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finding a prima facie case under section 727 requires that the objecting creditor show that the debtor failed to maintain and preserve adequate records and that debtor's failure to do so makes it impossible to ascertain the debtor's financial condition and material business transactions
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4:01-CV-0399-E
January 7, 2001
MEMORANDUM OPINION AND ORDER
This case has come before the Court on appeal from a final order of the United States Bankruptcy Court for the Northern District of Texas, Fort Worth Division, Honorable Massie Tillman, Bankruptcy Judge, granting summary judgment in favor of Appellee Londrew Glenn Terrell.
On May 29, 2001, The Cadle Company ("Cadle") filed this appeal with the Court. Terrell has responded in opposition, and Cadle has submitted reply briefing. After considering the motions and arguments of the parties, the record before the Court, and the applicable law, the Court makes the following determinations.
I. BACKGROUND
The following brief summary is taken from the findings of fact entered by the Bankruptcy Court on March 15, 2001, statements of the case prepared by both parties, and from the record.
On February 22, 2000, debtor Terrell filed a petition for relief under Chapter 7 of the Bankruptcy Code. On May 18, 2000, Cadle filed a complaint objecting to Terrell's discharge pursuant to 11 U.S.C. § 727(a)(2), (a)(3), and (a)(5). Cadle was a creditor of Terrell by way of its purchase of an unpaid judgment entered on February 12, 1990, by the United States District Court for the Southern District of Texas, Houston Division, in the matter of Universal Savings Association and Resolution Trust Corporation v. North Fort Worth-328 Joint Venture, Tri Star Corporation, and Londrew Glenn Terrell, Case No. H-89-1209 (Judge Lynn Hughes, presiding).
In response to Cadle's discovery requests, Terrell and his wife, Kathleen Ann Terrell, submitted all of the financial records in their possession. These included Terrell's income tax returns for 1995 through 1998; Terrell's sworn schedules filed in the bankruptcy proceeding; the insurance certificate on Terrell's automobiles and home; Terrell's Final Will and Testament; and documents related to the 1998 formation of Clearwater Creek, L.L.C. — a limited liability company owned equally by Kathleen Ann Terrell and a third-party investor — and an accounting of its funds from May 30, 1998, to August 18, 2000. Terrell did not provide Cadle with any bank statements, cancelled checks, or credit card statements. Because Terrell — who derived his income working as a salaried minister for Grace Vineyard Christian Fellowship Church and as a fee developer for Clearwater Creek, L.L.C. — closed his personal bank account in 1996 on the advice of counsel, he either cashed his paychecks or gave them to his wife for deposit in her bank account.
On February 7, 2001, after both parties had filed cross motions for summary judgment, the Bankruptcy Court issued a letter opinion granting summary judgment for Terrell. As a rationale for its decision, the Bankruptcy Court ruled that the unpaid judgment owned by Cadle was dormant under Texas law because it was more than 10 years old at the commencement of Terrell's bankruptcy proceedings. Dismissing Cadle's contention that its issuance of a writ of execution in January 2000 served to keep the judgment alive, the Court held that any such writ of execution was prohibited by Judge Hughes's deletion of language in the 1990 judgment expressly permitting the owner of the judgment to enforce collection through use of "all writs and processes as may be necessary.
On March 15, 2001, the Bankruptcy Court entered its Final Judgment and the proposed Findings of Fact and Conclusions of Law prepared by Terrell pursuant to the Court's letter opinion. After the Bankruptcy Court denied Cadle's Motion for Reconsideration on April 2, 2001, Cadle appealed to this Court.
II. STANDARDS OF REVIEW
The Court has jurisdiction over this appeal pursuant to 28 U.S.C. § 158(a). In reviewing a decision of the Bankruptcy Court, this Court functions as an appellate court and applies the standards of review generally applied by federal appellate courts. See Matter of Webb, 954 F.2d 1102, 1103-1104 (5th Cir. 1992). The Court reviews the Bankruptcy Court's conclusions of law de novo. See In re Hickman, 260 F.3d 400, 401 (5th Cir. 2001). Findings of fact, conversely, are reviewed for clear error. See id. A finding is clearly erroneous, although there is evidence to support it, when the reviewing court on the entire evidence is left with a definite and firm conviction that a mistake has been committed. See Memphis-Shelby County Airport Authority v. Braniff Airways, Inc. ( In re Braniff Airways, Inc.), 783 F.2d 1283, 1287 (5th Cir. 1986).
