JEAN K. FITZSIMON, Bankruptcy Judge.
The plaintiffs ("Plaintiffs") in this adversary proceeding are former home health care aides who worked for Lee's Industries, Inc. ("Lee's Industries"), which the debtor, Nina Marie Kinard ("Debtor") and her brother, Eric Lamback ("Eric"), co-owned. As will be explained in more detail below, Plaintiffs filed a class action lawsuit in state court ("State Court Litigation") against, inter alia, Lee's Industries, the Debtor and her brother (collectively the "State Court Defendants"). After a default was entered against the State Court Defendants but before a monetary judgment was entered against the Debtor, she filed a bankruptcy case under Chapter 7 of the Bankruptcy Code.
Plaintiffs subsequently commenced this nondischargeability action against the Debtor alleging that she should be denied a discharge, pursuant to 11 U.S.C.
Before the Court is the Plaintiffs' motion ("Motion") for summary judgment. Upon consideration, the Court concludes that there is no genuine dispute as to any material fact and that the Plaintiffs are entitled to judgment in their favor as a matter of law. Accordingly, the Plaintiffs' Motion shall be granted.
Plaintiffs are former employees of Lee's Industries, Inc. ("Lee's Industries"). Complaint ¶ 4; Deposition of Nina Kinard, dated September 27, 2007 ("Dep. 2007") at 26-33. The company, which originally provided janitorial and light pest control services, was founded in 1986 by the Debtor and her mother. Id. at 26-27. When her mother died in 1996, the Debtor and her brother, Eric, became equal owners of the company. Dep. 2007 at 28-29. The Debtor became the President of the company and Eric became the Vice President.
In 2003 or 2004, Lee's Home Health Services, Inc. ("Lee's Home Service") was formed so that the home health aides could, according to the Debtor, "be put under the right category."
Dep. 2007 at 32-33.
In 2007, Plaintiffs filed the State Court Litigation. Complaint ¶ 4; Exhibit E to Motion for Summary Judgment. Plaintiffs alleged that the State Court Defendants violated the Pennsylvania Minimum Wage Act, 43 P.S. § 333.10 et seq., and the Wage Payment and Collection Law, 43 P.S. § 260.1 et seq., by failing to pay them, and others similarly situated, for time spent traveling between clients and by failing to pay them an overtime premium for hours worked over forty per week. Complaint ¶ 4; Exhibit E to Motion for Summary Judgment; Dep. 2007 at 26-33.
In or about July of 2012, Lee's Industries ceased doing business and closed its office.
At her deposition in 2014, the Debtor was specifically asked whether any financial information for Lee's Industries was kept on a computer. Dep. 2014 at 24. The Debtor testified that the company used Quickbooks to issue checks and record payments owed to it. Id. at 24-26. However, she also disclosed that the company's subscription to Quickbooks lapsed in 2012 when the company failed to pay its annual fee. Id. at 24-25.
On or about December 28, 2012, a default was entered against the State Court Defendants. Exhibit E to Motion for Summary Judgment. A hearing to assess damages against the State Court Defendants was scheduled for June 19, 2013, but two days prior to that date, the Debtor and the other State Court Defendants entered into a stipulation ("Joint Stipulation") with the Plaintiffs regarding damages.
During her 2014 deposition, the Debtor was questioned regarding a Pennsylvania corporation named Cren, Inc. ("Cren"). See Dep. 2014 at 36-41. The Debtor testified that Cren is a company solely owned by her sister, Cynthia Lamback. Id. at 36. According to the Debtor, Cren is a "family business" which is or was primarily used by her sister to sell real estate. Id. at 36-38. When Cren was formed and through the date of her 2014 deposition, the Debtor was the Secretary of the company. Id. at 38-40. The Debtor never earned any income from Cren. Id. at 40. According to the Debtor, no financial records, bank accounts or checkbooks were kept for the company and, if any records happen to
On June 13, 2013, which was four days before the Debtor entered into the Damages Stipulation, she filed a pro se Voluntary Petition for Relief under Chapter 7 of the Bankruptcy Code. The Debtor thereafter obtained counsel and, on July 18, 2013, she entered her appearance on the Debtor's behalf. One day later, the Debtor filed her Schedules and SoFA.
