James L. Snyder v. Daryll Dykes ( 2020 )

United States Court of Appeals
For the Eighth Circuit
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No. 18-3557
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In re: Daryll Christopher Dykes; Sharon Luster Dykes
Debtors
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James L. Snyder, United States Trustee
Appellee
v.
Daryll Christopher Dykes; Sharon Luster Dykes
Appellants
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Appeal from the United States Bankruptcy
Appellate Panel for the Eighth Circuit
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Submitted: December 12, 2019
Filed: April 3, 2020
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Before LOKEN, GRASZ, and STRAS, Circuit Judges.
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LOKEN, Circuit Judge.
Daryll and Sharon Dykes (“Debtors”) filed a voluntary petition for relief under
Chapter 7 of the Bankruptcy Code, reporting just under $400,000 in assets, over $5.6
million in liabilities, and a monthly income insufficient to cover expenses. Before the
Chapter 7 trustee finished gathering assets and administering the bankruptcy estate,
the United States Trustee objected to Debtors’ discharge in bankruptcy. See 11
U.S.C. § 727(a), (c)(1).1 After a bench trial on that issue, the bankruptcy court2
denied a discharge on various grounds. In re Dykes, No. 16-42199-KHS, 2018 WL
5819371 (Bankr. D. Minn. Feb. 26, 2018). Debtors appealed, raising numerous
issues. The Bankruptcy Appellate Panel (“the BAP”) affirmed. In re Dykes, 590
B.R. 904 (B.A.P. 8th Cir. 2018). Debtors appeal, again raising numerous issues. We
independently review the bankruptcy court’s decision, applying the same standard of
review as the BAP. In re Ungar, 633 F.3d 675, 678-79 (8th Cir. 2011). Reviewing
the bankruptcy court’s factual findings for clear error and its legal conclusions de
novo, we affirm.
I. Background.
On Schedule A/B of their July 2016 Chapter 7 petition, Debtors averred that
the only jewelry they owned was a wedding ring worth $35, a wedding band and
anniversary ring collectively worth $700, two sets of cufflinks collectively worth
$1,250, and a watch winder worth $12,000. They averred they did not have “other
property of any kind [they] did not already list” and had no ongoing monthly
expenses related to “childcare or children’s education costs.” On their Statement of
Financial Affairs (“SOFA”), Debtors disclosed that in the ninety days before the
1
The Chapter 7 trustee represents the bankruptcy estate. The United States
Trustee “may be compared with a prosecutor, and serves as a bankruptcy watchdog
to prevent fraud, dishonesty, and overreaching.” Charges of Unprofessional Conduct
Against 99-37 v. Stuart, 249 F.3d 821, 824 (8th Cir. 2001) (cleaned up). In this
opinion, “the Trustee” refers to the United States Trustee, not the Chapter 7 trustee.
2
The Honorable Kathleen H. Sanberg, Chief United States Bankruptcy Judge
for the District of Minnesota.
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petition, they paid $4,000 to North Dakota State University (“NDSU”) and $3,020 to
Lux Communities to cover their son’s tuition and rent. On Question 13, they listed
no gifts above $600. On Question 18, they claimed no transfer of any property within
the last two years, “other than property transferred in the ordinary course of [their]
business or financial affairs.”
In early September, the Trustee notified the court it had “reviewed all materials
filed” and determined that the case was “presumed to be an abuse” under 11 U.S.C.
§ 707(b). On February 1, 2017, after the bankruptcy court twice extended the
Trustee’s deadline to file an objection to discharge, Debtors filed Amended Schedules
A/B and C and an Amended SOFA. On Question 18, they now disclosed
$108,473.77 of payments relating to their son’s attendance at the NDSU and their
daughter’s attendance at the University of California, Riverside.
In a status report after a meeting of creditors, the Chapter 7 trustee noted “a
potential fraudulent transfer” issue based on the return of “twenty to thirty valuable
watches” to Ezra Bekhor of Bellusso Jewelers in Las Vegas. Bekhor filed a $413,788
unsecured claim. The Chapter 7 trustee also filed a successful motion for turnover,
securing various household items including the watch winder.
