Opinion
No. 7-02-13414 MA, Adv. No. 02-1213 M.
June 24, 2004
Thomas E. Tapia, Albuquerque, NM, Attorney for Plaintiff.
Michael K. Daniels, Albuquerque, NM, Attorney for Defendant.
MEMORANDUM OPINION
THIS MATTER is before the Court on the Complaint Objecting to Discharge and for Determination of Dischargeability of Debt (the "Complaint") filed by J.H. Burkhead ("Plaintiff"), through his attorney, Thomas E. Tapia against Kenneth Carlton Shelby, Jr., the Debtor ("Defendant"). Defendant is represented by Michael K. Daniels. The Complaint seeks a denial of discharge under 11 U.S.C. § 727 or in the alternative, a determination that the debt is non-dischargeable under 11 U.S.C. § 523. A trial was held on February 17, 2004, and the Court took the matter under advisement. Upon review of the pleadings, evidence, and the applicable statutory and case law, the Court finds as follows:
FACTS
1. Beginning in 1991 and continuing to the end of 1999, the Plaintiff and Defendant had a business relationship. Plaintiff and Defendant called their business enterprise McGuire Investment Group ("MIG"). It operated a vehicle resale lot under the name Outwest Auto Corral ("Outwest"). The parties had no written agreement governing MIG.
The Defendant asserted that MIG was a limited liability corporation but presented no documentation related to such an entity. Therefore, the Court considers MIG a general partnership.
2. Plaintiff provided funds for the purchase of vehicles for resale according to a floor plan financing arrangement. Under this arrangement, Plaintiff advanced funds to Defendant to purchase vehicles and held the title to each vehicle until it was sold. When a vehicle was sold, Defendant would remit the funds, usually by check, to Plaintiff, and Plaintiff would turn over the title to the vehicle to Defendant who would consummate the sale. Defendant would usually ask Plaintiff to hold the check for a period of time until funds were available in the MIG checking account to cover that particular check after the sale was consummated. On each check, the vehicle's make or model and its model year was indicated as well as a corresponding floor plan number.
3. Plaintiff testified that he maintained a detailed record system of the floor plan. Plaintiff assigned each vehicle financed a floor plan number. Plaintiff kept the title of each vehicle on the floor plan in a separate envelope that was marked with the vehicle's make, model, vehicle identification number (VIN) and floor plan number. After Plaintiff remitted a title to Defendant, Plaintiff placed each check received from Defendant into the corresponding envelope until it could be negotiated. Plaintiff then recorded each payment received.
4. Beginning in May 1998, Defendant executed three Promissory Notes (collectively, the "Notes") in favor of Plaintiff. The first Promissory Note ("Note 1") was dated May 1, 1998 in the principal amount of $100,000.00, due on May 1, 2000, at an interest rate of 24% per annum, interest payable bi-monthly. See Trial Exhibit 4. Note 1 stated that it was secured by "[MIG] holdings, accounts receivables, real estate, autos etc." No security agreement, financing statement or mortgage was executed or recorded. The second Promissory Note ("Note 2") was dated January 22, 1999 in the principal amount of $50,000.00 and was due on February 1, 2001, bearing interest at the rate of 25% per annum payable bi-monthly. See Trial Exhibit 2. Note 2 stated that it was secured by an "escrow fund" with a stated value of $52,470.00. The third Promissory Note ("Note 3") was dated April 2, 1999 in the principal amount of $50,000.00 and was due on August 10, 1999, bearing interest at the rate of 25% per annum payable bi-monthly. See Trial Exhibit 3. Note 3 stated that it was secured by "$70,000 in accounts receivable;" however, no security agreement or financing statement was executed or recorded.
This Note was a consolidation of a previously executed Note for $50,000.00 and an additional advance of $50,000.00 on that date.
5. Defendant testified that in the beginning he dealt with Plaintiff on a "handshake basis." However, later in the course of their business relationship, Plaintiff asked Defendant to sign several agreements detailing their floor plan arrangement. Only one written agreement was presented at trial. This document was entitled General Agreement Contract (the "Agreement") and was dated June 28, 1999 with a six month duration. The parties stated that the Agreement illustrated the general terms of their arrangement for other periods of time. See Trial Exhibit 1. Under the Agreement, Defendant agreed to pay to Defendant a fee of $50.00 for each vehicle for the first 30 days after it was financed on the floor plan and $50.00 for each 30 day period thereafter. Upon sale, Defendant was to remit Plaintiff's investment amount in exchange for the title.
