Harrington v. Simmons

United States Court of Appeals
For the First Circuit

No. 15-9005

IN RE MICHAEL J. SIMMONS,

Debtor.

___________________

WILLIAM K. HARRINGTON,

Trustee, Appellee,

v.

MICHAEL J. SIMMONS,

Debtor, Appellant.

APPEAL FROM THE BANKRUPTCY APPELLATE PANEL
FOR THE FIRST CIRCUIT

Before

Lynch, Circuit Judge,
Souter,* Associate Justice,
and Selya, Circuit Judge.

James P. Ehrhard for appellant.
Sumi K. Sakata, Trial Attorney, with whom Ramona D. Elliott,
Deputy Director/General Counsel, Executive Office for United
States Trustees, U.S. Department of Justice, P. Matthew Sutko,
Associate General Counsel, William K. Harrington, United States
Trustee, and Richard T. King, Assistant United States Trustee,
were on brief, for appellee.
 January 20, 2016

__________
*Hon. David H. Souter, Associate Justice (Ret.) of the Supreme
Court of the United States, sitting by designation.
 SELYA, Circuit Judge. In exchange for a fresh start, a

debtor must paint a basic picture of his financial condition and

satisfactorily explain the disposition of his assets during the

period leading up to the filing of his bankruptcy petition. Here,

the bankruptcy court pronounced the debtor's lack of documentation

"shocking and disturbing" and found that he had not satisfactorily

explained the disposition of his assets. Consequently, the court

denied the debtor a discharge. The Bankruptcy Appellate Panel for

the First Circuit (the BAP) upheld this decision. See Harrington

v. Simmons (In re Simmons), 525 B.R. 543, 549 (B.A.P. 1st Cir.

2015). After careful consideration, we affirm.

I. BACKGROUND

In chapter 7 liquidation proceedings, an individual

debtor may receive a discharge that absolves him from virtually

all debts that arose before the bankruptcy case commenced.1 See

11 U.S.C. § 727(a). Nevertheless, certain behavior may preclude

the granting of a discharge. Two types of preclusive behavior are

relevant here. For one thing, the bankruptcy court may deny a

discharge if:

the debtor has concealed, destroyed, mutilated,
falsified, or failed to keep or preserve any recorded
information . . . from which the debtor's financial
condition or business transactions might be ascertained,

1
We say "virtually" because certain debts, excepted by statute,
are non-dischargeable. See 11 U.S.C. § 523(a). This case does
not require us to delve into these exceptions.

- 3 -
 unless such act or failure to act was justified under
all of the circumstances of the case . . . .

Id. § 727(a)(3). For another thing, the bankruptcy court may deny

a discharge if:

the debtor has failed to explain satisfactorily, before
determination of denial of discharge under this
paragraph, any loss of assets or deficiency of assets to
meet the debtor's liabilities . . . .

Id. § 727(a)(5).

In chapter 7 proceedings, the United States Trustee (the

Trustee) may be heard on any issue. See id. § 307; see also In re

Youk-See, 450 B.R. 312, 323 (Bankr. D. Mass. 2011) (explaining

that the Trustee "protect[s] the integrity of the bankruptcy

system"). The Trustee is specifically authorized to object to the

granting of a discharge in a chapter 7 case. See 11 U.S.C.

§ 727(c)(1).

Against this statutory backdrop, we proceed to the case

at hand. Michael J. Simmons (the debtor) became involved in the

real estate business around 1997. He left college before

completing his degree to work in the real estate business with an

individual named Kai Kunz. The debtor initially helped fund Kunz's

own real estate investments but, by around 2006, he was identifying

properties to purchase for his own account, obtaining financing,

and hiring property managers. By 2007, he had acquired 27 rental

properties in communities throughout Massachusetts.

- 4 -
 For aught that appears, the debtor took title to the

properties in his own name and signed all the pertinent loan

documents. He hired managers to oversee the properties and collect

rents. At least some of the rents were deposited into accounts

maintained by the debtor or his managers, but the accounts were

never segregated by tenant. Overall, the properties generated

rents that appear to have been the debtor's sole source of income.

