Berger & Assocs. Attorneys, P.C. v. Kran, No. 13-1931 (2d Cir. 2014)

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Bradley Ian Berger and his law firm filed suit against debtor and his law partner in state court for outstanding fees owed to plaintiffs under a referral agreement between the parties. Berger had difficulty proving the amount of fees owed because debtor's partnership failed to file certain documents with the State. The failure led to discovery sanctions and the parties eventually settled. Berger subsequently filed an adversary proceeding against debtor in the bankruptcy court, arguing that 11 U.S.C. 727(a)(3) prevented debtor from obtaining bankruptcy relief. The court concluded that Berger failed to show that the facts of this case fell within the scope of section 727(a)(3) and the court rejected Berger's contention that the court's ruling permits debtor to evade his "legal and ethical duties" where debtor had already been sanctioned by the state court for failure to keep legally required documents. Accordingly, the court affirmed the district court's affirmance of the bankruptcy court's grant of debtor's motion for summary judgment.

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13 1931 Berger & Assocs. Attorneys, P.C. v. Kran 1 2 UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT 3 August Term, 2013 (Submitted: March 20, 2014 4 Decided: July 25, 2014) Docket No. 13 1931 5 6 7 In re ALEXANDER KRAN, III 8 9 10 BERGER & ASSOCIATES ATTORNEYS, P.C., BRADLEY IAN BERGER, Plaintiffs Appellants, 11 v. 12 13 ALEXANDER KRAN, III, Defendant Appellee.* 14 15 Before: STRAUB, SACK, and LOHIER, Circuit Judges. The plaintiffs previously brought suit in state court against the debtor and 16 17 his law partner to recoup fees owed under a referral agreement between the 18 parties. In that action, the state court sanctioned the debtor and his partner for 19 discovery violations arising from their failure to keep and file certain records by 20 striking their answer. The parties eventually settled, and the debtor filed for 21 bankruptcy soon thereafter. The plaintiffs then filed this adversary proceeding 22 in the bankruptcy court, claiming that the deficient record keeping which led to The Clerk of the Court is respectfully directed to amend the official caption to conform to the caption set forth above. * 1 1 sanctions in state court also barred the debtorÊ¹s discharge under 11 U.S.C. 2 ' 727(a)(3). The bankruptcy court (Robert D. Drain, Judge) granted the debtorÊ¹s 3 motion for summary judgment, and the district court (Kenneth M. Karas, Judge) 4 affirmed. Because we agree that the debtor was entitled to judgment as a matter 5 of law, the judgment of the district court is hereby 6 AFFIRMED. 7 8 RONALD COHEN, Wilmington, NC, for Plaintiffs Appellants. 9 10 11 BRUCE L. WEINER, Rosenberg Musso & Weiner LLP, Brooklyn, NY, for Defendant Appellee. 12 13 SACK, Circuit Judge: Bradley Ian Berger and his law firm, Berger & Associates Attorneys, P.C., 14 brought suit against Alexander Kran, III, and his law partner in state court in 15 2004 for outstanding fees owed Berger and his firm (hereinafter referred to 16 collectively as ÊºBergerÊº) under a referral agreement between the parties. Because 17 KranÊ¹s partnership had failed to file certain documents with the New York State 18 Office of Court Administration as state law requires, Berger had difficulty 19 proving the amount of fees owed. This failure led to discovery sanctions in the 20 state court against the defendants and spurred the parties to settle. Soon 2 1 thereafter, KranÊ¹s partnership dissolved, his former partner died, and Kran filed 2 for Chapter 7 bankruptcy protection. 3 Berger filed an adversary proceeding against Kran in the bankruptcy court 4 contending that 11 U.S.C. ' 727(a)(3), which bars discharge if a debtor 5 unjustifiably concealed, destroyed, or failed to preserve recorded information 6 Êºfrom which the debtorÊ¹s financial condition or business transactions might be 7 ascertained,Êº prevented Kran from obtaining bankruptcy relief. The bankruptcy 8 court (Robert D. Drain, Judge) granted KranÊ¹s motion for summary judgment, and 9 the district court (Kenneth M. Karas, Judge) affirmed. Because we conclude that 10 section 727(a)(3) does not bar discharge under the circumstances presented, we 11 affirm the judgment of the district court. 