United States Trustee v. JosephUnited States Trustee v. Joseph
Introduction
Paul A. Randolph, Acting United States Trustee (“the UST“), filed a complaint to bar Debtor/Defendant Charbel S. Joseph (“Debtor“) from receiving a chapter 7 discharge. [ECF No. 1 (the “Complaint“).] After the close of discovery, the UST moved for a summary judgment on his claim under
Background
Debtor filed a chapter 7 petition on September 1, 2023, and his schedules and related documents on September 26, 2023. [Case No. 23-51021, ECF Nos. 1, 16, 17.]2 Debtor‘s petition identifies him as the sole proprietor of an unincorporated business known as Pro Builds Construction. The petition states Debtor owns assets valued at $0-$50,000 and liabilities of $10,000,001-$50 million. His Statement of Exemption from Presumption of Abuse under
Also on September 26, Debtor moved to compel William Johnson to appear for a
On October 18, 2023, Debtor testified at a
The Complaint contains two counts. In Count 1, the UST asks to bar Debtor‘s discharge under
The parties took discovery. UST issued a testimonial subpoena to William Johnson on May 31, 2024, requiring him to participate in a deposition on June 11, 2024. [ECF Nos. 14, 15.] The subpoena did not require the production of records.6 The UST served written discovery demands on Debtor on June 13, 2024. [ECF No. 17.]7
The UST filed the Motion seeking a summary judgment on Count 2 of the Complaint (to bar Debtor‘s discharge for a failure to maintain records under
Undisputed Material Facts
The Motion and the Objection reflect that several material facts are not in dispute:
- [Debtor] filed for relief under chapter 7 of the United States Bankruptcy Code on September 1, 2023 in the United States Bankruptcy Court for the Eastern District of Kentucky. Complaint, A.P. Doc. 1, ¶ 7; Answer, A.P. Doc. 11, ¶ 2.
- On September 26, 2023, [Debtor] filed his Schedules and Statement of Financial Affairs under penalty of perjury. Complaint ¶ 8; Answer ¶ 2.
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On March 7, 2024, [Debtor] testified under oath at an examination authorized by this Court pursuant to Fed. R. Bankr. P. 2004 . Complaint ¶ 10; Answer ¶ 2. - [Debtor] possesses a High School Diploma and an Associate Degree in Architecture Technology. Exhibit 1 (Excerpts from 2004 Exam) p.10.
- For at least five years before filing for bankruptcy relief, [Debtor] operated a construction operation in his personal capacity, without any associated LLC or other entity, under the assumed name Pro Builds Construction. Complaint ¶ 14; Answer ¶ 6.
- For at least five years prepetition, [Debtor] has not maintained any bank accounts. Instead, [Debtor] operated his construction operation on a cash-only basis. Complaint ¶¶ 15-16; Answer ¶ 6.
- Among the documents [Debtor] provided to the [UST] were pictures of 139 separate checks payable to [Debtor] (hereinafter “139 checks“) dated between January 5, 2022 and August 10, 2023 that total $1,421,337. Complaint ¶ 18; Answer ¶ 6. Exhibit 2 (Wright Declaration) ¶ 2.8
- [Debtor] testified under oath at his Rule 2004 examination that the 139 checks represent income to him from January 5, 2022 to August 10, 2023. Exhibit 1 (Excerpts from 2004 Exam) at p. 112.
- [Debtor] converted the 139 checks to cash. Complaint ¶ 20; Answer ¶ 6.
- As opposed to 139 checks totaling $1,421,337, [Debtor] only provided documents supporting disbursements of $65,426, and scheduled deposits to his spouse‘s bank account totaling $45,540 from January 5, 2022 to August 10, 2023. Exhibit 2 (Wright Declaration) ¶¶ 5-7.
[ECF Nos. 23, 25.]
