FILED AUG 13 2014 1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK 2 U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. CC-13-1578-BlPaKu ) 6 KAREN FORMAN MCALLISTER, ) Bk. No. 1:12-BK-20052-AA ) 7 Debtor. ) Adv. No. 1:13-AP-01045-AA ______________________________) 8 ) KAREN FORMAN MCALLISTER, ) 9 ) Appellant, ) 10 ) v. ) MEMORANDUM* 11 ) KRENGEL SPAMER & VANCE, LLC, ) 12 ) Appellee. ) 13 ______________________________) 14 Argued on June 26, 2014, at Pasadena, California Submitted on July 18, 2014 15 Filed - August 13, 2014 16 Appeal from the United States Bankruptcy Court 17 for the Central District of California 18 Honorable Alan M. Ahart, Bankruptcy Judge, Presiding 19 Appearances: Gary E. Klausner of Levene, Neale, Bender, Yoo & 20 Brill LLP argued for appellant Karen Forman McAllister; J’aime Williams argued for appellee 21 Krengel Spamer & Vance, LLC. 22 Before: BLUMENSTIEL,** PAPPAS, and KURTZ, Bankruptcy Judges. 23 24 * 25 This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may 26 have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1. 27 ** The Honorable Hannah L. Blumenstiel, Bankruptcy Judge for 28 the Northern District of California, sitting by designation. 1 Appellant-Debtor Karen F. McAllister (“McAllister”) appeals 2 a summary judgment denying her discharge under sections 3 727(a)(2)(A)1 and 727(a)(3) based upon claims brought by 4 Appellee-Creditor Krengel, Spamer & Vance, LLC (“Krengel”). Upon 5 de novo review, we conclude that Krengel failed to meet its 6 burden of establishing a prima facie case under 7 section 727(a)(3), and that the record gives rise to a genuine 8 issue of material fact as to the requisite intent under 9 section 727(a)(2). Accordingly, we REVERSE the summary judgment 10 and REMAND for further proceedings. 11 I. FACTS AND PROCEDURAL BACKGROUND 12 A. Pre-petition events 13 McAllister is the sole shareholder of a California 14 corporation, KFM Management, Inc. (“KFM”), which was incorporated 15 in or about July 2010. KFM’s principal place of business is Los 16 Angeles County, California. Through KFM, McAllister works as a 17 talent manager in cooperation with talent agencies or agents, 18 providing services akin to career guidance to actors. In 19 exchange for its services, KFM receives ten percent of the 20 client’s gross income. 21 KFM does not enter into written contracts with its 22 individual clients; all agreements are verbal. KFM also works 23 with multiple talent agencies, and may enter into an oral or 24 written contract for KFM’s management services depending on the 25 1 26 Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330, and 27 to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. The Federal Rules of Civil Procedure are referred to as Civil 28 Rules.
-2- 1 agency. 2 Krengel is a California limited liability company located in 3 Los Angeles, California, doing business as Domain. Krengel 4 employed McAllister from approximately January 2008 to July 2010. 5 In June 2011, McAllister filed suit against Krengel in the 6 Los Angeles County Superior Court, case number BC462838 (the 7 “State Court Action”). McAllister filed the State Court Action 8 individually, and did not include KFM as a co-plaintiff, 9 apparently because McAllister did not form KFM until after her 10 causes of action arose. The State Court Action alleged: 11 nonpayment of wages, violations of the California Labor Code, 12 breach of contract, intentional interference with contractual 13 relations, intentional interference with prospective economic 14 advantage, negligent interference with prospective economic 15 advantage, breach of implied covenant of good faith and fair 16 dealing, violation of the California Business and Professions 17 Code, and quantum meruit. 18 The State Court Action went to trial in May 2012. On 19 November 12, 2012, the state court entered an Amended Judgment on 20 Special Verdict (“Judgment”). The state court entered the 21 Judgment in favor of McAllister and against Krengel on two causes 22 of action in the complaint, awarding McAllister damages of 23 $1,808.78. However, the state court also found in favor of 24 Krengel and against McAllister on four causes of action, 25 determined Krengel to be the prevailing party, and awarded 26 Krengel attorneys’ fees and costs in the amount of $276,976.35 27 plus interest at 10% per annum from June 7, 2012. 28
-3- 1 B. McAllister’s bankruptcy filing 2 On November 14, 2012, two days after entry of the Judgment, 3 McAllister filed a voluntary bankruptcy petition for relief under 4 chapter 7 of the Bankruptcy Code. Along with her petition, 5 McAllister filed schedules of assets and liabilities and a 6 Statement of Financial Affairs (“SOFA”). In Schedule B — 7 Personal Property, McAllister scheduled the following assets: 8 Description Stated Value 9 • Personal Jewelry $1,000 10 • 100% interest in KFM $2,500;2 11 • 2001 Mercedes E320 $7,500 12 • 2003 Toyota Sequoia $5,000;3 13 On January 4, 2014, McAllister filed an amended Schedule B 14 which increased the value of her personal jewelry to $8,000 and 15 increased the value of KFM to $12,500. 16 McAllister disclosed $5,000 in monthly income from the 17 operation of KFM in Schedule I — Current Income of Individual 18 Debtor(s). In Schedule J — Current Expenditures of Individual 19 Debtor(s), McAllister listed $3,086 at line 16 for “regular 20 expenses from operation of business, profession, or farm.” In 21 accordance with the instructions pertaining to line 16, 22 23 2 McAllister noted in Schedule B that KFM’s 20 clients do 24 not have written contracts with KFM and can leave at any time; KFM’s value is based on McAllister’s ability and reputation, and 25 has no liquidation value other than the bank account balance. 26 3 McAllister noted in Schedule B that "[p]roperty was 27 acquired by non-filing spouse prior to the couple's marriage in 2005 and would constitute his separate property" and identified 28 the Toyota as community property.
-4- 1 McAllister attached a detailed statement itemizing KFM’s monthly 2 business expenses, which include $1,900 for “Legal.” 3 In Schedule F — Creditors Holding Unsecured Nonpriority 4 Claims, McAllister listed a debt owed to Krengel, incurred in 5 2009 in the amount of $276,976.35, which she identified as 6 “disputed.” McAllister also identified a debt owed to 7 “Taylor/Anderson” as a personal loan in the amount of $8,000. 8 McAllister signed a Declaration Concerning Debtor’s 9 Schedules, affirming under penalty of perjury that she reviewed 10 the schedules and that they were true and correct to the best of 11 her knowledge, information, and belief. 12 McAllister’s SOFA included the following disclosures: 13 • $56,997 gross income from KFM year to date in 2012 (net 14 income of approximately $23,000). 15 • $16,469 gross income from KFM in 2011 (net loss of $14,472). 16 • $31,000 gross income from talent management (unincorporated) 17 in 2010. 18 • No payments exceeding $600 on loans, installment purchases 19 of goods or services, and other debts to any creditor within 20 90 days immediately preceding the commencement of the case. 21 • No payments within one year immediately preceding the 22 commencement of the case to or for the benefit of creditors 23 who are or were insiders. 24 • The 2011 short sale of a prior residence in Tarzana, 25 California to an unrelated third party. 26 McAllister signed her SOFA, declaring under penalty of 27 perjury that she had read the responses therein and that they 28 were true and correct.
