Burchett v. Myers

• Decision Date: 11 March 1953
• Docket Number: No. 13208.,13208.
• Citation: 202 F.2d 920
• Parties: BURCHETT v. MYERS.
• Court: U.S. Court of Appeals — Ninth Circuit

202 F.2d 920 (1953)

BURCHETT v. MYERS.

No. 13208.

United States Court of Appeals Ninth Circuit.

March 11, 1953.

COPYRIGHT MATERIAL OMITTED

Douglas A. Busey, Reno, Nev., Springmeyer & Thompson, Reno, Nev., Charles M. Stark and Paul W. McComish, San Francisco, Cal., for appellant.

T. L. Withers, Reno, Nev., and Kearny & Adams, Reno, Nev., for appellee.

Before MATHEWS, BONE and POPE, Circuit Judges.

BONE, Circuit Judge.

Appellant Burchett filed a voluntary petition in bankruptcy and was adjudicated a bankrupt on December 12, 1949. The referee in bankruptcy subsequently sustained objections to his discharge which had been filed by the trustee in bankruptcy, G. E. Myers, and a creditor, Jerry Zolezzi, and entered an order denying discharge. On petition for review the District Judge affirmed the order and Burchett has appealed.

The District Judge rejected as clearly erroneous all findings of the referee except those sustaining trustee's objection No. 1 and Zolezzi's objection No. 1. We therefore need not concern ourselves with certain other objections made by Zolezzi and sustained by the referee. The two objections which are here in issue were grounded upon allegation that the bankrupt failed to keep or preserve adequate books of account or records from which his financial condition and business transactions could be ascertained.

Appellant contends that the referee erred in allowing amendments to the specifications of objection of the trustee and Zolezzi after the last day fixed for the filing of objections, which was June 12, 1950. It appears that when the trustee filed his specification of objection on June 10, 1950, it had not been verified. The referee permitted verification at the time of the hearing on the objections to discharge on July 17, 1950.

Lack of verification is not fatal. The defect may be waived. In re Baerncopf, D.C.E.D.Pa., 117 F. 975; 1 Collier on Bankruptcy 1279 (14th Ed.1940). The lack of verification may be supplied by amendment. In re Shanks, D.C.D.Minn., 19 F.2d 796; In re Hanna, 2 Cir., 168 F. 238; 1 Collier on Bankruptcy 1279 (14th Ed.1940).

When the referee at the hearing orally gave the trustee permission to verify the specification, counsel for appellant, who was present, remarked: "I won't make any contention that it has to be verified." This was an express waiver of the defect. Even absent a waiver, it was plainly within the discretion of the referee to permit the verification by amendment.

The referee also permitted amendment of the specifications of objection of Zolezzi. As filed on June 12, 1950, Zolezzi's objection No. 4 read as follows:

"That the bankrupt has failed to keep or preserve adequate records or books of account from which his financial business and transactions may be properly ascertained and has by fraud and deceit either concealed, transferred to others or unlawfully disposed of the proceeds of the said security."

The reference to the "said security" in the quoted specification related to certain other specifications of objection of Zolezzi which are not here pertinent. On July 20, 1950 the referee allowed amendments to Zolezzi's specifications of objections. As amended, Zolezzi's objection No. 1 reads as follows:

"That the bankrupt failed to keep or preserve books of account or records, from which his financial condition and business transactions might be ascertained."

The amendment makes no substantial change in the original specification quoted, and it patently falls outside the rule prohibiting the allegation of new matter in an amendment. No conceivable prejudice could have resulted from the allowance of the amendment. The question whether amendments should be permitted rests in the sound discretion of the bankruptcy court, and we are clearly of the opinion that there was no abuse here.

Appellant also urges that the specifications here in question were insufficient for failure to allege with particularity wherein the books and records of appellant were deficient.

The material portion of § 14, sub. c, of the Bankruptcy Act, 11 U.S.C.A. § 32, sub. c, reads as follows:

"The court shall grant the discharge unless satisfied that the bankrupt has * * * (2) * * * failed to keep or preserve books of account or records, from which his financial condition and business transactions might be ascertained, unless the court deems such acts or failure to have been justified under all the circumstances of the case."