The Motion also offers another fact the UST claims to be undisputed:
6. [Debtor] has not provided the [UST] with a general ledger or other type of summary accounting records even though he was ordered to do so. 2004 Exam Order, Doc. 33; Complaint ¶ 23; Answer ¶ 8.
Debtor now contends Debtor‘s Affidavit, tendered with his Objection, puts this fact in dispute. [ECF No. 25 at 2.] But Debtor‘s Affidavit neither states Debtor provided the UST with a general ledger or other summary accounting records nor explains why he disputes this fact. And Debtor never amended his Answer to deny what he already admitted. Under Sixth Circuit precedent, admissions in pleadings, including an answer, generally are binding upon the parties and the Court. See Brown v. Tenn. Gas Pipeline Co., 623 F.2d 450, 454 (6th Cir. 1980); see also Ferguson v. Neighborhood Housing Services, Inc., 780 F.2d 549, 551 (6th Cir. 1986) (“Once made, the subject matter of the admission should not be reopened in the absence of a showing of exceptional circumstances.“). This material fact is not genuinely in dispute.
Further, the Motion sets out (and provided evidence to support) facts the UST contends are material and undisputed based on (a) admissions made in Debtor‘s
- As of the date of his Rule 2004 examination (March 7, 2024), [Debtor] had not filed federal income tax returns since 2007. Exhibit 1 (Excerpts from 2004 Exam) p. 47-48.
- [Debtor] has not filed income tax returns for the past seventeen years because his “records are not good,” “poor recordkeeping,” and “never getting around to it.” Exhibit 1 (Excerpts from 2004 Exam) pp. 47-48.
- [Debtor] has only provided limited check images, images of receipts and cashier‘s checks payable to others, and scattered documents that could touch on his financial condition. Exhibit 2 [(Wright Declaration)] ¶ 2.
- From January 5, 2022 to August 10, 2023, [Debtor] was unable to produce documents explaining the disposition of $1,310,371. Exhibit 2 (Wright Declaration) ¶ 7.
The Objection states Debtor disputes these paragraphs but, again, does not explain why. Instead, the Objection generally references Debtor‘s Affidavit. [ECF No. 25-1.] Debtor‘s Affidavit is six pages and provides information about Debtor‘s business, record-keeping and tax-preparation practices, prior litigation, and relationship with William Johnson. Upon review and consideration of Debtor‘s Affidavit, and as discussed in more detail below, the Court concludes Debtor has not established a genuine dispute exists as to these material facts.
Analysis
I. Jurisdiction and Venue.
This Court has jurisdiction over this proceeding.
II. Summary Judgment Standard.
A summary judgment should be granted if “there is no genuine issue as to any material fact” and “the movant is entitled to judgment as a matter of law.”
Where the movant establishes a prima facie case to support their motion for summary judgment, however, the non-movant must do more than simply assert that a material dispute of fact exists. Rather, they “must come forward with persuasive evidence to support his or her claim that there is a genuine factual dispute; that is, the non-moving party must produce evidence on which the jury could reasonably find for the non-moving party. ‘The “mere possibility” of a factual dispute is not enough.‘” Bond v. Burson, No. 3:94-CV-502, 1996 U.S. Dist. LEXIS 22062, at *10-11 (D. Tenn. March 4, 1996) (citation omitted); see also Poss v. Morris (In re Morris), 260 F.3d 654, 665 (6th Cir. 2001) (“the nonmoving party has an affirmative duty to direct the court‘s attention to those specific portions of the record upon which it seeks to rely to create a genuine issue of material fact.” (citation omitted)).
III. The UST Is Entitled to a Summary Judgment on Count 2 of the Complaint Under § 727(a)(3) Owing to Debtor‘s Failure to Maintain Adequate Financial Records.
