Connors, John T. v. Union Planters Bank ( 2002 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 01-3007
Union Planters Bank, N.A.,
Plaintiff-Appellee,
v.
John T. Connors and Mary L. Connors,
Defendants-Appellants.
Appeal from the United States District Court
for the Southern District of Illinois.
No. 01-C-10-MJR--Michael J. Reagan, Judge.
Argued February 21, 2002--Decided March 21, 2002
Before Flaum, Chief Judge, and Harlington
Wood, Jr., and Williams, Circuit Judges.
Flaum, Chief Judge. John and Mary
Connors filed for bankruptcy under
Chapter 7 of the U.S. Bankruptcy Code
listing aggregate debts of over $19
million--more than $12 million of which
they owed to Union Planters Bank ("UPB").
On October 5, 2000, the bankruptcy court
granted UPB’s objection to discharge,
holding that the debtors failed to keep
adequate records as required by 11 U.S.C.
sec.727(a)(3). On June 28, 2001, the
district court affirmed the denial of
discharge. The Connors now appeal.
Because we agree with the bankruptcy and
district courts that the records provided
were inadequate to allow UPB to ascertain
the Connors’ financial condition or
business transactions, we affirm.
I. Background
In 1994, the Connors took out two lines
of credit with Magna Bank (now UPB) in
Belleville, Illinois, with a limit of $19
million. Over the course of the next
thirteen months, the Connors borrowed an
additional $9,002,116.10 from UPB,
bringing the approximate total to $28
million. These loans were secured with
2.5 million shares of stock in Agrosy
Gaming Corporation, a casino boat
partially owned by John Connors before it
became a publicly traded company. At its
highest, the stock traded at over $36 per
share. Because UPB believed that the
lines of credit were more than adequately
secured, it neither inquired as to how
the money was to be used nor placed any
restrictions on its application. When the
Connors needed money, they would call a
UPB officer who would release the
requested funds into a personal checking
account, wire them directly to one of the
Connors’ projects, or apply them to pay
off outstanding loans. By 1997, the value
of the Agrosy stock had fallen to under
$3 per share. After selling the stock,
UPB obtained a lien on almost all of the
Connors’ property and demanded repayment
of all outstanding loans--approximately
$12 million.
The Connors used the large sums of money
they borrowed from UPB, as well as that
borrowed from two other banks and four
individuals, to fund four major ventures:
the building of a home in Belleville that
cost $4 million; the building of the
Kings Point Racquet & Fitness Club, a
tennis facility also located in
Belleville that cost in excess of $10
million; the purchase of the Alystra, a
casino in Las Vegas, Nevada; and the
purchase of Crapper Jacks, a casino in
Cripple Creek, Colorado. None of these
projects was successful. The casinos lost
money, and the Connors’ plans to sell
Crapper Jacks and develop the Alystra
property fell through. They both closed
due to lack of funds. The tennis club
similarly failed to achieve an operating
gain. At trial, John Connors testified
that he did not recall why he obtained
each of the loans specifically, or where
the proceeds from each went. Money was
shifted among the various ventures in an
attempt to keep each above water.
The Connors admittedly did not keep many
records of their financial transactions,
most of which were handled through their
checking accounts at UPB and at West
Pointe Bank & Trust. They concede that
they disposed of financial records when
they moved from their home. They
did,however, provide the bankruptcy court
with bank statements that recorded
deposits and withdrawals to and from
their various checking accounts, and
cancelled checks. They also provided
balance sheets and other income
statements of Kings Point. These
documents will be further described
below, as necessary.
In the four years preceding their
bankruptcy, over $16 million of check and
other debit activity flowed from the
Connors’ checking accounts. During the
year before the filing, however, the sum
equaled only about $5,000. The Kings
Point records indicate that they ate some
of their meals there, and that the
racquet club repaid the Connors a portion
of its debt.
