United States Bankruptcy Appellate Panel
`FOR THE EIGHTH CIRCUIT
`
`No. 02-6023MN
`
`
`**
`
`**
`
`**
`
`In re:
`
`Thomas Michael Sendecky,
`
`Debtor.
`
` Appeal from the United States
`Floret, L.L.C., *
`Michele Lea Eggert, * Bankruptcy Court for the
` * District of Minnesota
` Plaintiffs-Appellants, *
`*
`
`**
`
`**
`
`*
`_____________
`
`v.
`
`Thomas Michael Sendecky
`
`Defendant-Appellee.
`
`Submitted: September 10, 2002
`Filed: October 10, 2002
`_____________
`
`Before KOGER, SCHERMER, and FEDERMAN, Bankruptcy Judges
`
`FEDERMAN, Bankruptcy Judge
`
`_____________
`
`Plaintiff/appellants Floret, L.L.C. and Michele Lea Eggert (Appellants) appeal
`an order of the bankruptcy court1 granting debtor Thomas M. Sendecky a discharge
`
`1The Honorable Nancy C. Dreher, United States Bankruptcy Judge for the District of
`Minnesota.
`
`
`FOR THE EIGHTH CIRCUIT
`
`No. 02-6023MN
`
`
`**
`
`**
`
`**
`
`In re:
`
`Thomas Michael Sendecky,
`
`Debtor.
`
` Appeal from the United States
`Floret, L.L.C., *
`Michele Lea Eggert, * Bankruptcy Court for the
` * District of Minnesota
` Plaintiffs-Appellants, *
`*
`
`**
`
`**
`
`*
`_____________
`
`v.
`
`Thomas Michael Sendecky
`
`Defendant-Appellee.
`
`Submitted: September 10, 2002
`Filed: October 10, 2002
`_____________
`
`Before KOGER, SCHERMER, and FEDERMAN, Bankruptcy Judges
`
`FEDERMAN, Bankruptcy Judge
`
`_____________
`
`Plaintiff/appellants Floret, L.L.C. and Michele Lea Eggert (Appellants) appeal
`an order of the bankruptcy court1 granting debtor Thomas M. Sendecky a discharge
`
`1The Honorable Nancy C. Dreher, United States Bankruptcy Judge for the District of
`Minnesota.
`
`
`
`and denying Appellants’ motion for sanctions based upon the inadequacy of Mr.
`Sendecky’s pre-trial brief. While this appeal was pending, Appellants filed a motion
`for sanctions with this Panel, based on statements contained in Mr. Sendecky’s
`appellate brief. For the reasons set forth below, we affirm the rulings of the
`bankruptcy court, and we also grant Appellants’ post-trial motion for sanctions.
`
`ISSUES
`
`There are three issues before us. Appellants argue that the bankruptcy court
`committed reversible error by granting Mr. Sendecky a discharge despite Appellant’s
`allegations that he failed to keep adequate records, and that he failed to satisfactorily
`explain a deficiency of assets. They also appeal the bankruptcy court’s denial of
`sanctions for the inadequacy of Mr. Sendecky’s pre-trial brief. Finally, Appellants ask
`for sanctions based upon counsel for Mr. Sendecky’s alleged “malicious and libelous
`falsehood” contained in his appellate brief. We conclude that the bankruptcy court did
`not commit reversible error when it found that Appellants failed to sustain their
`burden of proof as to the 11 U.S.C. § 727(a)(2) and (4) Counts. We also conclude that
`the bankruptcy court did not commit reversible error when it found that Mr.
`Sendecky’s failure to keep adequate books and records was justified under the
`circumstances. We further conclude that the bankruptcy court did not commit
`reversible error when it found that Mr. Sendecky adequately explained any
`deficiency of assets alleged by Appellants.
`
`We conclude that the bankruptcy court did not abuse its discretion when it
`failed to award sanctions for the alleged inadequacy of Mr. Sendecky’s pre-trial brief.
`We also conclude, however, that Mr. Sendecky’s appellate brief did contain a
`statement that is unbecoming to a member of the bar. As such, we grant Appellants’
`post-trial motion for sanctions.
`
`2
`
`
`
`BACKGROUND
`
`At one time, Mr. Sendecky operated a family construction business, Sendecky
`Concrete, Inc. While engaged in that business, Mr. Sendecky installed some flooring
`for Appellants. On June 5, 2001, the District Court of Hennepin County, Minnesota
`entered judgment in the amount of $16,253.19 in favor of Appellants for Mr.
