Okla. DHS Child Support Servs. v. Bryan (In re Bryan)

612 B.R. 618

IN RE: Thomas Wayne BRYAN, Debtor.

Oklahoma DHS Child Support Services, Plaintiff,

v.Thomas Wayne Bryan, Defendant.

Case No. 18-11331-M

Adv. No. 18-01050-M

United States Bankruptcy Court, N.D. Oklahoma.

Signed January 15, 2020

Anne Renee Lawrence, DHS/Child Support Services, Oklahoma City, OK, for Plaintiff.

Gary G. Grisso, Professional Bankruptcy, P.L.L.C., Tulsa, OK, for Defendant.

MEMORANDUM OPINION

TERRENCE L. MICHAEL, UNITED STATES BANKRUPTCY JUDGE

Since the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"),¹ bankruptcy courts have largely been removed from the province of family law. In general terms, with very limited exceptions, the debts owed by one ex-spouse to another ex-spouse are no longer dischargeable in bankruptcy cases. This case raises a slightly different issue; namely whether the failure by an employer to remit court ordered child support as part of the wages of an employee may be properly discharged. There is also an issue as to whether the destruction of business records by the employer is conduct so egregious as to justify denial of the employer's discharge in toto. The following findings of fact and conclusions of law are made pursuant to Federal Rule of Bankruptcy Procedure 7052.

Jurisdiction

This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b), and venue is proper pursuant to 28 U.S.C. § 1409.² Reference to the Court of this matter is proper pursuant to 28 U.S.C. § 157(a). This is a core proceeding as contemplated by 28 U.S.C. § 157(b)(2)(I) and (J).

Findings of Fact

Thomas Wayne Bryan ("Defendant" or "Bryan") filed a petition for relief under Chapter 7 of the Bankruptcy Code with this Court on July 3, 2018. Karen Carden Walsh ("Trustee") was appointed to serve as the Chapter 7 Trustee in this case. In his schedules, Bryan listed a claim owed to Mark Villio ("Villio") for failure to withhold child support in the amount of $4,513.00. This claim was listed as contingent and disputed. The bankruptcy case was administered as a "no-asset" case, meaning that there were no assets available for distribution to creditors, and no claims were filed.

The parties have stipulated to the following facts:³

1. Defendant operated a business, Metro Landscape Services, Inc. ("Metro Landscape") since January 5, 2007.

2. Metro Landscape generated gross receipts of $765,463.00 in tax year 2015 and gross receipts of $555,196.00 in tax year 2016. Defendant received personal income from this business of $103,064.00 in tax year 2015 and personal income from this business of $68,575.00 in tax year 2016.

3. Defendant made use of Southwest Payroll as his payroll company, Kathy Stewart as his bookkeeper, and Richard Stewart, Certified Public Accountant (CPA), as his tax preparer.

4. Villio was an employee of Defendant.⁴

5. Defendant orally reported hours worked by employees to Southwest Payroll for issuance of pay checks.

6. Southwest Payroll drafted Earning Statements for employees with an attached check. These were picked up by Defendant for issuance to employees.

7. Earning Statements reflected hours, rate, taxes withheld, and additional deductions.

8. The Earning Statements for Villio included child support deductions.

9. Defendant had a statutory and fiduciary duty to withhold child support from Villio's pay.

10. Defendant had a statutory and fiduciary duty to remit to Oklahoma DHS Child Support Services ("DHS") the child support withheld from Villio's pay.

11. Defendant remitted deductions for child support to DHS by check until February 2013.

12. The checks issued to DHS in February 2013 were returned unpaid as a result of insufficient funds.

13. Defendant was notified by DHS that further payments were to be remitted only by money order or cashier's check.

14. Defendant remitted deductions by money orders or cashier's checks to DHS from February 2013 through December 2016.

15. For calendar year 2014, child support deducted by Defendant from Villio's income was $6,211.84, while only $5,454.92 was remitted by Defendant to DHS.

16. For calendar year 2015, child support deducted by Defendant from Villio's income was $7,403.76, while only $3,263.88 was remitted by Defendant to DHS.

17. For calendar year 2016, child support deducted by Defendant from Villio's income was $6,527.76, while only $6,373.78 was remitted by Defendant to DHS.

18. A total of $20,143.36 was shown by Defendant as deducted from Villio's income for child support, while the total remitted by Defendant to DHS was $15,092.58. The amount shown as deducted but never remitted was $5,050.78.

