IN RE MOSHER

DOUGLAS TICE, Chief Judge, Bankruptcy

Trial on the U.S. Trustee's complaint objecting to debtor's Chapter 7 discharge in bankruptcy was held on January 13, 2005. The court took ruling under advisement. For reasons stated in this opinion, the court will dismiss the complaint and allow debtor to receive his discharge.

Findings of Fact.

Debtor formerly engaged in the activity of building and racing garage fabricated race cars under the name of Ramco Motorsports. To promote his fabricating and racing activities, he maintained an internet website. As recently as October 4, 2003, the website represented debtor to be the owner of Ramco Motorsports. Debtor never incorporated Ramco Motorsports.

In the pursuit of his car racing activities, debtor realized revenues, including small amounts of prize money and advertising on the race cars and website and also incurred expenses.

Debtor filed this chapter 7 bankruptcy case on August 1, 2003. Keith L. Phillips was appointed and continues to serve as debtor's trustee in bankruptcy. The trustee filed a report of no distribution on September 9, 2003, which is a statement that he had found no assets to liquidate.

On October 10, 2003, the trustee wrote a letter to debtor's counsel requesting additional information, including copies of debtor's 2001 and 2002 tax returns, copies of cancelled checks and bank statements and other documents relating to Ranco [Ramco] Motorsports and any debt of debtor to Sharon Bartlett. The trustee stated in the letter that he had received information that debtor's petition might have contained inaccurate or incomplete information. The trustee received no response to this letter or to a followup letter on November 11, 2003.

Debtor's petition misspelled Ramco as Ranco.

In debtor's statement of financial affairs included with his petition he revealed that he had employment income during the preceding two years of $16,000.00 for 2002 plus an additional $1,800.00 of other income also for 2002. In addition, he reported in his statement of financial affairs that in November 2002, he sold a "Mid-Atlantic w/trailer" for $9,500.00 and a "99 Chevy Mone Carlo `02 Monte Carlo w/no motor" for $9,500.00. He further reported that he paid both sums to Sharon Bartlett. Debtor's schedules disclose his possession of "20 junk untitled cars" worth a total of $300.

Debtor testified that the 2002 Monte Carlo was an old car with a 2002 body.

Debtor has never produced records pertaining to Ramco Motorsports or any other financial records except for a summary of debtor's personal checking account for the period from August 21, 2002, to August 25, 2003. For these 13 months, debtor made total deposits to his checking account in 2002 of $16,166.67 and in 2003 of $25,119.36. Also, Debtor has not filed income tax returns for the years 2002 and 2003. There are no title records of the disposed race cars because debtor fabricated the race cars in his garage, and the race cars were not automobiles that could be legally driven on public roadways.

The court reiterates that debtor filed his Chapter 7 petition on August 1, 2003.

On February 5, 2004, the U.S. Trustee filed the complaint in this adversary proceeding, alleging that debtor's discharge in bankruptcy should be denied pursuant to Bankruptcy Code § 727(a)(3) and (a)(5). The gravamen of the complaint relates to debtor's failure to produce records of his racing activities during the years preceding his filing bankruptcy.

Debtor's Trial Evidence.

During trial, the U.S. Trustee examined debtor at length about the deposits into debtor's checking account over the 13 month period and asked whether debtor disclosed the deposits on his bankruptcy schedules. Debtor replied, "I don't understand what you mean by schedules." Transcript, p. 37. Debtor did testify that the deposits were funds from his paychecks, disposals of car racing equipment and money from Sharon Bartlett who was "responsible for half of the household things" including rent and utilities. Transcript, p. 41. The account did not bear Bartlett's name.

Sharon Bartlett testified that she and debtor were decades long friends with a history of providing mutual financial support. She also testified that debtor gave her the sales proceeds of the race cars and in fact sold the race cars so that he could assist her with her medical bills and support following an accident and a stroke. While Bartlett did not provide testimony detailing the exact extent of debtor's race car fabricating and racing activities, she did testify that throughout the decades she had known him, he had always maintained a motley collection of junk cars and car parts and built race cars with his acquaintances.

Debtor testified that he very regularly spent varying amounts of his personal money on the activity, and he likened his expenditures to expenditures anyone would make to maintain a weekend hobby. He testified that he had two transmissions rebuilt and exchanged services from Champion Transmission for the placement of its name on the website and the cars but that no money exchanged hands between debtor and Champion Transmission. Debtor's friends also participated in the activity and made contributions of labor for the fabrication and operation of the race cars. At least one friend drove the race cars in weekend races at a local track.

Discussion and Conclusions of Law.

Section 727 of the Bankruptcy Code allows debtors to receive a general discharge of their debt in keeping with the purpose of bankruptcy law, to give honest debtors a fresh start "unhampered by the pressure and discouragement of preexisting debt." See Farouki v. Emirates Bank Int'l, Ltd., 14 F.3d 244, 249 (4^th Cir. 1994) (quoting Lines v. Frederick, 400 U.S. 18, 19 (1970)). However, provisions enumerated in § 727(a)(1)-(10) prohibit a discharge for those who "play fast and loose with their assets or with the reality of their affairs." See id. (quoting Boroff v. Tully (In re Tully), 818 F.2d 106, 110 (1st Cir. 1987)); First Union Nat. Bank v. Golub (In re Golub), 252 B.R. 69, 75 (Bankr. E.D. Va. 2000).

