Chemoil, Inc. v. Preifle , 154 F. App'x 432 ( 2005 )

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
November 18, 2005
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
__________________________ Clerk
No. 05-20335
Summary Calendar
__________________________
In the matter: MICHAEL M. PFEIFLE,; MARLENE T. PFEIFLE;
Debtors.
CHEMOIL, INC. ,
Appellant,
versus
MICHAEL M PREIFLE; MARLENE T PFEIFLE,
Appellees.
___________________________________________________
Appeal from the United States District Court
For the Southern District of Texas
(No. 4:05-CV-301)
___________________________________________________
Before BARKSDALE, STEWART, and CLEMENT, Circuit Judges.
*
PER CURIAM:
Chemoil, Inc. (“Chemoil”) appeals a district court judgment affirming a bankruptcy
court ruling in favor of Michael Pfeifle and Marlene Pfeifle (“the Pfeifles”). We observe
no clear error in the bankrupcty court’s finding that the Pfeifles kept adequate records of
*
Pursuant to 5th Cir. R. 47.5, the Court has determined that this opinion should not be
published and is not precedent except under the limited circumstances set forth in 5th Cir.
R. 47.5.4.
their financial condition. Chemoil’s assertion that the Pfeifles’ debt should not be
discharged under 11 U.S.C. § 727(a)(3) fails. Accordingly, we affirm.
I. FACTS AND PROCEEDINGS
Chemoil and Mr. Pfeifle were in a business relationship involving commodity
trading. The relationship terminated in November 2000 when Chemoil accused Mr. Pfeifle
of unauthorized trading. In January 2003, following arbitration proceedings related to the
charge, Chemoil obtained a judgment against Mr. Pfeifle for approximately $846,000. In
April 2003, the Pfeifles filed a voluntary bankruptcy petition under Chapter 7, and
Chemoil was listed as a creditor on the Pfeifles’ schedules. Subsequently, Chemoil sued
to bar the Pfeifles’ discharge of debt under 11 U.S.C. § 727.
In the bankruptcy court proceedings, Chemoil alleged, inter alia, that the Pfeifles
failed to maintain adequate records of their financial condition and that their debt should
not be discharged pursuant to 11 U.S.C. § 727(a)(3). Specifically, Chemoil argued that the
failure to keep records of untraceable cash, allegedly equal to twenty percent of the
debtors’ income, made it impossible to determine the debtors’ financial condition. The
bankruptcy court, however, accepted the sufficiency of the Pfeifles’ recordkeeping. The
Pfeifles moved for judgment pursuant to Federal Rule of Civil Procedure 54(b), also
Bankruptcy Rule 7054(a); the court granted the Pfeifles motion.
Chemoil appealed to the district court on the issue of adequacy of recordkeeping.
The district court affirmed the ruling of the bankruptcy court, and appeal to this Court was
timely taken. This Court has jurisdiction to hear an appeal from a final order of a district
2
court under 28 U.S.C. § 158(d).
II. STANDARD OF REVIEW
This Court reviews bankruptcy court decisions under the same standards the
district court employed in hearing the appeal from bankruptcy court; findings of fact are
reviewed for clear error, and legal conclusions are reviewed de novo. Williams v. Int’l
Brotherhood of Electrical Workers Local 520 (In re Williams), 337 F.3d 504, 508 (5th Cir.
2003); In re Nat’l Gypsum Co., 208 F.3d 498, 504 (5th Cir. 2000). A finding of fact is
“clearly erroneous only if ‘on the entire evidence, the court is left with the definite and
firm conviction that a mistake has been committed.’” Robertson v. Dennis (In re Dennis),
330 F.3d 696, 701 (5th Cir. 2003) (quoting Hibernia Nat’l Bank v. Perez, 954 F.2d 1026, 1027
(5th Cir. 1992)). Further, this Court must give “due regard” to the judgment of the
bankruptcy court in assessing the credibility of the witnesses. Id.Chemoil tries to characterize the bankruptcy court’s factual finding concerning the
Pfeifle’s recordkeeping as a legal conclusion, such that this Court would review the court’s
judgment under the de novo standard. However, this characterization is without merit.
The law is settled that a finding regarding the debtor’s financial recordkeeping is a factual
one. Id. at 703; Goff v. Russell Co. (In re Goff), 495 F.2d 199, 200 (5th Cir. 1974).
III. DISCUSSION
The sole issue on appeal is whether the Pfeifles complied with their duty to keep
adequate records in accordance with 11 U.S.C. § 727(a)(3).
