Meridian Bank v. Alten

• Decision Date: 13 March 1992
• Docket Number: No. 91-5365,91-5365
• Citation: 958 F.2d 1226
• Parties: 26 Collier Bankr.Cas.2d 846 MERIDIAN BANK, v. Eugene ALTEN, Marlene Alten, and Thomas J. Subranni, Trustee Eugene and Marlene Alten, Appellants.
• Court: U.S. Court of Appeals — Third Circuit

Page 1226

958 F.2d 1226

26 Collier Bankr.Cas.2d 846

MERIDIAN BANK, v. Eugene ALTEN, Marlene Alten, and Thomas J. Subranni, Trustee Eugene and Marlene Alten, Appellants.

No. 91-5365.

United States Court of Appeals Third Circuit.

Argued Jan. 6, 1992.

Decided March 13, 1992.

Janet Gold (argued), William V. Eisenberg, Eisenberg & Gold, P.C., Haddonfield, N.J., for appellants.

Peter J. Mooney (argued), J. Robert McMahon, White and Williams, Philadelphia, Pa., for appellee.

Before COWEN, NYGAARD and WEIS, Circuit Judges.

OPINION OF THE COURT

COWEN, Circuit Judge.

In this bankruptcy case the bankruptcy court entered an order discharging the debtors even though they maintained few if any records of their financial dealings. The district court reversed. We will affirm the district court, based on a conclusion that the debtors did not meet their burden of justifying failure to keep adequate records under 11 U.S.C. § 727(a)(3) (1988).

I.

Eugene Alten and Marlene Alten (collectively "the Altens" or "the debtors") personally guaranteed a loan from Meridian Bank (Meridian) for a development project which failed. Meridian thereafter obtained a judgment against the Altens for $3,836,181. At that point the Altens stopped using bank or other financial accounts for their financial transactions and began dealing only in cash and money orders. The Altens candidly acknowledged their reason for doing so was to avoid having bank or other financial accounts upon which their creditors could levy liens or effect collections. They maintained scant or no records of their business, professional or personal transactions, again to avoid having to pay the Meridian judgment or other debts.

Mr. Alten is an attorney licensed to practice law in Pennsylvania since 1958, and is also a member of the bar of the United States Tax Court. He has been self-employed as an international investment and real estate consultant since 1982. Prior to 1977 he engaged in the private practice of law specializing in real estate. Between 1977 and 1980, following entry of the Meridian judgment, Alten was a consultant and chief operating officer for several Atlantic City enterprises all of which dissolved by 1980.

The Altens filed for bankruptcy under Chapter 7 on May 22, 1985, seeking to discharge the Meridian debt. Meridian opposed the discharge, alleging that the Altens concealed their assets, failed to keep records as required by the Bankruptcy Code, and made fraudulent oaths regarding their financial affairs.

The evidence submitted to the bankruptcy court was scant. Mr. Alten's financial records for the period from 1982 through 1986, both business and personal, were virtually non-existent. The sole written records presented to the bankruptcy court of income received during that period were three handwritten sheets of paper, purporting to show income from his international consulting business and reflecting gross revenues of approximately $380,000. Mr. Alten kept no time records for his consulting practice, produced no written agreements or correspondence with clients concerning payment of fees or work performed, and had no evidence of payment of fees or expenses by clients. He produced no copies of checks or money orders reflecting payment or reimbursement of expenses. Other evidence presented to the bankruptcy court included a handwritten ledger showing dates and travel destinations, as well as income tax returns which lacked supporting documentation for $120,000 in business expense deductions Mr. Alten claimed on those returns.

Following trial the bankruptcy court found no merit in the objections of Meridian and granted the Altens a discharge in bankruptcy. The court held that the Altens' fear of levy of execution on bank and financial accounts by creditors and the nature of Mr. Alten's business justified failure to keep records. The bankruptcy court found that Mr. Alten worked at home, had sixteen clients between 1982 and 1986, and earned a net annual income of less than $50,000 during those years. It acknowledged Mr. Alten's sophistication as an attorney and experienced businessman. Nevertheless, the bankruptcy court concluded that failure to keep records was justified and discharged the Altens' debt to Meridian.

On appeal, the district court held that the bankruptcy court misapplied the record keeping provisions of the Bankruptcy Code, 11 U.S.C. § 727(a)(3), ¹ and vacated the discharge of the Meridian judgment. The Altens and their trustee appeal to this court asserting that the decision of the bankruptcy court, finding justification in failure to keep records, was a finding of fact, and that the district court applied the wrong standard of proof in reviewing that decision.

