Opinion ID: 763047
Heading Depth: 2
Heading Rank: 3

Heading: Failure to Keep Adequate Books and Records

Text: 30 Peterson presented evidence in his case-in-chief showing that the manner in which the Scotts kept their personal records, and the records of the business entities, effectively concealed where investors' money went. The maze of entities and the transactions among them, complicated by 435 boxes of supporting documents, hid whatever assets the estate had. At the close of Peterson's case-in-chief, the bankruptcy court granted judgment to the two Douglas Scotts, finding no evidence that either of the Douglases had engaged in any conduct which would justify a denial of discharge under § 727(a)(3). 8 The bankruptcy court held that the trustee ha[d] not shown that Douglas Scotts had such knowledge of or such indifference to the record keeping that this court finds them so culpable that the court could deny their discharges under Code § 727(a)(3). He reasoned that denial of discharge is such a harsh sanction that it should be based on criminal conduct, or actual dishonesty quasi-criminal in nature. At the conclusion of the trial, the bankruptcy court granted judgment to Richard Scott, finding that the trustee has an obligation to sift through the records of a debtor, and to cooperate with the debtor. 31 The bankruptcy court did not apply the correct legal standards to this claim. Section 727(a)(3) does not require proof of criminal or quasi-criminal conduct; rather, a transfer or removal of assets, a destruction or other wasting of assets, or a concealment of assets is all the trustee must prove. Concomitantly, intent is not an element of proof under § 727(a)(3). See, e.g., In re Juzwiak, 89 F.3d 424, 430 (7th Cir.1996) ( creditors do not need to prove that the debtor intended to defraud them in order to demonstrate a § 727(a)(3) violation). 32 Also, the existence of a complete set of records does not necessarily satisfy § 727(a)(3); both statute and case law support this conclusion. Section 727(a)(3) provides that a debtor be denied a discharge if he has failed to keep or preserve any recorded information ... 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. In this context, keep and preserve are not synonyms. Keep has the same meaning it would have in phrases such as to keep a diary or to keep a record, that is, to maintain a record by entering it in a book. Otherwise, the repetition of the word preserve is superfluous, a disfavored result. See, e.g., Mackey v. Lanier Collection Agency & Serv., 486 U.S. 825, 837 & n. 11, 108 S.Ct. 2182, 100 L.Ed.2d 836 (1988) (statute should be interpreted to give meaning to every word) (collecting cases). Also, the text of the statute does not merely require that the debtor not lose any records; rather, it authorizes denial of discharge where the debtor fails to act unless the failure to act is justifiable. This language places an affirmative duty on the debtor to create books and records accurately documenting his business affairs. Juzwiak, 89 F.3d at 429 (The debtor has the duty to maintain and retain comprehensible records.) (citations omitted). The debtors maintained a computer database of their various transactions, and perhaps this would have allowed the trustee to ascertain their financial condition and business transactions. However, this database became unusable before Peterson was appointed trustee. 33 The purpose of § 727(a)(3) is  'to make the privilege of discharge dependent on a true presentation of the debtor's financial affairs.'  Cox v. Lansdowne (In re Cox), 904 F.2d 1399, 1401 (9th Cir.1990) (quoting In re Underhill, 82 F.2d 258, 260 (2d Cir.1936)). This statute ensures that trustees and creditors will receive sufficient information to enable them to 'trace the debtor's financial history; to ascertain the debtor's financial condition; and to reconstruct the debtor's financial transactions.'  Juzwiak, 89 F.3d at 427-28 (citation omitted). In the absence of § 727(a)(3), debtors without proper books and records could obtain a discharge while frustrating a trustee's ability to liquidate prepetition assets to satisfy prepetition debts. Creditors are not required to risk the withholding or concealment of assets by the bankrupt under cover of a chaotic or incomplete set of books or records. Cox, 904 F.2d at 1401 (quoting Burchett v. Myers, 202 F.2d 920, 926 (9th Cir.1953)). 