United States Court of Appeals For the First Circuit
No. 22-9005
IN RE: RICHARD M. SHOVE, f/d/b/a Rick's Complete Lawn Care; KATHLEEN E. SHOVE,
Debtors.
JOSE R. HERNANDEZ,
Appellee,
v.
RICHARD M. SHOVE,
Appellant,
KATHLEEN E. SHOVE,
Defendant.
APPEAL FROM THE BANKRUPTCY APPELLATE PANEL FOR THE FIRST CIRCUIT
Before
Montecalvo, Selya, and Lynch, Circuit Judges.
James P. Ehrhard for appellant. Cynthia A. Spinola, with whom Hashim & Spinola was on brief, for appellee. October 6, 2023 MONTECALVO, Circuit Judge. In December 2017, the
appellant, Richard M. Shove ("Shove"), filed a Chapter 7 bankruptcy
petition. The appellee, Jose R. Hernandez, holds an unsatisfied
judgment against Shove and sought to deny Shove a discharge on
five grounds. The bankruptcy court denied the debtor a discharge
pursuant to 11 U.S.C. § 727(a)(3) for the debtor's failure to keep
or preserve records and 11 U.S.C. § 727(a)(4) for the debtor's
making a false oath or account. The Bankruptcy Appellate Panel
for the First Circuit (the "BAP") upheld the bankruptcy court's
decision to deny 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). After careful consideration, we
affirm the section 727(a)(3) denial and decline to decide whether
a denial is warranted under section 727(a)(4).
I. Background
Chapter 7 bankruptcy proceedings allow a debtor to
obtain a "fresh start" by discharging nearly all previously
incurred debts. Privitera v. Curran (In re Curran), 855 F.3d 19,
22 (1st Cir. 2017) (quoting Grogan v. Garner, 498 U.S. 279, 283
(1991)). Nevertheless, the bankruptcy code "limits the
opportunity for a completely unencumbered new beginning to the
honest but unfortunate debtor by exempting certain debts from
discharge." Grogan, 498 U.S. at 279. One such exemption --
section 727(a)(3) -- is relevant here.
- 3 - 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 . . . .
11 U.S.C. § 727(a)(3).
In this case, Shove, the debtor, operated a landscape
company, Rick's Complete Lawn Care, for about twenty-five years.
He also has experience in property management, owning
approximately ninety rental units over the years. After sustaining
an injury in a fall, Shove elected to close his landscaping
business following the 2014-2015 season. Later that year, in
December 2015, a house fire damaged Shove's home, forcing his
family to move elsewhere for about a year.
According to the bankruptcy court, Shove testified that
before the house fire in December 2015 he "kept paper copies of
business records related to . . . the rental properties in boxes
stored in the basement of [his home]" and that the fire and related
water and ice damage destroyed those records. Shove and his wife
Kathleen E. Shove ("Kathleen") did not keep records of rental
payments after the December 2015 house fire. Instead, the Shoves
"used a partial cash system." Shove testified that "a lot of
- 4 - tenants paid cash" and that when tenants paid by check, Kathleen
would often "cash some of those checks, at -- at the person's bank
to make sure that they didn't bounce." Kathleen testified that
the Shoves would keep cash from rental payments locked in the car,
in a drawer in their kitchen, or in a hutch in their living room.
The Shoves did not retain records of these rental payments,
Kathleen's cashing of rental checks, or their cash payments for
bills related to their rental properties.
In February 2015, before Shove's landscaping business
wound down, Hernandez, Shove's then-employee, sustained a serious
injury, falling from a snow-covered roof during the course of his
employment. At the time of the accident, Shove did not have a
workers' compensation policy in effect. Hernandez sued Shove for
his injuries and, in September 2017, recorded a judgment against
Shove in the amount of $965,201.53.1
Shortly after Hernandez obtained the judgment, in
December 2017, Shove and Kathleen filed for Chapter 7 bankruptcy
1 The jury in Hernandez's civil suit returned a verdict in his favor in the amount of $750,000 on June 14, 2017. On June 16, 2017, the trial court entered judgment for Hernandez, including interest and costs, in the amount of $937,097.83. Shove filed a notice of appeal on July 10, 2017, which was dismissed under Massachusetts Appellate Procedure Rule 10(c) on September 8, 2017, for Shove's failure to take the required steps to initiate his appeal. On September 20, 2017, Hernandez recorded the trial court's judgment, which had since accrued additional interest, against Shove in the Berkshire County Registry of Deeds. At that time the judgment included $750,000 in damages, $214,893.45 in interest, and $308.08 in costs of suit for a total of $965,201.53.