The specifications in issue were drafted substantially in the language of § 14, sub. c. It is well settled that an objection to discharge on the ground of failure to keep or preserve adequate books or records is sufficient if averred in the general language of the statute. In re Feuer, 2 Cir., 4 F.2d 892, 893; In re Biro, 2 Cir., 107 F.2d 386; 1 Collier on Bankruptcy 1276 (14th Ed. 1940).

Neither can we accept appellant's argument that the specifications were defective for not alleging that the failure of the bankrupt to keep adequate books or records was unjustified. It is no part of the objector's case to allege and prove lack of justification. When failure to keep adequate books or records is established, the burden of justification is upon the bankrupt. Rosenberg v. Bloom, 9 Cir., 99 F.2d 249; In re Wellin, 7 Cir., 132 F.2d 262; In re Underhill, 2 Cir., 82 F.2d 258; 1 Collier on Bankruptcy 1352-1353 (14th Ed.1940).

The bankrupt's principal contention is that the referee and the district judge erred in denying him a discharge on the ground of failure to keep adequate books or records. The argument is that his records were wholly sufficient to establish his financial condition and business transactions, in light of the fact that he was only a salaried employee and not regularly engaged in a business for himself.

The records of the bankrupt are indeed impressive in volume. There are hundreds of disordered documents, consisting of deeds, real esate contracts, escrow instructions, bills of sale, inventories, financial statements, bills, receipts, check books, cancelled checks, bank statements, correspondence and other items. However, the bankrupt kept no journals, ledgers or other books of account.

The bankrupt filed a schedule with the lower court showing assets of $66,000 and liabilities of $95,395.52.¹ From the testimony and the bankrupt's records the following facts as to his financial history appear.

Appellant previously received a discharge in bankruptcy in 1940 or 1941. From that time until he filed his petition in bankruptcy in the instant case his business affairs were multifarious and complex.

He became majority owner, president and manager of two Nevada corporations, the Silver State Appliance Company and the Nevada Supply Corporation. He obtained the stock of the first partially by way of gift and partially by a 1945 property settlement agreement with his wife, Chloe V. Burchett, from whom he was divorced in November, 1947. The second corporation was organized by him in 1947.

In May of 1948 he made a gift of all of of his stock in these two corporations (which stock was at that time valued at $32,000) to his two sons. He continued to work as vice-president and manager of the Silver State Appliance Company and as manager of the Nevada Supply Corporation.

The bankrupt also engaged extensively in the buying and selling of real estate. During the period from 1944 to 1948 he purchased, individually or with others, eight parcels of property with purchase prices aggregating approximately $155,000. The purchases were generally made on contracts calling for the bulk of the purchase price to be paid in installments or were financed by means of secured loans. He sold five of these properties. Of the three remaining parcels he retained only one. A second was forfeited in June of 1948 due to default by the bankrupt on a conditional sales contract on which he had paid approximately $6000. The third was lost by foreclosure of a trust deed thereon shortly before the filing of his petition in bankruptcy.

Appellant remarried early in 1948 and was again divorced in June of the same year. Under a property settlement agreement he was obliged to turn over to his wife an automobile and an insurance policy, to pay her $200 a month for 12 months and to pay the debts incurred by her during their brief marriage.

According to his testimony, the bankrupt became insolvent at some time during the latter half of the year 1948.

The foregoing statement of facts exhausts all matters in this case about which we can have any certainty. What remains is a penumbra of incomplete and confusing records, aided not at all by the bankrupt's hazy and inaccurate recollections and explanations.

The first meeting of creditors involved five separate hearings extended over a period of five months.² In the course of these hearings the bankrupt introduced a financial statement, dated October 31, 1947, which had been prepared by him for the First National Bank of Nevada, in Reno. According to this statement, appellant at that time had total assets of $124,328.50 and liabilities of $21,222.50. On questioning, however, appellant admitted that there were gross inaccuracies in the statement.³

Appellant also introduced a so-called balance sheet for April 15, 1948, which was completed by the bankrupt and his accountant, Joseph Redman, after bankruptcy proceedings had been commenced. The document shows total assets of $100,609.15 and liabilities of $56,959.15. Checked against the records, this statement also appears questionable.⁴

Attempts to obtain an understanding of the bankrupt's business transactions at the various sessions of the first meeting of creditors resulted only in confusion. At the fourth session appellant offered to employ his accountant at his own expense to prepare a report of his finances. The accountant, Joseph Redman, was instructed to determine whether the financial statements of the bankrupt could be verified by records, to attempt to resolve the...