In re: Karen Forman McAllister ( 2014 )

FILED
AUG 13 2014
1 NO FO PUBL A IO
T R IC T N
SUSAN M. SPRAUL, CLERK
2 U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. CC-13-1578-BlPaKu
)
6 KAREN FORMAN MCALLISTER, ) Bk. No. 1:12-BK-20052-AA
)
7 Debtor. ) Adv. No. 1:13-AP-01045-AA
______________________________)
8 )
KAREN FORMAN MCALLISTER, )
9 )
Appellant, )
10 )
v. ) MEMORANDUM*
11 )
KRENGEL SPAMER & VANCE, LLC, )
12 )
Appellee. )
13 ______________________________)
14 Argued on June 26, 2014, at Pasadena, California
Submitted on July 18, 2014
15
Filed - August 13, 2014
16
Appeal from the United States Bankruptcy Court
17 for the Central District of California
18 Honorable Alan M. Ahart, Bankruptcy Judge, Presiding
19
Appearances: Gary E. Klausner of Levene, Neale, Bender, Yoo &
20 Brill LLP argued for appellant Karen Forman
McAllister; J’aime Williams argued for appellee
21 Krengel Spamer & Vance, LLC.
22
Before: BLUMENSTIEL,** PAPPAS, and KURTZ, Bankruptcy Judges.
23
24
*
25 This disposition is not appropriate for publication.
Although it may be cited for whatever persuasive value it may
26 have (see Fed. R. App. P. 32.1), it has no precedential value.
See 9th Cir. BAP Rule 8013-1.
27
**
The Honorable Hannah L. Blumenstiel, Bankruptcy Judge for
28 the Northern District of California, sitting by designation.
1 Appellant-Debtor Karen F. McAllister (“McAllister”) appeals
2 a summary judgment denying her discharge under sections
3 727(a)(2)(A)1 and 727(a)(3) based upon claims brought by
4 Appellee-Creditor Krengel, Spamer & Vance, LLC (“Krengel”). Upon
5 de novo review, we conclude that Krengel failed to meet its
6 burden of establishing a prima facie case under
7 section 727(a)(3), and that the record gives rise to a genuine
8 issue of material fact as to the requisite intent under
9 section 727(a)(2). Accordingly, we REVERSE the summary judgment
10 and REMAND for further proceedings.
11 I. FACTS AND PROCEDURAL BACKGROUND
12 A. Pre-petition events
13 McAllister is the sole shareholder of a California
14 corporation, KFM Management, Inc. (“KFM”), which was incorporated
15 in or about July 2010. KFM’s principal place of business is Los
16 Angeles County, California. Through KFM, McAllister works as a
17 talent manager in cooperation with talent agencies or agents,
18 providing services akin to career guidance to actors. In
19 exchange for its services, KFM receives ten percent of the
20 client’s gross income.
21 KFM does not enter into written contracts with its
22 individual clients; all agreements are verbal. KFM also works
23 with multiple talent agencies, and may enter into an oral or
24 written contract for KFM’s management services depending on the
25
1
26 Unless otherwise indicated, all chapter, section and rule
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330, and
27 to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
The Federal Rules of Civil Procedure are referred to as Civil
28 Rules.
-2-
1 agency.
2 Krengel is a California limited liability company located in
3 Los Angeles, California, doing business as Domain. Krengel
4 employed McAllister from approximately January 2008 to July 2010.
5 In June 2011, McAllister filed suit against Krengel in the
6 Los Angeles County Superior Court, case number BC462838 (the
7 “State Court Action”). McAllister filed the State Court Action
8 individually, and did not include KFM as a co-plaintiff,
9 apparently because McAllister did not form KFM until after her
10 causes of action arose. The State Court Action alleged:
11 nonpayment of wages, violations of the California Labor Code,
12 breach of contract, intentional interference with contractual
13 relations, intentional interference with prospective economic
14 advantage, negligent interference with prospective economic
15 advantage, breach of implied covenant of good faith and fair
16 dealing, violation of the California Business and Professions
17 Code, and quantum meruit.
18 The State Court Action went to trial in May 2012. On
19 November 12, 2012, the state court entered an Amended Judgment on
20 Special Verdict (“Judgment”). The state court entered the
21 Judgment in favor of McAllister and against Krengel on two causes
22 of action in the complaint, awarding McAllister damages of
23 $1,808.78. However, the state court also found in favor of
24 Krengel and against McAllister on four causes of action,
25 determined Krengel to be the prevailing party, and awarded
26 Krengel attorneys’ fees and costs in the amount of $276,976.35
27 plus interest at 10% per annum from June 7, 2012.
28
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1 B. McAllister’s bankruptcy filing
2 On November 14, 2012, two days after entry of the Judgment,
3 McAllister filed a voluntary bankruptcy petition for relief under
4 chapter 7 of the Bankruptcy Code. Along with her petition,
5 McAllister filed schedules of assets and liabilities and a
6 Statement of Financial Affairs (“SOFA”). In Schedule B —
7 Personal Property, McAllister scheduled the following assets:
8 Description Stated Value
9 • Personal Jewelry $1,000
10 • 100% interest in KFM $2,500;2
11 • 2001 Mercedes E320 $7,500
12 • 2003 Toyota Sequoia $5,000;3
13 On January 4, 2014, McAllister filed an amended Schedule B
14 which increased the value of her personal jewelry to $8,000 and
15 increased the value of KFM to $12,500.
16 McAllister disclosed $5,000 in monthly income from the
17 operation of KFM in Schedule I — Current Income of Individual
18 Debtor(s). In Schedule J — Current Expenditures of Individual
19 Debtor(s), McAllister listed $3,086 at line 16 for “regular
20 expenses from operation of business, profession, or farm.” In
21 accordance with the instructions pertaining to line 16,
22
23
2
McAllister noted in Schedule B that KFM’s 20 clients do
24 not have written contracts with KFM and can leave at any time;
KFM’s value is based on McAllister’s ability and reputation, and
25 has no liquidation value other than the bank account balance.
26 3
McAllister noted in Schedule B that "[p]roperty was
27 acquired by non-filing spouse prior to the couple's marriage in
2005 and would constitute his separate property" and identified
28 the Toyota as community property.
-4-
1 McAllister attached a detailed statement itemizing KFM’s monthly
2 business expenses, which include $1,900 for “Legal.”
3 In Schedule F — Creditors Holding Unsecured Nonpriority
4 Claims, McAllister listed a debt owed to Krengel, incurred in
5 2009 in the amount of $276,976.35, which she identified as
6 “disputed.” McAllister also identified a debt owed to
7 “Taylor/Anderson” as a personal loan in the amount of $8,000.
8 McAllister signed a Declaration Concerning Debtor’s
9 Schedules, affirming under penalty of perjury that she reviewed
10 the schedules and that they were true and correct to the best of
11 her knowledge, information, and belief.
12 McAllister’s SOFA included the following disclosures:
13 • $56,997 gross income from KFM year to date in 2012 (net
14 income of approximately $23,000).
15 • $16,469 gross income from KFM in 2011 (net loss of $14,472).
16 • $31,000 gross income from talent management (unincorporated)
17 in 2010.
18 • No payments exceeding $600 on loans, installment purchases
19 of goods or services, and other debts to any creditor within
20 90 days immediately preceding the commencement of the case.
21 • No payments within one year immediately preceding the
22 commencement of the case to or for the benefit of creditors
23 who are or were insiders.
