Court Opinion

ID: 9373946
Source: CourtListenerOpinion
Date Created: 2023-02-22 16:10:41.712818+00
Date Added: 2024-06-11T17:16:49.365522
License: Public Domain

FILED
                                                                                   JUN 30 2022
                          NOT FOR PUBLICATION                                  SUSAN M. SPRAUL, CLERK
                                                                                 U.S. BKCY. APP. PANEL
                                                                                 OF THE NINTH CIRCUIT

          UNITED STATES BANKRUPTCY APPELLATE PANEL
                    OF THE NINTH CIRCUIT

In re:                                               BAP No. CC-21-1238-LGT
MICHAEL WILLIAM DEVINE,
            Debtor.                                  Bk. No. 8:18-bk-10905-MW

MICHAEL WILLIAM DEVINE,                              Adv. No. 8:19-ap-01095-MW
             Appellant,
v.                                                   MEMORANDUM∗
UNITED STATES TRUSTEE,
             Appellee.

               Appeal from the United States Bankruptcy Court
                    for the Central District of California
                Mark S. Wallace, Bankruptcy Judge, Presiding

Before: LAFFERTY, GAN, and TAYLOR, Bankruptcy Judges.

                                 INTRODUCTION

      Chapter 7 1 debtor Michael William Devine appeals the bankruptcy

court’s judgment denying his discharge under §§ 727(a)(2)(A) and (a)(3).

      We AFFIRM.

      ∗  This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
       1 Unless specified otherwise, all chapter and section references are to the

Bankruptcy Code, 11 U.S.C. §§ 101–1532, and “Rule” references are to the Federal Rules
of Bankruptcy Procedure.
                                            1
                                  FACTS

     In 2005, Debtor formed Devine Design, a home remodeling business,

as a sole proprietorship. Debtor has a high school education and has

completed a certificate program at Interior Designers Institute in Newport

Beach, California. Before forming Devine Design, he worked as a laborer in

the construction industry and held a position in sales and management at

California Bath Restoration.

     Devine Design began experiencing financial difficulty in 2017, which

eventually led to the shutdown of the business. Debtor began

subcontracting more work, which created financial problems. He obtained

merchant cash advances from hard money lenders that charged

approximately 45% per annum. These included a $258,000 advance from

Yellowstone, $68,000 from Cap Call, and $10,338.66 from Millstone. Devine

Design defaulted on the hard money loans in November 2017; the lenders

obtained confessions of judgment and began levying Debtor’s Wells Fargo

bank account.

     Around this time, Debtor was hospitalized twice for high blood

pressure. He also experienced depression and three bouts of pneumonia,

all of which he attributed to working fifteen-hour days seven days per

week and sleeping only four hours a night for seven years.

     During the same period, Devine Design moved its warehouse to a

new location. Debtor did not supervise the move, and he afterwards

discovered that $50,000-$60,000 worth of tools were missing. Other errors,

                                     2
which Debtor attributed to his employees, consisted of ordering materials

with the wrong dimensions or shipping them to the wrong address.

Because of these issues, Debtor lost track of Devine Design’ expenses on a

project-by-project basis.

      Debtor maintained a bank account at California Bank & Trust

Company. In December 2017 he opened a second bank account at Wells

Fargo Bank. Debtor used both bank accounts for business and personal

transactions, that is, he commingled business and personal funds and used

those funds to pay both business and personal expenses.

      After the hard money lenders began levying the Wells Fargo account,

Debtor closed it. He then arranged for his girlfriend to cash checks on his

behalf so that Devine Design could continue to make payroll and continue

its construction projects. He opened a new account at Orange County

Credit Union (“OCCU”), depositing a check for $2,809.20 on February 7,

2018. Debtor testified that he opened the OCCU account so Devine Design

could continue operating the business without further levies by Cap Call

and Yellowstone.