6. Plaintiff also remitted a separate fee to Defendant for each vehicle on the floor plan. Defendant accounted for this fee in an "escrow fund." Defendant testified that this escrow fund was intended to be "insurance" if the Defendant defaulted on any of the Notes. Plaintiff stated that he intended to use any positive balance in the escrow fund as a credit at the end of the term of each Note. Plaintiff testified that the escrow fund had a balance of $63,800.00 at the time of trial. Plaintiff maintained the accounting records of the escrow fund.
7. Plaintiff was an active participant in the business of Outwest. He was present on the business premises on a daily basis and had access to the business records. Plaintiff sometimes instructed the office staff to issue checks to him for certain vehicles that were on the floor plan. He also periodically instructed Defendant to quickly sell certain vehicles because he wanted them removed from the floor plan. As described above, Plaintiff maintained records of the amount he invested, the titles, and payments and fees received for each vehicle on the floor plan. He accounted for each payment from Defendant, both cash and checks, for the floor fees on each vehicle, and for the extra fees applied to the "escrow fund." None of these records were presented at trial.
Defendant authorized certain staff members to sign his name on checks.
8. On or about September 22, 1999, Plaintiff received several checks in exchange for vehicle titles. All of the checks were signed by Defendant except one, which was unsigned. As was customary, Defendant requested that Plaintiff hold the checks until funds were available. In December 1999, Plaintiff attempted to cash the checks, but 18 were returned due to insufficient funds. The unsigned check was not cashed. The dishonored checks were in the total sum of $75,500.00. Defendant testified that the business relationship between Plaintiff and himself deteriorated during the latter part of 1999 and Plaintiff did not advance any additional floor plan funds after September 1999.
9. On or about October 15, 1999, Defendant defaulted on the payments due on each Note.
10. Plaintiff filed suit in New Mexico state district court on April 2, 2000 to recover on the Notes, for breach of contract and in tort.
11. Defendant provided Plaintiff with 35 banker's boxes of documents containing business records of Outwest for Plaintiff's examination in connection with discovery in the state court case. Defendant testified that records kept in connection with Outwest's business included purchase orders, wholesale receipts, floor plan sheets, files on each buyer, check books and registers.
12. Defendant filed a Chapter 13 bankruptcy on March 19, 2001, just before the date trial was set in state court. The Chapter 13 was dismissed by this Court on January 13, 2002 because this Court found that Defendant's unsecured debts exceeded the amount required for eligibility for Chapter 13 relief under 11 U.S.C. § 109(e). See Order Dismissing Bankruptcy, No. 13-01-11875 MA, Docket No. 82, January 9, 2002.
13. This Chapter 7 bankruptcy was filed on May 14, 2002.
CONCLUSIONS OF LAW
I. Section 523 Exception from Discharge
In the body of the Complaint, the Plaintiff did not mention which subsection of § 523 Plaintiff was attempting to assert. In the prayer of the Complaint only § 523(a)(2)(A) was cited. However, Plaintiff also alleged breach of fiduciary duty the Complaint, which the Court will analyze under § 523(a)(4).
A. Dishonored Checks
Plaintiff asks this Court to deny discharge of the debt pursuant to § 523(a)(2)(A). Under Section 523(a)(2)(A) a court may deny a discharge of a debt for money, property, services, or an extension, renewal, or refinancing of credit to the extent obtained by false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition. 11 U.S.C. § 523(a)(2)(A). Under this section, Plaintiff must show by a preponderance of evidence that Defendant made a misrepresentation, that the misrepresentation was made with intent to deceive, that Plaintiff justifiably relied on the misrepresentation, and that the misrepresentation caused Plaintiff to sustain damages. See Fowler Bros. v. Young (In re Young), 91 F. 3d 1367, 1373 (10th Cir. 1996) (outlining requirements for § 523(a)(2)(A) claim); Field v. Mans, 516 U.S. 59, 74-75, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) (establishing "justifiable" standard of reliance); Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (establishing preponderance of evidence standard of proof for dischargeability actions).