A leading treatise on bankruptcy law has stated:

The provisions denying a discharge to a debtor are generally construed liberally in favor of the debtor and strictly against the creditor. Courts have noted that "a total bar to discharge is an extreme penalty." The reasons for denial of a discharge must be real and substantial rather than technical and conjectural. However, "[w]hile the law favors discharges in bankruptcy, it will not ordinarily tolerate the [debtor's] intentional departure from honest business practices where there is a reasonable likelihood of prejudice.

See 6 Collier on Bankruptcy, ¶ 727.01[4] (Alan N. Resnick Henry J. Sommer, eds., rev. 2003) (citations omitted).

The U.S. Trustee objects to debtor's discharge in bankruptcy under provisions of Bankruptcy Code § 727(a)(3) and (5), which provide:

(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 or failure to act was justified under all of the circumstances of the case;

. . .

(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;

In a proceeding to deny a debtor's discharge in bankruptcy, Bankruptcy Rule 4005 places the burden on the plaintiff, the U.S. Trustee in the instant adversary proceeding, to prove his objection to debtor's discharge by a preponderance of the evidence. Farouki v. Emirates Bank Intern., LTD, 14 at 249. However, a debtor may be called upon to offer rebuttal evidence once the plaintiff has established a prima facie case. Id. at 249; T.R. Press, Inc. v. Whitcomb (In re Whitcomb), 140 B.R. 396, 398 (Bankr. E.D. Va. 1992).

The U.S. Trustee argues that debtor's discharge should be denied because debtor failed to maintain adequate business records under Bankruptcy Code § 727(a)(3). Relying on debtor's testimony and the testimony of his witness Bartlett at trial, the court finds that debtor's race car fabrication and racing activity was a hobby, not a business. Debtor was not engaged in a profit seeking enterprise. He maintained a website merely to allow fans to interact with the members and to allow sponsors to exchange advertising space for fuel and other car racing needs.

Although it would have been prudent for debtor to have kept some records, given that income and expense were involved, the court does not consider the absence of records fatal to debtor's discharge. The necessity for records will always depend upon the circumstances. Where a debtor engages in a hobby rather than a business, the keeping of business records may not be necessary.See Colliers at P 727.03[3][b] ("[I]n general, consumer debtors have no obligation to keep books"), and [3][f] ("If the occupation or business is of a kind in which persons normally would not keep books or records, failure by the debtor to do so does not bar the discharge); see also Gullickson v. Brown (In re Brown), 108 F.3d 1290, 1295 (10^th Cir. 1997) (debtor not required to keep records of cash sales of antique cars when collecting cars was his hobby and not a business).

Furthermore, records of the race car sales are not necessary to evaluate debtor's financial condition. See Phillips v. Uddin (In re Uddin), 2004 Bankr. Lexis 2084 at *7 (Bankr. E.D. Va. 2004). Bartlett's testimony demonstrates that he sold the race cars and gave her the proceeds to pay for her medical bills and support during her disability. Debtor's schedules disclose the same dispositions. Regarding the deposits, debtor testified that the monies came from employment income, the disposal of race car equipment and from Bartlett who gave him money for household expenses.

The U.S. Trustee also opposes debtor's discharge under Code § 727(a)(5), alleging that debtor failed to explain the loss or deficiency of assets. "The plaintiff has the initial burden of proving the basis for the objection, and if the plaintiff meets this burden the debtor has the opportunity to explain the [loss or deficiency of assets]." In re Uddin at *10-11(citing In re Farouki, 133 B.R. 769, 777 (Bankr. E.D. Va. 1991), aff'd 14 F. 3d 244). As demonstrated in the testimony set out previously, debtor has attempted to explain the deficiency of assets. He disclosed in his schedules the disposition of the race cars and trailer and the disposition of the sales proceeds, and Bartlett's testimony substantiates the information in the schedules. Debtor has provided a reasonable explanation of the disposition of the trailer, race cars and their proceeds that satisfies the court and should satisfy the U.S. Trustee and creditors. In re Uddin at *11(citing In re Farouki at 777).

As mentioned previously, on cross examination, debtor explained that the bank deposits came from paychecks, disposals of race car equipment and money from Bartlett, who shared household expenses.

Conclusion.

In line with the statement quoted above from Collier ¶ 727.01[4], the denial of a debtor's general discharge in bankruptcy is a serious penalty that the court should not impose unless reasonably satisfied by the overall evidence that the debtor has violated a provision of § 727(a). The question is, has the debtor committed acts that justly require denial of discharge? The answer often lies in a broad assessment of the debtor's conduct rather than strict application of the technicalities of the statute.

The principal concern expressed in the trustee's complaint related to possible assets or income derived from debtor's racing activities. Although debtor failed to keep records, the court is satisfied by his evidence surrounding these activities. The only remaining questionable element of the case concerns debtor's explanation of the source of the deposits to his bank account in the months before he filed bankruptcy. Although debtor's explanation of the deposits was not supported by other records, the court concludes here that the trial record does not warrant a denial of debtor's discharge.

Finally, it must be noted that the debtor has only himself to blame for having to defend against a complaint seeking to deny discharge. His failure to maintain any records of a hobby that involved both income and expense, failure to file income tax returns and his reprehensible failure to cooperate with his counsel and the trustee in bankruptcy, more than justified the trustee's initiating this adversary proceeding.

IT IS ORDERED that judgment is entered in favor of debtor Richard A. Mosher. The U.S. Trustee's complaint objecting to debtor's discharge is DISMISSED.