Hernandez v. Shove

United States Court of Appeals
For the First Circuit

No. 22-9005

IN RE: RICHARD M. SHOVE, f/d/b/a Rick's Complete Lawn Care;
KATHLEEN E. SHOVE,

Debtors.

JOSE R. HERNANDEZ,

Appellee,

v.

RICHARD M. SHOVE,

Appellant,

KATHLEEN E. SHOVE,

Defendant.

APPEAL FROM THE BANKRUPTCY APPELLATE PANEL
FOR THE FIRST CIRCUIT

Before

Montecalvo, Selya, and Lynch,
Circuit Judges.

James P. Ehrhard for appellant.
Cynthia A. Spinola, with whom Hashim & Spinola was on brief,
for appellee.
October 6, 2023
 MONTECALVO, Circuit Judge. In December 2017, the

appellant, Richard M. Shove ("Shove"), filed a Chapter 7 bankruptcy

petition. The appellee, Jose R. Hernandez, holds an unsatisfied

judgment against Shove and sought to deny Shove a discharge on

five grounds. The bankruptcy court denied the debtor a discharge

pursuant to 11 U.S.C. § 727(a)(3) for the debtor's failure to keep

or preserve records and 11 U.S.C. § 727(a)(4) for the debtor's

making a false oath or account. The Bankruptcy Appellate Panel

for the First Circuit (the "BAP") upheld the bankruptcy court's

decision to deny a discharge pursuant to section 727(a)(3) and

declined to reach whether a discharge also should be denied

pursuant to section 727(a)(4). After careful consideration, we

affirm the section 727(a)(3) denial and decline to decide whether

a denial is warranted under section 727(a)(4).

I. Background

Chapter 7 bankruptcy proceedings allow a debtor to

obtain a "fresh start" by discharging nearly all previously

incurred debts. Privitera v. Curran (In re Curran), 855 F.3d 19,

22 (1st Cir. 2017) (quoting Grogan v. Garner, 498 U.S. 279, 283

(1991)). Nevertheless, the bankruptcy code "limits the

opportunity for a completely unencumbered new beginning to the

honest but unfortunate debtor by exempting certain debts from

discharge." Grogan, 498 U.S. at 279. One such exemption --

section 727(a)(3) -- is relevant here.

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 Under section 727(a)(3), a 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,
unless such act or failure to act was
justified under all of the circumstances of
the case . . . .

11 U.S.C. § 727(a)(3).

In this case, Shove, the debtor, operated a landscape

company, Rick's Complete Lawn Care, for about twenty-five years.

He also has experience in property management, owning

approximately ninety rental units over the years. After sustaining

an injury in a fall, Shove elected to close his landscaping

business following the 2014-2015 season. Later that year, in

December 2015, a house fire damaged Shove's home, forcing his

family to move elsewhere for about a year.

According to the bankruptcy court, Shove testified that

before the house fire in December 2015 he "kept paper copies of

business records related to . . . the rental properties in boxes

stored in the basement of [his home]" and that the fire and related

water and ice damage destroyed those records. Shove and his wife

Kathleen E. Shove ("Kathleen") did not keep records of rental

payments after the December 2015 house fire. Instead, the Shoves

"used a partial cash system." Shove testified that "a lot of

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tenants paid cash" and that when tenants paid by check, Kathleen

would often "cash some of those checks, at -- at the person's bank

to make sure that they didn't bounce." Kathleen testified that

the Shoves would keep cash from rental payments locked in the car,

in a drawer in their kitchen, or in a hutch in their living room.

The Shoves did not retain records of these rental payments,

Kathleen's cashing of rental checks, or their cash payments for

bills related to their rental properties.

