Kistler v. Fader

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	) Bankruptcy Case
) No. 08-30119DM
PETER R. FADER dba Urchin Capital 	)
Partners, dba Urchin Partners, LLC,)
)
Debtor. 	) Chapter 7
___________________________________)
SARA L. KISTLER, Acting United 	) Adversary Proceeding
States Trustee for Region 17, 	) No. 08-3080DM
)
Plaintiff, 	)
)
v. 	)
)
PETER R. FADER, 	)
)
Defendant. 	)
___________________________________)
MEMORANDUM DECISION ON OBJECTIONS TO DISCHARGE
I. 	Introduction
Plaintiff Sara L. Kistler, Acting United States Trustee for
Region 17 (“UST”), commenced this adversary proceeding against
Chapter 7 Debtor Peter R. Fader (“Fader”) seeking to deny his
discharge. 	The complaint alleges that Fader failed to explain the
loss of funds from bank accounts he owned and controlled from
early April, 2005, until the date of his bankruptcy case in
January, 2008, in violation of Section 727(a)(5) (First Cause of
Signed and Filed: July 03, 2009
________________________________________
DENNIS MONTALI
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
July 07, 2009
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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1 Unless otherwise indicated, all chapter, section and rule
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037, as
revised by The Bankruptcy Abuse Prevention and Consumer Protection
Act of 2005, Pub. L. 109-8, 119 Stat. 23.
2 The following discussion constitutes the court's findings
of fact and conclusions of law. 	Fed. R. Bankr. P. 7052(a).
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Action). 1
As an additional count UST alleged that Fader kept no
personal books and records regarding substantial cash expenditures
in violation of Section 727(a)(3) (Second Cause of Action).
Finally, the UST alleged that Fader transferred funds to hinder,
delay or defraud a creditor and thus discharge should be denied
under Section 727(a)(2)(A) (Third Cause of Action).
Fader denied all material allegations.
Trial was held on May 26, and May 27, 2008. 	UST appeared and
was represented by Patricia A. Cutler, Trial Attorney; Fader
appeared and was represented by William F. Abbott, Esq.
The court has considered the testimony of the witnesses, the
documentary evidence submitted and the arguments of counsel. 	For
the reasons set forth in this Memorandum Decision, the court will
award judgment to Fader and grant him his discharge. 	Because of
this result there is no need to address Fader’s unsupported
argument that the UST, as an agent of the government, must meet a
“clear and convincing” standard of proof rather than a
“preponderance of the evidence” standard as advocated by the UST.
II. 	Facts 2
In 2005, Fader formed, and was the 100% owner of, Urchin
Partners, LLC (“UP”); he also formed Urchin Capital Partners, LLC
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3 The court makes no determination whether treating personal
expenses as capital withdrawals is proper under applicable state
and federal tax law.
4 The court admonishes Fader’s counsel for condoning - or at
least permitting - blanket entries of this nature.
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(“UCP”) and owned 76% of UCP, a licensed and regulated broker-
dealer. 	UP acted as the management company for UCP, paying its
various expenses under expense sharing agreements. 	A great deal
of Fader’s personal expenses were paid by UP and apparently booked
by UP as withdrawals of capital. 3
Fader borrowed millions of dollars personally and did so to
keep UP liquid and to permit it to pay various lenders in order to
keep UCP operating.
During early 2005, up until the time of his bankruptcy, Fader
withdrew varying sums of money from his personal bank account at
Wells Fargo Bank, a UP account at Wells Fargo Bank, and another UP
account at First Republic Bank.
In March, 2007, Christopher Allick obtained a judgment
against Fader for $248,376.70. 	After that Fader used his personal
Wells Fargo Bank account infrequently, stating at trial and in
pretrial depositions varying reasons why he did not use the
account after the date of the Allick judgment.
Fader filed a voluntary Chapter 7 petition on January 26,
2008. 	In his amended schedules he disclosed unsecured debt
totaling $10,471,054. 	All of the creditors other than the
Internal Revenue Service were marked as “disputed;” nothing was
demonstrated at trial that establishes that there are any disputes
to those unsecured claims. 4
Prior to commencement of this adversary proceeding the UST,
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Fader’s counsel and Fader communicated frequently concerning the
UST’s desire to unravel confusing accounting records, bank
statements, general ledgers, etc. to establish a record of and
reconciliation for various transactions in and out of Fader’s and
UP’s and UCP’s bank accounts. 	By April 1, 2009, UST’s financial
expert, Ms. Patricia Martin, was unable to account for various
disbursements to Fader totaling $235,267 (see Exhibit 3). 	That
exhibit details $181,920.28 obtained by Fader from the UP bank
account.
