In re Schifano

• Citation: 378 F.3d 60
• Decision Date: 10 August 2004
• Docket Number: No. 03-9012.,03-9012.
• Parties: In re Frank SCHIFANO, Debtor. Alfred Razzaboni and Henry Razzaboni, Plaintiffs, Appellants, v. Frank Schifano Defendant, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

378 F.3d 60

In re Frank SCHIFANO, Debtor.

Alfred Razzaboni and Henry Razzaboni, Plaintiffs, Appellants, v. Frank Schifano Defendant, Appellee.

No. 03-9012.

United States Court of Appeals, First Circuit.

Heard June 9, 2004.

Decided August 10, 2004.

COPYRIGHT MATERIAL OMITTED

Lawrence P. Murray was on brief, for appellants.

Jordan L. Shapiro was on brief, for appellee.

Before LYNCH and LIPEZ, Circuit Judges; ROSENN,^* Senior Circuit Judge.

ROSENN, Senior Circuit Judge.

This appeal raises an interesting question relating to the importance for a debtor to maintain and preserve the debtor's financial records for a reasonable period prior to filing for bankruptcy to allow the bankruptcy court to make an intelligent inquiry of the debtor's financial status. In this case, Frank Schifano (the "Debtor") filed for personal bankruptcy under Chapter 7 of the Bankruptcy Code, frustrating the efforts of Alfred and Henry Razzaboni (the "Razzabonis") to collect a $200,000 judgment against him. The Razzabonis alleged that under 11 U.S.C. § 727(a) the debt should not be discharged because the Debtor transferred or concealed assets, made false oaths, and failed to keep adequate records. The bankruptcy court granted summary judgment to the Debtor on all three claims, and the United States Bankruptcy Appellate Panel for the First Circuit ("BAP") affirmed. The Razzabonis timely appealed to this court.

We agree that the Razzabonis have failed to produce sufficient evidence to survive summary judgment on their claims of concealment of assets and false oaths. However, we believe that there is a material issue of fact as to whether the Debtor failed to maintain adequate records. Thus, we will affirm in part, reverse in part and remand for trial on the issue pertaining to the adequate maintenance of records.

I.

We recognize the bitterness that often prevails when creditors are frustrated in the collection of a just debt due to the debtor's filing a petition in bankruptcy. Although creditors often challenge the discharge in bankruptcy of the debtor on grounds of fraud, concealment of assets, or other justifiable grounds, the challenge cannot survive summary judgment on mere speculation or accusation. Creditors must produce competent evidence. See Boroff v. Tully (In re Tully), 818 F.2d 106, 110 (1st Cir.1987). Yet, in producing competent evidence, a creditor may be hindered by the debtor's unwillingness to turn over financial records or the debtor's failure to maintain adequate records that would document any potential fraud or wrongdoing. Because the debtor is often the gatekeeper to any incriminating evidence, the Bankruptcy Code will avoid a discharge if a debtor fails to maintain adequate records to reasonably ascertain his financial condition. 11 U.S.C. § 727(a)(3).

The bankruptcy court in this proceeding granted the Debtor's motion for summary judgment from the bench without a written opinion or a statement of facts. Upon appeal, the BAP filed a written opinion recounting the relevant evidence of this case and affirming the bankruptcy court on all counts. The Razzaboni's claims of concealment, false oaths and failure to maintain records involve three assets relevant to this case: the construction companies owned by the Debtor and his brother, the Debtor's family residence, and gifts and loans paid by family members to the Debtor. We review the evidence from the record regarding each of these assets in the light most favorable to the Razzabonis as the non-moving party. Pacific Ins. Co., Ltd. v. Eaton Vance Mgmt., 369 F.3d 584, 588 (1st Cir.2004).

A. The Schifano Corporations

The Debtor has been involved with several family owned construction companies over approximately 25 years. His original company, Frank Schifano Building and Design Corporation (the "Schifano Corporation") contracted with the Appellants, the Razzabonis, for a construction project that resulted in the Razzabonis suing the Debtor in Massachusetts state court. The Razzabonis obtained a default judgment against the Debtor personally in the amount of $200,000 on January 5, 1995. The Debtor began making payments on the judgment until he filed a bankruptcy petition under Chapter 7 of the Bankruptcy Code on March 29, 1996.

