Appeal from the United States Bankruptcy Court for the Eastern District of California Honorable Christopher M. Klein, Bankruptcy Judge, Presiding Bk. No. 09-20986 Adv. No. 09-2241
SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT
Argued and Submitted on November 16, 2011 at Sacramento, California
Before: JURY, KIRSCHER, and DUNN, Bankruptcy Judges.
Appellant, chapter 7*fn2 debtor Marty Wayne Donohue, appeals from the bankruptcy court's judgment entered in favor of appellees, Peter and Carolyn Bronson (the "Bronsons"). The judgment denied debtor his discharge under § 727(a)(3) based on his failure to keep and preserve records for his businesses and personal affairs. We AFFIRM.
Michael Donohue, debtor's father, owned and operated a construction business under the name of River City Construction ("River City") with California Contractor License Number 330020. The Bronsons hired River City to perform construction and other work on their property in Penn Valley, California, which they planned to develop as an equestrian facility. The record shows that when the Bronsons hired River City, debtor was managing the business and in the process of acquiring it from his father who was semi-retired.*fn3
Mrs. Bronson first contacted debtor in 2006 to install fencing on the Bronsons' property after she saw an ad for River City in an equestrian publication called Equestrian Connection. After the fencing was installed, the Bronsons hired River City to do additional work on the property on a project-by-project 2 basis.
The projects included, among other things, the 3 correction of an improperly assembled barn which the Bronsons 4 had ordered as a kit, an irrigation system, a septic system, 5 building arenas, installation of entry gates, grading, and 6 substantial plantings for erosion control. These projects 7 spanned two years.
8 For each project, River City submitted a bid proposal to 9 the Bronsons. Change orders were also handled through the bid 10 proposal process. With few exceptions, the proposals were not 11 signed by the Bronsons, and none were signed by River City. The 12 bids typically required payment in full or a substantial portion 13 prior to delivery. Mrs. Bronson wrote the checks for those 14 payments which eventually added up to $400,000. The bid 15 proposals are part of the Bronsons' record on appeal. 16 As time went by, the Bronsons became dissatisfied with the 17 quality of River City's work and its failure to complete work 18 for which the Bronsons had paid in advance. The Bronsons 19 documented the numerous deficiencies in a November 19, 2007 20 letter sent to debtor and his father (collectively, the 21 "Donohues").
22 On February 22, 2008, River City recorded two mechanic's 23 liens against the Bronsons' property in the sum of $59,450. 24 This amount allegedly reflected unpaid invoices. The record 25 reflects that neither of the Donohues could ever point to an 26 invoice which the Bronsons had not paid.
27 On May 2, 2008, the Bronsons wrote to the Donohues, 28 asserting that River City's liens were improper because they had 1 paid for all the work. They further maintained that the work 2 done by River City was substandard and documented more than a 3 hundred deficiencies in the letter. Finally, the Bronsons 4 informed the Donohues that they would be taking legal action to 5 expunge the liens and recover damages.
6 The Donohues later caused River City to unconditionally 7 release the mechanic's liens against the Bronsons' property. 8 Bankruptcy Events 9 On January 21, 2009, debtor filed his chapter 7 petition. 10 Debtor's Schedule D showed creditors holding secured claims in 11 the amount of over $2.3 million, of which $1 million was 12 unsecured. Schedule E showed approximately $15,000 owed to the 13 Internal Revenue Service*fn4 and Amended Schedule F showed 14 unsecured claims in the amount of $426,000. Some of the secured 15 and unsecured debts listed on debtor's schedules belonged to 16 River City.
17 In his Statement of Financial Affairs, debtor listed 2007 18 and 2008 income from River City as $68,499 and $25,000, 19 respectively. Debtor stated that he had no other income from 20 employment or operation of a business during the two years 21 immediately preceding the commencement of his case. 22 On April 21, 2009, the Bronsons filed an adversary 23 proceeding against debtor, seeking damages in excess of 24 $350,000, which included $130,000 paid to River City that debtor 25 allegedly diverted for his own use, and $220,000 representing the cost of remediating River City's improper or illegal work on the Bronsons' property. The Bronsons also sought punitive damages.
The Bronsons alleged that these yet to be determined damages were non-dischargeable debts under § 523(a)(2) and (6). The § 523(a)(2) claim was based on debtor's alleged misrepresentations made to the Bronsons in connection with River City's work on their property and the § 523(a)(6) claim was based on River City's alleged improper filing of the mechanic's liens against their property.
The complaint also sought denial of debtor's discharge under § 727(a)(2) and (3). The § 727(a)(2) claim alleged that debtor had transferred or concealed property such as motor vehicles, gold, securities, cash, jewelry and other valuable personal property with the intent to defraud his creditors. The § 727(a)(3) claim alleged that debtor had failed to keep or preserve recorded information from which his financial condition or business transactions might be ascertained.
Debtor answered the complaint by denying all allegations and asserting twelve affirmative defenses. The bankruptcy court held a two-day trial on the matter.*fn5
On July 15, 2010, Mrs. Bronson and debtor testified. At the completion of the Bronsons' case in chief, debtor's attorney moved under Civil Rule 52(c)*fn6 for judgment on partial findings based on her assertion that the Bronsons had failed to meet their burden of proof on their § 727(a)(2) and (3) claims. The bankruptcy court granted the motion on the § 727(a)(2) claim, but found sufficient evidence to proceed on the § 727(a)(3) claim. On July 21, 2010, the court heard further testimony from Mrs. Bronson, debtor and other witnesses.
On August 2, 2010, the bankruptcy court placed its findings of fact and conclusions of law and order for judgment on the record. The court found that the Bronsons had not proven their claims under § 523(a)(2) or (6). On the § 727(a)(3) claim, the court found that based on the totality of exhibits in the record and debtor's testimony, it was persuaded that adequate records were not kept or preserved, particularly with respect to River City, which was debtor's responsibility. The court stated that in more than twenty years on the bench, it had never come into contact with such a weak collection of records. Based on the evidence presented, the court found debtor had no justification for his failure to keep or preserve records under the circumstances of the case.
1 On August 3, 2010, the bankruptcy court entered judgment 2 for the Bronsons on their § 727(a)(3) claim. ...