Sabatina v. Novak (In re Novak)

In Re: WILLIAM NOVAK, Debtor

JOHN SABATINA and LISA SABATINA Plaintiffs v. WILLIAM NOVAK, Defendant

Case No.: 15-15102-ABA

Adv. No.: 15-02330-ABA

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW JERSEY

November 7, 2016

NOT FOR PUBLICATION

Chapter: 7

Judge: Andrew B. Altenburg, Jr.

MEMORANDUM DECISION

Before the court is the adversary proceeding filed by plaintiffs John Sabatina and Lisa Sabatina objecting to discharge and dischargeability under sections 727(a)(3), (4) and 523(a)(2)(A) of title 11 of the United States Code (the "Bankruptcy Code"). The court finds that the Plaintiffs presented sufficient evidence necessary to meet their burden of proof under section 727(a)(3) and thus denies discharge. As the court finds discharge should be denied under section 727(a)(3), it need not make any determination under sections 727(a)(4) and 523(a)(2)(A).

JURISDICTION AND VENUE

This matter before the court is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I) and (J), and the court has jurisdiction pursuant to 28 U.S.C. § 1334, 28 U.S.C. § 157(a) and the Standing Order of Reference issued by the United States District Court for the District of New Jersey on July 23, 1984, as amended on September 18, 2012, referring all bankruptcy cases to the bankruptcy court. The following constitutes this court's findings of fact and conclusions of law as required by Federal Rule of Bankruptcy Procedure 7052.

PROCEDURAL HISTORY

The debtor, William Novak, filed a voluntary petition for bankruptcy under Chapter 7 of the Bankruptcy Code on March 23, 2015. On November 3, 2015, the Sabatinas filed this adversary proceeding seeking the denial of discharge of a certain debt under section 523(a)(2) and objecting to the discharge of the Debtor under paragraphs (3) and (4) of section 727(a) of the Bankruptcy Code.

A trial was held on September 7, 2016 and both parties submitted post-trial briefs on October 14, 2016. The following are the court's findings of fact and conclusions of law.

FINDINGS OF FACT

There are precious few established facts in this case. The relevant facts that have been established necessary for this court's determination are that Mr. Novak represents himself as a home improvement contractor licensed in New Jersey. At various times Mr. Novak operated under the names Mill Run Contractors and Mill Run Builders, which Mr. Novak testified were both unincorporated businesses (TR at 14:23-15:2¹). He further testified to having worked for Mill Run Construction and Mill Run Developers (TR at 21:5-8 and 40:6). While operating as Mill Run Builders in February of 2007, Mr. Novak signed a contract with the Plaintiffs whereby Mr. Novak agreed to demolish an existing kitchen and build a two-story addition onto the Plaintiffs' real property located at 204 East Louisville Avenue in Wildwood Crest, New Jersey (the "Wildwood Property"). Mr. Novak promised he was capable of and intended to complete the work in a professional manner. Finding the work was unsatisfactory, the Plaintiffs filed suit in the New Jersey Superior Court against Mr. Novak on January 30, 2009, alleging, among other things, fraudulent misrepresentation and violations of the Consumer Fraud Act. On February 11, 2011, a settlement agreement was reached whereby Mr. Novak would pay $25,000 over a 26-month period to the Plaintiffs and, in the event he defaulted on this obligation, the Plaintiffs could seek a judgment for $38,000. Mr. Novak defaulted without making any payments towards the settlement and the Plaintiffs obtained a judgment for the full amount on August 5, 2011. Post judgment discovery ensued. Testimony was obtained. Transfers suspected to be fraudulent transfers were uncovered.

On March 23, 2015, Mr. Novak filed a voluntary petition (the "Petition") for bankruptcy protection under Chapter 7 of the Bankruptcy Code. The Petition listed no interest in any real property on Schedule A, and listed only clothing and a 1992 van totaling $1,500 worth of personal property on Schedule B. On Schedule I, Mr. Novak listed $1,300 in wages, and separately listed $1,000 of income from rental property and operation of a business or a farm despite there being no real property, business or farm interest listed on the Petition. In addition, Mr. Novak did not list an ownership or interest in any businesses within the last six years on his Statement of Financial Affairs. However, Mr. Novak's tax returns show he owned and operated the business Mill Run Builders as of 2013. Finally, on Schedule J, Mr. Novak listed $1,750 per month for home ownership expenses, $300 towards electricity, heat and gas, $50 towards water and sewer, and $80 towards telephone and cable.

After the Petition was filed, Mill Run Contractors published, in July 2015, an advertisement for construction services listing Mr. Novak's personal contractor license number with the State of New Jersey.