- 5 - protection, requesting a discharge from, among other things, the
$965,201.53 judgment. A Chapter 7 bankruptcy trustee ("the
Trustee") was promptly appointed.
In due course, the Shoves filed their schedules of assets
and liabilities and statement of financial affairs. As a part of
their filings, the debtors disclosed that one or both of them owned
nine total properties, several of which were income-producing as
of 2017, all located in Berkshire County: their primary residence
in Lenox (jointly owned), five multi-unit properties in Lenox
(jointly owned), two multi-unit properties in Pittsfield (owned
solely by Shove), and a single-family home in Lee (jointly owned).
In addition, the Shoves indicated that they received monthly net
rental income of $1,056.59, but they did not heed the form's
instructions to attach a statement for each rental property showing
gross receipts, ordinary and necessary business expenses, and the
total monthly net income.
The Trustee requested that the debtors provide
additional documentation relating to their overall financial
affairs and, in particular, the Shoves' use of cash in their real
estate affairs. For example, the Trustee requested rent rolls,
bank statements, and whatever financial documents the Shoves had
so that he could attempt to ascertain the Shoves' financial
position.
- 6 - In March 2018, in response to the Trustee's request, the
Shoves produced a single-page document for each month from January
2017 to March 2018 listing rent received from each property. Each
document included a statement that the information represented
their "best recollection" as of March 2018 because the Shoves "no
longer ke[pt] records."
Also in March 2018, Hernandez commenced an adversary
proceeding in the bankruptcy court to prevent discharge of the
$965,201.53 judgment on five grounds. As is relevant to this
appeal, he claimed that Shove's discharge should be denied under
section 727(a)(3) because Shove, in the operation of his rental
property and landscaping businesses, "failed to keep or preserve
any recorded information, including books, documents, records, and
papers, from which [his] financial condition or business
transactions might be ascertained."
The debtors moved to dismiss Hernandez's amended
complaint for failure to state a claim. Hernandez agreed to
dismiss the claims against Kathleen but opposed the motion to
dismiss as to Shove. After a hearing, the bankruptcy court allowed
most of the claims, including the section 727(a)(3) claim, to
proceed against Shove.
The case continued to trial. The Shoves' failure to
keep records relating to the rental properties after the house
fire proved fatal. The bankruptcy court denied Shove a discharge
- 7 - pursuant to section 727(a)(3), concluding that "[a]lthough the
lack of records for the period preceding December 2015 has been
adequately explained, Shove has not justified the wholesale
failure to keep records regarding his financial affairs for the
post-[house-f]ire period." It also found that discharge should be
denied under section 727(a)(4). When the debtors appealed, the
BAP upheld the denial pursuant to section 727(a)(3) without
deciding whether section 727(a)(4) also provided grounds for
denial. This timely second-tier appeal ensued.
II. Standard of Review
The bankruptcy code channels bankruptcy appeals through
a two-tiered framework. City Sanitation, LLC v. 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. v.
- 8 - Keach (In re Montreal, Me. & Atl. Ry., Ltd. I), 799 F.3d 1, 5 (1st
Cir. 2015).
III. Discussion
Shove argues that the bankruptcy court erred in denying
his motion to dismiss which, among other things, sought to dismiss
Hernandez's claim that discharge should be denied pursuant to
section 727(a)(3). He further argues that, even assuming the
bankruptcy court's decision on the motion to dismiss was correct,
the bankruptcy court erred in denying Shove a discharge pursuant
to section 727(a)(3). We address each argument in turn.2
A. Motion to Dismiss
We review the bankruptcy court's decision denying the
motion to dismiss as to the section 727(a)(3) claim de novo. See
Keach v. Wheeling & Lake Erie Ry. Co. (In re Montreal, Me. & Atl.
