Lassman v. Keefe

In re
JOHN J. KEEFE, III,
Debtor
______________________________________
DONALD R. LASSMAN, as he is
CHAPTER 7 TRUSTEE,
Plaintiff
v.
JOHN J. KEEFE, III,
Defendant
U NITED STATES BANKRUPTCY COURT
D ISTRICT OF MASSACHUSETTS
Chapter 7
Case No. 05-11781-RS
Adversary Proceeding
No. 06-1198
MEMORANDUM OF DECISION
By his complaint in this adversary proceeding, Donald R. Lassman, as he is Chapter 7
trustee in this bankruptcy case, objects to the discharge of the defendant and debtor, John J.
Keefe, III, under 11 U.S.C. § 727(a)(3) on the basis that he destroyed certain documents and
records from which his financial condition or business transactions might be ascertained. The
matter having been duly tried and briefed, the Court now enters the following findings of fact
and rulings of law. 	For the reasons set forth below, the debtor shall be denied a discharge.
FACTS AND PROCEDURAL HISTORY
The debtor, John J. Keefe III, is a carpenter and homebuilding contractor. In or around
1997, after working for his father’s contracting business for some years, he went into business
for himself by incorporating, KRK Development, Inc. (“KRK”), of which he was, at all relevant
times, the sole shareholder, officer, and director. By 2004, KRK had approximately eight
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employees and was handling 12 to 15 large projects simultaneously, each involving contracts for
several hundreds of thousands of dollars. Keefe oversaw the entire enterprise but brought little
business sense or record keeping ability to the task 	Except for a period of one or two years
(2001 to 2002) in which Keefe hired a payroll assistant to oversee KRK’s payroll—she kept
track of employee hours, wrote payroll checks, and kept some payroll records—the corporation
had no record keeper other than Keefe himself. For the most part, he kept the corporation’s
records in a large plastic bin. The bin included the corporation’s bank records, consisting of
monthly statements and cancelled checks from three or four banks, with each bank’s records in a
shoe box of its own. One of these accounts was in the name of Keefe himself, doing business in
the name of the corporation, but I have no evidence as to which account that was and which time
period it related to. The bin also included file folders for each of the projects on which KRK was
working. Each folder included the contract for the project and various receipts and other
documents related to the project. Aside from the ledgers for KRK’s various checking accounts,
Keefe did not maintain a cash flow ledger for KRK. 	The bin was kept in KRK’s office, which,
after two previous locations, was located in Keefe’s own home in 2004 and the early months of
2005.
In the spring of 2004, KRK began experiencing cash flow problems that arose from non-
payment by a client who owed a substantial sum, from underbidding on other projects, and from
Keefe’s inability to serve as foreman on the many jobs that KRK was handling at once—the
employees he hired to do the job in his stead did not have his talent for cost containment. The
crisis only snowballed. KRK was unable to complete certain of its projects and, in essence, had
to walk away from them. In one instance, it abandoned a project on which it had received a
$100,000 advance for work that KRK had not completed.
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In August of 2004, Keefe consulted a bankruptcy attorney about his problems. By the
winter of 2004-2005, Keefe had become seriously depressed about KRK’s financial troubles.
His clients had begun to harass him—some had hired a sheriff to serve IRS Forms 1099 on him
on Christmas eve in 2004. He was physically threatened on more than one occasion. Some
clients circulated a slanderous letter about him to suppliers, subcontractors, and inspectors with
whom he regularly did business. The mere sight of the plastic bin containing the business’s
financial records would make him ill. Sometime between December 2004 and February 2005, he
relieved himself of this immediate problem by driving the bin to, and depositing it in, a dumpster
belonging to a roofing contractor friend. He thus essentially destroyed the records contained in
the bin.
Not all the corporation’s records were destroyed. He retained a disc or zip drive
containing the payroll records maintained by the payroll assistant he’d employed in 2001 and
2002. He also had retained the file relating to the project on which the client had defaulted, a
receivable he estimated at $200,000.
The trustee implies that Keefe discarded the bin of records with intent to hinder, delay, or
defraud his creditors and possibly the trustee himself. I find no evidence to support this. There
is no evidence that he destroyed the records or dealt with his clients with intent to hinder, delay,
or defraud. The evidence suggests that he simply had gotten in over his head. Seeing no way
out, he finally buckled under the pressure by destroying the records, which, as a human reaction
(though not a business practice) is understandable enough.
On March 11, 2005, Keefe filed a petition for relief under Chapter 7 of the Bankruptcy
Code. In his schedules he listed unsecured debts totaling approximately $1,000,000, consisting
mostly of obligations to clients, suppliers, and subcontractors of the construction business. It is
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1 Keefe testified whenever he received a payment from a client, he would make a
notation to that effect on the client’s contract. Aside from check registers, I have no evidence of
other self-generated records.
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not clear whether these obligations are truly his own or those of KRK.
Donald Lassman was appointed chapter 7 trustee in Keefe’s bankruptcy case. Keefe
disclosed to Lassman that he had discarded the records in the plastic bin. Lassman asked Keefe
to produce certain records. Keefe did produce records of certain real estate transactions from
sale of his home and of another home that his wife had owned before they married. Keefe also
told Lassman that he had made inquiry at the banks with whom he had done business about
obtaining copies of the records that he had discarded, and that the banks had told him he would
have to pay for retrieval of the records, and that cost might be substantial, more than Keefe could
afford. 	Lassman asked Keefe to inquire into the cost. Keefe apparently made initial inquiries
but met with resistance and then didn’t follow up and also didn’t keep Lassman informed of his
progress. However, close to the time of trial (held May 2, 2007), Keefe finally succeeded in
obtaining records from one of the three banks. Inexplicably, neither the debtor nor the trustee
moved to subpoena the records from the banks under Rule 2004.
