2011 Bankr. LEXIS 1235
April 7, 2011, Decided
COUNSEL: For Plaintiff: Michael D. Brofman, Esq., Weiss & Zarett, P.C., New Hyde
Park, New York.
For Defendant: Richard G. Gertler, Esq., Thaler & Gertler, East Meadow, New
York.
For Chapter 7 trustee: Seven B. Sheinwald, Esq., Kirschenbaum & Kirschenbaum,
Garden City, New York.
JUDGES: The Honorable Dorothy T. Eisenberg, United States Bankruptcy Judge.
OPINION BY: Dorothy Eisenberg
OPINION
MEMORANDUM DECISION AND ORDER
Before the Court is Plaintiff's motion for summary judgment on its Fifth
Cause of Action under 11 U.S.C. § 727(a)(3) and its Sixth Cause of Action under
11 U.S.C. § 727(a)(2)(A) seeking to deny the Defendant a discharge of all his
debts. This contested matter is a core proceeding under 28 U.S.C. §§
157(b)(2)(A), (J), and (O), and 11 U.S.C. §§ 727(a)(2)(A) and 727(a)(3). After
due consideration, the Plaintiff's motion is granted with respect to its Fifth
Cause of Action. The following constitutes the Court's finding of fact and
conclusions of law pursuant to Fed. R. Bankr. P. 7052.
FACTS
Unless otherwise noted, the following facts are undisputed. The Defendant
obtained a bachelor's degree from Queens College, The City University of New
York, where he majored in accounting and information systems. The Defendant also
has a Masters in Business Administration and has been a licensed Certified
Public Accountant ("CPA") since at least 1984. Defendant was first hired as
Controller for the Plaintiff and subsequently promoted to Chief Financial
Officer in or about 1994. Defendant's employment with the Plaintiff was
terminated in 2004.
Following the Defendant's termination, Plaintiff commenced a lawsuit against
the Defendant seeking damages allegedly sustained by Plaintiff as a result of
Defendant's conduct based on several theories of liability, including claims
under RICO statutes and fraud. The Defendant settled that lawsuit for $625,000
which remains unpaid. Plaintiff also commenced a separate lawsuit against the
Defendant which is currently pending in state court but stayed because of the
Debtor's bankruptcy.
After his termination, Defendant began working in 2005 with a real estate
agency at which point he obtained his associate real estate broker's license. In
2006, Defendant incorporated a Subchapter S corporation under the Internal
Revenue Code known as Landmark Real Estate Services, Inc. ("Landmark") for
limited liability purposes. Defendant directed the real estate agency he worked
for as one of its agents to pay commissions due to him individually to Landmark.
The commissions would be deposited into Landmark's bank accounts. Landmark
originally opened a bank account with North Fork Bank which subsequently became
part of Capital One Bank. In April of 2008, most of the funds in the North Fork
Bank/Capital One Bank account were transferred to a new account with Bank of
America. A review of cancelled checks for Landmark's North Fork Bank account
shows that the Debtor and his wife, Karen Schackner also known as Karen Klafter,
were signatories on the account. The Court does not have any copies of cancelled
checks to the Bank of America account to determine whether Karen Schackner was
also a signatory on Landmark's Bank of America account. However, a review of
Landmark's Bank of America statements show that payments were made for Mrs.
Schackner's benefit but there is no information as to whether these expenses
were related to Landmark's business or were Mrs. Schackner's personal expenses.
If the payments were for Mrs. Schackner's personal expenses, there is no
evidence as to what consideration was given for Landmark's payment of these
expenditures.
The Defendant's former litigation counsel, Siller Wilk, filed an involuntary
Chapter 7 petition against the Defendant on July 14, 2008 (the "Petition Date")
on the basis of unpaid legal fees. An order for relief was entered on September
26, 2008 and a Chapter 7 trustee (the "Trustee") was appointed to the
Defendant's bankruptcy case. Plaintiff took a Rule 2004 examination of the
Defendant and Mrs. Schackner. On March 6, 2009, Plaintiff commenced this
adversary proceeding seeking a judgment determining that all sums due to
Plaintiff by Defendant not be discharged pursuant to 11 U.S.C. § 523 and that
the Defendant be denied a discharge of all his debts pursuant to 11 U.S.C. § 727
. On June 16, 2009, the Trustee commenced a separate adversary proceeding
against the Defendant seeking a denial of discharge pursuant to 11 U.S.C. §§
727(a)(2)(A), 727(a)(2)(B), 727(a)(3), 727(a)(4), and 727(a)(5). On November 24,
2009, in the interest of judicial economy and the efficiency of administration
of these two adversary proceedings, the Court entered an order that this
adversary proceeding commenced by the Plaintiff and the one commenced by the
Trustee be procedurally consolidated for purposes of discovery and tried
together.
On November 4, 2010, Plaintiff filed this motion for summary judgment seeking
a determination as to the Plaintiff's Fifth and Sixth Causes of Action under 11
U.S.C. §§ 727(a)(2)(A) and 727(a)(3). Plaintiff argues that the Defendant has
failed to preserve and produce records, information, books and documents from
which the Defendant's financial condition or business transactions might be
ascertained and that the Defendant's failure to do so is legally insufficient to
overcome what is required to rebuff Plaintiff's allegations and evidence. In
addition, the Plaintiff asserts that within one year prior to the filing of the
involuntary petition against the Defendant the Defendant was secreting his
assets with the intent to hinder, delay or defraud the Plaintiff.