In February 2015, before Shove's landscaping business

wound down, Hernandez, Shove's then-employee, sustained a serious

injury, falling from a snow-covered roof during the course of his

employment. At the time of the accident, Shove did not have a

workers' compensation policy in effect. Hernandez sued Shove for

his injuries and, in September 2017, recorded a judgment against

Shove in the amount of $965,201.53.1

Shortly after Hernandez obtained the judgment, in

December 2017, Shove and Kathleen filed for Chapter 7 bankruptcy

1 The jury in Hernandez's civil suit returned a verdict in
his favor in the amount of $750,000 on June 14, 2017. On June 16,
2017, the trial court entered judgment for Hernandez, including
interest and costs, in the amount of $937,097.83. Shove filed a
notice of appeal on July 10, 2017, which was dismissed under
Massachusetts Appellate Procedure Rule 10(c) on September 8, 2017,
for Shove's failure to take the required steps to initiate his
appeal. On September 20, 2017, Hernandez recorded the trial
court's judgment, which had since accrued additional interest,
against Shove in the Berkshire County Registry of Deeds. At that
time the judgment included $750,000 in damages, $214,893.45 in
interest, and $308.08 in costs of suit for a total of $965,201.53.

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protection, requesting a discharge from, among other things, the

$965,201.53 judgment. A Chapter 7 bankruptcy trustee ("the

Trustee") was promptly appointed.

In due course, the Shoves filed their schedules of assets

and liabilities and statement of financial affairs. As a part of

their filings, the debtors disclosed that one or both of them owned

nine total properties, several of which were income-producing as

of 2017, all located in Berkshire County: their primary residence

in Lenox (jointly owned), five multi-unit properties in Lenox

(jointly owned), two multi-unit properties in Pittsfield (owned

solely by Shove), and a single-family home in Lee (jointly owned).

In addition, the Shoves indicated that they received monthly net

rental income of $1,056.59, but they did not heed the form's

instructions to attach a statement for each rental property showing

gross receipts, ordinary and necessary business expenses, and the

total monthly net income.

The Trustee requested that the debtors provide

additional documentation relating to their overall financial

affairs and, in particular, the Shoves' use of cash in their real

estate affairs. For example, the Trustee requested rent rolls,

bank statements, and whatever financial documents the Shoves had

so that he could attempt to ascertain the Shoves' financial

position.

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 In March 2018, in response to the Trustee's request, the

Shoves produced a single-page document for each month from January

2017 to March 2018 listing rent received from each property. Each

document included a statement that the information represented

their "best recollection" as of March 2018 because the Shoves "no

longer ke[pt] records."

Also in March 2018, Hernandez commenced an adversary

proceeding in the bankruptcy court to prevent discharge of the

$965,201.53 judgment on five grounds. As is relevant to this

appeal, he claimed that Shove's discharge should be denied under

section 727(a)(3) because Shove, in the operation of his rental

property and landscaping businesses, "failed to keep or preserve

any recorded information, including books, documents, records, and

papers, from which [his] financial condition or business

transactions might be ascertained."

The debtors moved to dismiss Hernandez's amended

complaint for failure to state a claim. Hernandez agreed to

dismiss the claims against Kathleen but opposed the motion to

dismiss as to Shove. After a hearing, the bankruptcy court allowed

most of the claims, including the section 727(a)(3) claim, to

proceed against Shove.

The case continued to trial. The Shoves' failure to

keep records relating to the rental properties after the house

fire proved fatal. The bankruptcy court denied Shove a discharge

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pursuant to section 727(a)(3), concluding that "[a]lthough the

lack of records for the period preceding December 2015 has been

adequately explained, Shove has not justified the wholesale

failure to keep records regarding his financial affairs for the

post-[house-f]ire period." It also found that discharge should be

denied under section 727(a)(4). When the debtors appealed, the

BAP upheld the denial pursuant to section 727(a)(3) without

deciding whether section 727(a)(4) also provided grounds for

denial. This timely second-tier appeal ensued.