A. The elements of the claim.
Under
The Code imposes a duty on the debtor “to maintain and retain comprehensible records” accurately documenting their financial affairs. In re Juzwiak, 89 F.3d 424, 429 (7th Cir. 1996). As another court explained:
to obtain a discharge, a debtor must “keep and preserve” records. Keep and preserve are not synonyms. “‘Keep’ has the same meaning it would have in phrases such as ‘to keep a diary’ or to ‘keep a record‘, that is, to maintain a record by entering it in a book. Otherwise the repetition of the word ‘preserve’ is superfluous, a disfavored result.” Keep also means to maintain continuously and methodically. Written information is required such that there are “accurate signposts on the trail showing what property passed through the debtor‘s hands during the period prior to his bankruptcy.”
Transworld, Inc. v. Volpe (In re Volpe), 317 B.R. 684, 690 (Bankr. D.S.C. 2003) (citations omitted).
The party seeking relief under
In Daniels, the court considered granting relief under
Whether a debtor has provided adequate records depends on the circumstances of the case, and courts often consider the debtor‘s “education, business experience, sophistication, or any other relevant factor.”
Although “not entitled to perfect, or even necessarily complete, records,” parties in interest must be given “enough information to ascertain the debtor‘s financial condition and track his financial dealings with substantial completeness and accuracy for a reasonable period past to present[.“] The records need not take any special form. But the trustee and creditors are not required to reconstruct the debtor‘s financial history or to speculate as to the debtor‘s affairs. Courts typically place a higher burden of recordkeeping on debtors who operate businesses. Indeed, numerous courts have held that to satisfy his disclosure obligations under § 727(a)(3), a debtor may be required to provide not only his own records but also records from closely-held businesses. This is true not only when the debtor has a direct ownership interest in the business, but also when the debtor‘s “business and personal finances are intertwined.” Similarly, “a sophisticated debtor is held to a greater degree of accountability than an unsophisticated debtor.”
Daniels, 641 B.R. at 184-185 (citations omitted).
B. Debtor‘s significant and continuing failure to file pre-petition tax returns violated his obligation to maintain adequate financial records.
The first argument Trustee raises to satisfy the initial burden of proof—and thereby shift the burden to Debtor—concerns Debtor‘s admitted failure to file federal tax returns for sixteen years while operating a construction business as a sole proprietorship. UST‘s Motion cites published opinions for the proposition that a debtor‘s failure to file tax returns for several consecutive years amounts to a failure to maintain adequate records that, on its own, warrants the denial of the debtor‘s discharge under
Debtor‘s failure to file personal tax returns for sixteen years (2008 to 2023) is outrageous. This is especially true given Debtor operated a construction business as a sole proprietorship and received significant income from that work. At oral argument, the UST advised no case could be found involving such a lengthy, persistent failure to file tax returns. The Court also could not locate such a case through independent research. The admission that Debtor failed to file federal tax returns for sixteen years constitutes an adequate basis to conclude the UST met its burden under
C. Debtor otherwise failed to maintain and retain comprehensible records of his financial condition.
The UST‘s second asserted basis for barring Debtor‘s discharge under
As with the tax returns, the material facts supporting UST‘s argument are not in genuine dispute. Despite multiple requests, Debtor did not provide the UST with general ledgers or other summary financial information concerning his sole proprietorship, Pro Builds Construction. Since at least January 1, 2019, Debtor has not had a bank account, and thus produced no bank records to the UST. Debtor operated only in cash in this period—using
Debtor‘s response to the UST‘s argument is that he did maintain financial records but could not access them for the reasons detailed in Debtor‘s Affidavit. This argument goes to Debtor‘s defense to the Motion (discussed next), not to the evidence the UST tendered to support the Motion. Simply put, the UST established Debtor did not provide adequate financial records to the UST that accurately document his financial affairs.
D. Debtor did not provide sufficient evidence to justify his failure to maintain adequate records to defeat summary judgment.
Because the UST tendered sufficient evidence to shift the evidentiary burden on the
If the lack of records is not adequately explained, the debtor is not entitled to a discharge. If the nature and extent of the debtor‘s transactions were such that others in like circumstances would ordinarily keep financial records, [ ]he must show more than that [ ]he did not comprehend the need for them. The justification must indicate that because of unusual circumstance, the debtor was absolved from the duty to maintain records.