In order to prevail on a motion for summary judgment, the moving party has the initial burden of demonstrating that there is no genuine issue as to any material fact and that it is entitled to a judgment as a matter of law. See Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 2511 (1986); Hill v. London, Stetelman, Kirkwood, Inc., 906 F.2d 204, 207 (5th Cir. 1990). Where the nonmoving party bears the burden of proof on a claim upon which summary judgment is sought, the moving party may discharge its summary judgment burden by showing that there is an absence of evidence to support the nonmoving party's case.See Celotex, 477 U.S. at 325, 106 S.Ct. at 2554. Once the moving party has made an initial showing, the burden shifts to the party opposing the motion to come forward with competent summary judgment evidence of the existence of a genuine fact issue. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 585, 106 S.Ct. 1348, 1355 (1986);Anderson, 477 U.S. at 256, 106 S.Ct. at 2514. In order to avoid summary judgment, the nonmoving party "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita, 475 U.S. at 586, 106 S.Ct. at 1356. Rule 56(e) requires that the nonmoving party "set forth specific facts showing that there is a genuine issue for trial." Anderson, 477 U.S. at 256, 106 S.Ct. at 2514.
In making its determination on the motion, the Court must look at the full record including the pleadings, depositions, answers to interrogatories, admissions on file, and affidavits. See Williams v. Adams, 836 F.2d 958, 961 (5th Cir. 1988). Although all reasonable inferences to be drawn from the underlying facts must be viewed in the light most favorable to the party opposing the motion, "[o]nly disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson, 477 U.S. at 248, 106 S.Ct. at 2510.
III. ISSUES ON APPEAL
Cadle raises 14 issues on appeal, which essentially can be narrowed to two major questions that this Court must answer:
(1) Did the bankruptcy court err by granting summary judgment for Terrell on the grounds that a 1990 judgment against Terrell that Cadle owned was dormant and could not be revived?
(2) Did Cadle present a prima facie case for denial of discharge pursuant to 11 U.S.C. § 727(a)(3) such that the bankruptcy court incorrectly denied Cadle's Motion for Final Summary Judgment?
IV. DISCUSSION
A. Did Cadle's 1990 Judgment Against Terrell Become Dormant?Section 34.001(a) of the Texas Civil Practice and Remedies Code states that:
If a writ of execution is not issued within 10 years after the rendition of a judgment of a court of record or a justice court, the judgment is dormant and execution may not be issued on the judgment unless it is revived.
TEX. CIV. PRAC. REM. CODE § 34.001(a) (West 2001). The term "issued" as used in § 34.001(a) means "more than clerical preparation of the writ and requires that it be delivered to an officer for enforcement." Williams v. Short, 730 S.W.2d 98, 99 (Tex.App. — Houston [14th Dist.] 1987, writ ref'd n.r.e.). The judgment creditor has the burden of demonstrating to the court both clerical preparation and actual delivery of the writ to the appropriate officer within the statutory period. See id. at 99-100.
The unpaid judgment now owned by Cadle was entered by United States District Judge Lynn Hughes on February 12, 1990. Cadle has demonstrated that a writ of execution was issued on the judgment on January 3, 2000. (R. 2 at 75.) On January 20, 2000, Terrell was served with the writ, and it was returned nulla bona. (Id. at 73.) As the writ clearly was "issued" less than 10 years after rendition of the judgment in Judge Hughes's court, there can be no doubt that the judgment did not become dormant.See TEX. CIV. PRAC. REM. CODE § 34.001(a).
In ruling that Cadle's judgment had become dormant, the Bankruptcy Court held that the writ of execution issued by Cadle in January 2000 was prohibited by Judge Hughes's deletion of language in the 1990 judgment expressly permitting the owner of the judgment to enforce collection through use of "all writs and processes as may be necessary." (R. 4 at 481, 528-29, 585-86.) The Bankruptcy Court determined that Judge Hughes's deletions indicated an intention, pursuant to Federal Rule of Civil Procedure 69(a) , to deny the issuance of a writ of execution to enforce the judgment.