A review of the list of documents provided to the Plaintiff and the Trustee
by the Defendant shows that the Defendant has not provided Landmark's tax
returns for the 2007 and 2008 tax years and the Defendant has not provided his
own tax returns for the 2008 tax year, if any. Based upon the nature of the
Debtor's livelihood, Trustee's counsel also made repeated requests for
documentation reflecting any real estate commissions, if any, which were earned
prepetition which were not paid until postpetition, or were due to him and were
yet still unpaid. Notwithstanding the representation by the Defendant's counsel
that information on such issue would be provided, the Defendant did not submit
any documentation or information.
While the Plaintiff and the Trustee obtained copies of whatever records the
Defendant's employer had concerning the Defendant's commissions that were paid
to Landmark, they are unable to reconcile these records with the limited
Landmark records turned over by the Defendant because the Defendant failed to
provide any of Landmark's records for the period prior to 2008. Defendant did
not maintain hard copies of the commission invoices from the real estate sales
he made which indicate the commissions he had earned and were paid into
Landmark's bank account on his behalf. Without all of the Defendant's Landmark
records, the invoices, tax returns and other documents, the Plaintiff and the
Trustee are unable to determine (1) whether all of Landmark's income came solely
from real estate commissions received from the real estate agency at which the
Defendant is employed; (2) whether the Defendant had other sources of
compensation; (3) whether additional commissions were due to the Defendant but
were paid elsewhere at the Defendant's direction; or (4) whether the Defendant
had unpaid prepetiton earnings that are due to the bankruptcy estate.
While the Defendant maintained his business records relating to Landmark on
his personal computer, the Defendant asserted that the hard drive on his
computer crashed in late 2007 or early 2008 and as a result he lost his
electronic records for Landmark relating to the period before 2008. Defendant
stated that he did not have any electronic back-up for his personal computer
prior to the computer crash. During the course of his employment with Plaintiff,
however, Defendant had authorized the purchase of back-up tape systems for the
Plaintiff and the Defendant allegedly removed one of the systems for his
personal use. However, Defendant argued that the computer back-up was for a
desktop computer the Defendant maintained in connection with his employment with
Plaintiff but he no longer has possession of this equipment since his employment
with Plaintiff was terminated nor did he obtain any backup for his personal
record keeping during the period between his termination and his computer
crashing.
The Defendant testified under oath at his Rule 2004 examination that the
commissions deposited into Landmark's bank accounts were ultimately transferred
to his spouse's bank account because his spouse wanted to control the household
finances. 1 Despite the Defendant's testimony that his spouse wanted to maintain
control over household finances, Mrs. Schackner testified under oath at her Rule
2004 examination that it was the Defendant who oversaw the couple's finances and
payment of expenses and that she only discussed their finances with the
Defendant approximately every six months. Moreover, the funds transferred from
Landmark's bank accounts were commingled with other funds that were deposited
into Mrs. Schackner's bank account. Such commingling of funds hindered the
Plaintiff and Trustee's ability to determine which payments or withdrawals from
Mrs. Schackner's bank account related to Defendant's income or whether fair
consideration was given for any withdrawal.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -1 While the
Defendant's list of documents provided to the Plaintiff and the Trustee
indicates that only the bank records for Defendant's personal bank accounts were
provided and not Mrs. Schackner's bank account, those documents have not been
submitted to the Court for review to examine the discrepancy between the list
and the Defendant's testimony. However, Defendant's testimony that the funds in
Landmark's bank accounts were transferred to his wife's bank account has not
been disputed.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
In the Trustee's affirmation in support of the Plaintiff's motion filed with
the Court on November 23, 2010 ("Trustee's Statement"), the Trustee noted that
when he initially conducted a review of the Defendant's financial affairs and
schedules filed in this bankruptcy case, he noted that there were
inconsistencies and substantial unexplained discrepancies. In different areas of
the Debtors' schedules, Statement of Financial Affairs, and the means test, the
Defendant had disclosed significantly different average monthly incomes ranging
from $1,990.72 to $7,657.22 per month without any explanation of this
discrepancy. In reconstructing the Defendant's monthly average income received
prior to the petition date, the Trustee looked at all the deposits that were
noted in whatever Landmark bank statements the Defendant produced and determined
that the Defendant's average monthly compensation added up to $7,863.70 for the
6 month period prepetition and $8,388.02 for the one year period prepetition.
Both averages were higher than the income reported by the Debtor in his Schedule
I and in his means test. In addition, the Trustee noted that the total deposits
into the Landmark bank accounts exceed the amount of income disclosed by the
Defendant.
In addition, the Trustee stated that the Defendant did not produce Landmark's
Bank of America statement for July 2008 which would give the Trustee information
as to Landmark's funds as of the Petition Date. The June 2008 bank statement
shows a checking account balance of $6,713.38 and an interest maximizer account
with a balance of $30,137.95. At the Debtor's meeting of creditors, the
Defendant stated that Landmark was no longer operating and had $0.00 value as of
the Petition Date. The Defendant has not provided any explanation as to the
whereabouts of approximately $37,000 that was in Landmark's bank account prior
to the Petition Date.
A hearing was held by the Court on the Plaintiff's motion and the Defendant's
opposition to the motion. The Court grants the Plaintiff's motion based on the
following.
DISCUSSION
Pursuant to Rule 56(c) of the Federal Rules of Civil Procedure as made
applicable by Bankruptcy Rule 7056, the Court may award summary judgment "if the
pleadings, depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no genuine issue as to
any material fact and that the moving party is entitled to a judgment as a
matter of law." Fed. R. Bankr. P. 7056.
When no genuine triable issues of material fact exist, the moving party is
entitled to judgment as a matter of law and summary judgment should be granted.
Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 11-12 (2d Cir. 1986). The mere
production of some evidence in support of the opposing party's position will not
justify denial of a summary judgment motion, unless the court finds that there
is evidence upon which a jury can properly proceed to find a verdict for the
party opposing the motion. American v. Liberty Lobby, Inc., 477 U.S. 242, 252,
106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Instead, the opposing party must "set
forth specific facts showing that there is a genuine issue for trial." Williams
v. Smith, 781 F.2d 318, 323 (2d Cir. 1986). A court must always "resolve
ambiguities and draw reasonable inferences against the moving party." King v.
