UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
December 2, 2011
IN RE: MARTY WAYNE DONOHUE, DEBTOR. MARTY WAYNE DONOHUE, APPELLANT,
PETER C. BRONSON AND CAROLYN P. BRONSON, APPELLEES.
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
Filed - December 2, 2011
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. Debtor filed a 3 timely appeal.
4 II. JURISDICTION
5 The bankruptcy court had jurisdiction over this proceeding 6 under 28 U.S.C. §§ 1334 and 157(b)(2)(J). We have jurisdiction 7 under 28 U.S.C. § 158.
8 III. ISSUE
9 Whether the bankruptcy court erred in denying debtor his 10 discharge under § 727(a)(3).
11 IV. STANDARDS OF REVIEW
12 On appeal of a denial of discharge under § 727(a), we 13 review the bankruptcy court's findings of fact for clear error 14 and conclusions of law de novo, and we apply de novo review to 15 "mixed questions" of law and fact that require consideration of 16 legal concepts and the exercise of judgment about the values 17 that animate the legal principles. Oney v. Weinberg (In re 18 Weinberg), 410 B.R. 19, 28 (9th Cir. BAP 2009).
19 A bankruptcy court's factual finding is clearly erroneous 20 if it is illogical, implausible, or without support in the 21 record. Retz v. Samson ((n re Retz), 606 F.3d 1189, 1196 (9th 22 Cir. 2010) (citing United States v. Hinkson, 585 F.3d 1247, 23 1261-62 & n.21 (9th Cir. 2009) (en banc)). 24 We may affirm on any ground supported by the record. 25 Shanks v. Dressel, 540 F.3d 1082, 1086 (9th Cir. 2008).
26 V. DISCUSSION
27 Section § 727(a)(3) states that a bankruptcy court shall 28 grant the debtor a discharge, unless --
[T]he 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.
Section 727(a)(3) is a broadly worded statute prohibiting numerous acts in relation to "any recorded information." The only qualification is that the recorded information concealed, falsified, or not kept or preserved by a debtor, must be such from which one "might" be able to ascertain the debtor's financial condition or business transactions.
The statute's purpose is to protect creditors by requiring debtors to make accurate disclosures regarding their financial affairs. Caneva v. Sun Cmtys. Operating Ltd. P'ship (In re Caneva), 550 F.3d 755, 761 (9th Cir. 2008). As a policy matter, and consistent with the statutory construction of other exceptions to discharge, § 727(a)(3) is strictly construed against the moving party and liberally in favor of the debtor.
As the parties objecting to debtor's discharge under § 727(a)(3), the Bronsons had the initial burden of proving, by a preponderance of the evidence,*fn7 "'(1) that the debtor failed to maintain and preserve adequate records, and (2) that such failure makes it impossible to ascertain the debtor's financial condition and material business transactions.'" Id. Once the Bronsons met their initial burden on these elements, "'the burden of proof then shifts to the debtor to justify the inadequacy or nonexistence of the records.'" Id.
Debtor argues on appeal that the evidence submitted during the trial does not support the bankruptcy court's decision to deny him a discharge under § 727(a)(3). In that regard, debtor has taken a two-pronged approach: First, debtor contends that the bankruptcy court erred in denying his motion under Civil Rule 52(c) at the close of the Bronsons' case in chief on July 15, 2010.*fn8 Second, debtor contends that the court erred in denying his discharge after hearing all the evidence. We address each argument below.
A. Debtor's Civil Rule 52(c) Motion
According to debtor, the Bronsons failed to present a prima facie case for denial of his discharge under § 727(a)(3) by the close of their case in chief on July 15, 2010.
Civil Rule 52(c) provides:
If a party has been fully heard on an issue during a 1 non-jury trial and the court finds against the party on that issue, the court may enter judgment against that 2 party on a claim or defense that, under the controlling law, can be maintained or defeated only 3 with a favorable finding on that issue. The court may, however, decline to render any judgment until the 4 close of the evidence . . .
5 Given the rule's use of the permissive "may," the bankruptcy 6 court had full discretion to defer entering judgment until it 7 had heard all the evidence. We cannot conclude in this case 8 that the bankruptcy court abused its discretion, especially in 9 light of our affirmance of the court's factual findings.
10 Moreover, it is undisputed that after the denial of 11 debtor's motion, he proceeded to offer evidence on his own 12 behalf at the July 21, 2010 hearing. Where a party introduces 13 evidence on his own behalf after he has moved for relief under 14 Rule 52(c), he waives his right to relief under Rule 52(c). See 15 Fed. Ins. Co. v. HPSC, Inc., 480 F.3d 26, 32 (1st Cir. 2007).
16 Therefore, we test the sufficiency of the evidence on appeal by 17 reviewing the entire record. Id.; Gaffney v. Riverboat Servs., 18 451 F.3d 424, 451 n.29 (7th Cir. 2006).
19 B. The Bronsons' Proof Of Missing Information
20 Debtor contends the bankruptcy court clearly erred by 21 finding that he failed to keep and preserve records from which 22 his financial condition or business transactions might be 23 ascertained.