II. Discussion
The bankruptcy court denied discharge of
debt, pursuant to 11 U.S.C. sec.727(a)(3)
which provides that a court may deny such
relief if:
The debtor has concealed, mutilated,
falsified, or failed to keep or preserve
any recorded information, including
books, documents, records, and papers,
from which the debtor’s financial
condition or business transactions might
be ascertained, unless such act or
failure to act was justified under all of
the circumstances of the case . . . .
The provision requires that debtors
produce records that provide "enough
information to ascertain the debtor’s
financial condition and track his
financial dealings with substantial
completeness and accuracy for a
reasonable period past to present." In re
Martin, 141 B.R. 986, 995 (N.D. Ill.
1992). The bankruptcy court held, and the
district court affirmed, that the Connors
did not provide a satisfactory record or
accounting for their financial condition
immediately prior to declaring
bankruptcy, or the nature of their
business transactions as required by
sec.727(a)(3) and Seventh Circuit
precedent. We review the courts’ legal
interpretations de novo; however, we
review the bankruptcy court’s findings of
fact for clear error only. In re Scott,
172 F.3d 959, 966 (7th Cir. 1999). Where
both the relevant law and the specific
facts are clear, and the job of the
bankruptcy court was to apply the law to
the facts in the case, we reverse that
court’s conclusion only if clearly
erroneous. In re Rovell, 194 F.3d 867
(7th Cir. 1999); Cook v. City of Chicago,
192 F.3d 693, 696 (7th Cir. 1999).
The Connors contend that the cancelled
checks and deposit account statements
that they provided to the court, along
with the Kings Point financial records,
adequately account for their financial
transactions and condition for the
several years prior to filing for
bankruptcy. For example,/1 they purport
to show that the use of the $225,000 loan
from John’s brother is easily traced. The
West Pointe bank statement dated 7/23/97,
they proclaim, shows that the Connors had
an overdrawn balance on their
priorstatement and that the full loan
proceeds were deposited on 6/30/97. The
July, August, and September bank
statements also show nearly 100 checks
and debits depleting the account, and no
additional deposits. Therefore, they
contend, it is easy to see from these
records exactly where the loan proceeds
went. Checks or debits were dispersed to
Caesars Palace in Las Vegas to pay a
gambling debt ($100,000), a law firm to
pay for legal fees ($34,000), Mastercard,
retail stores, utility companies, a
country club, and West Pointe Bank. The
additional loans--from banks and
individuals-- the Connors claim, can be
similarly traced.
The bankruptcy court found that the
documents that the Connors produced did
not meet the sec.727(a)(3) standard.
First, this Circuit’s case law makes
clear that neither the court nor a
creditor is required to reconstruct a
debtor’s financial situation by sifting
through a morass of checks and bank
statements. Scott, 172 F.3d at 970; In re
Juzwiak, 89 F.3d 424, 428-29 (7th Cir.
1996). The Bankruptcy Code simply does
not require UPB to match dates and
amounts of deposits and withdrawals with
dates and amounts of loans. It is the
debtor’s duty to maintain and provide the
court with organized records of its
financial dealings. Id. Moreover, the
Connors conducted multiple large-scale
transactions in the course of running
their businesses. "Where debtors are
sophisticated in business, and carry on a
business involving significant assets,
creditors have an expectation of greater
and better record keeping." Scott, 172
F.3d at 970. There is no question that
the Connors owned and invested in several
major enterprises. They borrowed, lent,
transferred, and spent extremely large
sums of money to keep these businesses
afloat. Providing the court with a stack
of cancelled checks and deposit account
statements simply does not meet their
burden under sec.727; it does not give
UPB sufficient information to trace their
financial history or to reconstruct their
transactions. Id. at 969.
Also, the bankruptcy court held that
even if the documents that they provided
had been properly recorded and presented
as a statement of their financial
transactions, the picture would remain
incomplete. After the funds that UPB,
among others, lent to the Connors were
initially spent, they were further
shifted among the various business enter
prises. Thus, even assuming that the
documents presented to the bankruptcy
court constituted a sufficient accounting
of the transactions that they record,
they do not allow UPB to reconstruct the
business transactions between the Connors
and their various enterprises.