United States Fire Ins. Co., 804 F.2d at 11. However, the opposing party may not
rely upon "mere speculation or conjecture as to the true nature of the facts to
overcome a motion for summary judgment." Id., 804 F.2d at 12.
With respect to the Plaintiff's Fifth Cause of Action under 11 U.S.C. §
727(a)(3), after a review of the facts and circumstances and the papers filed in
this proceeding and the bankruptcy case, the Court finds, and all the parties
agreed at the hearing, that no genuine issue of material fact exists that would
preclude this Court from finding that summary judgment is appropriate. Any
testimony that would be provided at trial would not add to or change the facts
as indicated herein.
Section 727 of the Bankruptcy Code provides in pertinent part:
(a) The Court shall grant the debtor a discharge unless --
***
(2) the debtor, with intent to hinder, delay or defraud a
creditor or an officer of the estate charged with custody of
property under this title, has transferred, removed,
destroyed, mutilated, or concealed, or has permitted to be
destroyed, mutilated, or concealed --
(A) property of the debtor within one year
before the date of the filing of the petition;
***
(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. . . .
11 U.S.C. §§ 727(a)(2)(A) and 727(a)(3).
Two elements must be proven by a preponderance of the evidence to determine
whether denial of debtor's discharge is appropriate under Section 727(a)(3). See
D.A.N. Joint Venture v. Cacioli (In re Cacioli), 463 F.3d 229, 235 (2d Cir.
2006). First, the creditor must prove the debtor failed to keep or preserve
books and records. Second, this failure must make it impossible to ascertain the
debtor's true financial condition. See In re Yerushalmi, 393 B.R. 288, 297
(Bankr. E.D.N.Y. 2008); Pergament v. DeRise (In re Nancy DeRise), 394 B.R. 677,
688 (Bankr. E.D.N.Y. 2008). Section 727(a)(3) 'does not require that a debtor
maintain a bank account or "an impeccable system of bookkeeping." It merely
requires that a debtor provide reasonable records so that his creditors may
ascertain the debtor's present financial condition and the nature of any
business transactions that occurred within a reasonable period prior to filing.'
Jacobowitz v. The Cadle Company (In re Jacobowitz), 309 B.R. 429, 436 (S.D.N.Y.
2004), citing Meridian Bank v. Alten, 958 F.2d 1226, 1230 (2d Cir. 1992).
In this case, while the Defendant did provide the Plaintiff and the Trustee
with voluminous documents, the Plaintiff has shown that the Defendant has failed
to keep or preserve sufficient or accurate books and records to satisfy section
727(a)(3). First, the Debtor has failed to keep or preserve records relating to
commissions he earned as a real estate broker prior to the year 2008. While the
Plaintiff and Trustee may have received some documentation directly from the
real estate agency where the Defendant is employed, Defendant did not maintain
any copies of written direction to the agency to pay each commission due him to
Landmark and it is uncertain whether the documentation provided by the agency
included all the commissions earned by the Defendant. In addition, Plaintiff and
the Trustee cannot reconcile the documents to determine whether the Defendant
received income from other sources.
While the Debtor indicated at his Rule 2004 examination that his accountant
may have some of Landmark's business records, the Defendant has not produced
those records or shown that he has attempted even to confirm whether the
accountant has the records, or to obtain his records from the accountant. In
addition, the Defendant has failed to provide records relating to the period
after his computer crashed that were requested by the Trustee, such as the
relevant tax returns for Landmark and the Defendant; Landmark's Bank of America
statement for July 2008; and information regarding any prepetition earnings that
may have been received or due postpetition. There is no explanation for the
Defendant's failure to provide these documents and no hardship shown as to why
the Debtor could not obtain copies from third parties.
Similarly, the Defendant has neither denied the existence of prepetition
earnings nor addressed whether he received them but rather asserts that the
Trustee had not identified any funds earned by the Defendant prepetition and
that the Trustee had not made a formal request for such information. Defendant's
response is an example of his unwillingness to cooperate in full with the
Trustee, much less the Plaintiff, in providing the Trustee and creditors with
sufficient information for them to ascertain the financial condition of the
Defendant and his assets. It is unreasonable to expect the Trustee to identify
specific prepetition commissions the Defendant may have received postpetition
without the Defendant providing him with the relevant documents to do so. A
formal request for such information is merely a formality and should not be a
condition for obtaining the Debtor's complete cooperation when the Trustee has
already discussed the need for this information with Defendant's counsel and
requested that the information be provided. Defendant is aware that the Trustee
requires information to confirm the existence, or a sworn statement or other
evidence to confirm the absence, of any prepetition earnings that may or may not
have been turned over for the benefit of the bankruptcy estate. The Defendant's
actions clearly indicate an intent to conceal information in regard to his
finances.
The burden of keeping and preserving records and providing such records from
which the debtor's financial condition can be ascertained rests upon the debtor.
Christy v. Kowalski (In re Kowalski), 316 B.R. 596, 602 (Bankr. E.D.N.Y. 2004).
Where there is a trustee appointed in a bankruptcy case, a debtor is obligated
to "surrender to the trustee all property of the estate and any recorded
information, including books, documents, records and papers relating to the
property of the estate". 11 U.S.C. § 541(a)(4). If the debtor does not have the
documents in his possession, the debtor is obligated to obtain such records
where possible. "The fact that a debtor directs its creditors to where they
might obtain the records they seek does not relieve the debtor of his
responsibility to provide adequate records." In re Jacobowitz, 309 B.R. at 438
citing United States v. Craig (In re Craig), 252 B.R. 822, 828 (Bankr. S.D. Fla.
