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In re Rojas
Not for Publication
MEMORANDUM DECISION
PETER W. BOWIE, Bankruptcy Judge
Plaintiff renews its motion for summary judgment on its complaint to deny debtor's discharge under Bankruptcy Code sections 727 (a) (3) and (a) (5).
This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California. This is alleged to be a core proceeding under 28 U.S.C. § 157(b) (2) (A) & (I).
DISCUSSION
Prior to filing this case Christina Rojas (Debtor) operated two primary businesses as d.b.a.'s. From 1993 through 2007 she operated a tour company called Aventura Artistica. From 2001 through 2007 she ran an art gallery called Sealight Gallery. On August 30, 2007 she filed the petition beginning this case. From 2004 through 2007, the years focused on by the United States Trustee (Plaintiff), Debtor ran the businesses and, it appears, also her personal finances through from four to seven bank accounts. The activity of the accounts forms the basis of Plaintiff's motion.
Before the Court is Plaintiff's renewed request for summary judgment under Bankruptcy Code sections 727(a) (3) and 727(a) (5). The Court denied the prior motion because, the reams of paper notwithstanding, Plaintiff had not provided competent evidence to support its prima facie case under either section. The Court explained that based upon the case law it was not enough to simply attach the documents - Plaintiff had to provide testimony of a forensic accountant or other qualified witness establishing one of the following: With respect to (a) (3)
"I [the accountant] have reviewed the books and records Debtor has provided, and they are inadequate in the following particulars, or I could not reasonably reconstruct the Debtor's financial activities for a reasonable period of time because the following kinds of records are missing that would normally be kept by somebody doing that kind of business. That's what Wright talked about... The Juzwiak case... had two expert accountants. I don't have any of that." (Transcript at 17:7-17);
or, with respect to (a) (5)
"The core premise is that a certain amount of assets existed at a certain point in time. I counted up the deposits, and I counted up the cash advances, and those totals equal the following numbers, and, therefore... "I've got competent evidence establishing that number, that may be sufficient in and of itself." (Transcript at 18:4-20).
The Court went on to explain that until such a prima facie case was established, the Debtor had no obligation to do more than simply deny Plaintiff's assertions. Transcript at 18:22-19:5.
The Court has reviewed the voluminous papers submitted in support of this renewed motion and finds that they suffer the same infirmity - Plaintiff simply has not provided competent evidence to support its prima face case under either section 727 (a) (3) or (a) (5)
Section 727 (a) (3)
Section 727(a) of the Bankruptcy Code provides that a debtor is entitled to discharge unless one of eight conditions is met. Section 727(a) (3) provides that the court shall grant the debtor's discharge unless:
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 the circumstances of the case.
The Ninth Circuit recently explained:
We have stated that the purpose of § 727(a) (3) is to make discharge dependent on the debtor's true presentation of his financial affairs. The disclosure requirement removes the risk to creditors of "the withholding or concealment of assets by the bankrupt under cover of a chaotic or incomplete set of books or records." The statute does not require absolute completeness in making or keeping records. Rather, the debtor must "present sufficient written evidence which will enable his creditors reasonably to ascertain his present financial condition and to follow his business transactions for a reasonable period in the past." This exception to dischargeability, however, "should be strictly construed in order to serve the Bankruptcy Act's purpose of giving debtors a fresh start."
A creditor states a prima facie case under § 727(a) (3) by showing "(1) that the debtor failed to maintain and preserve adequate records, and (2) that such failure makes it impossible to ascertain the debtor's financial condition and material business transactions.'" After showing inadequate or nonexistent records, "the burden of proof then shifts to the debtor to justify the inadequacy or nonexistence of the records."
In re Caneva , 550 F.3d 755, 761 (9th Cir. 2008) (citations omitted).
This is Plaintiff's motion for summary judgment. Thus, the first step is to determine whether Plaintiff has established a prima facie case by demonstrating that (1) that the debtor failed to maintain and preserve adequate records, and (2) that such failure makes it impossible to ascertain the debtor's financial condition and material business transactions.
Plaintiff has obviously spent a great deal of time organizing the numerous documents the Debtor and Debtor's banks have provided. Plaintiff has also apparently explained to Debtor that it is unable to figure out Debtor's business dealings from her records. However, as the Court explained at the hearing on the prior motion, that is not sufficient. Plaintiff has not provided the Court with any competent evidence that Debtor's records are inadequate or that her financial condition is impossible to ascertain.