`Sendecky’s breach of an oral contract to properly install the flooring. On June 18,
`2001, Appellants served a Notice of Garnishment on Mr. Sendecky’s employer, and
`on June 25, 2001, Mr. Sendecky filed a Chapter 7 bankruptcy petition.
`
`On September 24, 2001, Appellants filed an adversary proceeding objecting to
`Mr. Sendecky’s discharge. Appellants filed the Complaint in four Counts: Count I,
`Violation of 11 U.S.C. § 727(a)(2); Count II, Violation of 11 U.S.C. § 727(a)(3);
`Count III, Violation of 11 U.S.C. § 727(a)(4)(A); and Count IV, Violation of 11
`U.S.C. § 727(a)(4)(B).2 In his opening statement at the trial, however, Appellants’
`counsel indicated that in Count IV he intended to proceed under 11 U.S.C. §
`727(a)(5). 3 For purposes of this appeal, we find that Appellants sufficiently, if
`inartfully, pled an 11 U.S.C. § 727(a)(5) Count.
`
`STANDARD OF REVIEW
`
`We review a bankruptcy court’s conclusions of law de novo and its findings
`of fact for clear error.4 We will not, however, overturn a bankruptcy court’s factual
`
`2We note that 11 U.S.C. § 727(a)(4)(B) provides that the court will not grant a debtor a
`discharge if the debtor “knowingly and fraudulently, in or in connection with the case . . .
`presented or used a false claim.” Count IV of the Complaint, however, requests relief for debtor’s
`failure to satisfactorily explain any loss of assets or deficiency of assets. That request should have
`been pled pursuant to 11 U.S.C. § 727(a)(5).
`
`3Trial Transcript, Appellants’ Appendix 318 at 325.
`
`4Korte v. United States of America Internal Revenue Service (In re Korte), 262 B.R. 464,
`469 (8th Cir. B.A.P. 2001).
`
`3
`
`
`
`findings as clearly erroneous unless, on the basis of all of the evidence, we are left
`with a “definite and firm conviction that a mistake has been committed.”5 We review
`a bankruptcy court’s denial of a motion for sanctions for an abuse of discretion.6
`
`DISCUSSION
`
`The denial of a debtor’s discharge is a “harsh sanction,” therefore, the
`provisions of 11 U.S.C. § 727(a) are “strictly construed in favor of the debtor.”7 The
`burden of proof is on the objecting party to prove each element of a section 727
`Complaint by a preponderance of the evidence.8 Appellants argue that the bankruptcy
`court committed reversible error by ruling in favor of Mr. Sendecky on all four
`Counts of their Complaint. We will address each Count in turn.
`
`11 U.S.C. § 727(a)(2)(A)
`
`Section 727(a)(2)(A) provides that the court should deny a debtor a discharge
`if he concealed assets that might otherwise be made available to satisfy the claims of
`creditors:
`
`(a) The court shall grant the debtor a discharge, unless–
`
`. . .
`
`5Id. citing Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S. Ct. 1504, 1511, 84 L.
`Ed. 2d 518 (1985).
`
`6Eastern Equipment and Serv. Corp. v. Factory Point Nat’l Bank, Bennington, 236 F.3d
`117, 120 (2nd Cir. 2001).
`
`7Korte, 262 B.R. at 471 (citations omitted).
`
`8Id.
`
`4
`
`
`
`(2) the debtor, with intent to hinder, delay, or defraud a
`creditor or an officer of the estate charged with custody of
`property under this title, has transferred, removed,
`destroyed, mutilated, or concealed, or has permitted to be
`transferred, removed, destroyed, mutilated, or concealed–
`
`(A) property of the debtor, within one year
`before the date of the filing of the petition.9
`
`Appellants alleged that Mr. Sendecky concealed a Corvette and a “diamond grinder.”
`At the trial, however, one of the plaintiffs admitted that the Corvette belonged to Mr.
`Sendecky’s father. The bankruptcy court correctly found that a debtor cannot conceal
`assets that do not belong to him. As to the diamond grinder, the bankruptcy court
`found that Appellants failed to prove that Mr. Sendecky owned such a piece of
`equipment, or what the value of such a piece of equipment might be. Based upon
`these factual findings, we affirm the bankruptcy court as to the 11 U.S.C. §
`727(a)(2)(A) Count.
`
`11 U.S.C. § 727(a)(3)
`
`Section 727(a)(3) provides that the court will deny a debtor a discharge if he
`unjustifiably fails to keep adequate records:
`
`(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
`
`911 U.S.C. § 727(a)(2)(A).