24 • The 2011 short sale of a prior residence in Tarzana,
25 California to an unrelated third party.
26 McAllister signed her SOFA, declaring under penalty of
27 perjury that she had read the responses therein and that they
28 were true and correct.
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1 The meeting of creditors took place on December 20, 2012.
2 McAllister testified at the meeting that the bankruptcy schedules
3 were true to the best of her recollection.
4 C. Krengel’s complaint and motion for summary judgment
5 On February 19, 2013, Krengel filed a complaint seeking
6 denial of McAllister’s discharge pursuant to sections 727(a)(2),
7 (a)(3), (a)(4), (a)(5), and (a)(7) (“Complaint”). In the
8 Complaint and the subsequent Motion for Summary Judgment (the
9 “Motion”), Krengel contends that McAllister purposefully
10 misrepresented her assets, liabilities, and other financial
11 information in her bankruptcy schedules and SOFA, and that these
12 alleged misrepresentations, along with other acts or omissions,
13 are evidence of wrongful intent. Krengel questioned McAllister
14 about each of these issues during a Rule 2004 examination of
15 McAllister in January 2013. Krengel’s specific allegations,
16 along with McAllister’s explanations as given during her
17 Rule 2004 examination or her declaration in opposition to the
18 Motion, are set forth below.
19 1. Prior bankruptcies
20 Krengel asserts and McAllister readily concedes that she
21 and/or her non-filing spouse, Paul McAllister, have filed a total
22 of four bankruptcy cases. Although Krengel sets forth the facts
23 of the prior bankruptcies in the Motion, and includes them in the
24 findings of fact, Krengel does not assert anywhere in the Motion
25 or in its reply that the prior bankruptcies bear upon any of the
26 causes of action. We address this issue here only because our
27 review is de novo.
28 Paul McAllister filed bankruptcy petitions in 1995 and 1996.
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1 The couple filed a joint petition under chapter 13 in 2011, which
2 was dismissed one month later. McAllister filed the instant case
3 on November 14, 2012.
4 McAllister stated during her Rule 2004 examination that her
5 husband filed two bankruptcies before they knew each other and
6 that she knew nothing about those cases. McAllister also
7 explained why she and her husband filed the chapter 13 case in
8 2011: their home was in foreclosure and an attorney advised them
9 that by filing bankruptcy, they could buy some time to find a new
10 place to live. On this advice, they filed a joint petition,
11 found a home to rent, and allowed their case to be dismissed.
12 2. Value of wedding ring
13 Krengel asserts and McAllister concedes that she did not
14 include the value of her wedding ring in her original Schedule B.
15 At the meeting of creditors, Krengel asked whether her
16 reference to “Personal Jewelry” in Schedule B included her
17 wedding ring, and McAllister responded that it probably did not.
18 McAllister agreed to amend Schedule B. After the meeting of
19 creditors, McAllister had her wedding ring appraised and
20 determined it had a value of $8,000. She then amended Schedule B
21 to increase the value of her jewelry from $1,000 to $8,000.
22 McAllister does not explain why she did not include the
23 value of her wedding ring in the original Schedule B, but notes
24 that the Trustee did not object to her claim of exemption with
25 respect to the ring or pursue recovery of that asset.
26 3. Scheduling of debt owed to Krengel
27 Krengel asserts that McAllister “falsely stated” in
28 Schedule F that she incurred the Krengel claim in 2009. Although
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1 McAllister identified the Krengel claim as “disputed,” she admits
2 that the debt is based on a final judgment, as detailed below.
3 McAllister affirms in her declaration that she identified
4 the debt as “disputed” on advice of counsel. Her state court
5 attorney advised her that the state court might have erred in
6 determining that Krengel was the prevailing party entitled to
7 attorneys’ fees and costs because she had prevailed on two causes
8 of action; however, she acknowledges in her declaration that the
9 deadline to appeal the state court judgment had passed by the
10 time she filed her bankruptcy petition. During the Rule 2004
11 examination, Ms. Cohen, Krengel’s counsel, questioned McAllister
12 about her characterization of the Krengel debt as “disputed” and
13 the following exchange took place:
14 Q: Okay. So I’m trying to figure out why you are
15 saying it is a disputed claim when they actually got a
16 judgment in that amount.
17 A: They did, but I don’t have anywhere near that money
18 to pay them off. That’s why I’m disputing it.
19 Q: Well, do you have the money to pay off Alan Meyers?
20 A: No.
21 Q: Okay. But you didn’t list him as disputed?
22 A: Oh, I don’t know what the difference between
23 disputed or – it’s marked or not marked.
24 Mr. Hagen [McAllister’s Counsel]: Does it really
25 matter?
26 Q: I’m just trying to figure out if there’s any reason
27 to dispute a liquidated debt that’s reduced to a judgment.
28 I mean, you might not like it but –
-8-
1 A: Well, it’s a huge number. You know, we’re not
2 talking about $4,000. Alan Meyers, I owe $4,000. This is
3 almost $300,000.
4 Q: So you dispute it because it’s so big?
5 A: Yes.
6 Q: Okay. But you do acknowledge that they have a
7 judgment against you for that amount?
8 A: I am very aware of that, yes.
9 Q: Okay. So is it fair to say that you may not like
10 the fact that you owe the money, but you do acknowledge that
11 there is really no basis to dispute it at this time;
12 correct?
13 A: I don’t really understand the question. I mean,
14 that will go into a whole personal reason as to why I don’t
15 feel like I should be responsible for it.
16 Mr. Hagen: To answer your question, it is a
17 judgment.
18 A: It’s a judgment. It is what it is.
19 2004 Exam Transcript pp. 37-38.
20 Ms. Cohen also asked why McAllister indicated in Schedule F
21 that she incurred the Krengel debt in 2009:
22 Q: Why did you state that was incurred in 2009, if you
23 remember?
24 A: I don’t. I mean, if the judgment was final — which
25 it was just recently final in September of 2012, I don’t
26 know why it would say 2009.
27 Mr. Hagen: Technically, 2008, that’s when she
28 left the employment and the dispute arose.
-9-
1 Q: Well, actually, let’s go briefly into that issue.
2 You left Domain in 2008; is that right?
3 A: No. No. No. I started, I believe, in 2008. I
4 left Domain in July 2010.
5 Q: Okay, so there is no tie-in into the 2009 date is
6 there?
7 A: No.
8 Q: Okay.
9 Mr. Hagen: I’m reading the Complaint. The
10 Complaint says beginning of January 2008 and continued
11 employment to July 2008.
12 A: That’s a mistake in there.
13 Mr. Hagen: I’m just reading the Complaint.
14 2004 Exam Transcript p. 46.
15 McAllister explained that this misstatement resulted from
16 carelessness and not from an intent to mislead any party in
17 interest, to hide any information, or to compromise the rights of
18 creditors. McAllister further stated that she viewed the
19 misstatement as benign and of no consequence to the
20 administration of the bankruptcy estate.
21 4. Scheduling of debt owed to “Taylor/Anderson”
22 Taylor/Anderson represented McAllister in the State Court
23 Action on a contingency basis. McAllister incorrectly scheduled
24 an $8,000 debt owed to “Taylor/Anderson” as a personal loan when
25 it was actually a debt owed for legal costs.
26 At the Rule 2004 examination, Ms. Cohen questioned
27 McAllister about the Taylor/Anderson debt:
28 Q: . . . [I]f you go to Schedule F . . . it shows that
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1 you owe them $8,000 for a personal loan . . . Can you
2 explain to me the relationship between this $8,000 scheduled
3 amount, the $11,000 or so that they charged, and the amount
4 that you paid to them?
