Court Opinion

ID: 36511
Source: CourtListenerOpinion
Date Created: 2010-04-25 19:41:36+00
Date Added: 2024-06-11T17:15:04.745698
License: Public Domain

United States Court of Appeals
                                                                                                     Fifth Circuit
                                                                                                    F I L E D
                                    UNITED STATES COURT OF APPEALS
                                                                                                  September 29, 2004
                                             FIFTH CIRCUIT
                                         _______________________
                                                                                               Charles R. Fulbruge III
                                                                                                       Clerk
                                                   No. 03-11135
                                             _______________________

In the Matter of: LARRY L. WOMBLE,
                                                                                                          Debtor,

LARRY L. WOMBLE,
                                                                                                       Appellant,
versus

PHER PARTNERS,
                                                                      Appellee.
______________________________________________________________________________

                       Appeal from United States District Court
                      for the Northern District of Texas, Amarillo
                                     (C-03-CV-52)
______________________________________________________________________________

Before BARKSDALE and PICKERING, Circuit Judges, and LYNN*, District Judge.

PER CURIAM:**

         Before the court is Larry Womble’s appeal from the bankruptcy court’s decision to deny

discharge of certain debts owed by Womble to the appellee Pher Partners. The bankruptcy

court’s finding that Womble failed to maintain adequate financial records was not clearly

erroneous. Accordingly we affirm.

         Facts and Procedural History

         Womble and his daughter Christi Weaver maintained substantial ownership interests in

         *
             District Judge for the Northern District of Texas, sitting by designation.
         **
          Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is
not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
three entities: WW Farms, Womble Land & Cattle Company, and Womble Farms, Inc. Womble

also was affiliated with two other businesses: Four County Tractor & Equipment Co., Inc. and Ag

Resources. Womble’s mother, Lucille Bentley, died on February 2, 1996, creating the Bentley

Estate, of which Womble was the sole beneficiary and executor. On November 1, 1996, Womble

executed a partial disclaimer of all interest in real property under his mother’s will. The interest

passed to his daughter Christi Weaver.

       Pher Partners is a judgment creditor of Womble. Pher Partners filed a complaint objecting

to the discharge of Womble’s debts. Pher Partners asserted that the discharge should be denied

because (1) Womble’s disclaimer of the Bentley Estate was a sham and fraud; (2) Womble’s

transfer of approximately $71,000 on the eve of filing a Chapter 13 bankruptcy constituted a

fraudulent transfer pursuant to 11 U.S.C. § 727(a)(2)(A); and (3) Womble failed to maintain

adequate financial records from which his financial condition might reasonably be ascertained

pursuant to 11 U.S.C. § 727(a)(3).

       The bankruptcy court denied Womble’s discharge based on the second and third theories–

fraudulent transfer and inadequate financial records. The district court affirmed the bankruptcy

court’s decision. Womble now appeals and argues that the district court should not have applied

equitable tolling to bring the alleged fraudulent transfers within the one-year limitations’ period.

Womble further argues that the transfers were made to pay other creditors and not to hinder,

delay, or defraud Pher Partners. Womble also argues that the bankruptcy court’s finding that his

financial records were not adequate was clearly erroneous. He asserts that the financial

information he provided shows what passed through his hands and therefore should be deemed

adequate.

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        Standard of Review

        This court reviews the district court’s ruling on a bankruptcy appeal “by applying the same

standard to the bankruptcy court’s findings of fact and conclusions of law as the district court

applied.” Minatome v. Jack/Wade Drilling, Inc. (In re Jack/Wade Drilling, Inc.), 258 F.3d 385,

387 (5th Cir. 2001). “A bankruptcy court’s findings of fact are subject to clearly erroneous

review, while its conclusions of law are reviewed de novo.” Id.

        Analysis

        The district court upheld the bankruptcy court’s decision based on fraudulent transfers,

§ 727(a)(2)(A), and failure to maintain adequate financial records, § 727(a)(3). If either ground is

sufficient the judgment should be affirmed. We affirm based upon Womble’s failure to maintain

adequate financial records.

        Section 727(a)(3) provides:

        The court shall grant the debtor a 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 of the circumstances of the case[.]