In the first count of the Complaint, Plaintiff alleges that Defendant fraudulently induced Plaintiff to accept several checks (Exs. 5-23) in exchange for vehicle titles with the intention of not depositing funds to cover those checks. As stated by one court,
[a] debtor does not make a false representation under § 523(a)(2)(A) merely by presenting a check for payment which later bounces. . . . Rather, the creditor must show that the debtor was guilty of misrepresentation with intent to defraud in direct connection with issuance of the check. . . . . A false representation can be established if the debtor did not intend to pay the creditor when the check was issued and knew that the check would bounce.
Groetken v. Davis (In re Davis), 246 B.R. 646, 653 (10th Cir. BAP 2000) (finding that creditor failed to meet burden to show intent because creditor presented no evidence of a false representation by the debtor). See also, Union Nat'l Bank and Trust v. Guest (In re Guest), 193 B.R. 745, 748 (Bankr. E.D. Pa. 1996) (it is creditor's burden to establish the debtor's fraudulent intent at the time he issued the NSF check).
Defendant issued the checks to Plaintiff according to the parties' usual course of dealings. Defendant asked Plaintiff to hold the checks until funds from sales were available to cover them. The checks were dishonored some months later when the bank account was depleted. Although the parties' testimony differs, even the Plaintiff's version of the facts does not lead to an inference that the Defendant did not intend to pay Plaintiff when he issued the checks. Additionally, Plaintiff alleged that Defendant deliberately held back funds to cover the checks or deliberately failed to market the vehicles that were the subject of the checks. Plaintiff presented absolutely no evidence of these types of deliberate actions. Plaintiff alleged that Defendant represented to Plaintiff that he entered into sales agreements that did not exist. No evidence was presented respecting this allegation. Plaintiff alleged that Defendant gave false assurances that the checks would be honored to induce Plaintiff to refrain from making immediate demand on the checks. The testimony showed that at the end of 1999, the parties did not communicate. Plaintiff testified that 17 of the floor planned vehicles were not sold by the end of 1999, and that he obtained possession of those vehicles and sold them, albeit at a loss. Because no records were introduced, it is not possible to determine if these were the vehicles represented by the NSF checks.
Plaintiff testified that Defendant told him to wait to cash the checks until Defendant told him to cash them. After hearing nothing from Defendant for several weeks, Plaintiff attempted to cash the checks in December. Defendant testified that he told Plaintiff to cash the checks several times, but Plaintiff insisted that he wanted cash payment instead of checks and refused to cash them until December when the account had been depleted.
After analyzing the evidence, the Court finds that the Plaintiff has failed to meet his burden of showing that the dishonored checks were a debt incurred through false representation or actual fraud. As in the Sanchez case, Plaintiff failed to show that Defendant did not intend to honor the checks, or that the dishonor of them was "not the result of some financial difficulties that drove [Defendant] into bankruptcy." New Austin Roosevelt Currency Exchange, Inc. v. Sanchez (In re Sanchez), 277 B.R. 904, 908 (Bankr. N.D. Ill. 2002); see EDM Machine Sales, Inc. v. Harrison (In re Harrison), 301 B.R. 849, 854 (Bankr. N.D. Ohio 2003) (paying one creditor before another does not constitute fraud.). Consequently, the Court will not except from discharge the debt represented by the dishonored checks.
B. Promissory Notes
Plaintiff asks this Court to declare the Notes non-dischargeable under § 523(a)(2)(A) To succeed, Plaintiff must show that Defendant made a misrepresentation to Plaintiff to induce him to make the loans. Plaintiff must also show that the misrepresentation was made with the intent to defraud at the time the debt was incurred. See Harrison, 301 B.R.at 854 (Section 523(a)(2)(A), requires a showing that at the time the debt was incurred, there existed no intent on the part of the debtor to repay the obligation.) (citations omitted); In re Abraham, 247 B.R. 479, 483 (Bankr. D. Kan. 2000) (plaintiff required to show circumstantial evidence of defendant's fraudulent intent at the time he made the promise to pay). The evidence shows that Defendant made payments under the terms of the Notes until October 1999 and thereafter, defaulted on the Notes. Plaintiff alleged that in connection with this default, Defendant deliberately stopped marketing 25 vehicles to which Plaintiff held titles under the floor plan. Defendant remitted funds for 8 of those vehicles; however, failed sell the remaining vehicles. Thereafter, Plaintiff gained possession of 17 vehicles, which he sold at a loss. The Court does not consider this evidence sufficient to show that at the times the Notes were executed, Defendant did not intend to repay them. In addition, even though Plaintiff proved that Defendant breached the floor plan agreement, breach of contract cannot be the sole basis of a non-dischargeable debt. Sain v. Vernon (In re Vernon), 192 B.R. 165, 171 (Bankr. N.D. Ill. 1996). "The mere proof of an unfulfilled promise is insufficient to show fraudulent intent under § 523(a)(2)." Id.
