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Meridian Bank v. Alten

argued: January 6, 1992.


On Appeal from the United States District Court for the District of New Jersey. D.C. Civil No. 89-2988

Before: Cowen, Nygaard and Weis, Circuit Judges

Author: Cowen


COWEN, Circuit Judge.

In this bankruptcy case the bankruptcy court entered an order discharging the debtors even though they maintained few if any records of their financial dealings. The district court reversed. We will affirm the district court, based on a Conclusion that the debtors did not meet their burden of justifying failure to keep adequate records under 11 U.S.C. § 727(a)(3) (1988).


Eugene Alten and Marlene Alten (collectively "the Altens" or "the debtors") personally guaranteed a loan from Meridian Bank (Meridian) for a development project which failed. Meridian thereafter obtained a judgment against the Altens for $3,836,181. At that point the Altens stopped using bank or other financial accounts for their financial transactions and began dealing only in cash and money orders. The Altens candidly acknowledged their reason for doing so was to avoid having bank or other financial accounts upon which their creditors could levy liens or effect collections. They maintained scant or no records of their business, professional or personal transactions, again to avoid having to pay the Meridian judgment or other debts.

Mr. Alten is an attorney licensed to practice law in Pennsylvania since 1958, and is also a member of the bar of the United States Tax Court. He has been self-employed as an international investment and real estate consultant since 1982. Prior to 1977 he engaged in the private practice of law specializing in real estate. Between 1977 and 1980, following entry of the Meridian judgment, Alten was a consultant and chief operating officer for several Atlantic City enterprises all of which dissolved by 1980.

The Altens filed for bankruptcy under Chapter 7 on May 22, 1985, seeking to discharge the Meridian debt. Meridian opposed the discharge, alleging that the Altens concealed their assets, failed to keep records as required by the Bankruptcy

Code, and made fraudulent oaths regarding their financial affairs.

The evidence submitted to the bankruptcy court was scant. Mr. Alten's financial records for the period from 1982 through 1986, both business and personal, were virtually non-existent. The sole written records presented to the bankruptcy court of income received during that period were three handwritten sheets of paper, purporting to show income from his international consulting business and reflecting gross revenues of approximately $380,000. Mr. Alten kept no time records for his consulting practice, produced no written agreements or correspondence with clients concerning payment of fees or work performed, and had no evidence of payment of fees or expenses by clients. He produced no copies of checks or money orders reflecting payment or reimbursement of expenses. Other evidence presented to the bankruptcy court included a handwritten ledger showing dates and travel destinations, as well as income tax returns which lacked supporting documentation for $120,000 in business expense deductions Mr. Alten claimed on those returns.

Following trial the bankruptcy court found no merit in the objections of Meridian and granted the Altens a discharge in bankruptcy. The court held that the Altens' fear of levy of execution on bank and financial accounts by creditors and the nature of Mr. Alten's business justified failure to keep records. The bankruptcy court found that Mr. Alten worked at home, had sixteen clients between 1982 and 1986, and earned a net annual income of less than $50,000 during those years. It acknowledged Mr. Alten's sophistication as an attorney and experienced businessman. Nevertheless, the bankruptcy court concluded that failure to keep records was justified and discharged the Altens' debt to Meridian.

On appeal, the district court held that the bankruptcy court misapplied the record keeping provisions of the Bankruptcy Code, 11 U.S.C. § 727(a)(3),*fn1 and vacated the discharge of the Meridian judgment. The Altens and their trustee appeal to this court asserting that the decision of the bankruptcy court, finding justification in failure to keep records, was a finding of fact, and that the district court applied the wrong standard of proof in reviewing that decision.


The central issue is whether the Altens were justified in failing to keep records of financial transactions. In reviewing the bankruptcy court's decision, this court, like the district court, "applies a clearly erroneous standard to findings of fact, conducts plenary review of Conclusions of law, and must break down mixed questions of law and fact, applying the appropriate standard to each component." In re Sharon Steel Corp., 871 F.2d 1217, 1222 (3d Cir. 1989). See also Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 102-03 (3d Cir. 1981).

The Altens argue that the bankruptcy court's finding of justification was a finding of fact subject to a clearly erroneous standard of review. The Altens further argue that Rule 52(a) of the Federal Rules of Civil Procedure limits the ability of an appellate court to set aside findings of fact to instances where such findings are determined to be clearly erroneous. Similarly, Bankruptcy Rule 8013 provides in part that "findings of fact, whether based on oral or documentary evidence, shall not be set aside unless ...

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