The Trustee filed its Complaint on February 15, 2017, asserting three grounds
for denying Debtors a discharge: under 11 U.S.C. § 727(a)(2)(A), for transferring
thousands of dollars to their children in the year preceding the petition with the intent
to hinder, delay or defraud a creditor; under § 727(a)(4), for failing to disclose
numerous and substantial transfers to their adult children within two years prior to
commencement of the bankruptcy case; and under § 727(a)(3), for failing to maintain
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adequate records regarding “numerous and valuable watches which were transferred
to Bellusso.”3
The Trustee’s case proceeded to trial on October 13, 2017. Both Debtors
testified to events leading up to their bankruptcy.4 About ten years prior, Mr. Dykes
was earning “well over a million dollars a year” as an orthopedic surgeon. He holds
a medical degree, a Ph.D. in molecular biology, and a law degree. Ms. Dykes holds
a medical degree and operated a solo practice specializing in colon and rectal surgery,
which brought in “several hundred thousand dollars a year.” The couple lived with
their five children in a $3 million home, built through financing provided by Alliance
Bank and homebuilder Lecy Construction.
Debtors’ fortunes declined during and after the “national foreclosure crisis” in
2008. The Alliance Bank employee who arranged their mortgage was convicted of
mortgage fraud. Alliance Bank refused to restructure the loan, and Debtors were
unable to pay a multimillion-dollar balloon payment that came due. Alliance Bank
sued and eventually recovered a judgment that is now a $2.4 million claim against the
Chapter 7 estate. In 2011, Alliance Bank foreclosed and Debtors lost their home.
When moving out in 2012, the family placed “hundreds of thousands of dollars”
worth of household goods in portable containers at Dart Storage. They did not pay
3
The Trustee later identified two additional grounds for denial of discharge in
its trial memorandum and a post-trial brief: under § 727(a)(5), for an unexplained
loss of assets regarding “household goods and furnishings” and a “substantial amount
of jewelry,” and under § 727(a)(2)(B), for transferring money to their children after
the date of filing “with intent to hinder, delay or defraud a creditor.” As we affirm
the denial of discharge under § 727(a)(3), we need not consider the bankruptcy
court’s resolution of these claims.
4
For clarity, we will refer individually to Dr. Daryll Dykes as “Mr. Dykes” and
Dr. Sharon Dykes as “Ms. Dykes.”
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rent for “nine or ten months,” and with $10,000 owing, Dart auctioned off their
belongings. Debtors made no accounting of the forfeited property.
To collect its judgment, Alliance Bank levied Mr. Dykes’s interest in his
medical practice. He left to form two new groups in late 2011. Initially successful,
the new practice struggled after passage of the Affordable Care Act and loss of
provider designations with major medical insurers. At the time of trial, Mr. Dykes
was serving as a health policy fellow in Washington, D.C. Despite these financial
strains, Debtors continued to pay a “significant majority” of their college-age
children’s educational expenses. Mr. Dykes testified those expenses were “absolutely
central to [the family’s] normal business and financial affairs.”
Mr. Dykes testified that he is an avid collector of expensive watches. Invoices
admitted at trial showed that, between November 2008 and March 2012, Mr. Dykes
purchased twenty-one watches from Ezra Bekhor of Bellusso Jewelers in Las Vegas.
Mr. Dykes testified he ultimately acquired 27 watches, as well as the watch winder.
He also purchased jewelry. The invoices showed he received a Cartier bracelet worth
$4,350, four sets of Kwait earrings collectively worth over $16,000, and a Kwait
“Bridal Collection” ring with a 3.15 carat diamond worth over $68,000.
Although every invoice recorded deliveries, few recorded payments. Only five
watches purchased in 2008 and valued at $145,650 were marked “paid.” Another
invoice documented credit received for returning three of the four sets of Kwait
earrings. Mr. Dykes testified that his relationship with Bellusso “became very
informal” once he became a regular customer. Bellusso would send him watches; he
would keep the ones he liked and return the others, with no paperwork. The
arrangement resulted in a “running total” by Bellusso as it charged and credited
watches and jewelry Mr. Dykes received and returned. By late 2011, the amount
unpaid rose to $390,700. Unable to pay, Mr. Dykes signed a confession of judgment
in that amount.
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In February 2013, to partially satisfy that judgment, Mr. Dykes returned
twenty-seven watches and the $68,000 bridal collection ring to Bekhor’s Minneapolis
attorney. Mr. Dykes documented the returns with a receipt, listing the make, model,
and serial number of each item, but not the value of the items or the balance due after
the returns. Mr. Dykes did not return the “presentation cases” in which Bellusso had
delivered the watches, which increases their value. He testified that some cases
suffered water damage in his basement, while others were lost in the storage container
auction. Of the twenty-one watches appearing on invoices introduced at trial, at most
ten appeared on the list of returned items.