The Schifano Corporation was dissolved in 1993, and the Royal Crest Corporation ("Royal Crest") was formed the same year to take its place. The BAP's opinion acknowledged that the record was not clear on this point, but it appears that Royal Crest was originally formed with the Debtor as the President, but with the Debtor's brother, Joseph Schifano, as the sole shareholder. Then, in 1995, when the debt to the Razzabonis threatened the business, Joseph Schifano claims that he transferred ownership of Royal Crest to the Debtor so that Joseph could start a new business, Northlantic Construction Corporation ("Northlantic"). Neither the Debtor nor Joseph has explained what consideration, if any, was paid for the transfer of Royal Crest to the Debtor. The Debtor has produced no records of this transaction.

Joseph Schifano claims that he capitalized Northlantic with approximately $16,500 of his own savings, although no records have been produced documenting this capitalization. Joseph admits that he created the company to avoid the creditor-related problems with Royal Crest. Northlantic occupies the same office space as Royal Crest, uses all the same equipment, and employs the same people. Northlantic pays the Debtor a salary of $500 per week, and pays the Debtor's wife $800 per week for book keeping. Northlantic also made loans to the Debtor of approximately $16,500 over several months in 1995, just after the corporation was formed.

After Joseph Schifano formed Northlantic to replace Royal Crest, the Debtor extracted $38,000 from Royal Crest in what he described as "loan repayments." The Debtor supplied the cancelled checks to document these payments, but did not supply any records of the original loans that he alleges he had made to Royal Crest. The Debtor and his wife do not maintain a bank account, so they do not have any method of proving their payments made or income received. They pay all of their bills in cash or money orders. The Debtor's wife stated that they do not maintain a bank account so that the Internal Revenue Service (IRS) cannot levy their funds.

B. The Stoneham Property

Since 1987, the Debtor and his family have resided in a home at 12 Dapper Darby Drive in Stoneham, Massachusetts (the "Stoneham property"). The Stoneham property was purchased on February 5, 1987 by Massbay Land Management Corporation ("Massbay"). The Debtor was the president of Massbay, but his father, Rosario Schifano, was the record sole shareholder. Metropolitan Bank issued a mortgage on the property for $193,000, signed by the Debtor personally and as President of Massbay, and by Rosario as treasurer of Massbay. In 1990, Massbay borrowed $60,000 from Joseph Pascuccio, and backed the loan with a note on the Stoneham property. In June of 1990, Metropolitan Bank initiated foreclosure proceedings on the first mortgage, but sold the mortgage to Pascuccio, leaving Pascuccio holding the mortgage note on the Stoneham property for a total of approximately $257,000. The Razzabonis offered in evidence an appraisal of the property in 1997, which valued the property at $350,000.

Massbay dissolved in December of 1990, apparently transferring the Stoneham property to Rosario as Massbay's sole shareholder, even though the Debtor continued to live in the property. Rosario died in 1993, leaving all of his assets to his wife, Norma Schifano, who is the Debtor's mother.¹ The Debtor explained that he pays his mother $2,500 per month as rent to live in the Stoneham property. The rental amount is exactly equivalent to the monthly mortgage payment that is due to Pascuccio. Pascuccio has testified that since he has held the mortgage on the Stoneham property, he has received mortgage payments from Rosario, Norma, and from the Debtor. Even though the Debtor maintains personal liability on the mortgage for the Stoneham property and lives in the property, he claims that he has no ownership interest in it because the title to the property originally was held by Massbay, then transferred to Rosario, and finally transferred to Norma.

C. Gifts and Loans

The Debtor testified that over the course of several years preceding his filing for bankruptcy, he received over $50,000 from family members, including his parents, brothers and cousins. The Debtor describes these payments as loans and gifts, although he maintains no records of them, and has no bank account statements to verify the transactions or amounts.

II.

In January of 1995, the Razzabonis obtained a default judgment against the Debtor and attempted to collect on the judgment. The Debtor filed his petition for personal bankruptcy under Chapter 7 on March 29, 1996. On July 1, 1996, the Razzabonis filed objections to the discharge of the debt owed them. They alleged that the Debtor made a false oath by failing to list material assets and liabilities in his bankruptcy filing in violation of 11 U.S.C. § 727(a)(4), and transferred or concealed property within one year of filing the petition, thereby justifying an exclusion of discharge under 11 U.S.C. § 727(a)(2)(A). Although the original complaint was limited to these two claims, the Razzabonis also argued in the court proceedings that the debt should not be discharged because the Debtor failed to keep adequate records of his financial dealings under 11 U.S.C. § 727(a)(3).²

On January 21, 1998, the Debtor filed a motion for summary judgment, alleging that there was no evidence of fraudulent transfers or false oaths to support the Razzaboni's objections to the discharge of their debt. The bankruptcy court held a hearing on the motion on March 11, 1998, and issued an oral order granting summary judgment for the Debtor. The bankruptcy court also found the Razzabonis' objection...