-5- 1 The meeting of creditors took place on December 20, 2012. 2 McAllister testified at the meeting that the bankruptcy schedules 3 were true to the best of her recollection. 4 C. Krengel’s complaint and motion for summary judgment 5 On February 19, 2013, Krengel filed a complaint seeking 6 denial of McAllister’s discharge pursuant to sections 727(a)(2), 7 (a)(3), (a)(4), (a)(5), and (a)(7) (“Complaint”). In the 8 Complaint and the subsequent Motion for Summary Judgment (the 9 “Motion”), Krengel contends that McAllister purposefully 10 misrepresented her assets, liabilities, and other financial 11 information in her bankruptcy schedules and SOFA, and that these 12 alleged misrepresentations, along with other acts or omissions, 13 are evidence of wrongful intent. Krengel questioned McAllister 14 about each of these issues during a Rule 2004 examination of 15 McAllister in January 2013. Krengel’s specific allegations, 16 along with McAllister’s explanations as given during her 17 Rule 2004 examination or her declaration in opposition to the 18 Motion, are set forth below. 19 1. Prior bankruptcies 20 Krengel asserts and McAllister readily concedes that she 21 and/or her non-filing spouse, Paul McAllister, have filed a total 22 of four bankruptcy cases. Although Krengel sets forth the facts 23 of the prior bankruptcies in the Motion, and includes them in the 24 findings of fact, Krengel does not assert anywhere in the Motion 25 or in its reply that the prior bankruptcies bear upon any of the 26 causes of action. We address this issue here only because our 27 review is de novo. 28 Paul McAllister filed bankruptcy petitions in 1995 and 1996.
-6- 1 The couple filed a joint petition under chapter 13 in 2011, which 2 was dismissed one month later. McAllister filed the instant case 3 on November 14, 2012. 4 McAllister stated during her Rule 2004 examination that her 5 husband filed two bankruptcies before they knew each other and 6 that she knew nothing about those cases. McAllister also 7 explained why she and her husband filed the chapter 13 case in 8 2011: their home was in foreclosure and an attorney advised them 9 that by filing bankruptcy, they could buy some time to find a new 10 place to live. On this advice, they filed a joint petition, 11 found a home to rent, and allowed their case to be dismissed. 12 2. Value of wedding ring 13 Krengel asserts and McAllister concedes that she did not 14 include the value of her wedding ring in her original Schedule B. 15 At the meeting of creditors, Krengel asked whether her 16 reference to “Personal Jewelry” in Schedule B included her 17 wedding ring, and McAllister responded that it probably did not. 18 McAllister agreed to amend Schedule B. After the meeting of 19 creditors, McAllister had her wedding ring appraised and 20 determined it had a value of $8,000. She then amended Schedule B 21 to increase the value of her jewelry from $1,000 to $8,000. 22 McAllister does not explain why she did not include the 23 value of her wedding ring in the original Schedule B, but notes 24 that the Trustee did not object to her claim of exemption with 25 respect to the ring or pursue recovery of that asset. 26 3. Scheduling of debt owed to Krengel 27 Krengel asserts that McAllister “falsely stated” in 28 Schedule F that she incurred the Krengel claim in 2009. Although
-7- 1 McAllister identified the Krengel claim as “disputed,” she admits 2 that the debt is based on a final judgment, as detailed below. 3 McAllister affirms in her declaration that she identified 4 the debt as “disputed” on advice of counsel. Her state court 5 attorney advised her that the state court might have erred in 6 determining that Krengel was the prevailing party entitled to 7 attorneys’ fees and costs because she had prevailed on two causes 8 of action; however, she acknowledges in her declaration that the 9 deadline to appeal the state court judgment had passed by the 10 time she filed her bankruptcy petition. During the Rule 2004 11 examination, Ms. Cohen, Krengel’s counsel, questioned McAllister 12 about her characterization of the Krengel debt as “disputed” and 13 the following exchange took place: 14 Q: Okay. So I’m trying to figure out why you are 15 saying it is a disputed claim when they actually got a 16 judgment in that amount. 17 A: They did, but I don’t have anywhere near that money 18 to pay them off. That’s why I’m disputing it. 19 Q: Well, do you have the money to pay off Alan Meyers? 20 A: No. 21 Q: Okay. But you didn’t list him as disputed? 22 A: Oh, I don’t know what the difference between 23 disputed or – it’s marked or not marked. 24 Mr. Hagen [McAllister’s Counsel]: Does it really 25 matter? 26 Q: I’m just trying to figure out if there’s any reason 27 to dispute a liquidated debt that’s reduced to a judgment. 28 I mean, you might not like it but –
-8- 1 A: Well, it’s a huge number. You know, we’re not 2 talking about $4,000. Alan Meyers, I owe $4,000. This is 3 almost $300,000. 4 Q: So you dispute it because it’s so big? 5 A: Yes. 6 Q: Okay. But you do acknowledge that they have a 7 judgment against you for that amount? 8 A: I am very aware of that, yes. 9 Q: Okay. So is it fair to say that you may not like 10 the fact that you owe the money, but you do acknowledge that 11 there is really no basis to dispute it at this time; 12 correct? 13 A: I don’t really understand the question. I mean, 14 that will go into a whole personal reason as to why I don’t 15 feel like I should be responsible for it. 16 Mr. Hagen: To answer your question, it is a 17 judgment. 18 A: It’s a judgment. It is what it is. 19 2004 Exam Transcript pp. 37-38. 20 Ms. Cohen also asked why McAllister indicated in Schedule F 21 that she incurred the Krengel debt in 2009: 22 Q: Why did you state that was incurred in 2009, if you 23 remember? 24 A: I don’t. I mean, if the judgment was final — which 25 it was just recently final in September of 2012, I don’t 26 know why it would say 2009. 27 Mr. Hagen: Technically, 2008, that’s when she 28 left the employment and the dispute arose.
-9- 1 Q: Well, actually, let’s go briefly into that issue. 2 You left Domain in 2008; is that right? 3 A: No. No. No. I started, I believe, in 2008. I 4 left Domain in July 2010. 5 Q: Okay, so there is no tie-in into the 2009 date is 6 there? 7 A: No. 8 Q: Okay. 9 Mr. Hagen: I’m reading the Complaint. The 10 Complaint says beginning of January 2008 and continued 11 employment to July 2008. 12 A: That’s a mistake in there. 13 Mr. Hagen: I’m just reading the Complaint. 14 2004 Exam Transcript p. 46. 15 McAllister explained that this misstatement resulted from 16 carelessness and not from an intent to mislead any party in 17 interest, to hide any information, or to compromise the rights of 18 creditors. McAllister further stated that she viewed the 19 misstatement as benign and of no consequence to the 20 administration of the bankruptcy estate. 21 4. Scheduling of debt owed to “Taylor/Anderson” 22 Taylor/Anderson represented McAllister in the State Court 23 Action on a contingency basis. McAllister incorrectly scheduled 24 an $8,000 debt owed to “Taylor/Anderson” as a personal loan when 25 it was actually a debt owed for legal costs. 26 At the Rule 2004 examination, Ms. Cohen questioned 27 McAllister about the Taylor/Anderson debt: 28 Q: . . . [I]f you go to Schedule F . . . it shows that
-10- 1 you owe them $8,000 for a personal loan . . . Can you 2 explain to me the relationship between this $8,000 scheduled 3 amount, the $11,000 or so that they charged, and the amount 4 that you paid to them? 5 A: If I understand the question, I had made some 6 payments. This is what I owe them based on the $11,000 7 that’s on the form you have, plus an additional – I paid 4 8 or 5 after for the trial cost. I remember the total being 9 about $19,000 total in what I needed to pay them. So the 10 $8,000 is the remainder that is due. 11 Q: Okay. That was just a misstatement. Where it says 12 “personal amount,” it was incorrect? 13 A: Yeah, that’s not correct. It was legal expenses. 14 2004 Exam Transcript pp. 103-104. 15 McAllister attested that this misstatement also resulted 16 from carelessness rather than an intent to mislead any party in 17 interest, to hide any information, or to compromise the rights of 18 creditors. McAllister stated that she viewed the misstatement as 19 benign and of no consequence to the administration of the 20 bankruptcy estate. 21 5. Non-disclosure of transfer of diamond necklace 22 McAllister’s SOFA failed to disclose that, in 2012, she gave 23 her brother a diamond necklace valued at $7,000, allegedly in 24 satisfaction of a loan. Instead, the SOFA indicated that 25 McAllister did not transfer any assets or make any payments to or 26 for the benefit of creditors who were insiders in the year 27 preceding the petition date. Krengel also asserts that 28 McAllister has no evidence of a loan from her brother.
