Floret LLC v. Thomas M. Sendecky ( 2002 )

United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
No. 02-6023MN
In re: *
*
Thomas Michael Sendecky, *
*
Debtor. *
*
Floret, L.L.C., * Appeal from the United States
Michele Lea Eggert, * Bankruptcy Court for the
* District of Minnesota
Plaintiffs-Appellants, *
*
v. *
*
Thomas Michael Sendecky *
*
Defendant-Appellee. *
_____________
Submitted: September 10, 2002
Filed: October 10, 2002
_____________
Before KOGER, SCHERMER, and FEDERMAN, Bankruptcy Judges
FEDERMAN, Bankruptcy Judge
_____________
Plaintiff/appellants Floret, L.L.C. and Michele Lea Eggert (Appellants) appeal
an order of the bankruptcy court1 granting debtor Thomas M. Sendecky a discharge
1
The Honorable Nancy C. Dreher, United States Bankruptcy Judge for the District of
Minnesota.
and denying Appellants’ motion for sanctions based upon the inadequacy of Mr.
Sendecky’s pre-trial brief. While this appeal was pending, Appellants filed a motion
for sanctions with this Panel, based on statements contained in Mr. Sendecky’s
appellate brief. For the reasons set forth below, we affirm the rulings of the
bankruptcy court, and we also grant Appellants’ post-trial motion for sanctions.
ISSUES
There are three issues before us. Appellants argue that the bankruptcy court
committed reversible error by granting Mr. Sendecky a discharge despite Appellant’s
allegations that he failed to keep adequate records, and that he failed to satisfactorily
explain a deficiency of assets. They also appeal the bankruptcy court’s denial of
sanctions for the inadequacy of Mr. Sendecky’s pre-trial brief. Finally, Appellants ask
for sanctions based upon counsel for Mr. Sendecky’s alleged “malicious and libelous
falsehood” contained in his appellate brief. We conclude that the bankruptcy court did
not commit reversible error when it found that Appellants failed to sustain their
burden of proof as to the 11 U.S.C. § 727(a)(2) and (4) Counts. We also conclude that
the bankruptcy court did not commit reversible error when it found that Mr.
Sendecky’s failure to keep adequate books and records was justified under the
circumstances. We further conclude that the bankruptcy court did not commit
reversible error when it found that Mr. Sendecky adequately explained any
deficiency of assets alleged by Appellants.
We conclude that the bankruptcy court did not abuse its discretion when it
failed to award sanctions for the alleged inadequacy of Mr. Sendecky’s pre-trial brief.
We also conclude, however, that Mr. Sendecky’s appellate brief did contain a
statement that is unbecoming to a member of the bar. As such, we grant Appellants’
post-trial motion for sanctions.
2
BACKGROUND
At one time, Mr. Sendecky operated a family construction business, Sendecky
Concrete, Inc. While engaged in that business, Mr. Sendecky installed some flooring
for Appellants. On June 5, 2001, the District Court of Hennepin County, Minnesota
entered judgment in the amount of $16,253.19 in favor of Appellants for Mr.
Sendecky’s breach of an oral contract to properly install the flooring. On June 18,
2001, Appellants served a Notice of Garnishment on Mr. Sendecky’s employer, and
on June 25, 2001, Mr. Sendecky filed a Chapter 7 bankruptcy petition.
On September 24, 2001, Appellants filed an adversary proceeding objecting to
Mr. Sendecky’s discharge. Appellants filed the Complaint in four Counts: Count I,
Violation of 11 U.S.C. § 727(a)(2); Count II, Violation of 11 U.S.C. § 727(a)(3);
Count III, Violation of 11 U.S.C. § 727(a)(4)(A); and Count IV, Violation of 11
U.S.C. § 727(a)(4)(B).2 In his opening statement at the trial, however, Appellants’
counsel indicated that in Count IV he intended to proceed under 11 U.S.C. §
727(a)(5). 3 For purposes of this appeal, we find that Appellants sufficiently, if
inartfully, pled an 11 U.S.C. § 727(a)(5) Count.