2000). As noted by the court in In re Jacobwitz:
The debtor is under an affirmative obligation to provide records
that paint a true and accurate picture of the financial condition of
the debtor at the time of filing. Where the debtor is under a duty to
keep or preserve records, a party objecting to discharge need show
only that it cannot ascertain the debtor's financial condition and
recent business transactions from the records provided. It is not
necessary to show that there is no conceivable way to ascertain the
financial condition of the debtor.
In re Jacobowitz, 309 B.R. at 438 (internal citation omitted). Accordingly, it
was the Defendant's responsibility to provide his creditors and the Trustee with
the documents which could reveal the Defendant's financial condition, including
documents that may be held by third parties on his behalf such as those that may
be held by his accountant or obtainable from the bank, and the Defendant has
failed to do so. Accordingly, the Court finds that Defendant has failed to keep
and preserve books, documents and records relating to his financial condition or
business transactions. The Defendant's failure to keep or preserve such books,
documents and records adversely affects the ability of the Trustee and creditors
to ascertain the Debtor's financial condition, assets and business transactions.
As discussed above, Trustee is unable to determine the existence of any
prepetition earnings that may still be owed to the bankruptcy estate, and the
disposition of approximately $37,000 that was in Landmark's bank account shortly
before the Petition Date that was allegedly transferred to Mrs. Schackner's bank
account.
Without all of Landmark's records together with all of the Defendant's other
business records, if any, the Trustee and creditors do not have an adequate
picture of the Debtor's financial condition and business transactions.
Documentation obtained from the real estate agency may provide information as to
some of the Defendant's income but would not provide information regarding
whether the Defendant or Landmark had sources of income other than from
commissions earned through the real estate agency. While the Defendant states
that all the funds transferred from Landmark's bank account into Mrs.
Schackner's bank account were used to pay household expenses, the Trustee and
creditors are unable to confirm such assertion because the Defendant has failed
to provide evidence as to the nature of the payments or withdrawals from the
Landmark account and Mrs. Schackner's account, such as bills and invoices, and
whether all these payments were for household expenses. When the Defendant
commingled the Landmark funds with those from other sources, including those of
Mrs. Schankner, into his spouse's account, the Trustee and creditors are unable
to ascertain which payments from Mrs. Schackner's account are attributable to
the Defendant's funds, and/or whether fair consideration was given for such
payments. Defendant's actions have hindered the Trustee's administration of the
bankruptcy estate.
Moreover, the transfer of funds from Landmark to Mrs. Schackner's account as
directed by the Debtor appear to be have been done to avoid the Debtor's
creditors. At the time Landmark was created, the Plaintiff was pursuing
litigation against the Defendant. Contrary to Defendant's testimony, Mrs.
Schackner testified that the Defendant exerted control over the couple's
finances and her bank account. In light of the Defendant's failure to cooperate
with the Trustee and the facts and circumstances shown in this case, the Court
finds that the Defendant's failure to keep and preserve books, documents and
records has hindered and delayed the Trustee's and creditors' ability to
ascertain the Defendant's financial condition and business transactions.
Once the creditor has satisfied its burden of proof, it is the debtor's
burden to establish that the failure to produce records was justified in order
to avoid a denial of discharge. See In re Yerushalmi, 393 B.R. at 297. In
determining whether the failure is justified the court should take into account
the reasonableness of debtor's failure in the particular circumstances. See Id.
Debtor's education, experiences, and sophistication are some of the factors to
consider in making this determination. See In re Nancy DeRise, 394 B.R. at 688;
In re Cacioli, 463 F.3d at 235.
While the Defendant argues that his inability to provide some of the
information is justified because the computer he used to record Landmark's
transactions crashed and the records are no longer available, the Court finds
otherwise. The Defendant has a high level of education, experience and
sophistication. The Defendant has some background in information systems. As a
CPA and the former Chief Financial Officer of the Plaintiff, the Defendant had
been in the position of overseeing the Plaintiff's finances and record keeping
relating to those finances. Clearly, Defendant knew of the importance of back-up
systems and had the experience of authorizing the purchase of back-up tape
systems for the Plaintiff which he maintained in the course of his employment
with Plaintiff. The Defendant should have known that in the absence of a back-up
system, copies of records should be maintained or be accessible even if not for
bankruptcy purposes then for tax reporting and record keeping purposes. Indeed,
the Defendant would have needed to provide his accountant or Landmark's
accountant with records regarding his business transactions and those of
Landmark to prepare appropriate tax returns.
While the Defendant did indicate that the accountant may have some of the
relevant documentation, there is no evidence produced by the Defendant to
support his representations. It is the Defendant's duty to obtain such documents
from the accountant if they exist. Likewise, it is the Defendant's
responsibility to obtain necessary bank statements from the bank if the
Defendant did not have possession of such statements as discussed above. Based
upon the facts and circumstances presented to the Court, the Court finds that
the Defendant's failure to keep and preserve books, documents and records to be
unjustifiable.
Accordingly, the Court finds that the Debtor's discharge should be denied
pursuant to 11 U.S.C. § 727(a)(3). As the Court determined that a denial of a
discharge under 11 U.S.C. § 727(a)(3) is warranted, the Court deems it
unnecessary to make a determination with respect to Plaintiff's Sixth Cause of
Action under 11 U.S.C. §727(a)(2)(A).
CONCLUSION
Based upon the foregoing, the Plaintiff's motion for summary judgment on its
Fifth Cause of Action under 11 U.S.C. § 727(a)(3) is granted. The Defendant's
discharge is denied.
So ordered.