After trial, the bankruptcy court denied discharge. It rejected the Trustee’s
claims under §§ 727(a)(2)(A) and (B) but agreed with the Trustee on three grounds.
First, the court denied discharge under § 727(a)(3), finding that Debtors had
unjustifiably failed to keep adequate records regarding the “purchase, sale and return
of hundreds of thousands of dollars in jewelry.” The court expressly found that Mr.
Dykes’s testimony “regarding the purchase of the watches without paperwork or
receipts” was not credible:
[I]f only for insurance purposes, a jeweler would want to make sure that
a valuable item was received by a customer and would issue a receipt.
Similarly, a sophisticated collector and customer would want
documentation regarding a return.
The court concluded that Debtors’ failure to document purchases and returns of
hundreds of thousands of dollars in watches and jewelry “makes it impossible to
ascertain [their] financial condition and material transactions.” It “defies logic that
[Debtors] did not receive or keep documents indicating the value of the returns to be
deducted from the balance owing on the Confession of Judgment.” Though Mr.
Dykes testified additional records were in the forfeited storage containers, Debtors
failed to provide any accounting of the personal property they lost in the auction.
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The bankruptcy court also denied discharge under § 727(a)(4)(A), finding that
Debtors failed to disclose substantial transfers for the benefit of their adult children,
and under § 727(a)(5), finding that they failed to document what happened to the five
valuable watches purchased in 2008 and marked as “paid” on the invoices, and failed
to provide an accounting of the assets allegedly lost in the storage containers.
On appeal, the BAP in a thorough opinion agreed with the bankruptcy court’s
determination that Debtors failed to maintain adequate records of valuable watch
transactions and failed to meet their burden to justify this lack of adequate records.
Accordingly, the BAP affirmed the denial of discharge under § 727(a)(3) without
addressing §§ 727(a)(4)(A) and (a)(5). Debtors appeal. Like the BAP, we affirm the
denial of discharge under § 727(a)(3) and decline to consider the other issues Debtors
raise on appeal.
II. Discussion.
A. Chapter 7 of the Bankruptcy Code allows debtors to discharge their debts
by liquidating assets to pay creditors. See 11 U.S.C. §§ 704(a)(1), 726, 727. Section
727(a) lists grounds for denying a discharge to prevent debtor abuse of the
Bankruptcy Code. As denial of discharge is a harsh remedy, the provisions of
§ 727(a) “are strictly construed in favor of the debtor.” In re Korte, 262 B.R. 464,
471 (B.A.P. 8th Cir. 2001). But an objecting party need only establish one ground
to support a discretionary denial of discharge by the bankruptcy court. See Union
Planters Bank, N.A. v. Connors, 283 F.3d 896, 901 (7th Cir. 2002).5
Section 727(a)(3) authorizes denial of discharge if “the debtor has concealed,
destroyed, mutilated, falsified, or failed to keep or preserve any recorded information,
5
Debtors do not argue on appeal that the bankruptcy court abused its discretion
in denying a discharge.
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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.” This provision “make[s]
the privilege of discharge dependent on a true presentation of the debtor’s financial
affairs.” In re Cacioli, 463 F.3d 229, 234 (2d Cir. 2006) (quotation omitted).
Although this court has never addressed § 727(a)(3), the BAP has applied it in
numerous cases. See, e.g., In re Swanson, 476 B.R. 236, 240-41 (B.A.P. 8th Cir.
2012).
To present a prima facie case under § 727(a)(3), the objecting party (here, the
Trustee) 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). 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.” Id. at 1230 (quotation omitted). “The debtor is required to take such
steps as ordinary fair dealing and common caution dictate to enable the creditors to
learn what he did with his estate.” In re Wolfe, 232 B.R. 741, 745 (B.A.P. 8th Cir.
1999) (quotation omitted). If the Trustee meets that initial burden, “the burden of
production shifts to the debtor to offer a justification for his record keeping (or lack
thereof); however, the objecting party bears the ultimate burden of proof with respect
to all elements of this claim.” In re Swanson, 476 B.R. at 240. These are questions
of fact. Section 727(a)(3) embodies an objective standard of reasonableness; it does
not require proof of intent. In re Wolfe, 232 B.R. at 745.
