In re Salvador, CIVIL ACTION NO. 17–10923–RGS

277 F.Supp.3d 154

IN RE Paul J. SALVADOR

In re Walter Salvador

CIVIL ACTION NO. 17–10923–RGS

CIVIL ACTION NO. 17–10926–RGS

United States District Court, D. Massachusetts.

Filed October 3, 2017

Gary W. Cruickshank, Boston, MA, for Walter Salvador.

MEMORANDUM AND ORDER ON CONSOLIDATED APPEALS FROM THE BANKRUPTCY COURT'S JUDGMENT OF DEBTORS' CHAPTER 7 PLAN

Richard G. Stearns, UNITED STATES DISTRICT JUDGE

The pivotal issue on appeal is whether the Bankruptcy Judge erred in finding that the failure of Paul Salvador and Walter Salvador (Debtors) to comply with the records-keeping provision of the Bankruptcy Code, 11 U.S.C. § 727(a)(3), disqualified them from a Chapter 7 discharge. After a trial, Judge Feeney found that "Debtors [had] failed to preserve recorded information from which their financial information and business transactions could be ascertained, and, at worst, permitted their agents or children to deliberately destroy and appropriate recorded information from which their financial condition might be ascertained." In re Salvador , 570 B.R. 460, 476 (Bankr. D. Mass. 2017). Consequently, she allowed the exception brought by creditor Andrew Kaplan and denied the discharge. On appeal, Debtors challenge Judge Feeney's determination that they (or someone acting on their behalf) "scrubbed" the computers of their insurance business by erasing critical files. According to Debtors, Judge Feeney based her finding on the "unequivocal[ ] testimony" of a forensic expert "that files were intentionally removed from the server ...." Id. Debtors contend that this was error because "there was no such testimony from [the expert] Mr. Steen." Appellant Br. at 4. The Salvadors also make a "spoliation" argument—that "[t]he Bankruptcy Court should not have allowed any information relative to the destroyed evidence to be admitted at trial" because the purchaser of the insurance business "destroy[ed] the server." Reply Br. at 3. I will affirm the Bankruptcy Court essentially for the reasons stated by Judge Feeney.

BACKGROUND

The relevant facts are undisputed.

In 2008, David B. Kaplan made two loans to Paul and Walter Salvador in conjunction with their various businesses—$100,000 on April 30, 2008, and $120,000 on October 29, 2008. Among the Salvadors' pledged assets was a family-owned insurance agency, Salvador & Company Insurance Agency (Salvador Co.) in which each Debtor held a 50% share.¹ When the Salvadors defaulted on the loans, Kaplan brought a collection action in the Norfolk Superior Court. Salvador Co. was named as a reach and apply defendant. Eventually, a judgment entered against the Salvadors in the amount of $744,764. In aid of execution, a judge of the Superior Court appointed a special commissioner to sell the stock and assets of Salvador Co. The Superior Court also ordered the Salvadors to turn the books and records of Salvador Co. over to a court-appointed receiver, John F. Hegarty.

The Salvadors filed for a discharge under Chapter 7 of the Bankruptcy Act on February 11, 2014. Judgment creditor/appellee Andrew Kaplan, as the personal representative of the estate of David Kaplan, opposed the Salvadors' requests for a discharge.²

Salvador Co. operated as an insurance agency from 1983 until February 1, 2014. App. at 169. After the Salvadors relinquished the company, Mark Salvador (Paul's son) and Christy Robbins (his niece) operated an insurance agency under the name The Insurance Connection, Inc., from the Salvador Co.'s former office at 111 Main Street in Bridgewater, Massachusetts. Paul Salvador admitted soliciting more than 200 of the Salvador Co.'s customers on behalf of The Insurance Connection, Inc.

On February 3, 2014, Hegarty, visited the premises where the Salvador Co. had been located, but found the office closed. Hegarty returned the following day and met with the Salvadors. Hegarty observed the Salvador Co.'s computers and office equipment in a large pile on the floor. Hegarty was unable to find any client files or financial records. When questioned by Hegarty, the Salvadors stated that the agency had gone "paperless" in "2010 or 2011." Dkt. # 13–1, App. at 87, 175. Hegarty returned to the premises on February 6, 2017, to inspect paper records of Salvador Co. that had been stored in the basement. After inspecting these files, Hegarty concluded that they were "stale" and shipped them to a storage facility in Pepperel, Massachusetts. Hegarty removed two computers from Salvador Co.—the "main server and a desktop screen." Id. at 92. A forensic examiner, Brian Steen, was hired to "ascertain whether any data or computer programs could be retrieved from [the computers]." Id. at 93.

