Opinion
BAP No. MB 05-020, Bankruptcy Case No. 96-12276-WCH, Adv. Pro. No. 96-1350.
August 1, 2005
John F. Cullen, Esq., on brief for Appellant.
John F. Drew, Esq., on brief for Appellees.
Before de Jesús, Vaughn, and Deasy, United States Bankruptcy Appellate Panel Judges.
Appeal from the United States Bankruptcy Court for the District of Massachusetts, (Hon. William C. Hillman, U.S. Bankruptcy Judge).
Frank J. Schifano (the "Debtor") appeals from the bankruptcy court's exclusion of two pieces of evidence during trial on the § 727(a)(3) claim brought by Alfred and Henry Razzaboni (the "Creditors"). For the reasons described below, we AFFIRM the bankruptcy court rulings.
All references to the "Bankruptcy Code" and all references to specific statutory sections are to the Bankruptcy Reform Act of 1978, as amended, 11 U.S.C. § 101, et seq.
BACKGROUND
The parties have appealed several matters relating to the underlying adversary proceeding. For a more comprehensive background, see the unpublished opinions available on the BAP web page for cases 98-022 and 99-094.
The Debtor filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code. The Debtor, who is "uneducated but skilled in general construction," has served for over twenty-five years as president of several construction companies owned by members of his family, and has been involved in a number of transactions and business activities relating to those companies. There is a "convoluted" history of a lack of records of ownership for certain of those companies, including Royal Crest and Northlantic. The Debtor has served as president of these companies, has maintained a central role in managing their finances and incurring debt, yet has never been an original shareholder or held an ownership interest other than a purported transfer of ownership of Royal Crest from the Debtor's brother to the Debtor, a transaction for which there are no records.
The Creditors held a $200,000 judgment against the Debtor, and brought an adversary proceeding objecting to the Debtor's discharge on the grounds that the Debtor had transferred or concealed assets, made false oaths, and failed to keep adequate records. The bankruptcy court granted summary judgment in favor of the Debtor on all three counts. The Creditors appealed to the Panel, and the Panel affirmed the bankruptcy court on all three counts. The Creditors appealed to the Court of Appeals.
The Court of Appeals opinion refers to the proceeding as an objection to discharge of the Creditors' debt. However, the record is clear that the Creditors object to the Debtor's discharge under § 727, and not merely dischargeability of the debt they held under § 523.
The Court of Appeals affirmed the bankruptcy court with respect to the Creditors' claims of concealment of assets and false oaths. However, the Court of Appeals concluded that there was a genuine issue of material fact as to whether the Debtor had failed to maintain adequate records. The Court of Appeals, therefore, reversed the bankruptcy court with respect to the Creditors' § 727(a)(3) claim, and remanded for trial on that issue. Specifically, the Court of Appeals directed the bankruptcy court:
to determine if the Debtor's failure to maintain records of his financial and business activities, especially as to Royal Crest and Northlantic transactions, unreasonably prevented the [bankruptcy] court and the parties from ascertaining a complete and accurate picture of the Debtor's financial affairs. If the Debtor's failure to maintain these records was unreasonable, then discharge may be avoided under 11 U.S.C. § 727(a)(3).
The bankruptcy court held a trial on the § 727(a)(3) issue, and during the course of trial excluded from evidence checks from the Debtor to Royal Crest (the "Royal Crest checks") and corporate records of Northlantic (the "Northlantic records"). The court excluded the Royal Crest checks based on the doctrine of collateral estoppel. The bankruptcy court excluded the Northlantic records on the grounds that they were not relevant to the issue of whether the Debtor had maintained proper records. At the conclusion of the trial, the court entered judgment in favor of the Creditors, denying the Debtor's discharge pursuant to § 727(a)(3) for failure to keep adequate records and falsification of records. This appeal followed.
JURISDICTION
A bankruptcy appellate panel may hear appeals from "final judgments, orders and decrees [pursuant to 28 U.S.C. § 158(a)(1)] or with leave of the court, from interlocutory orders and decrees [pursuant to 28 U.S.C. § 158(a)(3)]." Fleet Data Processing Corp. v. Branch (In re Bank of New England Corp.), 218 B.R. 643, 645 (B.A.P. 1st Cir. 1998). "A decision is final if it `ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.'" Id. at 646 (citations omitted). An interlocutory order "`only decides some intervening matter pertaining to the cause, and requires further steps to be taken in order to enable the court to adjudicate the cause on the merits.'" Id. (quoting In re American Colonial Broad. Corp., 758 F.2d 794, 801 (1st Cir. 1985). A bankruptcy appellate panel is duty-bound to determine its jurisdiction before proceeding to the merits even if not raised by the litigants. See In re George E. Bumpus, Jr. Constr. Co., 226 B.R. 724 (B.A.P. 1st Cir. 1998). A judgment denying a debtor's discharge is a final appealable order that ends the litigation on the merits. See Bank of New England, 218 B.R. at 645.
