Harrington v. Simmons

United States Court of Appeals
For the First Circuit
No. 15-9005
IN RE MICHAEL J. SIMMONS,
Debtor.
___________________
WILLIAM K. HARRINGTON,
Trustee, Appellee,
v.
MICHAEL J. SIMMONS,
Debtor, Appellant.
APPEAL FROM THE BANKRUPTCY APPELLATE PANEL
FOR THE FIRST CIRCUIT
Before
Lynch, Circuit Judge,
Souter,* Associate Justice,
and Selya, Circuit Judge.
James P. Ehrhard for appellant.
Sumi K. Sakata, Trial Attorney, with whom Ramona D. Elliott,
Deputy Director/General Counsel, Executive Office for United
States Trustees, U.S. Department of Justice, P. Matthew Sutko,
Associate General Counsel, William K. Harrington, United States
Trustee, and Richard T. King, Assistant United States Trustee,
were on brief, for appellee.
January 20, 2016
__________
*Hon. David H. Souter, Associate Justice (Ret.) of the Supreme
Court of the United States, sitting by designation.
SELYA, Circuit Judge. In exchange for a fresh start, a
debtor must paint a basic picture of his financial condition and
satisfactorily explain the disposition of his assets during the
period leading up to the filing of his bankruptcy petition. Here,
the bankruptcy court pronounced the debtor's lack of documentation
"shocking and disturbing" and found that he had not satisfactorily
explained the disposition of his assets. Consequently, the court
denied the debtor a discharge. The Bankruptcy Appellate Panel for
the First Circuit (the BAP) upheld this decision. See Harrington
v. Simmons (In re Simmons), 525 B.R. 543, 549 (B.A.P. 1st Cir.
2015). After careful consideration, we affirm.
I. BACKGROUND
In chapter 7 liquidation proceedings, an individual
debtor may receive a discharge that absolves him from virtually
all debts that arose before the bankruptcy case commenced.1 See
11 U.S.C. § 727(a). Nevertheless, certain behavior may preclude
the granting of a discharge. Two types of preclusive behavior are
relevant here. For one thing, the bankruptcy court may deny a
discharge if:
the debtor has concealed, destroyed, mutilated,
falsified, or failed to keep or preserve any recorded
information . . . from which the debtor's financial
condition or business transactions might be ascertained,
1
We say "virtually" because certain debts, excepted by statute,
are non-dischargeable. See 11 U.S.C. § 523(a). This case does
not require us to delve into these exceptions.
- 3 -
unless such act or failure to act was justified under
all of the circumstances of the case . . . .
Id. § 727(a)(3). For another thing, the bankruptcy court may deny
a discharge if:
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 . . . .
Id. § 727(a)(5).
In chapter 7 proceedings, the United States Trustee (the
Trustee) may be heard on any issue. See id. § 307; see also In re
Youk-See, 450 B.R. 312, 323 (Bankr. D. Mass. 2011) (explaining
that the Trustee "protect[s] the integrity of the bankruptcy
system"). The Trustee is specifically authorized to object to the
granting of a discharge in a chapter 7 case. See 11 U.S.C.
§ 727(c)(1).
Against this statutory backdrop, we proceed to the case
at hand. Michael J. Simmons (the debtor) became involved in the
real estate business around 1997. He left college before
completing his degree to work in the real estate business with an
individual named Kai Kunz. The debtor initially helped fund Kunz's
own real estate investments but, by around 2006, he was identifying
properties to purchase for his own account, obtaining financing,
and hiring property managers. By 2007, he had acquired 27 rental
properties in communities throughout Massachusetts.
- 4 -
For aught that appears, the debtor took title to the
properties in his own name and signed all the pertinent loan
documents. He hired managers to oversee the properties and collect
rents. At least some of the rents were deposited into accounts
maintained by the debtor or his managers, but the accounts were
never segregated by tenant. Overall, the properties generated
rents that appear to have been the debtor's sole source of income.