5 A: If I understand the question, I had made some
6 payments. This is what I owe them based on the $11,000
7 that’s on the form you have, plus an additional – I paid 4
8 or 5 after for the trial cost. I remember the total being
9 about $19,000 total in what I needed to pay them. So the
10 $8,000 is the remainder that is due.
11 Q: Okay. That was just a misstatement. Where it says
12 “personal amount,” it was incorrect?
13 A: Yeah, that’s not correct. It was legal expenses.
14 2004 Exam Transcript pp. 103-104.
15 McAllister attested that this misstatement also resulted
16 from carelessness rather than an intent to mislead any party in
17 interest, to hide any information, or to compromise the rights of
18 creditors. McAllister stated that she viewed the misstatement as
19 benign and of no consequence to the administration of the
20 bankruptcy estate.
21 5. Non-disclosure of transfer of diamond necklace
22 McAllister’s SOFA failed to disclose that, in 2012, she gave
23 her brother a diamond necklace valued at $7,000, allegedly in
24 satisfaction of a loan. Instead, the SOFA indicated that
25 McAllister did not transfer any assets or make any payments to or
26 for the benefit of creditors who were insiders in the year
27 preceding the petition date. Krengel also asserts that
28 McAllister has no evidence of a loan from her brother.
-11-
1 In her defense, McAllister explained that she did not
2 understand the meaning of “insider” when she checked “none” in
3 response to SOFA question 3c, which calls for disclosures to
4 insiders. She readily disclosed the transfer when asked about it
5 at the meeting of creditors.
6 As to the loan itself, McAllister testified at the Rule 2004
7 examination that she borrowed $7,000 from her brother in late
8 2011. They did not enter into a written agreement. She gave the
9 diamond necklace to him as payment for that loan in July 2012,
10 following trial of the State Court Action. She estimated its
11 value at $7,000. About ten years prior, it had been insured for
12 $10,000.
13 6. Loans or gifts from parents
14 Krengel asserts that McAllister’s SOFA does not disclose
15 approximately $60,000 given to McAllister by her mother between
16 2010 and mid-2012. Krengel further asserts that McAllister has
17 inconsistently claimed that the $60,000 was a loan (constituting
18 an undisclosed liability), a forgiven debt (constituting
19 undisclosed income), or a gift (constituting an undisclosed
20 gift). Finally, Krengel asserts that McAllister has no records
21 of an alleged loan from her mother.
22 During the Rule 2004 examination, McAllister admitted that
23 her mother loaned her $50,000 or $60,000 between 2010 and
24 mid-2012, but explained that, after she “lost the case,” her
25 mother told her the $60,000 was a gift that would be deducted
26 from McAllister’s future inheritance.
27 When Ms. Cohen asked McAllister if she intended to report
28 the debt forgiveness as income, the following exchange took
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1 place:
2 Q: Are you intending to report that forgiveness income
3 for that?
4 A: I don’t know what that is.
5 Q: Well, I guess I can tell you. You can give me your
6 best answer that you can. If a debt is forgiven, then that
7 creates a taxable event because you no longer have to pay it
8 back. So the question is whether you’ll be scheduling in
9 your tax return the fact that this debt was forgiven, as an
10 income event, if you know?
11 A: I don’t know. We haven’t met with our accountant,
12 so I don’t know.
13 2004 Exam Transcript p. 80.
14 In her declaration, McAllister attested that she did not
15 disclose the funds received from her mother in her Schedule F or
16 SOFA because her mother told her she did not need to repay them.
17 7. Automobiles
18 McAllister listed on her amended Schedule B a 2001 Mercedes
19 Benz automobile and a 2003 Toyota Sequoia automobile. Krengel
20 asserts that McAllister misrepresented information about the
21 automobiles in Schedule B.
22 During the Rule 2004 examination, McAllister explained that
23 her “in-laws” bought the 2001 Mercedes for her for $10,000 in
24 2011. McAllister valued the Mercedes at $7,500 based on an
25 estimate she obtained from Carmax. Krengel contends that this
26 testimony is inconsistent with her testimony at a deposition in
27 the State Court Action: that she bought a 2002 Mercedes Benz for
28 $12,000 in 2010.
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1 As evidence of this alleged inconsistency, Krengel offers
2 the first declaration of Joe Vance, which attests to statements
3 McAllister allegedly made at a deposition taken in the State
4 Court Action.4 Krengel introduced the 280-page deposition
5 transcript (the “Deposition Transcript”) as an exhibit to the
6 second Joe Vance declaration. Mr. Vance, however, may not have
7 been present at the deposition, as the Deposition Transcript
8 notes the appearance of a “John Vance,” but not of a “Joe Vance.”
9 In addition, Krengel never provided a citation to the location of
10 McAllister’s allegedly inconsistent statement within the
11 Deposition Transcript, and this Panel could not locate one.5
12 McAllister testified that the Toyota Sequoia is her
13 husband’s car, that he bought it in 2003 before they were
14 married, and that she has no idea how much he paid for it. The
15 Toyota was not fully paid off when McAllister and her husband
16 married, and the remaining car payments were made with community
17 property. Amended Schedule B identifies the Toyota as both
18 community property and McAllister’s husband’s separate property.
19 McAllister swears that the characterization of the Toyota as
20 constituting her husband’s separate property was not the result
21 of her intention to mislead any party in interest, to hide any
22 information, or to otherwise impede the administration of the
23
24 4
The first Vance declaration was filed in support of the
Motion. The second Vance declaration was filed in support of
25 Krengel’s reply.
26 5
Tevis v. Wilke, Fleury, Hoffelt, Gould & Birney, LLP
27 (In re Tevis), 347 B.R. 679, 686 (9th Cir. BAP 2006) (appellate
courts are not required to search an entire record, unaided, for
28 error).
-14-
1 estate.
2 8. Disclosure of foreclosed property
3 McAllister does not dispute that she incorrectly reported on
4 her SOFA a short sale of her prior residence when in fact she
5 lost the property to foreclosure.
6 The following exchange took place between Ms. Cohen,
7 McAllister, and Mr. Hagen during McAllister’s Rule 2004
8 examination:
9 Q: Now, in your statement of financial affairs . . .
10 It indicates that the Monard Place property – that’s where
11 you used to live; right?
12 A: Yes.
13 Q: It says that it was a short sale. But was there a
14 short sale or [a] foreclos[ure]?
15 A: No, it was foreclosed on.
16 Mr. Hagen: That was my mistake.
17 2004 Exam Transcript p. 98
18 In her declaration, McAllister stated: “the misstatement
19 regarding the nature of the sale is embedded in our attempt to
20 effect a short sale following receipt of the default notice.
21 These attempts to conclude a short sale proved futile, and . . .
22 the property was ultimately lost by way of the foreclosure
23 process.” McAllister Decl. ¶ 31. McAllister further stated,
24 “[m]y confusion as to the means by how our home ‘was lost’ was
25 not the result of my intention to mislead any party [in]
26 interest, to hide any information or to otherwise act in a manner
27 that would compromise the rights of creditors.” Id.28
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1 9. Value of KFM
2 Between her original and amended Schedule B, McAllister
3 adjusted the value of her 100% interest in KFM from $2,500 to
4 $12,500. Krengel asserts that the conflicting valuations of her
5 company are evidence of McAllister’s wrongful intent. At
6 McAllister’s Rule 2004 examination, Ms. Cohen asked why she
7 changed the value of KFM:
8 A: I’m not sure why that was changed, unless we were
9 anticipating that a client is going to be paying me on a
10 job, so — which we didn’t know when we originally filed.