Federal Rule of Civil Procedure 69(a) states that: "Process to enforce a judgment for the payment of money shall be a writ of execution, unless the court directs otherwise." (emphasis added)
This Court finds the Bankruptcy Court's interpretation of Judge Hughes's intent to be misguided and erroneous. It is axiomatic that the "right to collect a money judgment by execution is inherent in the judgment and does not depend on specific recitals." Ford v. Wied, 823 S.W.2d 423, 423 (Tex.App.-Texarkana 1992, pet. denied); see also In re Dryden, 52 S.W.3d 257, 263 (Tex.App.-Corpus Christi 2001, n.w.h.) ("Execution will issue on any valid judgment whenever proper, irrespective of the inclusion of the words `let execution issue' in the judgment; such language is surplusage."). Indeed, Judge Hughes has written that "[m]any collection judgments end with the granting of whatever writs are necessary to enforce the judgment . . . That is wrong," as the clerk of court may issue the writ appropriate to the judgment of the court without any authorization or direction in the judgment itself. (R. 4 at 555.) It seems clear that by deleting language from Cadle's judgment authorizing the collection of the judgment by "all writs and processes as may be necessary," Judge Hughes simply was eliminating unnecessary and excessive verbiage. If Judge Hughes had intended to prohibit the issuance of a writ of execution, he explicitly would have stated this in the judgment pursuant to Rule 69(a).
Accordingly, because the Bankruptcy Court mistakenly based its grant of summary judgment to Terrell on the flawed theory that Judge Hughes had prohibited issuance of a writ of execution on Cadle's 1990 judgment against Terrell — and thus the judgment was dormant (R. 4 at 481, 585-86) — the Bankruptcy Court's ruling that Terrell is entitled to summary judgment in this matter is hereby REVERSED. The Court now turns to whether the Bankruptcy Court erred in denying Cadle's Cross Motion for Summary Judgment.
B. Has Cadle presented a prima facie case for denial of discharge pursuant to 11 U.S.C. § 727(a)(3)?
Under 11 U.S.C. § 727(a)(3):
(A) The court shall grant the debtor a discharge, unless —
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(3) the debtor has . . . failed to keep or preserve any recorded information, including books, documents, records, and papers, 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. . . .
Section 727(a)(3) requires as a precondition to discharge that debtors produce records "which provide creditors `with enough information to ascertain the debtor's financial condition and track his financial dealings with substantial accuracy for a reasonable period past to present.'" In re Juzwiak, 89 F.3d 424, 427 (7th Cir. 1996) ( quoting In re Martin, 141 B.R. 986, 995 (Bankr.N.D.Ill. 1992)). The purpose of the section is to give the trustee and creditors full and accurate information regarding the status of the debtor's financial affairs and history, with which they may test the completeness of the debtor's disclosure requirements to a discharge. See Meridian Bank v. Alten, 958 F.2d 1226, 1230 (3d Cir. 1992). "[C]ourts and creditors should not be required to speculate as to the financial history or condition of the debtor, nor should they be compelled to reconstruct the debtor's affairs." In re Juzwiak, 89 F.3d at 428.
In order to state a prima facie case under § 727(a)(3), a creditor objecting to discharge must show (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. See Meridian Bank, 958 F.2d at 1232. Should the creditor satisfy his burden on these two factors, the debtor has the burden to prove that his failure to keep adequate records was justified under the circumstances. See In re Cox, 41 F.3d 1294, 1297 (9th Cir. 1994); In re Grisham, 245 B.R. 65, 75 (Bankr. N.D. Tex 2000).
In this matter, Terrell has attempted to satisfy his duty of full disclosure by producing his income tax returns for 1995 through 1998, sworn schedules filed in the bankruptcy proceeding, the insurance certificate on his automobiles and home, his Final Will and Testament, and documents related to the formation and operation of Clearwater Creek, L.L.C. Terrell acknowledges, however, that he has failed to produce any credit card records or bank statements, despite the fact that he claims at least $59,000 of debt spread over four credit cards (R. 3 at 404), and has admitted to depositing many of his paychecks into his wife's bank account since 1996 (R. 4 at 571).