24 Under Civil Rule 52(a)(6), "[f]indings of fact, whether 25 based on oral or other evidence, must not be set aside unless 26 clearly erroneous, and the reviewing court must give due regard 27 to the trial court's opportunity to judge the witnesses' 28 credibility."
Where there are two plausible views of the 1 evidence, "the factfinder's choice between them cannot be 2 clearly erroneous." Anderson v. City of Bessemer City, N.C., 3 470 U.S. 564, 574 (1985). Moreover, findings based on 4 determinations regarding the credibility of witnesses "demand 5 even greater deference to the trial court's findings; for only 6 the trial judge can be aware of the variations in demeanor and 7 tone of voice that bear so heavily on the listener's 8 understanding of and belief in what is said." Id. at 575.
9 After reviewing the testimony and exhibits in the record 10 provided to us, we find no reversible error in the bankruptcy 11 court's fact determination. The bankruptcy court made a 12 credibility determination regarding debtor's testimony about his 13 records (or lack thereof) and was otherwise unconvinced by 14 debtor's testimony that he had kept records -- especially as they 15 pertained to River City's business.
16 The evidence in the record shows that debtor treated River 17 City's business and assets as his own; that debtor engaged in 18 automotive-related businesses and commingled funds from those 19 businesses with the funds of River City; and that debtor was 20 unable to account for the more than $400,000 he received from 21 the Bronsons. Most significantly, the record reveals that 22 debtor was missing substantial categories of documents: (1) any 23 organized documents which related to receipts or other 24 information regarding car sales; (2) cancelled checks or other 25 records which supported River City's income and payment of 26 expenses; and (3) records relating to debtor's personal affairs, 27 household expenditures or budgets.
28 We need not recite all the evidence (or lack thereof) which 1 supports the bankruptcy court's finding, but highlight the 2 missing information with the following excerpts of debtor's 3 unsubstantiated testimony:
4 * Debtor explained through his testimony that he listed and 5 brokered a couple dozen cars and that he sometimes made a 6 commission. Debtor could not estimate how much he received in 7 any given year from his "hobby." Hr'g Tr. at 33-35 (July 21, 8 2010).
9 * When Mr. Bronson questioned debtor about his interests in 10 a BMW, debtor testified that at one point a customer of River 11 City wanted work done, but did not have the money to pay for it. 12 The customer had a BMW for sale which debtor agreed to take in 13 exchange for the work. Debtor testified that he never owned the 14 vehicle, but he sold the vehicle to pay his material costs and 15 the men that worked on the job, so he didn't get the car. Hr'g 16 Tr. at 26-27 (July 21, 2010). When asked if he received $9,500 17 for the BMW, debtor answered: "I believe so, yeah." Id. at 28. 18 When asked how much he netted from the sale, debtor answered: 19 "A few thousand dollars probably." Id. at 33.
20 * Debtor testified that although he believed the Bronsons 21 owed River City money, he could not point to an invoice showing 22 an unpaid amount. Debtor testified that he did not have all the 23 bid proposals or parts of them.*fn9 Debtor further testified that 24 it was "kind of hard to tell exactly where we're at and actually 25 really what was paid, because I don't have check numbers on all 1 of these. So I never could really determine what was paid and 2 what was not paid." Hr'g Tr. at 192-93 (July 15, 2010).
3 Finally, debtor testified that there had never been an 4 accounting of the various invoices during the project and 5 conceded that there may have been bid proposals that were not 6 reflected in the documents that he maintained. Id. at 193.
7 * Debtor was unable to explain how the Bronsons' advance 8 payments for the construction of their gate were spent. In this 9 regard, the bankruptcy court made a factual finding that debtor 10 had never ordered the gate that the Bronsons had paid for in 11 advance. Hr'g Tr. at 8 (August 2, 2010). During the trial, 12 Mr. Bronson asked debtor what he did with the $9,000 they paid 13 him for their gate. Debtor testified that he purchased part of 14 the materials, and part of the money sat in the account.
Debtor 15 further testified that the money was no longer in the account, 16 simply stating that it got used over the years and that, as the 17 times got tough, the money got spent. Hr'g Tr. at 57 (July 21, 18 2010). "I mean I don't know exactly when your money got spent."
20 * Mr. Bronson questioned debtor about his personal 21 financial status and living expenses; specifically, how did 22 debtor pay $4100 in monthly rent payments when his Statement of 23 Financial Affairs showed that his income for the year preceeding 24 the bankruptcy filing was $25,000. Debtor testified that the 25 "source" of payment was "the stuff dealing with autos or River 26 City construction money that comes in . . . . It's all run 27 through my bank account." Hr'g Tr. at 162-63 (July 15, 2010). 28 On appeal, debtor is adamant that he had client files, bank 1 statements, invoices, and "everything else" for River City's 2 business.