`
`5
`
`
`
`or failure to act was justified under all of the circumstances
`of the case.10
`
`The bankruptcy court found that Mr. Sendecky did not keep adequate business
`records.11 As a result, the burden of production shifted to him to offer some
`justification for his “sloppy record keeping.”12 But he did produce his income tax
`returns, his checking account records, and some credit reports. The court further
`found that once the plaintiff proves the records are inadequate, the burden of
`production “shifts to the debtor to prove that the failure to keep adequate records was
`justified under the circumstances.”13 In order to determine if the failure was justified,
`the trial court must first determine what records someone in like circumstances to Mr.
`Sendecky would keep.14The bankruptcy court found that Mr. Sendecky was poorly
`educated, that he had no sophistication, that he had little business experience, that he
`still lived at home with his parents, and that he had neither the motivation nor the
`ability to keep better records than those he provided. The bankruptcy court, thus,
`found that someone with Mr. Sendecky’s education, business experience, and
`personal financial structure, operating a business the size of Sendecky Concrete, Inc.,
`could not be expected to keep professional business records. Given these
`inadequacies, and the fact that an 11 U.S.C. § 727(a)(3) Count does not require proof
`of intent,15 the bankruptcy court found that the Mr. Sendecky was justified in
`maintaining the records he provided, even if they were inadequate. We cannot find
`
`1011 U.S.C. § 727(a)(3).
`
`11Trail Transcript, Appellants’ Appendix, pg. 462.
`
`12Miller v. Pulos (In re Pulos), 168 B.R. 682, 690 (Bankr. D. Minn. 1994).
`
`13Id.
`
`14Id. at 692.
`
`15See Pulos, 168 B.R. at 692.
`
`6
`
`
`
`that these factual findings are clearly erroneous, therefore, we affirm as to the section
`727(a)(3) Count.
`
`11 U.S.C. § 727(a)(4)
`
`Section 727(a)(4) grants the bankruptcy court the authority to deny a debtor’s
`discharge if he intentionally made a misrepresentation in connection with his
`bankruptcy case:
`(a) The court shall grant the debtor a discharge, unless–
`
`. . .
`
`(4) the debtor knowingly and fraudulently, in connection
`with the case–
`
`(A) made a false oath or account.16
`
`Appellants argue that the bankruptcy court committed clear error when it refused to
`find that Mr. Sendecky failed to accurately fill out his schedules. Appellants allege
`that Mr. Sendecky duplicated some claims of creditors, and listed some debts that
`were no longer collectible because the statute of limitations had run. The also alleged
`that he listed a debt from his parents for $170,000, when his parents had never
`demanded payment. The bankruptcy court found that the Code requires “nothing less
`than full and complete disclosure of any and all apparent interests of any kind.”17 In
`Korte v. United States of America Internal Revenue Service,18 we held that in order
`for a false statement, made in connection with a case, to bar a debtor’s discharge, the
`
`1611 U.S.C. § 727(a)(4).
`
`17Appellant’s Appendix, Tr. Transcript, pg. 466.
`
`18262 B.R. 464 (8th Cir. B.A.P. 2001).
`
`7
`
`
`
`statement must be both material and made with intent.19 The bankruptcy court found
`that Mr. Sendecky did, indeed, duplicate some claims, but that he did so on the advice
`of his counsel. Mr. Sendecky stated that his counsel advised him to list all debts, both
`those of Sendecky Concrete, Inc. and himself personally. He stated that he duplicated
`some debts because he obtained the debts from his credit reports, and the credit
`reports duplicated some of the debts.
`
`The bankruptcy court found that Mr. Sendecky followed his counsel’s advice
`in listing his debts, and that mistaken reliance on counsel’s advice can excuse
`fraudulent intent. In Kaler v. McLaren (In re McLaren),20 the court held that reliance
`on an attorney’s advice, if the advice is reasonable, may “excuse acts that otherwise
`bear indicia of fraud.”21 The bankruptcy court also found that there was ample
`evidence in the record that Mr. Sendecky’s parents did, indeed, loan him $170,000,
`plus other funds, therefore, he did not materially misrepresent that debt.22 The
`bankruptcy court further found that there was no evidence in
` the record that Mr. Sendecky did not fully inform his counsel, or that Mr. Sendecky’s
`counsel offered unreasonable advice. We, therefore, find that the bankruptcy court did
`not err in finding that Mr. Sendecky’s discharge should not be denied based upon
`Appellants’ section 727(a)(4) Count.
