ROBERT MAYER, Bankruptcy Judge
THIS CASE is before the court on the complaint of M. Aman Sulaimani objecting to the discharge of the debtor, William L. Hall. For the reasons stated in this memorandum opinion, the complaint will be dismissed and the debtor will be granted a discharge.
Background
William L. Hall filed a voluntary petition in bankruptcy pursuant to chapter 7 of the United States Bankruptcy Code in this court on June 18, 2003. This adversary proceeding was filed on September 22, 2003. In his complaint, Sulaimani alleges that Hall should be denied a discharge under section 727 (a)(3) for concealment and failure to preserve financial records and under section 727(a)(5) for failure to explain and/or disclose the loss of assets.
The complaint also contained a § 523(a)(2)(A) count. On May 25, 2004, the Court granted summary judgment to the defendant on the basis of collateral estoppel.
Sulaimani is listed as a unsecured creditor on Schedule F. The amount of the claim is listed at $265,000 and arises from a suit brought in the Circuit Court of the City of Alexandria. In that case, the motion for judgment was based on three counts: breach of contract, fraud and conversion. The circuit court found for the defendants on the breach of contract and the fraud count and for the plaintiff in the amount of $265,000 as to conversion.
The suit was brought against Susan L. Hall, William Hall, Hansan Lee Trading Corp., and Europa Salon. The suit was stayed as to Susan Hall because she filed for bankruptcy on June 13, 2002.
The breach of contract claim was dismissed on the defendants' motion to strike. The conversion and fraud counts were the only two counts sent to the jury.
Sulaimani met Susan Hall, William Hall's wife, approximately nine years ago at a dry cleaners located at 806 King Street, Alexandria, Virginia, where Mrs. Hall used to work. Mrs. Hall testified in her de bene esse deposition that in May, 2001, Sulaimani approached her indicating that he had money to loan. At that time Mrs. Hall did not need money but took Sulaimani's phone number. In August, 2001, she contacted Sulaimani to borrow money because she and Hall had recently separated. Her agreement with Sulaimani was that for every $20,000 he lent her she would pay him $600 a month in interest. Mrs. Hall continued to borrow money from Sulaimani until around March, 2002, when one of her checks was returned for insufficient funds. She was hospitalized at the time, having been diagnosed with brain cancer. The loan arrangement was never formally documented until April, 2002, when Sulaimani visited Mrs. Hall in the hospital and had her sign a promissory note. In total, Mrs. Hall borrowed approximately $265,000.
It is not clear how Mrs. Hall spent the $265,000 she borrowed from Sulaimani. However, the joint tax return for 2001 showed gambling winnings and losses of $161,000. Gambling losses are deductible only to the extent of gambling winnings. Consequently, the actual gambling losses may have exceeded those claimed as a deduction on the tax returns.
All loans made by Sulaimani to Mrs. Hall were made while the Halls were separated. They were living apart and had a signed separation agreement. Sulaimani knew of the separation because he rented a room to Mrs. Hall. As part of the Hall's separation, Hall agreed to sell his one half ownership interest in Europa Salon to Mrs. Hall for $35,000 to be paid in monthly installments. This agreement was made in August 2001. After signing the agreement, Mr. and Mrs. Hall went to Virginia Commerce Bank, the bank where Europa Salon had its checking account, and removed his name from the Europa Salon bank account. He also went to see the landlord of the business premises of Europa Salon to remove his name from the lease. The landlord agreed to accept payment from Mrs. Hall but refused to allow Hall to remove his name from the lease. After Hall agreed to sell his interest in the salon to Mrs. Hall, he did not hold himself out as an owner of the salon. He no longer worked at the salon or accepted or deposited money on behalf of the salon. After Mrs. Hall defaulted on her payments to him in December, 2001, Hall became involved in the salon's operations. However, he did not become a signatory on the bank account, greet customers or hold himself out as a owner. He testified that his role was more of an advisory role. He made sure the bills were getting paid on time.
A final decree of divorce was entered shortly after Mrs. Hall's death. Hall was not aware of her death when the decree was entered.
The court finds Hall's testimony that he signed a signatory card to remove his name from the account credible. The plaintiff did not put on evidence to rebut this testimony.
Position of Parties
Sulaimani asserts that Hall has not fairly accounted for the money that he loaned Mrs. Hall through March, 2002. He alleges that the monies loaned were funneled into Europa Salon and since Hall was a partner in the salon he is required to account for the money. Sulaimani argues that Hall should be denied a discharge because he received $265,000 of his money and ran the money through the bank account for Europa Salon in order to conceal the location of the assets.
Hall asserts that he has not concealed any assets, failed to preserve recorded information or failed to disclose or account for a loss of assets. He asserts that he provided all his financial information to the plaintiff. He subpoenaed the financial records for Europa Salon and of his late wife.
Discussion
The purpose of granting a debtor a discharge is to give the debtor a "fresh start." The burden of proof is on the objecting party in a complaint objecting to discharge of a debtor, and the objecting party must meet this burden by a preponderance of the evidence. See Farouki v. Emirates Bank Int'l, Ltd. ( In re Farouki), 14 F.3d 244 (4th Cir. 1994). Once the objecting party establishes a prima facie case, the burden shifts to the debtor to provide satisfactory evidence to rebut the allegations. Id. at 249. Without credible evidence the debtor cannot prevail. Id. at 250. In the present case, Sulaimani asserts that the debtor should be denied a discharge under § 727(a)(3) for soliciting investments, failing to maintain adequate records, and/or engaging in intentional activity to conceal the financial dealings, and under § 727(a)(5) for failing to account for the $265,000 plaintiff loaned Mrs. Hall, the proceeds received from the sale of Hall's Alexandria, Virginia townhouse, and the proceeds from the sale of a single family home located in Richmond, Virginia. § 727(a)(3)
To the extent that Sulaimani argues that Hall must account for the proceeds from these properties, there was no evidence that Sulaimani's money was invested in either the Alexandria or Richmond properties. Hall did provide the settlement statement for both properties which state that he received $83,385 in net proceeds. Hall received $78,844.45 in net proceeds from the sale of the Alexandria townhome. He adequately accounted for these proceeds. See Defendant's exhibit 49.
