2 attached. (Tr. at 27;
see
P.Ex. 2). The 2001 return lacked a Schedule B. (Tr. at 28;
see
P.Ex. 3). Hansen did not keep copies of the checks he wrote on his Fidelity account (Tr. at 38), and he maintained no records whatever of withdrawals from the account, whether by wire transfer or by check (Dep. Tr. at 41).
6
Hansen did
Finally, Hansen was unable to produce and apparently did not retain the majority of the statements and canceled checks from his Harris Bank checking account. Schechter requested statements and canceled checks from August 1, 2001 through September 30, 2002, the period covering roughly the year before Hansen filed the bankruptcy. (Tr. 44-45, 54-55). In response, Hansen mustered only four monthly statements from that fourteen-month period, statements listing just sixteen checks. (See D. Ex. 4). Hansen produced 130 checks, but only thirty-one of them were from the relevant period. (See D. Ex. 5). He said that these were all the records he had and conceded his records were not complete. (Tr. at 100-01). Schechter was less euphemistic in his assessment, calling Hansen’s bank records “very minimal.” (Id. at 54).
3. Conclusions of Law
Section 727(a) denies a discharge to a debtor who has been unscrupulous in certain ways. The bankruptcy system is designed to aid the “honest but unfortunate debtor.”
Grogan v. Garner,
In this case, Schechter, the chapter 7 trustee, contends that Hansen should be denied his discharge under sections 727(a)(3), 727(a)(4)(A), and 727(a)(5). Schechter proved each of these grounds for the denial of discharge by a preponderance of the evidence.
a. Section 727(a)(4)(A)
Schechter easily demonstrated, first of all, that Hansen should be denied a discharge under section 727(a)(4)(A).
To receive a “fresh start” under the Bankruptcy Code, a debtor must present full and accurate information about himself and his affairs.
Bostrom,
Section 727(a)(4)(A) enforces this “paramount and absolute” duty,
Petersen,
The evidence at trial established each of these elements. First, Hansen made statements under oath because all debtors swear to the accuracy of their petitions and schedules.
See Olbur,
Third, many of these statements were false. Indeed, Hansen’s schedules were riddled with misstatements and omissions. Hansen listed the Harris CD as personal property on Schedule B and asserted that the CD was in his possession, although the CD was no longer an asset and he no longer held it. On Schedule B, Hansen failed to list the Fidelity account under “accounts,” although the account was still open; failed to list his oriental rugs either as “household goods and furnishings” or as “art objects”; falsely checked “none” in response to the question about “all losses,” although the rugs had been destroyed; and falsely checked “none” in response to the question about “stock,” although he owned 400 shares of Nextel stock. On Schedule F, Hansen inflated the balance of his son’s student loan to $100,000, when the balance was less than half that. On Schedule J, Hansen listed no expenditures for maintenance and support and no expenditures for support of dependents not living with him, when his payments for maintenance, child support, insurance and the student loan totaled roughly $5,400 per month.
The trail of falsehoods continued on Hansen’s SOFA. Hansen falsely stated that he had no prior addresses in the two years before the bаnkruptcy when there had been three. He falsely stated that he had not served as a corporate officer during the six years before the bankruptcy. He falsely stated both that he had no income from employment in 2000 and 2001 and that he had no income other than from employment during those years. He falsely stated that he had transferred no property outside the ordinary course of his business or financial affairs in the year before the bankruptcy, neglecting to mention the $100,000 loan to APMC. And somehow he failed to list the $4 million Harris Bank foreclosure action as a suit to which he was a party. 7
No reasonable person could doubt that in completing his schedules and SOFA Hansen was utterly indifferent to the truth. Hansen is an intelligent and educated businessman, a lawyer, and a corporate officer sophisticated in financial matters. He surely recognized both the importance of supplying accurate information and the significance of attesting under oath to that information’s accuracy.