`
`19Id. at 474. See also Cuervo v. Hull (In re Snell), 240 B.R. 728, 730 (Bankr. S.D. Ohio
`1999) (holding that holding that good faith reliance on advice of counsel will negate fraudulent
`intent); Kaler v. Craig (In re Craig), 195 B.R. 443, 452 (Bankr. D. N.D. 1996) (holding that
`mistaken reliance on an attorney’s advice will excuse acts of fraudulent intent if the advice was
`reasonable and the attorney was aware of all relevant facts).
`
`20236 B.R. 882 (Bankr. D. N.D. 1999).
`
`21Id. at 882.
`
`22Appellant’s Appendix, Tr. Transcript, pg. 466.
`
`8
`
`
`
`11 U.S.C. § 727(a)(5)
`
`Section 727(a)(5) authorizes a bankruptcy court to deny a discharge to a
`Chapter 7 debtor who fails to satisfactorily explain either a loss of assets or a
`deficiency of assets:
`
`(a) The court shall grant the debtor a discharge, unless–
`
`. . .
`
`(5) the debtor has failed to explain satisfactorily, before
`determination of denial of discharge under this paragraph,
`any loss of assets or deficiency of assets to meet the
`debtor’s liabilities.23
`
`The party objecting to a debtor’s discharge pursuant to section 727(a)(5) has the
`burden of proving facts establishing that a loss or shrinkage of assets actually
`occured.24 Appellants’ proof as to this Count consisted of the fact that Mr. Sendecky’s
`father testified he had loaned his son funds in excess of $170,000 to keep a family
`business operating, that, not only did Mr. Sendecky use that money to pay business
`debts, he continued to incur debt, and that at the time of the bankruptcy filing, he did
`not have any assets. The bankruptcy court did not expressly find that these
`allegations either satisfied, or failed to satisfy, Appellants’ burden of proving a
`deficiency of assets. The court stated that there was no proof in the record that Mr.
`Sendecky ever made very much money, and that Appellants never proved Mr.
`Sendecky owned any assets that were inexplicably missing.25 On the other hand, the
`bankruptcy court found that Mr. Sendecky had a business that was losing money, that
`
`2311 U.S.C. § 727(a)(5).
`
`24The Cadle Co. v. Stewart (In re Stewart), 263 B.R. 608, 618 (10th Cir. B.A.P. 2001).
`
`25Appellant’s Appendix, Tr. Transcript, pg. 482-83.
`
`9
`
`
`
`somebody put money into that business, that Mr. Sendecky had a propensity to incur
`credit card debt, and that the business failed leaving business debt in its wake. In
`addition, Mr. Sendecky’s father testified that he loaned his son money to satisfy some
`of the business debt, and Mr. Sendecky testified that he used those funds to satisfy
`some of the business debt. After making the above findings, the bankruptcy court
`ruled against Appellants as to the section 727(a)(5) Count.
`
`If a party demonstrates a deficiency of assets, the burden shifts to the debtor
`to explain the loss.26 “If the explanation is too vague, indefinite, or unsatisfactory
`then the debtor is not entitled to a discharge.”27 The explanation given by the debtor
`must be definite enough to convince the trial judge that assets are not missing.28 The
`bankruptcy court found both that Appellants failed to prove that Mr. Sendecky ever
`owned any assets the loss of which was not explained, and further found that Mr.
`Sendecky invested any funds received from his father in the failing business.
`Appellants contend that the court did not adequately consider the section 727(a)(5)
`Count because the court’s initial ruling did not specifically address that Count. As
`noted, the Complaint did not specifically refer to section 727(a)(5). Nevertheless,
`having reviewed the entire record, we find that the bankruptcy court fully considered
`Appellants’ request for relief under section 727(a)(5), and that it did not err in finding
`in favor of Mr. Sendecky. We affirm.
`
`26Stewart, 263 B.R. at 618..
`
`27Diamond Bank v. Carter (In re Carter), 203 B.R. 697, 707 (Bankr. W.D. Mo. 1996);
`United States of America v. Hartman (In re Hartman), 181 B.R. 410, 413 (Bankr. W.D. Mo.
`1995).
`
`28Grant v. Sadler (In re Sadler), 282 B.R. 254, 265 (Bankr. M.D. Fla. 2002).
`
`10
`
`
`
`SANCTIONS
`A. Pre-Trial Brief
`
`Appellants moved for sanctions, alleging that the pre-trial brief filed by Mr.
