In re Baxter, Bankruptcy No. 86-02406-R
| Decision Date | 17 January 1989 |
| Docket Number | Bankruptcy No. 86-02406-R,Adv. No. 87-0119-R. |
| Citation | 96 BR 58 |
| Court | U.S. Bankruptcy Court — Eastern District of Virginia |
| Parties | In re Roger Gorton BAXTER, Debtor. DOMINICK & DOMINICK, INCORPORATED and Dominick Investor Services Corporation, Plaintiffs, v. Roger Gorton BAXTER, Defendant. |
Ben C. Ackerly, George R. Pitts, Hunton & Williams, Richmond, Va., for plaintiffs.
Thomas F. Eubank, Spinella, Owings & Shaia, P.C., Richmond, Va., for defendant.
This matter comes upon the complaint of plaintiffs, Dominick & Dominick, Incorporated and Dominick Investor Services Corporation ("Dominick"), seeking a determination of the dischargeability of certain debts and, in the alternative, the denial of a discharge in bankruptcy of the debtor, defendant Roger Gorton Baxter. Following a hearing before the Court on October 20, 1988, and oral argument on January 10, 1989 the matter was taken under advisement. After reviewing the testimony and exhibits presented at trial and the briefs and arguments of counsel, the Court concludes that the debtor failed to keep or preserve adequate records from which the debtor's financial condition or business transactions could be ascertained, and further that no justification or excuse for this failure exists under the circumstances of this case and, consequently, pursuant to 11 U.S.C. § 727 the debtor should be denied a discharge in bankruptcy. As a result of the Court's determination that the debtor's discharge should be denied, the Court finds it unnecessary at this time to address the issue of the dischargeability of the debtor's indebtedness, if any, to Dominick.
The debtor filed his petition for relief under Chapter 7 of the Bankruptcy Code on December 17, 1986. Sometime in 1982, the debtor, who was graduated in 1978 from North Carolina State University with a degree in accounting, formed a corporation called Structured Shelters of Richmond, Inc. ("Structured Shelters") which was in the business of providing investment advice and services to corporate and individual clients. The debtor was able to purchase and sell various investment instruments for clients of Structured Shelters through his position as a registered representative with Integrated Resources, a Richmond securities firm. As a licensed broker with Integrated Resources, the debtor claimed to have earned income in the form of sales commissions. In his deposition testimony, which was entered into evidence, the debtor stated tht he earned approximately $150,000 in commissions in 1984, $150,000 in 1985, and $60,000 in 1986.
In the operation of Structured Shelters the debtor solicited funds for investment from individuals and other entities. On or about September 2, 1986 the debtor opened an options trading account with Dominick at its branch office in Richmond, Virginia. The debtor's own testimony showed that he deposited funds received from investors into his personal checking accounts, and either failed to keep or failed to preserve records adequate to permit identification of the ownership of particular monies.
An excerpt from the debtor's deposition testimony illustrates the point:
The testimony further showed that the $165,000 check from Ellen Wood was deposited into the debtor's checking account at Central Fidelity Bank on September 5, 1986, at a time when the account contained only $3,831.15. The debtor tendered a personal check for $100,000, dated September 4, 1986, drawn on his Central Fidelity account to Dominick as a deposit made to open his options trading account there. The Court can only conclude from these facts that absent the commingling of Ms. Wood's funds, the debtor's checking account would have contained funds insufficient to cover the check to Dominick.
Other instances of unexplained commingling appear from the evidence. For example, the debtor also stated that he deposited funds received from the West End Medical Group into his personal account, and that he was unable to determine from his own records which money was West End's and which was his.
In addition to causing a complete inability to trace the ownership of funds, the debtor's lack of adequate recordkeeping meant that at any given moment the debtor was unable to inform a particular investor how his money was doing. When a client requested information on the status of his investment the debtor responded with an accrual figure of a percentage targeted to be made on the investment. By the debtor's own admission, this figure was merely a projection, and was not related to actual market performance of any particular investment. The debtor also provided his clients with periodic statements concerning their investments, the content of which was based upon these targeted amounts.
The debtor used the commingled funds to purchase and sell index options through his account at Dominick. According to the unrefuted testimony of a number of stock brokers who testified at trial, index options are extremely risky investments, and the debtor traded them in an equally risky manner. Specifically, the debtor regularly traded index options without cover, that is he did not hedge his investments in order to limit his liability should the market move in a direction adverse to his positions.
Section 727(a)(3) of the Bankruptcy Code directs that:
The court shall grant the debtor a discharge, unless . . . the debtor has concealed, destroyed, mutilated, falsified or 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 act or failure to act was justified under all of the circumstances of the case.
This section "is intended to allow creditors and/or the trustee to examine a debtor's financial condition and determine what has passed through a debtor's hands." In re Grimes, 58 B.R. 368, 371 (Bankr.W.D. La.1986). A debtor's records "must at least reasonably allow for reconstruction of the debtor's financial condition to meet the requirements of the Bankruptcy Code." Id. The purpose of § 727(a)(3) "is to make the privilege of discharge dependent upon...
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