Haskell v. Shigo ( 1996 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
In Re: JOHN J. SHIGO,
Debtor.
FRANK B. HASKELL, III, Trustee,
No. 95-1959
Plaintiff-Appellant,
v.
JOHN J. SHIGO,
Defendant-Appellee.
Appeal from the United States District Court
for the District of Maryland, at Greenbelt.
Alexander Williams, Jr., District Judge.
(CA-94-2717-AW, BK-89-997-4)
Argued: June 5, 1996
Decided: July 19, 1996
Before WILKINSON, Chief Judge, MICHAEL, Circuit Judge, and
MACKENZIE, Senior United States District Judge for the
Eastern District of Virginia, sitting by designation.
_________________________________________________________________
Affirmed by unpublished per curiam opinion.
_________________________________________________________________
COUNSEL
ARGUED: Lorraine Jeanette Rice, Upper Marlboro, Maryland, for
Appellant. Brian Richard Seeber, GINS & SEEBER, P.C., Washing-
ton, D.C., for Appellee. ON BRIEF: Frank B. Haskell, III, Upper
Marlboro, Maryland, for Appellant.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
_________________________________________________________________
OPINION
PER CURIAM:
On April 15, 1989, Dr. John Shigo filed a voluntary petition for
relief under Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 101, et
seq. Prior to this filing, beginning in 1985, Dr. Shigo suffered a rather
unfortunate series of events. In 1985, Shigo separated from his wife
and began divorce proceedings. In 1986, both of his parents died
unexpectedly from carbon monoxide asphyxiation. As a result of
these two traumatic events, Shigo became increasingly irresponsible
with respect to his financial affairs and depleted his rather substantial
assets by making large gifts to family and friends. In the spring of
1987, Shigo abandoned his Bowie, Maryland medical practice and
went on a "sabbatical" to Bermuda and India for a few months.1 In
October, 1987, while visiting his daughter in South Carolina, Shigo
was arrested and jailed for failure to pay alimony and child support.
Upon release from jail, Shigo returned to his medical practice, only
to discover that his associate, Dr. Sood, had changed the locks on all
the doors. In January and May of 1988, Shigo attempted suicide and,
after each attempt, spent approximately one month in the hospital for
treatment related to manic depression. As a result, the Medical Board
suspended Shigo's license to practice medicine. Dr. Shigo then filed
a Chapter 7 Voluntary Bankruptcy Petition in April, 1989 in the
United States Bankruptcy Court in Rockville, Maryland.
_________________________________________________________________
1 When he left his practice, he entrusted his friend, J.P. Rickett, with
his corporation's affairs, however, Rickett ultimately began diverting
funds from Shigo's practice through his own business.
2
This action stems from Dr. Shigo's Chapter 7 proceedings, wherein
Frank Haskell, III, the elected trustee, filed an Objection to Discharge
under 11 U.S.C. § 727, on June 30, 1989.2 The Objection noted Dr.
Shigo's irregular behavior and the lack of adequate explanation in the
form of either documentation or testimony for the disappearance of
certain categories of assets. The trustee specifically alleged assets in
the form of jewelry, automobiles, furniture, Dr. Shigo's inheritance
from his parents, and monies withdrawn from his pension plan. Based
_________________________________________________________________
2 11 U.S.C. § 727 -- Discharge
(a) The court shall grant the debtor a discharge, unless--
....
(2) the debtor, with intent to hinder, delay, or defraud a
creditor or an officer of the estate charged with custody
of property under this title, has transferred, removed,
destroyed, mutilated, or concealed, or has permitted to
be transferred, removed, destroyed, mutilated, or con-
cealed--
(A) property of the debtor, within one year before the
date of the filing of the petition; or
....
(3) the debtor has concealed, destroyed, mutilated, falsi-
fied, or failed to keep or preserve any recorded infor-
mation, 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 cir-
cumstances of the case; or
(4) the debtor knowingly and fraudulently, in or in connec-
tion with the case--
(A) made a false oath or account;
....
(5) the debtor has failed to explain satisfactorily, before
determination of denial of discharge under this para-
graph, any loss of assets or deficiency of assets to meet
the debtor's liabilities; . . . .
3
on these factual allegations, the trustee has repeatedly argued that
under § 727 Dr. Shigo is not entitled to a discharge in bankruptcy
because he intended to hinder, delay and defraud his creditors by con-
cealing his property. On July 25, 1991, Judge Stephen Derby of the
United States Bankruptcy Court for the District of Maryland entered
his Memorandum of Decision Overruling Trustee's Objection to Dis-
charge, in which he held that none of the trustee's allegations were
sufficient to support denial of discharge under 11 U.S.C.
§ 727(a)(2)(A) or (a)(4). The trustee appealed and Judge Norman P.