Courts routinely consider a variety of factors in determining whether the inadequacy of the debtor‘s records was justifiable. Such factors include the debtor‘s education, sophistication, business experience, size and complexity of the debtor‘s business, debtor‘s personal financial structure, and any special circumstances.
Wazeter, 209 B.R. at 230 (alterations in original, internal quotation marks and citations omitted).
The only evidence Debtor offered to defeat the UST‘s Motion is Debtor‘s Affidavit, which attaches (a) Debtor‘s responses to written discovery, and (b) eight documents showing time kept for Debtor‘s employees or subcontractors on a construction job.11
To begin, a debtor‘s self-serving affidavit, standing alone, is insufficient to satisfy their burden to justify a failure to maintain adequate records on a motion for summary judgment to bar their discharge under
The evidence presented by the [debtors] is almost entirely testimonial explanations for the disappearance of assets. This provides little help under the § 727(a)(3) claim. [One debtor] conducted farming operations during the relevant period, including raising cattle and crops. It is reasonable to expect him to maintain records of sales, particularly because the numbers involved are so large. But, as the subsequent discussion shows, he cannot produce documentation regarding cattle and crop sales, or transfers of equipment used in the farming operations. Further, the [Debtors] had a duty to preserve these records for a reasonable period. See [Crocker v. Stiff (In re Stiff), 512 B.R. 893, 898 (Bankr. E.D. Ky. 2014).]
Testimonial explanations might provide more help under § 727(a)(5), Stiff, 512 B.R. at 900, but testimony is not always enough under either section. See, e.g., Bond v. Burson, No. 3:94-CV-502, 1996 U.S. Dist. LEXIS 22062, at *9-12 (E.D. Tenn. March 4, 1996) (discussing Sixth Circuit law that requires convincing evidence from the non-moving party). The non-moving party cannot simply refute an argument; it must provide some proof there is a triable issue of fact. See
FED. R. CIV. P. 56(c)(1) ; see also Sinclair v. Schriber, 916 F.2d 1109, 1112 (6th Cir. 1990) (“Although the nonmoving party‘s evidence ... need not be of the sort admissible at trial, he must employ proof other than his pleadings and own affidavits to establish the existence of specific triable facts.“). A motion for summary judgment is one way to challenge an opposing party to “put up or shut up” on a critical element of the case. Street v. J.C. Bradford & Co., 886 F.2d 1472, 1478 (6th Cir. 1986); see also Caruso v. Clemmens, Civil Action No. 5:17-CV-325-KKC, 2018 U.S. Dist. LEXIS 188862, *4-5 (E.D. Ky. Nov. 5, 2018) (summary judgment is appropriate if the non-moving party fails to make a sufficient showing when he bears the burden of proof).
Id. at 404-05; see also Juzwiak, 89 F.3d at 429 (“[o]ral testimony is not a valid substitute or supplement for concrete written records.“); Vinewood Capital, LLC v. Dar Al-Maal Al-Islami Trust, 541 F. App‘x 443, 447-48 (5th Cir. 2013) (“a party‘s uncorroborated self-serving testimony cannot prevent summary judgment, particularly if the overwhelming documentary evidence supports the opposite scenario.“); Lashinsky v. Kresock (In re Kresock), Adv. Pro. No. 0:19-ap-00091-BMW, 2020 Bankr. LEXIS 3316, at *31 (Bankr. D. Az. Nov. 24, 2020) (“conclusory statements of fact and self-serving declarations are insufficient to create genuine issues of material fact” in a § 727 action), aff‘d, BAP No. AZ-20-1270-BSL, 2021 Bankr. LEXIS 3512 (B.A.P. 9th Cir. Dec. 22, 2021); Rosenman & Colin LLP v. Jarrell (In re Jarrell), 251 B.R. 448, 450-51 (Bankr. S.D.N.Y. 2000) (to defeat a motion for summary judgment on a § 727(a)(3) claim, “[t]he nonmoving party must show that there is more than a metaphysical doubt regarding a material fact and may not rely solely on self-serving conclusory statements.“). Debtor‘s Affidavit provides no more than uncorroborated, self-serving statements intended to explain away his failure to maintain written records and provide them to the UST.