On November 15, 2010, the debtor filed a chapter 7
bankruptcy petition, seeking to discharge, inter alia, nearly
$3,500,000 in unsecured debt. In due course, the debtor filed his
schedules of assets and liabilities and his statement of financial
affairs. These filings revealed that the debtor by then retained
an interest in only five properties (all of which he intended to
surrender to lenders). The vast majority of the debtor's unsecured
debt was described as deficiencies on various mortgages or
deficiencies arising after the foreclosure of multiple properties.
The filings also showed that the debtor was unemployed, that he
reportedly had no income from 2008 to 2010, and that he depended
on family members for support. His bank account balances were
close to zero, and he disclaimed possession of any other assets of
value.
The Trustee requested that the debtor furnish further
documentation relating to his real estate holdings and his overall
financial condition (including bank account statements, canceled
- 5 -
checks, and state and federal income tax returns). In response,
the debtor produced copies of his federal tax returns for the years
2007, 2008, and 2009. Each return reflected income and loss from
only one property. No information pertaining to other rental
properties was produced.
When the Trustee later deposed the debtor, he discovered
that the debtor had owned a total of 27 separate rental properties
during the years immediately preceding the filing of his bankruptcy
petition. The debtor professed an inability to recall any
meaningful detail regarding the disposition of his rental income.
He testified that 22 of the properties had been transferred through
short sales or foreclosures prior to his filing for bankruptcy,
but he did not provide any details about the ultimate disposition
of these properties.
Following the deposition, the Trustee again demanded
that the debtor produce rent rolls and ledgers showing how much
rent he had collected, together with documentation explaining
where the collected rents and his other assets had gone. The
debtor provided no responsive documents, and several more document
requests also went begging.
Frustrated by this apparent stonewalling, the Trustee
instituted an adversary proceeding against the debtor, seeking to
deny him a discharge. In due season, the Trustee moved for summary
judgment. At that point, the debtor surrendered some additional
- 6 -
records — but this document dump was disorganized and omitted the
most critical information sought by the Trustee. No rent rolls,
ledgers, bank statements, or other records showing itemized
accounts of either rental proceeds or real estate transactions
were forthcoming. Withal, the debtor opposed summary judgment
arguing that he had given the Trustee all the documents that he
either possessed or could reasonably obtain.
The Trustee pressed his summary judgment motion. The
bankruptcy court granted the Trustee's motion and denied a
discharge on two grounds: it concluded that the debtor had violated
both 11 U.S.C. § 727(a)(3) and 11 U.S.C. § 727(a)(5). When the
debtor appealed, the BAP upheld the denial of the discharge on
both grounds. See In re Simmons, 525 B.R. at 549. This timely
second-tier appeal ensued.
II. ANALYSIS
A two-tiered framework exists for appellate review in
bankruptcy cases:
Under this framework, litigants in the ordinary case
must first appeal to the district court (or, in some
circuits, a bankruptcy appellate panel). See 28 U.S.C.
§ 158(a)-(b); Brandt v. Repco Printers & Lithographics,
Inc. (In re Healthco Int'l, Inc.), 132 F.3d 104, 107
(1st Cir. 1997). The courts of appeals are then
available as a second tier of appellate review. See 28
U.S.C. § 158(d)(1); Stornawaye Fin. Corp. v. Hill (In re
Hill), 562 F.3d 29, 32 (1st Cir. 2009).
City Sanit., LLC v. Allied Waste Servs. of Mass., LLC (In re Am.
Cartage, Inc.), 656 F.3d 82, 87 (1st Cir. 2011). "We accord no
- 7 -
special deference to determinations made by the first-tier
appellate tribunal but, rather, train the lens of our inquiry
directly on the bankruptcy court's decision." Wheeling & Lake
Erie Ry. Co. v. Keach (In re Montreal, Me. & Atl. Ry., Ltd.), 799
F.3d 1, 5 (1st Cir. 2015). We afford de novo review to that
decision. See Razzaboni v. Schifano (In re Schifano), 378 F.3d
60, 66 (1st Cir. 2004).
Federal Rule of Bankruptcy Procedure 7056 incorporates
Federal Rule of Civil Procedure 56 as the mechanism for
adjudicating summary judgment motions. The moving party (here,
the Trustee) must show that "there is no genuine dispute as to any
material fact and [he] is entitled to judgment as a matter of law."
