Cox, In re

• Decision Date: 03 November 1994
• Docket Number: No. 93-35421,93-35421
• Citation: 41 F.3d 1294
• Parties: , 32 Collier Bankr.Cas.2d 745, Bankr. L. Rep. P 76,223 In re Deborah M. COX, Debtor. Paul LANSDOWNE, Trustee, Plaintiff-Appellee, v. Deborah M. COX, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1294

41 F.3d 1294

63 USLW 2399, 32 Collier Bankr.Cas.2d 745,

Bankr. L. Rep. P 76,223

In re Deborah M. COX, Debtor Paul LANSDOWNE, Trustee, Plaintiff-Appellee, v. Deborah M. COX, Defendant-Appellant.

No. 93-35421.

United States Court of Appeals Ninth Circuit.

Submitted Nov. 3, 1994 ^*.

Decided Dec. 2, 1994.

George W. Kelly and John L. Svoboda, Eugene, OR, for defendant-appellant.

Keith Boyd, Eugene, OR, for plaintiff-appellee.

Appeal from the United States District Court for the District of Oregon.

Before FLETCHER, D.W. NELSON, and RYMER, Circuit Judges.

D.W. NELSON, Circuit Judge:

Deborah Cox appeals from the district court's decision affirming the bankruptcy court's finding that she was not entitled to a discharge under 11 U.S.C. Sec. 727(a)(3) because she was not justified in failing to maintain books and records of her financial circumstances. We have jurisdiction under 28 U.S.C. Sec. 158(d). We reverse.

I. BACKGROUND

This is the second time this case has come before this court. See In re Cox, 904 F.2d 1399 (9th Cir.1990). The facts of this case are adequately set forth in our previous decision, see id. at 1400, and need only be summarized here.

Stephen and Deborah Cox were married in 1973 and resided thereafter in or around Medford, Oregon. After giving birth to the couple's first child, Ms. Cox quit her teaching position and Mr. Cox provided the family's sole support. Mr. Cox was involved in more than a dozen business enterprises, including several corporations and partnerships involved in real estate, diamond and bullion trading, and other investments.

During the course of their marriage, Ms. Cox signed numerous documents by which she became 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. Ms. Cox did not participate actively in any of these ventures. She did not discuss business matters with her husband, nor did she inquire into matters concerning business transactions, including those in which she nominally was involved. She kept no books or records of any of the businesses or properties in which she had an interest.

In September 1984, Stephen told Deborah that he was being pursued by angry creditors, so the family left Medford for Monterey, California. They later fled to Hawaii, where they resided as fugitives for several months. On October 29, 1984, an involuntary bankruptcy proceeding was filed against Ms. Cox. In May 1985, the couple and their two children returned to California. In July, when Ms. Cox learned that the FBI was about to seek a warrant for her arrest, she left her husband in California and returned to Oregon, where she met with government agents and the trustee in bankruptcy. Mr. Cox became a fugitive from the law.

The trustee filed this adversary action in bankruptcy court, objecting to Ms. Cox's discharge. The bankruptcy court denied the discharge, finding that Ms. Cox had failed to maintain books and records as required by 11 U.S.C. Sec. 727(a)(3). It found that the records she presented were inadequate and that because she had a shared duty with her husband to keep records, she was not justified in failing to maintain records.

On appeal, this court affirmed the bankruptcy court's finding that the records were inadequate. Id. at 1402. However, we reversed the denial of discharge because the bankruptcy court had erred in refusing to consider Ms. Cox's reliance on her husband as a justification for her failure to keep records. Id. at 1403. On remand, the bankruptcy court found that Ms. Cox was not reasonable in relying upon her husband to keep business records and thus her failure to keep adequate records was not justified.

II. DISCUSSION

A. Standard of Review

This court applies the same standard of review applied by the district court to the bankruptcy court's decision. In re Siragusa, 27 F.3d 406, 407 (9th Cir.1994). "Because 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." In re Cox, 904 F.2d 1399, 1401 (9th Cir.1990) (citations omitted). Accordingly, "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." Id.