12 BACKGROUND 13 In 1992, David Davidson, a New York lawyer, concluded a referral 14 agreement with Berger. Berger would solicit plaintiffs in personal injury cases 15 through advertising and then refer them to Davidson, who would perform all of 16 the legal work and remit forty percent of the fees received to Berger. The 17 following year, Davidson formed a partnership with Kran under the name 3 1 Davidson & Kran. The partnership continued the arrangement with Berger until 2 sometime in 1996. 3 In 2004, Berger brought an action in New York state court against the firm 4 of Davidson & Kran and against Davidson and Kran individually to collect fees 5 due under the agreement. In the discovery phase of the litigation, Berger sought 6 documents related to the cases referred under the agreement. Although 7 Davidson and Kran supplied some of the requested information, they had either 8 lost or destroyed many of the relevant records. Still other records were never 9 created in the first place, even though state law required them to be filed with the 10 New York State Office of Court Administration. See N.Y. Comp. Codes R. & 11 Regs. tit. 22, §§ 603.7, 691.20. 12 Berger moved for discovery sanctions. Although Davidson and Kran 13 supplied additional responsive documents, the state court concluded that they 14 had willfully obstructed discovery, struck their answer to BergerÊ¹s complaint, 15 and directed a trial on damages. At trial, BergerÊ¹s expert testified that the 16 amount owed under the referral agreement exceeded $2 million. Following trial, 17 the parties began settlement discussions, which culminated in May 2007 in a 4 1 consent judgment awarding Berger $1.4 million in damages. After the judgment, 2 Davidson & Kran dissolved, and Davidson died soon thereafter. On August 22, 2008, Kran filed for bankruptcy protection under Chapter 7 3 4 of the Bankruptcy Code. After examining Kran and reviewing his financial 5 records, the Chapter 7 trustee concluded that Kran possessed no non exempt 6 property that could be reduced to money for the benefit of his creditors. Report 7 of No Distribution, In re Kran, No. 08 23193 RDD (Bankr. S.D.N.Y. Nov. 18, 8 2008).1 In December 2008, Berger brought an adversary proceeding seeking to 9 10 prevent the discharge of KranÊ¹s debts pursuant to section 727(a)(3). Kran moved 11 for summary judgment. Berger cross moved, arguing that KranÊ¹s failure to 12 produce documents in the referral fee litigation had complicated BergerÊ¹s efforts 13 to determine how much was owed under the referral agreement and had led him 14 to accept a settlement far below the amount he had sought in damages. Berger At the conclusion of a Chapter 7 bankruptcy case, the trustee must provide an accounting to the court, certifying that the case has been Êºfully administered.Êº Fed. R. Bankr. P. 5009; 11 U.S.C. §§ 704(a)(1), (4) (setting out the duties of the trustee to investigate the financial condition of the debtor and collect and reduce to money all of the debtorÊ¹s assets). Where, as here, the trustee concludes that no non exempt property exists to be collected on behalf of creditors, he or she files a ÊºNo AssetÊº report or a ÊºReport of No Distribution.Êº See, e.g., In re Magee, 444 B.R. 254, 256 (Bankr. S.D.N.Y. 2011); In re Cruz, 254 B.R. 801, 803 (Bankr. S.D.N.Y. 2000). 1 5 1 argued that this alone justified denying KranÊ¹s discharge, whether or not the 2 record keeping failures were temporally related to the bankruptcy. 