Failure to Keep Sufficient Business Records leads to Denial of Bankruptcy Discharge: 11 USC 727(a)(3)

October 13, 2023
Hernandez v. Shove
Docket: 22-9005

Opinion Date: October 6, 2023

Judge: Montecalvo

Areas of Law: Bankruptcy, Discharge Denial for Failure to Maintain Sufficient Business Records


The First Circuit affirmed the judgment of the bankruptcy court denying Debtor a discharge pursuant to 11 U.S.C. 727(a)(3) for Debtor’s failure to keep or preserve records and declined to decide whether a denial was warranted under 11 U.S.C. 727(a)(4) holding that the bankruptcy court properly denied a discharge under section 727(a)(3).


Plaintiff filed a Chapter 7 bankruptcy petition.  Creditor-Defendant, who held an unsatisfied judgment against Plaintiff, commenced an adversary proceeding seeking to deny Plaintiff a discharge on five separate grounds.  The bankruptcy court denied Plaintiff a discharge pursuant to section 727(a)(3) and also found that the discharge should be denied under section 727(a)(4).  The First Circuit affirmed, holding that the bankruptcy court properly denied a discharge pursuant to section 727(a)(3) and declined to reach whether a discharge also should be denied pursuant to section 727(a)(4).


Chapter 7 bankruptcy proceedings allow a debtor to obtain a “fresh start” by discharging nearly all previously incurred debts. Privitera vs. Curran(In re Curran), 855 F.3d 19, 22 (1st Cir. 2017)(quoting Grogan vs. Garner, 498 U.S. 279, 283(1991)).


Under section 727(a)(3), a bankruptcy court may deny a discharge if the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information … from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case……


The bankruptcy code channels bankruptcy appeals through a two-tiered framework. City Sanitation, LLC vs. Allied Waste Servs. of Mass., LLC (In re Am. Cartage, Inc.), 656 F.3d 82, 87 (1st Cir. 2011).


Under this framework, a litigant who loses in the bankruptcy court may first appeal to either the district court or the BAP.  See 28 U.S.C. § 158(a)-(b); In re Curran, 855 F.3d at 24. A party may then obtain a second level of appellate review from the court of appeals. See 28 U.S.C. § 158(d)(1). “We afford no particular deference to decisions of the first-tier appellate tribunal (be it the district court or the BAP) and focus instead on the bankruptcy court’s decision.” In re Curran, 855 F.3d at 24.  We review that court’s “findings of fact for clear error and its conclusions of law de novo.” Wheeling & Lake Erie Ry. Co. vs. Keach(In re Montreal, Me.& Atl. Ry., Ltd.I), 799 F.3d 1, 5 (1st Cir. 2015).


“The legal standards traditionally applicable to … motions to dismiss apply without change in bankruptcy proceedings.” Rok Builders, LLC vs. Venture LLC (In re Moultonborough Hotel Grp., LLC), 726 F.3d 1, 4(1st Cir. 2013).


Accordingly, we accept all well-pleaded facts in the amended complaint as true “and draw[] all reasonable inferences in the pleader’s favor.”  In re Curran, 855 F.3d at 25. “[A] complaint need not set forth ‘detailed factual allegations,’ but it must ‘contain sufficient factual matter … to state a claim to relief that is plausible on its face.'”Id.(first quoting Bell Atl. Corp.v. Twombly, 550 U.S. 544, 555 (2007); and then quoting Ashcroftv. Iqbal, 556 U.S. 662, 678 (2009)). “Dismissal is warranted when a complaint’s factual averments are ‘too meager, vague, or conclusory to remove the possibility of relief from the realm of mere conjecture.'”  In re Montreal, Me. & Atl. Ry., Ltd. II, 888 F.3d at 6 (citation omitted).


To prevail “[u]nder §727(a)(3), a creditor” must prove that the debtor (1) “unreasonably failed to maintain sufficient records” and (2) that this failure makes it impossible “to adequately ascertain [their] financial situation.” Razzaboni vs. Schifano(In re Schifano), 378 F.3d 60, 70 (1st Cir. 2004). Thus, “[a]motion to dismiss a section 727(a)(3) claim is properly denied where the complaint specifically alleges that (a) the debtor failed to maintain any accounting or financial records and (b) . . .the failure made it impossible to determine the debtor’s financial condition.” Rasmussen vs. LaMantia(In re LaMantia), No. 18-10632, 2019 WL 5388056, at *8 (Bankr. D. Me. Oct. 18, 2019).


Although a debtor’s “[r]ecord-keeping need not be precise to the point of pedantry,” the records must “sufficiently identify the transactions [so] that intelligent inquiry can be made of them.”  In re Simmons, 810 F.3d 852 at 857-58 (1st Cir. 2016).

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