Ramsey, by Order entered January 24, 1992, affirmed in part,
reversed in part, and remanded the case, concluding that Judge Derby
erred in failing to consider the trustee's objection pursuant to § 727
generally, since the record established a prima facie basis for denial
of discharge under both § 727(a)(3) and (a)(5). On remand, the Bank-
ruptcy Court again reviewed the trustee's objections, consistent with
Judge Ramsey's Order, and again overruled them. By Order entered
August 15, 1994, Judge Duncan Keir granted the debtor's discharge,
finding that he had met his burden of persuasion under (a)(3) and
(a)(5), that his circumstances justified his failure to preserve records,
and that his explanation of the loss of his assets was credible. The
trustee appealed to the District Court and Judge Alexander Williams,
Jr. affirmed the Bankruptcy Court by order entered January 26, 1995.
It is well settled that findings of fact made in a bankruptcy proceed-
ing will not be set aside by a reviewing court unless "clearly errone-
ous." Due regard must be given to the fact that the bankruptcy court
had the opportunity to hear witnesses and to assess their credibility.
See Farouki v. Emirates Bank International, Limited, 14 F.3d 244
(4th Cir. 1994). Such a presumption, however, does not apply to legal
conclusions, and the court must make an independent determination
of ultimate legal conclusions adopted by the bankruptcy judge on the
basis of the factual findings, reversing only if they are erroneous. In
Re Martin, 698 F.2d 883 (7th Cir. 1983).
The only real issues seriously pressed by the trustee in this appeal
concern § 727(a)(3) and (a)(5). The trustee contends that Dr. Shigo
failed to preserve records under (a)(3) and failed to satisfactorily
4
explain the loss of his assets, specifically the inheritance and pension
plan withdrawals, as required under (a)(5).
While the preservation of records is required under (a)(3), the stat-
ute also provides an exception where failure to do so "was justified
under all of the circumstances of the case." The Bankruptcy Court is
vested with broad discretion in determining whether the records kept
by a particular debtor are adequate, given the circumstances of each
case. See In re Goff, 495 F.2d 199 (5th Cir. 1974). Judge Keir specifi-
cally found that Dr. Shigo fell within the exception provided in (a)(3)
holding:
. . . that given the fact that Dr. Shigo lived a rather itinerant
life, to say the least, in 1987 and 1988, that he went through
two very serious mental breakdowns in that period of time
and was hospitalized for significant periods of time in the
relevant period, that it is certainly justified under the cir-
cumstances that he might not have a complete record of
every personal financial expenditure of any significance
during the relevant time.
Judge Keir further found that Dr. Shigo had maintained an adequate
record of his financial condition, even though he could not produce
them, and that there was no evidence that Dr. Shigo had destroyed
records with any intent to hide anything or done other than to cooper-
ate.
Whether Dr. Shigo's explanation of his loss of assets under (a)(5)
was adequate and satisfactory is a question of fact, left to the discre-
tion of the bankruptcy court. Farouki, 14 F.3d at 251. Dr. Shigo's
uncontradicted testimony was that he used his pension and inheritance
to cover tax debts, wedding expenses for his children, college educa-
tion expenses, and other personal living expenses and the Bankruptcy
Court found this testimony to be credible. The huge reduction in his
income, from $97,000.00 in 1986 to $4,000.00 in 1988, adequately
explains the resulting insufficiency of his assets to meet his liabilities.
The real question before this court is whether the debtor has an
obligation under § 727 to reconstruct his entire financial history or
just provide the trustee with the records he has, and, if he has none,
5
give an explanation as to why. We subscribe to the latter burden
which Dr. Shigo has met in this case. It is clear from the record that
Dr. Shigo furnished all records of his financial condition within his
possession, including tax returns, to the trustee. While it is true, as the
trustee points out, that Dr. Shigo could not provide a transactional
record of his personal living expenses, § 727(a)(3) does not require
that. That kind of detail is only required of business transactions and
no issue concerning business transactions has been raised. Further-
more, Dr. Shigo provided information which the trustee, if he had
desired, could have utilized to obtain a more complete set of records
from other readily available sources. The trustee chose not to do so.
The purpose of § 727 is to require that a debtor deal fairly with his
creditors by fully disclosing his financial condition. Dr. Shigo
explained the transfers of all the assets sought by the trustee in such
detail that the trustee was able to pursue most of them directly
through fraudulent conveyance actions, some of which were success-
ful. This case also presents a unique scenario in that the trustee has
been familiar with Dr. Shigo's financial condition long before the
bankruptcy petition was filed, through his involvement as counsel for
Dr. Shigo's ex-wife--and number one creditor in bankruptcy--in
their divorce proceedings.
Regarding any lingering allegations of concealment, both the
Bankruptcy Court and the District Court found that the transfers in
question had taken place more than one year prior to the filing of the
petition, that there was no evidence that Dr. Shigo continued to con-
trol the assets in question, and that the trustee failed to prove other
acts of intentional concealment within that year. Unless clearly erro-
neous, these findings of the bankruptcy court must be accepted, par-
ticularly when they have been affirmed by the district court. Id.
We agree with the District Court that the legal conclusions of the
Bankruptcy Court in this case are supported by the record and that the
factual findings are not clearly erroneous. The decision of the District
Court is affirmed.
AFFIRMED
6