      Debtor filed a chapter 7 petition on March 19, 2018. After gathering

evidence from the § 341(a) meeting and a Rule 2004 examination, the

United States Trustee (“UST”) filed a complaint in May 2019 seeking denial

of discharge under §§ 727(a)(2), (a)(3), and (a)(5). The parties had

previously stipulated that, to assist the UST in determining the disposition

of funds received from his customers, Debtor would produce all

                                       3
documents related to Schedule F claims of Devine Design’ former

customers, including written agreements, contracts, invoices, and purchase

orders. Debtor did not produce those documents. He did, however,

produce bank statements, deposit slips, and canceled checks from his three

bank accounts for calendar year 2017 through August 31, 2018.

      Using the banking information that was produced, the UST’s

paralegal, Michele Steele, attempted to reconcile the payments by former

customers with the bank statements and related documents, but she was

unsuccessful. The UST filed Ms. Steele’s declaration explaining her

attempts in October 2020. In his trial brief filed in September 2021, Debtor

unsuccessfully attempted to tie the known customer payments to deposits

on the bank statements. At trial, Debtor’s counsel stated that information

regarding specific projects was recorded on QuickBooks, but no such

documentation was provided. Instead, Debtor produced financial reports

containing hundreds of pages of information on the expenses of Devine

Design, but virtually nothing regarding income, other than total sales

figures.

      By agreement of the parties, all trial testimony was by declaration;

the parties waived their right to cross-examine. After hearing argument on

the date set for trial, the bankruptcy court issued its memorandum decision

and order denying Debtor’s discharge under §§ 727(a)(2)(A) and (a)(3); it

found for Debtor on the § 727(a)(5) claim. U.S. Tr. v. Devine (In re Devine),

633 B.R. 626 (Bankr. C.D. Cal. 2021). Debtor timely appealed.

                                       4
                               JURISDICTION

      The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and

157(b)(2)(J). We have jurisdiction under 28 U.S.C. § 158.

                                    ISSUES

      Did the bankruptcy court err in denying Debtor’s discharge under

§ 727(a)(3)?

      Did the bankruptcy court err in denying Debtor’s discharge under

§ 727(a)(2)(A)?

                         STANDARDS OF REVIEW

      “In an action for denial of discharge, we review: (1) the bankruptcy

court’s determinations of the historical facts for clear error; (2) its selection

of the applicable legal rules under § 727 de novo; and (3) its determinations

of mixed questions of law and fact de novo.” Hussain v. Malik (In re

Hussain), 508 B.R. 417, 421 (9th Cir. BAP 2014) (citing Searles v. Riley (In re

Searles), 317 B.R. 368, 373 (9th Cir. BAP 2004), aff’d, 212 F. App’x 589 (9th

Cir. 2006)). De novo review means that we review the matter anew, as if

the bankruptcy court had not previously decided it. Francis v. Wallace (In re

Francis), 505 B.R. 914, 917 (9th Cir. BAP 2014).

      Whether a debtor failed to maintain and preserve adequate records is

a finding of fact that we review for clear error. In re Hussain, 508 B.R. at 424.

Factual findings are clearly erroneous if they are illogical, implausible, or

without support from inferences that may be drawn from the facts in the

record. Retz v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010).

                                        5
                                DISCUSSION

A.    The bankruptcy court did not err in denying Debtor’s discharge
      under § 727(a)(3).
      Section 727(a)(3) provides that a court shall grant a 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 of the circumstances of the case[.]” A plaintiff

objecting to discharge under this section must demonstrate “(1) that the

debtor failed to maintain and preserve adequate records, and (2) such

failure makes it impossible to ascertain the debtor’s financial condition and

material business transactions.” Lansdowne v. Cox (In re Cox), 41 F.3d 1294,

1296 (9th Cir. 1994) (citation omitted). The burden of proof then shifts to

the debtor to justify the inadequacy or nonexistence of the records. Id. The

purpose of § 727(a)(3) “is to make the privilege of discharge dependent on

a true presentation of the debtor’s financial affairs.” Id. (citation omitted).