Item #13 on Schedule B requires a debtor to list his or her "[s]tocks and interests in incorporated and unincorporated businesses." Debtor's response to this item was none.
On Schedule F, the Debtor listed the Plaintiffs' counsel, Brodie and Rubinsky, P.C., as an unsecured creditor. She listed the amount of the firm's claim as zero. Interestingly, the Debtor did not list the Plaintiffs as creditors anywhere on her Schedules.
Question #1 on the SoFA requires debtors to list their gross income from employment or business for the year in which they file bankruptcy as well as for two prior years. In response to Question #1, the Debtor stated that she had rental income in 2011 in the amount of $11,120. She did not list any income from wages. However, payroll records for Lee's Industries showed that, in 2011, the Debtor earned $24,150 from the company.
Question #2 on the SoFA requires a debtor to list "all suits and administrative proceedings to which the debtor is or was a party within one year immediately preceding the filing" of his or her "bankruptcy case." While the Debtor listed five other lawsuits in response to Question #2, she did not list the State Court Litigation.
Question #18 on the SoFA states, in relevant part:
In response to Question #18 on her original SoFA, the Debtor checked the box for "none."
Question 19 on the SoFA, which is titled "Books, records and financial statements, has four sub-parts, namely "a" through "b."
On her original SoFA, the Debtor responded to Question #19 by filling in the box for "none" which was adjacent to each sub-part.
On July 25, 2013, the Chapter 7 Trustee, Gary Seitz, Esquire, conducted the meeting of creditors for the Debtor's bankruptcy case. He subsequently filed a Report of No Distribution.
Plaintiffs commenced the instant adversary proceeding on September 26, 2013. Approximately one month later, the Court issued a Pretrial Scheduling Order setting January 21, 2014 as the deadline discovery.
On December 6, 2013, the Plaintiffs served a Notice of Deposition and a request for documents (the "Document Requests") on the Debtor.
On January 8, 2014, the Debtor's deposition was taken as planned despite the Debtor's failure to respond to the Document Requests. See Plaintiffs' Motion to Compel Discovery ¶¶ 4-5. About two weeks later, on January 21, 2014, which was the Court-imposed discovery deadline,
On February 2, 2014, Plaintiffs filed their Motion. Thereafter, the Debtor filed a response.
Nearly seven months after she filed her bankruptcy case and more than five months after the Plaintiffs commenced the instant adversary proceeding, the Debtor filed an amended Schedule B and an amended SoFA.
Under Rule 56, a court "shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R.Civ.P. 56(a). "A fact is `material' if it might affect the outcome of the suit under the governing law[.] A factual dispute is `genuine' if the evidence would permit a reasonable jury to return a verdict for the nonmoving party." Brangman v. AstraZeneca, L.P., 952 F.Supp.2d 710, 720 (E.D.Pa.2013) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)).
The party moving for summary judgment "bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of `the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,' which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). "After the moving party has met its initial burden, the adverse party's response `must — by affidavits or as otherwise provided in this rule — set out specific facts showing a genuine
Id. at *2 (quoting Berckeley Inv. Grp., Ltd. v. Colkitt, 455 F.3d 195, 201 (3d Cir.2006)).
Plaintiffs seek to have the Debtor denied a discharge under § 727(a)(3) and § 727(a)(4). "Completely denying a debtor his discharge ... is an extreme step" which "should not be taken lightly." Rosen v. Bezner, 996 F.2d 1527, 1531 (3rd Cir.1993). Consequently, objections to discharge under § 727(a) are strictly construed against the creditor and liberally construed in favor of the debtor. Panda Herbal International, Inc. v. Luby (In re Luby), 438 B.R. 817, 826 (Bankr.E.D.Pa. 2010). However, "a discharge in bankruptcy is a privilege — not a right — which must be earned." Sonders v. Margolies-Mezvinsky (In re Margolies-Mezvinsky), 265 B.R. 681, 690 (Bankr.E.D.Pa.2001).