However, besides the bid proposals, there are no bank 3 statements or invoices in the record on appeal, and it does not 4 appear that they were presented to the trial court. Debtor also 5 maintains that he gave tax returns and bank statements to the 6 trustee. The fact that debtor may have been forthcoming in 7 producing those records to the trustee is insufficient.*fn10 "The 8 terms of [§] 727(a)(3) do not condition a debtor's discharge on 9 the presentation of the documents that he did keep and 10 preserve."
In re Caneva, 550 F.3d at 764. In any event, 11 debtor's tax returns and bank statements are but summaries of 12 information and incomplete unless debtor provided source 13 materials. We found no source materials in the record on 14 appeal.
15 Given the lack of documentation in the record, it is 16 apparent in this case that the bankruptcy court's decision 17 rested almost entirely on debtor's testimony and credibility 18 determinations.
Debtor's testimony shows that he could not 19 confirm his commissions from car sales or how much he made from 20 the sale of the BMW. Debtor admitted that he was missing bid 21 proposals for the Bronsons' projects. Debtor admitted that he 22 did not have check numbers for the Bronsons' payments so he 23 could not determine what was paid or not paid. Finally, nothing 24 in debtor's testimony established that his income from River 25 City and his automotive related businesses was sufficient to pay 1 his personal expenses. We thus conclude that debtor's testimony 2 provided a plausible basis for the bankruptcy court to find that 3 debtor failed to keep or preserve records from which his 4 financial condition and business transactions could be 5 ascertained.
6 It is not enough that Debtor merely recite from records ostensibly 'kept in his head' and detail from 7 memory what transactions he engaged in and how the funds were dissipated. Records of substantial 8 completeness and accuracy are necessary in order that they may be checked against Debtor's oral statements. 9 Creditors, in other words, are not required to rely on a debtor's oral representations concerning these 10 matters without also having some independent means of substantiating such representations.
In re Juzwiak, 89 F.3d 424, 429-30 (7th Cir. 1996). 13 In short, we found no documentary proof in the record for 14 the majority of the transactions debtor describes in his 15 testimony. Without being able to trace the financial history of 16 debtor's various businesses, it is impossible to fully 17 understand debtor's finances in this case. Accordingly, the 18 bankruptcy court correctly found that the Bronsons met their 19 burden of proof on their prima facie case. 20 C. Debtor's Proof of Justification 21 The bankruptcy court found that debtor's failure to keep 22 and preserve records was not justified considering all the 23 circumstances in the case. "'Justification for [a] bankrupt's 24 failure to keep or preserve books or records will depend 25 on . . . whether others in like circumstances would ordinarily 26 keep them.'" In re Caneva, 550 F.3d at 763. This is an 27 objective inquiry.
28 In considering the nature of River City's business, the 1 court concluded a contracting business would require 2 documentation such as contracts. The court explained that it 3 had not seen a single contract for construction for any of the 4 Bronsons' projects. The court viewed debtor as running River 5 City's business as though he were a handyman. In other words, 6 an informal "I do the work and you pay for it" approach.
7 Debtor's brief on appeal misconstrues the court's comments 8 regarding River City's use of bid proposals rather than a formal 9 document called a "contract" for its business. The point was 10 that River City did not have the most basic records, used by 11 other construction businesses in like circumstances, that would 12 have documented its business transactions with the Bronsons or 13 other customers. Debtor's reliance on the bid proposals is 14 misplaced when the proposals were missing crucial information, 15 not the least of which were the signatures of the parties.
16 Debtor attempts to justify the lack of records for River 17 City on the grounds that he was in the process of taking over 18 his father's business, he had no formal training or education, 19 he relied on the services of his CPA to manage the tax returns 20 and his wife performed data entry. According to debtor, he did 21 all that was necessary for a person reasonably to assume that 22 his records were adequate and accurate.
23 It does not appear that debtor made these arguments in the 24 bankruptcy court. Debtor's opening brief did not cite to any 25 portion of the record where his training or education was 26 discussed. In general, we do not consider an issue raised for 27 the first time on appeal. Cold Mountain v. Garber, 375 F.3d 28 884, 891 (9th Cir. 2004). Even so, the bankruptcy court found 1 that as between debtor's father and debtor, it was debtor's 2 responsibility to keep the books and records of River City based 3 upon the circumstances surrounding their "transaction" for the 4 transition of the business from father to son. On appeal, 5 debtor does not contend this finding is clearly erroneous.
6 Indeed, the record shows that debtor was essentially treating 7 the business as his own even though a formal transfer from 8 father to son had not taken place.
9 The bankruptcy court further stated, after listening 10 carefully to the testimony of debtor's wife, Sabrina Donohue, 11 that she was filing whatever debtor gave her to file and 12 recording whatever debtor gave her to record. This finding, 13 based on credibility determinations, is also one we do not 14 disturb on appeal. Accordingly, even if debtor had preserved 15 his arguments for purposes of this appeal, we conclude that the 16 record supports the bankruptcy court's finding that debtor 17 failed to prove that the lack of records was justified under the 18 circumstances of the case.
19 VI. CONCLUSION
For the reasons stated, we AFFIRM.