Opinion
NOT FOR PUBLICATION
ORDER ON MOTION FOR PARTIAL SUMMARY JUDGMENT
Peter W. Bowie, Chief Judge United States Bankruptcy Court
The United States Trustee filed an adversary complaint seeking to deny debtor a discharge on multiple grounds. After lengthy discovery, the United States Trustee brought the current motion for partial summary judgment, assenting that debtor should be denied a discharge 1) under § 727(a)(3) for failure to keep or preserve sufficient recorded information about debtor's financial condition or transactions; and 2) under § 727 (a) (5) for failure to satisfactorily explain or account for a diminution of assets.
This Court has subject matter jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding under 28 U.S.C. § 157(b)(2)(J).
Definitive guidance on assessing causes of action under § 727(a)(3) was provided by the Ninth Circuit Court of Appeals in Lansdowne v. Cox, 41 F.3d 1294 (1994), and more recently in In re Caneva, 550 F.3d 755 (2008). Caneva provides the matrix against which the United States Trustee's present claim under § 727(a)(3) should be measured. Consequently, that guidance is set out in some detail.
Section 727(a) of the Bankruptcy Code provides that a debtor is entitled to discharge unless one of eight conditions is met. . . . Under 11 U.S.C. § 727(a)(3), the court shall grant the discharge unless:
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 of failure to act was justified under all the circumstances of the case.
We have stated that the purpose of 727(a)(3) is to make discharge dependent on the debtor's true presentation of his financial affairs. Cox, 41 F.3d at 1296 (citation omitted). The disclosure requirement removes the risk to creditors of "the withholding or concealment of assets by the bankrupt under cover of a chaotic or incomplete set of books or records." [Citation omitted.] The statute does not require absolute completeness in making or keeping records [Citation omitted.] Rather, the debtor must "present sufficient written evidence which will enable his creditors reasonably to ascertain his present financial condition and to follow his business transactions for a reasonable period in the past." Id. . .
A creditor states a prima facie case under § 727(a) (3) by showing "MD that the debtor failed to maintain and preserve adequate records, and (2) that such failure makes it impossible to ascertain the debtor's financial condition and material business transactions.'" [Citations omitted.] After showing inadequate or nonexistent records, "the burden of proof then shifts to the debtor to justify the inadequacy or nonexistence of the records."
Caneva argued that he had produced a lot of records, while admitting that he produced none as to several of his business entities and one large transaction. In addition, he argued that at lest some of what the objecting creditor wanted to see was available from alternative sources. In rejecting those arguments, the Ninth Circuit observed:
The Seventh Circuit has held that § 727(a)(3) "places an affirmative duty on the debtor to create books and records accurately documenting his business affairs." [Citations omitted.] The court also noted that when a debtor is sophisticated and carries on a business involving substantial assets, "creditors have an expectation of greater and better record keeping" . . . Caneva has asked Sun, the bankruptcy and district court, and now this court to disregard the affirmative duty that § 727(a) (3) imposes on a debtor to keep and preserve records, take him at his word that he has no records because there was nothing to record, and focus instead on what might be learned from the boxes of records he did keep and eventually offered to the bankruptcy court. In other words, he says that if there is a needle in this haystack, it is up to the court to find it. . . .
As the Third Circuit has stated "[c]omplete disclosure is in every case a condition precedent to the granting of the discharge, and if such a disclosure is not possible without the keeping of books or records, then the absence of such amounts to that failure to which the act applies.'" [Citations omitted.] Without the records that Caneva admitted he did not keep. Sun cannot determine what assets his business entities held or may still hold, what assets passed through them and where they might have gone, and what their present value is, if anything. Without any documentation related to the payment to Bowden, Sun cannot determine the details of that transaction or verify that it actually took place.
The requirements for a cause of action under § 727(a)(5) follow a similar line of reasoning. An intent to defraud is not required. In re Carter, 236 B.R. 173 (Bankr. E.D. PA 1999) . The purpose, like § 727(a)(3), is to require full disclosure and, while (a)(3) is to aid creditors in understanding the debtor's financial situation, (a)(5) requires the debtor to provide the explanation.
Finally, Rule 56, Federal Rules of Civil Procedure, is made applicable in Bankruptcy proceedings through Rule 7056, Federal Rules of Bankruptcy Procedure and provides in relevant part: "The judgment sought should be rendered if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." While the movant has the burden of establishing that no material fact exists, if the moving party does so, the non-moving party cannot simply rely on denials in its answer to the complaint or otherwise, but must show there is a genuine issue of material fact which requires resolution by trial. Anderson v. Libertv Lobby, Inc.. 477 U.S. 242 (1986).