In the cases cited by Plaintiff, evidence on these points was provided. In Caneva the debtor admitted that he kept no records. 550 F.3d at 759. In Matter of Juzwiak, the plaintiff provided two expert accountants who, after reviewing the debtor's records, declared that debtor's records were incomplete compared with those maintained by similar clients. 89 F.3d 424, 429 (7th Cir.1996).
In contrast, in In re Wright, the court ruled that the complaining party (OCI) failed to satisfy its burden because it provided no evidence that debtor's records were insufficient:
In the instant case... OCI offered no testimony by a qualified expert accountant or any other witness regarding what it found in the Debtors' file cabinets or other records, and offered no expert testimony by qualified experts in the fields of real estate transactions, sales of insurance agencies, accounting, or any other field of expertise upon which the Court could make a finding that the Debtors' records of the S4I transaction, real estate transfers, or other business transactions were not adequate. The record includes numerous deeds, trust indentures, settlement statements, income statements and bank statements. OCI argues that additional buy-sell agreements, records of credits, valuations and other documentation should exist, but it offered no expert testimony in support of its argument or specifying what documents and records would be considered adequate.
OCI did not even offer testimony from a representative or employee of OCI asserting that the Debtors' records of their financial condition and business dealings are not adequate. OCI argues in its brief that the Debtors failed to keep and preserve records and documentation of their real estate transactions and transfer of Wright Insurance to S4I, but attorney argument is not evidence. Given OCI's burden of proof and strict construction of § 727(a) against the objecting party, any inference by the Court regarding the adequacy of the Debtors' books and records, in the absence of qualified testimony, would be inappropriate, improper and inconsistent with the assigned burden of proof.
...
Based upon the Debtors' voluminous business records, and OCI's failure to offer testimony by expert witnesses as was offered in Juzwiak, the Court concludes that OCI failed to satisfy the first Cox requirement that the Debtors failed to maintain and preserve adequate business records. Given that failure it is not necessary to consider the second Cox factor-whether such failure makes it impossible to ascertain the Debtors' financial condition and material business transactions, and the burden of proof does not shift to the Wrights to justify the inadequacy or nonexistence of the records.
364 B.R. 51, 68-69 (Bankr.D.Mont. 2007).
The Court has reviewed the record and finds neither competent evidence that Debtor's records are insufficient nor that the state of Debtor's records "makes it impossible to ascertain the debtor's financial condition and material business transactions." The motion is based upon the stipulated facts and the stipulated exhibits. However, there is no testimony, expert or otherwise, tying the exhibits to Plaintiff's burden under § 727 (a) (3).
Plaintiff did propound Requests for Admission including that Debtor failed to maintain records. However, Debtor denied them. As the Court explained at the prior hearing, until Plaintiff establishes its prima facie case, that is all Debtor is required to do to avoid summary judgment.
Plaintiff is correct that, had it made its prima facie case, the Debtor would have to justify her failure to keep records and provide evidence (as opposed to promising it at trial). However, since Plaintiff has not met its burden, there is no need for Debtor to establish that her failure, if any, to keep records was justified at this point. When and if Plaintiff does support its case, then Debtor will have to provide evidence to the contrary - perhaps by supporting her argument that she justifiably relied on outside professionals to maintain her records and obtaining their testimony as to the records they kept. The Court will then have to determine whether this is reasonable under the circumstances. See In re Cox , 41 F.3d 1294 (9th Cir. 1994).
In the meantime, Plaintiff's motion for summary judgment with respect to § 727(a) (3) is denied.
Section 727 (a) (5)
Section 727(a) (5) will cost a debtor his or her discharge if the court finds "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." Plaintiff recognizes that in order to make its prima facie case it bears the burden of proving that (1) Debtor owned identifiable assets at a time not too remote from the petition date; (2) that Debtor did not own them on the petition date; (3) that the schedules and statements do not provide an adequate explanation for the disposition of the assets; and (4) the creditor requested explanation from the debtor about the missing assets. See e.g., Wright, 364 B.R. at 79.
As with the claim under § 727(a) (3), Plaintiff's prima facie case lacks evidentiary support. In an effort to make its prima facie case in this second motion for summary judgment Plaintiff provides the declaration of a paralegal specialist, Shannon Vencill, who declares that for the year 2004 she reviewed Debtor's bank statements and "created a summary chart for deposits made into the Debtor's four (4) known bank accounts active for the year 2004." The chart was appended to a letter from Plaintiff to the Debtor which was submitted as Stipulated Exhibit 11. It indicated that the deposits into the four (4) accounts totaled $883, 635.61 for 2004. Stipulated Exhibit 11 contained similarly created charts for the years 2005 and 2006 each showing considerable deposits into the various accounts.