STANDARD OF REVIEW
We review a bankruptcy court’s conclusions of law de novo and its findings
of fact for clear error.4 We will not, however, overturn a bankruptcy court’s factual
2
We note that 11 U.S.C. § 727(a)(4)(B) provides that the court will not grant a debtor a
discharge if the debtor “knowingly and fraudulently, in or in connection with the case . . .
presented or used a false claim.” Count IV of the Complaint, however, requests relief for debtor’s
failure to satisfactorily explain any loss of assets or deficiency of assets. That request should have
been pled pursuant to 11 U.S.C. § 727(a)(5).
3
Trial Transcript, Appellants’ Appendix 318 at 325.
4
Korte v. United States of America Internal Revenue Service (In re Korte), 262 B.R. 464,
th
469 (8 Cir. B.A.P. 2001).
3
findings as clearly erroneous unless, on the basis of all of the evidence, we are left
with a “definite and firm conviction that a mistake has been committed.”5 We review
a bankruptcy court’s denial of a motion for sanctions for an abuse of discretion.6
DISCUSSION
The denial of a debtor’s discharge is a “harsh sanction,” therefore, the
provisions of 11 U.S.C. § 727(a) are “strictly construed in favor of the debtor.”7 The
burden of proof is on the objecting party to prove each element of a section 727
Complaint by a preponderance of the evidence.8 Appellants argue that the bankruptcy
court committed reversible error by ruling in favor of Mr. Sendecky on all four
Counts of their Complaint. We will address each Count in turn.
11 U.S.C. § 727(a)(2)(A)
Section 727(a)(2)(A) provides that the court should deny a debtor a discharge
if he concealed assets that might otherwise be made available to satisfy the claims of
creditors:
(a) The court shall grant the debtor a discharge, unless–
...
5
Id. citing Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S. Ct. 1504, 1511, 84 L.
Ed. 2d 518 (1985).
6
Eastern Equipment and Serv. Corp. v. Factory Point Nat’l Bank, Bennington, 236 F.3d
117, 120 (2nd Cir. 2001).
7
Korte, 262 B.R. at 471 (citations omitted).
8
Id.
4
(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 concealed–
(A) property of the debtor, within one year
before the date of the filing of the petition.9
Appellants alleged that Mr. Sendecky concealed a Corvette and a “diamond grinder.”
At the trial, however, one of the plaintiffs admitted that the Corvette belonged to Mr.
Sendecky’s father. The bankruptcy court correctly found that a debtor cannot conceal
assets that do not belong to him. As to the diamond grinder, the bankruptcy court
found that Appellants failed to prove that Mr. Sendecky owned such a piece of
equipment, or what the value of such a piece of equipment might be. Based upon
these factual findings, we affirm the bankruptcy court as to the 11 U.S.C. §
727(a)(2)(A) Count.
11 U.S.C. § 727(a)(3)
Section 727(a)(3) provides that the court will deny a debtor a discharge if he
unjustifiably fails to keep adequate records:
(a) The court shall grant the debtor a discharge, unless–
...
(3) the debtor has concealed, destroyed, mutilated,
falsified, or failed to keep or preserve any recorded
information, including books, documents, records, and
papers, from which the debtor’s financial condition or
business transactions might be ascertained, unless such act
9
11 U.S.C. § 727(a)(2)(A).
5
or failure to act was justified under all of the circumstances
of the case.10
The bankruptcy court found that Mr. Sendecky did not keep adequate business
records.11 As a result, the burden of production shifted to him to offer some
justification for his “sloppy record keeping.”12 But he did produce his income tax
returns, his checking account records, and some credit reports. The court further
found that once the plaintiff proves the records are inadequate, the burden of
production “shifts to the debtor to prove that the failure to keep adequate records was
justified under the circumstances.”13 In order to determine if the failure was justified,
the trial court must first determine what records someone in like circumstances to Mr.