B. The Burden of Proof

Title 11 of the United States Code, Sec. 727(a)(3) provides 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, and papers, from which the debtor's financial condition of business transactions might be ascertained, unless such ... failure to act was justified under all the circumstances of the case;

As we stated in our earlier opinion in this case, "[t]he purpose of [section 727] is to make the privilege of discharge dependent on a true presentation of the debtor's financial affairs." In re Cox, 904 F.2d at 1401 (internal quotations and citations omitted). The initial burden of proof under Sec. 727(a)(3) is on the plaintiff. Fed.R.Bank.P. 4005. "In order to state a prima facie case under section 727(a)(3), a creditor objecting to discharge must show (1) that the debtor failed to maintain and preserve adequate records, and (2) that such failure makes it impossible to ascertain the debtor's financial condition and material business transactions." Meridian Bank v. Alten, 958 F.2d 1226, 1232 (3d Cir.1992). Once the objecting party shows that the debtor's records are absent or are inadequate, the burden of proof then shifts to the debtor to justify the inadequacy or nonexistence of the records. Id. at 1233; Cox, 904 F.2d at 1404 n. 5; Matter of Horton, 621 F.2d 968, 972 (9th Cir.1980); In re Lawler, 141 B.R. 425, 428-29 (9th Cir. BAP 1992) (stating that a debtor must "provide a credible explanation" for failure to keep records); see also In re Wolfson, 152 B.R. 830, 832 (S.D.N.Y.1993); In re Folger, 149 B.R. 183, 188 (D.Kan.1992); In re Pulos, 168 B.R. 682, 690 (Bankr.D.Minn.1994); In re Sausser, 159 B.R. 352, 355-56 (Bankr.M.D.Fla.1993). We have already affirmed the bankruptcy court's factual finding that the business records maintained by Ms. Cox were inadequate. In re Cox, 904 F.2d at 1402. Thus, the only issue in this case is whether Ms. Cox's explanation that she relied upon her husband to keep records satisfied her burden of presenting evidence that she was justified in failing to maintain adequate records.

We have previously held that "exceptions to dischargeability should be strictly construed in order to serve the Bankruptcy Act's purpose of giving debtors a fresh start." Matter of Kasler, 611 F.2d 308, 310 (9th Cir.1979) (citing Gleason v. Thaw, 236 U.S. 558, 562, 35 S.Ct. 287, 289, 59 L.Ed. 717 (1915)); In re Bugna, 33 F.3d 1054, 1059 (9th Cir.1994) ("The [Bankruptcy] Code is designed to afford debtors a fresh start, and we interpret liberally its provisions favoring debtors."). The Supreme Court has recognized that while the "fresh start" is "a central purpose of the [Bankruptcy] Code," this opportunity is limited to the "honest but unfortunate debtor." Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 659, 112 L.Ed.2d 755 (1991); see In re Bugna, 33 F.3d at 1059; In re Britton, 950 F.2d 602, 606 (9th Cir.1991). Here, the bankruptcy court specifically found that Ms. Cox had no knowledge of her husband's business affairs, did not participate in the transfer or removal of assets, and lacked an actual intent to hinder, delay or defraud a creditor or an officer of the estate. Cf. In re Lansford, 822 F.2d 902, 905 (9th Cir.1987) (refusing to base denial of wife's discharge on strict agency or partnership principles, but finding wife was aware of and participated in her husband's filing of false financial statement); Matter of Walker, 726 F.2d 452, 454 (8th Cir.1984) (holding that "more than the mere existence of an agent-principal relationship is required to charge the agent's fraud to the principal" and that the agent's fraud will be imputed to the principal only "if the principal either knew or should have known of the agent's fraud"); In re Lovich, 117 F.2d 612, 614-15 (2d Cir.1941) (stating that "[a] discharge is a privilege accorded to bankrupts by the statute unless they are chargeable with conduct showing some lack of personal business morality"). We note, however, that "intent to conceal one's financial conditions is not a necessary element for the denial of discharge under Sec. 727(a)(3)." In re Wolfson, 139 B.R. 279, 287 (Bankr.S.D.N.Y.1992), aff'd, 152 B.R. 830 (S.D.N.Y.1993); In re Pulos, 168 B.R. 682, 690 (Bankr.D.Minn.1994); In re Savel, 29 B.R. 854, 856 (Bankr.S.D.Fla.1983). Thus, the burden was on Ms. Cox to show by a preponderance of the evidence that her failure to keep adequate business records was justified under all of the circumstances in this case. See In re Lawler, 141 B.R. at 429; In re Pulos, 168 B.R. at 690 ("If the lack of records is not adequately explained, the debtor is not entitled to a discharge.") (citations omitted); In re Wolfson, 139 B.R. at 287. If the extent and nature of the debtor's transactions were such that others in like circumstances would ordinarily keep financial records, she must show more than that she did not comprehend the need for them. In re Sandow, 151 F.2d 807, 809 (2d Cir.1945) (applying Sec. 14(2) of the Bankruptcy Act). In such cases, the justification must indicate that because of unusual circumstances, the debtor was absolved from the duty to maintain records herself. Id.

C. The Bankruptcy Court's Findings of Fact and Conclusions of Law

On remand, the bankruptcy court considered the six factors this court had identified to determine whether Ms. Cox's failure to keep adequate business records was justified, id. at 1403 n. 5, and made additional factual findings regarding each of those factors....