11 That number might have gone up a little bit.
12 Q: What customer made you change the valuation?
13 A: Well, I no longer represent this client. Actually,
14 your client represents her. Her name is Vivian Bang, and I
15 put her on a series. And I know the show has been picked
16 up, so she should be paying me even though I don’t represent
17 her anymore. But I’m not sure if she was legally picked up
18 to be a part of the show. So that would increase it . . . .
19 Q: Approximately when did you find that out?
20 A: The end of the year or maybe just after the first
21 of the year.
22 Q: And that was the basis of your changing the
23 valuation of the company?
24 A: I believe so.
25 Q: Okay. Was it a guesstimate? I mean, how do you —
26 A: Yeah, it’s a guesstimate.
27 2004 Exam Transcript pp. 54-56.
28 Consistent with this testimony, McAllister stated in her
-16-
1 declaration that she amended Schedule B to increase the
2 liquidation value of KFM to $12,500 “based upon possible
3 additional revenue from a client arising from her being cast in
4 an upcoming television series.” McAllister Decl. ¶ 15.
5 10. KFM income and expenses included in Schedules I and J
6 McAllister included $5,000 per month business income in
7 Schedule I and $3,086 per month business expenses in Schedule J.
8 The attachment to Schedule J indicates that these business
9 expenses include “gifts and entertainment for clients,” “office
10 expenses,” “corporate taxes,” and “legal fees.” KFM, however, is
11 a separate corporate entity. The $1,900 monthly legal fees
12 expense represents McAllister’s personal legal fees, which KFM is
13 no longer paying. Krengel asserts that McAllister wrongfully
14 inflated her personal expenses by including KFM business
15 expenses.
16 McAllister testified that she (through KFM) is no longer
17 paying $1,900 per month in legal fees and that the last such
18 payment took place in October or November 2012. She stated that
19 she included the legal fees as an expense because she had paid it
20 throughout most of the year and, in preparing for her bankruptcy
21 filing, her counsel asked her for an estimate of her year-to-date
22 expenses.
23 In her declaration, McAllister confirmed that she included
24 KFM’s monthly business expenses in Schedule J upon the advice of
25 her counsel, who told her that although the information is not
26 required, many trustees request it. McAllister further stated
27 that she did not intend to mislead any party in interest, to hide
28 any information, or otherwise impede the administration of the
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1 estate.
2 11. Payments to creditors within 90 days of petition
3 McAllister’s SOFA indicates that she made no payments to
4 creditors in the 90 days preceding the petition date,
5 November 14, 2012. Krengel points out that McAllister stated
6 during her Rule 2004 examination that KFM stopped making payments
7 on her behalf for legal fees in October or November 2012.
8 Krengel contends that McAllister should have disclosed KFM’s
9 payment of her legal bills in the SOFA.
10 McAllister offered the following explanation during her
11 Rule 2004 examination:
12 Q: And you didn’t list the payments to D2 – Taylor
13 Anderson or D2 in your statement of affairs because that was
14 paid by the corporation; is that right?
15 A: I believe so.
16 2004 Exam Transcript p. 42.
17 Q: [O]n your statement of affairs it says . . . “list
18 each payment or other transfer to any creditor made within
19 90 days immediately preceding the commencement of the case”
20 . . . . And you put “none.” Is that because you didn’t pay
21 anyone within the 90 days or because you thought since KFM
22 paid it, you didn’t need to list it?
23 A: I don’t think I paid anybody three months before I
24 filed bankruptcy.
25 2004 Exam Transcript pp. 115—16.
26 There is no other evidence in the record concerning payments
27 to creditors within 90 days pre-petition and no evidence that
28 McAllister made any such payments.
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1 12. KFM’s payment of McAllister’s personal legal fees
2 Krengel points out that McAllister’s schedules and SOFA do
3 not indicate any debt owed to KFM, nor any gifts from KFM, on
4 account of its payment of her legal fees. Krengel asserts that
5 McAllister should have accounted for Krengel’s payment of her
6 legal fees as either debt or income. McAllister, however,
7 disclosed $5,000 monthly income from her business on Schedule I.
8 When asked why KFM paid her legal fees as opposed to her
9 paying them personally, McAllister responded: “[B]ecause I
10 couldn’t pay anybody out of my account with my husband, because
11 we didn’t have — we were using that money to live on. So his
12 salary is based on every expense we were paying. So any money
13 that I had coming into the KFM was money I was putting towards
14 the lawsuit. So I just took the money out of there.” 2004 Exam
15 Transcript pp. 114-15; 118. Ms. Cohen asked if KFM’s books
16 reflected the payment of legal fees by KFM as McAllister’s
17 income, and McAllister responded affirmatively.
18 With respect to how KFM’s payment of the legal fees were
19 reported on KFM’s corporate and McAllister’s personal tax
20 returns, McAllister stated, “I’m not sure how my accountant
21 listed things. I know we put it on corporation taxes, what I had
22 made, but he knew that I spent all the money in legal fees. So I
23 don’t know how he listed it.” 2004 Exam Transcript p. 119.
24 While testifying concerning KFM’s 2011 corporate tax return,
25 McAllister stated, “If I am looking at it correctly, it says
26 $16,469 was my income. So that would have been my income. And
27 I’m sure all of that went to my legal expenses because they were
28 more than that.” 2004 Exam Transcript pp. 119-120. She further
-19-
1 stated, “My accountant didn’t think that was a problem that I –
2 when I told him that I was paying right out of my KFM account, he
3 said that was fine.” Id.4 13. Non-disclosure of executory contracts on Schedule G
5 McAllister did not schedule KFM’s executory contracts on
6 Schedule G. Krengel asserts that McAllister should have
7 disclosed KFM’s contracts with clients and talent agencies.
8 During her Rule 2004 examination, McAllister testified that
9 KFM has numerous ongoing executory contracts with clients at
10 various talent agencies. Consistent with her prior testimony,
11 McAllister declared that she is not party to any executory
12 contract or unexpired lease; the contracts she described during
13 the Rule 2004 examination are between KFM and the clients.
14 14. Books and records
15 Krengel asserts that McAllister failed to keep or preserve
16 any recorded information, including books, documents, records,
17 and papers, regarding (1) loans or gifts from her mother and
18 brother, and (2) transactions between herself and KFM. Krengel
19 contends the alleged failure to maintain records warrants relief
20 under section 727(a)(3).
21 During her Rule 2004 examination, McAllister testified about
22 her personal and corporate tax returns. She also discussed the
23 contracts between KFM and its clients, KFM’s lease, and that she
24 kept the books for KFM. And she discussed the lack of
25 documentation of the alleged loan from her brother. At no point
26 during the Rule 2004 examination did Krengel’s attorney question
27 McAllister about her personal record-keeping practices, or those
28 of KFM. Likewise, McAllister’s record-keeping practices are
-20-
1 never discussed in the Deposition Transcript, or any of the
2 declarations supporting Krengel’s motion for summary judgment.
3 D. Summary judgment proceedings
4 Krengel filed the Motion on September 25, 2014. Evidence
5 submitted by Krengel included the declaration of Joe Vance, who
6 is a principal of Krengel; the bankruptcy petition, schedules,
7 and SOFA; and the transcript of the Rule 2004 examination.