Sendecky would keep.14The bankruptcy court found that Mr. Sendecky was poorly
educated, that he had no sophistication, that he had little business experience, that he
still lived at home with his parents, and that he had neither the motivation nor the
ability to keep better records than those he provided. The bankruptcy court, thus,
found that someone with Mr. Sendecky’s education, business experience, and
personal financial structure, operating a business the size of Sendecky Concrete, Inc.,
could not be expected to keep professional business records. Given these
inadequacies, and the fact that an 11 U.S.C. § 727(a)(3) Count does not require proof
of intent,15 the bankruptcy court found that the Mr. Sendecky was justified in
maintaining the records he provided, even if they were inadequate. We cannot find
10
11 U.S.C. § 727(a)(3).
11
Trail Transcript, Appellants’ Appendix, pg. 462.
12
Miller v. Pulos (In re Pulos), 168 B.R. 682, 690 (Bankr. D. Minn. 1994).
13
Id.
14
Id. at 692.
15
See Pulos, 168 B.R. at 692.
6
that these factual findings are clearly erroneous, therefore, we affirm as to the section
727(a)(3) Count.
11 U.S.C. § 727(a)(4)
Section 727(a)(4) grants the bankruptcy court the authority to deny a debtor’s
discharge if he intentionally made a misrepresentation in connection with his
bankruptcy case:
(a) The court shall grant the debtor a discharge, unless–
...
(4) the debtor knowingly and fraudulently, in connection
with the case–
(A) made a false oath or account.16
Appellants argue that the bankruptcy court committed clear error when it refused to
find that Mr. Sendecky failed to accurately fill out his schedules. Appellants allege
that Mr. Sendecky duplicated some claims of creditors, and listed some debts that
were no longer collectible because the statute of limitations had run. The also alleged
that he listed a debt from his parents for $170,000, when his parents had never
demanded payment. The bankruptcy court found that the Code requires “nothing less
than full and complete disclosure of any and all apparent interests of any kind.”17 In
Korte v. United States of America Internal Revenue Service,18 we held that in order
for a false statement, made in connection with a case, to bar a debtor’s discharge, the
16
11 U.S.C. § 727(a)(4).
17
Appellant’s Appendix, Tr. Transcript, pg. 466.
18
262 B.R. 464 (8th Cir. B.A.P. 2001).
7
statement must be both material and made with intent.19 The bankruptcy court found
that Mr. Sendecky did, indeed, duplicate some claims, but that he did so on the advice
of his counsel. Mr. Sendecky stated that his counsel advised him to list all debts, both
those of Sendecky Concrete, Inc. and himself personally. He stated that he duplicated
some debts because he obtained the debts from his credit reports, and the credit
reports duplicated some of the debts.
The bankruptcy court found that Mr. Sendecky followed his counsel’s advice
in listing his debts, and that mistaken reliance on counsel’s advice can excuse
fraudulent intent. In Kaler v. McLaren (In re McLaren),20 the court held that reliance
on an attorney’s advice, if the advice is reasonable, may “excuse acts that otherwise
bear indicia of fraud.”21 The bankruptcy court also found that there was ample
evidence in the record that Mr. Sendecky’s parents did, indeed, loan him $170,000,
plus other funds, therefore, he did not materially misrepresent that debt.22 The
bankruptcy court further found that there was no evidence in
the record that Mr. Sendecky did not fully inform his counsel, or that Mr. Sendecky’s
counsel offered unreasonable advice. We, therefore, find that the bankruptcy court did
not err in finding that Mr. Sendecky’s discharge should not be denied based upon
Appellants’ section 727(a)(4) Count.
19
Id. at 474. See also Cuervo v. Hull (In re Snell), 240 B.R. 728, 730 (Bankr. S.D. Ohio
1999) (holding that holding that good faith reliance on advice of counsel will negate fraudulent
intent); Kaler v. Craig (In re Craig), 195 B.R. 443, 452 (Bankr. D. N.D. 1996) (holding that
mistaken reliance on an attorney’s advice will excuse acts of fraudulent intent if the advice was
reasonable and the attorney was aware of all relevant facts).