Fed. R. Civ. P. 56(a). Within this rubric, an issue is "genuine"
"if the record permits a rational factfinder to resolve that issue
in favor of either party." Jarvis v. Vill. Gun Shop, Inc., 805
F.3d 1, 7 (1st Cir. 2015). A fact is "material" "if its existence
or nonexistence has the potential to change the outcome of the
suit." Id. (quoting Borges ex rel. S.M.B.W. v. Serrano-Isern, 605
F.3d 1, 5 (1st Cir. 2010)). Establishing a genuine issue of
material fact requires evidence that is "significantly probative."
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986).
"[C]onclusory allegations, improbable inferences or unsupported
speculation" will not suffice. In re Schifano, 378 F.3d at 66.
- 8 -
With respect to issues on which the non-movant would
bear the burden of proof at trial, the non-movant (here, the
debtor) must adduce sufficient evidence to permit the trier of
fact to resolve that issue in his favor. See Serrano-Isern, 605
F.3d at 5. If the non-movant fails to make the required showing
on such an issue and the issue is a dispositive one, summary
judgment is appropriate. See id.We turn now from the general to the specific. In
granting summary judgment, the bankruptcy court determined that
the undisputed facts established two separate and independently
sufficient grounds for denying the debtor a discharge. We examine
each ground separately, mindful that the bankruptcy court's
judgment should be upheld so long as either ground is valid. See
Beaubouef v. Beaubouef (In re Beaubouef), 966 F.2d 174, 177 (5th
Cir. 1992).
A. 11 U.S.C. § 727(a)(3).
We start with 11 U.S.C. § 727(a)(3). Every debtor has
a duty to maintain books and records accurately memorializing his
business affairs. See Peterson v. Scott (In re Scott), 172 F.3d
959, 969 (7th Cir. 1999). Section 727(a)(3) operates in
furtherance of this duty: by virtue of the statute, a bankruptcy
court may deny a discharge to a debtor who has failed to "keep or
preserve" adequate business records "from which the debtor's
financial condition or business transactions might be
- 9 -
ascertained." Congress's evident purpose in enacting section
727(a)(3) was to give interested parties and the court a reasonably
complete picture of the debtor's financial condition during the
period prior to bankruptcy. See Tucker v. Devine (In re Devine),
11 B.R. 487, 488 (Bankr. D. Mass. 1981).
A party who desires to invoke section 727(a)(3) must
make a prima facie showing that the debtor has failed to maintain
adequate records. See CM Temp. Servs., Inc. v. Bailey (In re
Bailey), 375 B.R. 410, 415 (Bankr. S.D. Ohio 2007). Record-keeping
need not be precise to the point of pedantry: records can be
adequate without being textbook models. The operative standard is
functional: a debtor's records must "sufficiently identify the
transactions [so] that intelligent inquiry can be made of them."
In re Schifano, 378 F.3d at 69 (quoting Meridian Bank v. Alten,
958 F.2d 1226, 1230 (3d Cir. 1992)) (alteration in original). The
standard is an objective one. A debtor's records may be judged
deficient under section 727(a)(3) even if the debtor did not intend
to conceal financial information, see State Bank of India v. Sethi
(In re Sethi), 250 B.R. 831, 837 (Bankr. E.D.N.Y. 2000), or
harbored an honest belief that he did not need to keep records,
see Miller v. Pulos (In re Pulos), 168 B.R. 682, 692 (Bankr. D.
Minn. 1994).
Here, the debtor kept virtually no records in connection
with his 27 income-producing properties. The gaps in documentation
- 10 -
are as pervasive as they are disturbing. There is a total absence
of information regarding the amount of rent the debtor received
each month; a dearth of bank statements tracing the flow of rent
proceeds; and a general absence of documentation regarding income
earned from or expenses paid in connection with any of the debtor's
properties. There is a similar lack of documentation concerning
the acquisition, financing, and disposition of the properties.