Specifically, Plaintiff alleges that Defendant fraudulently induced Plaintiff to extend credit by misrepresenting his financial condition and by misrepresenting that the funds from the sales of vehicles would be available to satisfy the obligation incurred to Plaintiff in the immediate future. See Complaint ¶¶ 19-25.
Plaintiff also argues that Defendant misrepresented his ownership interest in certain collateral listed as security for the Notes. Specifically, Plaintiff testified that Defendant had no ownership interest in a residential property pledged to secure Note 1. However, Plaintiff must show that he justifiably relied on this collateral in making the loans. Field v. Mans, 516 U.S. at 74-75 (reliance must be "justifiable"). The Court finds that Plaintiff could not have justifiably relied on the collateral because no security agreements or financing statements were executed or recorded in connection with the Notes. Therefore, Defendant cannot be denied a discharge of these debts for misrepresentations regarding this collateral.
Plaintiff next argues that Defendant used false financial statements showing a sizeable net worth to mislead Plaintiff from 1998 to early 2000. However, Plaintiff did not show that he relied on these statements in making the loans to Defendant. Therefore, Plaintiff's attempt to have the Court declare these debts non-dischargeable fails.
The financial statements were not offered into evidence at trial; however, they were attached as exhibits to Defendant's Deposition, which was admitted in its entirety into evidence at trial.
The Court recognizes that the financial statements would constitute written representations of financial condition and would, therefore, fall under § 523(a)(2)(B), which was not specifically alleged by Plaintiff.
C. Breach of Fiduciary Duty
Under § 523(a)(4) a debt may be non-dischargeable if the debtor committed "fraud or defalcation while acting in a fiduciary capacity, . . ." 11 U.S.C. § 523(a)(4). Plaintiff must establish that a fiduciary relationship between himself and Defendant existed and that Defendant committed fraud or defalcation in the course of that fiduciary relationship. Fowler Bros. v. Young (In re Young), 91 F.3d 1267, 1371 (10th Cir. 1996). The existence of a fiduciary relationship under § 523(a)(4) is determined under federal law, but state law is relevant to this inquiry. Id. at 1371. To find a fiduciary relationship under this section, the Court must find that an express or technical trust existed between the parties. Id. A general fiduciary duty of confidence, trust, loyalty and good faith is not sufficient to establish a fiduciary relationship for non-dischargeability purposes. Id. at 1372. An express trust must be created by agreement entrusting a res of property to the debtor. Id. A technical trust must be imposed by statute. Id.
Plaintiff argues that he and Defendant formed a partnership with respect to the floor planned vehicles, thus imposing a general fiduciary duty upon Defendant under New Mexico law. Defendant does not dispute this, but argues that even if he and Plaintiff had a partnership, this relationship does not impose the type of fiduciary duty required under § 523(a)(4). While New Mexico law imposes a fiduciary duty on partners, this alone is insufficient to create the fiduciary capacity contemplated in the Bankruptcy Code. Several courts have considered the applicable provision of the Uniform Partnership Act, which is identical to NMSA § 54-1-21A, and have concluded that this statute does not create a fiduciary relationship for purposes of § 523(a)(4). The courts reason that although the provision imposes a general fiduciary duty between partners, it does not create an express or technical trust. See e.g. Ragsdale v. Haller, 780 F.2d 794, 796 (9th Cir. 1986); Moore v. Holman (In re Holman), 42 B.R. 848, 850-51 (Bankr. E.D. Mo. 1984); Donohoe v. Hurbace (In re Hurbace), 61 B.R. 563, 566 (Bankr. W.D. Tex. 1986); Medved v. Novak (In re Novak), 97 B.R. 47, 59 (Bankr. D. Kan. 1987); Reiter v. Napoli (In re Napoli), 82 B.R. 378, 382 (Bankr. E.D. Pa. 1988); Arnett v. Weiner (In re Weiner), 95 B.R. 204, 206 (Bankr. D. Kan. 1989) (all finding that fiduciary duty under Uniform Partnership Act is insufficient to create an express or technical trust required by § 523(a)(4)).