-11- 1 In her defense, McAllister explained that she did not 2 understand the meaning of “insider” when she checked “none” in 3 response to SOFA question 3c, which calls for disclosures to 4 insiders. She readily disclosed the transfer when asked about it 5 at the meeting of creditors. 6 As to the loan itself, McAllister testified at the Rule 2004 7 examination that she borrowed $7,000 from her brother in late 8 2011. They did not enter into a written agreement. She gave the 9 diamond necklace to him as payment for that loan in July 2012, 10 following trial of the State Court Action. She estimated its 11 value at $7,000. About ten years prior, it had been insured for 12 $10,000. 13 6. Loans or gifts from parents 14 Krengel asserts that McAllister’s SOFA does not disclose 15 approximately $60,000 given to McAllister by her mother between 16 2010 and mid-2012. Krengel further asserts that McAllister has 17 inconsistently claimed that the $60,000 was a loan (constituting 18 an undisclosed liability), a forgiven debt (constituting 19 undisclosed income), or a gift (constituting an undisclosed 20 gift). Finally, Krengel asserts that McAllister has no records 21 of an alleged loan from her mother. 22 During the Rule 2004 examination, McAllister admitted that 23 her mother loaned her $50,000 or $60,000 between 2010 and 24 mid-2012, but explained that, after she “lost the case,” her 25 mother told her the $60,000 was a gift that would be deducted 26 from McAllister’s future inheritance. 27 When Ms. Cohen asked McAllister if she intended to report 28 the debt forgiveness as income, the following exchange took
-12- 1 place: 2 Q: Are you intending to report that forgiveness income 3 for that? 4 A: I don’t know what that is. 5 Q: Well, I guess I can tell you. You can give me your 6 best answer that you can. If a debt is forgiven, then that 7 creates a taxable event because you no longer have to pay it 8 back. So the question is whether you’ll be scheduling in 9 your tax return the fact that this debt was forgiven, as an 10 income event, if you know? 11 A: I don’t know. We haven’t met with our accountant, 12 so I don’t know. 13 2004 Exam Transcript p. 80. 14 In her declaration, McAllister attested that she did not 15 disclose the funds received from her mother in her Schedule F or 16 SOFA because her mother told her she did not need to repay them. 17 7. Automobiles 18 McAllister listed on her amended Schedule B a 2001 Mercedes 19 Benz automobile and a 2003 Toyota Sequoia automobile. Krengel 20 asserts that McAllister misrepresented information about the 21 automobiles in Schedule B. 22 During the Rule 2004 examination, McAllister explained that 23 her “in-laws” bought the 2001 Mercedes for her for $10,000 in 24 2011. McAllister valued the Mercedes at $7,500 based on an 25 estimate she obtained from Carmax. Krengel contends that this 26 testimony is inconsistent with her testimony at a deposition in 27 the State Court Action: that she bought a 2002 Mercedes Benz for 28 $12,000 in 2010.
-13- 1 As evidence of this alleged inconsistency, Krengel offers 2 the first declaration of Joe Vance, which attests to statements 3 McAllister allegedly made at a deposition taken in the State 4 Court Action.4 Krengel introduced the 280-page deposition 5 transcript (the “Deposition Transcript”) as an exhibit to the 6 second Joe Vance declaration. Mr. Vance, however, may not have 7 been present at the deposition, as the Deposition Transcript 8 notes the appearance of a “John Vance,” but not of a “Joe Vance.” 9 In addition, Krengel never provided a citation to the location of 10 McAllister’s allegedly inconsistent statement within the 11 Deposition Transcript, and this Panel could not locate one.5 12 McAllister testified that the Toyota Sequoia is her 13 husband’s car, that he bought it in 2003 before they were 14 married, and that she has no idea how much he paid for it. The 15 Toyota was not fully paid off when McAllister and her husband 16 married, and the remaining car payments were made with community 17 property. Amended Schedule B identifies the Toyota as both 18 community property and McAllister’s husband’s separate property. 19 McAllister swears that the characterization of the Toyota as 20 constituting her husband’s separate property was not the result 21 of her intention to mislead any party in interest, to hide any 22 information, or to otherwise impede the administration of the 23 24 4 The first Vance declaration was filed in support of the Motion. The second Vance declaration was filed in support of 25 Krengel’s reply. 26 5 Tevis v. Wilke, Fleury, Hoffelt, Gould & Birney, LLP 27 (In re Tevis), 347 B.R. 679, 686 (9th Cir. BAP 2006) (appellate courts are not required to search an entire record, unaided, for 28 error).