11 U.S.C. § 727(a)(3). The party objecting to a debtor’s discharge bears the initial burden to

prove that the debtor failed to keep and preserve his financial records and that this failure

prevented the party from ascertaining the debtor’s financial condition. Robertson v. Dennis (In re

Dennis), 330 F.3d 696, 703 (5th Cir. 2003). Although a debtor’s financial records need not

contain full detail, there should be written evidence of the debtor’s financial condition. Id. If this

initial burden is satisfied, the burden shifts to the debtor to prove that the inadequacy is justified

under all the circumstances of the case. Id. The bankruptcy court has wide discretion in both

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inquiries, and the bankruptcy court’s decision is a finding of fact reviewed for clear error. Id.

       The bankruptcy court found that Pher Partners satisfied its initial burden of showing that

Womble failed to keep and preserve adequate financial records and that this failure prevented

Pher Partners from ascertaining Womble’s financial condition. The bankruptcy court noted the

following deficiencies in Womble’s record keeping: (1) Womble failed to maintain any written

records of the loans and leases which he asserts were made between the Bentley Estate and the

Womble Entities; (2) Womble failed to introduce any lease agreements or invoices from one entity

to another to substantiate numerous transfers between the entities; (3) for five years, Womble

failed to file tax returns for his entities; and (4) Womble took money from his entities without

records explaining why such money was taken.

       Womble does not directly contradict any of these findings. Instead, he cites to WTHW

Investment Builders v. Dias (In re Dias), 95 B.R. 419, 422 (Bankr. N.D. Tex. 1988), and argues

that as a matter of law all he was required to produce were financial records sufficient to show

“what passed through his hands.” He explained that the transfer of money between himself and

various Womble entities “went to pay the legitimate arms-length creditors of whatever entities

needed the money the most.”

       Womble construes the requirements of § 727(a)(3) too narrowly. A mere log of what

passed through a debtor’s hands is insufficient to provide basic information about the debtor’s

financial condition. Many of the transfers made by Womble passed through his hands to other

Womble entities. However, the records do not reveal the purpose of these various transfers or

what happened to the money after the transfers. The Seventh Circuit has rejected the argument

that the financial records of closely held entities are irrelevant. See Union Planters Bank v.

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Connors, 283 F.3d 896, 900 (7th Cir. 2002). Rather, where personal and business expenses are

intertwined, the business transactions cannot be fully ascertained without tracing the loan

proceeds of closely held entities. See id. The evidence in the record supports the bankruptcy

court’s finding that Womble did not keep adequate financial records with respect to the

transactions between himself and the other business ventures in which he was involved. Hence,

the finding that Womble failed to maintain adequate records from which his financial condition

could be ascertained was not clearly erroneous.

       The burden then shifted to Womble to show that the failure to keep adequate financial

records was justified under all of the circumstances of the case. The bankruptcy court found that

the failure was not justified, and that finding also is reviewed for clear error. In re Dennis, 330

F.3d at 703.

       The level of the debtor’s sophistication and extent of his business activities will bear on the

adequacy of his record keeping. See Goff v. Russell Co. (In re Goff), 495 F.2d 199, 201-02 (5th

Cir. 1974). The justification inquiry should include the education, experience, and sophistication

of the debtor; the volume of the debtor’s business; the complexity of the debtor’s business; the

amount of credit extended to the debtor in his business; and any other circumstances that should

be considered in the interest of justice. Meridian Bank v. Alten, 958 F.2d 1226, 1231 (3d Cir.

1992). “The demands of operating a business do not excuse a debtor from keeping basic financial

records.” Dias, 95 B.R. at 422; see also In re Goff, 495 F.2d at 202.

       The bankruptcy court found that Womble’s failure to keep adequate financial records was

not justified: “Womble is not unsophisticated: he attended college; he ran several businesses for a

number of years; he has been in bankruptcy several times before and therefore knows what is

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expected of him; and he employed able attorneys to advise him.” Womble does not contest the

bankruptcy court’s characterization of the facts. These facts support a finding that Womble failed

to maintain adequate records and that his failure to keep adequate records was not justified under

all of the circumstances of the case. Thus, the bankruptcy court’s finding was not clearly

erroneous.

       Accordingly, the judgment of the district court is AFFIRMED.

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