8 McAllister opposed the Motion and objected to the Vance
9 declaration. Evidence submitted by McAllister included her
10 declaration, a June 8, 2012 Partial Judgment on Special Verdict
11 entered in the State Court Action, and the November 12, 2012
12 Amended Judgment on Special Verdict. Krengel filed a reply and a
13 second declaration from Joe Vance, which included the Deposition
14 Transcript. McAllister also objected to the second Vance
15 declaration and the Deposition Transcript.
16 The bankruptcy court issued the following tentative ruling
17 prior to the hearing on the Motion:
18 “Grant the motion under (Sec.) 727(a)(2) and (a)(3) because
19 the debtor transferred, removed or concealed the necklace
20 with intent to hinder of delay creditor within one year
21 before the petition was filed and because the debtor failed
22 to keep or preserve recorded information of loans or gifts
23 from her mother, a loan from her brother and transactions
24 between herself and KFM.”
25 Appellant Brief p. 9. The tentative ruling did not otherwise
26 address the evidentiary objections.
27 At the hearing on the Motion, the bankruptcy court adhered
28 to its tentative ruling, and in doing so granted the Motion,
-21-
1 denied McAllister’s discharge pursuant to sections 727(a)(2) and
2 (a)(3), and overruled her evidentiary objections. The bankruptcy
3 court then instructed Krengel to prepare and submit an order that
4 included specific findings of fact and conclusions of law.
5 McAllister objected to the findings in paragraphs 1 through
6 24 of Krengel’s proposed order. Krengel responded to the
7 objection, stating: “The only material fact that the Debtor
8 denied was with respect to her intent when she gave her brother
9 her diamond necklace on the eve of bankruptcy and then failed to
10 schedule that in her bankruptcy filings. The Court found the
11 Debtor’s assertions that she forgot about the diamond necklace,
12 and/or didn’t realize her brother was an insider, not to be
13 credible.” Response to Opposition to Proposed Order p. 2.
14 The bankruptcy court entered Krengel’s proposed order6 and
15 McAllister filed this timely appeal.
16 II. JURISDICTION
17 The bankruptcy court had jurisdiction under 28 U.S.C. § 133418 and 28 U.S.C. § 157(b)(1)(J). We have jurisdiction under
19 28 U.S.C. § 158.720
21 6
It appears that the proposed order was entered without any
22 changes. Krengel’s proposed order is not included in the
excerpts of record, nor is it available from the adversary
23 proceeding docket. However, the upper left corner of the order
granting summary judgment indicates that the signed order was
24 prepared by counsel for Krengel.
25 7
At oral argument in this appeal, the Panel noted that the
26 order on appeal was interlocutory because it did not resolve all
of appellant's claims and therefore was not a final judgment. On
27 June 30, 2014, the Panel entered an order of limited remand
directing appellant to obtain an amended judgment from the
28 continue...
-22-
1 III. ISSUES
2 1. Did the bankruptcy court abuse its discretion in
3 overruling McAllister’s evidentiary objections?
4 2. Did the bankruptcy court err in determining that there
5 was no dispute of material fact with respect to the requisite
6 intent to hinder, delay, or defraud her creditors under section
7 727(a)(2)(A)?
8 3. Did the bankruptcy court err in determining that there
9 was no dispute of material fact with respect to McAllister’s
10 failure to keep and maintain records under section 727(a)(3)?
11 IV. STANDARD OF REVIEW
12 The Panel reviews a bankruptcy court’s grant of summary
13 judgment de novo. Caneva v. Sun Communities Operating Ltd.
14 P’ship (In re Caneva), 550 F.3d 755, 760 (9th Cir. 2008).
15 In reviewing an order granting summary judgment, the Panel
16 “must view the evidence in the light most favorable to the
17 non-moving party and ‘determine whether there are any genuine
18 issues of material fact and whether the bankruptcy court
19 correctly applied the substantive law.’” Id. (quoting Bagdadi v.
20 Nazar, 84 F.3d 1194, 1197 (9th Cir. 1966)). A material fact is
21 one that, under governing substantive law could affect the
22 outcome of the case. Id. A genuine issue of material fact
23 exists when the evidence is such that a reasonable jury could
24 return a verdict for the nonmoving party. Id. at 761. Findings
25
7
26 ...continue
bankruptcy court to resolve the finality issue. On July 16,
27 2014, the bankruptcy court entered its amended judgment, which
the Panel has found to be a final, appealable judgment over which
28 it has jurisdiction.
-23-
1 of fact made in summary judgment proceedings are not entitled to
2 the “clearly erroneous” standard of review because the trial
3 court has not weighed the evidence or resolved disputed factual
4 issues. Am. Fed’n of State, County and Municipal Employees,
5 Local 2051 v. Stephens (In re Stephens), 51 B.R. 591, 594 (9th
6 Cir. BAP 1985).
7 Plaintiff bears the initial burden of setting forth credible
8 evidence to support each element of the claim. “[W]hen a
9 creditor makes out a prima facie case, the debtor who fails to
10 respond with credible evidence cannot prevail in a discharge
11 case.” Aubrey v. Thomas (In re Aubrey), 111 B.R. 268, 273 (9th
12 Cir. BAP 1990)(citing Devers v. Bank of Sheridan, Mont.
13 (In re Devers), 759 F.2d 751, 754 (9th Cir. 1985)).
14 A trial court's exclusion of evidence in a summary judgment
15 motion is reviewed for an abuse of discretion. Orr v. Bank of
16 Am., NT & SA, 285 F.3d 764, 773 (9th Cir. 2002)(citing Gen. Elec.
17 Co. v. Joiner, 522 U.S. 136, 141, (1997)). It follows that we
18 must affirm the trial court unless its evidentiary ruling was
19 manifestly erroneous and prejudicial. Orr, 285 F.3d at 773
20 (citing Joiner, 522 U.S. at 142; Maffei v. N. Ins. Co., 12 F.3d
21 892, 897 (9th Cir. 1993)).
22 V. DISCUSSION
23 A. The Bankruptcy Court did not abuse its discretion in
24 overruling McAllister’s evidentiary objections
25 McAllister filed two evidentiary objections prior to the
26 bankruptcy court’s ruling on the Motion. McAllister’s first
27 objection attacked several pieces of evidence Krengel offered in
28 support of its Motion. In response to McAllister’s opposition to
-24-
1 the Motion and her first evidentiary objection, Krengel filed a
2 reply that included a new declaration, which introduced the
3 Deposition Transcript. McAllister objected to the new evidence
4 included with the reply declaration. The bankruptcy court orally
5 overruled both evidentiary objections at the hearing on the
6 Motion.8
7 When attempting to establish the absence or existence of a
8 dispute of material fact, parties must cite to specific materials
9 in the record or show that the materials cited do not establish
10 the absence or existence of a genuine dispute. Fed. R. Civ.
11 P. 56(c)(1). Statements in a brief, unsupported by the record,
12 cannot be used to create an issue of fact. Barnes v. Indep.
13 Auto. Dealers Ass'n Health & Benefit Plan, 64 F.3d 1389, 1396 n.3
14 (9th Cir. 1995). Only evidence admissible at trial may be
15 considered in ruling on a motion for summary judgment. Orr,
16 285 F.3d at 773. In determining admissibility for summary
17 judgment purposes, it is the contents of the evidence rather than
18 its form that must be considered. Fraser v. Goodale, 342 F.3d
19 1032, 1036-37 (9th Cir. 2003). If the contents of the evidence
20 could be presented in an admissible form at trial, those contents
21 may be considered on summary judgment. Id.; see also Fed. R.