Dated: Central Islip, New York
April 7, 2011
/s/ Dorothy Eisenberg
Dorothy Eisenberg
United States Bankruptcy Judge
2011 Bankr. LEXIS 1235April 7, 2011, Decided
COUNSEL: For Plaintiff: Michael D. Brofman, Esq., Weiss & Zarett, P.C., New HydePark, New York.
For Defendant: Richard G. Gertler, Esq., Thaler & Gertler, East Meadow, NewYork.
For Chapter 7 trustee: Seven B. Sheinwald, Esq., Kirschenbaum & Kirschenbaum,Garden City, New York.
JUDGES: The Honorable Dorothy T. Eisenberg, United States Bankruptcy Judge.
OPINION BY: Dorothy Eisenberg
OPINION
MEMORANDUM DECISION AND ORDER
Before the Court is Plaintiff's motion for summary judgment on its FifthCause of Action under 11 U.S.C. § 727(a)(3) and its Sixth Cause of Action under11 U.S.C. § 727(a)(2)(A) seeking to deny the Defendant a discharge of all hisdebts. This contested matter is a core proceeding under 28 U.S.C. §§157(b)(2)(A), (J), and (O), and 11 U.S.C. §§ 727(a)(2)(A) and 727(a)(3). Afterdue consideration, the Plaintiff's motion is granted with respect to its FifthCause of Action. The following constitutes the Court's finding of fact andconclusions of law pursuant to Fed. R. Bankr. P. 7052.
FACTS
Unless otherwise noted, the following facts are undisputed. The Defendantobtained a bachelor's degree from Queens College, The City University of NewYork, where he majored in accounting and information systems. The Defendant alsohas a Masters in Business Administration and has been a licensed CertifiedPublic Accountant ("CPA") since at least 1984. Defendant was first hired asController for the Plaintiff and subsequently promoted to Chief FinancialOfficer in or about 1994. Defendant's employment with the Plaintiff wasterminated in 2004.
Following the Defendant's termination, Plaintiff commenced a lawsuit againstthe Defendant seeking damages allegedly sustained by Plaintiff as a result ofDefendant's conduct based on several theories of liability, including claimsunder RICO statutes and fraud. The Defendant settled that lawsuit for $625,000which remains unpaid. Plaintiff also commenced a separate lawsuit against theDefendant which is currently pending in state court but stayed because of theDebtor's bankruptcy.
After his termination, Defendant began working in 2005 with a real estateagency at which point he obtained his associate real estate broker's license. In2006, Defendant incorporated a Subchapter S corporation under the InternalRevenue Code known as Landmark Real Estate Services, Inc. ("Landmark") forlimited liability purposes. Defendant directed the real estate agency he workedfor as one of its agents to pay commissions due to him individually to Landmark.The commissions would be deposited into Landmark's bank accounts. Landmarkoriginally opened a bank account with North Fork Bank which subsequently becamepart of Capital One Bank. In April of 2008, most of the funds in the North ForkBank/Capital One Bank account were transferred to a new account with Bank ofAmerica. A review of cancelled checks for Landmark's North Fork Bank accountshows that the Debtor and his wife, Karen Schackner also known as Karen Klafter,were signatories on the account. The Court does not have any copies of cancelledchecks to the Bank of America account to determine whether Karen Schackner wasalso a signatory on Landmark's Bank of America account. However, a review ofLandmark's Bank of America statements show that payments were made for Mrs.Schackner's benefit but there is no information as to whether these expenseswere related to Landmark's business or were Mrs. Schackner's personal expenses.If the payments were for Mrs. Schackner's personal expenses, there is noevidence as to what consideration was given for Landmark's payment of theseexpenditures.
The Defendant's former litigation counsel, Siller Wilk, filed an involuntaryChapter 7 petition against the Defendant on July 14, 2008 (the "Petition Date")on the basis of unpaid legal fees. An order for relief was entered on September26, 2008 and a Chapter 7 trustee (the "Trustee") was appointed to theDefendant's bankruptcy case. Plaintiff took a Rule 2004 examination of theDefendant and Mrs. Schackner. On March 6, 2009, Plaintiff commenced thisadversary proceeding seeking a judgment determining that all sums due toPlaintiff by Defendant not be discharged pursuant to 11 U.S.C. § 523 and thatthe Defendant be denied a discharge of all his debts pursuant to 11 U.S.C. § 727. On June 16, 2009, the Trustee commenced a separate adversary proceedingagainst the Defendant seeking a denial of discharge pursuant to 11 U.S.C. §§727(a)(2)(A), 727(a)(2)(B), 727(a)(3), 727(a)(4), and 727(a)(5). On November 24,2009, in the interest of judicial economy and the efficiency of administrationof these two adversary proceedings, the Court entered an order that thisadversary proceeding commenced by the Plaintiff and the one commenced by theTrustee be procedurally consolidated for purposes of discovery and triedtogether.
On November 4, 2010, Plaintiff filed this motion for summary judgment seekinga determination as to the Plaintiff's Fifth and Sixth Causes of Action under 11U.S.C. §§ 727(a)(2)(A) and 727(a)(3). Plaintiff argues that the Defendant hasfailed to preserve and produce records, information, books and documents fromwhich the Defendant's financial condition or business transactions might beascertained and that the Defendant's failure to do so is legally insufficient toovercome what is required to rebuff Plaintiff's allegations and evidence. Inaddition, the Plaintiff asserts that within one year prior to the filing of theinvoluntary petition against the Defendant the Defendant was secreting hisassets with the intent to hinder, delay or defraud the Plaintiff.