The New Mexico statute governing partnerships states as follows:
Partnership accountable as fiduciary
(a) General Rule — Every Partner must account to the partnership for any benefit and hold as trustee for it any benefits derived by him without the consent of the other partners from any transaction connected with the formation, conduct or liquidation of the partnership or from any use by him of its property. NMSA § 54-1-21A (1996 Repl. Pamp.).
The reasoning of these cases is persuasive; therefore, the Court finds that NMSA § 54-1-21A does not establish an express or technical trust for purposes of non-dischargeability. Therefore, the Court finds as a matter of law that Plaintiff and Defendant, although partners, did not have a fiduciary relationship for non-dischargeability purposes, and the debts to Plaintiff cannot be excepted from discharge under this provision.
II. Objections to Discharge
Section 727(a) of the Bankruptcy Code provides in relevant part as follows:
(a) The court shall grant the debtor a discharge, unless — . . . .
(2) the debtor, with intent to hinder, delay, or defraud a creditor . . . has transferred, removed, . . . [or] concealed . . . —
(A) property of the debtor, within one year before the date of the filing of the petition; or . . .
(3) the debtor has concealed, destroyed, . . . or failed to keep or preserve any recorded information . . . 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;
(4) the debtor knowingly and fraudulently, in or in connection with the case —
(A) made a false or account; . . .
(5) the debtor has failed to explain satisfactorily . . . any loss of assets or deficiency of assets to meet the debtor's liabilities. . . .
(7) the debtor has committed any act specified in paragraph (2), (3), (4), (5), or (6) of this subsection, on or within one year before the date of the filing of the petition or during the case, in connection with another case, under this title, . . . concerning an insider. 11 U.S.C. §
727(a)(2), (3), (4), (5) and (7).
The Plaintiff must prove every element necessary to deny discharge by a preponderance of the evidence. See Casey v. Kasal (In re Kasal), 217 B.R. 727, 733 (Bankr. E.D. Pa. 1998), citing Grogan v. Garner, 498 U.S. 279, 282-289, 111 S.Ct. 654, 656-61, 112 L.Ed.2d 755 (1991).
A. Section 727(a)(2)(A): Transfer or Concealment of Property
The Plaintiff argues that Defendant should be denied a discharge because Defendant transferred or concealed property of the estate during the one-year period prior to the bankruptcy filing. Section 727(a)(2)(A) requires Plaintiff to show that: 1) a transfer or concealment occurred; 2) that the property transferred or concealed was property of the debtor; 3) that the transfer or concealment occurred within one year of the petition; and 4) that at the time of the transfer or concealment Defendant had the requisite intent to hinder, delay or defraud a creditor. Carter Engineering Company, Inc. v. Carter (In re Carter), 236 B.R. 173, 182 (Bankr. E.D. Pa. 1999).
Plaintiff alleges that Defendant concealed or transferred property during the one year period prior to the filing of both his prior Chapter 13 proceeding and his current Chapter 7 proceeding. The Court will consider both time periods pursuant to § 727(a)(7).
