Hernandez v. Shove (In re Shove)

638 B.R. 1

Richard M. SHOVE, f/d/b/a Ricks Complete Lawn Care, and Kathleen E. Shove, Debtors.

Jose R. Hernandez, Plaintiff-Appellee,

v.Richard M. Shove and Kathleen E. Shove, Defendants-Appellants.

BAP NO. MS 21-019

Bankruptcy Case No. 17-31052-EDK

Adversary Proceeding No. 18-03009-EDK

United States Bankruptcy Appellate Panel of the First Circuit.

April 29, 2022

James Ehrhard, Esq., Worcester, and Carrie Naatz, Esq., on brief for Defendants-Appellants.

Cynthia A. Spinola, Esq., Pittsfield, on brief for Plaintiff-Appellee.

Before Godoy, Lamoutte, and Harwood, United States Bankruptcy Appellate Panel Judges.

Harwood, U.S. Bankruptcy Appellate Panel Judge.

Richard M. Shove ("Shove") and Kathleen E. Shove ("Kathleen" and, collectively with Shove, "the Debtors") appeal from the bankruptcy court's judgment denying Shove's discharge pursuant to §§ 727(a)(3) and 727(a)(4)(A).¹ For the reasons discussed below, we DISMISS Kathleen's appeal for lack of standing. As for Shove's appeal, we conclude the bankruptcy court did not clearly err when it found that Shove failed to maintain adequate records and that his failure was unjustified. Accordingly, we AFFIRM the bankruptcy court's denial of Shove's discharge under § 727(a)(3).²

BACKGROUND

I. Pre-Bankruptcy Events

The Debtors are married and reside in Massachusetts. Shove operated a landscape company known as Rick's Complete Lawn Care Service for about 25 years and also owned 90 rental units. In 2013, however, Shove was injured in a fall and, after the 2014-2015 landscaping season, he closed his landscaping business. Thereafter, Shove worked for his son, who owned a landscaping company. On December 28, 2015, a house fire damaged the Debtors’ house, forcing them to vacate their home for approximately a year.

Earlier that year, on February 11, 2015, Jose R. Hernandez ("Hernandez"), then Shove's employee, sustained a serious injury of his own in a fall from a snow-covered roof during the course of his employment. At the time of Hernandez's injury, Shove did not have a workers’ compensation policy in effect. Hernandez sued him in state court to recover damages for his injuries. In September 2017, Hernandez obtained a judgment in the amount of $965,201.53, which is secured by a lien on various properties owned by Shove.

II. The Bankruptcy Proceedings

A. The Bankruptcy Filing

A few months later, on December 15, 2017, the Debtors filed a joint chapter 7 bankruptcy case. Thereafter, Jack E. Houghton was appointed chapter 7 trustee (the "Trustee"). On Schedule A/B, the Debtors disclosed that they jointly owned their primary residence in Lenox, Massachusetts, five multi-unit properties in Lenox, and a single-family home in Lee, Massachusetts, and that Shove solely owned two multi-unit properties in Pittsfield, Massachusetts. Schedule D reflected that the secured claims against the Debtors’ properties exceeded $1.8 million, while Schedule E/F indicated that approximately $540,000 of their unsecured debt was "mortgage" or "mortgage deficiency debt."

B. The Commencement of the Adversary Proceeding

In August 2018, Hernandez filed a five-count amended complaint against the Debtors (the "First Amended Complaint"). Only Counts III and IV are involved in this appeal. In Count III of the First Amended Complaint—after incorporating the background facts and allegations of the prior counts—Hernandez sought the denial of Shove's discharge under § 727(a)(3), on the grounds that Shove, in the operation of his property rental and landscaping businesses, "concealed, destroyed, mutilated, falsified, or 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." In Count IV, Hernandez again incorporated the facts and allegations of the prior counts by reference, and requested a judgment denying Shove's discharge under § 727(a)(4)(A), on the grounds that Shove "made a false oath or account" at the § 341 meeting of creditors and in his schedules.

C. The Motion to Dismiss

On August 24, 2018, the Debtors filed a motion to dismiss the First Amended Complaint (the "Motion to Dismiss"). They argued that Count III (the § 727(a)(3) count) should be dismissed for failure to state a claim under Rule 12(b)(6) and Bankruptcy Rule 7012, because it "merely parrot[ed]" the statute, made "vague," "unsupported assertions," and "combined facts" from previous counts. Moreover, the Debtors asserted that Hernandez "failed to do the minimum" to state a cause of action under § 727(a)(3) by "fail[ing] to plead what records [we]re necessary, why they [we]re necessary, or that they [we]re unavailable elsewhere." Highlighting that Count IV (the § 727(a)(4)(A) count) sounded in fraud, the Debtors asserted that Hernandez failed to "allege with particularity the who, what, when, where, and how of the fraud" as required by Rule 9(b). Accordingly, the Debtors asked the court to dismiss Count IV pursuant to Rule 12(b)(6), Rule 9(b), and Bankruptcy Rule 7012.