The discarded bank records could have been recovered by subpoenaing the records in
question from the various banks. The discarded project records could not have been so easily
reconstructed. Some of these documents could have been obtained by subpoenaing records from
clients, suppliers, inspectors, and subcontractors, but, in view of the number and nature of the
sources, the cost, time, and logistical difficulties would be prohibitive, especially where the
estate had no funds with which to proceed and Keefe himself had little money to pay the banks’
retrieval fees. The discarded records also included Keefe’s notations on the records; these
notations are lost forever.1
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DISCUSSION
Section 727(a)(3) states that
(a) The court shall grant the debtor a discharge, unless–
(3) 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). The initial burden is on the party objecting to discharge to prove two
things: (i) that the debtor “concealed, destroyed, mutilated, falsified, or failed to keep or
preserve any recorded information”; and (ii) that the recorded information was information
“from which the debtor’s financial condition or business transactions might be ascertained.” The
plaintiff need not establish specific intent of any kind. If the party objecting to discharge proves
these two requirements, the burden then shifts to the debtor to prove that “such act or failure to
act was justified under all of the circumstances of the case.” Campana v. Pilavis (In re Pilavis),
244 B.R. 173, 176 (BAP 1st Cir. 2000) (debtor must come forward with justification).
The act on which the trustee is proceeding against the debtor is solely his destruction of
records by discarding of the bin of bank records and project folders. The trustee has also
adduced evidence that the debtor failed to keep—“keep” here meaning generate, not
retain—records of the business activities of his contracting business. However it is clear from
his complaint and his pretrial statement that the gravamen of the complaint is that “he destroyed
relevant financial records.” Joint Pretrial Statement, p. 7 (statement summarizing the plaintiff’s
case); Complaint, ¶ 13. The debtor admits that he destroyed the records contained in the plastic
storage bin. The plaintiff’s first element is therefore established.
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The plaintiff must next establish that the recorded information that was destroyed was
information “from which the debtor’s financial condition or business transactions might be
ascertained.” The records contained in the bin were, for the most part, records of KRK, a
corporation separate and distinct from Keefe; they are not per se information from which the
debtor’s financial condition or business transactions might be ascertained.
However, the debtor listed a number of KRK’s clients, suppliers, and subcontractors as
creditors in his schedules, including three clients with claims of $150,000 or more. At least one
client has filed a proof of claim in this case. It has not been established that the claim of this
client, or the claims of the listed clients, suppliers, and subcontractors, are valid claims against
the debtor (as opposed to KRK). Nonetheless, the debtor anticipated that these entities might
assert claims against him personally, and the project files would clearly be relevant to
determining the validity of these claims as against him.
I also note that the discarded bin included the records of one bank account that the debtor
testified he had maintained in his own name (albeit d/b/a KRK). I surmise that the activity in
that account was, by virtue of the fact that the records were contained in the bin, activity relating
almost entirely to the contracting business of KRK. Nonetheless, where the account was in
Keefe’s own name, it would on its face be relevant to determining Keefe’s own financial
condition and business transactions. However, the bin apparently included records going back
many years, and Lassman has not established that the account in question pertained to the two
years immediately preceding the bankruptcy filing, when KRK’s troubles began. As to this
account, therefore, I find that relevance has not been established.
The trustee has established that the debtor destroyed project records and that these were
records from which the debtor’s financial condition or business transactions might have been
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ascertained. The burden now shifts to the debtor to prove that the destruction of these records
“was justified under all of the circumstances of the case.” Keefe’s effort at justification includes
four components: (i) he did not destroy the records with intent to hinder, delay, or defraud
creditors or the trustee; (ii) in destroying the records, he was simply reacting to the records as the
source of his depression and anxiety; (iii) the destroyed records can be recovered by various
means; and (iv) he made a good faith attempt to recover the bank records but was stymied by the
cost and by the unwillingness of the banks to produce the record except for a fee, and then only
at their own pace.
The debtor has failed to establish that the destruction of the records was justified. His
intent in destroying the records was benign, but the records were destroyed nonetheless, and
their destruction has greatly hindered the trustee in ascertaining the debtor’s financial condition
and financial transactions. An act is justified if it is right or appropriate in the circumstances.
There is no sense in which the destruction of the project records can be viewed as right, good, or
appropriate. Keefe himself testified that he fully expected to see a number of law suits arising
from the projects that KRK had abandoned. As he was well aware, there remained unresolved
legal issues arising from these projects, issues to which the discarded records would be relevant.
The necessity of the records makes their destruction unjustified.
If the records could be recovered easily and without much cost, perhaps their destruction
would be deemed justified in the sense that the destruction was inconsequential. That is not the
case here. The project records cannot be retrieved except at prohibitive expense. The
destruction
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of the records was not inconsequential and was not justified. It follows that the debtor must be
denied a discharge. A separate judgment shall enter accordingly.
Date: December 27, 2007 	_______________________________
Robert Somma
United States Bankruptcy Judge
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