A review of the list of documents provided to the Plaintiff and the Trusteeby the Defendant shows that the Defendant has not provided Landmark's taxreturns for the 2007 and 2008 tax years and the Defendant has not provided hisown tax returns for the 2008 tax year, if any. Based upon the nature of theDebtor's livelihood, Trustee's counsel also made repeated requests fordocumentation reflecting any real estate commissions, if any, which were earnedprepetition which were not paid until postpetition, or were due to him and wereyet still unpaid. Notwithstanding the representation by the Defendant's counselthat information on such issue would be provided, the Defendant did not submitany documentation or information.
While the Plaintiff and the Trustee obtained copies of whatever records theDefendant's employer had concerning the Defendant's commissions that were paidto Landmark, they are unable to reconcile these records with the limitedLandmark records turned over by the Defendant because the Defendant failed toprovide any of Landmark's records for the period prior to 2008. Defendant didnot maintain hard copies of the commission invoices from the real estate saleshe made which indicate the commissions he had earned and were paid intoLandmark's bank account on his behalf. Without all of the Defendant's Landmarkrecords, the invoices, tax returns and other documents, the Plaintiff and theTrustee are unable to determine (1) whether all of Landmark's income came solelyfrom real estate commissions received from the real estate agency at which theDefendant is employed; (2) whether the Defendant had other sources ofcompensation; (3) whether additional commissions were due to the Defendant butwere paid elsewhere at the Defendant's direction; or (4) whether the Defendanthad unpaid prepetiton earnings that are due to the bankruptcy estate.
While the Defendant maintained his business records relating to Landmark onhis personal computer, the Defendant asserted that the hard drive on hiscomputer crashed in late 2007 or early 2008 and as a result he lost hiselectronic records for Landmark relating to the period before 2008. Defendantstated that he did not have any electronic back-up for his personal computerprior to the computer crash. During the course of his employment with Plaintiff,however, Defendant had authorized the purchase of back-up tape systems for thePlaintiff and the Defendant allegedly removed one of the systems for hispersonal use. However, Defendant argued that the computer back-up was for adesktop computer the Defendant maintained in connection with his employment withPlaintiff but he no longer has possession of this equipment since his employmentwith Plaintiff was terminated nor did he obtain any backup for his personalrecord keeping during the period between his termination and his computercrashing.
The Defendant testified under oath at his Rule 2004 examination that thecommissions deposited into Landmark's bank accounts were ultimately transferredto his spouse's bank account because his spouse wanted to control the householdfinances. 1 Despite the Defendant's testimony that his spouse wanted to maintaincontrol over household finances, Mrs. Schackner testified under oath at her Rule2004 examination that it was the Defendant who oversaw the couple's finances andpayment of expenses and that she only discussed their finances with theDefendant approximately every six months. Moreover, the funds transferred fromLandmark's bank accounts were commingled with other funds that were depositedinto Mrs. Schackner's bank account. Such commingling of funds hindered thePlaintiff and Trustee's ability to determine which payments or withdrawals fromMrs. Schackner's bank account related to Defendant's income or whether fairconsideration was given for any withdrawal.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -1 While theDefendant's list of documents provided to the Plaintiff and the Trusteeindicates that only the bank records for Defendant's personal bank accounts wereprovided and not Mrs. Schackner's bank account, those documents have not beensubmitted to the Court for review to examine the discrepancy between the listand the Defendant's testimony. However, Defendant's testimony that the funds inLandmark's bank accounts were transferred to his wife's bank account has notbeen disputed.- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
In the Trustee's affirmation in support of the Plaintiff's motion filed withthe Court on November 23, 2010 ("Trustee's Statement"), the Trustee noted thatwhen he initially conducted a review of the Defendant's financial affairs andschedules filed in this bankruptcy case, he noted that there wereinconsistencies and substantial unexplained discrepancies. In different areas ofthe Debtors' schedules, Statement of Financial Affairs, and the means test, theDefendant had disclosed significantly different average monthly incomes rangingfrom $1,990.72 to $7,657.22 per month without any explanation of thisdiscrepancy. In reconstructing the Defendant's monthly average income receivedprior to the petition date, the Trustee looked at all the deposits that werenoted in whatever Landmark bank statements the Defendant produced and determinedthat the Defendant's average monthly compensation added up to $7,863.70 for the6 month period prepetition and $8,388.02 for the one year period prepetition.Both averages were higher than the income reported by the Debtor in his ScheduleI and in his means test. In addition, the Trustee noted that the total depositsinto the Landmark bank accounts exceed the amount of income disclosed by theDefendant.
In addition, the Trustee stated that the Defendant did not produce Landmark'sBank of America statement for July 2008 which would give the Trustee informationas to Landmark's funds as of the Petition Date. The June 2008 bank statementshows a checking account balance of $6,713.38 and an interest maximizer accountwith a balance of $30,137.95. At the Debtor's meeting of creditors, theDefendant stated that Landmark was no longer operating and had $0.00 value as ofthe Petition Date. The Defendant has not provided any explanation as to thewhereabouts of approximately $37,000 that was in Landmark's bank account priorto the Petition Date.
A hearing was held by the Court on the Plaintiff's motion and the Defendant'sopposition to the motion. The Court grants the Plaintiff's motion based on thefollowing.
DISCUSSION
Pursuant to Rule 56(c) of the Federal Rules of Civil Procedure as madeapplicable by Bankruptcy Rule 7056, the Court may award summary judgment "if thepleadings, depositions, answers to interrogatories, and admissions on file,together with the affidavits, if any, show that there is no genuine issue as toany material fact and that the moving party is entitled to a judgment as amatter of law." Fed. R. Bankr. P. 7056.
