Falsifying financial records to defraud clients does not result in the denial of discharge under Section 727(a)(3) if the records are accurate and allow the trustee to ascertain the debtor’s financial condition accurately, according to Bankruptcy Judge Jennie D. Latta of Memphis, Tenn.
In her January 27 opinion, Judge Latta seems to be saying that a debtor’s fraud can result in the denial of discharge under other subsections in Section 727, perhaps subsection (a)(2). However, a debtor who keeps accurate financial records of his or her fraud is not denied a discharge under Section 727(a)(3) for that reason alone.
Accurate Records of Fraud
The debtor was evidently a financial advisor who defrauded two of his clients by taking some of their money for his own benefit. Apparently, the debtor repaid one of the clients.
With regard to the other client, the debtor pled guilty to a felony, served time, and is paying restitution. The debtor conceded that the claim of the defrauded creditor is nondischargeable.
The debtor filed a chapter 7 petition, and the U.S. Trustee mounted a complaint to deny discharge under several subsections of Section 727. Neither the chapter 7 trustee nor any creditors joined in the complaint.
The debtor and the U.S. Trustee filed cross motions for summary judgment regarding the two counts in the complaint under Section 727(a)(3). It provides for the denial of 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 U.S. Trustee and the debtor proffered divergent interpretations of Section 727(a)(3). According to Judge Latta, the U.S. Trustee “asserts that the statute prevents discharge to any debtor who concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information.” [Emphasis in original.]
Judge Latta characterized the debtor as arguing that “the statute prevents discharge only when, on a cumulative basis, the debtor’s recorded information is insufficient to permit the creditors or trustee in bankruptcy to ascertain his or her financial condition or business transactions.”
The debtor contended in substance that his books and records accurately depicted his fraud, allowing the trustee and creditors to ascertain his financial condition accurately.
‘(a)(3)’ Isn’t a Catchall for All Fraud
Judge Latta surveyed the statute from the Bankruptcy Act of 1898 through the numerous amendments leading to Section 727(a)(3) as it reads today. She said that “courts focus upon the ability of the creditors and trustee[s] to ascertain the debtor’s financial condition rather than upon every act or omission of the debtor with respect to his or her financial records.”
Judge Latta cited cases that she saw as “correctly interpret[ing] the intention of section 727(a)(3) to protect creditors when it is impossible to ascertain the financial condition or material business transactions of a debtor.”
The debtor’s falsifications of documents “are not insubstantial matters in their own context, and the court does not in any way excuse the acts of [the debtor], but most of these activities came to light before the bankruptcy petition was filed, and all are reflected in the banking and other records produced by [the debtor].”
Judge Latta dismissed the U.S. Trustee’s claims under Section 727(a)(3) “because he fails to allege or prove that [the debtor’s] financial condition or business transactions could not be accurately ascertained when his bankruptcy case was filed.” She added,
Section 727(a)(3) is not a general prohibition of bankruptcy discharge for persons who have falsified records at any time or in any context, but rather prohibits discharge of debtors in bankruptcy who have falsified records such that it is impossible to ascertain their financial condition or material business transaction now.
Although Judge Latta dismissed claims under Section 727(a)(3), the U.S. Trustee’s complaint included claims under Sections 727(a)(2), for an actual fraud committed within one year of bankruptcy, and 727(a)(4), for making a false oath in connection with the case.
Judge Latta said she would not enter judgment under Section 727(a)(3) until she disposes of the other claims, meaning that her ruling is interlocutory and can’t be appealed, absent certification of an interlocutory appeal.
Falsifying financial records to defraud clients does not result in the denial of discharge under Section 727(a)(3) if the records are accurate and allow the trustee to ascertain the debtor’s financial condition accurately, according to Bankruptcy Judge Jennie D. Latta of Memphis, Tenn.
In her January 27 opinion, Judge Latta seems to be saying that a debtor’s fraud can result in the denial of discharge under other subsections in Section 727, perhaps subsection (a)(2). However, a debtor who keeps accurate financial records of his or her fraud is not denied a discharge under Section 727(a)(3) for that reason alone.