9th Circuit Rules on Requirement that a Debtor Keep Records

Sun Communities v. Caneva (In re Caneva), ---- F. 3d ----, 2008 WL -------- (9th Cir. November 2008)

Issue:   Does the debtor’s admission that he did not keep business records establish a prima facie case that his discharge should be denied such that summary judgment is appropriate?

Holding:   Yes   
appeal from District Court Arizona

Per Curiam
This chapter 7 debtor owned and operated “numerous business entities, recreational vehicle and mobile home parks in Florida, and an airplane.”  Sun Communities filed an adversary proceeding asserting that the debtor should be denied a discharge for failure to keep sufficient books and records.  Section 727(a)(3).  During a 2004 exam, the debtor “admitted that he kept no records for the entities, despite the fact that some of them had business operations and others existed as holding companies for active businesses.  [He] also admitted during the Rule 2004 Examination that he had no documentation regarding the payment of $500,000 to Bowden as a brokerage fee for a $20 million loan that [the debtor] stated he did not receive.”  Sun filed a Motion for Summary Judgment which was granted.  The district court affirmed. 

The 9th Circuit affirmed also.  “The statute does not require absolute completeness in making or keeping records.  Rather, the debtor must ‘present sufficient written evidence which will enable his creditors reasonably to ascertain his present financial condition and to follow his business transactions for a reasonable period in the past.’  This exception to dischargeability, however, ‘should be strictly construed in order to serve the Bankruptcy Act’s purpose of giving debtors a fresh start.’  A creditor states a prima facie case under § 727(a)(3) by showing ‘(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.’  After showing inadequate or nonexistent records, ‘the burden of proof then shifts to the debtor to justify the inadequacy or nonexistence of the records.’”

The debtor argued that there was a triable issue of fact as to whether the significant records that were turned over were sufficient to meet the test.  He also argued that additional records were available to Sun through at least one criminal action that had taken place prepetition.  “We disagree. The Seventh Circuit has held that § 727(a)(3) ‘places an affirmative duty on the debtor to create books and records accurately documenting his business affairs.” Peterson v. Scott (In re Scott), 172 F.3d 959, 969 (7th Cir. 1999)  The court also noted that when a debtor is sophisticated and carries on a business involving substantial assets, ‘creditors have an expectation of greater and better record keeping.’”  “Without the records that [the debtor] admitted he did not keep, Sun cannot determine what assets his business entities held or may still hold, what assets passed through them and where they might have gone, and what their present value is, if anything.  Without any documentation related to the payment to Bowden, Sun cannot determine the details of that transaction or verify that it actually took place.”  Further the debtor did not provide any justification for the failure to keep records in his opposition to the MSJ.