Appeal from the Ninth Circuit Bankruptcy Appellate Panel Pappas, Dunn, and Jury, Bankruptcy Judges, Presiding, Bk. No. 04-60302-7-RBK, Adv. No. 05-00018.
The opinion of the court was delivered by: Tallman, Circuit Judge
Argued and Submitted March 3, 2010 -- Portland, Oregon.
Before: Richard A. Paez, Richard C. Tallman, and Milan D. Smith, Jr., Circuit Judges.
Debtor-Appellant Brendon Keith Retz ("Retz") filed for Chapter 7 bankruptcy on February 12, 2004. On March 8, 2005, Bankruptcy Trustee Richard J. Samson ("Trustee") and Retz's former business partner Donald G. Abbey ("Abbey"), along with several banks, filed this adversary proceeding in bankruptcy court seeking to stop Retz's discharge. After a five-day trial, the bankruptcy court found for the plaintiffs and denied Retz's discharge under 11 U.S.C. § 727(a)(2)(A), (a)(2)(B), (a)(4)(A), and (a)(5). Retz then appealed to the Ninth Circuit Bankruptcy Appellate Panel ("BAP"), which affirmed on all four grounds, any of which would have been sufficient to deny the discharge.
Retz now appeals, arguing that the bankruptcy court and BAP erred in denying him a general discharge because: (1) there is insufficient evidence of his intent to hinder, delay, or defraud his creditors because he relied in good faith on the advice of counsel in his actions during the bankruptcy proceeding; (2) any missing documents were easily obtainable by the Trustee; (3) one of the improper transfers did not involve an asset of the debtor; and (4) Retz's failure to file his tax returns was not his fault. We affirm the bankruptcy court's denial of Retz's discharge.
Retz formed Timberland Construction, Inc. ("TCI") in 1994 soon after graduating from college with a degree in business management. He was the sole shareholder of TCI, which performed development and construction work in the White-fish, Montana, area. For the first few years of operations Retz kept the books for TCI and became proficient with the business's accounting software, Master Builder.
Abbey has been a successful California real estate investor for over thirty-five years. He has taken part in approximately 10,000 real estate transactions and has interests in over sixty companies. In 2001, Abbey decided to build a multi-million dollar residence in Montana (the "Shelter Island Project").*fn1 In order to maintain control of the construction process and save money on the project, Abbey decided to form a new construction and development company with Retz.
In early 2001, Retz and TCI entered into an oral agreement with Abbey to form Timberland Construction, LLC ("TCLLC"). TCLLC began operations in 2001. The TCLLC Operating Agreement, which had an effective date of July 1, 2001, was finalized and executed in March 2002 after extensive negotiations. Abbey and TCI were the governing members of TCLLC. The Operating Agreement provided that Abbey would contribute $300,000 to TCLLC, while TCI would contribute all its assets and liabilities. Abbey provided the first $100,000 in approximately March 2001 and provided the remaining $200,000 upon the execution of the Operating Agreement in 2002.
Abbey testified that he would not have provided the final $200,000, and in fact would have demanded the return of the original $100,000, if the Operating Agreement had not been signed. In contrast, Retz testified that Abbey told him the Operating Agreement was "only for the file," and that they did not actually have to operate within its parameters.*fn2 Abbey insists that he never told Retz that he did not have to abide by the terms of the Operating Agreement.
In May 2003, Abbey ran into Retz on the "comp" floor of the Bellagio Resort & Casino in Las Vegas, Nevada. Abbey testified that he was shocked that someone who earned only $40,000 a year had been given a complimentary room at the Bellagio, and became suspicious about Retz's behavior. He traveled to Montana in July 2003 and spoke with representatives at several local banks about Retz and TCLLC. Abbey discovered that TCLLC had entered into partnerships and loan agreements in violation of the Operating Agreement, which required Abbey's written permission.
In August 2003, Abbey brought William Matteson, an accountant with whom Abbey had worked in California, to Montana for the purpose of assessing TCLLC's financial condition and operations, ensuring Retz's compliance with the Operating Agreement, verifying that TCI had made the required contributions to TCLLC, and investigating a draft audit report prepared by Deloitte & Touche regarding potential overcharges on the Shelter Island Project. Matteson found numerous accounting irregularities in the TCLLC books and suspicious transfers between Retz and TCLLC. Retz testified that the transfers were short term loans that he made to TCLLC so that the company could meet its payroll obligations, followed by repayment of the loans. However, the loans and repayments were not clearly identified in the accounting system, and Matteson could not confirm that the amounts in and out of the business account matched. Due to Matteson's discoveries, Abbey began withdrawing financial support from TCLLC and shutting down the Shelter Island Project.
Soon thereafter, Retz learned that Abbey was planning to file litigation against him and decided to preemptively file a lawsuit against Abbey in state court. Abbey countersued Retz and his brother Ryan.*fn3 The state court appointed a receiver for TCLLC, effective September 3, 2003. The state court litigation was stayed when Retz filed a voluntary Chapter 7 bankruptcy petition on February 12, 2004.