3 The bankruptcy court denied BergerÊ¹s motion and granted KranÊ¹s motion, 4 concluding that because the amount Berger was owed under the referral 5 agreement had been fixed by the partiesÊ¹ settlement agreement, the alleged 6 difficulty in determining damages was irrelevant. The bankruptcy court rejected 7 BergerÊ¹s contention that section 727(a)(3) did not require a temporal relationship 8 between the alleged failure to preserve records and the bankruptcy. The court 9 concluded instead that the focus of a section 727(a)(3) action was appropriately 10 on the debtorÊ¹s financial condition during the bankruptcy and his condition for a 11 reasonable period of time before the filing of the bankruptcy petition. 12 The district court affirmed, stating that Berger failed to allege let alone 13 prove that KranÊ¹s failure to keep the required records had any bearing on the 14 courtÊ¹s ability to ascertain whether he was capable of repaying his creditors. In re 15 Kran, 493 B.R. 398, 405 06 (S.D.N.Y. 2013). Berger appeals. 16 17 18 DISCUSSION Under Federal Rule of Civil Procedure 56, applicable in adversary proceedings pursuant to Federal Rule of Bankruptcy Procedure 7056, a court 6 1 Êºshall grant summary judgment if the movant shows that there is no genuine 2 dispute as to any material fact and the movant is entitled to judgment as a matter 3 of law.Êº This Court Êºreview[s] the bankruptcy courtÊ¹s findings of fact for clear 4 error and its conclusions of law de novo.Êº In re Cacioli, 463 F.3d 229, 234 (2d Cir. 5 2006). 6 7 Berger argues that 11 U.S.C. ' 727(a)(3) bars the discharge of KranÊ¹s debt. Section 727(a)(3) states: 8 The court shall grant the debtor a discharge, unless . . . the debtor 9 has concealed, destroyed, mutilated, falsified, or failed to keep or 10 preserve any recorded information, including books, documents, 11 records, and papers, from which the debtorÊ¹s financial condition or 12 business transactions might be ascertained, unless such act or failure 13 to act was justified under all of the circumstances of the case[.] 14 Berger argues that because Kran failed to keep required records relating to the 15 cases referred to him under their agreement, his financial condition could not be 16 ascertained and his debts should not have been discharged. 17 In a proceeding under section 727(a)(3), Êº[t]he initial burden lies with the 18 creditor to show that the debtor failed to keep and preserve any books or records 19 from which the debtorÊ¹s financial condition or business transactions might be 20 ascertained.Êº In re Cacioli, 463 F.3d at 235. We agree with the bankruptcy court 7 1 that the inquiry into the debtorÊ¹s financial condition is limited to the span from a 2 reasonable period of time before the bankruptcy filing through the pendency of 3 the bankruptcy proceedings. We further conclude that Berger has not met his 4 burden to show that the missing records were necessary to ascertain KranÊ¹s 5 financial condition during this temporally limited period. 6 Êº[A] central purpose of the [Bankruptcy] CodeÊº is to allow the ÊºÊ¹honest but 7 unfortunate debtorÊ¹Êº to Êºreorder [his] affairs, make peace with [his] creditors, and 8 enjoy Ê¹a new opportunity in life with a clear field for future effort, unhampered 9 by the pressure and discouragement of preexisting debt.Ê¹Êº Grogan v. Garner, 498 10 U.S. 279, 286 87 (1991) (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934)). 11 For this reason, we have described section 727, which requires the denial of 12 discharge under certain enumerated circumstances, as Êºimpos[ing] an extreme 13 penalty for wrongdoing, which must be construed strictly against those who 14 object to the debtorÊ¹s discharge and liberally in favor of the bankrupt.Êº In re 15 Cacioli, 463 F.3d at 234 (quoting State Bank of India v. Chalasani (In re Chalasani), 92 16 F.3d 1300, 1310 (2d Cir. 1996)) (internal quotation marks omitted). 17 We have long been of the view that, although the Code Êºmake[s] the 18 privilege of discharge dependent on a true presentation of the debtorÊ¹s financial 8 1 affairs[,] . . . . it is intendedÊº only Êºthat there be available written evidence made 2 and preserved from which the present financial condition of the bankrupt, and 3 his business transactions for a reasonable period in the past may be ascertained.