-14- 1 estate. 2 8. Disclosure of foreclosed property 3 McAllister does not dispute that she incorrectly reported on 4 her SOFA a short sale of her prior residence when in fact she 5 lost the property to foreclosure. 6 The following exchange took place between Ms. Cohen, 7 McAllister, and Mr. Hagen during McAllister’s Rule 2004 8 examination: 9 Q: Now, in your statement of financial affairs . . . 10 It indicates that the Monard Place property – that’s where 11 you used to live; right? 12 A: Yes. 13 Q: It says that it was a short sale. But was there a 14 short sale or [a] foreclos[ure]? 15 A: No, it was foreclosed on. 16 Mr. Hagen: That was my mistake. 17 2004 Exam Transcript p. 98 18 In her declaration, McAllister stated: “the misstatement 19 regarding the nature of the sale is embedded in our attempt to 20 effect a short sale following receipt of the default notice. 21 These attempts to conclude a short sale proved futile, and . . . 22 the property was ultimately lost by way of the foreclosure 23 process.” McAllister Decl. ¶ 31. McAllister further stated, 24 “[m]y confusion as to the means by how our home ‘was lost’ was 25 not the result of my intention to mislead any party [in] 26 interest, to hide any information or to otherwise act in a manner 27 that would compromise the rights of creditors.” Id. 28
-15- 1 9. Value of KFM 2 Between her original and amended Schedule B, McAllister 3 adjusted the value of her 100% interest in KFM from $2,500 to 4 $12,500. Krengel asserts that the conflicting valuations of her 5 company are evidence of McAllister’s wrongful intent. At 6 McAllister’s Rule 2004 examination, Ms. Cohen asked why she 7 changed the value of KFM: 8 A: I’m not sure why that was changed, unless we were 9 anticipating that a client is going to be paying me on a 10 job, so — which we didn’t know when we originally filed. 11 That number might have gone up a little bit. 12 Q: What customer made you change the valuation? 13 A: Well, I no longer represent this client. Actually, 14 your client represents her. Her name is Vivian Bang, and I 15 put her on a series. And I know the show has been picked 16 up, so she should be paying me even though I don’t represent 17 her anymore. But I’m not sure if she was legally picked up 18 to be a part of the show. So that would increase it . . . . 19 Q: Approximately when did you find that out? 20 A: The end of the year or maybe just after the first 21 of the year. 22 Q: And that was the basis of your changing the 23 valuation of the company? 24 A: I believe so. 25 Q: Okay. Was it a guesstimate? I mean, how do you — 26 A: Yeah, it’s a guesstimate. 27 2004 Exam Transcript pp. 54-56. 28 Consistent with this testimony, McAllister stated in her
-16- 1 declaration that she amended Schedule B to increase the 2 liquidation value of KFM to $12,500 “based upon possible 3 additional revenue from a client arising from her being cast in 4 an upcoming television series.” McAllister Decl. ¶ 15. 5 10. KFM income and expenses included in Schedules I and J 6 McAllister included $5,000 per month business income in 7 Schedule I and $3,086 per month business expenses in Schedule J. 8 The attachment to Schedule J indicates that these business 9 expenses include “gifts and entertainment for clients,” “office 10 expenses,” “corporate taxes,” and “legal fees.” KFM, however, is 11 a separate corporate entity. The $1,900 monthly legal fees 12 expense represents McAllister’s personal legal fees, which KFM is 13 no longer paying. Krengel asserts that McAllister wrongfully 14 inflated her personal expenses by including KFM business 15 expenses. 16 McAllister testified that she (through KFM) is no longer 17 paying $1,900 per month in legal fees and that the last such 18 payment took place in October or November 2012. She stated that 19 she included the legal fees as an expense because she had paid it 20 throughout most of the year and, in preparing for her bankruptcy 21 filing, her counsel asked her for an estimate of her year-to-date 22 expenses. 23 In her declaration, McAllister confirmed that she included 24 KFM’s monthly business expenses in Schedule J upon the advice of 25 her counsel, who told her that although the information is not 26 required, many trustees request it. McAllister further stated 27 that she did not intend to mislead any party in interest, to hide 28 any information, or otherwise impede the administration of the
-17- 1 estate. 2 11. Payments to creditors within 90 days of petition 3 McAllister’s SOFA indicates that she made no payments to 4 creditors in the 90 days preceding the petition date, 5 November 14, 2012. Krengel points out that McAllister stated 6 during her Rule 2004 examination that KFM stopped making payments 7 on her behalf for legal fees in October or November 2012. 8 Krengel contends that McAllister should have disclosed KFM’s 9 payment of her legal bills in the SOFA. 10 McAllister offered the following explanation during her 11 Rule 2004 examination: 12 Q: And you didn’t list the payments to D2 – Taylor 13 Anderson or D2 in your statement of affairs because that was 14 paid by the corporation; is that right? 15 A: I believe so. 16 2004 Exam Transcript p. 42. 17 Q: [O]n your statement of affairs it says . . . “list 18 each payment or other transfer to any creditor made within 19 90 days immediately preceding the commencement of the case” 20 . . . . And you put “none.” Is that because you didn’t pay 21 anyone within the 90 days or because you thought since KFM 22 paid it, you didn’t need to list it? 23 A: I don’t think I paid anybody three months before I 24 filed bankruptcy. 25 2004 Exam Transcript pp. 115—16. 26 There is no other evidence in the record concerning payments 27 to creditors within 90 days pre-petition and no evidence that 28 McAllister made any such payments.
-18- 1 12. KFM’s payment of McAllister’s personal legal fees 2 Krengel points out that McAllister’s schedules and SOFA do 3 not indicate any debt owed to KFM, nor any gifts from KFM, on 4 account of its payment of her legal fees. Krengel asserts that 5 McAllister should have accounted for Krengel’s payment of her 6 legal fees as either debt or income. McAllister, however, 7 disclosed $5,000 monthly income from her business on Schedule I. 8 When asked why KFM paid her legal fees as opposed to her 9 paying them personally, McAllister responded: “[B]ecause I 10 couldn’t pay anybody out of my account with my husband, because 11 we didn’t have — we were using that money to live on. So his 12 salary is based on every expense we were paying. So any money 13 that I had coming into the KFM was money I was putting towards 14 the lawsuit. So I just took the money out of there.” 2004 Exam 15 Transcript pp. 114-15; 118. Ms. Cohen asked if KFM’s books 16 reflected the payment of legal fees by KFM as McAllister’s 17 income, and McAllister responded affirmatively. 18 With respect to how KFM’s payment of the legal fees were 19 reported on KFM’s corporate and McAllister’s personal tax 20 returns, McAllister stated, “I’m not sure how my accountant 21 listed things. I know we put it on corporation taxes, what I had 22 made, but he knew that I spent all the money in legal fees. So I 23 don’t know how he listed it.” 2004 Exam Transcript p. 119. 24 While testifying concerning KFM’s 2011 corporate tax return, 25 McAllister stated, “If I am looking at it correctly, it says 26 $16,469 was my income. So that would have been my income. And 27 I’m sure all of that went to my legal expenses because they were 28 more than that.” 2004 Exam Transcript pp. 119-120. She further
-19- 1 stated, “My accountant didn’t think that was a problem that I – 2 when I told him that I was paying right out of my KFM account, he 3 said that was fine.” Id. 4 13. Non-disclosure of executory contracts on Schedule G 5 McAllister did not schedule KFM’s executory contracts on 6 Schedule G. Krengel asserts that McAllister should have 7 disclosed KFM’s contracts with clients and talent agencies. 8 During her Rule 2004 examination, McAllister testified that 9 KFM has numerous ongoing executory contracts with clients at 10 various talent agencies. Consistent with her prior testimony, 11 McAllister declared that she is not party to any executory 12 contract or unexpired lease; the contracts she described during 13 the Rule 2004 examination are between KFM and the clients. 14 14. Books and records 15 Krengel asserts that McAllister failed to keep or preserve 16 any recorded information, including books, documents, records, 17 and papers, regarding (1) loans or gifts from her mother and 18 brother, and (2) transactions between herself and KFM. Krengel 19 contends the alleged failure to maintain records warrants relief 20 under section 727(a)(3). 21 During her Rule 2004 examination, McAllister testified about 22 her personal and corporate tax returns. She also discussed the 23 contracts between KFM and its clients, KFM’s lease, and that she 24 kept the books for KFM. And she discussed the lack of 25 documentation of the alleged loan from her brother. At no point 26 during the Rule 2004 examination did Krengel’s attorney question 27 McAllister about her personal record-keeping practices, or those 28 of KFM. Likewise, McAllister’s record-keeping practices are