Following the filing of his bankruptcy petition, Retz filed what purported to be the required financial Schedules and Statement of Financial Affairs ("SOFA"). Retz acknowledged at trial that the Schedules and SOFA he filed were incomplete, but explained that he intended to amend them at some point, when he obtained additional information about his debts and assets. He attended the first Meeting of Creditors mandated by 11 U.S.C. § 341 ("§ 341 Creditors' Meeting") on March 19, 2004, and answered questions posed by the Trustee and the attending creditors. The second § 341 Creditors' Meeting took place on July 8, 2004. Retz again attended and answered some questions posed by the Trustee and other creditors.
On March 8, 2005, the Trustee and Abbey filed an adversary proceeding in bankruptcy court seeking denial of Retz's discharge pursuant to various subsections of 11 U.S.C. §§ 523 and 727. The bankruptcy court held a five-day trial, April 10 and 11, and June 1, 4, and 5, 2007. Many witnesses testified, including Retz, Abbey, the Trustee, Ryan, David Schultz (the Retz family accountant), Matteson, and Retz's bankruptcy attorneys Bruce Measure and Harold Dye. At the time of trial, nearly three years after Retz filed his bankruptcy petition, Retz still had not filed amendments to either the Schedules or the SOFA.*fn4
In its written memorandum of decision the bankruptcy court found, "after observing [Retz's] demeanor while testifying under oath and cross examination, and examination of the transcripts of the state court hearing . . . that [Retz] is not a credible witness." The court then denied Retz's discharge on four independent grounds: (1) Retz "knowingly and fraudulently, in or in connection with the case[,] made a false oath or account" on his Schedules and SOFA by failing to disclose income, assets, and transfers in violation of § 727(a)(4)(A); (2) Retz sold a house allegedly belonging to TCLLC to his brother Ryan for $60,000 under market value within one year before filing for bankruptcy, with the intent to hinder, delay, or defraud a creditor in violation of § 727(a)(2)(A); (3) Retz participated in the transfer, after the date of the filing of the bankruptcy petition, of North Forty Resort Corp. ("NFRC") assets to North Forty Resort, LLC, which greatly reduced the value of the bankruptcy estate's 6% ownership of the Corporation, with the intent to hinder, delay, or defraud a creditor in violation of § 727(a)(2)(B); and (4) Retz "failed to explain satisfactorily . . . any loss of assets or deficiency of assets to meet [his] liabilities" in violation of § 727(a)(5).*fn5 The BAP affirmed on all four grounds. Retz timely appealed. We have jurisdiction pursuant to 28 U.S.C. § 158(d), and we affirm.
We review decisions of the BAP de novo and apply the standard of review applied by the BAP to the bankruptcy court's decision. Boyajian v. New Falls Corp. (In re Boyajian), 564 F.3d 1088, 1090 (9th Cir. 2009). The BAP reviewed the bankruptcy court decision in this case using the following standards:
(1) the [bankruptcy] court's determinations of the historical facts are reviewed for clear error; (2) the selection of the applicable legal rules under § 727 is reviewed de novo; and (3) the application of the facts to those rules requiring the exercise of judgments about values animating the rules is reviewed de novo.
Searles v. Riley (In re Searles), 317 B.R. 368, 373 (B.A.P. 9th Cir. 2004) (relying upon Murray v. Bammer (In re Bammer), 131 F.3d 788, 791-92 (9th Cir. 1997) (en banc)). A court's factual determination is clearly erroneous if it is illogical, implausible, or without support in the record. United States v. Hinkson, 585 F.3d 1247, 1261-62 & n.21 (9th Cir. 2009) (en banc) (quoting Anderson v. City of Bessemer City, 470 U.S. 564, 577 (1985)) (explaining that the clearly erroneous standard of review is an element of the clarified abuse of discretion standard).
Those objecting to discharge "bear[ ] the burden of proving by a preponderance of the evidence that [the debtor's] discharge should be denied." Khalil v. Developers Sur. & Indem. Co. (In re Khalil), 379 B.R. 163, 172 (B.A.P. 9th Cir. 2007), aff'd, 578 F.3d 1167, 1168 (9th Cir. 2009) (expressly adopting the BAP's statement of applicable law). "In keeping with the 'fresh start' purposes behind the Bankruptcy Code, courts should construe § 727 liberally in favor of debtors and strictly against parties objecting to discharge." Bernard v. Sheaffer (In re Bernard), 96 F.3d 1279, 1281 (9th Cir. 1996). This does not alter the burden on the objector, but rather means that "actual, rather than constructive, intent is required" on the part of the debtor. In re Khalil, 379 B.R. at 172. When factual findings are based on determinations regarding the credibility of witnesses, we give great deference to the bankruptcy court's findings, because the bankruptcy court, as the trier of fact, had the opportunity to note "variations in demeanor and tone of voice that bear so heavily on the listener's understanding of and belief in what is said." Anderson, 470 U.S. at 575.