Cox, In re

• Decision Date: 08 June 1990
• Docket Number: No. 89-35081,89-35081
• Citation: 904 F.2d 1399
• Parties: , 22 Collier Bankr.Cas.2d 1754, 20 Bankr.Ct.Dec. 1043, Bankr. L. Rep. P 73,404 In re Deborah M. COX, Debtor. Deborah M. COX, Appellant, v. Paul LANSDOWNE, Trustee, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1399

904 F.2d 1399

58 USLW 2739, 22 Collier Bankr.Cas.2d 1754,

20 Bankr.Ct.Dec. 1043, Bankr. L. Rep. P 73,404

In re Deborah M. COX, Debtor.

Deborah M. COX, Appellant, v. Paul LANSDOWNE, Trustee, Appellee.

No. 89-35081.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Nov. 3, 1989.

Decided June 8, 1990.

John L. Svoboda, Eugene, Or., for debtor-appellant.

G. Jefferson Campbell, Medford, Or., for trustee-appellee.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel.

Before WRIGHT, TANG and FERNANDEZ, Circuit Judges.

EUGENE A. WRIGHT, Circuit Judge:

In a case involving massive securities fraud, flight in the dark of night from angry creditors, and avoidance of the law for several months, we consider whether the bankruptcy court erred in denying a discharge in bankruptcy for failure to maintain books and records as required under 11 U.S.C. Sec. 727(a)(3).

BACKGROUND

After marrying in 1973, Stephen and Deborah Cox resided in or around Medford, Oregon. She taught school until 1980, when she quit working after having her first child. At that time, Mr. Cox provided the family's sole support. Mrs. Cox did not know the source of funds used to maintain the couple's lifestyle.

Over the years of their marriage, she signed numerous documents, in which she became, with Stephen, a co-owner of at least 14 parcels of real estate, a partner in at least two partnerships, and an officer or director in at least four corporations. Her signature appearing on additional documents had been forged.

Deborah did not participate actively in any of these ventures. She did not discuss business matters with Stephen, nor did she inquire into matters concerning business transactions, including those involving herself. She admitted that she kept no books or records for any of the businesses or property in which she had an interest.

After dark on September 24, 1984, the family left Medford for Monterey, California. Stephen told Deborah they were leaving to get away from angry creditors. When they arrived in San Francisco, he was informed that an angry creditor was looking for him in Medford. They took the next flight to Hawaii, where they lived as fugitives for several months.

On October 29, 1984, an involuntary bankruptcy proceeding was filed against Deborah. After the couple's second child was born in May 1985, they returned to California. In July, after learning that the FBI was about to seek a warrant for her arrest, she left Stephen and returned to Oregon. She met then with government agents and the trustee in bankruptcy. Stephen's whereabouts are apparently unknown and he is apparently a fugitive from justice.

The trustee filed this adversary action in bankruptcy court, objecting to Mrs. Cox's discharge. After a four-day trial, the court denied the discharge for failing to maintain books and records as required by 11 U.S.C. Sec. 727(a)(3). It found that the records presented to the court were inadequate. Although Mrs. Cox was in some respects a victim of her husband's actions, it found The Bankruptcy Appellate Panel affirmed in an unpublished memorandum, one judge dissenting. We have jurisdiction of this appeal of the BAP decision under 28 U.S.C. Sec. 158(d).

that she was an intelligent and educated person. The court concluded that "a self-imposed curtain of ignorance" was an inadequate legal justification under Sec. 727(a)(3).

DISCUSSION

I. Standard of Review

We review the BAP's decision de novo. In re Two "S" Corp., 875 F.2d 240, 242 (9th Cir.1989). Because this court is in as good a position as the BAP to review the findings of the bankruptcy court, we review the bankruptcy court's factual findings for clear error, and its conclusions of law de novo. In re Taylor, 884 F.2d 478, 480 (9th Cir.1989); Ragsdale v. Haller, 780 F.2d 794, 795 (9th Cir.1986).

In the context of discharges we have applied a more deferential standard. "Because the right to a discharge is a matter generally left to the sound discretion of the bankruptcy judge, we disturb this determination only if we find a gross abuse of discretion." Shaver v. Shaver, 736 F.2d 1314, 1316 (9th Cir.1984) (emphasis added) (citing Stout v. Prussel, 691 F.2d 859, 861 (9th Cir.1982)). Our cases have not defined what is a "gross abuse of discretion." ¹

We must defer to the bankruptcy court's conclusion that the discharge should be denied unless its factual findings are clearly erroneous or it applies the incorrect legal standard. See Tenn v. First Hawaiian Bank, 549 F.2d 1356, 1357 (9th Cir.) (in applying the gross abuse of discretion standard in discharge cases, "[f]indings of fact will not be overturned unless found to be clearly erroneous."), cert. denied, 434 U.S. 832, 98 S.Ct. 117, 54 L.Ed.2d 93 (1977); Hunt v. National Broadcasting Company, Inc., 872 F.2d 289, 292 (9th Cir.1989) (in the context of preliminary injunctions, "the court abuses its discretion if it did not apply the correct legal standard ..., or if it misapprehended the underlying substantive law.").