`Sendecky did not comply with the bankruptcy court’s pre-trial order. The bankruptcy
`court summarily dismissed this motion at the trial stating that “I didn’t find the
`Defendant’s brief helpful either, much helpful, but we muddled our way through, and
`it certainly is not grounds for sanctions.”29 Appellants cite to the bankruptcy court’s
`Order of Trial, which provides that “[f]ailure to abide by the provisions of this Order
`may result in imposition of sanctions upon counsel or party.”30 By its terms, the Order
`leaves it within the discretion of the bankruptcy court to determine if sanctions are
`warranted. The denial of a such a motion is, thus, reviewed for abuse of that
`discretion.31 A court abuses its discretion “when its ruling is founded on an error of
`law or a misapplication of law to the facts.”32 The bankruptcy court ruled that the
`inadequacy of Mr. Sendecky’s pre-trial brief did not warrant the imposition of
`sanctions. We cannot find, under the circumstances, that the bankruptcy court
`committed an error of law or misapplied the law to the facts as to that motion. We
`affirm.
`
`B. Appellate Brief
`
`Appellants filed a motion with this Panel asking us to impose a “significant
`monetary sanction” upon counsel for Mr. Sendecky, Richard J. Haefele, for an alleged
`
`29Appellant’s Appendix, Tr. Transcript, pg. 469.
`
`30Appellant’s Brief pg. 19-20.
`
`31Eastern Equipment and Serv. Corp. v. Factory Point Nat’l Bank, Bennington, 236 F.3d
`117, 120 (2nd Cir. 2001); Johnson v. Ventra Group, Inc., 191 F.3d 732, 749 (6th Cir. 1999);
`Ramirez v. Fuselier (In re Ramirez), 183 B.R. 583, 586 (9th Cir. B.A.P. 1995).
`
`32Montrose Medical Group Participating Savings Plan v. Bulger, 243 F.3d 773, 779 (3rd
`Cir. 2001).
`
`11
`
`
`
`“malicious and libelous falsehood” contained in Mr. Sendecky’s appellate brief.
`Appellants did not specify any amount of monetary sanction in their motion, and no
`basis for the award of any particular amount was provided. The motion was
`accompanied by a notarized affidavit signed by Alfred Stanbury, counsel for
`Appellants. Mr. Sendecky’s appellate brief contained the following statement:
`
`Mr. Stanbury’s stated intention to various litigants is to force the
`Chapter 7 debtor to incur such substantial attorney’s fees that he will be
`forced to persuade his family to pay appellant’s [sic] and their attorney
`the amounts sought to be discharged in the Chapter 7 proceeding.33
`
`In his motion Mr. Stanbury denies ever making such a statement.
`
`Rule 8018A of the Local Rules of the United States Bankruptcy Appellate
`Panel for the Eighth Circuit (the Local Rules) sets forth the procedure for both
`admitting and disciplining attorneys that appear before us. Local Rule 8018A(b)
`provides as follows:
`
`(b) Discipline. The court may take any appropriate disciplinary action
`against an attorney who practices before it for conduct unbecoming a
`member of the bar or for failure to comply with these rules or any court
`Rule. Counsel will be afforded reasonable notice, an opportunity to
`show cause to the contrary, and, if requested, a hearing. The Bankruptcy
`Appellate Panel may direct the clerk to refer a disciplinary matter to the
`United States Court of Appeals for the Eighth Circuit.34
`
`Appellants did not pursue their motion at oral argument. Counsel for Mr. Sendecky,
`on the other hand, did not respond to the motion, deny the allegations, or request a
`separate hearing. Without substantiation, Mr. Haefele’s inclusion of such an
`allegation in an appellate brief is conduct unbecoming to a member of the bar. As
`
`33Appellee’s Brief, pg. 3.
`
`34Local Rule 8018A(b).
`
`12
`
`
`
`such, we will sanction Mr. Haefele in the amount of $100.00, such sum to be payable
`to Appellants within ten days.
`
`CONCLUSION
`
`The bankruptcy court did not err in finding that debtor Thomas Michael
`Sendecky is entitled to a discharge. The bankruptcy court did not abuse its discretion
`in denying Appellants’ motion for sanctions. We will grant Appellants’ motion for
`sanctions to be imposed on counsel for Mr. Sendecky for his violation of Local Rule
`8018A(b).
`
`A true copy.
`
`Attest:
`
`CLERK, U.S. BANKRUPTCY APPELLATE PANEL FOR THE
`EIGHTH CIRCUIT
`
`13
`
`
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