Ry., Ltd. II), 888 F.3d 1, 6 (1st Cir. 2018). "The legal standards
traditionally applicable to . . . motions to dismiss apply without
change in bankruptcy proceedings." Rok Builders, LLC v. 2010-1
2 Shove raises several other arguments related to the section 727(a)(4) claim. Because we conclude that his challenges to the section 727(a)(3) claim fail, we need not reach his challenges to the bankruptcy court's ruling on the section 727(a)(4) claim and its associated evidentiary rulings. See Zizza v. Harrington (In re Zizza), 875 F.3d 728, 733 (1st Cir. 2017) (affirming denial of discharge under section 727(a)(4)(A) and declining to address alternative ground for denial under section 727(a)(2)); Farouki v. Emirates Bank Int'l, Ltd., 14 F.3d 244, 250 (4th Cir. 1994) ("Proof of conduct satisfying any one of [section 727(a)'s] sub-sections is enough to justify a denial of a debtor's request for a discharge.").
- 9 - SFG 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 Ashcroft v. 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).
Against this backdrop, we turn to the plausibility of
Hernandez's section 727(a)(3) claim. The bankruptcy court
declined to dismiss the section 727(a)(3) claim against Shove.
The court's reasons for deciding so are unclear, as Shove did not
meet his obligation to provide a transcript of the hearing. "We
have held repeatedly that we will not review a claim of error if
the appellant has failed to include a transcript of the pertinent
proceedings in the record on appeal." Valedon Martinez v. Hosp.
Presbiteriano de la Comunidad, Inc., 806 F.2d 1128, 1135 (1st Cir.
1986). This failure to include the transcript is a sufficient
basis to reject Shove's argument that this decision was erroneous.
- 10 - Even if we were to reach that issue, as we may choose to do,
see, e.g., id., we would still reject this argument for the reasons
stated below.
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 v.
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 v. LaMantia (In re LaMantia), No. 18-10632,
2019 WL 5388056, at *8 (Bankr. D. Me. Oct. 18, 2019).
In the amended complaint, Hernandez alleges that the
Shoves, "in their operation and management of their various income
producing properties in Berkshire County have . . . failed to keep
or preserve any recorded information, including books, documents,
records, and papers, from which [their] financial condition or
business transactions might be ascertained." Parts of this
allegation mirror the statutory language and further specify that
the type of information not kept or preserved was financial
information regarding the Shoves' "income producing properties in
Berkshire County."
- 11 - What is more, Hernandez's other allegations add further
context for the specific records that he contends were not kept or
preserved. For example, he also alleges that despite requests,
the Shoves "[n]ever produced any financial, rental or business
records in either electronic or hard copy form" and that "[b]oth
one year prior to and subsequent to the filing of [the Shoves']
[p]etition in [b]ankruptcy, the [d]ebtors have concealed numerous
rent receipts and other earned income paid to them in cash and
checks[ and] have failed to record [the] same." Considering these
allegations in conjunction with Hernandez's allegation that the
Shoves "owned and operated at least nine multi-unit residential
income-producing properties in Berkshire County," one could
reasonably infer that Hernandez was unable to ascertain the
whereabouts of a significant amount of rental income and therefore
could not discern Shove's financial condition. Cf. Bank of Am. v.
Seligman (In re Seligman), 478 B.R. 497, 504 (Bankr. N.D. Ga. 2012)
(drawing similar inference in denying motion to dismiss section
727(a)(3) claim predicated on debtor's lack of documentation
regarding "undeposited wages and cash withdrawals"); Aspire Fed.
Credit Union v. Robinson (In re Robinson), 595 B.R. 148, 158-59
(Bankr. S.D.N.Y. 2019) (inferring that scant records which
"fail[ed] to identify the sources and uses of hundreds of thousands
of dollars of funds that flowed through and among . . . accounts"
- 12 - made "it impossible to determine the [d]ebtor's true financial
condition").
Thus, Hernandez's allegations in the amended complaint
and the reasonable inferences therefrom state a plausible claim
that discharge should be denied under section 727(a)(3), and we
affirm this aspect of the bankruptcy court's ruling on the motion
to dismiss.