Êº 4 In re Underhill, 82 F.2d 258, 260 (2d Cir. 1936) (construing a precursor to modern 5 11 U.S.C. § 727(a)(3)). In light of the admonition to construe section 727 Êºliberally 6 in favor of the bankrupt,Êº In re Chalasani, 92 F.3d at 1310, we see no reason to 7 depart from the established principle that the Êºfinancial affairsÊº which a debtor 8 must adequately document are his circumstances during the pendency of the 9 bankruptcy proceedings and those obtaining Êºfor a reasonable periodÊº prior to 10 11 the filing of the bankruptcy petition. In re Underhill, 82 F.2d at 260. Berger has failed to show that the facts of this case fall within the scope of 12 section 727(a)(3). He provided no evidence establishing either that Kran failed to 13 keep records such that his financial condition or business transactions could not 14 be ascertained during the pendency of the proceedings or for a reasonable time 15 before, or that Berger or the Trustee were impeded in determining whether Kran 16 had other assets that could be used to pay his creditors. Indeed, Kran provided 17 the bankruptcy court with sufficient documentation to permit the trustee in this 18 case to file a Report of No Distribution. 9 1 BergerÊ¹s oral argument before the bankruptcy court underscores the 2 insufficiency of his showing. When asked whether he alleged that it was 3 impossible to Êºdiscern existing accounts receivable or existing income of the 4 debtor as of the petition date,Êº BergerÊ¹s attorney answered that ÊºitÊ¹s quite possible 5 there are still some outstanding cases that were referred from my client,Êº but 6 admitted that Êºthat goes back a few yearsÊº to 2007, before KranÊ¹s partnership 7 dissolved. Transcript of Oral Argument at 10 12, Berger & Assocs. Attorneys v. 8 Kran, No. 08 08428 (RDD) (Bankr. S.D.N.Y. Mar. 22, 2011). And when asked to 9 explain how KranÊ¹s Êºomissions preclude[d] the ascertainment of [his] financial 10 condition,Êº id. at 23, counsel eventually offered that Êºthe fact that we donÊ¹t have 11 the records means that we couldnÊ¹t trace the cash,Êº id. at 24, an allegation not 12 made in his summary judgment papers. None of these explanations brings 13 KranÊ¹s record keeping failures within the scope of section 727(a)(3). We therefore 14 conclude that Berger has not met his initial burden under the statute. 15 Finally, we reject BergerÊ¹s contention that our ruling permits Kran to evade 16 his Êºlegal and ethical duties.Êº AppellantÊ¹s Br. at 23. Section 727(a) bars from 17 relief a debtor whose misconduct threatens to undermine the just and orderly 18 administration of his bankruptcy, In re Chalasani, 92 F.3d at 1311 (explaining that 10 1 the statute Êºis directed toward protecting the integrity of the bankruptcy 2 systemÊº)2; it does not exist to police the debtorÊ¹s legal and ethical obligations 3 more generally. We will not apply the Êºextreme penaltyÊº of denying discharge, 4 id. at 1310, to failings so clearly unconnected with the bankruptcy proceeding, 5 especially when the New York courts have already sanctioned Kran for his 6 failure to keep legally required documents. CONCLUSION 7 For the foregoing reasons, the judgment of the district court is AFFIRMED. 8 Like section 727(a)(3), the other paragraphs of section 727(a) punish actions that hamper the TrusteeÊ¹s ability to collect and distribute non exempt assets on behalf of creditors. See 11 U.S.C. ' 727(a)(2) (barring discharge where a debtor Êºhas transferred, removed, destroyed, mutilated, or concealedÊº property of the debtor or the bankruptcy estate Êºwith intent to hinder, delay, or defraudÊº); id. ' 727(a)(4) (barring discharge for certain kinds of debtor fraud Êºin or in connection with the caseÊº); id. ' 727(a)(5) (barring discharge for failure Êºto explain satisfactorily . . . any loss of assets or deficiency of assetsÊº); id. ' 727(a)(6) (barring discharge if the debtor refuses, Êºin the case,Êº to obey a court order or, under certain circumstances, to testify). 2 11

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