In Re Deborah M. Cox, Debtor. Deborah M. Cox v. Paul Lansdowne, Trustee

TANG, Circuit Judge,

concurs in part and dissents in part:

I concur in the majority’s holding that Deborah Cox maintained inadequate records. I also concur that she had a shared duty to maintain records. However, I dissent from the majority’s conclusion that the bankruptcy court committed a gross abuse of discretion when it allegedly failed to consider as a relevant factor justifying Deborah Cox’s failure to keep adequate records her claim that she delegated record keeping to her husband.

Deborah Cox sought in bankruptcy to discharge her debts which had accumulated in large part from her husband’s fraudulent activities. The trustee objected to her discharge and alleged that she attempted to defraud creditors and to conceal her financial records. The adversarial matter was heard by the bankruptcy court, which then denied her discharge pursuant to 11 U.S.C. § 727(a)(3), which requires that a debtor maintain adequate records or provide a sufficient excuse.

The bankruptcy court found that Cox did not intentionally defraud her creditors, but that there was a failure to maintain records from which her financial condition could be determined. This lack of records made it impossible for the trustee or creditors to ascertain or follow the debtor’s business transactions with any assurance of accuracy-

Cox argued to the bankruptcy court that she discharged her duty by relying on her husband to maintain the records. The bankruptcy court rejected Cox’s argument and held that delegation of her duty to maintain adequate records to her husband was not justification sufficient to discharge her from responsibility.

On appeal to the bankruptcy appellate panel, Cox argued that the bankruptcy court’s holding required her to maintain separate books. The bankruptcy appellate panel rejected this argument. It found that the bankruptcy court did not mandate duplicate bookkeeping but rather had held only that she had a shared duty to maintain books.

The majority agrees that Cox maintained inadequate records and does not dispute the fact that Cox had a shared duty to maintain records. The majority reverses, however, on the ground that the bankruptcy court failed to consider Deborah Cox’s delegation of her duty to her husband as a relevant factor justifying her failure to maintain records.

I dissent. The basic principle is that even when a shared duty is delegated, the delegator retains the duty to perform when the delegate fails to perform and remains liable for the delegate’s nonperformance. For example, if Stephen and Deborah Cox co-signed for a home loan, both have a shared duty to pay the mortgage. If Deborah delegated her duty to pay the mortgage to Stephen, Deborah still has (1) a duty to perform (pay the mortgage) and (2) liability for any breach (suffer eviction upon default). As UCC 2-210(1) states: “No delegation of performance relieves the party delegating of any duty to perform or any liability for breach.”

This basic principle applies here. As the majority concedes, both Stephen and Deborah Cox had a shared duty to maintain records. Even if Deborah Cox delegated that duty, she remains liable for performance of the duty when Stephen fails to do so. She also bears the consequences of Stephen’s nonperformance of that duty, the bankruptcy court’s refusal to grant a discharge of debt under 11 U.S.C. § 727(a)(3).

Citing legal error, the majority remands for relitigation of Deborah Cox’s justifications for nonperformance of her duty to maintain records. The court has already found that Cox's failure to keep records was not justified. It found that she was inextricably involved in the business ven*1405tures of her spouse. The court recognized that she did not participate actively in the business, that she did not have business experience and that in some regard she was the victim of her husband’s actions. Nevertheless, the bankruptcy court said: “[S]he certainly had the education and intelligence to keep and read documents she signed, to determine the extent of her assets and liabilities, to determine the sources of funds to satisfy the obligations she was incurring, and to make inquiries concerning those items she did not understand. Ms. Cox was not a person of limited intelligence who is incapable of understanding or determining the consequences of her actions.”

On remand, the majority requires the bankruptcy court to reconsider these issues already addressed by the bankruptcy court —Cox’s intelligence, business involvement and experience in business.

The majority’s opinion gives the strong impression that the majority may feel that Deborah Cox is deserving of discharge as the unknowing victim of her husband’s fraud. Although the majority’s sympathy for Cox is not unreasonable, other equities weigh strongly in favor of preventing her discharge. Ms. Cox enjoyed the benefits of her husband’s fraud for a number of years. Thus, while she may paint herself now as a victim, it is plausible and even probable that Cox knew that the financial source of her lavish life style was fraudulent. As an intelligent person who lived in an extravagant life style, Cox would naturally have had more than a passing interest in where and how that money was derived.

In short, the issue is whether the bankruptcy court clearly erred in its factual determinations about Cox’s capacity to perform her duty. Given our standard of review and the conflicting interpretations of the evidence on whether Cox was an unknowing victim or a willing and knowing beneficiary, I am unable to conclude that the bankruptcy court committed clear error much less a gross abuse of discretion. I would affirm.