      Here, although Debtor produced bank statements and

documentation of expenses, he was unable to provide documentation to

help match deposits with payments known to have been made to Devine

Design by former customers. This made it impossible for the UST to

ascertain the source of Debtor’s revenues. From these undisputed facts, the

bankruptcy court concluded that the UST had established a failure to keep

                                        6
adequate records that made it impossible to ascertain the Debtor’s financial

condition. Nor did Debtor offer any justification for his failure to keep

adequate records. Although he argued in the bankruptcy court that his

illnesses kept him from keeping adequate records, he provided no evidence

that he had ever done so, even before he became ill. The bankruptcy court

also rejected the explanation offered by Debtor’s counsel at trial that the

reason payments could not be matched with deposits was that Square, the

credit card processor, included in a single deposit several payments made

by different customers. 2

      On appeal, Debtor argues that the bankruptcy court erred in three

ways: (1) by not explaining why it was necessary to reconcile the customer

payments with the bank statements to ascertain Debtor’s financial

condition; (2) by denying Debtor an opportunity to testify regarding how

Square worked and attempting to reconcile the customer payments with

the bank statements; and (3) by concluding that the customer payments

could not be reconciled with the bank statements when Debtor’s trial brief

identified the payments in a manner sufficient to ascertain Debtor’s

financial condition. We are not persuaded by these arguments.

      2
        The bankruptcy court also found it implausible that Debtor could have run his
business without some mechanism for tracking customer payments. The court thus
inferred the existence of such records. Accordingly, the court found, as an independent
ground under § 727(a)(3), that Debtor had concealed those records. Because we
conclude that the record supports the conclusion that Debtor failed to keep adequate
records, we need not analyze the propriety of this finding.
                                           7
      Section 727(a)(3) “places an affirmative duty on the debtor to create

books and records accurately documenting his business affairs.” Caneva v.

Sun Cmtys. Operating Ltd. P’ship (In re Caneva), 550 F.3d 755, 762 (9th Cir.

2008) (citations omitted). The bankruptcy court’s findings that Debtor

failed to keep adequate records and that Debtor’s trial brief did not

adequately reconcile customer payments with the bank statements is not

illogical, implausible, or without support in the record. The bankruptcy

court did not need to explain why Debtor’s financial condition could not be

adequately ascertained. The court implicitly found that the information

provided did not reasonably provide a “true presentation” of the Debtor’s

financial affairs. As for Debtor’s complaint that he was not permitted to

testify regarding how Square worked, his counsel did not request that he

be permitted to testify, nor does Debtor explain how such testimony would

have changed anything or why he could not have provided documentation

from Square that showed the detail of each transaction. There was no due

process violation. As pointed out by the UST, Ms. Steele’s declaration was

filed October 30, 2020, nearly a year before the trial, so there was ample

opportunity for Debtor to have provided a complete reconciliation. He did

not do so.

B.    The bankruptcy court did not err in denying Debtor’s discharge
      under § 727(a)(2)(A).
      Section 727(a)(2)(A) provides that a court shall grant a debtor’s

discharge unless “the debtor, with intent to hinder, delay, or defraud a

                                       8
creditor . . . has transferred, removed, destroyed, mutilated, or

concealed . . . property of the debtor, within one year before the date of the

filing of the petition.” The term “transfer” includes “each mode, direct or

indirect, absolute or conditional, voluntary or involuntary, of disposing of

or parting with . . . property; or . . . an interest in property.” § 101(54)(D).

      To prevail on a claim under § 727(a)(2)(A), the plaintiff must

demonstrate two elements, both occurring within one year of the petition

date: (1) a disposition of property, such as transfer or concealment; and

(2) a subjective intent on the debtor’s part to hinder, delay, or defraud a

creditor through the act disposing of the property. Hughes v. Lawson (In re

Lawson), 122 F.3d 1237, 1240 (9th Cir. 1997).

      The bankruptcy court found that all elements of the claim were met

because: (1) Debtor made a transfer when he deposited the $2,809.80 check

into the OCCU account; (2) the transfer occurred within one year of the

petition date; and (3) Debtor admitted that he opened the OCCU account

so that Devine Design could continue operating without levies by Cap Call

and Yellowstone, which established intent to hinder and delay those

creditors.