II. Standard of Review

The bankruptcy code channels bankruptcy appeals through

a two-tiered framework. City Sanitation, LLC v. Allied Waste

Servs. of Mass., LLC (In re Am. Cartage, Inc.), 656 F.3d 82, 87

(1st Cir. 2011). Under this framework, a litigant who loses in

the bankruptcy court may first appeal to either the district court

or the BAP. See 28 U.S.C. § 158(a)-(b); In re Curran, 855 F.3d at

24. A party may then obtain a second level of appellate review

from the court of appeals. See 28 U.S.C. § 158(d)(1). " We afford

no particular deference to decisions of the first-tier appellate

tribunal (be it the district court or the BAP) and focus instead

on the bankruptcy court's decision." In re Curran, 855 F.3d at

24. We review that court's "findings of fact for clear error and

its conclusions of law de novo." Wheeling & Lake Erie Ry. Co. v.

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Keach (In re Montreal, Me. & Atl. Ry., Ltd. I), 799 F.3d 1, 5 (1st

Cir. 2015).

III. Discussion

Shove argues that the bankruptcy court erred in denying

his motion to dismiss which, among other things, sought to dismiss

Hernandez's claim that discharge should be denied pursuant to

section 727(a)(3). He further argues that, even assuming the

bankruptcy court's decision on the motion to dismiss was correct,

the bankruptcy court erred in denying Shove a discharge pursuant

to section 727(a)(3). We address each argument in turn.2

A. Motion to Dismiss

We review the bankruptcy court's decision denying the

motion to dismiss as to the section 727(a)(3) claim de novo. See

Keach v. Wheeling & Lake Erie Ry. Co. (In re Montreal, Me. & Atl.

Ry., Ltd. II), 888 F.3d 1, 6 (1st Cir. 2018). "The legal standards

traditionally applicable to . . . motions to dismiss apply without

change in bankruptcy proceedings." Rok Builders, LLC v. 2010-1

2 Shove raises several other arguments related to the
section 727(a)(4) claim. Because we conclude that his challenges
to the section 727(a)(3) claim fail, we need not reach his
challenges to the bankruptcy court's ruling on the section
727(a)(4) claim and its associated evidentiary rulings. See Zizza
v. Harrington (In re Zizza), 875 F.3d 728, 733 (1st Cir. 2017)
(affirming denial of discharge under section 727(a)(4)(A) and
declining to address alternative ground for denial under section
727(a)(2)); Farouki v. Emirates Bank Int'l, Ltd., 14 F.3d 244, 250
(4th Cir. 1994) ("Proof of conduct satisfying any one of [section
727(a)'s] sub-sections is enough to justify a denial of a debtor's
request for a discharge.").

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SFG Venture LLC (In re Moultonborough Hotel Grp., LLC), 726 F.3d

1, 4 (1st Cir. 2013). Accordingly, we accept all well-pleaded

facts in the amended complaint as true "and draw[] all reasonable

inferences in the pleader's favor." In re Curran, 855 F.3d at 25.

"[A] complaint need not set forth 'detailed factual allegations,'

but it must 'contain sufficient factual matter . . . to state a

claim to relief that is plausible on its face.'" Id. (first

quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007); and

then quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)).

"Dismissal is warranted when a complaint's factual averments are

'too meager, vague, or conclusory to remove the possibility of

relief from the realm of mere conjecture.'" In re Montreal, Me.

& Atl. Ry., Ltd. II, 888 F.3d at 6 (citation omitted).

Against this backdrop, we turn to the plausibility of

Hernandez's section 727(a)(3) claim. The bankruptcy court

declined to dismiss the section 727(a)(3) claim against Shove.

The court's reasons for deciding so are unclear, as Shove did not

meet his obligation to provide a transcript of the hearing. "We

have held repeatedly that we will not review a claim of error if

the appellant has failed to include a transcript of the pertinent

proceedings in the record on appeal." Valedon Martinez v. Hosp.

