Opinion
Case No. 09-59136, Adv. Pro. No. 10-2321.
August 1, 2011
MEMORANDUM OPINION AND ORDER DENYING DISCHARGE
I. Introduction
United States Trustee Daniel M. McDermott ("Plaintiff") seeks to deny Debtor Shimelis Ketema ("Defendant") a discharge pursuant to 727(a)(3). Plaintiff claims Defendant under-reported income from his businesses and/or concealed assets. Plaintiff contends that Defendant excluded numerous documents associated with his businesses, including mortgage loan applications, federal tax returns, and transactional records regarding rental properties. These exclusions, Plaintiff alleges, form a prima facie case for denial of discharge under 727(a)(3) because they prevented Plaintiff from ascertaining Defendant's true financial condition. While conceding his initial filing was deficient, Defendant claims that his actions were not meant to hinder creditors and all deficiencies have now been remedied. For the reasons stated below, the Court finds it appropriate to deny the Defendant a discharge under 727(a)(3) of the Bankruptcy Code.
Unless otherwise noted, all statutory citations will refer to Title 11 of the United States Code, a.k.a. the Bankruptcy Code.
This Memorandum Opinion constitutes the Court's findings of fact and conclusions of law under Federal Rule of Civil Procedure 52, made applicable in this adversary proceeding by Rule 7052 of the Federal Rules of Bankruptcy Procedure ("Bankruptcy Rule(s)").
II. Jurisdiction
The Court has jurisdiction to hear and determine this matter pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. See 28 U.S.C. § 157(b)(2)(J).
III. Findings of Fact
Having considered the pleadings, the arguments and representations of counsel, the testimony and the relative credibility of witnesses, including the Debtor, the exhibits admitted into evidence, the other evidence adduced at trial, and, most dispositive upon this case, the U.S. Trustee's First Set of Admissions (Doc. No. 16), the Court makes the following findings of fact.
On August 10, 2009, the Debtor commenced this case by filing a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. Upon review, the U.S. Trustee's office found a large discrepancy between the debt owed and the assets listed; this prompted Plaintiff to become suspicious of Defendant's filing. Specifically, Defendant scheduled secured debts totaling $1,224,359. Schedule F listed unsecured non-priority debts totaling $277,515. These were seen as unusually high compared to his scheduled assets totaling $7,545. Additionally, Defendant's Schedule I reveals that he has a negative net monthly household income.
At the § 341 Meeting of Creditors on September 17, 2009, Defendant gave sworn testimony pertaining to his financial situation. Plaintiff then conducted a Rule 2004 Examination of the Defendant on November 30, 2009. During the examination, Defendant divulged his interests in LLC's and other businesses for the preceding six years that were not previously disclosed in his Schedules or Statement of Financial Affairs. Defendant then filed an Amended Statement of Financial Affairs which included some of the originally excluded information. To date, Defendant has not amended his Schedule B to include his interests in incorporated businesses (question 13) or his interests in joint ventures (question 14), despite the Defendant's testimony and Plaintiff's exhibits proving their existence.
In an attempt to gain a complete picture of Defendant's financial situation, Plaintiff continually requested records from Defendant through formal and informal means. Plaintiff's efforts bore no fruit. Therefore, the Court finds that Defendant knowingly failed to provide the U.S. Trustee with all of the following: (1) any of the Defendant's checking or savings account statements for 2006 through 2009; (2) most of the Defendant's credit card billing statements for 2006 through 2009; (3) Defendant's federal personal tax returns for 2006 through 2009; (4) documents necessary to estimate the value of Defendant's businesses such as The Gourmet Sub Shop, Airport Auto Sales, and Metro Beer/World Beverage; and (5) documentation pertaining to Addis Enterprise, LLC real estate investment business. While Defendant did provide some information regarding Addis, the Court finds via the U.S. Trustee's First Set of Admissions and the Defendant's testimony that the documentation was incomplete and does not allow Plaintiff to ascertain the Defendant's financial affairs or material transactions.
IV. Legal Analysis
A. Plaintiff's First Request for Admissions Are Deemed Admitted Under Rule 36(b) of the Federal Rules of Civil Procedure.
The majority of this Court's findings of fact come from Plaintiff's First Set of Requests for Admissions, which went uncontested by Defendant. Because the admissions were entered as a matter of law, their significance requires discussion independent of those based on the Bankruptcy Code.
Under Rule 36 of the Federal Rules of Civil Procedure ("Rule 36"), made applicable by Bankruptcy Rule 7036, requests for admissions are automatically deemed admitted if not answered within 30 days, and the matters therein are conclusively established. Fed.R.Civ.P. 36(b); see Friendly v. Niswonger (In re Niswonger), 116 B.R. 562, 565-66 (Bankr. S.D. Ohio 1990) (defendant's failure to answer the requests for admissions results in the admissions being conclusively established); Airco Industrial Gases, Inc. Div. of BOC Group, Inc. v. Teamsters Health Welfare Pension Fund, 850 F.2d 1028 (3d Cir. 1988) (admission made under Rule 36 binds party making admission); Rainbolt v. Johnson, 669 F.2d 767, 768 (D.C. Cir. 1981) (noting the binding effect of deemed admissions for summary judgment purposes). The Court must deem all unanswered submissions as conclusive fact; it cannot accept some and reject others in light of evidence presented at trial. See Rainbolt, 669 F.2d at 769.