20
236 B.R. 882 (Bankr. D. N.D. 1999).
21
Id. at 882.
22
Appellant’s Appendix, Tr. Transcript, pg. 466.
8
11 U.S.C. § 727(a)(5)
Section 727(a)(5) authorizes a bankruptcy court to deny a discharge to a
Chapter 7 debtor who fails to satisfactorily explain either a loss of assets or a
deficiency of assets:
(a) The court shall grant the debtor a discharge, unless–
...
(5) the debtor has failed to explain satisfactorily, before
determination of denial of discharge under this paragraph,
any loss of assets or deficiency of assets to meet the
debtor’s liabilities.23
The party objecting to a debtor’s discharge pursuant to section 727(a)(5) has the
burden of proving facts establishing that a loss or shrinkage of assets actually
occured.24 Appellants’ proof as to this Count consisted of the fact that Mr. Sendecky’s
father testified he had loaned his son funds in excess of $170,000 to keep a family
business operating, that, not only did Mr. Sendecky use that money to pay business
debts, he continued to incur debt, and that at the time of the bankruptcy filing, he did
not have any assets. The bankruptcy court did not expressly find that these
allegations either satisfied, or failed to satisfy, Appellants’ burden of proving a
deficiency of assets. The court stated that there was no proof in the record that Mr.
Sendecky ever made very much money, and that Appellants never proved Mr.
Sendecky owned any assets that were inexplicably missing.25 On the other hand, the
bankruptcy court found that Mr. Sendecky had a business that was losing money, that
23
11 U.S.C. § 727(a)(5).
24
The Cadle Co. v. Stewart (In re Stewart), 263 B.R. 608, 618 (10th Cir. B.A.P. 2001).
25
Appellant’s Appendix, Tr. Transcript, pg. 482-83.
9
somebody put money into that business, that Mr. Sendecky had a propensity to incur
credit card debt, and that the business failed leaving business debt in its wake. In
addition, Mr. Sendecky’s father testified that he loaned his son money to satisfy some
of the business debt, and Mr. Sendecky testified that he used those funds to satisfy
some of the business debt. After making the above findings, the bankruptcy court
ruled against Appellants as to the section 727(a)(5) Count.
If a party demonstrates a deficiency of assets, the burden shifts to the debtor
to explain the loss.26 “If the explanation is too vague, indefinite, or unsatisfactory
then the debtor is not entitled to a discharge.”27 The explanation given by the debtor
must be definite enough to convince the trial judge that assets are not missing.28 The
bankruptcy court found both that Appellants failed to prove that Mr. Sendecky ever
owned any assets the loss of which was not explained, and further found that Mr.
Sendecky invested any funds received from his father in the failing business.
Appellants contend that the court did not adequately consider the section 727(a)(5)
Count because the court’s initial ruling did not specifically address that Count. As
noted, the Complaint did not specifically refer to section 727(a)(5). Nevertheless,
having reviewed the entire record, we find that the bankruptcy court fully considered
Appellants’ request for relief under section 727(a)(5), and that it did not err in finding
in favor of Mr. Sendecky. We affirm.
26
Stewart, 263 B.R. at 618..
27
Diamond Bank v. Carter (In re Carter), 203 B.R. 697, 707 (Bankr. W.D. Mo. 1996);
United States of America v. Hartman (In re Hartman), 181 B.R. 410, 413 (Bankr. W.D. Mo.
1995).
28
Grant v. Sadler (In re Sadler), 282 B.R. 254, 265 (Bankr. M.D. Fla. 2002).
10
SANCTIONS
A. Pre-Trial Brief
Appellants moved for sanctions, alleging that the pre-trial brief filed by Mr.
