Martinez v. Sears (In re Sears)

Case Type:
Business
Case Status:
Affirmed
Citation:
BAP No. CO-16-025 (10th Circuit, Mar 24,2017) Published
Tag(s):
Ruling:
A prima facie case under § 727(a)(3) requires a showing that debtor failed to maintain and preserve adequate records and that the failure made it impossible to ascertain his financial condition and material business transactions. If this initial burden is met, the burden shifts to the debtor to justify his failure to maintain the records. A party objecting to a debtor’s discharge under § 727(a)(5) has the burden of proving facts establishing that a loss of assets occurred. The burden then shifts to the debtor to explain the loss of assets in a satisfactory manner.
Procedural context:
The chapter 7 trustee brought an adversary proceeding against debtor to deny his discharge. After a two day trial, the bankruptcy court sided with the trustee and denied debtor a discharge and debtor appealed. The 10th Circuit BAP reviewed the court’s factual finding for clear error and affirmed.
Facts:
In 1983, Debtor began leasing land for hunting and grazing cattle. Beginning in 2004, Debtor operated his hunting and cattle businesses through five companies which generated $9,294,429 in income from 2008-2015. From 2011 through 2013, Debtor suffered unexpected losses and increased operating costs and filed chapter 7. Debtor had no personal bank accounts prior to April 21, 2014, when he opened a checking account. Debtor’s income could not be traced through this personal account because all his personal expenses were paid by the companies. Debtor brought a large stack of boxes containing bank records but these were not admitted into evidence. A report prepared by Debtor’s accountant from the records in the boxes was admitted into evidence but Debtor’s records were not adequate to identify transactions or allow the trustee to make inquiry into them and Debtor’s strategy of using cashier’s checks for draws or intercompany transfers, so the funds would clear the bank more quickly made money difficult to trace. The trustee identified over $2.2 million in disbursements from the companies to the Debtor, his wife, and son from 2009-2015 but could not determine the ultimate disposition of those funds. Debtor failed to produce evidence of the intercompany transfers or to explain the disposition of the disbursements he received, other than to offer a vague explanation that the funds were used for personal or business expenses, for which he offered no documentary support.
Judge(s):
Cornish, Michael, Hall (Michael)

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