      Debtor does not dispute either the timing or the intent element, but

he disputes the finding that the deposit into the OCCU account was a

“transfer” within the meaning of § 727(a)(2)(A).

      The Ninth Circuit has concluded that a withdrawal from a bank

account, if done with the requisite intent, may qualify as a transfer for

                                         9
purposes of § 727(a)(2)(A). Bernard v. Sheaffer (In re Bernard), 96 F.3d 1279,

1282 (1996). In that case, the debtors, after being served with notice that a

creditor was applying for a temporary protective order, withdrew

significant funds from their personal and business bank accounts and put

the cash in a safe at their home. Id. at 1281. The debtors admitted they

made the withdrawals to fend off the creditor’s attempts to reach their

assets. They argued that the withdrawals were not transfers because they

were merely moving assets from one of their own “pockets” to another. Id.

at 1282.

      The court of appeals rejected this argument. Although it

acknowledged that the withdrawals did not reduce the assets available to

creditors, it held that this was not a prerequisite to denial of discharge

under § 727(a)(2)(A). Id. It noted that the definition of “transfer” is

extremely broad and quoted the legislative history of that definition: “’any

transfer of an interest in property is a transfer, including a transfer of

possession, custody, or control even if there is no transfer of title, because

possession, custody, and control are interests in property. A deposit in a

bank account or similar account is a transfer.’” Id. (quoting S. Rep. No. 989,

95th Cong., 2d Sess. 27 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5813).

The court of appeals then commented, “[i]f, as the legislative history

indicates, depositing money into a bank account is a transfer, then later

withdrawing money from that account should be a transfer too—it ought

to be a two-way street.” Id.

                                        10
      But the court of appeals also concluded that it need not rely on the

legislative history because, under California law, “’[a]s between the bank

and the depositor such money becomes the property of the bank and the

bank becomes the debtor of the depositor for the amount deposited.’” Id.

(quoting Chang v. Redding Bank of Com., 29 Cal. App. 4th 673, 681 (1994);

additional citation omitted)). The court of appeals thus reasoned that the

debtors did not own the money in their accounts but instead owned claims

against the bank. In re Bernard, 96 F.3d at 1283. So, when they withdrew

from their accounts, they exchanged debt for money, i.e., they parted with

their property—specifically, their claims against the bank. Id.

      In a case with facts similar to those presented here, the District Court

for the Northern District of California, relying in part on Bernard, affirmed

the bankruptcy court’s denial of discharge under § 727(a)(2)(A). Locke v.

Schafer (In re Schafer), 294 B.R. 126 (N.D. Cal. 2003). In Schafer, the debtor

defaulted on a line of credit, after which the creditor attached the debtor’s

bank account. Id. at 128. Shortly thereafter, the debtor opened a new bank

account and deposited $75,000 into it. Id. The debtor testified that he

opened the new account because the old one had been attached, and he

used the funds he deposited into the new account to pay his creditors on a

pro rata basis. Id. Based on these facts, the bankruptcy court concluded that

the elements of § 727(a)(2)(A) had been met. See id. at 129. On appeal, the

debtor argued that the deposit was not a transfer because the money

placed into the new account was not concealed, and it remained

                                       11
susceptible to attachment, meaning that assets available to creditors were

not reduced. Id. at 130. Although the district court in Schafer focused

primarily on the intent element, it rejected the latter argument, citing

Bernard. It concluded that “deposits in bank accounts clearly qualify” as

transfers and thus affirmed the bankruptcy court’s ruling. Id. at 131-32.

      Based on the foregoing authorities, we see no error in the bankruptcy

court’s finding that Debtor’s deposit into the OCCU account qualified as a

transfer under § 727(a)(2).