STANDARD OF REVIEW
Appellate courts generally apply the clearly erroneous standard to findings of fact and de novo review to conclusions of law.See TI Fed. Credit Union v. DelBonis, 72 F.3d 921, 928 (1st Cir. 1995); Western Auto Supply Co. v. Savage Arms, Inc. (In re Savage Indus., Inc.), 43 F.3d 714, 719-20 n. 8 (1st Cir. 1994). Whether the bankruptcy court properly followed the instructions of the Court of Appeals on remand is a question of law, which the Panel reviews de novo. See Seavey v. Barnhart, 276 F.3d 1, 10 (1st Cir. 2001).
A court's determination that evidence was not produced during the discovery period is a finding of fact, which the Panel reviews for clear error. See Batson v. Neal Spelce Assoc., Inc., 805 F.2d 546, 550 (5th Cir. 1986). A finding is clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed. Anderson v. Bessemer City, 470 U.S. 564, 573 (1985); Cabral v. Shamban (In re Cabral), 285 B.R. 563, 571 (B.A.P. 1st Cir. 2002); Gray v. Travelers Ins. Co. (In re Neponset River Paper Co.), 231 B.R. 829, 830 (B.A.P. 1st Cir. 1999). If the trial court's account of the evidence is plausible in light of the record reviewed in its entirety, a reviewing court may not reverse even if convinced that it would have weighed the evidence differently as a trier of fact. Anderson, 470 U.S. at 574.
A court's decision to exclude evidence from trial is reviewed for abuse of discretion. Williamson v. Busconi, 87 F.3d 602, 603 (1st Cir. 1996). Judicial discretion is broad, but it is not absolute. Colon v. Rivera (In re Colon), 265 B.R. 639 (B.A.P. 1st Cir. 2001) (citations omitted). Abuse of discretion occurs when a material factor deserving significant weight is ignored, when an improper factor is relied upon, or when all proper and no improper factors are assessed, but the court makes a serious mistake in weighing them. Id.
DISCUSSION
I. Compliance with Remand Instructions
The Debtor argues that the bankruptcy court failed to comply with the remand instructions of the Court of Appeals. The decision by the Court of Appeals stated that a genuine issue of material fact existed as to whether the Debtor maintained sufficient corporate records for the bankruptcy court to determine his financial status under § 727(a)(3), set forth the standard for determining the sufficiency of record keeping under § 727(a)(3), and directed the bankruptcy court to conduct a trial on the matter. The decision is silent as to whether the bankruptcy court should admit into evidence the Royal Crest checks or the Northlantic records, because that issue was not before the Court of Appeals.
The Debtor confuses the Court of Appeals' instruction that the bankruptcy court conduct a trial on the Debtor's failure to maintain records "especially as to Royal Crest and Northlantic transactions" with an instruction that the bankruptcy court must admit any and all proffered evidence, particularly evidence connected to Royal Crest and Northlantic, without regard for applicable rules of evidence. However, the Court of Appeals' instruction that the bankruptcy court conduct a trial on the claim does not imply any instruction with respect to admission or exclusion of any particular piece of evidence. The questions regarding admissibility of the Royal Crest checks and Northlantic records are therefore new issues, and the Court of Appeals' remand directions are simply not instructive on these points.
Indeed, if it could be said that the Court of Appeals' remand instruction implied anything with respect to admissibility of evidence, the implication would be that the bankruptcy court should conduct the § 727(a)(3) trial properly and in accordance with all applicable rules. The bankruptcy court complied with the remand instructions. Therefore, the only question before us is whether the bankruptcy court abused its discretion and adversely affected the Debtor's substantial rights by excluding from evidence the Royal Crest checks or the Northlantic records. II. Royal Crest Checks A. Finding that the Royal Crest checks were not produced during discovery
The Debtor argues that the bankruptcy court erred in finding that the Royal Crest checks were not produced during the discovery period. At trial, the Creditors objected to the Royal Crest checks on the grounds that the Debtor had failed to timely produce them during the "full discovery process" that occurred during 1996-1997, and instead produced them for the first time when the summary judgment motion was filed. The Creditors maintained that they had requested the checks at the Debtor's deposition during the discovery period. However, the Debtor argued that he had in fact timely produced the Royal Crest checks, and that the Debtor's deposition was "replete with conversation and colloquy" between the Debtor, the Debtor's counsel, and the Creditors' counsel indicating that the Creditors' counsel "had the information in his hand."