A. 11 U.S.C. § 727(a)(3)
3
The court shall grant discharge to a debtor, unless the debtor has “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). The plaintiff bears the initial burden of proving that the debtor’s
financial records are inadequate and that this failure prevented the plaintiff from
ascertaining the debtor’s financial condition. In re Dennis, 330 F.3d at 703. If this burden
is met, the burden shifts to the debtors to show the inadequacy is justified under all of the
circumstances. Id.B. Findings of the bankruptcy court
The bankruptcy court concluded that Chemoil did not meet its burden. Rather, the
court noted that there were thousands of pages of financial records and substantial
documents produced. The Pfeifles admitted into evidence four years of tax returns,
together with various supplemental documentation in support of the returns. Also
admitted were bank statements, quarterly reports of retirement accounts, insurance
information, and credit card statements.
Mr. Pfeifle testified that he kept records of deductible business expenses and
records generally necessary for filing tax returns. He stated that he maintained other types
of records as well, such as property tax bills and pay stubs. Chemoil does not dispute that
the records referenced by Mr. Pfeifle were included in the record before the bankruptcy
court. Mr. Pfeifle asserted that his records were adequate for his circumstances. The
4
forensic accountant hired by Chemoil to review the Pfeifles’ financial records did not
testify.
Mr. Pfeifle testified that neither he nor his wife kept records of how they spent cash
but that they used it for living expenses and entertainment items as well as for mortgage
payments. The proportion of expenses paid in cash, Mr. Pfeifle said, was between fifteen
and twenty percent.
The bankruptcy court found that the number of records was substantial and that
the records kept were both reasonable given the needs of the debtor and appropriate given
his situation. The court also specifically gave credit to the testimony of Mr. Pfeifle and
found that Mr. Pfeifle’s financial condition had been clearly described in the course of the
proceedings.
C. Chemoil’s argument
Chemoil contests the bankruptcy court finding and chiefly makes two arguments
1
on appeal. First, Chemoil contends that because no records exist to account for the use of
1
We address the two most pertinent claims. In its brief, Chemoil does make other
arguments as well, but they are unsuccessful. For example, Chemoil states that the Pfeifles
are justified in not keeping records of their cash expenditures only if a normal and
reasonable person would do so under similar circumstances. However, the justification
inquiry only follows after the plaintiff has made a prima facie case that the debtor kept
inadequate records. In re Dennis, 330 F.3d at 703. Because the bankruptcy court found
that Chemoil did not make out a prima facie case and we find no error in this assessment,
we need not address the justification inquiry. Also, Chemoil correctly points out that no
showing of fraudulent intent need be made under 11 U.S.C. § 727(a)(3). The bankruptcy
court did address intent under its analysis of section 727(a)(4) but did not factor this into
its analysis under section 727(a)(3). Consequently we do not find this to be an issue.
5
credit card cash advances or cash withdrawals made when depositing checks, an accurate
picture of the Pfeifles’ financial condition cannot be ascertained. This Circuit has not
delineated a precise threshold beyond which a debtor becomes accountable for further
recordkeeping. However, we have required only “written evidence” of the debtor’s
financial condition, not “full detail” of all of the debtor’s financial records. In re Dennis,
330 F.3d at 703 (citing In re Goff, 495 F.2d at 201). The bankruptcy court found that the
absence of records as to these cash expenditures did not impede Chemoil from ascertaining
the Pfeifles’ financial condition. Using the above standard as a guide, we cannot say that
the bankruptcy court clearly erred in this regard.
Second, Chemoil insists that, as sophisticated wage earners, the Pfeifles should be
held to a higher standard regarding the amount and type of financial documentation
retained. The appellant cites to Womble v. Pher Partners which suggests that the level of
a debtor’s sophistication as well as the extent of his business activities should bear on the
adequacy of his record keeping. Womble v. Pher Partners (In re Womble), 108 Fed. Appx.
993, 996 (5th Cir. 2004). While we agree that this is true, this Court has also stated both
that debtors must only keep and preserve records which are appropriate to their situation
and that income tax returns are the “quintessential documents” in a personal bankruptcy.
In re Dennis, 330 F.3d at 703. The Pfeifles’ case is a personal bankruptcy. The record
shows that they have produced four years of income tax returns as well as other
documentation. The bankruptcy court found this to be reasonable. Again, we cannot say
that the bankruptcy court made a clear error.
6
In light of the above considerations, and based on Mr. Pfeifle’s testimony and the
evidence admitted into the record, we cannot say that the bankruptcy court clearly erred
in finding the Pfeifle’s records sufficient to ascertain their financial condition. A
bankruptcy court has “wide discretion” in making this finding. In re Dennis, 330 F.3d at
703. Additionally, the bankruptcy court found Mr. Pfeifle to be a credible witness. We
give deference to the court in this regard. Id. at 701. This Circuit has stated that discharge
should be denied only for very specific and serious infractions. In re Ichinose, 946 F.2d
1169, 1172 (5th Cir. 1991). The discharge of the Pfeifles’ debt should not be denied under
11 U.S.C. § 727(a)(3).
IV. CONCLUSION
The order of the district court is AFFIRMED.
7