II.

The central issue is whether the Altens were justified in failing to keep records of financial transactions. In reviewing the bankruptcy court's decision, this court, like the district court, "applies a clearly erroneous standard to findings of fact, conducts plenary review of conclusions of law, and must break down mixed questions of law and fact, applying the appropriate standard to each component." In re Sharon Steel Corp., 871 F.2d 1217, 1222 (3d Cir.1989). See also Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 102-03 (3d Cir.1981).

The Altens argue that the bankruptcy court's finding of justification was a finding of fact subject to a clearly erroneous standard of review. The Altens further argue that Rule 52(a) of the Federal Rules of Civil Procedure limits the ability of an appellate court to set aside findings of fact to instances where such findings are determined to be clearly erroneous. Similarly, Bankruptcy Rule 8013 provides in part that "[f]indings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of witnesses."

Meridian contends that the district court properly found that the question of whether the Altens' failure to keep or preserve records was "justified" was a mixed question of law and fact within the meaning of 11 U.S.C. § 727(a)(3), and that the district court correctly held that the bankruptcy court misapplied section 727(a)(3) to the facts of this case. A mixed question of law and fact is found whenever a legal precept is applied to the sum of the facts of a case. See, e.g., In re Ruti-Sweetwater, Inc., 836 F.2d 1263, 1266 (10th Cir.1988); In re Abbotts Dairies of Pennsylvania, Inc., 788 F.2d 143, 147 (3d Cir.1986); In re Hammons, 614 F.2d 399, 403 (5th Cir.1980).

This court has distinguished three different kinds of facts as fundamental to the anatomy of fact finding in the judicial process, i.e., basic, inferred and ultimate facts.

Basic facts are the historical and narrative events elicited from the evidence presented at trial, admitted by stipulation, or not denied, where required, in responsive pleadings. Inferred factual conclusions are drawn from basic facts and are permitted only when, and to the extent that, logic and human experience indicate a probability that certain consequences can and do follow from the basic facts. No legal precept is implicated in drawing permissible factual inferences. But an inferred fact must be distinguished from a concept described in a term of art as an "ultimate fact." So conceived, an ultimate fact is a mixture of fact and legal precept.... "The ultimate finding is a conclusion of law or at least a determination of a mixed question of law and fact."

Universal Minerals, 669 F.2d at 102 (citations omitted).

The bankruptcy court's determination that all the factual circumstances of the case amounted to justification for inadequate record keeping by the Altens is an ultimate fact. Our review of a bankruptcy court's application of section 727(a)(3) to basic and inferred facts necessitates plenary review of the legal standards applied by the court in its analysis. Thus, we undertake plenary review of the concept of "justification" actually applied by the bankruptcy court in this case, and also of the bankruptcy court's allocation of the burden of persuasion on this issue. See In re Cox, 904 F.2d 1399, 1401 (9th Cir.1990). ²

III.

It is undisputed that the Altens failed to keep or preserve records of their financial dealings. The question before this court is whether their failure was justified under all the circumstances of the case.

A.

The purpose of section 727(a)(3) is to give creditors and the bankruptcy court complete and accurate information concerning the status of the debtor's affairs and to test the completeness of the disclosure requisite to a discharge. See 4 Collier on Bankruptcy p 727.-03 (15th ed. 1979). The statute also ensures that the trustee and creditors are supplied with dependable information on which they can rely in tracing a debtor's financial history. Creditors are not required to risk having the debtor withhold or conceal assets "under cover of a chaotic or incomplete set of books or records." Cox, 904 F.2d at 1401 (quoting Burchett v. Myers, 202 F.2d 920, 926 (9th Cir.1953)).

The standard for disclosure by a debtor under the Act was announced by the Second Circuit in In re Underhill, 82 F.2d 258 (2d Cir.), cert. denied, 299 U.S. 546, 57 S.Ct. 9, 81 L.Ed. 402 (1936). In that case, the court emphasized that what constituted sufficient record keeping varied with the facts of each case, but in all cases complete disclosure was required.

The law is not unqualified in imposing a requirement to keep books or records, and it does not require that if they are kept they shall be kept in any special form of accounts. It is a question in each instance of reasonableness in the particular circumstances. Complete disclosure is in every case a condition precedent to the granting of the discharge, and if such a disclosure is not possible without the keeping of books or records, then the absence of such amounts to that...