-20- 1 never discussed in the Deposition Transcript, or any of the 2 declarations supporting Krengel’s motion for summary judgment. 3 D. Summary judgment proceedings 4 Krengel filed the Motion on September 25, 2014. Evidence 5 submitted by Krengel included the declaration of Joe Vance, who 6 is a principal of Krengel; the bankruptcy petition, schedules, 7 and SOFA; and the transcript of the Rule 2004 examination. 8 McAllister opposed the Motion and objected to the Vance 9 declaration. Evidence submitted by McAllister included her 10 declaration, a June 8, 2012 Partial Judgment on Special Verdict 11 entered in the State Court Action, and the November 12, 2012 12 Amended Judgment on Special Verdict. Krengel filed a reply and a 13 second declaration from Joe Vance, which included the Deposition 14 Transcript. McAllister also objected to the second Vance 15 declaration and the Deposition Transcript. 16 The bankruptcy court issued the following tentative ruling 17 prior to the hearing on the Motion: 18 “Grant the motion under (Sec.) 727(a)(2) and (a)(3) because 19 the debtor transferred, removed or concealed the necklace 20 with intent to hinder of delay creditor within one year 21 before the petition was filed and because the debtor failed 22 to keep or preserve recorded information of loans or gifts 23 from her mother, a loan from her brother and transactions 24 between herself and KFM.” 25 Appellant Brief p. 9. The tentative ruling did not otherwise 26 address the evidentiary objections. 27 At the hearing on the Motion, the bankruptcy court adhered 28 to its tentative ruling, and in doing so granted the Motion,
-21- 1 denied McAllister’s discharge pursuant to sections 727(a)(2) and 2 (a)(3), and overruled her evidentiary objections. The bankruptcy 3 court then instructed Krengel to prepare and submit an order that 4 included specific findings of fact and conclusions of law. 5 McAllister objected to the findings in paragraphs 1 through 6 24 of Krengel’s proposed order. Krengel responded to the 7 objection, stating: “The only material fact that the Debtor 8 denied was with respect to her intent when she gave her brother 9 her diamond necklace on the eve of bankruptcy and then failed to 10 schedule that in her bankruptcy filings. The Court found the 11 Debtor’s assertions that she forgot about the diamond necklace, 12 and/or didn’t realize her brother was an insider, not to be 13 credible.” Response to Opposition to Proposed Order p. 2. 14 The bankruptcy court entered Krengel’s proposed order6 and 15 McAllister filed this timely appeal. 16 II. JURISDICTION 17 The bankruptcy court had jurisdiction under 28 U.S.C. § 1334 18 and 28 U.S.C. § 157(b)(1)(J). We have jurisdiction under 19 28 U.S.C. § 158.7 20 21 6 It appears that the proposed order was entered without any 22 changes. Krengel’s proposed order is not included in the excerpts of record, nor is it available from the adversary 23 proceeding docket. However, the upper left corner of the order granting summary judgment indicates that the signed order was 24 prepared by counsel for Krengel. 25 7 At oral argument in this appeal, the Panel noted that the 26 order on appeal was interlocutory because it did not resolve all of appellant's claims and therefore was not a final judgment. On 27 June 30, 2014, the Panel entered an order of limited remand directing appellant to obtain an amended judgment from the 28 continue...
-22- 1 III. ISSUES 2 1. Did the bankruptcy court abuse its discretion in 3 overruling McAllister’s evidentiary objections? 4 2. Did the bankruptcy court err in determining that there 5 was no dispute of material fact with respect to the requisite 6 intent to hinder, delay, or defraud her creditors under section 7 727(a)(2)(A)? 8 3. Did the bankruptcy court err in determining that there 9 was no dispute of material fact with respect to McAllister’s 10 failure to keep and maintain records under section 727(a)(3)? 11 IV. STANDARD OF REVIEW 12 The Panel reviews a bankruptcy court’s grant of summary 13 judgment de novo. Caneva v. Sun Communities Operating Ltd. 14 P’ship (In re Caneva), 550 F.3d 755, 760 (9th Cir. 2008). 15 In reviewing an order granting summary judgment, the Panel 16 “must view the evidence in the light most favorable to the 17 non-moving party and ‘determine whether there are any genuine 18 issues of material fact and whether the bankruptcy court 19 correctly applied the substantive law.’” Id. (quoting Bagdadi v. 20 Nazar, 84 F.3d 1194, 1197 (9th Cir. 1966)). A material fact is 21 one that, under governing substantive law could affect the 22 outcome of the case. Id. A genuine issue of material fact 23 exists when the evidence is such that a reasonable jury could 24 return a verdict for the nonmoving party. Id. at 761. Findings 25 7 26 ...continue bankruptcy court to resolve the finality issue. On July 16, 27 2014, the bankruptcy court entered its amended judgment, which the Panel has found to be a final, appealable judgment over which 28 it has jurisdiction.
-23- 1 of fact made in summary judgment proceedings are not entitled to 2 the “clearly erroneous” standard of review because the trial 3 court has not weighed the evidence or resolved disputed factual 4 issues. Am. Fed’n of State, County and Municipal Employees, 5 Local 2051 v. Stephens (In re Stephens), 51 B.R. 591, 594 (9th 6 Cir. BAP 1985). 7 Plaintiff bears the initial burden of setting forth credible 8 evidence to support each element of the claim. “[W]hen a 9 creditor makes out a prima facie case, the debtor who fails to 10 respond with credible evidence cannot prevail in a discharge 11 case.” Aubrey v. Thomas (In re Aubrey), 111 B.R. 268, 273 (9th 12 Cir. BAP 1990)(citing Devers v. Bank of Sheridan, Mont. 13 (In re Devers), 759 F.2d 751, 754 (9th Cir. 1985)). 14 A trial court's exclusion of evidence in a summary judgment 15 motion is reviewed for an abuse of discretion. Orr v. Bank of 16 Am., NT & SA, 285 F.3d 764, 773 (9th Cir. 2002)(citing Gen. Elec. 17 Co. v. Joiner, 522 U.S. 136, 141, (1997)). It follows that we 18 must affirm the trial court unless its evidentiary ruling was 19 manifestly erroneous and prejudicial. Orr, 285 F.3d at 773 20 (citing Joiner, 522 U.S. at 142; Maffei v. N. Ins. Co., 12 F.3d 21 892, 897 (9th Cir. 1993)). 22 V. DISCUSSION 23 A. The Bankruptcy Court did not abuse its discretion in 24 overruling McAllister’s evidentiary objections 25 McAllister filed two evidentiary objections prior to the 26 bankruptcy court’s ruling on the Motion. McAllister’s first 27 objection attacked several pieces of evidence Krengel offered in 28 support of its Motion. In response to McAllister’s opposition to
-24- 1 the Motion and her first evidentiary objection, Krengel filed a 2 reply that included a new declaration, which introduced the 3 Deposition Transcript. McAllister objected to the new evidence 4 included with the reply declaration. The bankruptcy court orally 5 overruled both evidentiary objections at the hearing on the 6 Motion.8 7 When attempting to establish the absence or existence of a 8 dispute of material fact, parties must cite to specific materials 9 in the record or show that the materials cited do not establish 10 the absence or existence of a genuine dispute. Fed. R. Civ. 11 P. 56(c)(1). Statements in a brief, unsupported by the record, 12 cannot be used to create an issue of fact. Barnes v. Indep. 13 Auto. Dealers Ass'n Health & Benefit Plan, 64 F.3d 1389, 1396 n.3 14 (9th Cir. 1995). Only evidence admissible at trial may be 15 considered in ruling on a motion for summary judgment. Orr, 16 285 F.3d at 773. In determining admissibility for summary 17 judgment purposes, it is the contents of the evidence rather than 18 its form that must be considered. Fraser v. Goodale, 342 F.3d 19 1032, 1036-37 (9th Cir. 2003). If the contents of the evidence 20 could be presented in an admissible form at trial, those contents 21 may be considered on summary judgment. Id.; see also Fed. R. 22 Civ. P. 56(c)(2). Civil Rule 56(c)(2) permits a party to object 23 to material offered in support of a motion for summary judgment 24 if the material cannot otherwise be presented in a form that 25 26 8 As noted earlier, the bankruptcy court issued a tentative 27 ruling, which is not included in the record on appeal. It is unclear whether the tentative ruling addressed the evidentiary 28 objections.