The bankruptcy court reviewed with the parties in open court a portion of the transcript of the Debtor's deposition testimony. At his deposition, the Debtor testified that he had produced corporate records of Royal Crest. When asked if he had produced all of the documents, the Debtor replied: "Whatever I had." When asked what he had not produced, the Debtor replied: "I don't know."
The Debtor acknowledged that his previous counsel had "neglected to mark anything" and that "[t]here is no record" of what evidence the Debtor produced during discovery, but maintained that "the colloquy in the deposition of [the Debtor] indicates that these documents were produced and they went through them." The Creditors argued that the deposition ended upon conclusion of the Debtor's testimony, and that there was "no colloquy as to documents that are missing." After reviewing the deposition transcript and hearing from the parties, the bankruptcy court found that the Royal Crest checks had not been produced during discovery: "I cannot find that those checks were brought forward earlier."
It is the appellant's burden on appeal to establish that the lower court judgment should be reversed. Espiefs v. Settle, 14 B.R. 280 (D.N.H. 1981). Here, the Debtor has not met that burden. The portion of the deposition transcript read aloud at trial does not reflect any colloquy regarding the Royal Crest checks that the Debtor argues proves the checks had been produced during discovery. Indeed, the Debtor even concedes that there is no record of what the Debtor produced during discovery. Therefore, review of the entire evidence that was before the bankruptcy court on this issue indicates that the bankruptcy court's finding is not clearly erroneous. See Anderson, 470 U.S. at 573; In re Cabral, 285 B.R. at 571; In re Neponset River Paper Co., 231 B.R. at 830. The bankruptcy court's account of the evidence is plausible in light of the record reviewed in its entirety.See Anderson, 470 U.S. at 574.
B. Exclusion of the Royal Crest checks
The Debtor argues that the bankruptcy court abused its discretion and adversely affected his substantial rights by excluding the Royal Crest checks from evidence. The decision of a trial judge to exclude evidence will not be disturbed unless the exclusion was an abuse of discretion adversely affecting the complaining party's substantial rights. Williamson, 87 F.3d at 603.
1. Abuse of Discretion
The bankruptcy court excluded the Royal Crest checks based on the doctrine of collateral estoppel, citing Smith Barney, Inc. v. Strangie (In re Strangie), 192 F.3d 192, 194 (1st Cir. 1999). In Smith Barney, the Court of Appeals stated that under Massachusetts law, "`collateral estoppel precludes relitigation of issues determined in prior actions between the parties or those in privity with the parties, [provided the issues were] actually litigated in the first action, and determined by a "final judgment on the merits."'" Smith Barney, 192 F.3d at 194 (quoting Sena v. Commonwealth, 629 N.E.2d 986, 992 (1994) (citations omitted from original).
However, "`a judgment that has been vacated, reversed, or set aside on appeal is thereby deprived of all conclusive effect, both as res judicata and as collateral estoppel.'" Palmer v. Liggett Group, Inc., 635 F. Supp. 392, 395 n. 5 (D. Mass. 1984) (quoting 1B J. Moore, Moore's Federal Practice 0.416[2] (2d ed. 1983)); see also Lytle v. Household Mfg., Inc., 494 U.S. 545, 546 (1990) (explaining that reversing and remanding for trial denies trial court's factual findings collateral estoppel effect); Limbach v. Hooven Allison Co., 466 U.S. 353, 362-63 (1984) (holding that collateral estoppel doctrine did not apply where lower court's judgment was vacated and case was remanded);Raxton Corp. v. Anania Assoc., 668 F.2d 622, 624 n.* (1st Cir. 1982) (noting that collateral estoppel effect of issue on appeal may depend on whether lower court's holding is affirmed or reversed). In the instant case, therefore, the doctrine of collateral estoppel does not apply with respect to the § 727(a)(3) claim, because the Court of Appeals reversed that part of the bankruptcy court's judgment and remanded for trial. See id. As such, the bankruptcy court abused its discretion by excluding evidence based on the improper factor of collateral estoppel. Williamson, 87 F.3d at 603; In re Colon, 265 B.R. at 639.
In light of its finding that the Debtor had failed to produce the Royal Crest checks during discovery, it appears that the bankruptcy court's decision of whether to exclude the evidence should have rested on Federal Rule of Bankruptcy Procedure ("Rule") 7037. Rule 7037, which incorporates Federal Rule of Civil Procedure 37, provides that a party in an adversary proceeding that "without substantial justification fails to disclose information" requested by the opposing party during discovery is not permitted to use such information as evidence at trial, unless the failure to disclose is harmless. Fed.R.Bankr.P. 7037 (cross referencing Fed.R.Civ.P. 26 regarding discovery requests).
