Crocker v. Stiff (In re Stiff)
| Decision Date | 03 October 2014 |
| Docket Number | Bankruptcy No. 12–53085.,Adversary No. 13–5030. |
| Citation | 519 B.R. 665 |
| Parties | In re Dennis R. STIFF, the Debtor. Samuel K. Crocker, U.S. Trustee, v. Dennis R. Stiff. |
| Court | U.S. Bankruptcy Court — Eastern District of Kentucky |
OPINION TEXT STARTS HERE
John L. Daugherty, Lexington, KY, for Samuel K. Crocker.
J.D. Kermode, Lexington, KY, for Dennis R. Stiff.
In this action, the United States Trustee seeks denial of discharge to the Debtor, a bloodstock agent, based on 11 U.S.C. §§ 727(a)(3) and 727(a)(5). The U.S. Trustee alleges the Debtor failed to keep records that would help assess his financial condition and explain the loss of certain assets. The U.S. Trustee raises questions with the disposition of two loans, cash withdrawals over a seven-year period, funds which the Debtor solicited from investors to purchase horses and interests in horses, and shares in a syndicated stallion.
The purpose of § 727(a)(3) and § 727(a)(5) is to “remove[ ] the risk to creditors of ‘the withholding or concealment of assets by the bankrupt.’ ” In re Caneva, 550 F.3d 755, 761 (9th Cir.2008) (quoting Burchett v. Myers, 202 F.2d 920, 926 (9th Cir.1953)). The testimony suggests the Debtor may have grossly mismanaged his investors' money and it is clear his recordkeeping was poor. Still, it seems clear where the money in this case went: the Debtor spent it. Thus, a denial of discharge grounded on provisions enacted to check the concealment of assets from creditors is not warranted.
The facts, procedural history and issues for trial were set up in the Memorandum Opinion which denied the Debtor's motion for summary judgment. [Doc. 29; published at Crocker v. Stiff (In re Stiff), 512 B.R. 893 (Bankr.E.D.Ky.2014) ]. The Memorandum Opinion describes the procedural history as follows:
Debtor filed a Chapter 7 petition for bankruptcy on December 7, 2012. Debtor listed nine judgment debts on his petition. On March 15, 2013, several of Debtor's scheduled judgment creditors filed a nondischargeability action, generally alleging that their judgments against Debtor were for fraud and hence non-dischargeable. On June 7, 2013, that adversary proceeding was voluntarily dismissed. On August 28, 2013, the U.S. Trustee filed this adversary proceeding, objecting to Debtor's discharge under 11 U.S.C. §§ 727(a)(2)(A) (), 727(a)(3) (), and 727(a)(5) (). The U.S. Trustee subsequently dismissed the § 727(a)(2)(A) count, explaining at the hearing on Debtor's motion for summary judgment that he dismissed the count because he was unable to find evidence that Debtor concealed any assets within one year prior to the commencement of Debtor's case, as § 727(a)(2)(A) requires.
The Debtor's summary judgment request essentially argued for a two-year limit on the look back period for a non-dischargeability action under either § 727(a)(3) or § 727(a)(5). The Memorandum Opinion concluded there was no outer limit; the time period merely affected the reasonableness of the failure to keep records or the need to explain a loss of assets. Id. at 898–901. With respect to lost assets, a normal two-year look-back period may be extended with respect to substantial assets relative to a debtor's liabilities. Id. at 900–01. The Memorandum Opinion further explained that the length of time a debtor is required to keep records will depend on the nature of the business in which the debtor is engaged, the size of the transaction, and other facts and circumstances of the case. Id. at 898–99.
The Memorandum Opinion further recognized a burden-shifting framework that places the initial obligation to show missing records or a loss of assets on the U.S. Trustee. Once the U.S. Trustee proves that a debtor failed to keep records of the kind required by § 727(a)(3), the burden shifts to the debtor to explain why his failure to keep the records was reasonable. The U.S. Trustee also has the initial burden to identify certain assets previously owned by the debtor that he no longer possesses. Once that occurs, the debtor must explain the loss of those assets.