See Chavin,
At trial, though, Hansen blamed his lawyer for his failure to amend. According to Hansen, his lawyer advised him that a case called “Bailey” made it irrelevant whether he ever fixed his mistakes.
If Hansen was telling the truth when he said this and did not simply concoct the answer for trial, his lawyer gave him bad advice. The decision to which Hansen was likely referring,
Bensenville Cmty. Ctr. Union v. Bailey (In re Bailey),
But Hansen’s unamended, error-filled schedules and SOFA tell a different story, one rather more reliable than his self-serving protestations of innocence.
Costello,
Because Hansen knowingly and fraudulently made a false oath in connection with his bankruptcy, judgment will be entered in Schechter’s favor on the section 727(a)(4)(A) claim.
b. Section 727(a)(3)
Schechter is also entitled to judgment on his claim that Hansen’s discharge is barred under section 727(a)(3).
Section 727(a)(3) denies a discharge to a debtor who 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 cirсumstances of the case.” 11 U.S.C. § 727(a)(3). The provision ensures that debtors will provide “enough information to ascertain the debt- or’s financial condition and track his financial dealings with substantial completeness and accuracy for a reasonable period past to present.”
Union Planters Bank, N.A. v. Connors,
Debtors accordingly have an obligation to maintain, preserve, and produce records of their financial affairs.
Id.; Brandt v. Carlson (In re Carlson),
The party alleging a violation of section 727(a)(3) has the initial burden of demonstrating the inadequacy of the debtor’s records.
Self,
Schechter readily met his burden of proving Hansen’s records inadequate. Hansen’s income tax records for 2000 and 2001 were incomplete, the former lacking a W-2, the latter missing a Schedule B. Hansen had no copy of either the Harris CD or the promissory note to his mother. More important, Hаnsen did not produce the monthly statements from his Fidelity account, the checks written on the account, or a ledger or other record of those checks, all of which were necessary to explain the flow of funds in and out of the account. Most damning of all, perhaps, Hansen came up with virtually no checks or statements from his account at Harris Bank — -just four statements and just thirty-one checks — for August 2001 through the end of September 2002, roughly the year preceding the bankruptcy.
The records Hansen lacked are the kind every adult is expected to keep and preserve: tax returns, promissory notes, checks, check ledgers, bank statements, statements from investment accounts.
See Ochs v. Nemes (In re Nemes),
Once Schechter established the inadequacy of Hansen’s records, Hansen had the burden of showing that his failure to keep or preserve records was “justified under all of the circumstances of the case.” 11 U.S.C. § 727(a)(3). In this, Hansen fell well short. He offered no explanation for the sketchy tax returns, the missing promissory note, or the incomplete checking account records, stating only that he had produced all the checks and statements he had. (Tr. at 44-45, 100-101). He defended the missing Fidelity checks on the ground that Fidelity does not return canceled checks
(Id.
at 38), but he never said why he failed to keep copies of the checks in the first plaсe or why he maintained no ledger for the account. He claimed, finally, that the monthly Fidelity statements were ruined in basement floods. Even if this story were believable, however, Hansen conceded that he could have secured duplicate statements but decided not to.
(Id.
at 31). Hansen failed to justify the inadequacy of his records.
Cf. Self,
Section 727(a)(3) is not designed to bar the discharge of an ordinary consumer debtor.
Scott,
Because Hansen unjustifiably failed to keep and preserve records from which his financial condition and transactions might be ascertained, Schechter is entitled to judgment on his section 727(a)(3) claim.
c. Section 727(a)(5)
Given the outcome on the section 727(a)(3) claim, it is no surprise that Schechter is entitled to judgment on his section 727(a)(5) claim as well.
See First Commercial Fin. Group, Inc. v. Herman-son (In re Hermanson),
Section 727(a)(5) bars a discharge when “the debtor has failed to explain satisfactorily ... any loss of assets or deficiency of assets to meet the debtor’s liabilities.” 11 U.S.C. § 727(a)(5). By penalizing a debtor who is insufficiently forthcoming about what happened to his assets, this section is another designed to “relieve[] creditors and courts of the full burden of reconstructing the debtor’s financial history and condition, placing it instead upon the debtor.”