Presbiteriano de la Comunidad, Inc., 806 F.2d 1128, 1135 (1st Cir.

1986). This failure to include the transcript is a sufficient

basis to reject Shove's argument that this decision was erroneous.

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Even if we were to reach that issue, as we may choose to do,

see, e.g., id., we would still reject this argument for the reasons

stated below.

To prevail "[u]nder § 727(a)(3), a creditor" must prove

that the debtor (1) "unreasonably failed to maintain sufficient

records" and (2) that this failure makes it impossible "to

adequately ascertain [their] financial situation." Razzaboni v.

Schifano (In re Schifano), 378 F.3d 60, 70 (1st Cir. 2004). Thus,

"[a] motion to dismiss a section 727(a)(3) claim is properly denied

where the complaint specifically alleges that (a) the debtor failed

to maintain any accounting or financial records and (b) . . . the

failure made it impossible to determine the debtor's financial

condition." Rasmussen v. LaMantia (In re LaMantia), No. 18-10632,

2019 WL 5388056, at *8 (Bankr. D. Me. Oct. 18, 2019).

In the amended complaint, Hernandez alleges that the

Shoves, "in their operation and management of their various income

producing properties in Berkshire County have . . . failed to keep

or preserve any recorded information, including books, documents,

records, and papers, from which [their] financial condition or

business transactions might be ascertained." Parts of this

allegation mirror the statutory language and further specify that

the type of information not kept or preserved was financial

information regarding the Shoves' "income producing properties in

Berkshire County."

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 What is more, Hernandez's other allegations add further

context for the specific records that he contends were not kept or

preserved. For example, he also alleges that despite requests,

the Shoves "[n]ever produced any financial, rental or business

records in either electronic or hard copy form" and that "[b]oth

one year prior to and subsequent to the filing of [the Shoves']

[p]etition in [b]ankruptcy, the [d]ebtors have concealed numerous

rent receipts and other earned income paid to them in cash and

checks[ and] have failed to record [the] same." Considering these

allegations in conjunction with Hernandez's allegation that the

Shoves "owned and operated at least nine multi-unit residential

income-producing properties in Berkshire County," one could

reasonably infer that Hernandez was unable to ascertain the

whereabouts of a significant amount of rental income and therefore

could not discern Shove's financial condition. Cf. Bank of Am. v.

Seligman (In re Seligman), 478 B.R. 497, 504 (Bankr. N.D. Ga. 2012)

(drawing similar inference in denying motion to dismiss section

727(a)(3) claim predicated on debtor's lack of documentation

regarding "undeposited wages and cash withdrawals"); Aspire Fed.

Credit Union v. Robinson (In re Robinson), 595 B.R. 148, 158-59

(Bankr. S.D.N.Y. 2019) (inferring that scant records which

"fail[ed] to identify the sources and uses of hundreds of thousands

of dollars of funds that flowed through and among . . . accounts"

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made "it impossible to determine the [d]ebtor's true financial

condition").

Thus, Hernandez's allegations in the amended complaint

and the reasonable inferences therefrom state a plausible claim

that discharge should be denied under section 727(a)(3), and we

affirm this aspect of the bankruptcy court's ruling on the motion

to dismiss.

B. Denial of Discharge Pursuant to Section 727(a)(3)

Having determined that Hernandez stated a plausible

section 727(a)(3) claim, we turn next to Shove's challenges to the

merits of the section 727(a)(3) ruling. On appeal, Shove contends

that the bankruptcy court erred in finding that (1) he failed to

keep adequate rental records and (2) his failure to keep records

was not justified. The bankruptcy court concluded that Hernandez

had met his burden to show that Shove had failed to maintain

adequate records. Shove does not seriously dispute that he failed

to keep and maintain contemporaneous records of rental payments.

Rather, he argues that the post-hoc rent rolls he created for the

Trustee fulfilled his duty to keep records and that his practice

of not keeping records was justified under the circumstances.