-25- 1 would be admissible in evidence. 2 1. The first objection 3 McAllister’s first evidentiary objection takes issue with 4 the first declaration from Joe Vance and with Krengel’s statement 5 of uncontroverted facts and conclusions of law. A statement of 6 uncontroverted facts is not evidence, but a pleading which states 7 the facts that the filer believes to be undisputed. Civil 8 Rule 56 does not contemplate the lodging of evidentiary 9 objections against such pleadings. In this respect, McAllister’s 10 objection is improper and should be disregarded. 11 Turning to the first declaration of Joe Vance, McAllister 12 enumerates twelve factual assertions which she finds 13 objectionable. For each factual assertion, McAllister raises one 14 or more grounds for objection, specifically: lack of foundation 15 (enumerated assertions 1-12), relevance (enumerated assertions 16 2-4, 8-10, and 12), best evidence (enumerated assertion 5), and 17 hearsay (enumerated assertions 11 and 12). 18 a. Relevance 19 The fact that a statement may be irrelevant has no bearing 20 upon a motion for summary judgment. A bankruptcy court can award 21 summary judgment only when there exists no genuine dispute of 22 material fact. It cannot rely on irrelevant facts; thus, 23 relevance objections are redundant. Burch v. Regents of the 24 Univ. of Cal., 433 F. Supp. 2d 1110, 1119 (E.D. Cal. 2006). If a 25 decision on summary judgment relies on certain statements, they 26 are by definition relevant. Instead of objecting, parties should 27 simply argue that the statements in question are not material. 28 Therefore, the bankruptcy court correctly overruled McAllister’s
-26- 1 relevance objections. 2 b. Lack of foundation 3 Assertions 1 through 7 involve facts that could be within 4 the personal knowledge of the declarant. To be admissible, 5 however, the declarant must state facts sufficient to establish 6 the basis for his or her personal knowledge. Based upon the 7 contents of the declaration, it was not an abuse of discretion 8 for the bankruptcy court to overrule this objection. It is also 9 difficult to see how McAllister was prejudiced by the admission 10 of the declaration, as much of its contents had already been 11 admitted by McAllister in her answer, or could have been 12 introduced in other ways, such as via the Rule 2004 examination 13 transcript (for example, all statements relating to the 14 underlying state court action). 15 c. Best evidence/hearsay 16 The bankruptcy court also did not abuse its discretion with 17 respect to the remaining assertions. Again, the challenged 18 statements relate to facts that McAllister had already admitted, 19 can be derived from other parts of the record, or are legal 20 conclusions mixed with facts.9 To the extent the statements 21 contain factual allegations, it was not an abuse of discretion 22 for the bankruptcy court to consider them. And while a 23 supporting affidavit is not the proper place to include legal 24 argument, it was not “manifestly improper” for the bankruptcy 25 9 26 For example, McAllister objects to assertion 11, which states “I am informed and believe Debtor’s amended Schedule B 27 indicates she owns a 2001 Mercedes Benz automobile; at the 2004 Examination, Debtor indicated her parents-in-law purchased just 28 such a vehicle for her for $10,000 in 2011.”
-27- 1 court to choose not to exclude these statements. 2 2. The second objection 3 McAllister’s second evidentiary objection focuses on the 4 second declaration of Joe Vance and the Deposition Transcript 5 attached thereto. McAllister raises two arguments. First, she 6 asserts that it is inappropriate for Krengel to offer evidence in 7 its reply brief that it could have offered as part of the Motion. 8 Second, she asserts that the Deposition Transcript should have 9 been excluded because it was not properly authenticated. 10 a. Consideration of evidence or argument presented in 11 a reply 12 In support of her first argument, McAllister cites Civil 13 Rule 6(c)(2), which states in relevant part: “[a]ny affidavit 14 supporting a motion must be served with the motion.” Fed. R. 15 Civ. P. 6(c)(2). McAllister also cites several out of circuit 16 cases. 17 Burns v. Gadsden State Community College, 908 F.2d 1512, 18 1519 (11th Cir. 1990), addresses the interplay between Civil 19 Rule 6 and Civil Rule 56(c). Burns, however, addresses a trial 20 court’s exclusion of late filed affidavits by a nonmovant; it 21 does not involve evidence included in a reply brief that could 22 have been included in an original motion. While the case is not 23 directly on point, it does support the assertion that Civil 24 Rule 56(c), in combination with Civil Rule 6, are designed to 25 provide the nonmoving party a meaningful opportunity to respond 26 to the factual assertions and legal arguments contained within a 27 motion for summary judgment. 28 Reid v. Lockheed Martin Aero. Co., 205 F.R.D. 655 (N.D. Ga.
-28- 1 2001) involves a motion for class certification. Plaintiffs bore 2 the burden of establishing adequacy of representation. The court 3 held that Plaintiffs failed to cite a single piece of evidence in 4 support of their assertion that the requirement had been 5 satisfied. In a footnote, the court acknowledged that Plaintiffs 6 had filed an affidavit in support of their contentions with their 7 reply brief and stated, without citation or analysis, that “[a]s 8 a general rule, a party may not submit evidence with a reply that 9 was available but not included with the original motion.” Reid, 10 205 F.R.D. at 678 n.30. 11 Finally, in Tetra Techs, Inc. v. Harter, 823 F. Supp. 1116 12 (S.D.N.Y. 1993), the parties moving for summary judgment saved 13 several legal and factual arguments for their reply brief. The 14 court noted that this was for the “obvious purpose of sandbagging 15 their adversary” and was foreign to the spirit of the Federal 16 Rules of Civil Procedure. Harter, 823 F. Supp. at 1120. While 17 the court discussed the reply brief with disdain, it is unclear 18 from the opinion whether the brief was disregarded. 19 It does not appear that the Ninth Circuit takes such a 20 strict approach to new information contained within a reply. 21 Most cases addressing the issue conclude that consideration of 22 new arguments or evidence in a reply falls within the discretion 23 of the trial court. See, e.g., Zamani v. Carnes, 491 F.3d 990, 24 996 (9th Cir. 2007)(“The district court need not consider 25 arguments raised for the first time in a reply brief”); Glenn K. 26 Jackson, Inc. v. Roe, 273 F.3d 1192, 1201-02 (9th Cir. 2001)(A 27 district court has discretion to consider an issue on summary 28 judgment even if first raised in the reply brief.). Other
-29- 1 circuits have acknowledged that the consideration of new evidence 2 or argument at the reply stage can be permissible in certain 3 circumstances. See, e.g., Green v. New Mexico, 420 F.3d 1189, 4 1196 (10th Cir. 2005)(If a reply contains new information 5 (defined as either new evidence or new legal arguments), the 6 Court needs to give the nonmoving party an opportunity to respond 7 only if the Court will rely on that new material. It is not an 8 abuse of discretion to ignore the new material and preclude a 9 surreply). 10 In this case, the bankruptcy court could have, in its 11 discretion, considered the new information provided by Krengel 12 with its reply. The declaration served little purpose other than 13 to introduce the Deposition Transcript. While permitting the 14 moving party to introduce new information on summary judgment 15 without giving the nonmoving party an opportunity to respond can 16 be prejudicial to the nonmoving party, the bankruptcy court’s 17 overruling of McAllister’s objection was not “manifestly 18 erroneous” under these circumstances, specifically given the fact 19 that McAllister had prior knowledge of the contents of the 20 Deposition Transcript and of her own testimony under oath. 21 Accordingly, the bankruptcy court did not abuse its discretion in 22 overruling the second evidentiary objection. 23 b. Failure to properly authenticate 24 McAllister’s second objection also asserts that the 25 Deposition Transcript was inadmissable because Joe Vance did not 26 lay a proper foundation. The Deposition Transcript purportedly 27 sets forth McAllister’s testimony in connection with the State 28 Court Action.