In his Chapter 13 schedules filed in March 2001, Defendant listed very few items of personal property, one piece of jewelry and no art objects. At trial, Plaintiff questioned Defendant about art objects, jewelry and other items of personal property that were listed on his financial statement dated January 10, 2000. Defendant testified that he disposed of personal property items in early 2000 to pay creditors. Defendant also testified that the Rolex watch he listed as an asset in the financial statement was later determined to be a fake. Plaintiff also questioned Defendant about stocks and bonds listed as assets on his financial statement. Defendant testified that this entry was based on the value of the escrow fund maintained by Plaintiff in connection with the floor plan, which was to be credited to the amount due on the Notes. Defendant testified that he thought Plaintiff had invested these monies in a mutual fund. The only other significant asset listed in the January 2000 financial statement is Defendant's ownership interest in Autoland USA, LLC, which was valued at $245,000.00 on the financial statement. In Defendants March 2001 Chapter 13 schedules, he listed the value of his interest in Autoland USA at $45,000.00. In 2000, however, Defendant was sued by the other owner of Autoland for dissolution, accounting and damages. See Motion by Autoland USA, LLC and Mercedes Mejia For Relief From Stay, filed in Chapter 13 case, Docket No. 7. This lawsuit appears to account for the difference in value.
The Stay Motion requests a lift of stay to continue arbitration proceedings in connection with a settlement agreement in the state court suit.
Plaintiff has shown that Defendant transferred property listed on his financial statement before Defendant filed Chapter 13. Defendant credibly explained that he sold the personal property in early 2000 to pay creditors. The Court concludes that Plaintiff has failed to show that Defendant transferred or concealed property with intent to delay, hinder or defraud creditors. Therefore, the Court will not deny discharge under § 727(a)(2)(A).
B. Section 727(a)(3): Failure to Maintain Adequate Records
Section 727(a)(3) provides that the Court may deny a debtor's discharge if the "debtor 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 transaction might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case." 11 U.S.C. § 727(a)(3). Plaintiff must first show that Defendant's records were insufficient to ascertain Defendant's financial condition. Johnson v. Bockman (In re Bockman), 282 F.2d 544, 545 (10th Cir. 1960) (initial burden rests upon the one objecting to establish reasonable basis for which discharge can be denied). If Plaintiff presents a prima facie case, the burden shifts to Defendant to present a justification for the insufficiency. In re Wiess, 132 B.R. 588, 592 (Bankr. E.D. Ark. 1991) (after initial burden met, debtor must show that the failure to maintain sufficient records was justified under the circumstances). Whether a failure to keep records is justifiable is to be decided under all the circumstances of the case. Id. A debtor is not required to keep and maintain "complete and impeccable records as a precondition to obtaining a discharge." Heinecke, v. Ryan (In re Ryan), 285 B.R. 624, 630 (Bankr. W.D. Pa. 2002). The records must identify a debtor's financial condition with sufficient clarity to make intelligent inquiry possible. Id.
In connection with this count, Plaintiff alleged the following:
1. Defendant kept no records of cash payments to Plaintiff or any other creditor;
2. Defendant lacked records of accounts receivable and installment sales contracts;
3. Defendant lacked organizational documents of MIG;
4. Defendant lacked records of his own compensation, stating that he was paid on an "as needed" basis and that his personal expenses were often paid by the business;
5. Defendant lacked copies of cancelled checks written from and after September 1999 (the month that the dishonored checks were written to Plaintiff);
6. Defendant lacked copies of credit card applications for MIG; and
7. Defendant filed no tax returns for several years.
Defendant testified that he turned over to Plaintiff more than 35 banker's boxes of records maintained in the business. Plaintiff did not testify about what was found, or not found, in those records. Moreover, the records found in those boxes were not presented to the Court to show their inadequacy. Defendant testified that a cash log was kept by his office secretary. However in his deposition testimony, Defendant admitted that he kept no records of payments made to Plaintiff, either cash or check, because he knew that Plaintiff kept detailed records of those payments. Defendant testified that he was not in charge of keeping financial records for Outwest, but that his office staff and Plaintiff kept records, checkbooks, title ledgers etc. . . . Defendant testified that Plaintiff was not only an active participant, but was in charge of the financial end of the business. Plaintiff disputes this characterization of his role in the business.
Defendant also admitted that he kept no records of his compensation from the business. Defendant stated that he was paid after all expenses were paid on an "as needed" basis, admitting that his personal expenses were often paid directly by Outwest. Bank records for the last few months of 1999 were attached to Defendant's deposition but no cancelled checks from 1999 were attached. Plaintiff alleged that no cancelled checks from the last part of 1999 were available. Plaintiff argued that without the cancelled checks for that period, no record shows where the funds in the depleted checking account went to explain the dishonored checks given to Plaintiff. Defendant explained that the funds were lacking due to the failing business and even though the funds in the checking account were depleted, Plaintiff had the escrow fund to offset the dishonored checks. As for the missing tax returns, Defendant testified that he had been working on filing back tax returns and had filed some of the tax returns for the years that he did not file, but that not all of the returns for the business were prepared by the time of the trial.