After Ms. Martin prepared her accounting Fader’s accountant,
Jill Anderson, submitted a declaration in response to a request to
her to analyze the accounting of funds received and expended by UP
and UCP between May 1, 2005 and January 31, 2008, on behalf of
Fader. 	Ms. Anderson provided information previously unavailable
to Ms. Martin that caused Ms. Martin to prepare a supplemental
declaration (Exhibit 32) wherein she concluded that an additional
$381,340 was unaccounted for; in addition to that amount she
identified $11,030 of unexplained ATM withdrawals from Fader’s
personal account, resulting in a total, as of the time of trial,
of $627,637 that Fader was unable to account for. 	Those amounts
were a combination of withdrawals from bank accounts, checks paid
to Fader, ATM withdrawals by Fader, and cash paid to Fader for
which Ms. Martin found no support.
At trial Fader called as a witness Mr. Brian Dennen who
served as UCP’s Chief Compliance Officer and who kept the books of
UP although he had no position with it. 	Mr. Dennen prepared trial
Exhibit A, identified as his accounting of the so-called
unexplained expenses established first in Ms. Martin’s Exhibit 3
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5 There is a $20,000 disbursement on July 13, 2005, for
“broker-dealer exchange” that has not been questioned.
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and later in her Exhibit 32 (other than the $11,030 in ATM
withdrawals). 	According to Mr. Dennen, Ms. Martin’s total could
be reduced by $136,014.92 for “cash withdrawals for misc expenses”
and an additional $478,995.48 as “items discovered” leaving an
unexplained expense of $1,598.30. 	Exhibit 1 did not deal with the
$11,030 in ATM withdrawals identified by Ms. Martin.
Mr. Dennen’s explanation is incomplete in that he attempts to
explain $348,800 with only four labels: “Repayment to Boal”;
“Fader Personal”; “Amy child support”; and “SFCS.” 5 	The first
item represented a $187,500 repayment of an obligation from Fader
to Steven Boal that Ms. Martin conceded at trial was a payment
Fader properly accounted for.
The entries “Amy child support” and “SFCS” together represent
domestic support obligations Fader owed to his former wife or to
the San Francisco Child Services Agency for the benefit of his
children and relate to the same domestic support obligations.
Finally, “Fader Personal” is not analyzed in any detail.
As the trial continued Mr. Dennen and Ms. Martin described
their attempts to reconcile Fader’s finances. 	By the time they
were finished, Mr. Dennen conceded that at least $74,000 was
unaccounted for; there remained an additional $136,014 of cash
withdrawals. 	Mr. Dennen and Fader contended that those two
amounts together (rounded to $210,000) had been expended by Fader
over a two and one-half year period on meals, taxis, daily
expenses, and related charges when Fader was traveling to New York
and Boston and conducting his business of UCP.
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A significant difference between Mr. Dennen’s and Ms.
Martin’s calculations has to do with payments made to SFCS. 	She
contrasts Fader’s contention that he paid $7,500 per month to
SFCS, or $90,000 a year, against SFCS’s receipts in 2005 and 2006
that she reviewed, and found them to be short by $124,000. 	The
problem the court has with Ms. Martin’s approach is that the fact
that monies were not paid to SFCS does not mean that they were
diverted or unexplained by Fader.
Because the court does not equate nonpayment of child
support with unaccounted or unexplained use of actual dollars, Ms.
Martin’s figure must be discounted; exactly how much is not
relevant.
III. 	Discussion
On an objection to discharge the debtor is entitled to a
strict construction of the statutory grounds for objection because
of the policy of giving debtors a fresh start. 	Lansdowne v. Cox
(In re Cox), 41 F.3d 1294 (9th Cir. 1994)(citing Matter of Kasler,
611 F.2d 308, 310 (9th Cir.1979) (in turn citing Gleason v. Thaw,
236 U.S. 558, 562, 35 S.Ct. 287, 289, 59 L.Ed. 717 (1915)); see,
also In re Bugna, 33 F.3d 1054, 1059 (9th Cir. 1994) (“The
[Bankruptcy] Code is designed to afford debtors a fresh start, and
we interpret liberally its provisions favoring debtors”).
The UST as plaintiff has the burden of proving an objection
to discharge. 	Fed. R. Bankr. P. 4005. 	She has not carried her
burden on the Third Cause of Action. 	While relying on cases such
Bernard v. Schaefer (In re Bernard) 96 F.2d 1279 (9th Cir. 1996),
that involve actual transfers from one bank account to another to
cause a debtor to lose a discharge for a fraudulent transfer or
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concealment, the UST has only proven that Fader generally stopped
using his personal Wells Fargo Bank account after Mr. Allick
obtained his judgment. 	There were a few deposits and withdrawals
after that. 	This does not amount to a transfer at all, but rather
simply the utilization of a different source of funds. 	Even if it
did amount to a transfer, the UST has not demonstrated that Fader
did so with intent to hinder, delay or defraud Mr. Allick or any
other creditor or officer of the estate. 	There is insufficient
evidence in the record for the court to draw an adverse inference
to satisfy the UST’s burden. 	Accordingly, Fader is entitled to
judgment in his favor on the Third Cause of Action.