22 Civ. P. 56(c)(2). Civil Rule 56(c)(2) permits a party to object
23 to material offered in support of a motion for summary judgment
24 if the material cannot otherwise be presented in a form that
25
26 8
As noted earlier, the bankruptcy court issued a tentative
27 ruling, which is not included in the record on appeal. It is
unclear whether the tentative ruling addressed the evidentiary
28 objections.
-25-
1 would be admissible in evidence.
2 1. The first objection
3 McAllister’s first evidentiary objection takes issue with
4 the first declaration from Joe Vance and with Krengel’s statement
5 of uncontroverted facts and conclusions of law. A statement of
6 uncontroverted facts is not evidence, but a pleading which states
7 the facts that the filer believes to be undisputed. Civil
8 Rule 56 does not contemplate the lodging of evidentiary
9 objections against such pleadings. In this respect, McAllister’s
10 objection is improper and should be disregarded.
11 Turning to the first declaration of Joe Vance, McAllister
12 enumerates twelve factual assertions which she finds
13 objectionable. For each factual assertion, McAllister raises one
14 or more grounds for objection, specifically: lack of foundation
15 (enumerated assertions 1-12), relevance (enumerated assertions
16 2-4, 8-10, and 12), best evidence (enumerated assertion 5), and
17 hearsay (enumerated assertions 11 and 12).
18 a. Relevance
19 The fact that a statement may be irrelevant has no bearing
20 upon a motion for summary judgment. A bankruptcy court can award
21 summary judgment only when there exists no genuine dispute of
22 material fact. It cannot rely on irrelevant facts; thus,
23 relevance objections are redundant. Burch v. Regents of the
24 Univ. of Cal., 433 F. Supp. 2d 1110, 1119 (E.D. Cal. 2006). If a
25 decision on summary judgment relies on certain statements, they
26 are by definition relevant. Instead of objecting, parties should
27 simply argue that the statements in question are not material.
28 Therefore, the bankruptcy court correctly overruled McAllister’s
-26-
1 relevance objections.
2 b. Lack of foundation
3 Assertions 1 through 7 involve facts that could be within
4 the personal knowledge of the declarant. To be admissible,
5 however, the declarant must state facts sufficient to establish
6 the basis for his or her personal knowledge. Based upon the
7 contents of the declaration, it was not an abuse of discretion
8 for the bankruptcy court to overrule this objection. It is also
9 difficult to see how McAllister was prejudiced by the admission
10 of the declaration, as much of its contents had already been
11 admitted by McAllister in her answer, or could have been
12 introduced in other ways, such as via the Rule 2004 examination
13 transcript (for example, all statements relating to the
14 underlying state court action).
15 c. Best evidence/hearsay
16 The bankruptcy court also did not abuse its discretion with
17 respect to the remaining assertions. Again, the challenged
18 statements relate to facts that McAllister had already admitted,
19 can be derived from other parts of the record, or are legal
20 conclusions mixed with facts.9 To the extent the statements
21 contain factual allegations, it was not an abuse of discretion
22 for the bankruptcy court to consider them. And while a
23 supporting affidavit is not the proper place to include legal
24 argument, it was not “manifestly improper” for the bankruptcy
25
9
26 For example, McAllister objects to assertion 11, which
states “I am informed and believe Debtor’s amended Schedule B
27 indicates she owns a 2001 Mercedes Benz automobile; at the 2004
Examination, Debtor indicated her parents-in-law purchased just
28 such a vehicle for her for $10,000 in 2011.”
-27-
1 court to choose not to exclude these statements.
2 2. The second objection
3 McAllister’s second evidentiary objection focuses on the
4 second declaration of Joe Vance and the Deposition Transcript
5 attached thereto. McAllister raises two arguments. First, she
6 asserts that it is inappropriate for Krengel to offer evidence in
7 its reply brief that it could have offered as part of the Motion.
8 Second, she asserts that the Deposition Transcript should have
9 been excluded because it was not properly authenticated.
10 a. Consideration of evidence or argument presented in
11 a reply
12 In support of her first argument, McAllister cites Civil
13 Rule 6(c)(2), which states in relevant part: “[a]ny affidavit
14 supporting a motion must be served with the motion.” Fed. R.
15 Civ. P. 6(c)(2). McAllister also cites several out of circuit
16 cases.
17 Burns v. Gadsden State Community College, 908 F.2d 1512,
18 1519 (11th Cir. 1990), addresses the interplay between Civil
19 Rule 6 and Civil Rule 56(c). Burns, however, addresses a trial
20 court’s exclusion of late filed affidavits by a nonmovant; it
21 does not involve evidence included in a reply brief that could
22 have been included in an original motion. While the case is not
23 directly on point, it does support the assertion that Civil
24 Rule 56(c), in combination with Civil Rule 6, are designed to
25 provide the nonmoving party a meaningful opportunity to respond
26 to the factual assertions and legal arguments contained within a
27 motion for summary judgment.
28 Reid v. Lockheed Martin Aero. Co., 205 F.R.D. 655 (N.D. Ga.
-28-
1 2001) involves a motion for class certification. Plaintiffs bore
2 the burden of establishing adequacy of representation. The court
3 held that Plaintiffs failed to cite a single piece of evidence in
4 support of their assertion that the requirement had been
5 satisfied. In a footnote, the court acknowledged that Plaintiffs
6 had filed an affidavit in support of their contentions with their
7 reply brief and stated, without citation or analysis, that “[a]s
8 a general rule, a party may not submit evidence with a reply that
9 was available but not included with the original motion.” Reid,
10 205 F.R.D. at 678 n.30.
11 Finally, in Tetra Techs, Inc. v. Harter, 823 F. Supp. 111612 (S.D.N.Y. 1993), the parties moving for summary judgment saved
13 several legal and factual arguments for their reply brief. The
14 court noted that this was for the “obvious purpose of sandbagging
15 their adversary” and was foreign to the spirit of the Federal
16 Rules of Civil Procedure. Harter, 823 F. Supp. at 1120. While
17 the court discussed the reply brief with disdain, it is unclear
18 from the opinion whether the brief was disregarded.
19 It does not appear that the Ninth Circuit takes such a
20 strict approach to new information contained within a reply.
21 Most cases addressing the issue conclude that consideration of
22 new arguments or evidence in a reply falls within the discretion
23 of the trial court. See, e.g., Zamani v. Carnes, 491 F.3d 990,
24 996 (9th Cir. 2007)(“The district court need not consider
25 arguments raised for the first time in a reply brief”); Glenn K.
26 Jackson, Inc. v. Roe, 273 F.3d 1192, 1201-02 (9th Cir. 2001)(A
27 district court has discretion to consider an issue on summary
28 judgment even if first raised in the reply brief.). Other
-29-
1 circuits have acknowledged that the consideration of new evidence
2 or argument at the reply stage can be permissible in certain
3 circumstances. See, e.g., Green v. New Mexico, 420 F.3d 1189,
4 1196 (10th Cir. 2005)(If a reply contains new information
5 (defined as either new evidence or new legal arguments), the
6 Court needs to give the nonmoving party an opportunity to respond
7 only if the Court will rely on that new material. It is not an
8 abuse of discretion to ignore the new material and preclude a
9 surreply).