The Memorandum Opinion recognized four asset groups identified by the U.S. Trustee that would require additional proof:
(i) the U.S. Trustee argues that Debtor has failed to explain the loss of the $194,000 cash withdrawn from two bank accounts from 2002 to 2009;
(ii) the funds owed on a $55,000 note payable in 2004 and a $35,000 note payable in 2006;
(iii) funds solicited to invest in stallion seasons and broodmare prospects in 2004 and 2005, and
(iv) interests in Equality, a stud horse, transferred between 2003 and 2009.
Crocker v. Stiff, 512 B.R. at 896 ().
The Memorandum Opinion determined that the Debtor had not established as a matter of law that his failure to keep records regarding these items was reasonable. Id. at 899. It reserved on whether the U.S. Trustee had met its burden to prove that Debtor failed to keep § 727(a)(3) records. Id. at 897 n. 2. On the § 727(a)(5) count, the Memorandum Opinion held that the U.S. Trustee had shown that some explanation was required as to the cash and promissory notes, items (i) and (ii), but it was not yet clear an explanation was required for any loss related to the investments in stallion seasons and broodmares or the shares in Equality, items (iii) and (iv). Id. at 901. Further proof of the materiality of these assets, given their remoteness from the bankruptcy, would be required at trial. Id.
The U.S. Trustee identified $194,000 that was taken from the Debtor's personal account and the business account of Bay Bloodstock between 2002 and the first half of 2009. The Debtor testified that the U.S. Trustee's calculation does not give credit for $74,000 that was redeposited into the Bay Bloodstock account. The Debtor also asserts the U.S. Trustee's calculation does not account for a $33,000 check that was initially rejected for lack of endorsement, but later corrected. If true, the Debtor must only account for cash totaling $87,000.
The Debtor's failure to keep detailed records explaining his use of $28,000 a year in cash (or by the Debtor's calculation, about $12,500 a year) for a period beginning ten years, and ending over three years, before the petition date is not unreasonable. As discussed in more detail hereafter, the Debtor credibly testified that he spent the cash he withdrew on personal living expenses, including food and living accommodations, vacations, jewelry,gambling and certain aspects of his business. Even the U.S. Trustee's expert witness on accounting issues, Todd Wright, testified that individuals would not normally keep records of ordinary living expenses going back more than two or three years. Further, some records had deteriorated and were discarded, which is not surprising considering the extended time period involved in this review.
The U.S. Trustee met his burden under § 727(a)(5) to show that the Debtor possessed substantial cash assets prior to bankruptcy which he no longer possessed, shifting the burden to the Debtor to explain the loss. The Debtor testified in considerable detail about his cash expenditures, both specifically and in general.
The Debtor and his witnesses testified that he spent approximately $20,000 on racing forms and gave $7,000 to Bob Greenbaum during the relevant period. The Debtor's former partner, Sheila Bayes, testified that the Debtor spent approximately $10,000 cash on jewelry for her at her store during the relevant time period. The Debtor testified that he lost approximately $204,000 gambling from 2002–12. While the Debtor provided nothing to support this amount, he testified that the gambling receipts that would have substantiated it became too faded to read and were discarded prepetition.
The Debtor also provided testimony regarding expenditures that he could not specifically quantify. The Debtor and Bayes said they took several expensive vacations a year during the relevant period, including trips to Hawaii, Paris, Las Vegas and the Caribbean. Both the Debtor and Bayes testified that the Debtor paid cash for most expenses on these vacations. The U.S. Trustee countered the Debtor's claims that he used large sums of cash on vacations by showing limited travel deductions on the Debtor's tax returns. [Debtor's Exs. 1–3.] But the Debtor's explanation that many trips were not subject to deduction because they were for pleasure or were made as a companion of his partner on her business trips is reasonable.
The Debtor also testified that he has used cash for most purchases his entire life. Bayes confirmed the Debtor usually paid for items with cash during their fourteen years together. the Debtor testified that he spent reasonable sums on food and other living expenses, including periodic payments to Bayes to compensate for rent. The parties accounted for one significant check for a domestic support obligation, but the Debtor claims he made other monthly payments in cash.
The final general area of cash expenditures involved the Debtor's efforts to locate horses for clients, including his syndication efforts hereafter discussed. The Debtor did not give significant detail, but did testify that many times the expenses incurred to locate horses for his clients or him ended without success.
A satisfactory explanation is not always meritorious or proper; it need only convince the court that a debtor has not hidden assets. See First Am. Bank of N.Y. v. Bodenstein (In re Bodenstein...
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