The Connors argue that because they
filed for personal bankruptcy, it is
their disbursements that are critical--
not those of the casinos or racquet club-
-and those are shown within the records
produced. However, considering the
significance of the business entities to
the Connors’ bankruptcy, as well as the
intertwining of personal and business
expenses, we find that the Connors’
business transactions cannot be fully
ascertained without further tracing of
the loan proceeds. See id. at 970 ("[As
the debtors] directly controlled both the
flow of funds and the investment
decisions of the business entities, we
conclude that they should be held to a
higher level of scrutiny than an ordinary
debtor."). Moreover, at least one
$500,000 loan--from the J.H. Berra
Construction Company--is not documented
at all. Several other personal loans were
deposited into the Connors’ checking
accounts, but no record exists as to
their purpose or terms. We do not find
the court’s conclusion to be clearly
erroneous.
Furthermore, as the bankruptcy court
reasonably found, the Connors failed to
provide a complete record as to their
personal financial status and living
expenses during the two years preceding
their declaration of bankruptcy. The
Connors argue that the bankruptcy court
erred by ignoring the financial records
of the Kings Point club during the pre-
bankruptcy period. These records, as well
as the testimony by the Kings Point
general manager, purport to show that the
club provided meals to the Connors, paid
many of their utility bills, and signed
checks directly to John Connors. Although
these records do provide a piece to the
puzzle, as the district court noted,
they--along with the totality of the
documents produced--do not present the
entire picture. The Connors have no
primary records of loan repayments
received from their businesses. There is
no way to know if the money and services
that Kings Point provided were the
Connors’ sole source of income. In fact,
John Connors’s testimony during the
hearing on UPB’s motion for summary
judgment indicates that it was not; they
received additional loans from family
members and friends. A recording of money
given to the Connors from one entity is
not adequate to show their living
expenses; the Connors had the duty to
keep records of all repayments and other
moneys actually received. They failed to
do so.
Finally, the Connors argue that even if
grounds for denying their discharge of
debt exist, the bankruptcy court abused
its discretion by failing to weigh the
equities of the case. We cannot agree.
The debtors contend that because they
would face such a sizable amount of debt
in the absence of discharge--more than
$15 million--and because there is no
evidence of intent to defraud their
creditors, the equities favor a
discharge. It is true that "it remains
within the discretion of a bankruptcy
court to grant a discharge even when
grounds for denial of discharge are
demonstrated to exist." In re Hacker, 90
B.R. 994, 997 (W.D. Mo. 1987). Although
the bankruptcy court likely would have
been within its discretion to grant the
discharge, weighing the vast amount of
debt against the Connors’ wrongdoing, see
Hacker, 90 B.R. at 998, it found that the
documents that the Connors were able to
produce were grossly inadequate. Their
failure to keep primary records, and the
fact that they disposed of significant
documents that they may have had,
warranted a denial of discharge in the
eyes of the bankruptcy court. We do not
find this to be an abuse of discretion.
III. Conclusion
Although the denial of discharge in
bankruptcy "should be construed strictly
against the creditor and liberally in
favor of the debtor," such discharge is
not a right, but a privilege. Juzwiak, 89
F.3d at 427. Moreover, intent to defraud
is not a required element of a
sec.727(a)(3) violation. Scott, 172 F.3d
at 969; Juzwiak, 89 F.3d at 430. The
conclusion of both the bankruptcy and
district courts--that the Connors
violated 11 U.S.C. sec.727(a)(3)--was not
clearly erroneous. We AFFIRM.
FOOTNOTE
/1 An example is required here as we, like the
creditors and courts below, decline to analyze
each check and each bank statement produced to
reconstruct the Connors’ financial dealings.