Steen spent a total of nine hours examining the computers on February 25, 2014. Id. at 211 (Steen Dep.). He prepared a summary report concluding that "[a]s of 2/3/2014, there is no data in any user folder, Company folder or folder designated for scanning. This date is clearly shown on the server as the last date those folders were modified." Id. at 224. Steen also determined that Agency Management Software (AMS) had been uninstalled on the main server and that the AMS data folder "contained no records of any customers and no information concerning insurance policies, payments or commissions earned by the Salvador Co."³ While Steen found that a Quickbooks program had also been disabled, he was able to determine that it was last accessed on February 6, 2014, at 8:11 a.m., and that data had been deleted. The Quickbooks data that remained was from two to three years old. Steen also testified that there were five " ‘users’ who had accessed th[e] computer work station –‘Bill [Walter Salvador], Christy, Doug, Mark [debtors' relatives] and Paul [Salvador] ... and they had all logged on between February 3rd of 2014 and February 6th of 2014.’ " Id. at 208.

Steen used two data recovery software programs—EaseUS and GetDataBack —in an attempt to recover missing or deleted files from the server and computer work station. Steen concluded that numerous folders had been deleted from the computer server, and while he was able to recover the host folders, he was unable to retrieve any of their missing data. Id. at 207. He testified that this was consistent with a "scrubbing:" "It's quite possible a program had been used to scrub some files. That would explain the inability for either software package to recover files themselves."⁴ Id. at 209–210.

On March 18, 2014, the Bearce Insurance Agency purchased the assets of Salvador Co. Hegarty turned the office equipment and paper records over to William Bearce, the new owner. Bearce inspected the paper records and, as did Hegarty, found them to consist only of "dead" files.

After a trial at which the Debtors⁵ , Hegarty, Bearse, and Steen testified, Judge Feeney ruled for the Salvadors on Count I, finding "that the Debtors did not intentionally destroy the value of their 50% ownership interests in the Insurance Agency." However, on Count II she found that Kaplan had

sustained his burden of proof, namely that the Debtors failed to keep or preserve recorded information—information from which their financial condition or business transactions might be ascertained. Specifically, the Debtors, who were successful and sophisticated businessmen, failed to keep and preserve up-to-date records in any format.

In re Salvador , 570 B.R. at 476. Judge Feeney further found that the Debtors had permitted a deliberate scrub of customer and financial information from [Salvador Co.'s] computers and had turned over to the receiver only "outdated" or "dead files." Id. Accordingly, she denied the request for a discharge. The Salvadors appealed.

This court heard argument on the appeals on September 28, 2017. Appearing for the Debtors, Attorney Gary Cruickshank stated that he was not challenging Judge Feeney's credibility findings with respect to the Salvadors' trial testimony. Rather, he objected to Judge Feeney's factual findings that the computer and server files had been intentionally deleted, and that the Salvadors were responsible. Cruickshank also argued that Judge Feeney's discussion of the law relied on three prior court decisions that on closer examination are not factually analogous to the Salvadors' case.

DISCUSSION

The district court has jurisdiction to hear appeals "from final judgments, orders, and decrees" of the Bankruptcy Court. 28 U.S.C. § 158(a)(1). The court applies a "clearly erroneous" standard in reviewing a bankruptcy judge's findings of fact. Jeffrey v. Desmond , 70 F.3d 183, 185 (1st Cir. 1995) ; see also Fed. R. Bankr. P. 8013 (the Bankruptcy Court's "[f]indings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses."). "Under the clear error standard, the trier's findings of fact and the conclusions drawn therefrom ought not to be set aside ‘unless, on the whole of the record, we form a strong, unyielding belief that a mistake has been made.’ " In re Carp , 340 F.3d 15, 22 (1st Cir. 2003). The application of a Bankruptcy Code provision to a particular case poses a mixed question of law and fact, subject to review for clear error, unless the Bankruptcy Court's analysis was based on a mistaken view of the legal principles involved. Id.

The Bankruptcy Code, 11 U.S.C. § 727(a)(3), permits a Bankruptcy Judge to deny a discharge when a debtor fails to maintain or preserve adequate records to reasonably ascertain its financial condition.⁶ See also In re: Frank Schifano , 378 F.3d 60 (1st Cir. 2004). Judge Feeney, in explaining her decision to deny the Salvadors a discharge, quoted from In re Simmons , 525 B.R. 543 (1st Cir. BAP 2015), aff'd , 810 F.3d 852 (1st Cir. 2016),

"[t]he purpose of § 727(a)(3) is to give creditors, the trustee and the bankruptcy court complete and accurate information concerning the debtor's affairs and to ensure that dependable

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