On November 15, 2010, the debtor filed a chapter 7

bankruptcy petition, seeking to discharge, inter alia, nearly

$3,500,000 in unsecured debt. In due course, the debtor filed his

schedules of assets and liabilities and his statement of financial

affairs. These filings revealed that the debtor by then retained

an interest in only five properties (all of which he intended to

surrender to lenders). The vast majority of the debtor's unsecured

debt was described as deficiencies on various mortgages or

deficiencies arising after the foreclosure of multiple properties.

The filings also showed that the debtor was unemployed, that he

reportedly had no income from 2008 to 2010, and that he depended

on family members for support. His bank account balances were

close to zero, and he disclaimed possession of any other assets of

value.

The Trustee requested that the debtor furnish further

documentation relating to his real estate holdings and his overall

financial condition (including bank account statements, canceled

- 5 -
checks, and state and federal income tax returns). In response,

the debtor produced copies of his federal tax returns for the years

2007, 2008, and 2009. Each return reflected income and loss from

only one property. No information pertaining to other rental

properties was produced.

When the Trustee later deposed the debtor, he discovered

that the debtor had owned a total of 27 separate rental properties

during the years immediately preceding the filing of his bankruptcy

petition. The debtor professed an inability to recall any

meaningful detail regarding the disposition of his rental income.

He testified that 22 of the properties had been transferred through

short sales or foreclosures prior to his filing for bankruptcy,

but he did not provide any details about the ultimate disposition

of these properties.

Following the deposition, the Trustee again demanded

that the debtor produce rent rolls and ledgers showing how much

rent he had collected, together with documentation explaining

where the collected rents and his other assets had gone. The

debtor provided no responsive documents, and several more document

requests also went begging.

Frustrated by this apparent stonewalling, the Trustee

instituted an adversary proceeding against the debtor, seeking to

deny him a discharge. In due season, the Trustee moved for summary

judgment. At that point, the debtor surrendered some additional

- 6 -
records — but this document dump was disorganized and omitted the

most critical information sought by the Trustee. No rent rolls,

ledgers, bank statements, or other records showing itemized

accounts of either rental proceeds or real estate transactions

were forthcoming. Withal, the debtor opposed summary judgment

arguing that he had given the Trustee all the documents that he

either possessed or could reasonably obtain.

The Trustee pressed his summary judgment motion. The

bankruptcy court granted the Trustee's motion and denied a

discharge on two grounds: it concluded that the debtor had violated

both 11 U.S.C. § 727(a)(3) and 11 U.S.C. § 727(a)(5). When the

debtor appealed, the BAP upheld the denial of the discharge on

both grounds. See In re Simmons, 525 B.R. at 549. This timely

second-tier appeal ensued.

II. ANALYSIS

A two-tiered framework exists for appellate review in

bankruptcy cases:

Under this framework, litigants in the ordinary case
must first appeal to the district court (or, in some
circuits, a bankruptcy appellate panel). See 28 U.S.C.
§ 158(a)-(b); Brandt v. Repco Printers & Lithographics,
Inc. (In re Healthco Int'l, Inc.), 132 F.3d 104, 107
(1st Cir. 1997). The courts of appeals are then
available as a second tier of appellate review. See 28
U.S.C. § 158(d)(1); Stornawaye Fin. Corp. v. Hill (In re
Hill), 562 F.3d 29, 32 (1st Cir. 2009).

City Sanit., LLC v. Allied Waste Servs. of Mass., LLC (In re Am.

Cartage, Inc.), 656 F.3d 82, 87 (1st Cir. 2011). "We accord no

- 7 -
special deference to determinations made by the first-tier

appellate tribunal but, rather, train the lens of our inquiry

directly on the bankruptcy court's decision." Wheeling & Lake

Erie Ry. Co. v. Keach (In re Montreal, Me. & Atl. Ry., Ltd.), 799

F.3d 1, 5 (1st Cir. 2015). We afford de novo review to that

decision. See Razzaboni v. Schifano (In re Schifano), 378 F.3d

60, 66 (1st Cir. 2004).

