- Case Type:
- Case Status:
- 20-1154 (9th Circuit, Jul 01,2021) Not Published
- The Bankruptcy Appellate Panel of the Ninth Circuit found no error in the decision of the Bankruptcy Court for the Southern District of California (BC) to deny a discharge to Sean P. Nevett (SPN) per § 727(a)(3) due to its and the trustee's inability to accurately gauge his true financial condition at filing time based largely on the nature of the SPN's business dealings, the amounts lent to him by two men in the preceding six years, the scarce funds he possessed on the petition date, and his inconsistent testimony regarding how he had used proceeds from these loans.
- Procedural context:
- This appeal arose from the efforts of the United States Trustee (UST) to understand how SPN had used loans totaling $1.5 million. That confusion first prompted an objection-to-discharge complaint pursuant to § 727(a)(3) and (5) and later a motion for summary judgment pursuant to these same subsections, which SPN obviously opposed. As the UST and the BC agreed, this opposition contained adequate records for $575,000 of those loan proceeds. However, the BC further ruled, on an interim basis, that there existed no reasonable factual dispute that SPN had failed to maintain any records relating to three other loans: one from Heath Bell (Bell) for $500,000 in 2011; the majority ($400,000) of a second for $450,000 from Mitch Pullman (Pullman) between 2009 and 2010; and a third for $25,000 from Deanne Gage (Gage) from 2010 (collectively, the Loans). As the BC explained, these "facts" shifted the burden to SPN to show that his failure to maintain records as to these loan proceeds was justified under the circumstances. Finding there to be a genuine issue of material fact regarding whether the Loans were too temporally remote to render retention of the records to be reasonable, the BC set this factual issue for trial. Unfortunately, for SPN, after a one-day trial, the BC could still only speculate about what happened to the full amount of the Loans, some of which dated as far back as six years before the serial entrepreneur (and his wife) had jointly filed their petition for relief pursuant to the Code's seventh chapter (Petition), due to SPN's contradictory testimony, imperfect records, and meager prepetition funds. Admittedly, at and before trial, SPN had managed to sufficiently, if belatedly, document the disposition of $544,000, including the entirety of the Loan from Gage. Nonetheless, the $381,000 obtained from Pullman and Bell remained entirely unaccounted for. Despite the fact that both SPN had borrowed this sum no less than four years before he invoked the Code's protection, the BC saw no reason to excuse SPN from the obligation to retain the relevant records based on his education, training, business experience, and sophistication, and on the size and nature of these two transactions. So convinced, the BC concluded that SPN had not provided sufficient information to discern his current financial condition, his discharge hence barred under § 727(a)(3). SPN timely appealed. He primarily contended that the BC had clearly erred when it imposed a six-year "lookback" on his duty to keep records of his material transactions and that, given the age of the two loans, his failure to keep adequate records was justified. As an alternative argument, SPN asserted that, even without records of his use of the proceeds from the Loans, he had produced ample documents to the UST that did provide a clear and complete understanding of his financial condition in the days leading up to the Petition's docketing.
- In December 2015, SPN and his wife, Shannon Lee Nevett (SLN, and with SPN, Debtors or DRs) filed the Petition. Therein, the DRs listed total assets of $1,720,002.49 and total liabilities of $7,320,467.61. Of their liabilities, nearly $6,000,000 was owed to their general unsecured creditors. The DRs listed the vast majority of their general unsecured debt as "business obligations." Seemingly, $5,178,842 of this debt originated from loans SPN received from eleven individuals from 2009 through 2015. Yet, though he borrowed over $5,000,000, the DRs had less than $10,000 in cash and bank account balances on the Petition Date. In light of this gap, the UST examined the DRs at the § 341(a) first meeting of creditors. It subsequently requested a number of documents to better understand the DRs' financial condition. It first reviewed documents produced by them in September 2016 and January 2017; thereafter, it sought additional documentation to explain the disposition of loan proceeds from the individual lenders. In March 2017, the UST and SPN stipulated to an examination and production of documents under Rule 2004 of the Federal Rules of Bankruptcy Procedure 2004. Afterwards, the UST sought documentation explaining SPN's receipt and disbursement of the Loans, a request that led to further examinations of SPN beginning in April 2017 and ending in February 2018. Unsatisfied with the completeness and perceived reliability of SPN's kaleidoscopic explanations, the UST filed the complaint objecting to SPN's discharge under § 727(a)(3) and (5) from which this appeal emerged.
- Gary A. Spraker; Scott H. Gan; and Julia W. Brand
Margaret Kinney v. HSBC Bank USA
Summarizing by Lars Fuller
3285 in the system
2 Being Processed