II. Application of 11 U.S.C. Sec. 727(a)(3)

The bankruptcy court denied Deborah's discharge under 11 U.S.C. Sec. 727(a)(3), which states in relevant part:

(a) The court shall grant the debtor a discharge, unless--

(3) the debtor has ... 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 ... failure to act was justified under all the circumstances of the case;

. . . . .

The purpose of this statute is "to make the privilege of discharge dependent on a true presentation of the debtor's financial affairs." In re Underhill, 82 F.2d 258, 260 (2d Cir.) (applying the predecessor provision of Sec. 727(a)(3) in the Bankruptcy Act of 1898), cert. denied, 299 U.S. 546, 57 S.Ct. 9, 81 L.Ed. 402 (1936). "Creditors are not required to risk the withholding or concealment of assets by the bankrupt under cover of a chaotic or incomplete set of books or records." Burchett v. Myers, 202 F.2d 920, 926 (9th Cir.1953).

A. Bankruptcy Court's Finding of Inadequate Records

We first determine whether the bankruptcy court's finding that Deborah failed to keep or maintain adequate records was clearly erroneous. See In re Horton, 621 F.2d 968, 971 (9th Cir.1980). The bankrupt must "present sufficient written evidence which will enable his creditors reasonably to ascertain his present financial condition and to follow his business transactions for a reasonable period in the past." Id. (quoting Rhoades v. Wikle, 453 F.2d 51, 53 (9th Cir.1971)).

The bankruptcy court found that it was impossible for the trustee or creditors to ascertain Deborah's financial position or to follow her business transactions with any assurance of accuracy. The trustee found no ledgers or books of account for the Coxes individually or for their major corporation. Deborah had interests in residential real estate, but there were no records concerning rental income or the source of payments for the underlying contracts or mortgages. The court's finding that the records were inadequate was not clearly erroneous. We affirm this portion of the court's decision.

B. Deborah's Duty to Keep Records

1. Deborah's "Shared Duty"

Having found the records inadequate, the bankruptcy court concluded that Stephen and Deborah shared in the duty to keep records. Relying on our decision in Rhoades, it found a shared duty because Deborah was inextricably involved in Stephen's business ventures.

In Rhoades, we considered a bankruptcy referee's denial of a husband's discharge for failing to keep adequate books or records. The Rhoades had owned a realty business, with the wife holding the business license and the husband working part-time as an agent. Rhoades, 453 F.2d at 52. Mrs. Rhoades became involved in a series of fraudulent real estate schemes, then deserted her husband. He continued to operate the business for a short time before filing a petition in bankruptcy. The referee denied his discharge for failing to keep adequate books or records. Id.

We held that Mr. Rhoades shared in his wife's duty to keep books and records for the real estate business. Id. at 53. We found that he had a duty under state law to keep records as a licensed real estate broker, and it was impossible to separate his interest from his wife's or the realty business itself. Id. at 52.

Although Deborah did not hold a professional business license and was not actively involved in her husband's businesses, the bankruptcy court did not abuse its discretion in finding that Deborah shared in Stephen's duty to keep books and records. Deborah owned jointly at least 14 parcels of real estate, was a partner with Stephen in at least two partnerships, and was an officer in at least four of his corporations. She was therefore engaged in relatively extensive and complex business transactions. See id. at 53; Moffett v. Union Bank, 378 F.2d 10, 11 (9th Cir.1967) ("The key factor to consider in regard to the duty to keep books is the complexity of the matters and transactions which would be recorded."); In re Halpern, 387 F.2d 312, 315 (2d Cir.1968) ("In most cases, the complexity of the bankrupt's business activities determines whether he should have maintained books.").

The bankruptcy court's finding that she shared in the duty to keep records was not a gross abuse of discretion.

2. Deborah's Duty to Maintain Separate Records

Having found that Deborah shared in the duty to keep records, the court concluded:

The debtor had a duty to her creditors to maintain her own records of business transactions. That duty may not be delegated. Thus, the debtor cannot justify her failure to keep books and records because as between the two of them, her husband, and not she, was responsible for their maintenance. (citations omitted)

It relied on our decisions in Horton and Rhoades in reaching this conclusion. Deborah argues on appeal that...