Federal Rule of Bankruptcy Procedure 7056 incorporates

Federal Rule of Civil Procedure 56 as the mechanism for

adjudicating summary judgment motions. The moving party (here,

the Trustee) must show that "there is no genuine dispute as to any

material fact and [he] is entitled to judgment as a matter of law."

Fed. R. Civ. P. 56(a). Within this rubric, an issue is "genuine"

"if the record permits a rational factfinder to resolve that issue

in favor of either party." Jarvis v. Vill. Gun Shop, Inc., 805

F.3d 1, 7 (1st Cir. 2015). A fact is "material" "if its existence

or nonexistence has the potential to change the outcome of the

suit." Id. (quoting Borges ex rel. S.M.B.W. v. Serrano-Isern, 605

F.3d 1, 5 (1st Cir. 2010)). Establishing a genuine issue of

material fact requires evidence that is "significantly probative."

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986).

"[C]onclusory allegations, improbable inferences or unsupported

speculation" will not suffice. In re Schifano, 378 F.3d at 66.

- 8 -
 With respect to issues on which the non-movant would

bear the burden of proof at trial, the non-movant (here, the

debtor) must adduce sufficient evidence to permit the trier of

fact to resolve that issue in his favor. See Serrano-Isern, 605

F.3d at 5. If the non-movant fails to make the required showing

on such an issue and the issue is a dispositive one, summary

judgment is appropriate. See id.

We turn now from the general to the specific. In

granting summary judgment, the bankruptcy court determined that

the undisputed facts established two separate and independently

sufficient grounds for denying the debtor a discharge. We examine

each ground separately, mindful that the bankruptcy court's

judgment should be upheld so long as either ground is valid. See

Beaubouef v. Beaubouef (In re Beaubouef), 966 F.2d 174, 177 (5th

Cir. 1992).

A. 11 U.S.C. § 727(a)(3).

We start with 11 U.S.C. § 727(a)(3). Every debtor has

a duty to maintain books and records accurately memorializing his

business affairs. See Peterson v. Scott (In re Scott), 172 F.3d

959, 969 (7th Cir. 1999). Section 727(a)(3) operates in

furtherance of this duty: by virtue of the statute, a bankruptcy

court may deny a discharge to a debtor who has failed to "keep or

preserve" adequate business records "from which the debtor's

financial condition or business transactions might be

- 9 -
ascertained." Congress's evident purpose in enacting section

727(a)(3) was to give interested parties and the court a reasonably

complete picture of the debtor's financial condition during the

period prior to bankruptcy. See Tucker v. Devine (In re Devine),

11 B.R. 487, 488 (Bankr. D. Mass. 1981).

A party who desires to invoke section 727(a)(3) must

make a prima facie showing that the debtor has failed to maintain

adequate records. See CM Temp. Servs., Inc. v. Bailey (In re

Bailey), 375 B.R. 410, 415 (Bankr. S.D. Ohio 2007). Record-keeping

need not be precise to the point of pedantry: records can be

adequate without being textbook models. The operative standard is

functional: a debtor's records must "sufficiently identify the

transactions [so] that intelligent inquiry can be made of them."

In re Schifano, 378 F.3d at 69 (quoting Meridian Bank v. Alten,

958 F.2d 1226, 1230 (3d Cir. 1992)) (alteration in original). The

standard is an objective one. A debtor's records may be judged

deficient under section 727(a)(3) even if the debtor did not intend

to conceal financial information, see State Bank of India v. Sethi

(In re Sethi), 250 B.R. 831, 837 (Bankr. E.D.N.Y. 2000), or

harbored an honest belief that he did not need to keep records,

see Miller v. Pulos (In re Pulos), 168 B.R. 682, 692 (Bankr. D.

Minn. 1994).

Here, the debtor kept virtually no records in connection

with his 27 income-producing properties. The gaps in documentation

- 10 -
are as pervasive as they are disturbing. There is a total absence

of information regarding the amount of rent the debtor received

each month; a dearth of bank statements tracing the flow of rent

proceeds; and a general absence of documentation regarding income

earned from or expenses paid in connection with any of the debtor's

properties. There is a similar lack of documentation concerning

the acquisition, financing, and disposition of the properties.