B. Denial of Discharge Pursuant to Section 727(a)(3)
Having determined that Hernandez stated a plausible
section 727(a)(3) claim, we turn next to Shove's challenges to the
merits of the section 727(a)(3) ruling. On appeal, Shove contends
that the bankruptcy court erred in finding that (1) he failed to
keep adequate rental records and (2) his failure to keep records
was not justified. The bankruptcy court concluded that Hernandez
had met his burden to show that Shove had failed to maintain
adequate records. Shove does not seriously dispute that he failed
to keep and maintain contemporaneous records of rental payments.
Rather, he argues that the post-hoc rent rolls he created for the
Trustee fulfilled his duty to keep records and that his practice
of not keeping records was justified under the circumstances.
"[T]he ultimate decision about whether to grant or
withhold a discharge is a mixed question of law and fact." Gannett
v. Carp (In re Carp), 340 F.3d 15, 25 (1st Cir. 2003). Shove's
arguments, however, primarily take aim at the bankruptcy court's
- 13 - factual findings. "Accordingly, we 'review only for clear error,
with due regard . . . to the opportunity of the bankruptcy court
to judge the credibility of witnesses.'" Id. (citation and some
internal quotation marks omitted). In reviewing for clear error,
we will not set aside the bankruptcy court's "findings of fact and
the conclusions drawn therefrom . . . 'unless, on the whole of the
record, we form a strong, unyielding belief that a mistake has
been made.'" Id. at 22 (citation omitted). Thus, "if the
bankruptcy court's findings are supportable on any reasonable view
of the record, we are bound to uphold them." Id.
Before we dive further into Shove's challenges to the
merits of the section 727(a)(3) ruling, some additional background
on section 727(a)(3) and the legal principles employed to assess
section 727(a)(3) claims is useful. "Every debtor has a duty to
maintain books and records accurately memorializing [their]
business affairs." Harrington v. Simmons (In re Simmons), 810
F.3d 852, 857 (1st Cir. 2016). "Congress's evident purpose in
enacting section 727(a)(3) was to give interested parties [such as
creditors] and the court a reasonably complete picture of the
debtor's financial condition during the period prior to
bankruptcy" to facilitate "intelligent inquiry" into the debtor's
financial condition. Id. at 857-58 (citations omitted). "Section
727(a)(3) operates in furtherance of [the debtor's record-keeping]
duty" by empowering a bankruptcy court to "deny a discharge to a
- 14 - debtor who has failed to 'keep or preserve' adequate business
records 'from which the debtor's financial condition or business
transactions might be ascertained.'" Id. at 857 (quoting
11 U.S.C. § 727(a)(3)).
Claims that a discharge should be denied pursuant to
section 727(a)(3) proceed through two steps. At the first step,
the party invoking section 727(a)(3) carries the burden to
demonstrate "that the debtor has failed to maintain adequate
records." Id. If the claimant makes this prima facie showing,
the burden then shifts to the debtor to establish that the
"debtor's failure to keep and preserve records [was] justified."
Id. at 858; see In re Schifano, 378 F.3d at 70.
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 at 857-58 (citation
omitted) (second alteration in original). Shove's efforts here
fall woefully short of this requirement. At trial, Shove conceded
that he did not keep contemporaneous records relating to his
several income-producing properties. And because Shove's rental
business dealt primarily in cash transactions that were not always
deposited into a bank account, Shove's failure to keep
contemporaneous records made it all the more difficult for the
- 15 - Trustee or creditors to have any degree of confidence that they
understood Shove's financial affairs.
Shove's post-hoc rent rolls that he created for the
Trustee do not move the needle. As the rent rolls themselves note,
they reflect Shove's and Kathleen's "best recollection" as to rent
received rather than actual rents received "as [they] no longer
keep records." What is more, even though the Shoves claim that
"money received from . . . paying tenants goes to maintenance,
upkeep[,] and utility bills for all properties" and provided at
least some copies of bills and properties expenses, the information
provided still was insufficient for the bankruptcy court and the
Trustee to reconcile the difference between estimated rent
received and bank deposits.