The deposits alone, however, do not establish what the Court asked for at the prior hearing - evidence that "a certain amount of assets existed at a certain point in time." Looking solely at the deposits, without evidence of the source or of withdrawals, does not give the Court an identifiable asset for which the Debtor would be required to account. As Debtor points out In her opposition, a deposit is simply a transaction - it is not necessarily a net gain of assets to the Debtor. It appears undisputed that many, if not most, of the deposits identified by Plaintiff were simply transfers from one of Debtor's accounts to another.
If Plaintiff wants to rely on the accounts and their contents to support its § 727(a) (5) claim it will have to provide evidence that (1) on a date certain, not too remote from the petition date, Debtor's accounts had balances of $X; (2)that as of the petition date, the accounts had balances of less than $X; (3) that the schedules and statements do not provide an adequate explanation for the disposition of the assets; and (4) Plaintiff requested explanation from the Debtor about the missing assets. See Wright, 364 B.R. at 79.
In its reply, Plaintiff argues that the fact that Debtor had any deposits in her various accounts is at odds with her statement of financial affairs, in which she disclosed no gross income. That may well be. However, Plaintiff has moved for summary judgment under sections 727(a) (3) and (5), not (a) (4) The same is true of Plaintiff's argument that Debtor failed to disclose her receipt of cash advances in her statement of financial affairs.
Ms. Vencill also declared that based upon her review of Debtor's bank statements, cash withdrawals were made from the Debtor's accounts of $128, 195.54 in 2006 and $66, 734.59 in 2005. The cash withdrawals are similarly insufficient on their own to establish a prima facie case under section 727(a) (5). The cash withdrawals between Debtor and her various accounts does not give the Court evidence of any particular asset or any pot of money that existed at any particular time to which the Court could point and expect the Debtor to account for. This is not a situation where a debtor received a chunk of money from an outside source prepetition and was unable to account for it as of the petition date. Rather, this Debtor was operating two d.b.a.'s, and apparently made numerous transfers between them and herself. Her accounting and business practices mayor may not have been appropriate. As far as the record before the Court stands, though, Plaintiff has not established its prima facie case under section 727(a) (3) or (a) (5), so Debtor need justify nothing at this point to avoid summary judgment. The Debtor has denied that she had such cash prior to the petition, though at this stage she did not even have to do that to defeat Plaintiff's motion for summary judgment.
At the same time that Plaintiff has failed to make a prima facie case under either subpart (a) (3) or (a) (5) of section 727, the motion filed by Plaintiff seems to attempt to conflate some sort of discovery sanctions with the summary judgment process. Plaintiff reviewed the history of its oral requests at the meetings of creditors, and of its written requests made by letters from Plaintiff's counsel, including Plaintiff's requests for explanations. Ultimately, Plaintiff did serve formal discovery on Defendant in the form of requests for admission, followed by corresponding interrogatories.
Having recited the foregoing history of requests for information, Plaintiff then embarks on pages of argument in subparts B and C of the motion about the inadequacy of Defendant's responses to the informal requests and the one round of formal discovery requests. Subpart B begins by stating "Debtor's response to the UST's requests for information and documents has been inadequate and extremely late." Subpart C begins by asserting that "Debtor's response to the UST's requests is inadequate." Yet, at no time in these proceedings has Plaintiff sought any sort of discovery sanctions under the Federal Rules of Bankruptcy Procedure for the claimed inadequacies of Defendant's responses. Nor does Plaintiff explain how those claimed but undetermined inadequacies somehow provide the elements of Plaintiff's claims under § 727(a)(3) and/or (a) (5).
Plaintiff also attacks the financial statements for 2005 and 2006 that Defendant ultimately produced. It seems uncontroverted that those documents were created some time in 2007. The Plaintiff then argues "the Debtor should have maintained books and records at the time the businesses were in operation - not create records post-petition." Plaintiff has a subpart in its motion which states "2005 Financial Statements and 2006 Financial Statements Were Created Post-Petition and Are Unreliable". Whether the statements are unreliable depends on the quality and integrity of the source documents. The time of their creation may raise a flag, but in itself does not render them unreliable without review of the materials on which they were based. Curiously, in the same subpart, Plaintiff offers illustrations of Defendant's inability to explain specific transactions, but does not show how they establish the asserted unreliability of the financial statements themselves, which were prepared by the Defendant's accountant.
CONCLUSION
For the reasons set forth above, Plaintiff's renewed motion for summary judgment is denied. The Court will conduct a status conference for purposes of setting trial dates in this matter on February 14, 2011 at 2 p.m. in Department Four.
IT IS SO ORDERED.
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