When no genuine triable issues of material fact exist, the moving party isentitled to judgment as a matter of law and summary judgment should be granted.Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 11-12 (2d Cir. 1986). The mereproduction of some evidence in support of the opposing party's position will notjustify denial of a summary judgment motion, unless the court finds that thereis evidence upon which a jury can properly proceed to find a verdict for theparty opposing the motion. American v. Liberty Lobby, Inc., 477 U.S. 242, 252,106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Instead, the opposing party must "setforth specific facts showing that there is a genuine issue for trial." Williamsv. Smith, 781 F.2d 318, 323 (2d Cir. 1986). A court must always "resolveambiguities and draw reasonable inferences against the moving party." King v.United States Fire Ins. Co., 804 F.2d at 11. However, the opposing party may notrely upon "mere speculation or conjecture as to the true nature of the facts toovercome a motion for summary judgment." Id., 804 F.2d at 12.
With respect to the Plaintiff's Fifth Cause of Action under 11 U.S.C. §727(a)(3), after a review of the facts and circumstances and the papers filed inthis proceeding and the bankruptcy case, the Court finds, and all the partiesagreed at the hearing, that no genuine issue of material fact exists that wouldpreclude this Court from finding that summary judgment is appropriate. Anytestimony that would be provided at trial would not add to or change the factsas indicated herein.
Section 727 of the Bankruptcy Code provides in pertinent part:
(a) The Court shall grant the debtor a discharge unless --
***
(2) the debtor, with intent to hinder, delay or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be destroyed, mutilated, or concealed --
(A) property of the debtor within one year before the date of the filing of the petition;
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(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. . . .
11 U.S.C. §§ 727(a)(2)(A) and 727(a)(3).
Two elements must be proven by a preponderance of the evidence to determinewhether denial of debtor's discharge is appropriate under Section 727(a)(3). SeeD.A.N. Joint Venture v. Cacioli (In re Cacioli), 463 F.3d 229, 235 (2d Cir.2006). First, the creditor must prove the debtor failed to keep or preservebooks and records. Second, this failure must make it impossible to ascertain thedebtor's true financial condition. See In re Yerushalmi, 393 B.R. 288, 297(Bankr. E.D.N.Y. 2008); Pergament v. DeRise (In re Nancy DeRise), 394 B.R. 677,688 (Bankr. E.D.N.Y. 2008). Section 727(a)(3) 'does not require that a debtormaintain a bank account or "an impeccable system of bookkeeping." It merelyrequires that a debtor provide reasonable records so that his creditors mayascertain the debtor's present financial condition and the nature of anybusiness transactions that occurred within a reasonable period prior to filing.'Jacobowitz v. The Cadle Company (In re Jacobowitz), 309 B.R. 429, 436 (S.D.N.Y.2004), citing Meridian Bank v. Alten, 958 F.2d 1226, 1230 (2d Cir. 1992).
In this case, while the Defendant did provide the Plaintiff and the Trusteewith voluminous documents, the Plaintiff has shown that the Defendant has failedto keep or preserve sufficient or accurate books and records to satisfy section727(a)(3). First, the Debtor has failed to keep or preserve records relating tocommissions he earned as a real estate broker prior to the year 2008. While thePlaintiff and Trustee may have received some documentation directly from thereal estate agency where the Defendant is employed, Defendant did not maintainany copies of written direction to the agency to pay each commission due him toLandmark and it is uncertain whether the documentation provided by the agencyincluded all the commissions earned by the Defendant. In addition, Plaintiff andthe Trustee cannot reconcile the documents to determine whether the Defendantreceived income from other sources.
While the Debtor indicated at his Rule 2004 examination that his accountantmay have some of Landmark's business records, the Defendant has not producedthose records or shown that he has attempted even to confirm whether theaccountant has the records, or to obtain his records from the accountant. Inaddition, the Defendant has failed to provide records relating to the periodafter his computer crashed that were requested by the Trustee, such as therelevant tax returns for Landmark and the Defendant; Landmark's Bank of Americastatement for July 2008; and information regarding any prepetition earnings thatmay have been received or due postpetition. There is no explanation for theDefendant's failure to provide these documents and no hardship shown as to whythe Debtor could not obtain copies from third parties.
Similarly, the Defendant has neither denied the existence of prepetitionearnings nor addressed whether he received them but rather asserts that theTrustee had not identified any funds earned by the Defendant prepetition andthat the Trustee had not made a formal request for such information. Defendant'sresponse is an example of his unwillingness to cooperate in full with theTrustee, much less the Plaintiff, in providing the Trustee and creditors withsufficient information for them to ascertain the financial condition of theDefendant and his assets. It is unreasonable to expect the Trustee to identifyspecific prepetition commissions the Defendant may have received postpetitionwithout the Defendant providing him with the relevant documents to do so. Aformal request for such information is merely a formality and should not be acondition for obtaining the Debtor's complete cooperation when the Trustee hasalready discussed the need for this information with Defendant's counsel andrequested that the information be provided. Defendant is aware that the Trusteerequires information to confirm the existence, or a sworn statement or otherevidence to confirm the absence, of any prepetition earnings that may or may nothave been turned over for the benefit of the bankruptcy estate. The Defendant'sactions clearly indicate an intent to conceal information in regard to hisfinances.
The burden of keeping and preserving records and providing such records fromwhich the debtor's financial condition can be ascertained rests upon the debtor.Christy v. Kowalski (In re Kowalski), 316 B.R. 596, 602 (Bankr. E.D.N.Y. 2004).Where there is a trustee appointed in a bankruptcy case, a debtor is obligatedto "surrender to the trustee all property of the estate and any recordedinformation, including books, documents, records and papers relating to theproperty of the estate". 11 U.S.C. § 541(a)(4). If the debtor does not have thedocuments in his possession, the debtor is obligated to obtain such recordswhere possible. "The fact that a debtor directs its creditors to where theymight obtain the records they seek does not relieve the debtor of hisresponsibility to provide adequate records." In re Jacobowitz, 309 B.R. at 438citing United States v. Craig (In re Craig), 252 B.R. 822, 828 (Bankr. S.D. Fla.2000). As noted by the court in In re Jacobwitz:
The debtor is under an affirmative obligation to provide records that paint a true and accurate picture of the financial condition of the debtor at the time of filing. Where the debtor is under a duty to keep or preserve records, a party objecting to discharge need show only that it cannot ascertain the debtor's financial condition and recent business transactions from the records provided. It is not necessary to show that there is no conceivable way to ascertain the financial condition of the debtor.