- Debtor had assistance from tax professionals in the 2000s and early 2010s, and some tax returns may have been filed from 2008 to 2012, but the only tax return he could locate was filed for tax year 2007. Post-petition, Debtor tried to retain a tax professional to file tax returns for 2023 and the prior five years, but no professionals were willing to assist him. But he does not state he actually filed his tax returns for 2008 to 2023, nor does he provide a meaningful explanation why he failed to file sixteen years’ worth of tax returns when they were due.
- After Debtor‘s March 2024 testimony in his Bankruptcy Rule 2004 examination, he found records in his garage going back to 2010 (or earlier) and provided certain additional records to the UST. Debtor does not state that Mr. Wright, the UST‘s auditor, failed to account for these records in his compilations of information provided.
- Debtor maintained records of income and expenses related to various construction projects. Debtor offers no detail regarding any income generated or expenses incurred on any specific project.
- William Johnson, working as Debtors’ subcontractor (primarily for electrical and light carpentry work), started maintaining some of Debtor‘s records in 2019, and then kept Debtor‘s complete records from the fall of 2021 to March 2023. In response to an interrogatory regarding the oversight Debtor maintained over Mr. Johnson concerning his business record keeping practices, Debtor responded that he “had discussions on a daily basis” with Mr. Johnson from the fall of 2021 through March of 2023 on matters related to certain jobs and worked with Mr. Johnson to generate bids for work. Debtor also stated: “Mr. Johnson kept the business records in multiple folders, binders and Tupperware containers” and “was adamant about taking these business records home with him every day with the explanation that he was fearful the records would get lost, stolen or there would be a fire in the office trailer.” [ECF No. 25-2 at 7-8.] But Debtor does not explain how Debtor effectively oversaw Mr. Johnson‘s record-keeping or how he ensured he had access to his own business records.
- Mr. Johnson refused to return Debtor‘s records after Debtor failed to pay Mr. Johnson for the work he performed, such that Debtor‘s documents “are not available due to the conduct and actions of William Johnson.” [Id. at 5.] Debtor offers no corroborating evidence for this statement, including that the only relevant and requested documents Debtor failed to provide to the UST were those purportedly in Mr. Johnson‘s possession.
In sum, Debtor provided a self-serving affidavit to blame a third party for his failure to keep and preserve his business records. A debtor cannot evade their duty to maintain records for purposes of
Debtor ran a construction business for a significant time period and, thus, should have some sophistication as a business owner. Debtor chose to operate a business that generated significant income and required frequent outlays for expenses without a bank account. Debtor failed to keep the records of his sole proprietorship in a manner sufficient to establish his financial condition with substantial completeness and accuracy. Debtor also failed to file tax returns for a very long period. Debtor did not offer sufficient evidence to create a material dispute of fact to justify these failures, such that a trial would be required. No reasonable fact-finder could find in Debtor‘s favor on the justification issue based on the evidence presented on the Motion.
Conclusion
Debtor has not filed federal tax returns since 2007. The UST, Debtor‘s creditors, and this Court cannot determine his actual financial circumstances based on the documents he maintained and produced. Debtor cannot simply disclaim his personal responsibility to maintain accurate business records for his sole proprietorship.
For these and the foregoing reasons, there is no genuine dispute of material fact, and the UST is entitled to a judgment as a matter of law on his request to bar Debtor‘s discharge under
Douglas L. Lutz
Bankruptcy Judge
Dated: Thursday, October 31, 2024