-30- 1 As noted above, it is the contents of the evidence, and not 2 its form, which dictates its admissibility for purposes of 3 summary judgment. Fraser, 342 F.3d at 1036-37. While the 4 Deposition Transcript itself might not be admissible at trial 5 without appropriate authentication, McAllister’s statements 6 therein can be considered in the summary judgment context. Id. 7 at 1037 (notwithstanding a hearsay objection, in the context of a 8 motion for summary judgment the contents of a diary were “mere 9 recitations of events within the [plaintiff/appellant’s] personal 10 knowledge and, depending on the circumstances, could be admitted 11 into evidence at trial in a variety of ways.”). 12 Further, the bankruptcy court’s consideration of the 13 unauthenticated Deposition Transcript would only constitute 14 harmless error given that the document could have easily been 15 authenticated at trial. See Hal Roach Studios, Inc. v. Feiner & 16 Co., 896 F.2d 1542 (9th Cir. 1990)(Trial court’s consideration of 17 unauthenticated registration statement was harmless where failure 18 could have been easily remedied by a statement from a competent 19 witness, or substitution of certified copy). McAllister does not 20 argue that the deposition never took place or that the Deposition 21 Transcript was somehow inaccurate. She simply contends that Mr. 22 Vance is not competent to authenticate that document. A 23 competent witness, namely McAllister, could easily cure this 24 alleged defect. Alternatively, the bankruptcy court could have 25 permitted Krengel to obtain a certified copy of the Deposition 26 Transcript. For these reasons, the bankruptcy court did not 27 abuse its discretion by overruling McAllister’s objection and 28 considering this evidence.
-31- 1 B. The Bankruptcy Court erred by weighing evidence to determine 2 that McAllister had the requisite intent to hinder, delay, 3 or defraud Krengel under section 727(a)(2)(A) 4 A bankruptcy court must deny a discharge if “the debtor, 5 with intent to hinder, delay, or defraud a creditor ... has 6 transferred, removed, destroyed, mutilated, or concealed property 7 of the debtor, within one year before the date of the filing of 8 the petition. . . .” 11 U.S.C. § 727(a)(2)(A). The burden of 9 proof is on the creditor to show that: (1) the debtor 10 transferred or concealed property; (2) the property belonged to 11 the debtor; (3) the transfer occurred within one year of the 12 bankruptcy filing; and (4) the debtor executed the transfer with 13 the intent to hinder, delay or defraud a creditor. In re Aubrey, 14 111 B.R. 268, 273 (9th Cir. BAP 1990). 15 Section 727(a)(2) states its intent requirement in the 16 disjunctive. Thus, a movant need only demonstrate one of the 17 three alternatives, either intent to hinder or to delay or to 18 defraud creditors. Beauchamp v. Hoose (In re Beauchamp), 19 236 B.R. 727, 731-32 (9th Cir. BAP 1999), aff’d 5 Fed. Appx. 743 20 (9th Cir. 2001) (adopting the Panel’s opinion). A court must 21 liberally construe a claim for denial of a discharge in favor of 22 the discharge and strictly against the party arguing for its 23 denial. First Beverly Bank v. Adeeb (In re Adeeb), 787 F.2d 24 1339, 1342 (9th Cir. 1986). 25 Constructive fraudulent intent cannot be the basis for 26 denial of discharge. Id. at 1343. However, fraudulent intent 27 sufficient to justify denial of discharge may be established by 28 circumstantial evidence or by inferences drawn from a course of
-32- 1 conduct. Id. (citing In re Devers, 759 F.2d at 753-754 (noting 2 that a debtor is unlikely to testify directly that his intent was 3 fraudulent)). In examining the relevant circumstances or 4 conduct, a court may focus on “badges of fraud,” including: 5 (1) a close relationship between the transferor and the 6 transferee; (2) the transfer was in anticipation of a pending 7 suit; (3) the transferor debtor was insolvent or in poor 8 financial condition at the time of the transfer; (4) all or 9 substantially all of the debtor's property was transferred; 10 (5) the transfer so completely depleted the debtor's assets that 11 the creditor has been hindered or delayed in recovering any part 12 of the judgment; and (6) the debtor received inadequate 13 consideration for the transfer. Roberts v. Erhard 14 (In re Roberts), 331 B.R. 876, 885 (9th Cir. BAP 2005). These 15 factors need not all be present in order to find that a debtor 16 acted with the requisite intent. Id. 17 Krengel’s argument for denial of discharge pursuant to 18 section 727(a)(2) consists of two sentences: “Defendant has 19 misrepresented the value and description of her assets, including 20 her jewelry, KFM and two automobiles. This omission warrants 21 denial of discharge under § 727(a)(2).” Motion p. 8. In 22 Krengel’s argument for denial of discharge pursuant to section 23 727(a)(4), Krengel asserts, “[i]n light of a pattern of behavior 24 abusing the bankruptcy process, these acts when weighed 25 altogether evidence cause to deny Debtor’s discharge per 26 § 727(a)(4).” Motion p. 10. Finally, Krengel asserts in its 27 argument for denial of discharge pursuant to section 727(a)(5), 28 “[t]hat a 2004 Examination was needed just to flesh out some of
-33- 1 the discrepancies in her schedules is evidence of possible 2 wrongful intent.” Motion p. 11. Taken together, the Panel can 3 infer from these statements that Krengel believes the 4 misrepresentations and omissions in McAllister’s bankruptcy 5 documents are evidence of her intent to hinder, delay, or defraud 6 creditors. 7 McAllister does not dispute that she amended her schedules 8 to increase the reported value of her jewelry and KFM, or that 9 she described the two automobiles as Krengel complains. 10 McAllister flatly disagrees with Krengel’s assertion that the 11 misstatements in her schedules and SOFA — to the extent that they 12 were misstatements — warrant a denial of her discharge. 13 McAllister asserts that the misstatements were benign, did not 14 affect the administration of the estate, and were not made with 15 any intent to hinder, delay or defraud creditors. 16 The bankruptcy court erred in granting summary judgment 17 pursuant to section 727(a)(2) for two reasons. First, Krengel 18 did not meet its burden of establishing an intent to hinder, 19 delay, or defraud creditors. Krengel did not even address the 20 element of intent in its argument. And in fact, Krengel’s 21 response to McAllister’s objection to the proposed order 22 acknowledges the existence of a factual dispute regarding intent, 23 and that the bankruptcy court weighed the evidence in finding 24 McAllister’s explanations lacking credibility. Response to 25 Opposition to Proposed Order p. 2. 26 Second, even if the Panel could infer intent from 27 McAllister’s multiple misstatements, McAllister has proffered 28 evidence sufficient to create a genuine dispute of material fact.