What records there are do not permit intelligent inquiry into the

debtor's finances. Indeed, it is fair to characterize the debtor's

real estate dealings as a black hole.

Faced with this black hole, the debtor does not gainsay

his failure to maintain adequate business records. Nor does he

assert that he supplied sufficient documentation from which the

Trustee might have ascertained his financial condition. Rather,

his sole argument is that his failure to keep and preserve records

was justified by extenuating circumstances. This is a

justification defense, and we treat it as such.

To be sure, section 727(a)(3) explicitly allows for a

justification defense; and there are some situations in which

courts have found a debtor's failure to keep and preserve records

justified. See, e.g., Lansdowne v. Cox (In re Cox), 41 F.3d 1294,

1298-1300 (9th Cir. 1994) (upholding finding of justification when

debtor-wife reasonably relied on husband to keep records); Floret,

L.L.C. v. Sendecky (In re Sendecky), 283 B.R. 760, 764 (B.A.P. 8th

- 11 -
Cir. 2002) (upholding finding of justification for incomplete

records because debtor was poorly educated, unsophisticated, and

had little business experience); Hunter v. Kinney (In re Kinney),

33 B.R. 594, 596-97 (Bankr. N.D. Ohio 1983) (finding justification

where debtor's records were "irretrievably lost" through no fault

of his own). But the debtor has the burden of proving

justification, see Meridian Bank, 958 F.2d at 1234, and his ability

to prevail on such a defense turns on whether his asserted

justification is objectively reasonable, see In re Schifano, 378

F.3d at 68. The standard is that of a reasonably prudent person

in the same or similar circumstances. See Meridian Bank, 958 F.2d

at 1231.

Myriad factors may inform this inquiry, including the

debtor's education, experience, and sophistication; the volume and

complexity of the debtor's business; and whatever other

circumstances are made relevant by the idiosyncrasies of the case.

See id. at 1231.

In this instance, the bankruptcy court concluded that

the relevant factors militated strongly against a finding that the

debtor had acted as a reasonably prudent real estate owner. It

noted that the debtor was an experienced investor who had some

college education. He had left college for the specific purpose

of working in the real estate business with Kunz and had branched

out from there. He had been dealing in real estate for several

- 12 -
years. The volume of his business was substantial: he had amassed

a total of 27 properties. Importantly, he had borrowed millions

of dollars to finance the acquisition of properties. And at any

rate, the debtor's status as a taxpayer and borrower presumably

compelled him to keep such records.

Given these historical facts, we think it nose-on-the-

face plain that any reasonable property owner would have kept and

preserved documentation detailing income, expenses, and property

dispositions. The debtor's only asserted justification for

failing to keep even the most rudimentary financial records is

that he "was nothing more than a dupe for managers (such as Kai

Kunz)" and "he was manipulated and victimized by those who created

and controlled the documentation." But these bald assertions

(proffered without any specifics) are not enough to relieve the

debtor of responsibility for his abject record-keeping.2 After

all, "factually unsupported claims [and] defenses" are

insufficient to withstand summary judgment. Celotex Corp. v.

Catrett, 477 U.S. 317, 323-24 (1986); see Aponte-Rosario v.

Acevedo-Vilá, 617 F.3d 1, 12 (1st Cir. 2010) (explaining that

2
At oral argument in this court, the debtor suggested that a
trial would have fleshed out these assertions. But the record
offers no indication that the debtor made any effort to undertake
discovery. Nor did he request that the bankruptcy court postpone
adjudication of the summary judgment motion until he could obtain
more information. See Fed. R. Civ. P. 56(d). The case law makes
clear that such inaction has consequences. See Nieves-Romero v.
United States, 715 F.3d 375, 382 (1st Cir. 2013).

- 13 -
"general allegations" lacking specificity cannot survive summary

judgment).