Here, the bankruptcy court found that the Debtor had failed to produce the Royal Crest checks during discovery. However, the court made no finding as to whether the Creditors had requested the evidence during discovery, although the record would appear to support such a finding. The court also made no finding as to whether the Debtor's failure to disclose the Royal Crest checks was without substantial justification, or whether the failure to disclose was harmless. Thus, the record does not provide an adequate basis for the Panel to assess whether the checks could have been excluded pursuant to Rule 7037.
The trial transcript reflects that at the deposition the Creditors' counsel asked the Debtor whether he had produced all records relating to Royal Crest, and the Debtor replied "yes." The Appellant did not provide us with the deposition transcript.
2. Adversely Affecting Complaining Party's Substantial Rights
Even where there is abuse of discretion, however, the Panel will not disturb the bankruptcy court's decision to exclude the Royal Crest checks unless the exclusion adversely affected the Debtor's substantial rights. See Williamson, 87 F.3d at 603. An error adversely affects a party's substantial rights where it substantially sways the judgment. Lataille v. Ponte, 754 F.2d 33, 37 (1st Cir. 1985).
Here, the bankruptcy court denied the Debtor's discharge under § 727(a)(3) because of a lack of records and falsification of records. With respect to falsification, the bankruptcy court found that the Debtor's account of the checks he had received from Royal Crest was unconvincing. The court went on to explain that the Debtor was one of the least credible witnesses he had heard testify in all his years as a practicing lawyer and a judge. The court stated that the Debtor
For clarity, these checks are different from the checks that were excluded from evidence. The excluded Royal Crest checks were written by the Debtor to Royal Crest.
did not impress me as being a truly truthful man. He impressed me as shaping his answers to what would be the best, given the nature of the question to which he was responding. That does not build considerable trust in my book, and it further backs up the question of concealment, which is another of the magic words [. . .] to go with falsification.
As the bankruptcy court's conclusion that the Debtor falsified records provides an independent basis to deny the Debtor's discharge under § 727(a)(3), the court's exclusion of the Royal Crest checks did not substantially sway the judgment, and therefore did not adversely affect the Debtor's substantial rights. See Lataille v. Ponte, 754 F.2d at 37. Therefore, the bankruptcy court's ruling will not be disturbed. See Williamson, 87 F.3d at 603.
III. Exclusion of the Northlantic records
The Debtor argues that the bankruptcy court abused its discretion by excluding the Northlantic records from evidence, and that the exclusion adversely affected his substantial rights. The bankruptcy court excluded the Northlantic records on the grounds that they were not relevant to the issue of whether the Debtor had maintained proper records:
The bankruptcy court also indicated that the Northlantic records could be excluded on the grounds that they were not produced during discovery, but seems to stop short of making such a conclusion. The bankruptcy court stated: "Now the question is, having presented nothing as to Northlantic first go around, can you now come in and present this stuff?"
What we have is undisputed testimony from this [D]ebtor that he didn't own Northlantic, that he just sort of managed the books while his brother went out on the job and did the work. If that is the case, absent a showing that money flowed into Northlantic from him or out from Northlantic to them, I don't see its relevance to my issue of whether he maintained proper records, because those weren't records he was supposed to keep. They're not his.
In a § 727(a)(3) action, the act or omission complained of must be that of the debtor or of someone for whose conduct the debtor is legally responsible. Lawrence P. King, 6 Collier on Bankruptcy ¶ 727.03[2] (15th ed. rev. 2005). Here, the Debtor does not dispute the court's findings that the Debtor did not own Northlantic or that the Northlantic records "weren't records he was supposed to keep." The Debtor has thus conceded that he was not legally responsible for maintaining the Northlantic records. As such, the bankruptcy court did not abuse its discretion in excluding the Northlantic records as not relevant to the question of whether the Debtor maintained adequate records. See id.;In re Colon, 265 B.R. at 639.
As the bankruptcy court did not abuse its discretion by excluding the Northlantic records, the Panel need not reach the question of whether the exclusion adversely affected the Debtor's substantial rights. See Lataille v. Ponte, 754 F.2d at 37.
CONCLUSION
The instructions of the Court of Appeals do not bear on the issues raised in this appeal beyond the general instruction that the bankruptcy court hold a trial on the § 727(a)(3) issue, which the bankruptcy court did. The bankruptcy court's finding that the Royal Crest checks were not produced during discovery is not clearly erroneous, but the court's exclusion of the Royal Crest checks on the grounds of collateral estoppel was an abuse of discretion. However, because the exclusion of the Royal Crest checks did not adversely affect the Debtor's substantial rights, the exclusion should not be disturbed. Lastly, the bankruptcy court did not abuse its discretion by excluding the Northlantic records. We therefore AFFIRM the bankruptcy court's rulings.