Hermanson,
Proof under section 727(a)(5) comes in two stages.
First Federated Life Ins. Co. v. Martin (In re Martin),
What explanation will be “satisfactory” rests with the court’s discretion.
11
Costello,
As he did on the section 727(a)(3) claim, Schechter met his burden of going forward. There was no dispute that Hansen sold his house on Gavin Court in June 2001 and deposited the entire $270,469 he netted from the sale into his Fidelity account. There was also no dispute that by December 31, 2002, almost all of the money was gone: the Fidelity account had a balance of only $291. A loss of more than a quarter of a million dollars in the year preceding a bankruptcy filing could fairly be described as a loss of “substantial and identifiable assets,”
Bostrom,
He did not. Hansen asserted, first, that he had lost a total of $325,000 trading technology stocks. The year-end Fidelity account statements and tax statements he provided, however, do not contain that number, and Hansen was never able to give a cogent explanation of where it came from. The statements do reflect losses. They also contain numbers that, if added together, produce a figure in the vicinity of $325,000. But Hansen did not explain why he added those numbers and not others. (Hansen’s $325,000 figure also tended to vary depending on when he was asked about it.) As Schechter rightly remarked, the Fidelity statements standing alone are incomprehensible.
{See
Tr. at 60). Rendering them comprehensible was Hansen’s job, not the job of the trustee or the court.
See Scott,
Just as Hansen’s records fail to explain satisfactorily his stock market losses, they do not explain what he claimed were his withdrawals of roughly $100,000 in 2001 and again in 2002. Hansen said that near the end of 2001 he withdrew $100,000 from the Fidelity account to lend to APMC. The 2001 statement shows total withdrawals of $102,403 (not $100,000), but nothing in the statements indicates where that money went or how it arrived there. Hansen testified that the funds had been wired from the Fidelity account to his account at Harris Bank, but he produced no record of a wire transfer. So although he produced two Harris checks from December 2001 totaling $100,000 payable to 5841 Building Corporation, apparently the checks intended for APMC, he offered no documentary link between the Fidelity account and those checks. 12
Hansen claimed that the $100,262 (not $100,000) withdrawn in 2002, meanwhile, was used for “living expenses.” But Hansen was unable to corroborate this assertion because he failed to come forward with checks from the Fidelity account, a check ledger for the account, records of any wire transfers from the account ($30,650 of the $100,262 consisted of wire transfers), or the vast majority of the checks and statements from his Harris account (the account to which the funds were presumably transferred). Without these records, it is impossible to verify Hansen’s vague claim that in 2002 $100,000 vanished down his “living expense” drain. His explanation was not satisfactory.
13
Cf. D’Agnese,
Because Hansen failed to explain satisfactorily a loss of assets to meet his liabilities, Schechter is entitled to judgment on the section 727(a)(5) claim.
4. Conclusion
Judgment is entered in favor of plaintiff Joel A. Schechter and against defendant Chris Hansen on the claims in the complaint under 11 U.S.C. §§ 727(a)(4)(A), 727(a)(3) and 727(a)(5). The claim under 11 U.S.C. § 727(a)(4)(D) is dismissed as moot. Debtor Chris Hansen is dеnied a discharge. A separate Rule 9021 judgment will be entered consistent with this opinion.
Notes
. The remaining claim under section 727(a)(4)(D) will be dismissed as moot.
See In re Krehl,
. The trial transcript is cited in this opinion as "Tr._" Hansen's deposition transcript (defendant's exhibit No. 18) is cited as "Dep. Tr._" Plaintiff’s and defendant's exhibits are cited respectively as "P.Ex._" and "D. Ex_"
. Why Hansen continued to work there for nothing was never adequately explained. At his deposition, he said simply, “I have no other job.” (Dep. Tr. at 10). At trial, however, he said that he continued working for Alliance in hope that when the company "turned around” he would receive a salary. (Tr. at 23).