The First and Second Causes of Actions are somewhat
interrelated and present a much greater challenge to Fader.
Under §727(a)(5) a failure to account for assets or a deficiency
of assets is an element of a failure to keep books. 	6 Collier on
Bankruptcy ¶ 727.08 at 727-47 (15th ed. rev. 2009). 	The objector
(here the UST) must prove a disappearance of substantial assets,
in which case the burden shifts to the debtor to explain those
assets. 	Chalik v. Moorfield (In re Chalik), 748 F.2d 616 (11th
Cir. 1984; see also, First Federated Life Ins. Co. v. Martin (In
re Martin), 698 F.2d 883 (7th Cir. 1983).
The same initial burden on the plaintiff and subsequent shift
to the defendant applies when the charge is failure to keep
adequate books and records under § 727(a)(3). 	Caneva v. Sun
Communities Oper. Ltd. P’ship (In re Caneva), 550 F.3d 755 (9th
Cir. 2008; Cox, supra. 	Fader is a sophisticated business person.
As such he can be held to a higher standard of accountability and
record keeping. 	Meridian Bank v. Alten (In re Alten), 958 F.2d
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1226 (3rd Cir. 1992). 	And while section 727(a)(3) does not
require absolute completeness in the records, it does require a
debtor to keep and preserve records that will enable his creditors
to accurately ascertain his financial condition and business
transactions. 	Caneva, 550 F.3d at 762, quoting Rhoades v. Wikle,
453 F.2d 51 (9th Cir. 1971).
Efforts by the UST to account for Fader’s assets before the
adversary proceeding was filed were unsuccessful. 	After the case
proceeded prior to trial, the search for the unknown continued.
While a great deal of evidence was submitted, and much of Fader’s
financial history has been reconstructed (not without substantial
effort by the UST) the fact remains that over $200,000 has not
been documented with adequate records that Fader should have
maintained.
Without adequate records, the debtor must provide adequate
explanations. 	Id.,at 762-3, relying on Cox. 	That case in turn
held that justification for failure to keep adequate records will
depend on how others in like circumstances would keep their
records. 	Fader offered no such evidence, which is not
surprising, given the incompleteness of the records presented and
the difficulty first Ms. Martin and then and then Ms. Anderson and
Mr. Dennon had in explaining Fader’s financial affairs. 	But the
court does not believe that Caneva and Cox foreclose an adequate
explanation for incomplete records even in the absence of proof of
what others do.
What this case boils down to, then, is whether the court
accepts Fader’s explanation that he expended over $200,000 drawn
from ATM’s or cashed from his and UP bank accounts and expended
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that amount while engaged in his business over a long period of
time and while he traveled cross-country frequently, paying for
meals, taxis, hotels and other similar expenses. 	The court does
accept that explanation, not because it condones the practice but
because it is credible and has not been rebutted. 	In this day
and age it is hard to imagine why many of those expenses would not
have been handled by credit cards, and certainly one who deals in
cash transactions may draw an inquisitive look. 	But that is not
the point; the critical inquiry is whether Fader has explained
satisfactorily the apparent absence of cash (section 727(a)(5))
and justified the lack of records (section 727(a)(3)). 	He has.
From the foregoing the court has concluded that Fader simply
used UP and the proceeds of his friends personal loans to run his
business and run his life. 	He purposely chose a small amount of
salary to withdraw from UP, a questionable practice in itself if
he was receiving funds for nonbusiness expenses such as payment of
personal rent, etc., when those amounts presumably should have
been reported as income. 	This case, however, is not about tax
liability. 	It is about whether, considering all of the
circumstances, the UST can unravel this financial quagmire and
figure out Fader’s financial condition and business transactions,
and if not, whether Fader is able to explain a deficiency in his
assets to meet his liabilities and why some of his financial
transactions lack documentation.
Given the “fresh start” principle and the presumption in
Fader’s favor, together with the interrelation of the dual
requirements of maintaining adequate records and accounting for
assets, or explaining the absence of one or the other, the court
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concludes that Fader is entitled to judgment on the First and
Second Causes of Action and is entitled to his discharge.
IV. 	Conclusion
The court is concurrently entering a judgment granting
Fader’s discharge.
**END OF MEMORANDUM DECISION**
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