B. We agree with the BAP that the Trustee met its initial burden because
Debtors’ failure to keep adequate records left the bankruptcy court “without a way to
determine the exact transactions between the Debtors and the jeweler.” We do not
agree with the Trustee that Debtors had the same “duty to create and preserve
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records” of their watch and jewelry transactions as a Chapter 7 debtor operating a
business with substantial assets that is the focus of the bankruptcy case. But even in
a consumer bankruptcy, the debtor has a greater duty to keep records of “a sudden and
large dissipation of assets.” 6 Alan N. Resnick & Henry J. Sommer, Collier on
Bankruptcy ¶ 727.03[3][g] at 727-34 (16th ed. 2019).
Mr. Dykes’s return of twenty-seven valuable watches and the Kwait bridal
collection ring to Bekhor, a judgment creditor, was such a “sudden and large
dissipation of assets.” See, e.g., In re Buzzelli, 246 B.R. 75, 113-14 (W.D. Pa. 2000)
($190,000 art and wine collections). Nor was Mr. Dykes a typical consumer debtor.
He was a sophisticated collector of highly valuable watches and jewelry, and his
purchase and return transactions had a significant impact on Debtors’ financial
condition. The transactions also impacted the legitimacy of the jeweler’s bankruptcy
claim for the complete Confession of Judgment, despite Mr. Dykes’s testimony that
he returned the watches to partially satisfy that judgment. The only record of the
returns was a receipt that utterly failed to substantiate the financial effect of the
transaction. This was sufficient evidence to shift the burden of production to Debtors
to justify their lack of adequate records.
C. In determining whether a debtor’s record keeping was justified, the
Bankruptcy Code “requires the trier of fact to make a determination based on all the
circumstances of the case.” Meridian Bank, 958 F.2d at 1231. The inquiry turns on
factors such as the education, experience, and sophistication of the debtor; the volume
and complexity of the transactions; and “any other circumstances that should be
considered in the interest of justice.” Id. (quotation omitted). For this inquiry, “the
trial court must first determine what records someone in like circumstances to [the
Debtor] would keep.” In re Sendecky, 283 B.R. 760, 764 (B.A.P. 8th Cir. 2002).
We agree with the BAP and the bankruptcy court that Debtors failed to justify
their failure to keep adequate records. At the time Mr. Dykes returned the watches
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to Bellusso, Debtors were considering bankruptcy, and creditors were circling.
Alliance Bank, a judgment creditor, had foreclosed Debtors’ home and levied Mr.
Dykes’s interest in his medical practice. Lecy Construction was another substantial
judgment creditor. In these circumstances, a reasonable person would insist on
documenting the impact of this transaction on his financial condition. See In re
Caneva, 550 F.3d 755, 762 (9th Cir. 2008) (undocumented $500,000 payment to third
party); In re Gordon, 83 B.R. 78, 81 (Bankr. S.D. Fla. 1988) (undocumented sales of
jewelry); In re Young, No. 08-32333 RTL, 2010 WL 4777626, at *9 (Bankr. D.N.J.
Nov. 15, 2010) (failure to document resale of consumer goods purchased on credit).
Mr. Dykes, a sophisticated, highly educated debtor, understood the consequences of
the transaction. Yet the bankruptcy court found his testimony not credible.
Debtors argue that Mr. Dykes had no way of knowing the fair market value of
the watches at the time of their return. That may be true. But he could have matched
each watch with an invoice in his possession, noted the purchase price charged by
Bellusso, and demanded that Bekhor document the amount each returned watch
would reduce his unpaid judgment. This information would have permitted Mr.
Dykes at the time, and the Chapter 7 trustee after the petition was filed, to challenge
Bekhor’s unsecured claim for the full amount of his confession of judgment.6 Instead,
Debtors provided no records supporting the valuation of the returned watches.
Moreover, the mismatches between the watches listed on the receipt and the invoices
introduced at trial created serious, unanswered questions as to the whereabouts of
many of these assets as well as the legitimacy of Bekhor’s bankruptcy claim.
6
In April 2017, after the Trustee filed its discharge claim but before trial,
Bekhor filed an amendment reducing his unsecured claim to $300,669.84 without
explanation. We express no view as to the legitimacy of that claim. That is an issue
for the Chapter 7 trustee in administering the bankruptcy estate.
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III. Conclusion.
For these reasons, we agree with the BAP that the bankruptcy court did not err
in denying Debtors a discharge in bankruptcy under 11 U.S.C. § 727(a)(3) based on
its findings that Debtors unjustifiably failed to keep adequate records of financially
significant watch and jewelry transactions. Like the BAP, we need not address the
bankruptcy court’s alternative rulings denying discharge under §§ 727(a)(4)(A) and
(a)(5). The judgment of the bankruptcy court is affirmed.
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