-34- 1 Her declaration, as well as the statements she made under oath at 2 the Rule 2004 examination, explain each of the issues raised by 3 Krengel. Appropriately considered in a light most favorable to 4 McAllister, a trier of fact could find that the misstatements did 5 not evidence a pattern of misconduct, but were simply unintended 6 errors or benign mistakes. Assessment of a witness’ credibility 7 is appropriate for trial, not in considering a motion for summary 8 judgment. Musick v. Burke, 913 F.2d 1390, 1394 (9th Cir. 1990) 9 (“When judging the evidence at the summary judgment stage, the 10 district court is not to make credibility determinations or weigh 11 conflicting evidence, and is required to draw all inferences in a 12 light most favorable to the nonmoving party.”). 13 C. The Bankruptcy Court erred by finding that Krengel met its 14 burden as to McAllister’s failure to keep or preserve 15 recorded information under section 727(a)(3) 16 Section 727(a)(3) provides that a court shall grant a debtor 17 a discharge unless “the debtor has concealed, destroyed, 18 mutilated, falsified, or failed to keep or preserve any recorded 19 information, including books, documents, records, and papers, 20 from which the debtor's financial condition or business 21 transactions might be ascertained, unless such act or failure to 22 act was justified under all of the circumstances of the case.” 23 11 U.S.C. § 727(a)(3). 24 The initial burden of proof under section 727(a)(3) is on 25 the plaintiff. Lansdowne v. Cox (In re Cox), 41 F.3d 1294, 1296 26 (9th Cir. 1994)(Cox II). In order to establish a prima facie 27 case, the plaintiff must show (1) that the debtor failed to 28 maintain and preserve adequate records, and (2) that such failure
-35- 1 makes it impossible to ascertain the debtor's financial condition 2 and material business transactions. Id. 3 What constitutes adequate records must be decided case by 4 case, based on debtor's business operations and sophistication. 5 AVCO Fin. Servs. of Billings v. Sullivan (In re Sullivan), 6 111 B.R. 317, 321 (Bankr. D. Mt. 1990)(citing In re Horton, 7 621 F.2d 968 (9th Cir. 1980)(construing 11 U.S.C. § 32(c)(2) of 8 the Bankruptcy Act)). The debtor must maintain “sufficient 9 written evidence which will enable his creditors reasonably to 10 ascertain his present financial condition and to follow his 11 business transactions for a reasonable period in the past.” 12 Cox v. Lansdowne (In re Cox), 904 F.2d 1399, 1402 (9th Cir. 13 1990)(Cox I)(quoting In re Horton, 621 at 971). “Keep” means to 14 maintain a record, as in “to keep a diary.” Peterson v. Scott 15 (In re Scott), 172 F.3d 959, 969 (7th Cir. 1999). “This language 16 places an affirmative duty on the debtor to create books and 17 records accurately documenting his business affairs.” Id. 18 Once the objecting party shows that the debtor’s records are 19 absent or inadequate, the burden of proof shifts to the debtor to 20 justify the inadequacy or nonexistence of records. Cox II, 21 41 F.3d at 1296. The debtor must show, by a preponderance of the 22 evidence, that failure to keep adequate business records was 23 justified under all of the circumstances in the case. Id. at 24 1297. 25 Krengel’s Motion argues that denial of discharge was 26 justified under section 727(a)(3) because McAllister: (1) failed 27 to adequately explain certain expense items on her schedules 28 during her deposition; (2) failed to disclose the loan
-36- 1 forgiveness by her mother, the loans from her family members, the 2 transfer of the diamond necklace, and payments made on her behalf 3 by KFM; (3) incorrectly listed her debt to Krengel as “disputed” 4 in her schedules; and (4) failed to keep adequate records for 5 KFM. After making these allegations in its Motion, Krengel 6 states the conclusion that “Defendant has undeniably failed to 7 keep and maintain adequate records, including financial 8 documentation.” Motion p. 9. 9 The first three allegations are not material to a 10 determination that McAllister (1) failed to maintain records, and 11 (2) that said failure made it impossible to ascertain the 12 debtor’s financial condition. Section 727(a)(3) is concerned 13 with a debtor’s record keeping, not the adequacy of her 14 disclosures (which is relevant under sections 727(a)(2) and 15 (a)(4)). The Motion makes no attempt to relate the adequacy of 16 McAllister’s disclosure with her failure to maintain records. In 17 its appellate brief, Krengel goes a bit further, alleging that 18 McAllister was “unable to produce records to explain (1) the 19 commingling of income and expenses on Debtor’s schedules, but 20 [sic] (2) the failure to disclose the executory contracts/clients 21 of the wholly-owned business entity, or (3) the payment of 22 Debtor’s legal expenses in the State Court Action made by KFM 23 (not a party to the State Court Action).” Appellee’s Brief 24 p. 30. Even if this assertion had been raised before the 25 bankruptcy court (which it was not), Krengel does not cite to, 26 and we have not been able to find, any material in the record to 27 support the assertion that McAllister did not maintain or turn 28 over information related to these business records.
-37- 1 Unlike the first three allegations in the Motion, Krengel’s 2 fourth allegation could satisfy the first prong of section 3 727(a)(3). However, Krengel again fails to cite in its Motion or 4 in its reply to any material in the record to support this 5 allegation. While a movant should cite to particular parts of 6 the record to support its position on summary judgment, a court 7 may consider uncited materials in the record. Fed. R. Civ. 8 P. 56(c)(3). We are unable to find any evidence, apart from 9 Krengel’s bare assertion, that McAllister failed to keep and 10 maintain adequate records for KFM. The 2004 examination 11 transcript is full of instances where Krengel asks McAllister if 12 she possessed or could produce documents, to which she repeatedly 13 replied that she (1) had already provided such documentation, 14 (2) could provide it, or (3) had an accountant who maintained 15 such information. McAllister also testified that she maintained 16 books for KFM. Krengel does not allege, and the record does not 17 reflect, that McAllister did not keep records of her transactions 18 with KFM. The record simply does not support the result reached 19 by the bankruptcy court. 20 As for McAllister’s transactions with her mother and 21 brother, looking beyond the unsupported facts and arguments 22 contained in Krengel’s Motion and reply, we have been able to 23 find just two specific instances of McAllister not keeping or 24 maintaining records that are specifically mentioned in the record 25 on appeal. First, McAllister did not keep a written record of 26 the loan from her brother; second, KFM did not have written 27 28
-38- 1 contracts with its clients.10 2 If the absence of written records was sufficient by itself 3 to justify denial of discharge under section 727(a)(3), summary 4 judgment might have been appropriate. However, the movant must 5 also establish that these failures resulted in an inability to 6 assess the debtor’s financial condition. Here again, there 7 appears to be no evidence in the record to support such a 8 conclusion. For these reasons, the bankruptcy court should have 9 denied summary judgment on Krengel’s claim under section 10 727(a)(3). 11 VI. CONCLUSION 12 For the reasons stated above, the bankruptcy court should 13 not have granted summary judgment in favor of Krengel under 14 sections 727(a)(2) or (a)(3). We therefore REVERSE and REMAND 15 for further proceedings. 16 17 18 19 20 21 22 23 24 25 10 In its brief, Krengel asserts that, in addition to 26 failing to keep records of the loan from her brother, McAllister failed to keep a record of the loan from her mother. The 27 declarations, 2004 exam transcript, and Deposition Transcript make no reference as to whether the loan with her mother was 28 reduced to writing or evidenced in some other way.
-39-