. But not always. At his deposition, Hansen said that he "lost $275,000 in the stock market.” (Dep. Tr. at 50).
. In fact, the funds were loaned to an entity Stiefel owned called "5841 Building Corporation.” (Dep. Tr. at 24-25), the idea being to keep the funds beyond Harris Bаnk's reach. Hansen testified: "Mr. Stiefel was using the 5841 Building Corporation account as APMC’s account because any money that would have been put in APMC's account would have been taken or liened against by Harris Bank, so he was operating APMC out of that account.” {Id. at 24).
. Only the monthly statements would have shown the dates and amounts of withdrawals, Hansen admitted (Dep. Tr. at 41), and the statements were lost in the same basement flood that destroyed the oriental rugs, as well as in another flood at an earlier address. (Tr. at 29-30). Hansen investigated the possibility of procuring duplicates from Fidelity but decided the cost was prohibitive. (Id. at 31).
. On the other hand, Hansen told the truth when he listed no employment on Schedule I and maintained at trial that he was unemployed in 2002 when he filed his petition. (P.Ex. 1, Sched. I; Tr. at 97). Hansen was an officer of a corporation and was going to work there daily, but he never received a salary. (Tr. at 97). Although courts disagree, most appear to hold that someone who is not paid is not employed.
See, e.g., York v. Association of Bar of N.Y.,
. So does Hansen’s trial testimony generally. His answers were typically curt, as if he were trying to avoid giving uр too much, and often they were simply unbelievable. He repeatedly responded "I don’t know,” for example, to questions calling for basic information— where he had lived and when, who were the officers, directors, and shareholders at companies where he himself had been an officer, and so on — information an average person could reasonably be expected to know. More than once he contradicted himself. In all, Hansen’s cavalier testimony — and the arrogant, disdainful manner in which he delivered it — left the definite impression that he considered the adversary proceeding (if not the entire bankruptcy) a mere nuisance, unworthy of his attention. Hansen certainly viewed the trustee as little better than a pest, declaring that in trying to extract information and rec
. Hansen’s other explanations are equally unconvincing. He claimed that he listed the Harris CD as an asset in order to notify the trustee that the trustee might have some form of avoidance action; that he did not remember owning the Nextel stock (although he was happy three months earlier to represent to an Illinois court that he owned it); and that he somehow "missed” the question about prior addresses. None of these explanations is remotely plausible. Hansen also said that he failed to list the oriental rugs because he concluded they were "worthless,” and that he left off dividends and interest he received because they were so minimal he did not consider them income. These were not decisions Hansen had a right to make. "Debtors have an absolute duty to report whatever interests they hold in property, even if they believe their assets are worthless or are unavailable to the bankruptcy estate.”
Yonikus,
. That Hansen acted on legal advice — if indeed he dkl — also is not a valid excuse for the many falsehoods in his schedules and SOFA. Hansen signed the schedules and SOFA, attesting to the truth of their contents. He is responsible for their inaccuracy, not his lawyer.
See Lewis v. Summers (In re Summers),
. Or as the court in
Green
put it, no irony apparently intended: "A satisfactory explanation is one that convinces the judge.”
Green,
. Further clouding the question of what happened to the $100,000 withdrawn frоm the Fidelity account in 2001 :(1) the 2001 annual statement shows only $25,000 in "other withdrawals” (i.e., wire transfers), not $100,000 as Hansen claimed; (2) the statement lists $70,403 in "checking activity” that has never been explained; and (3) Hansen produced a third 2001 Harris check payable to 5841 Building Corporation (see D. Ex. 13), this one for $100,000, the origin and purpose of which remain a mystery.
. Notwithstanding bankruptcy court decisions suggesting otherwise, see, e.g.,
Costello,