10 In this case, the bankruptcy court could have, in its
11 discretion, considered the new information provided by Krengel
12 with its reply. The declaration served little purpose other than
13 to introduce the Deposition Transcript. While permitting the
14 moving party to introduce new information on summary judgment
15 without giving the nonmoving party an opportunity to respond can
16 be prejudicial to the nonmoving party, the bankruptcy court’s
17 overruling of McAllister’s objection was not “manifestly
18 erroneous” under these circumstances, specifically given the fact
19 that McAllister had prior knowledge of the contents of the
20 Deposition Transcript and of her own testimony under oath.
21 Accordingly, the bankruptcy court did not abuse its discretion in
22 overruling the second evidentiary objection.
23 b. Failure to properly authenticate
24 McAllister’s second objection also asserts that the
25 Deposition Transcript was inadmissable because Joe Vance did not
26 lay a proper foundation. The Deposition Transcript purportedly
27 sets forth McAllister’s testimony in connection with the State
28 Court Action.
-30-
1 As noted above, it is the contents of the evidence, and not
2 its form, which dictates its admissibility for purposes of
3 summary judgment. Fraser, 342 F.3d at 1036-37. While the
4 Deposition Transcript itself might not be admissible at trial
5 without appropriate authentication, McAllister’s statements
6 therein can be considered in the summary judgment context. Id.
7 at 1037 (notwithstanding a hearsay objection, in the context of a
8 motion for summary judgment the contents of a diary were “mere
9 recitations of events within the [plaintiff/appellant’s] personal
10 knowledge and, depending on the circumstances, could be admitted
11 into evidence at trial in a variety of ways.”).
12 Further, the bankruptcy court’s consideration of the
13 unauthenticated Deposition Transcript would only constitute
14 harmless error given that the document could have easily been
15 authenticated at trial. See Hal Roach Studios, Inc. v. Feiner &
16 Co., 896 F.2d 1542 (9th Cir. 1990)(Trial court’s consideration of
17 unauthenticated registration statement was harmless where failure
18 could have been easily remedied by a statement from a competent
19 witness, or substitution of certified copy). McAllister does not
20 argue that the deposition never took place or that the Deposition
21 Transcript was somehow inaccurate. She simply contends that Mr.
22 Vance is not competent to authenticate that document. A
23 competent witness, namely McAllister, could easily cure this
24 alleged defect. Alternatively, the bankruptcy court could have
25 permitted Krengel to obtain a certified copy of the Deposition
26 Transcript. For these reasons, the bankruptcy court did not
27 abuse its discretion by overruling McAllister’s objection and
28 considering this evidence.
-31-
1 B. The Bankruptcy Court erred by weighing evidence to determine
2 that McAllister had the requisite intent to hinder, delay,
3 or defraud Krengel under section 727(a)(2)(A)
4 A bankruptcy court must deny a discharge if “the debtor,
5 with intent to hinder, delay, or defraud a creditor ... has
6 transferred, removed, destroyed, mutilated, or concealed property
7 of the debtor, within one year before the date of the filing of
8 the petition. . . .” 11 U.S.C. § 727(a)(2)(A). The burden of
9 proof is on the creditor to show that: (1) the debtor
10 transferred or concealed property; (2) the property belonged to
11 the debtor; (3) the transfer occurred within one year of the
12 bankruptcy filing; and (4) the debtor executed the transfer with
13 the intent to hinder, delay or defraud a creditor. In re Aubrey,
14 111 B.R. 268, 273 (9th Cir. BAP 1990).
15 Section 727(a)(2) states its intent requirement in the
16 disjunctive. Thus, a movant need only demonstrate one of the
17 three alternatives, either intent to hinder or to delay or to
18 defraud creditors. Beauchamp v. Hoose (In re Beauchamp),
19 236 B.R. 727, 731-32 (9th Cir. BAP 1999), aff’d 5 Fed. Appx. 74320 (9th Cir. 2001) (adopting the Panel’s opinion). A court must
21 liberally construe a claim for denial of a discharge in favor of
22 the discharge and strictly against the party arguing for its
23 denial. First Beverly Bank v. Adeeb (In re Adeeb), 787 F.2d
24 1339, 1342 (9th Cir. 1986).
25 Constructive fraudulent intent cannot be the basis for
26 denial of discharge. Id. at 1343. However, fraudulent intent
27 sufficient to justify denial of discharge may be established by
28 circumstantial evidence or by inferences drawn from a course of
-32-
1 conduct. Id. (citing In re Devers, 759 F.2d at 753-754 (noting
2 that a debtor is unlikely to testify directly that his intent was
3 fraudulent)). In examining the relevant circumstances or
4 conduct, a court may focus on “badges of fraud,” including:
5 (1) a close relationship between the transferor and the
6 transferee; (2) the transfer was in anticipation of a pending
7 suit; (3) the transferor debtor was insolvent or in poor
8 financial condition at the time of the transfer; (4) all or
9 substantially all of the debtor's property was transferred;
10 (5) the transfer so completely depleted the debtor's assets that
11 the creditor has been hindered or delayed in recovering any part
12 of the judgment; and (6) the debtor received inadequate
13 consideration for the transfer. Roberts v. Erhard
14 (In re Roberts), 331 B.R. 876, 885 (9th Cir. BAP 2005). These
15 factors need not all be present in order to find that a debtor
16 acted with the requisite intent. Id.17 Krengel’s argument for denial of discharge pursuant to
18 section 727(a)(2) consists of two sentences: “Defendant has
19 misrepresented the value and description of her assets, including
20 her jewelry, KFM and two automobiles. This omission warrants
21 denial of discharge under § 727(a)(2).” Motion p. 8. In
22 Krengel’s argument for denial of discharge pursuant to section
23 727(a)(4), Krengel asserts, “[i]n light of a pattern of behavior
24 abusing the bankruptcy process, these acts when weighed
25 altogether evidence cause to deny Debtor’s discharge per
26 § 727(a)(4).” Motion p. 10. Finally, Krengel asserts in its
27 argument for denial of discharge pursuant to section 727(a)(5),
28 “[t]hat a 2004 Examination was needed just to flesh out some of
-33-
1 the discrepancies in her schedules is evidence of possible
2 wrongful intent.” Motion p. 11. Taken together, the Panel can
3 infer from these statements that Krengel believes the
4 misrepresentations and omissions in McAllister’s bankruptcy
5 documents are evidence of her intent to hinder, delay, or defraud
6 creditors.
7 McAllister does not dispute that she amended her schedules
8 to increase the reported value of her jewelry and KFM, or that
9 she described the two automobiles as Krengel complains.
10 McAllister flatly disagrees with Krengel’s assertion that the
11 misstatements in her schedules and SOFA — to the extent that they
12 were misstatements — warrant a denial of her discharge.
13 McAllister asserts that the misstatements were benign, did not
14 affect the administration of the estate, and were not made with
15 any intent to hinder, delay or defraud creditors.
16 The bankruptcy court erred in granting summary judgment
17 pursuant to section 727(a)(2) for two reasons. First, Krengel
18 did not meet its burden of establishing an intent to hinder,
19 delay, or defraud creditors. Krengel did not even address the
20 element of intent in its argument. And in fact, Krengel’s
21 response to McAllister’s objection to the proposed order
22 acknowledges the existence of a factual dispute regarding intent,
23 and that the bankruptcy court weighed the evidence in finding
24 McAllister’s explanations lacking credibility. Response to
25 Opposition to Proposed Order p. 2.
26 Second, even if the Panel could infer intent from
27 McAllister’s multiple misstatements, McAllister has proffered
28 evidence sufficient to create a genuine dispute of material fact.