Sendecky did not comply with the bankruptcy court’s pre-trial order. The bankruptcy
court summarily dismissed this motion at the trial stating that “I didn’t find the
Defendant’s brief helpful either, much helpful, but we muddled our way through, and
it certainly is not grounds for sanctions.”29 Appellants cite to the bankruptcy court’s
Order of Trial, which provides that “[f]ailure to abide by the provisions of this Order
may result in imposition of sanctions upon counsel or party.”30 By its terms, the Order
leaves it within the discretion of the bankruptcy court to determine if sanctions are
warranted. The denial of a such a motion is, thus, reviewed for abuse of that
discretion.31 A court abuses its discretion “when its ruling is founded on an error of
law or a misapplication of law to the facts.”32 The bankruptcy court ruled that the
inadequacy of Mr. Sendecky’s pre-trial brief did not warrant the imposition of
sanctions. We cannot find, under the circumstances, that the bankruptcy court
committed an error of law or misapplied the law to the facts as to that motion. We
affirm.
B. Appellate Brief
Appellants filed a motion with this Panel asking us to impose a “significant
monetary sanction” upon counsel for Mr. Sendecky, Richard J. Haefele, for an alleged
29
Appellant’s Appendix, Tr. Transcript, pg. 469.
30
Appellant’s Brief pg. 19-20.
31
Eastern Equipment and Serv. Corp. v. Factory Point Nat’l Bank, Bennington, 236 F.3d
117, 120 (2nd Cir. 2001); Johnson v. Ventra Group, Inc., 191 F.3d 732, 749 (6th Cir. 1999);
Ramirez v. Fuselier (In re Ramirez), 183 B.R. 583, 586 (9th Cir. B.A.P. 1995).
32
Montrose Medical Group Participating Savings Plan v. Bulger, 243 F.3d 773, 779 (3rd
Cir. 2001).
11
“malicious and libelous falsehood” contained in Mr. Sendecky’s appellate brief.
Appellants did not specify any amount of monetary sanction in their motion, and no
basis for the award of any particular amount was provided. The motion was
accompanied by a notarized affidavit signed by Alfred Stanbury, counsel for
Appellants. Mr. Sendecky’s appellate brief contained the following statement:
Mr. Stanbury’s stated intention to various litigants is to force the
Chapter 7 debtor to incur such substantial attorney’s fees that he will be
forced to persuade his family to pay appellant’s [sic] and their attorney
the amounts sought to be discharged in the Chapter 7 proceeding.33
In his motion Mr. Stanbury denies ever making such a statement.
Rule 8018A of the Local Rules of the United States Bankruptcy Appellate
Panel for the Eighth Circuit (the Local Rules) sets forth the procedure for both
admitting and disciplining attorneys that appear before us. Local Rule 8018A(b)
provides as follows:
(b) Discipline. The court may take any appropriate disciplinary action
against an attorney who practices before it for conduct unbecoming a
member of the bar or for failure to comply with these rules or any court
Rule. Counsel will be afforded reasonable notice, an opportunity to
show cause to the contrary, and, if requested, a hearing. The Bankruptcy
Appellate Panel may direct the clerk to refer a disciplinary matter to the
United States Court of Appeals for the Eighth Circuit.34
Appellants did not pursue their motion at oral argument. Counsel for Mr. Sendecky,
on the other hand, did not respond to the motion, deny the allegations, or request a
separate hearing. Without substantiation, Mr. Haefele’s inclusion of such an
allegation in an appellate brief is conduct unbecoming to a member of the bar. As
33
Appellee’s Brief, pg. 3.
34
Local Rule 8018A(b).
12
such, we will sanction Mr. Haefele in the amount of $100.00, such sum to be payable
to Appellants within ten days.
CONCLUSION
The bankruptcy court did not err in finding that debtor Thomas Michael
Sendecky is entitled to a discharge. The bankruptcy court did not abuse its discretion
in denying Appellants’ motion for sanctions. We will grant Appellants’ motion for
sanctions to be imposed on counsel for Mr. Sendecky for his violation of Local Rule
8018A(b).
A true copy.
Attest:
CLERK, U.S. BANKRUPTCY APPELLATE PANEL FOR THE
EIGHTH CIRCUIT
13