19. Defendant failed to maintain books and records in the ordinary course of business.

20. Defendant did not provide books and records of his business to the Trustee.

21. Defendant sold his home January 5, 2018, for $359,000.00.

22. Defendant shredded business records after the sale of his house on January 5, 2018.

23. Defendant testified in discovery that his business records in possession of Richard Steward, CPA, are inaccessible to Defendant for production.

24. Defendant testified in discovery that his business and personal bank statements are available through Security Bank. Defendant failed to acquire those records or provide them to the Trustee.

25. Defendant filed personal and business tax returns for 2015 and 2016 on March 14, 2019.

26. Defendant did not file tax returns for 2017.

27. Defendant did not provide any tax returns to the Trustee.

28. Defendant failed to provide tax returns and business records to the Trustee.

29. Defendant provided the Trustee with documents regarding the sale of his home.

At trial, Bryan testified that the business records of Metro Landscape were destroyed as part of the downsizing when his house was sold. Bryan testified the records were of no use to him, and that he lacked ample storage space at his new house to accommodate those records. There is no evidence in the record to indicate that at the time the records were destroyed, Bryan was contemplating filing a bankruptcy case. There is also no evidence in the record to establish that the Trustee was hampered in her administration of this case by the destruction of those records.

To the extent the "Conclusions of Law" contain any items that should more appropriately be considered "Findings of Fact," they are incorporated herein by this reference.

Burden of Proof

In order to prevail on an objection to discharge, the plaintiff must prove each statutory element by a preponderance of the evidence.⁵ Once the plaintiff establishes a prima facie case for denying a defendant's discharge under § 727, the burden of going forward shifts to the defendant.⁶ The ultimate burden, however, remains with the plaintiff.⁷ In order to further the policy of providing a debtor with a "fresh start," "the Bankruptcy Code must be construed liberally in favor of the debtor and strictly against the creditor."⁸ Even so, "a discharge in bankruptcy is a privilege, not a right, and should only inure to the benefit of the honest debtor."⁹

The second issue before the Court is whether a debt owed by the Defendant to the Plaintiff should be excepted from discharge under § 523(a)(4) or (6) of the Bankruptcy Code. Exceptions to discharge are to be narrowly construed in favor of the debtor so as to promote the "fresh start" policy of the Bankruptcy Code.¹⁰ Under § 523, a creditor seeking to except its claim from discharge must prove the claim is nondischargeable by a preponderance of the evidence.¹¹

Conclusions of Law

§ 727(a)(3)

This Court first addressed the issue of denial of discharge under § 727(a)(3) more than sixteen years ago.¹² In this area of the law, little has changed. Section 727(a)(3) reads as follows:

The court shall grant the debtor a discharge, unless–

* * *

(3) the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, 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[.]¹³

The United States Court of Appeals for the Tenth Circuit has held that in order to sustain a claim under § 727(a)(3), the plaintiff must establish that the debtor "failed to maintain and preserve adequate records and that the failure made it impossible to ascertain his financial condition and material business transactions."¹⁴ "If the creditor makes such a showing, the burden then shifts to the debtor to justify his or her failure to maintain the records."¹⁵ "Records need not be so complete that they state in detail all or substantially all of the transactions taking place in the course of the business. It is enough if they sufficiently identify the transactions that intelligent inquiry can be made respecting them."¹⁶

Factors that a court may take into account when determining the sufficiency of disclosures include:

1. Whether the debtor was engaged in business, and if so, the complexity and volume of the business;

2. The amount of the debtor's obligations;

3. Whether the debtor's failure to keep or preserve books and records was due to the debtor's fault;

4. The debtor's education, business experience and sophistication;

5. The customary business practices for record keeping in the debtor's type of business;

6. The degree of accuracy disclosed by the debtor's existing books and records;

7. The extent of any egregious conduct on the debtor's part; and

8. The debtor's courtroom demeanor.¹⁷

The decision as to whether the books and records provided are sufficient is to be made on a case-by-case basis, and is a matter left to the discretion of the bankruptcy court.¹⁸ Some courts have held that the bankruptcy court has the discretion to allow the entry of a discharge even if grounds for its denial are found.¹⁹

At trial, the Court found Bryan to be a quite unsophisticated business person. Although he was responsible for operating the business of Metro Landscape, he...