CONCLUSIONS OF LAW

Section 727(a)(3) of the Bankruptcy Code states that the court shall grant the debtor a discharge, unless "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[.]" 11 U.S.C. § 727(a)(3); In re Kinard, 518 B.R. 290, 301 (Bankr. E.D. Pa. 2014).

The purpose of section 727(a)(3) of the Bankruptcy Code is to ensure that a debtor provides the trustee and his or her creditors with sufficient information to "'ascertain the debtor's financial condition and track his [or her] financial dealings with substantial completeness and accuracy for a reasonable period past to present.'" Id. (quoting In re Juzwiak, 89 F.3d 424, 427 (7th Cir. 1996)). A "discharge under § 727(a) is a 'privilege, not a right', that is reserved for the honest debtor who has dealt fairly with the court and his creditors." In re Jackson, 453 B.R. 789, 796 (Bankr. E.D. Pa. 2011) (citing In re Spitko, 357 B.R. 272, 298 (Bankr. E.D. Pa. 2006)). As a precondition to the bankruptcy discharge, section 727(a)(3) requires a debtor to produce enough information for creditors to determine and track the debtor's financial and business transactions for a reasonable time prior to the bankruptcy. In re Jackson, 453 B.R. 789, 796 (Bankr. E.D. Pa. 2011) (citing In re Juzwiak, 89 F.3d 424, 427 (7th Cir.1996)).

When a party objects to the discharge of a debtor, that party bears the initial burden of proving that the case falls within one of the statutory exceptions to discharge. Meridian Bank v. Alten, 958 F.2d 1226, 1232 (3d Cir. 1992). However, once a prima facie showing of inadequate record keeping is made by the creditor, "the burden of going forward to establish justification for inadequate recordkeeping rests with the debtor." In re Boyajian, 486 B.R. 306, 312 (Bankr. D.N.J. 2013), as corrected (Feb. 6, 2013) (citing Meridian Bank v. Alten, 958 F.2d 1226, 1230-31 (3d Cir. 1992)) (emphasis in original).

A. A Failure to Maintain Records

In order to state a prima facie claim under 727(a)(3), a party objecting to the discharge must show (1) that the debtor failed to maintain and preserve adequate records, and (2) that such failure makes it impossible to ascertain the debtor's financial condition and material business transactions. Meridian Bank v. Alten, 958 F.2d 1226, 1232 (3d Cir. 1992) (citing In re Decker, 595 F.2d 185, 187 (3d Cir.1979). Significantly, intent is not an element to make a case under 727(a)(3). In re Spitko, 357 B.R. 272, 305 (Bankr. E.D. Pa. 2006). "Intended concealment of a debtor's financial condition by failure to maintain appropriate records need not be established to deny discharge per § 727(a)(3) (mere failure to maintain recorded information being sufficient)." In re Boyajian, 486 B.R. 306, 312 (Bankr. D.N.J. 2013) (citing Meridian Bank v. Alten, 958 F.2d at 1234.

The standard for what constitutes a "failure to maintain" and preserve adequate records was defined by the Second Circuit in In re Underhill, 82 F.2d 258 (2d Cir.), cert. denied, 299 U.S. 546, 57 S. Ct. 9, 81 L. Ed. 402 (1936). Meridian Bank v. Alten, 958 F.2d at 1230. TheUnderhill court emphasized that what constituted sufficient record keeping varied with the facts of each case, but in all cases complete disclosure was required. Meridian Bank v. Alten, 958 F.2d 1226, 1230 (3d Cir. 1992).

The law is not unqualified in imposing a requirement to keep books or records, and it does not require that if they are kept they shall be kept in any special form of accounts. It is a question in each instance of reasonableness in the particular circumstances. Complete disclosure is in every case a condition precedent to the granting of the discharge, and if such a disclosure is not possible without the keeping of books or records, then the absence of such amounts to that failure to which the act applies.

Meridian Bank v. Alten, 958 F.2d at 1230 (quoting In re Underhill, 82 F.2d 258, 259-60 (2d Cir.), cert. denied, 299 U.S. 546, 57 S. Ct. 9, 81 L. Ed. 402 (1936)).

In determining whether the failure to keep records makes it impossible to ascertain a debtor's financial condition, the Third Circuit ruled that the test is whether "there [is] available written evidence made and preserved from which the present financial condition of the bankrupt, and his business transactions for a reasonable period in the past may be ascertained." Meridian Bank v. Alten, 958 F.2d at 1230 (quoting In re Decker, 595 F.2d 185, 187 (3d Cir. 1979)). In the Meridian case, the Third Circuit overturned a bankruptcy court's grant of discharge after finding the debtors maintained "scant or no records of their business, professional or personal transactions" Id. at 1228.

Other courts have described it in the following manner: "A debtor's records must be such that '[c]reditors . . . [are] not [ ] forced to undertake an independent investigation...