The debtor's unsupported claim that he was a "dupe" does

not save the day. A debtor cannot shirk his statutory duty under

section 727(a)(3) by the simple expedient of claiming conclusorily

that he was merely a pawn for someone else. At least in the

absence of proof of special circumstances (not present here), such

a claim is not an objectively reasonable justification for a

commercial property owner's failure to keep and maintain any

semblance of adequate records.3

That ends this aspect of the matter. We hold, without

serious question, that even when the facts of record are taken in

the light most hospitable to the debtor, they do not form a

predicate sufficient to allow him to carry his burden of proving

justification. The debtor argues that such a holding amounts to

a rule of strict liability for a failure to keep and preserve

records. That argument is misguided. We hold only that a

discharge may be denied where, as here, the debtor fails, without

any objectively reasonable justification, to keep and preserve

records.

3
In all events, the debtor's claim that he was a "dupe" is
open to serious question. For example, he was able to name each
of the 27 properties (citing street addresses and facts concerning
mortgage financing).

- 14 -
 To say more would be to paint the lily. It follows from

what we already have said that the bankruptcy court's entry of

summary judgment and its concomitant denial of a discharge based

on 11 U.S.C. § 727(a)(3) was appropriate.

B. 11 U.S.C. § 727(a)(5).

The second ground that underlies the bankruptcy court's

decision is equally firm. Section 727(a)(5) authorizes the

bankruptcy court to deny a discharge when a debtor has experienced

a loss of assets or some other deficiency that the debtor cannot

satisfactorily explain. See Aoki v. Atto Corp. (In re Aoki), 323

B.R. 803, 817 (B.A.P. 1st Cir. 2005). A burden-shifting framework

applies: if the party seeking to thwart a discharge shows that the

debtor has not accounted for previously owned assets or previously

earned income, the burden shifts to the debtor to explain the

deficiency. See id. The debtor's explanation "must be supported

by at least some corroboration," and it "must be sufficient to

eliminate the need for any speculation as to what happened to all

of the assets." Id. Something more than vague allusions is

required. See id.

To invoke section 727(a)(5), it is unnecessary to show

that the debtor has acted fraudulently or in bad faith. See id.

Rather, the issue turns on whether a satisfactory explanation is

— or is not — forthcoming.

- 15 -
 In this case, the Trustee plainly carried his initial

burden. First, he showed that numerous pieces of property, once

owned by the debtor, are no longer included in his schedule of

assets. Second, he showed that the rents from those properties

had not been accounted for. The record demonstrates that the

debtor owned 27 income-producing properties; that he received rent

from at least some of these properties in the two years leading up

to his bankruptcy filing; and that he could not account for either

the disposition of the 22 properties that he no longer owns or his

rental income.

Given this prima facie showing, the burden shifted to

the debtor to explain his loss of assets. The bankruptcy court

found that the debtor had wholly failed to account for either the

disposition of the properties that he formerly had owned or for

the rental income that his properties had generated. Moreover,

the court found that the debtor had not offered any coherent

explanation for the dissipation of his assets. The hodge-podge of

records that the debtor ultimately provided were not only unlabeled

and disorganized but also proved inadequate to illuminate any of

the relevant issues.

The bankruptcy court's findings are unimpugnable. The

debtor has never submitted anything remotely resembling a

satisfactory explanation for the loss of millions of dollars in

assets.

- 16 -
 In an effort to paper over the lack of a satisfactory

explanation, the debtor once again asserts that he was a mere

"dupe" who produced all the information in his possession. This

assertion provides no explanation at all, much less one that would

satisfy the strictures of section 727(a)(5). We — like the courts

below — are left entirely in the dark as to what happened to the

debtor's considerable assets. We hold, therefore, that the

bankruptcy court did not err in granting the Trustee's motion for

summary judgment and thus denying the debtor a discharge under 11

U.S.C. § 727(a)(5).

III. CONCLUSION

We need go no further. A debtor need not keep and

preserve meticulously detailed records in order to secure a

discharge in bankruptcy. Nor must a debtor provide an infinitely

detailed explanation of where his money and property have gone.

But the debtor must keep and preserve records containing enough

information to paint a reasonably clear picture of his finances

during the period leading up to the filing of his bankruptcy

petition. He also must offer some satisfactory explanation for

apparent losses and deficiencies. In this case, the debtor has

not been able to cross this low threshold — and he has offered no

legally objectively reasonable justification for his failure.

Affirmed.

- 17 -