Section 727(a)(3) provides:
11 U.S.C. § 727(a)(3). The purpose of § 727(a)(3) is to insure that the debtor provides the trustee and his creditors with sufficient information to "`ascertain the debtor's financial condition and track his financial dealings with substantial completeness and accuracy for a reasonable period past to present.'" In re Juzwiak, 89 F.3d 424, 427 (7th Cir.1996) (quoting Bay State Milling Company v. Martin (In re Martin), 141 B.R. 986, 995 (Bankr.N.D.Ill. 1992)). "It also ensures that `creditors are supplied with dependable information on which they can rely in tracing a debtor's financial history.'" Holber v. Jacobs (In re Jacobs), 381 B.R. 147, 166 (Bankr.E.D.Pa. 2008) (quoting Meridian Bank v. Alten, 958 F.2d 1226, 1230 (3d Cir.1992)). See
The court in Exner v. Schultz (In re Schultz), 71 B.R. 711 (Bankr.E.D.Pa.1987), aptly expressed the purpose of § 727(a)(3), stating:
Id. at 716 (citations omitted except for quotation).
In Meridian Bank v. Alten, 958 F.2d 1226 (3d Cir.1992), the Third Circuit addressed the record-keeping obligations of a debtor, noting that the Bankruptcy Code does not require a debtor to maintain a bank account nor "an impeccable system of bookkeeping." Id. at 1230. "Nevertheless," the Third Circuit observed, the records must "`sufficiently identify the transactions [so] that intelligent inquiry can be made of them.'" Id. at 1230 (citations omitted). "A debtor's records must be such that `[c]reditors ... [are] not [] forced to undertake an independent investigation of a debtor's affairs.'" In re Juzwiak, 89 F.3d 424, 429 (7th Cir.1996) (quoting United States v. Ellis, 50 F.3d 419, 424 (7th Cir.1995) (citations omitted)); see also PNC Bank v. Buzzelli (In re Buzzelli), 246 B.R. 75, 96-97 (Bankr. W.D.Pa.2000) (quoting same passage from In re Juzwiak).
"The test is whether `there [is] available written evidence made and preserved from which the present financial condition of the bankrupt, and his business transactions for a reasonable period in the past may be ascertained.'" Meridian Bank v. Alten, 958 F.2d 1226, 1230 (3d Cir.1992) (quoting In re Decker, 595 F.2d 185, 187 (3d Cir.1979) (citations omitted)). Oral testimony is not a substitute for written records. In re Juzwiak, 89 F.3d 424, 429 (7th Cir.1996). In order to obtain the benefits of a Chapter 7 discharge, a debtor has "a legal duty to maintain adequate records of his income and expenses." Meridian Bank v. Alten, 958 F.2d 1226, 1232 (3d Cir.1992). Bankruptcy courts have broad discretion "in determining whether a debtor's records are sufficient under § 727(a)(3)." In re Jackson, 453 B.R. 789, 796 (Bankr.E.D.Pa.2011).
The language of § 727(a)(4) "is not by its terms limited to records belonging only to" the debtor "or are property of an estate, but instead the mandate subsumes all records relating to a debtor's financial affairs." Blanchard v. Ross (In re Ross), 1999 WL 10019, at *4 (Bankr. E.D.Pa. January 4, 1999). When a debtor
The party objecting to a debtor's discharge under § 727(a)(3) must show that: (1) the debtor failed to maintain and preserve adequate records; and (2) the failure made it impossible to ascertain the debtor's financial condition for a reasonable period past to present. See Roodhof v. Roodhof, 491 B.R. 679, 688 (Bankr.M.D.Pa.2013) (citing Meridian Bank v. Alten, 958 F.2d 1226, 1230 (3d Cir.1992)). Notably, § 727(a)(3) does not require a showing of intent. Jou v. Adalian (In re Adalian), 474 B.R. 150, 164 (Bankr.M.D.Pa.2012); see also Wachovia Bank v. Spitko (In re Spitko), 357 B.R. 272, 305 (Bankr.E.D.Pa.2006) (no intent to defraud is required under § 727(a)(3)). It is also important to note that § 727(a)(3)'s "disclosure requirement extends beyond the property of the estate to include all `business transactions' which shed light on the financial condition of the debtor." Wachovia Bank v. Spitko (In re Spitko), 357 B.R. 272, 307 (Bankr.E.D.Pa.2006) (quoting Office of Comptroller General of Republic of Bolivia on Behalf of Bolivian Air Force v. Tractman, 107 B.R. 24, 27 (S.D.N.Y.1989)).