"[T]he ultimate decision about whether to grant or

withhold a discharge is a mixed question of law and fact." Gannett

v. Carp (In re Carp), 340 F.3d 15, 25 (1st Cir. 2003). Shove's

arguments, however, primarily take aim at the bankruptcy court's

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factual findings. "Accordingly, we 'review only for clear error,

with due regard . . . to the opportunity of the bankruptcy court

to judge the credibility of witnesses.'" Id. (citation and some

internal quotation marks omitted). In reviewing for clear error,

we will not set aside the bankruptcy court's "findings of fact and

the conclusions drawn therefrom . . . 'unless, on the whole of the

record, we form a strong, unyielding belief that a mistake has

been made.'" Id. at 22 (citation omitted). Thus, "if the

bankruptcy court's findings are supportable on any reasonable view

of the record, we are bound to uphold them." Id.

Before we dive further into Shove's challenges to the

merits of the section 727(a)(3) ruling, some additional background

on section 727(a)(3) and the legal principles employed to assess

section 727(a)(3) claims is useful. "Every debtor has a duty to

maintain books and records accurately memorializing [their]

business affairs." Harrington v. Simmons (In re Simmons), 810

F.3d 852, 857 (1st Cir. 2016). "Congress's evident purpose in

enacting section 727(a)(3) was to give interested parties [such as

creditors] and the court a reasonably complete picture of the

debtor's financial condition during the period prior to

bankruptcy" to facilitate "intelligent inquiry" into the debtor's

financial condition. Id. at 857-58 (citations omitted). "Section

727(a)(3) operates in furtherance of [the debtor's record-keeping]

duty" by empowering a bankruptcy court to "deny a discharge to a

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debtor who has failed to 'keep or preserve' adequate business

records 'from which the debtor's financial condition or business

transactions might be ascertained.'" Id. at 857 (quoting

11 U.S.C. § 727(a)(3)).

Claims that a discharge should be denied pursuant to

section 727(a)(3) proceed through two steps. At the first step,

the party invoking section 727(a)(3) carries the burden to

demonstrate "that the debtor has failed to maintain adequate

records." Id. If the claimant makes this prima facie showing,

the burden then shifts to the debtor to establish that the

"debtor's failure to keep and preserve records [was] justified."

Id. at 858; see In re Schifano, 378 F.3d at 70.

Although a debtor's "[r]ecord-keeping need not be

precise to the point of pedantry," the records must "sufficiently

identify the transactions [so] that intelligent inquiry can be

made of them." In re Simmons, 810 F.3d at 857-58 (citation

omitted) (second alteration in original). Shove's efforts here

fall woefully short of this requirement. At trial, Shove conceded

that he did not keep contemporaneous records relating to his

several income-producing properties. And because Shove's rental

business dealt primarily in cash transactions that were not always

deposited into a bank account, Shove's failure to keep

contemporaneous records made it all the more difficult for the

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Trustee or creditors to have any degree of confidence that they

understood Shove's financial affairs.

Shove's post-hoc rent rolls that he created for the

Trustee do not move the needle. As the rent rolls themselves note,

they reflect Shove's and Kathleen's "best recollection" as to rent

received rather than actual rents received "as [they] no longer

keep records." What is more, even though the Shoves claim that

"money received from . . . paying tenants goes to maintenance,

upkeep[,] and utility bills for all properties" and provided at

least some copies of bills and properties expenses, the information

provided still was insufficient for the bankruptcy court and the

Trustee to reconcile the difference between estimated rent

received and bank deposits.

At the end of the day, the Trustee testified that he was

"having great difficulty determining the status of [the Shoves']

financial affairs" and that he never fully "satisf[ied] [himself]

that [he] had a complete handle on the status of their financial

affairs from the records" provided. Accordingly, given the

Trustee's testimony and the lack of contemporaneous records, we

would be hard pressed to find that the court erred in finding that

Shove failed to keep adequate records after the house fire.