In re Jacobowitz, 309 B.R. at 438 (internal citation omitted). Accordingly, itwas the Defendant's responsibility to provide his creditors and the Trustee withthe documents which could reveal the Defendant's financial condition, includingdocuments that may be held by third parties on his behalf such as those that maybe held by his accountant or obtainable from the bank, and the Defendant hasfailed to do so. Accordingly, the Court finds that Defendant has failed to keepand preserve books, documents and records relating to his financial condition orbusiness transactions. The Defendant's failure to keep or preserve such books,documents and records adversely affects the ability of the Trustee and creditorsto ascertain the Debtor's financial condition, assets and business transactions.As discussed above, Trustee is unable to determine the existence of anyprepetition earnings that may still be owed to the bankruptcy estate, and thedisposition of approximately $37,000 that was in Landmark's bank account shortlybefore the Petition Date that was allegedly transferred to Mrs. Schackner's bankaccount.
Without all of Landmark's records together with all of the Defendant's otherbusiness records, if any, the Trustee and creditors do not have an adequatepicture of the Debtor's financial condition and business transactions.Documentation obtained from the real estate agency may provide information as tosome of the Defendant's income but would not provide information regardingwhether the Defendant or Landmark had sources of income other than fromcommissions earned through the real estate agency. While the Defendant statesthat all the funds transferred from Landmark's bank account into Mrs.Schackner's bank account were used to pay household expenses, the Trustee andcreditors are unable to confirm such assertion because the Defendant has failedto provide evidence as to the nature of the payments or withdrawals from theLandmark account and Mrs. Schackner's account, such as bills and invoices, andwhether all these payments were for household expenses. When the Defendantcommingled the Landmark funds with those from other sources, including those ofMrs. Schankner, into his spouse's account, the Trustee and creditors are unableto ascertain which payments from Mrs. Schackner's account are attributable tothe Defendant's funds, and/or whether fair consideration was given for suchpayments. Defendant's actions have hindered the Trustee's administration of thebankruptcy estate.
Moreover, the transfer of funds from Landmark to Mrs. Schackner's account asdirected by the Debtor appear to be have been done to avoid the Debtor'screditors. At the time Landmark was created, the Plaintiff was pursuinglitigation against the Defendant. Contrary to Defendant's testimony, Mrs.Schackner testified that the Defendant exerted control over the couple'sfinances and her bank account. In light of the Defendant's failure to cooperatewith the Trustee and the facts and circumstances shown in this case, the Courtfinds that the Defendant's failure to keep and preserve books, documents andrecords has hindered and delayed the Trustee's and creditors' ability toascertain the Defendant's financial condition and business transactions.
Once the creditor has satisfied its burden of proof, it is the debtor'sburden to establish that the failure to produce records was justified in orderto avoid a denial of discharge. See In re Yerushalmi, 393 B.R. at 297. Indetermining whether the failure is justified the court should take into accountthe reasonableness of debtor's failure in the particular circumstances. See Id.Debtor's education, experiences, and sophistication are some of the factors toconsider in making this determination. See In re Nancy DeRise, 394 B.R. at 688;In re Cacioli, 463 F.3d at 235.
While the Defendant argues that his inability to provide some of theinformation is justified because the computer he used to record Landmark'stransactions crashed and the records are no longer available, the Court findsotherwise. The Defendant has a high level of education, experience andsophistication. The Defendant has some background in information systems. As aCPA and the former Chief Financial Officer of the Plaintiff, the Defendant hadbeen in the position of overseeing the Plaintiff's finances and record keepingrelating to those finances. Clearly, Defendant knew of the importance of back-upsystems and had the experience of authorizing the purchase of back-up tapesystems for the Plaintiff which he maintained in the course of his employmentwith Plaintiff. The Defendant should have known that in the absence of a back-upsystem, copies of records should be maintained or be accessible even if not forbankruptcy purposes then for tax reporting and record keeping purposes. Indeed,the Defendant would have needed to provide his accountant or Landmark'saccountant with records regarding his business transactions and those ofLandmark to prepare appropriate tax returns.
While the Defendant did indicate that the accountant may have some of therelevant documentation, there is no evidence produced by the Defendant tosupport his representations. It is the Defendant's duty to obtain such documentsfrom the accountant if they exist. Likewise, it is the Defendant'sresponsibility to obtain necessary bank statements from the bank if theDefendant did not have possession of such statements as discussed above. Basedupon the facts and circumstances presented to the Court, the Court finds thatthe Defendant's failure to keep and preserve books, documents and records to beunjustifiable.
Accordingly, the Court finds that the Debtor's discharge should be deniedpursuant to 11 U.S.C. § 727(a)(3). As the Court determined that a denial of adischarge under 11 U.S.C. § 727(a)(3) is warranted, the Court deems itunnecessary to make a determination with respect to Plaintiff's Sixth Cause ofAction under 11 U.S.C. §727(a)(2)(A).
CONCLUSION
Based upon the foregoing, the Plaintiff's motion for summary judgment on itsFifth Cause of Action under 11 U.S.C. § 727(a)(3) is granted. The Defendant'sdischarge is denied.
So ordered.
Dated: Central Islip, New York
April 7, 2011
/s/ Dorothy Eisenberg
Dorothy Eisenberg
United States Bankruptcy Judge