If a plaintiff proves both prongs of the aforementioned test by a preponderance of the evidence, then the debtor must justify his/her failure to maintain and preserve adequate records under the circumstances. Haupt v. Belonzi (In re Belonzi), 476 B.R. 899, 904 (Bankr.W.D.Pa.2012). "The plain language of section 727(a)(3) places the burden on the debtor to justify the lack of adequate record keeping." Meridian Bank v. Alten, 958 F.2d 1226, 1234 (3d Cir.1992)
A determination of justification under § 727(a)(3) "requires the court to look at all of the circumstances and evaluate everything on a `case-by-case basis.'" Eveland v. Kishbaugh (In re Kishbaugh), 399 B.R. 419, 427 (Bankr.M.D.Pa.2009) (quoting Meridian Bank v. Alten, 958 F.2d 1226, 1231 (3d Cir.1992)). "The basic standard is to look at what a reasonable person would do in similar circumstances. Such an inquiry should take into account the sophistication, education, and experience of the debtor." Eveland v. Kishbaugh (In re Kishbaugh), 399 B.R. 419, 427 (Bankr. M.D.Pa.2009) (citations omitted). See also Meridian Bank v. Alten, 958 F.2d 1226, 1231 (3d Cir.1992) ("The issue of justification depends largely on what a normal, reasonable person would do under similar circumstances.").
As one of the principle officers of Lee's Industries and one of its 50% shareholders, the Debtor had control over the closely held corporation. Accordingly, the records of Lee's Industries are relevant in ascertaining the Debtor's financial condition and her business transactions. As the Plaintiffs aptly assert, the company's records could reveal "what income and transfers may have been received by Debtor from the company, whether expenses of the Debtor were paid by the company, and
As the Debtor explained during her 2014 deposition, certain records for Lee's Industries are not available because they were destroyed by a flood and subsequently discarded. Assuming, for purposes of deciding the Motion, that the Debtor, through no fault of her own, could not salvage any of the records that were damaged as a result of the flood, the Debtor would not be denied a discharge for failing to preserve these documents.
However, the Debtor testified that Lee's Industries maintained computerized financial records using Quickbooks. The Debtor specifically testified that the company used Quickbooks to record: (1) checks and other payments which it issued; and (2) payments that were due and forthcoming to it. Thus, the Quickbook records would provide significant information regarding the financial transactions and financial condition of Lee's Industries. Accordingly, the Debtor's failure to maintain and preserve the Quickbook records renders it impossible for the Debtor's creditors to ascertain her financial condition and her business transactions for a reasonable period past to present.
The Debtor's asserted justification for not maintaining and preserving the Quickbook records is that the Plaintiffs have possession of significantly more records for Lee's Industries than she has or ever had. The Plaintiffs may indeed possess significant records from Lee's Industries such as the their personnel files and documents concerning their wages. Such records would be relevant to the State Court Litigation. However, the Debtor has failed to provide even a scintilla of evidence that Plaintiffs possess or were ever given financial records showing the financial transactions, account receivables or financial condition of the company, particularly in the years leading up to the Debtor's bankruptcy filing. The Debtor cannot withstand the Plaintiffs' Motion by making a sweeping assertion and failing to support it with evidence.
The Debtor's other asserted justification for failing to maintain and preserve the Quickbook records for her company is that she is not a sophisticated business person.
