“Cash Is Not a Record”: The Second Circuit’s Re-affirmation that Mental Reconstructions and Lost Papers Do Not Excuse a §727(a)(3) Violation

1. Introduction

The Second Circuit’s summary order in In re Richard Joseph Legenza, No. 23-1322-bk (June 30, 2025) tackles a perennial question in bankruptcy practice: when may a debtor be stripped of the right to discharge because of inadequate record-keeping? Although issued as a non-precedential summary order, the decision sharply reiterates that the privilege of discharge depends on verifiable documentation and that business debtors who operate in cash proceed “at their own risk.”

The dispute grew out of a $58,000 investment that Gina Del Rosario made in Richard Legenza’s black-jack game, “Wild Aces.” After performance under the loan agreement soured, Del Rosario sued in Nevada; Legenza responded by filing chapter 7 in Buffalo. When Del Rosario sought to deny his discharge under 11 U.S.C. §727(a)(3), the Bankruptcy Court granted summary judgment against him, finding that his decision to keep all loan proceeds in cash—and his subsequent loss of the lone “cash journal” during an interstate move—left creditors without any reliable window into his finances. Both the District Court (W.D.N.Y.) and, now, the Second Circuit have affirmed.

2. Summary of the Judgment

• The Circuit reviewed the District Court’s summary-judgment affirmance de novo.
• It agreed that:
  • Del Rosario carried her initial burden of showing the absence of books and records.
  • Legenza failed to offer a legally sufficient justification for that absence.
• Accordingly, denial of discharge under §727(a)(3) stands.

3. Detailed Analysis

3.1 Precedents Cited and Their Influence

• In re Chalasani, 92 F.3d 1300 (2d Cir. 1996) – reaffirmed the policy that discharge is a privilege earned through full financial disclosure.
• In re Cacioli, 463 F.3d 229 (2d Cir. 2006) – fixed the burden-shifting framework under §727(a)(3): creditor proves absence of records; burden shifts to debtor to justify.
• Meridian Bank v. Alten, 958 F.2d 1226 (3d Cir. 1992) – cited for the bankruptcy court’s broad discretion in evaluating “justification.”
• In re Underhill, 82 F.2d 258 (2d Cir. 1936) – longstanding rejection of uncorroborated debtor recollections.
• Lower-court cases (In re Artura, In re Sethi, In re Shapiro) furnished practical illustrations of what constitutes adequate documentation.

While Legenza relied heavily on In re Brenes, 261 B.R. 322 (Bankr. D. Conn. 2001) for a more lenient “business sophistication” test, the Circuit dismissed the argument, noting that a single bankruptcy-court opinion from another district cannot bind the courts of the Second Circuit. The Court therefore applied the stricter Chalasani–Cacioli standard.

3.2 The Court’s Legal Reasoning

1. Statutory Hook
   Section 727(a)(3) denies discharge where a debtor “has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information … unless such act or failure to act was justified under all of the circumstances.”
2. Undisputed Failure to Preserve
   – Debtor admitted having no bank statements tracing Del Rosario’s funds.
   – The sole “cash journal” disappeared during a cross-country move.
   – No electronic backup existed.
3. No Adequate Justification
   – Operating wholly in cash is a voluntary choice that magnifies record-keeping duties.
   – The amount at issue ($58k principal; $70k acknowledged debt) exceeded a “nominal” sum.
   – Entrusting original financial papers to movers without duplication was unreasonable.
   – “Mental reconstruction” conflicts with the statutory objective of verifiable data.
4. Summary-Judgment Fit
   Because all material facts (loss of records, absence of backups) were uncontested, the question was purely legal: does that failure bar discharge? The court held yes.

3.3 Potential Impact of the Decision

Although labeled “Summary Order” and therefore non-precedential under Second Circuit Local Rule 32.1.1, the opinion has persuasive force and sends several clear signals:

• Cash-Heavy Ventures Beware – Debtors running cash businesses must create parallel documentation (e.g., duplicate ledgers, scanned receipts, periodic deposits) or risk denial of discharge.
• Loss-of-Records Excuses Narrowed – Fire, theft, or moving mishaps will not automatically satisfy the “justification” prong without evidence of preventive measures (back-ups, insurance, off-site storage).
• Reliance on Memory Rejected – Courts remain hostile to post-hoc, narrative reconstructions unsupported by contemporaneous writings.
• Uniformity Across Districts – By declining to adopt the Brenes test, the Circuit underscores that leniency based on “small-business unsophistication” is limited in this circuit.

4. Complex Concepts Simplified

5. Conclusion

The Second Circuit’s decision in In re Legenza squarely reinforces a straight-forward but often overlooked message: bankruptcy relief is contingent on reliable, tangible records. Debtors who elect informal, cash-based operations or fail to safeguard their paperwork do so at great peril. Even where the debtor’s narrative seems plausible, the absence of verifiable documentation—or reasonable efforts to preserve it—will outweigh equitable sympathy. Future litigants should treat this case as a cautionary tale and implement robust record-keeping protocols long before financial distress arises.