-34-
1 Her declaration, as well as the statements she made under oath at
2 the Rule 2004 examination, explain each of the issues raised by
3 Krengel. Appropriately considered in a light most favorable to
4 McAllister, a trier of fact could find that the misstatements did
5 not evidence a pattern of misconduct, but were simply unintended
6 errors or benign mistakes. Assessment of a witness’ credibility
7 is appropriate for trial, not in considering a motion for summary
8 judgment. Musick v. Burke, 913 F.2d 1390, 1394 (9th Cir. 1990)
9 (“When judging the evidence at the summary judgment stage, the
10 district court is not to make credibility determinations or weigh
11 conflicting evidence, and is required to draw all inferences in a
12 light most favorable to the nonmoving party.”).
13 C. The Bankruptcy Court erred by finding that Krengel met its
14 burden as to McAllister’s failure to keep or preserve
15 recorded information under section 727(a)(3)
16 Section 727(a)(3) provides that a court shall grant a debtor
17 a discharge unless “the debtor has concealed, destroyed,
18 mutilated, falsified, or failed to keep or preserve any recorded
19 information, including books, documents, records, and papers,
20 from which the debtor's financial condition or business
21 transactions might be ascertained, unless such act or failure to
22 act was justified under all of the circumstances of the case.”
23 11 U.S.C. § 727(a)(3).
24 The initial burden of proof under section 727(a)(3) is on
25 the plaintiff. Lansdowne v. Cox (In re Cox), 41 F.3d 1294, 1296
26 (9th Cir. 1994)(Cox II). In order to establish a prima facie
27 case, the plaintiff must show (1) that the debtor failed to
28 maintain and preserve adequate records, and (2) that such failure
-35-
1 makes it impossible to ascertain the debtor's financial condition
2 and material business transactions. Id.3 What constitutes adequate records must be decided case by
4 case, based on debtor's business operations and sophistication.
5 AVCO Fin. Servs. of Billings v. Sullivan (In re Sullivan),
6 111 B.R. 317, 321 (Bankr. D. Mt. 1990)(citing In re Horton,
7 621 F.2d 968 (9th Cir. 1980)(construing 11 U.S.C. § 32(c)(2) of
8 the Bankruptcy Act)). The debtor must maintain “sufficient
9 written evidence which will enable his creditors reasonably to
10 ascertain his present financial condition and to follow his
11 business transactions for a reasonable period in the past.”
12 Cox v. Lansdowne (In re Cox), 904 F.2d 1399, 1402 (9th Cir.
13 1990)(Cox I)(quoting In re Horton, 621 at 971). “Keep” means to
14 maintain a record, as in “to keep a diary.” Peterson v. Scott
15 (In re Scott), 172 F.3d 959, 969 (7th Cir. 1999). “This language
16 places an affirmative duty on the debtor to create books and
17 records accurately documenting his business affairs.” Id.18 Once the objecting party shows that the debtor’s records are
19 absent or inadequate, the burden of proof shifts to the debtor to
20 justify the inadequacy or nonexistence of records. Cox II,
21 41 F.3d at 1296. The debtor must show, by a preponderance of the
22 evidence, that failure to keep adequate business records was
23 justified under all of the circumstances in the case. Id. at
24 1297.
25 Krengel’s Motion argues that denial of discharge was
26 justified under section 727(a)(3) because McAllister: (1) failed
27 to adequately explain certain expense items on her schedules
28 during her deposition; (2) failed to disclose the loan
-36-
1 forgiveness by her mother, the loans from her family members, the
2 transfer of the diamond necklace, and payments made on her behalf
3 by KFM; (3) incorrectly listed her debt to Krengel as “disputed”
4 in her schedules; and (4) failed to keep adequate records for
5 KFM. After making these allegations in its Motion, Krengel
6 states the conclusion that “Defendant has undeniably failed to
7 keep and maintain adequate records, including financial
8 documentation.” Motion p. 9.
9 The first three allegations are not material to a
10 determination that McAllister (1) failed to maintain records, and
11 (2) that said failure made it impossible to ascertain the
12 debtor’s financial condition. Section 727(a)(3) is concerned
13 with a debtor’s record keeping, not the adequacy of her
14 disclosures (which is relevant under sections 727(a)(2) and
15 (a)(4)). The Motion makes no attempt to relate the adequacy of
16 McAllister’s disclosure with her failure to maintain records. In
17 its appellate brief, Krengel goes a bit further, alleging that
18 McAllister was “unable to produce records to explain (1) the
19 commingling of income and expenses on Debtor’s schedules, but
20 [sic] (2) the failure to disclose the executory contracts/clients
21 of the wholly-owned business entity, or (3) the payment of
22 Debtor’s legal expenses in the State Court Action made by KFM
23 (not a party to the State Court Action).” Appellee’s Brief
24 p. 30. Even if this assertion had been raised before the
25 bankruptcy court (which it was not), Krengel does not cite to,
26 and we have not been able to find, any material in the record to
27 support the assertion that McAllister did not maintain or turn
28 over information related to these business records.
-37-
1 Unlike the first three allegations in the Motion, Krengel’s
2 fourth allegation could satisfy the first prong of section
3 727(a)(3). However, Krengel again fails to cite in its Motion or
4 in its reply to any material in the record to support this
5 allegation. While a movant should cite to particular parts of
6 the record to support its position on summary judgment, a court
7 may consider uncited materials in the record. Fed. R. Civ.
8 P. 56(c)(3). We are unable to find any evidence, apart from
9 Krengel’s bare assertion, that McAllister failed to keep and
10 maintain adequate records for KFM. The 2004 examination
11 transcript is full of instances where Krengel asks McAllister if
12 she possessed or could produce documents, to which she repeatedly
13 replied that she (1) had already provided such documentation,
14 (2) could provide it, or (3) had an accountant who maintained
15 such information. McAllister also testified that she maintained
16 books for KFM. Krengel does not allege, and the record does not
17 reflect, that McAllister did not keep records of her transactions
18 with KFM. The record simply does not support the result reached
19 by the bankruptcy court.
20 As for McAllister’s transactions with her mother and
21 brother, looking beyond the unsupported facts and arguments
22 contained in Krengel’s Motion and reply, we have been able to
23 find just two specific instances of McAllister not keeping or
24 maintaining records that are specifically mentioned in the record
25 on appeal. First, McAllister did not keep a written record of
26 the loan from her brother; second, KFM did not have written
27
28
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1 contracts with its clients.10
2 If the absence of written records was sufficient by itself
3 to justify denial of discharge under section 727(a)(3), summary
4 judgment might have been appropriate. However, the movant must
5 also establish that these failures resulted in an inability to
6 assess the debtor’s financial condition. Here again, there
7 appears to be no evidence in the record to support such a
8 conclusion. For these reasons, the bankruptcy court should have
9 denied summary judgment on Krengel’s claim under section
10 727(a)(3).
11 VI. CONCLUSION
12 For the reasons stated above, the bankruptcy court should
13 not have granted summary judgment in favor of Krengel under
14 sections 727(a)(2) or (a)(3). We therefore REVERSE and REMAND
15 for further proceedings.
16
17
18
19
20
21
22
23
24
25 10
In its brief, Krengel asserts that, in addition to
26 failing to keep records of the loan from her brother, McAllister
failed to keep a record of the loan from her mother. The
27 declarations, 2004 exam transcript, and Deposition Transcript
make no reference as to whether the loan with her mother was
28 reduced to writing or evidenced in some other way.
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