34 The Scotts' case is analogous to In re Juzwiak, 89 F.3d 424 (7th Cir.1996). In the Scotts' case, the bankruptcy court held that the trustee had better go get someone from the debtor to cooperate with them in identifying all of the records. There is a problem when many records are turned over to a trustee to analyze those records. However, that is the obligation of the trustee. Along these same lines, the bankruptcy court in Juzwiak found that Juzwiak's financial transactions could be constructed from the records submitted if the creditors hired an accountant to go over the records with Juzwiak. 89 F.3d at 428-29. In Juzwiak, we reversed the bankruptcy court, noting that [c]reditors are not required 'to sift through documents and attempt to reconstruct the flow of the debtor's assets.'  Id. at 429 (citations omitted). Similarly, the bankruptcy court in this case held that the trustee would have to reconstruct the financial condition of the Scotts and their business entities, despite Elson's testimony that it would be a Herculean effort to do so. The trustee would have to comb through 435 boxes of records produced by the Scotts, and document the entire maze of transactions between the Scotts and their business entities. But as we noted in Juzwiak, the trustee does not have the obligation to undertake this. 9 35 Another case with significant similarity is United Mortgage Corp. v. Mathern (In re Mathern), 137 B.R. 311 (Bankr.D.Minn.1992), aff'd. on other grounds, 141 B.R. 667 (D.Minn.1992). Like the Scotts, the Matherns created a financial empire involving over 50 corporations and partnerships. After filing for bankruptcy, the Matherns produced tens of thousands of documents which, in the trustee's view, formed an impenetrable maze of transactions. The bankruptcy court recognized that [s]ection 727(a)(3) serves a statutory goal of fair dealing, by requiring a debtor to furnish a satisfactory written record and accounting for his current financial condition and for the nature of his business transactions for a reasonable period in the past, upon demand of a trustee or creditor. Id. at 317 (citing In re Drenckhahn, 77 B.R. 697, 708 (Bankr.D.Minn.1987)). While the bankruptcy court in Mathern found a question of fact regarding Mathern's books and records, the bankruptcy court accepted the legal theory that the complexity of the records could be enough to form the basis of a § 727(a)(3) violation. 36 Krohn v. Frommann (In re Frommann) is another case involving complex records: 37 The Debtor provided the Trustee with a carton of records consisting of bills, checks, bank statements, and closing statements with respect to sales of real estate properties. The Debtor maintains that these written records readily establish her financial condition. However, a debtor cannot simply place sacks of records before the bankruptcy judge or trustee and request the judge or trustee to sift through the documents and attempt to reconstruct the flow of the debtor's assets. 38 153 B.R. 113, 118 (Bankr.E.D.N.Y.1993) (citing In re Hughes, 873 F.2d 262, 264 (11th Cir.1989)). The same holds true for the Scotts; however, the Scotts placed 435 cartons worth of records before the trustee. See also Havel v. Vandewoestyne (In re Vandewoestyne), 174 B.R. 518, 522 (Bankr.C.D.Ill.1994) (courts have held that 'too many' is just as bad as 'not enough' ). 39 We have no doubt that the principal concern of § 727(a)(3) is debtors who destroy or hide their records. Moreover, most bankruptcies are consumer-type bankruptcies with no assets or business affairs to speak of, and, therefore, the complexity of their business transactions do not implicate § 727(a)(3). But where debtors are sophisticated in business, and carry on a business involving significant assets, creditors have an expectation of greater and better record keeping. See Juzwiak, 89 F.3d at 428. As the debtors in this case lost over $20 million, there might be grounds to question their level of sophistication. But as they solicited the investments made, set up the impenetrable financial maze and directly controlled both the flow of funds and the investment decisions of the business entities, we conclude that they should be held to a higher level of scrutiny than an ordinary debtor. Where debtors fail to maintain books and records from which their financial history and condition can be ascertained, they must be denied a discharge under 11 U.S.C. § 727(a)(3).