Plaintiffs also contend that the Debtor should be denied a discharge pursuant to § 727(a)(4)(A) on the grounds that she made false statements on her Schedules and SoFA. In order for a debtor to be denied a discharge under § 727(a)(4), "a plaintiff must establish that: (1) the debtor knowingly and fraudulently; (2) in connection with a case; (3) made a false oath or account; (4) regarding a material matter." The Cadle Company v. Zofko (In re Zofko), 382 B.R. 45, 48 (Bankr. W.D.Pa.2008). The purpose of § 727(a)(4) "`is to allow creditors to have adequate information of the [debtor's] estate without the need for an examination to determine if the statements are correct.'" Carto v. Oakley (In re Oakley), 503 B.R. 407, 424 (Bankr.E.D.Pa.2013) (quoting In re Hiegel, 117 B.R. 655, 659 (Bankr.D.Kan.1990)). Stated differently, "section 727(a)(4)(A) seeks to insure that the chapter 7 debtor has made full, honest and accurate disclosure of her financial circumstances to the bankruptcy trustee and creditors have sufficient information for the proper administration of the chapter 7 case without having to incur the time and expense of an investigation into her affairs." Carto, 503 B.R. at 424.
The party objecting to a debtor's discharge based on § 727(a)(4) "must prove an `actual intent on the part of the bankrupt to hinder, delay, and defraud his creditors.' In re Topper, 229 F.2d 691, 692 (3d Cir.1956) (citation and internal quotations omitted)." In re Georges, 138 Fed. Appx. 471, 472 (3d Cir.2005). However, a debtor's "reckless indifference to the truth" is sufficient to deny the debtor "a discharge if the subject matter of the omission is material to the administration of the bankruptcy." In re Diloreto, 2006 WL 2974156, at *7 (E.D.Pa. October 13, 2006). "Even an omission or misstatement of material information made with a `reckless indifference to the truth' may suffice to establish fraudulent intent." DeAngelis v. Williams (In re Williams), 2012 WL 3564027, at *8 (Bankr.M.D.Pa. August 17, 2012) (citation omitted). Of course, not all omissions or errors establish fraudulent intent. A debtor who "is merely careless in preparing schedules and statements or in testimony in connection with a case may receive a discharge absent proof of fraudulent intent." Id.
The Debtor made multiple material omissions in her Schedules and SoFA. On her original Schedules, the Debtor failed to disclose that: (i) she was a 50% shareholder in Lee's Industries; and (ii) the existence of Plaintiffs' claim against her. Moreover, on her original SoFA, the
The Debtor's failure to list her 50% shareholder interest in Lee's Industries on Schedule B and her failure to list her 2011 income from the company on her SoFA would not, by themselves, prevent her from receiving her discharge. If these two errors were the Debtor's only omissions, the Court would be willing to accept the Debtor's explanation that these omissions were honest mistakes. However, viewed collectively, the omissions on Debtor's Schedules and her SoFA are too many and too material to attribute them to honest mistakes.
Even assuming that the Debtor believed that she did not have to list her shareholder interest in Lee's Industries on Schedule B because the company had ceased operating, Question # 18 on the SoFA specifically required the Debtor to list Lee's Industries since she was an officer and 50% shareholder of the company within the lengthy six year period preceding her bankruptcy filing.
Moreover, the Debtor has provided no explanation for waiting for almost six months after she filed her bankruptcy case to file an amended Schedule B and SoFA. It is understandable that a debtor, who hastily files her Schedules and SoFA within days after retaining counsel, might need to amend them to correct inaccurate or incomplete answers, but it is not acceptable for a debtor to wait nearly six months after filing her bankruptcy case to do so.
Consequently, the Court concludes, based on the material omissions on the Debtor's Schedules and her SoFA, that she acted with a reckless indifference to the truth sufficient to establish fraudulent intent for the purpose of § 727(a)(4). The Debtor shall be denied a discharge for "knowingly and fraudulently" making a false oath in connection with her bankruptcy case.
Based on the record before the Court on the Motion, there are no disputed issues of material fact and the Plaintiffs are entitled to judgment as a matter of law. The Debtor shall be denied a discharge in her bankruptcy case pursuant to §§ 727(a)(3) and 727(a)(4)(a).
An order consistent with this Memorandum will be entered.
Dep. 2014 at 21-24.
Dep. 2014 at 24-26.
Id. Notably, under the terms of the Damages Stipulation, the Debtor and the corporate defendants are responsible for the bulk of the damages. In comparison, Eric's monetary obligations are minimal. There is no evidence in the record explaining why the damages were divided in this manner. Accordingly, the Court will not draw any inference from it.
See Exhibit A to Plaintiffs' Motion to Compel Discovery, Docket Entry No. 11.