The Court concludes that the evidence in this case firmly demonstrates that Terrell failed to keep records from which his financial condition and business transactions could be ascertained. While bank statements and credit card receipts or monthly statements may be simple records, they "form the core" of what creditors would need to ascertain Terrell's financial condition, primarily his use of cash assets through his credit card transactions and his wife's bank account. In re Sharp, 244 B.R. (Bankr. E.D. Mich. 2000); In re Senese, 245 B.R. 565, 576 (Bankr. N.D.Ill. 2000). In this regard, the trustee in Terrell's case, Harry Cure, Jr., has provided his expert opinion — not rebutted by Terrell — that the documents produced by Terrell "are insufficient to provide the . . . creditors of Debtor Terrell with the Debtor Terrell's financial condition or financial transactions within the years immediately proceeding his bankruptcy filing." (R. 3 at 227.) Bolstering the trustee's opinion, numerous courts have held that a debtor's failure to provide credit card or bank statements justifies a denial of discharge pursuant to § 727(a)(3). See, e.g., Sharp, 224 B.R. at 895 (denial of discharge for debtor who did not keep credit card receipts or bank statements); In re Senese, 245 B.R. at 576 (denial of discharge where debtor's production of nominal documents made it impossible for his creditors to determine use of debtor's cash assets through credit card transactions and bank accounts); In re Craig, 252 B.R. 822, 828 (Bankr. S.D. Fla. 2000) (denial of discharge where debtor failed to produce any credit card statements); In re Wazeter, 209 B.R. 222, 228 (W.D. Mich. 1997) (no discharge for debtor who failed to produce, among other documents, credit card bills and checking account statements).
Cadle having put forth a sufficient prima facie case for a denial of discharge under § 727(a)(3), the burden now shifts to Terrell to prove that his failure to keep adequate records was justified under the circumstances. Terrell, evidently believing that he did not have the burden on this issue, does not assert a discernable argument regarding justification. However, he appears to argue that he did not have to produce his credit card records and bank account statements in response to Cadle's discovery requests because these records were in the possession of the credit card companies and his wife's bank, and not in his "actual possession, custody, or control." (Appellee's Br. at 12.) This argument must be rejected, as Terrell had an obligation to produce any documents requested by Cadle that he had "the legal right to obtain . . . upon demand." See Cochran Consulting, Inc. v. Uwatec USA, Inc., 102 F.3d 1224, 1229-30 (Fed. Cir. 1996); Searock v. Stripling, 736 F.2d 650, 653 (11th Cir. 1984). Because Terrell had the legal right to request copies of his statements from the credit card companies, and his wife could obtain records of her account from the bank, Terrell had a duty to disclose the requested information to Cadle. Despite what he may believe, Terrell's creditors were "not required to ferret out" the records necessary to trace his financial history. In re Craig, 252 B.R. at 828 (quoting In re Caserta, 182 B.R. 599, 611 (Bankr. S.D. Fla. 1995)). Terrell has failed to demonstrate that his inability to produce adequate records was justified under the circumstances. Accordingly, his discharge shall be denied pursuant to § 727(a)(3).
Terrell relies on In re Oesterle, 651 F.2d 401 (5th Cir. 1981) for his argument that the party objecting to discharge has the burden of proving the absence of any justification. While Oesterle does stand for this proposition, the Court based its decision upon Bankruptcy Rule 407, which has since been repealed. Thus, the debtor now has the burden of proving that he was justified in his failure to keep adequate records.See In re Cox, 41 F.3d at 1297; In re Grisham, 245 B.R. at 75.
IV. CONCLUSION
Having considered the parties' motions, the record before the Court, and the applicable law, the Court determines that the Bankruptcy Court's grant of summary judgment to Appellee Terrell should be REVERSED.
Considering that Appellant Cadle has demonstrated a prima facie case for denial of discharge under § 727(a)(3), the Court FURTHER ORDERS that the Bankruptcy Court's denial of Cadle's Motion for Summary Judgment is hereby REVERSED, and summary judgment is hereby RENDERED for Cadle.
It is so ORDERED.