APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA D.C. Nos. B-71-138, 71-139, 71-140 in Bankruptcy
Before Hunter and Weis, Circuit Judges, and Stapleton,*fn* District Judge.
Martin M. Decker, the bankrupt, appeals from the district court's judgment denying him a discharge in bankruptcy under section 14c(2) of the Bankruptcy Act, 11 U.S.C. § 32(c)(2) (1976). The district court, in affirming the bankruptcy judge, determined that Decker failed to keep or preserve books of account or records from which his financial condition and material business transactions might be ascertained. Because we believe that the bankruptcy judge improperly imposed on the bankrupt, rather than the Trustee, the burden of proof with regard to the adequacy of the records, we reverse.
Decker was a real estate developer in the Philadelphia area, owning and managing office buildings, luxury high-rise apartment buildings, and other income producing property. On February 12, 1971 three creditors filed an involuntary petition in bankruptcy against him. Shortly thereafter, Decker filed a voluntary petition for a real property arrangement under Chapter XII of the Bankruptcy Act, 11 U.S.C. §§ 801-926 (1976). Price Waterhouse & Co., which had been retained by Decker to assist in the preparation of a financial statement, reported that as of the date of the filings, Decker had assets of $62 million and liabilities of $56 million. However, Decker did not file a plan for the satisfaction of his debts, and on July 10, 1972 he was adjudged bankrupt.
On September 6, 1974 the Trustee in Bankruptcy, Morris Gerber, filed a complaint under section 14c of the Bankruptcy Act objecting to Decker's discharge in bankruptcy. After a hearing, the bankruptcy judge found no merit in the Trustee's objection and granted the discharge. The Trustee appealed and the district court remanded "for the purpose of (the Trustee's) presenting all relevant testimony to support (his) position." Before hearing the case on remand, the bankruptcy judge who had handled the case since its filing retired, and a replacement was appointed.
The newly appointed bankruptcy judge considered three objections by the Trustee to Decker's discharge. Two of the grounds, essentially alleging intentional concealment of property, were dismissed. However, on April 4, 1977 the bankruptcy judge denied the discharge solely on the basis of the Trustee's third objection, that Decker had failed to keep books of account or records from which his financial condition and material business transactions might be ascertained.
The bankruptcy judge noted two major record keeping errors which he used to justify a denial of the discharge. First, the court listed ten specific journal entries which he stated "disclose(d) a pattern of careless, haphazard bookkeeping uniquely ill-suited to an enterprise of the size and complexity of the Decker organization." Generally, the entries illustrated Decker's failure to record major transactions until several months after they had occurred. The judge noted, however, that documentation existed to support each questionable entry. Second, and of particular importance in his opinion, the judge cited testimony by the Trustee's accountant which indicated that Decker's cash ledger account reflected at least $200,000 and perhaps as much as $370,000 for which an origin could not be ascertained. The bankruptcy judge noted that "(a)ll the other myriad inadequacies of the Bankrupt's bookkeeping system pale by comparison."
In reviewing the evidence, the bankruptcy judge placed the burden on the Bankrupt to disprove the Trustee's allegations of inadequate records. He stated that "(i)f the evidence is in a state of "substantial equilibrium,' the discharge should be denied." Further, he explained that he ruled "against (the Bankrupt) only where no explanation was available." Thus, the bankruptcy judge held that Decker had not demonstrated that he had fulfilled the "high degree of duty to present to his creditors, represented by the Trustee, a substantially accurate and complete record of his affairs" and denied the discharge.
On appeal the district court regarded the bankruptcy court's determination that Decker's records were inadequate within the meaning of section 14c(2) as a finding of fact. Reviewing under the clearly erroneous standard, the court affirmed the denial of the discharge. Decker appeals.
Section 14a of the Bankruptcy Act, 11 U.S.C. § 32(a), provides that "the adjudication of any person, except a corporation, shall operate as an application for a discharge." A bankrupt is entitled to a discharge unless the court is satisfied that the bankrupt has committed one of the acts listed in section 14c. Here, the Trustee filed a complaint under section 14c(2).*fn1 To prevail, the Trustee must show that the Bankrupt failed to keep or preserve books of account or records and that the failure makes it impossible to ascertain the financial condition and material business transactions of the bankrupt. In re Leichter, 197 F.2d 955, 958 (3d Cir. 1952), Cert. denied, 344 U.S. 914, 73 S. Ct. 336, 97 L. Ed. 705 (1953); 1A Collier on Bankruptcy P 14.33, at 1370 (14th ed. 1973). While "the statute does not exact as a condition precedent to the granting of a discharge the keeping of an impeccable system of bookkeeping which would meet the approval of a skilled accountant or records so complete that they would satisfy an expert in business," the records must "sufficiently identify the transactions that intelligent inquiry can be made of them." Johnson v. Bockman, 282 F.2d 544, 546 (10th Cir. 1960). 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." In re Underhill 82 F.2d 258, 260 (2d Cir.), Cert. denied, 299 U.S. 546, 57 S. Ct. 9, 81 L. Ed. 402 (1936).
While the trial court has wide discretion in determining whether the books or records are sufficient within the meaning of the statute, Goff v. Russell Co., 495 F.2d 199, 202 (5th Cir. 1974), this court has stressed the "well-settled principles that the right to a discharge is statutory, and that Section 14 of the Bankruptcy Act must be construed strictly as against the objector and liberally in favor of the bankrupt." In re Leichter, 197 F.2d 955, 959 (3d Cir. 1952), ...