      On appeal, Debtor argues that a deposit into a bank account cannot

be a transfer under § 727(a)(2)(A). He relies on the “control test” developed

in fraudulent transfer cases, including Danning v. Miller (In re Bullion

Reserve of North America), 922 F.2d 544 (9th Cir. 1991), and Pioneer

Liquidating Corp. v. San Diego Trust & Savings Bank (In re Consolidated Pioneer

Mortgage Entities), 211 B.R. 704 (S.D. Cal. 1997), aff’d in part, rev’d in part, 166

F.3d 342 (9th Cir. 1999). He argues that, under the control test, his deposit

into the OCCU account was not a transfer because OCCU never received a

beneficial interest or obtained dominion over the funds and was instead a

conduit for Debtor’s checking transactions.

      But the issues and the applicable law in Bullion Reserve and

Consolidated Mortgage Entities are distinguishable. In both cases, the issue

before the court was whether certain individuals were “transferees” under

§ 550(a) from whom fraudulent transfers could be recovered. The control

test is used to determine who received the benefit of the transfer and is

                                         12
thus liable for returning the transferred property to the estate. The purpose

of § 550 is to restore the debtor’s financial condition to the state it would

have been had the transfer not occurred. Decker v. Voisenat (In re Serrato),

214 B.R. 219, 232 (Bankr. N.D. Cal. 1997). Accordingly, the focus is not on

the debtor’s actions, but on the liability of the transferee.

      In comparison, the salient question in the context of § 727(a)(2)(A) is

whether a debtor placed property out of the reach of creditors to avoid

paying them. This question focuses on the debtor’s actions. The purpose of

§ 727(a)(2)(A) “is to prevent the discharge of a debtor who attempts to

avert collection of his debts by concealing or otherwise disposing of

assets.” In re Kessler, 51 B.R. 895, 898 (Bankr. D. Kan. 1985) (citation

omitted).

      To that end, unlike the avoidance statutes, which are limited to

transfers, § 727(a)(2) provides for denial of discharge when a debtor has

disposed of property in any manner, i.e., by transferring, removing,

destroying, mutilating or concealing property of the debtor or the estate, if

that act was done with intent to hinder, delay, or defraud a creditor.3 For

      3  The bankruptcy court and the parties focused narrowly on whether a deposit
into a checking account constitutes a “transfer,” and the bankruptcy court correctly
applied binding Ninth Circuit authority (as it, and we, must) in finding that it does. But
even if the deposit did not qualify as a transfer, the act of depositing funds into a new
checking account for the purpose of hiding those funds from levying creditors could
just as easily qualify as “removing” or “concealing” an asset. Although the levying
creditors might have eventually discovered the OCCU account, there is no question that
Debtor’s act of opening that account and depositing a check or checks into it hid the
funds from the judgment creditors and hindered their ability to collect, at least
                                           13
this reason, we are not persuaded that the control test has any bearing on

the § 727(a)(2)(A) analysis.

      Finally, we think it is worthy of mention that §§ 727(a)(2)(A) and

(a)(3) do not necessarily require the most nefarious of intents on the part of

a debtor, nor do those sections require a showing of harm to creditors.

Moreover, although § 727(a) identifies numerous culpable acts by debtors

(“transferring” assets, “concealing” assets, etc.) and although there is an

obvious overlap or relationship between some of these culpable acts

(perhaps there is frequently an element of “concealment” within a

“transfer”), it must also be acknowledged that, per the statute, a finding

that a debtor committed any of these individual acts is sufficient to deny a

discharge. These sections underscore the policy that a debtor should come

into bankruptcy with his assets in the most coherent form possible and

with all creditors treated equitably. Allowing a debtor to move assets

around to keep them from some creditors flies in the face of that policy,

and a debtor facing attachment or levy needs to be cognizant of the risk

that he may lose his discharge as a result of exercising self-help if he later

decides to file a chapter 7 bankruptcy petition.

                               CONCLUSION

      For these reasons, the bankruptcy court did not err in denying

Debtor’s discharge under §§ 727(a)(3) or (a)(2)(A). We therefore AFFIRM.

temporarily.
                                       14