At the end of the day, the Trustee testified that he was
"having great difficulty determining the status of [the Shoves']
financial affairs" and that he never fully "satisf[ied] [himself]
that [he] had a complete handle on the status of their financial
affairs from the records" provided. Accordingly, given the
Trustee's testimony and the lack of contemporaneous records, we
would be hard pressed to find that the court erred in finding that
Shove failed to keep adequate records after the house fire.
Shove next argues that, notwithstanding any failure to
keep records, his record practices were reasonable under the
circumstances because, according to him, "such records are
- 16 - customarily not used with few rental units," and his family was
going through extenuating circumstances after being displaced by
the fire. In other words, he contends that his failure to keep
contemporaneous records was justified.
The justification defense is one of objective
reasonableness. In re Simmons, 810 F.3d at 858. In assessing
whether a failure to keep adequate records is justified, we ask
what "a reasonably prudent person" would do in like circumstances.
Id.; see Meridian Bank v. Alten, 958 F.2d 1226, 1231-32 (3d Cir.
1992). Many factors may be pertinent to this inquiry. In re
Simmons, 810 F.3d at 858. For example, we may consider "the
debtor's education, experience, and sophistication; the volume and
complexity of the debtor's business; and whatever other
circumstances are made relevant by the idiosyncrasies of the case."
Id. (collecting cases).
In this case, the bankruptcy court determined that the
relevant factors counseled against a finding that Shove acted as
a "reasonably prudent" rental property owner and manager. Id.
Specifically, it reasoned that in light of Shove's "lengthy history
as a business and rental property owner," the change in record-
keeping practice pre- and post-fire, the relatively light burden
involved in recording rent-related transactions, and Shove's
demeanor at trial, Shove's failure to keep records was unreasonable
and unjustified.
- 17 - We see no error in the bankruptcy court's well-reasoned
assessment. At the time Shove filed for bankruptcy he owned and
managed several income-producing properties. A reasonable
individual who owned several income-producing properties would
keep and preserve records related to those properties, and the
bankruptcy court was within its province in concluding that Shove's
failure to do so was unreasonable and unjustified. As the
bankruptcy court found, Shove previously operated a landscaping
company for twenty-five years, owned ninety rental units over his
career, and kept rental income and expense records in the past.
Shove thus possessed the necessary expertise to contemporaneously
record rental income and expenses.3
Shove's argument that the bankruptcy court improperly
assessed his credibility and demeanor does not persuade us
otherwise. As an initial matter, "we are not free to . . . make
independent judgments about the credibility of witnesses." In re
Carp, 340 F.3d at 19. Instead, we must give "due regard . . . to
the opportunity of the bankruptcy court to judge" a witness's
3 We need not address Shove's argument that the financial and emotional challenges his family faced after the fire and in connection with defending against Hernandez's lawsuit justify his lack of record keeping because Shove did not raise and develop this argument before the bankruptcy court. As such, any argument on this score is waived. See Banco Bilbao Vizcaya Argentaria v. Net-Velázquez (In re Net-Velázquez), 625 F.3d 34, 39-40, 40 n.8 (1st Cir. 2010) ("[A]rguments must be presented in the bankruptcy court to be preserved.").
- 18 - credibility. Id. at 25 (citation omitted). Shove's contention
that the bankruptcy court erroneously assigned Kathleen's traits
to Shove lacks merit. To be sure, the bankruptcy court took issue
with Kathleen's demeanor and found her incredible at times. But
it also found that, at times, Shove was "condescending," "evasive,"
and "visibly frustrated" during questioning at trial. The mere
fact that the bankruptcy court found that both Shove and Kathleen
exhibited these traits does not render its credibility
determination erroneous, particularly where Shove offers nothing
to suggest he behaved in a different manner.
Accordingly, we see no reason to disturb the bankruptcy
court's finding that Shove, without any objectively reasonable
justification, failed to keep adequate records regarding his
rental properties. Shove argues that such an outcome punishes a
debtor for operating on a cash basis. But his argument is
misguided. It is not the cash basis of his rental business that
dooms his ability to obtain a discharge. Rather, it is his failure
to adequately record and account for the flow of that cash in a
way that makes it possible for someone to ascertain his financial
status that does so. We thus affirm the section 727(a)(3) denial
of discharge.
IV. Conclusion
For the reasons stated above, we affirm the denial of
discharge under section 727(a)(3).
- 19 -