The evidence shows that Defendant relied on his staff to do the paper work related to Outwest's business and relied on Plaintiff to keep account of the floor plan. Defendant testified that he was not concerned with bookkeeping; he was concerned with making sales and acquiring inventory. Moreover, it is un-controverted that Plaintiff kept meticulous financial records of his dealings with Defendant. The Court is mindful that this business was a partnership, and it is not unusual for partners to divide tasks related to the business according to their expertise. See D.A.N. Joint Venture v. Cacioli (In re Cacioli), 285 B.R. 778, 783 (Bankr. D. Conn. 2002) (finding that evidence of record keeping deficiencies were insufficient to deny discharge noting that debtor's partner kept business records of partnership which was primary source of debtor's income).
Moreover under § 727(a)(3), even if Plaintiff showed a deficiency in record keeping, Plaintiff must show that from this lack of records, he was unable to ascertain the state of Defendant's business and what led to Defendant's bankruptcy filing. Defendant explained that the downfall of Outwest's business was due to the high interest payments due on the Notes coupled with the shortened time within which Defendant was allowed to sell cars under the floor plan, a downturn in the economy, and defaults by customers on sales contracts. Considering Plaintiff's access to the business premises and its records on a daily basis up until the time he received the checks on September 22, 1999, it is difficult for the Court to understand how Plaintiff could not have known the status of Outwest's business. Plaintiff testified that he did not advance any additional monies to Defendant after September 1999, indicating the breakdown in the parties' relationship and an end to Plaintiff's role as floor plan financier. When asked by the Court if the floor plan wrapped up at the end of 1999, Plaintiff testified that 17 vehicles remained on the floor plan which Plaintiff acquired and sold at a loss.
Plaintiff testified that he was excluded from the premises from this date. Defendant testified that thereafter, the floor plan arrangement between Plaintiff and Defendant ended. Defendant continues to operate a business under the name Outwest Auto Corral. See Chapter 7 Statement of Financial Affairs (Doc. 21).
Considering the evidence presented, the Court concludes that the Plaintiff has not shown such an inadequacy of records that Defendant's financial situation could not be ascertained. Therefore, the Court finds that discharge should not be denied under § 727(a)(3).
C. Section 727(a)(4): False Oath
To obtain a denial of discharge, Plaintiff must show that Defendant knowingly and fraudulently, in or in connection with the case, made a false oath or account that relates to a material fact. Gullickson v. Brown (In re Brown), 108 F.3d 1290, 1294 (10th Cir. 1997). Plaintiff argued that Defendant made material misstatements on his Chapter 13 and Chapter 7 schedules and statements. 11 U.S.C. § 727(a)(4)(A) and (7). The Chapter 13 was filed in March 2001 and dismissed in January 2002. This Chapter 7 was filed in May 2002. Plaintiff argues that Defendant's financial statement dated January 10, 2000 lists jewelry valued at $48,000.00 and art and collectibles valued at $19,000.00. In his Chapter 13 schedules; however, Defendant listed only one piece of jewelry valued at $2,000.00 and no art and collectibles. Defendant testified that he sold the property to pay creditors before his bankruptcy was filed.