Here, Plaintiff served Defendant with the First Set of Requests for Admissions on April 1, 2011. Defendant then had thirty days to specifically deny each claim asserted, or state in detail his reasons for not admitting or denying the same. Fed.R.Civ.P. 36(a)(3). The thirty day deadline came and went without a response from Defendant. Furthermore, Defendant did not argue at trial that the admissions should be withdrawn by this Court, but instead presented evidence disputing the facts already admitted. These statements would only have had effect if they were presented in an answer to the admissions as required by rule. Considering the admissions' binding effect, Defendant's attempts to refute them at trial must fail.
B. Denial of Discharge Under Section 727(a)(3) is Appropriate.
Section 727(a)(3) of the Bankruptcy Code states that a denial of discharge is appropriate when 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 transactions 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). As an objection to discharge, the statute is to be liberally construed in favor of the debtor. CM Temp. Servs. v. Bailey (In re Bailey), 375 B.R. 410, 415 (Bankr. S.D. Ohio 2007). However, discharge from debt is a privilege, and not a right, and should only benefit the honest debtor. Id.; In re Juzwiak, 89 F.3d 424, 427 (7th Cir. 1996).
As a precondition to discharge, Section 727(a)(3) requires debtors to produce records "which provide creditors with enough information to ascertain the debtor's financial condition and track his financial dealings with substantial accuracy for a reasonable period past to present." Astro Bldg. Supplies v. Slavik, 433 B.R. 651, 667 (E.D. Mich. 2010) [hereinafter Astro] (quoting In re Wazeter, 209 B.R. 222, 227 (W.D. Mich. 1997); In re Juzwiak, 89 at 427. To garner "enough information" about the debtor's financial condition, it is the duty of the debtor to provide complete and accurate information to the trustee. Astro, 433 B.R. at 667; In re Wazeter, 209 B.R. at 227.
In considering whether the information is complete and accurate, this Court may consider the debtor's education, business experience, or any other relevant factor. CM Temp. Servs., 375 B.R. at 415; Turoczy v. Bonding Co. v. Starbac (In re Starbac), 235 B.R. 880, 882 (B.A.P. 6th Cir. 1999). While the Sixth Circuit has not ruled on the issue, other circuit courts have stated that businessmen should be held to a higher standard for record keeping, and this Court will certainly follow suit. See In re Pfeifle, 154 Fed. Appx. 432 (5th Cir. 2005) (sophisticated wage earners should be held to a higher standard regarding the amount and type of financial documentation retention); Meridian Bank v. Alten, 958 F.2d 1226 (3d Cir. 1992) (sophisticated business persons are generally held to a higher level of accountability for record keeping than are less experienced debtors).
The trustee must establish a prima facie case showing the debtor failed to keep adequate records by a preponderance of the evidence. CM Temp. Servs., 375 B.R. at 415-16; Grange Mut. Ins. Co. v. Benningfield (In re Benningfield), 109 B.R. 291, 293 (Bankr. S.D. Ohio 1989). If the plaintiff establishes his prima facie case, the burden then shifts to the debtor. Turoczy, 235 B.R. at 882; United States v. Trogdon (In re Trogdon), 111 B.R. 655, 658 (Bankr. N.D. Ohio 1990).
The debtor's burden is to justify, under the circumstances of the case, his failure to keep the appropriate records. CM Temp. Servs., 375 B.R. at 416. When evaluating the debtor's explanation, the Court will consider his credibility and the reasonableness of the explanation. Id. The debtor's sophistication and the materiality of the records themselves also factor into the reasonableness of the debtor's justification. Id.
In the case at bar, Plaintiff establishes his prima facie case through the First Set of Admissions and corroborates these facts with testimony. On this basis the Court finds that Defendant is a sophisticated businessman who owned and operated numerous companies. The Defendant's failure to provide information pertaining to these businesses and how it relates to his own finances cannot be excused. His inability to present information on his personal finances to the U.S. Trustee's office, specifically checking account and tax-related records, is unacceptable.
While Mr. Ketema may not have had the intent to hinder his creditors, section 727(a)(3) does not have an "intent" requirement. See Fid. Guar. Life Ins. Co. v. Settembre (In re Settembre), 2007 Bankr. LEXIS 140, *7 (Bankr. W.D. Ky. Jan. 24, 2007) ("In order to succeed on a 727(a)(3) action, a plaintiff need not prove fraudulent intent on the part of the debtor."). Without the need for fraudulent intent, deficient documents themselves satisfy the requirements of 727(a)(3). Id. Thus, the Court finds that Defendant never provided adequate records to the Plaintiff, and therefore Mr. Ketema's creditors are unable to ascertain an accurate portrait of his financial dealings.
Despite the statements in the pleadings and his testimony at trial, Defendant never justified the reasons for these deficiencies. While the recession of 2008 may have financially hindered Defendant's businesses, the economy did not force Mr. Ketema to become careless with his recordkeeping. It was his responsibility to maintain financial information; the downturn in the economy cannot be an excuse for his failure to act. Also, Defendant's confusion, mistake, and carelessness cannot justify the failure to provide adequate records. Once Defendant filed his petition it was his duty to provide all of the necessary information, originally or in the form of timely amendments, so that creditors could get an accurate picture. As a result of his failure to do so, the discharge is forfeit.
V. Conclusion
For the foregoing reasons, the Court finds and concludes that Defendant failed to keep pertinent recorded information regarding his financial condition in violation of 727(a)(3) of the Bankruptcy Code. Accordingly, the Debtor's discharge is DENIED. IT IS SO ORDERED.