A court may deny a debtor a discharge if "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." 11 U.S.C. § 727(a)(3). In order for a plaintiff to maintain an objection under § 727(a)(3) the plaintiff must show
(1) either a failure by the debtor to keep or preserve any recorded information, or an act of destruction, mutilation, falsification, or concealment of any recorded information; and (2) that by failure to keep such records or the act complained of it is impossible to ascertain the financial condition and material business transactions of the debtors.
In re Golob, 252 B.R. 69, 76-77 (Bankr.E.D.Va. 2000) (Tice, C.J.). If the plaintiff shows that the debtor breached his duty to preserve his books and records for the benefit of creditors, the debtor then must show facts and circumstances to justify the lack of records.
Id. at 76;
See 6 Collier on Bankruptcy, ¶ 727.03[1]. A failure to do so should result in a discharge being denied.
Id. The obligation of the debtor under this section is to present books and records that enable the creditors to determine or confirm the cause of the debtor's financial troubles.
See In re Golob, 252 B.R. at 76;
See 6 Collier on Bankruptcy, ¶ 727.03[3][a]. The records are not required to be in any particular form, however, they must be sufficient to allow creditors to ascertain the debtor's present financial condition and follow his business transactions for a reasonable period.
See 6 Collier on Bankruptcy, ¶ 727.03[3][a].
In the present case, Hall did keep books and records of his financial affairs. They consisted of bank statements, tax returns and other ordinary documentation. In addition, he subpoenaed and provided the bank records of Europa Salon and Susan Hall. Furthermore, he provided their joint tax returns for 2001 and 2002 and the tax returns of Europa Salon for 2001, 2002 and 2003. The court finds that the plaintiff did not meet his burden in proving that the debtor has failed to provide or concealed his financial records from his creditors. The court finds that the actions and records maintained or provided by Hall are adequate and his financial condition can be reasonably ascertained from such records. The additional records reflect that he never received any portion of the money loaned to Mrs. Hall.
Hall never had actual or constructive possession of the money loaned by Sulaimani to Mrs. Hall. In fact, the loan checks were made payable to Mrs. Hall. He is not required to maintain records for money loaned to his estranged wife or to account for it. To the extent that the loans were deposited in Europa's checking account, the records presented, especially the tax returns and the bank statements, reasonably account for the operations of Europa. Any other loan proceeds deposited to Europa's account were not used by Europa, were not Europa's money and were withdrawn by Mrs. Hall and used by her for her own purposes. Hall was not involved in those transactions. § 727(a)(5)
Section 727(a)(5) of the Bankruptcy Code states that the Court shall grant a debtor a discharge unless:
the debtor had failed to explain satisfactorily, before the determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor's liabilities.
11 U.S.C. § 727(a)(5). Once the objecting creditor has identified the missing asssets, the debtor must then satisfactorily explain the loss or deficiency of assets. "The explanation must be reasonable and credible so as to satisfy the court that the creditors have no cause to wonder where the assets went."
In re Farouki, 133 B.R. 769, 777 (Bankr.E.D.Va. 1991),
aff'd by Farouki v. Emirates Bank International, Limited, 14 F.3d 244 (4th Cir. 2004). The debtor must provide the court with documentary evidence to support his testimony as to the loss or disposition of assets.
Id.;
See Chalik v. Moorefield (
In re Chalik),
748 F.2d. 616, 619 ("Vague and indefinite explanations of losses that are based upon estimates uncorroborated by documentation are unsatisfactory.").
In the present case, Sulaimani asserts that Hall has not satisfactorily explained where the money he loaned Mrs. Hall went. Hall did not borrow the money from the plaintiff; his estranged wife did. During the period, Mrs. Hall borrowed the money, she and Hall were separated and had executed a separation agreement. There was no evidence that the monies loaned to Mrs. Hall were in any way assets of Hall and, therefore, he should not be held accountable for the loss of those assets. This bankruptcy is a personal bankruptcy. It is neither a joint bankruptcy with Mrs. Hall nor the bankruptcy of Europa Salon. Hall is responsible for identifying his assets and explaining the loss of those assets. To the extent Hall had any obligation to account for the use of the loans, he did so: Mrs. Hall received the proceeds. After that point, Hall is not required to account for his estranged wife's use of the money.
In the present case, Hall provided all the applicable bank and tax records to the creditor. Furthermore, he satisfactorily explained his role in the business and the exchange of money between him and Mrs. Hall. Sulaimani's money was loaned to Mrs. Hall during a time when Sulaimani knew of her separation from Mr. Hall.
Conclusion
The money Sulaimani loaned Mrs. Hall was for her benefit. Sulaimani knew that he was lending money to her, not to Hall or to Europa Salon. In fact, Sulaimani made the checks payable to Mrs. Hall and not to Europa. At the time he loaned the money, Sulaimani knew that Mrs. Hall and Hall were separated. In these circumstances, Hall is not responsible for the debts of his estranged wife and does not have to account for Sulaimani's money, only his personal assets. The court finds that Hall has fairly accounted for his assets. The complaint will be dismissed.