In the Chapter 13, Defendant listed secured claims totaling $569,588.00 and in the Chapter 7, listed secured claims totaling $383,703.00. Defendant testified that several secured creditors recovered their collateral prior to the Chapter 7 filing. Moreover, Plaintiff's claim was scheduled as secured to the extent of $170,000.00 in the Chapter 13, but in the Chapter 7 was listed as a disputed unsecured claim in the amount of $0. Defendant listed $245,022.00 in unsecured non-priority claims in the Chapter 13 and listed $399,433.00 in unsecured non-priority claims in the Chapter 7. Defendant testified that he did not list several unsecured claims totaling $65,000.00 in his Chapter 13 because he thought MIG alone was liable for these debts. However, in his Chapter 7, he listed all of MIG's debts as his own, explaining some of the discrepancy. As mentioned above, Plaintiff's claim was listed as secured in the amount of $170,000.00 and unsecured in the amount of $40,000.00 in the Chapter 13. In the Chapter 7, Defendant listed Plaintiff's claim as a disputed claim in the amount of $0. At trial, Defendant testified that he thought that he owed Plaintiff nothing, but did not know how to determine what he owed Plaintiff without Plaintiff's records. Defendant argued that the escrow fund totaling over $63,000 at the time of trial was intended to be the source of any unpaid balance on the debt to Plaintiff. In his statement of intention filed in the Chapter 7, Plaintiff indicated that he would abandon any interest has in the escrow fund. (Doc. 22).
Plaintiff has not shown that Defendant made material misstatements in his statements and schedules in either of the bankruptcy filings. Defendant explained the differences in assets, and debts listed in each bankruptcy. Moreover, Plaintiff failed to present documentary evidence, consisting of detailed records kept regarding money owed by Defendant, to refute Defendant's contention that the debt to Plaintiff was disputed in the amount of $0. Plaintiff presented evidence of the dishonored checks totaling $75,500.00, supporting the disputed nature of any remaining claims against Defendant. Defendant explained the differences between reported assets and liabilities in his Chapter 13 and Chapter 7. Moreover, even if Defendant made a misstatement regarding how much he owed Plaintiff or other financial information, "material misstatements, absent fraudulent intent, do not warrant denial discharge under § 727(a)(4)(A). . . ." Garcia v. Coombs (In re Coombs), 193 B.R. 557, 564 (Bankr. S.D. Cal. 1996); see also Overly v. Guthrie (In re Guthrie), 265 B.R. 253, 262 (Bankr. M.D. Ala. 2001) (finding debtor lacked intent to defraud even though debtor made material misstatements). Plaintiff did not show that Defendant calculated and reported information on his bankruptcy statements and schedules with the intent to defraud creditors. Id. The statements were not part of a pattern or scheme to defraud and do not appear to have been intended to obscure a scheme to convey or conceal assets or to cover up any other wrongdoing. Id. Defendant satisfactorily explained the differences in his schedules; therefore, the Court finds no intent to defraud.
D. Section 727(a)(5): Unexplained Loss of Assets
Plaintiff next asserts that Defendant has failed to explain satisfactorily the deficiency of assets sufficient to meet the Defendant's liabilities and should be denied a discharge under § 727(a)(5). Plaintiff must introduce more than merely an allegation that Defendant has failed to explain losses. Plaintiff must produce some evidence of the losses. Carter Engineering Company, Inc. v. Carter (In re Carter), 236 B.R. 173, 181 (Bankr. E.D. Pa. 1999). Once Plaintiff proves loss of assets, the debtor must provide some credible explanation of the loss or deficiency of the assets to show that the debtor has not hidden or improperly shielded assets. Id. (citations omitted). There is no requirement that a debtor act fraudulently or intentionally in order for a plaintiff to sustain this objection to discharge. Id. See also D.A.N. Joint Venture v. Cacioli (In re Cacioli), 285 B.R. 778, 784 (Bankr. D. Conn. 2002) (objector must produce evidence of unusual transactions or disappearance of assets beyond bankruptcy insolvency).
Plaintiff points to the evidence described in the discussion of § 727(a)(2)(A) and also argues that Defendant has failed to explain the depletion of money from the business checking account in the latter part of 1999. Plaintiff also contends that Defendant has not explained the lack of accounts receivable that should be available as a asset of this estate. Defendant, however, testified that he transferred the accounts receivable another creditor, Marcus de Costa, at Plaintiff's direction, which the Plaintiff did not contradict in his testimony. Bank statements for the latter part of 1999 were attached as exhibits to the Defendant's deposition and show a depletion of cash. Defendant explained that he was winding down the business at that time and the account did not cover all outstanding indebtedness. The absence of personal property, jewelry, art and collectibles listed on the 2000 financial statement was also explained by Defendant. In sum, Plaintiff has failed to establish facts necessary to deny Defendant's discharge under this section.
For the foregoing reasons, judgment will be entered in favor of Defendant in this adversary proceeding.