Hernandez opposed the Motion to Dismiss as to Shove, but not as to Kathleen. He argued that the allegations in Count III were more than sufficient to withstand dismissal and disputed the charge that the factual allegations set forth in Count IV were "mere conclusory statements."

After a hearing on January 17, 2019, the bankruptcy court entered the following order (the "Order Partially Denying Motion to Dismiss"), without any explication:

Granted in part and denied in part. The Motion is Granted as to all counts against Kathleen Shove and as to Count V against Richard Shove. The Motion is denied as to Counts I through IV against Richard Shove.

The parties did not include a transcript of that hearing in the appellate record. We discuss the import of that omission below.

III. The Trial

The court conducted a five-day trial in February and March 2020 and heard closing arguments in April 2020. In total, seven witnesses testified, and their testimony covered a broad range of topics. However, we summarize only the testimony that is essential to the denial of Shove's discharge under § 727(a)(3).

A. Shove's Testimony

Shove testified that, before the house fire, he kept business records in boxes stored in his basement, where he managed both his landscaping and property rental businesses. Shove testified, however, that he did not have any records for the post-fire period. For this reason, at his attorney's request, in March 2018, Shove prepared documents entitled "Rents Received" (the "Rent Rolls"), which identified several multi-unit properties and the corresponding rents charged for each month from January 2017 through March 2018. The Rent Rolls were based on Shove's memory and only reflected amounts he hoped to collect, not rents he had actually collected. To compile the necessary information, Shove explained, he "went to each tenant" and "asked ... what they paid for the year." Notably, each Rent Roll included the following caveat at the bottom, signed by both Debtors: "[T]his is best recollection, as we no longer keep records. Many tenants do not pay regularly, or partial-pay their rent. ... The money received from the paying tenants goes to maintenance, upkeep, and utility bills for all properties." Shove testified that he received some rent payments in cash but did not keep a receipt of those payments for his own personal records.

Through July 2017, Shove deposited some rent checks in an account he referred to as the "Mission Management" account. Thereafter, Shove used a different account, ending in number 6134 (the "6134 account"), for the deposit of some rents. When questioned regarding certain bank statements,³ however, Shove had difficulty identifying any deposits that correlated with the amounts listed on the Rent Rolls. For example, although he identified a single deposit of rent in the amount of $372.77 on his Mission Management bank statement for January 2017, he could not identify any tenant who was charged that amount of rent. Similarly, he could not identify any deposits into the 6134 account representing rents received for the months of October 2017 and November 2017.

Shove stated that "Kathleen used to cash [rent] checks" and they kept the "cash on hand to pay bills." Occasionally, Kathleen would use the cash to purchase money orders to pay utility bills. The Debtors paid bills in this manner to avoid overdraft fees, according to Shove's testimony. Generally, bank deposits consisted of rent payments with "something else ... mixed in," such as Kathleen's wages or Airbnb income derived from renting their residence. Yet, Shove was unable to point to a line item on the Rent Rolls for the Airbnb income. When asked whether he had "any records of any kind made contemporaneously ... that corroborate[d] his statement about what rents [he had] received," Shove answered: "Not currently, no."

When asked if there was "any way ... that anyone looking closely at [his] business affairs or ... records[ ] could determine how much cash he had on hand at various times," Shove answered:

Yes, because I've disclosed it on my taxes. I've disclosed on my Schedule I, that we take in ... $4,800 a month, and I disclosed exactly what we tried to take in, and I actually erred on caution and went higher to make sure that I had all my income, even if I was below.

After Shove testified that he and Kathleen "had a lot of cash on hand," Hernandez's counsel asked Shove if he had any record that would reflect the amount of cash he had in December 2017 (the month he filed his bankruptcy case). Shove responded:

You're asking about a specific month, how much cash we would have. We ... wouldn't know that. It depends on who paid ... maybe a tenant paid that month, maybe they didn't. I ... wouldn't know how much cash was on hand at that time.

As for the absence of records relating to the period pre-dating the house fire, Shove explained that certain contents of his home were lost in the fire. Regarding the missing...