Discussion
The United Stats Trustee invested significant effort in trying to gather information from debtor and third parties that would aid that office in understanding debtor's financial activities. Over the intervening period, bits and pieces of information floated to the surface which primarily added to the confusion. In this motion, the United States Trustee has focused on debtor's relationship to Chase Auto Credit, which was a used car dealership on Mission Gorge Road, San Diego. According to documents provided. Chase was, at least initially, owned 99% by Mared in Texas, and 1% by debtor. Debtor also served as its president and CEO. The business site was leased, initially in the name of Chase, then in debtor's name. At various times, debtor has contended he was just an employee of Chase, and that all the books and records were in the hands of an accountant in Texas. Despite those assertions, debtor has claimed that he personally made loans to Chase, usually to buy cars. However, the only documents debtor produced to support those claims were checks. Moreover, he also claimed he made a number of cash loans for the same purpose. However, there are no loan documents setting out amounts, repayment terms, interest rates, due dates, or anything else. Further, in the roughly five months between March 7, 2005 through August 10, 2005, Debtor received payments of approximately $60,000 from Chase, according to debtor's own testimony. Since there are no documents explaining what those checks were for, and assuming for purposes of the instant discussion that at least some were payments of salary at $3,000 per month (as debtor has claimed), $42,000 - $45,000 represents something else that debtor was paying to himself from Chase's account. But even though debtor wrote the checks payable to himself, he has no documents to explain what they were for, how much he was owed, for what, and what any adjusted balance might be. In his later revision of his schedules, debtor claimed Chase owed him over $100,000 in salary and loan debts. Again, no documentation has been provided. Further muddying the question of debtor's relationship with Chase is that he loaned Chase -according to his testimony - $10,000 in December, 2004 and $50,000 in January, 2005. Moreover, when he stopped operating Chase, he purported to sell it to Good Guys for a net of $40,000 - $50,000, post-petition, and used the proceeds for his own purposes. In addition, as sub-lessor debtor leased the Mission Gorge site to Good Guys for more than he was obligated to pay-monthly. No records have been provided by debtor to show how those funds were handled as between debtor and Chase.
At the center of the issue is debtor's contention that he made loans to Chase, on no apparent terms, then repaid himself as and when he saw fit, with the only documentation being processed checks without useful annotations. The Court finds and concludes that the United States Trustee has established a prima facie case that debtor failed to make, keep or preserve documents which one would expect to exist under the circumstances of the multiple business dealings debtor was supposedly conducting, including the nature and size of the amounts involved.
The burden thus shifts to the debtor to show there is a genuine issue of material fact in order to defeat the current motion. Debtor's response, however, is very much like that of the debtor in Caneva. In Caneva, the debtor testified that as to certain businesses there were no documents because the entities did little or no transactions. Further, as to a $500,000 fee payment made by debtor there were also no documents. Here, the only documents are processed checks, and we are left with debtor's occasional recollection of what each check might have been for and where the proceeds went. Those checks, and debtor's uncorroborated occasional explanation do not create a genuine issue of material fact requiring a trial to resolve it. Accordingly, the United States Trustee's motion for summary judgment as to the § 727(a) (3) cause of action shall be, and hereby is granted.
The Court notes in passing, as it has explained in court, that a creditor is not required to show that a debtor defrauded or intended to defraud or deceive. Rather, as already discussed, a discharge of debt is a privilege earned by the disclosure of the amount and kind of information that would enable a creditor to understand a debtor's financial dealings, unless the circumstances would allow the conclusion that the absence of such information was justified. Here, given the nature of the business operated by the debtor, his role as president and CEO, the size, volume and nature of the transactions between he and chase require substantially more recorded information than he has provided and no sufficient justification for the failure has been proffered.
As already noted, the United States Trustee also seeks summary judgment on its cause of action under § 727(a)(5). Because of the Court's findings and conclusions as to § 727(a)(3), the Court need not reach and decide the § 727(a)(5) in this summary judgment content.
Conclusion
For the foregoing reasons, the Court grants the United States Trustee's motion for partial summary judgment as to the § 727(a)(3) cause of action. Because of that holding, the Court expresses no opinion on the motion as to the § 727(a)(5) cause of action.
Because the Court's ruling resolves less than all the claims pending in the complaint brought by the United States Trustee, a status conference will be noticed to both parties to discuss proceeding on the remainder of the complaint.
IT IS SO ORDERED.