What records there are do not permit intelligent inquiry into the
debtor's finances. Indeed, it is fair to characterize the debtor's
real estate dealings as a black hole.
Faced with this black hole, the debtor does not gainsay
his failure to maintain adequate business records. Nor does he
assert that he supplied sufficient documentation from which the
Trustee might have ascertained his financial condition. Rather,
his sole argument is that his failure to keep and preserve records
was justified by extenuating circumstances. This is a
justification defense, and we treat it as such.
To be sure, section 727(a)(3) explicitly allows for a
justification defense; and there are some situations in which
courts have found a debtor's failure to keep and preserve records
justified. See, e.g., Lansdowne v. Cox (In re Cox), 41 F.3d 1294,
1298-1300 (9th Cir. 1994) (upholding finding of justification when
debtor-wife reasonably relied on husband to keep records); Floret,
L.L.C. v. Sendecky (In re Sendecky), 283 B.R. 760, 764 (B.A.P. 8th
- 11 -
Cir. 2002) (upholding finding of justification for incomplete
records because debtor was poorly educated, unsophisticated, and
had little business experience); Hunter v. Kinney (In re Kinney),
33 B.R. 594, 596-97 (Bankr. N.D. Ohio 1983) (finding justification
where debtor's records were "irretrievably lost" through no fault
of his own). But the debtor has the burden of proving
justification, see Meridian Bank, 958 F.2d at 1234, and his ability
to prevail on such a defense turns on whether his asserted
justification is objectively reasonable, see In re Schifano, 378
F.3d at 68. The standard is that of a reasonably prudent person
in the same or similar circumstances. See Meridian Bank, 958 F.2d
at 1231.
Myriad factors may inform this inquiry, including the
debtor's education, experience, and sophistication; the volume and
complexity of the debtor's business; and whatever other
circumstances are made relevant by the idiosyncrasies of the case.
See id. at 1231.
In this instance, the bankruptcy court concluded that
the relevant factors militated strongly against a finding that the
debtor had acted as a reasonably prudent real estate owner. It
noted that the debtor was an experienced investor who had some
college education. He had left college for the specific purpose
of working in the real estate business with Kunz and had branched
out from there. He had been dealing in real estate for several
- 12 -
years. The volume of his business was substantial: he had amassed
a total of 27 properties. Importantly, he had borrowed millions
of dollars to finance the acquisition of properties. And at any
rate, the debtor's status as a taxpayer and borrower presumably
compelled him to keep such records.
Given these historical facts, we think it nose-on-the-
face plain that any reasonable property owner would have kept and
preserved documentation detailing income, expenses, and property
dispositions. The debtor's only asserted justification for
failing to keep even the most rudimentary financial records is
that he "was nothing more than a dupe for managers (such as Kai
Kunz)" and "he was manipulated and victimized by those who created
and controlled the documentation." But these bald assertions
(proffered without any specifics) are not enough to relieve the
debtor of responsibility for his abject record-keeping.2 After
all, "factually unsupported claims [and] defenses" are
insufficient to withstand summary judgment. Celotex Corp. v.
Catrett, 477 U.S. 317, 323-24 (1986); see Aponte-Rosario v.
Acevedo-Vilá, 617 F.3d 1, 12 (1st Cir. 2010) (explaining that
2
At oral argument in this court, the debtor suggested that a
trial would have fleshed out these assertions. But the record
offers no indication that the debtor made any effort to undertake
discovery. Nor did he request that the bankruptcy court postpone
adjudication of the summary judgment motion until he could obtain
more information. See Fed. R. Civ. P. 56(d). The case law makes
clear that such inaction has consequences. See Nieves-Romero v.
United States, 715 F.3d 375, 382 (1st Cir. 2013).
- 13 -
"general allegations" lacking specificity cannot survive summary
judgment).