Shove next argues that, notwithstanding any failure to

keep records, his record practices were reasonable under the

circumstances because, according to him, "such records are

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customarily not used with few rental units," and his family was

going through extenuating circumstances after being displaced by

the fire. In other words, he contends that his failure to keep

contemporaneous records was justified.

The justification defense is one of objective

reasonableness. In re Simmons, 810 F.3d at 858. In assessing

whether a failure to keep adequate records is justified, we ask

what "a reasonably prudent person" would do in like circumstances.

Id.; see Meridian Bank v. Alten, 958 F.2d 1226, 1231-32 (3d Cir.

1992). Many factors may be pertinent to this inquiry. In re

Simmons, 810 F.3d at 858. For example, we may consider "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."

Id. (collecting cases).

In this case, the bankruptcy court determined that the

relevant factors counseled against a finding that Shove acted as

a "reasonably prudent" rental property owner and manager. Id.

Specifically, it reasoned that in light of Shove's "lengthy history

as a business and rental property owner," the change in record-

keeping practice pre- and post-fire, the relatively light burden

involved in recording rent-related transactions, and Shove's

demeanor at trial, Shove's failure to keep records was unreasonable

and unjustified.

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 We see no error in the bankruptcy court's well-reasoned

assessment. At the time Shove filed for bankruptcy he owned and

managed several income-producing properties. A reasonable

individual who owned several income-producing properties would

keep and preserve records related to those properties, and the

bankruptcy court was within its province in concluding that Shove's

failure to do so was unreasonable and unjustified. As the

bankruptcy court found, Shove previously operated a landscaping

company for twenty-five years, owned ninety rental units over his

career, and kept rental income and expense records in the past.

Shove thus possessed the necessary expertise to contemporaneously

record rental income and expenses.3

Shove's argument that the bankruptcy court improperly

assessed his credibility and demeanor does not persuade us

otherwise. As an initial matter, "we are not free to . . . make

independent judgments about the credibility of witnesses." In re

Carp, 340 F.3d at 19. Instead, we must give "due regard . . . to

the opportunity of the bankruptcy court to judge" a witness's

3 We need not address Shove's argument that the financial
and emotional challenges his family faced after the fire and in
connection with defending against Hernandez's lawsuit justify his
lack of record keeping because Shove did not raise and develop
this argument before the bankruptcy court. As such, any argument
on this score is waived. See Banco Bilbao Vizcaya Argentaria v.
Net-Velázquez (In re Net-Velázquez), 625 F.3d 34, 39-40, 40 n.8
(1st Cir. 2010) ("[A]rguments must be presented in the bankruptcy
court to be preserved.").

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credibility. Id. at 25 (citation omitted). Shove's contention

that the bankruptcy court erroneously assigned Kathleen's traits

to Shove lacks merit. To be sure, the bankruptcy court took issue

with Kathleen's demeanor and found her incredible at times. But

it also found that, at times, Shove was "condescending," "evasive,"

and "visibly frustrated" during questioning at trial. The mere

fact that the bankruptcy court found that both Shove and Kathleen

exhibited these traits does not render its credibility

determination erroneous, particularly where Shove offers nothing

to suggest he behaved in a different manner.

Accordingly, we see no reason to disturb the bankruptcy

court's finding that Shove, without any objectively reasonable

justification, failed to keep adequate records regarding his

rental properties. Shove argues that such an outcome punishes a

debtor for operating on a cash basis. But his argument is

misguided. It is not the cash basis of his rental business that

dooms his ability to obtain a discharge. Rather, it is his failure

to adequately record and account for the flow of that cash in a

way that makes it possible for someone to ascertain his financial

status that does so. We thus affirm the section 727(a)(3) denial

of discharge.

IV. Conclusion

For the reasons stated above, we affirm the denial of

discharge under section 727(a)(3).

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