Court: United States Bankruptcy Appellate Panel for the Eighth Circuit; October 29, 2018; Us Bankruptcy; United States Bankruptcy Court
Daryll Christopher Dykes and Sharon Luster Dykes (Debtors) appealed a bankruptcy court's ruling that denied their discharge under Bankruptcy Code § 727(a). The appellate court affirmed the lower court's decision, confirming its jurisdiction over the appeal under 28 U.S.C. § 158(b). The Debtors filed for Chapter 7 bankruptcy on July 26, 2016, reporting debts exceeding $5 million, including over $4.1 million from judgments related to the construction of their home, which was foreclosed in 2011. Following the foreclosure, the Debtors moved their belongings to three rented storage units, which were later forfeited and sold due to unpaid rent totaling approximately $10,000, despite the contents being valued in the hundreds of thousands. Mr. Dykes, a physician, testified that the loss of their home and subsequent legal battles severely impacted his income, dropping from over $1 million to nearly zero. The Debtors incurred substantial debt related to a collection of watches purchased from Bellusso Jewelers, totaling approximately $390,700. The purchasing process became informal over time, resulting in a lack of documentation for many transactions. Mr. Dykes testified about receiving and returning high-value watches without proper paperwork, which diminished their value.
Mr. Dykes lacked the original boxes and paperwork for the watches he purchased, but evidence indicated the Debtors took possession of watches valued between $4,350.00 and $107,950.00, along with diamond earrings and a Kuwait platinum bridal ring valued at approximately $68,000.00. In October 2011, Mr. Dykes executed a confession of judgment for $390,700.00 in favor of jeweler Mr. Bekhor. In February 2013, he returned 27 watches and the Kuwait platinum diamond ring to Mr. Bekhor's attorney, providing a list of these items. However, the Debtors failed to present evidence regarding the value of the returned items or the remaining balance on the judgment, and the returned watches did not match those listed in the jeweler's invoices. The U.S. Trustee filed a complaint to object to the Debtors' discharge under multiple provisions of Bankruptcy Code § 727, particularly § 727(a)(3), which the bankruptcy court used to deny the discharge.
Denial of discharge is treated as a severe measure, interpreted strictly in favor of debtors, yet aimed at preventing abuse of the Bankruptcy Code. To deny a debtor's discharge, the objecting party must prove each element of § 727 by a preponderance of the evidence. Under § 727(a)(3), a discharge is not granted if the debtor has concealed or failed to maintain adequate records that would allow assessment of their financial condition. Once inadequacy of records is established, the debtor must justify their record-keeping or lack thereof, while the objecting party maintains the burden of proof for all elements. A creditor must demonstrate that the debtor failed to maintain adequate records, making it impossible to ascertain their financial condition or business transactions, without needing to prove intent.
Under § 727(a)(3), the standard for evaluating a debtor's record-keeping is based on reasonableness. Courts assess what records a similarly situated individual would retain to determine if the debtor's failure to keep records is justifiable. Debtors must act with ordinary diligence to allow creditors to understand their financial activities. Adequate records are necessary for trustees and creditors to trace the debtor's financial history, ascertain their financial condition, and reconstruct transactions. Courts should not be expected to speculate about a debtor's financial situation or reconstruct their affairs.
In this case, the bankruptcy court found that the Debtors failed to maintain adequate records, hindering the ability to ascertain their financial condition and transactions. Specifically, the Debtors could not provide a credible account of transactions with a jeweler, and discrepancies existed between the watches returned and those listed on invoices. Mr. Dykes was involved in transactions worth hundreds of thousands of dollars yet kept minimal records. The court noted that the list of returned items lacked crucial details such as their value and the credit applied against debts.
Despite the Debtors' claims that Mr. Dykes's testimony provided sufficient information about their transactions, the court emphasized that oral testimony does not replace the need for comprehensive written records. The court characterized Mr. Dykes's record-keeping as disorganized, leading to an inability to clarify the financial exchanges. Moreover, Mrs. Dykes was deemed co-responsible for the inadequate record-keeping. The court also found that the Debtors did not account for personal property disposed of by the storage company, further supporting the decision against granting a discharge.
The bankruptcy court found that the Debtors failed to provide adequate records regarding the contents of their storage bins, as confirmed by the parties' Stipulation of Facts. The absence of an accounting was deemed a valid basis for this conclusion, and the Debtors did not justify their lack of records. Mr. Dykes' testimony, which sought to explain the absence of written records, was considered non-credible by the court. The court noted the Debtors' high level of education and sophistication, including Mr. Dykes' prestigious fellowship and their involvement in high-value transactions, which logically suggested they should have maintained proper records for insurance and debt purposes.
The court found the Debtors' failure to account for items in storage unjustified, rejecting their argument that their expectation to recover the items excused the lack of documentation. The standard applied was one of reasonableness, focusing on what a prudent person in similar circumstances would keep. The bankruptcy court also determined that the significant value of the stored items warranted better record-keeping, and it appropriately reviewed transactions without a specific time limitation, as no statute mandates a timeframe for accounting under Section 727(a)(3). The Debtors' additional arguments against the court's findings were deemed meritless.
Records produced by debtors must sufficiently detail their financial condition and transactions over a reasonable period, as established in Juzwiak, 89 F.3d at 427. This determination is case-specific, considering all circumstances. The bankruptcy court examined Mr. Dykes' transactions with the jeweler, noting deficiencies in the Debtors' documentation regarding watches returned in 2013 and the absence of records on prior transactions leading to the bankruptcy. The lack of accounting for property stored since 2012 further complicated the understanding of the Debtors' financial dealings. The Debtors' argument regarding their unexpected bankruptcy filing does not hold, as the standard for record-keeping is objective. The Debtors contested the bankruptcy court's consideration of certain transactions and storage issues but failed to raise these arguments previously, thus they were not considered on appeal. The court noted that the Debtors did not object to evidence regarding transactions beyond the 2013 returns and acknowledged their participation in the stipulation about the stored property. Ultimately, the U.S. Trustee successfully demonstrated grounds for denying the Debtors' discharge under § 727(a)(3), and the bankruptcy court's decision was affirmed. Additionally, the proof of claim filed by Mr. Bekhor was amended without explanation for the reduction in amount.