The debtor's unsupported claim that he was a "dupe" does
not save the day. A debtor cannot shirk his statutory duty under
section 727(a)(3) by the simple expedient of claiming conclusorily
that he was merely a pawn for someone else. At least in the
absence of proof of special circumstances (not present here), such
a claim is not an objectively reasonable justification for a
commercial property owner's failure to keep and maintain any
semblance of adequate records.3
That ends this aspect of the matter. We hold, without
serious question, that even when the facts of record are taken in
the light most hospitable to the debtor, they do not form a
predicate sufficient to allow him to carry his burden of proving
justification. The debtor argues that such a holding amounts to
a rule of strict liability for a failure to keep and preserve
records. That argument is misguided. We hold only that a
discharge may be denied where, as here, the debtor fails, without
any objectively reasonable justification, to keep and preserve
records.
3
In all events, the debtor's claim that he was a "dupe" is
open to serious question. For example, he was able to name each
of the 27 properties (citing street addresses and facts concerning
mortgage financing).
- 14 -
To say more would be to paint the lily. It follows from
what we already have said that the bankruptcy court's entry of
summary judgment and its concomitant denial of a discharge based
on 11 U.S.C. § 727(a)(3) was appropriate.
B. 11 U.S.C. § 727(a)(5).
The second ground that underlies the bankruptcy court's
decision is equally firm. Section 727(a)(5) authorizes the
bankruptcy court to deny a discharge when a debtor has experienced
a loss of assets or some other deficiency that the debtor cannot
satisfactorily explain. See Aoki v. Atto Corp. (In re Aoki), 323
B.R. 803, 817 (B.A.P. 1st Cir. 2005). A burden-shifting framework
applies: if the party seeking to thwart a discharge shows that the
debtor has not accounted for previously owned assets or previously
earned income, the burden shifts to the debtor to explain the
deficiency. See id. The debtor's explanation "must be supported
by at least some corroboration," and it "must be sufficient to
eliminate the need for any speculation as to what happened to all
of the assets." Id. Something more than vague allusions is
required. See id.To invoke section 727(a)(5), it is unnecessary to show
that the debtor has acted fraudulently or in bad faith. See id.Rather, the issue turns on whether a satisfactory explanation is
— or is not — forthcoming.
- 15 -
In this case, the Trustee plainly carried his initial
burden. First, he showed that numerous pieces of property, once
owned by the debtor, are no longer included in his schedule of
assets. Second, he showed that the rents from those properties
had not been accounted for. The record demonstrates that the
debtor owned 27 income-producing properties; that he received rent
from at least some of these properties in the two years leading up
to his bankruptcy filing; and that he could not account for either
the disposition of the 22 properties that he no longer owns or his
rental income.
Given this prima facie showing, the burden shifted to
the debtor to explain his loss of assets. The bankruptcy court
found that the debtor had wholly failed to account for either the
disposition of the properties that he formerly had owned or for
the rental income that his properties had generated. Moreover,
the court found that the debtor had not offered any coherent
explanation for the dissipation of his assets. The hodge-podge of
records that the debtor ultimately provided were not only unlabeled
and disorganized but also proved inadequate to illuminate any of
the relevant issues.
The bankruptcy court's findings are unimpugnable. The
debtor has never submitted anything remotely resembling a
satisfactory explanation for the loss of millions of dollars in
assets.
- 16 -
In an effort to paper over the lack of a satisfactory
explanation, the debtor once again asserts that he was a mere
"dupe" who produced all the information in his possession. This
assertion provides no explanation at all, much less one that would
satisfy the strictures of section 727(a)(5). We — like the courts
below — are left entirely in the dark as to what happened to the
debtor's considerable assets. We hold, therefore, that the
bankruptcy court did not err in granting the Trustee's motion for
summary judgment and thus denying the debtor a discharge under 11
U.S.C. § 727(a)(5).
III. CONCLUSION
We need go no further. A debtor need not keep and
preserve meticulously detailed records in order to secure a
discharge in bankruptcy. Nor must a debtor provide an infinitely
detailed explanation of where his money and property have gone.
But the debtor must keep and preserve records containing enough
information to paint a reasonably clear picture of his finances
during the period leading up to the filing of his bankruptcy
petition. He also must offer some satisfactory explanation for
apparent losses and deficiencies. In this case, the debtor has
not been able to cross this low threshold — and he has offered no
legally objectively reasonable justification for his failure.
Affirmed.
- 17 -