In Re. Salvador et al
Judge Richard G. Stearns: ORDER entered. MEMORANDUM AND ORDER(Zierk, Marsha)
UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
CIVIL ACTION NO. 17-10923-RGS
In re PAUL J. SALVADOR
CIVIL ACTION NO. 17-10926-RGS
In re WALTER SALVADOR
MEMORANDUM AND ORDER ON
CONSOLIDATED APPEALS FROM THE BANKRUPTCY COURT’S
JUDGMENT OF DEBTORS’ CHAPTER 7 PLAN
October 3, 2017
The pivotal issue on appeal is whether the Bankruptcy Judge erred in
finding that the failure of Paul Salvador and Walter Salvador (Debtors) to
comply with the records-keeping provision of the Bankruptcy Code, 11 U.S.C.
§ 727(a)(3), disqualified them from a Chapter 7 discharge. After a trial,
Judge Feeney found that “Debtors [had] failed to preserve recorded
information from which their financial information and business
transactions could be ascertained, and, at worst, permitted their agents or
children to deliberately destroy and appropriate recorded information from
which their financial condition might be ascertained.” In re Salvador, 570
B.R. 460, 476 (Bankr. D. Mass. 2017).
Consequently, she allowed the
exception brought by creditor Andrew Kaplan and denied the discharge. On
appeal, Debtors challenge Judge Feeney’s determination that they (or
someone acting on their behalf) “scrubbed” the computers of their insurance
business by erasing critical files. According to Debtors, Judge Feeney based
her finding on the “unequivocal testimony” of a forensic expert “that files
were intentionally removed from the server . . . .” Id. Debtors contend that
this was error because “there was no such testimony from [the expert] Mr.
Steen.” Appellant Br. at 4. The Salvadors also make a “spoliation” argument
– that “[t]he Bankruptcy Court should not have allowed any information
relative to the destroyed evidence to be admitted at trial” because the
purchaser of the insurance business “destroy[ed] the server.” Reply Br. at 3.
I will affirm the Bankruptcy Court essentially for the reasons stated by Judge
The relevant facts are undisputed.
In 2008, David B. Kaplan made two loans to Paul and Walter Salvador
in conjunction with their various businesses – $100,000 on April 30, 2008,
and $120,000 on October 29, 2008. Among the Salvadors’ pledged assets
was a family-owned insurance agency, Salvador & Company Insurance
Agency (Salvador Co.) in which each Debtor held a 50% share. 1 When the
Salvadors defaulted on the loans, Kaplan brought a collection action in the
Norfolk Superior Court. Salvador Co. was named as a reach and apply
defendant. Eventually, a judgment entered against the Salvadors in the
amount of $744,764. In aid of execution, a judge of the Superior Court
appointed a special commissioner to sell the stock and assets of Salvador Co.
The Superior Court also ordered the Salvadors to turn the books and records
of Salvador Co. over to a court-appointed receiver, John F. Hegarty.
The Salvadors filed for a discharge under Chapter 7 of the Bankruptcy
Act on February 11, 2014. Judgment creditor/appellee Andrew Kaplan, as
the personal representative of the estate of David Kaplan, opposed the
Salvadors’ requests for a discharge. 2
Salvador Co. operated as an insurance agency from 1983 until
February 1, 2014.
App. at 169.
After the Salvadors relinquished the
company, Mark Salvador (Paul’s son) and Christy Robbins (his niece)
In negotiating for the loans, the Salvadors provided Kaplan with
“correct and complete” financial statements for each of their companies.
They valued Salvador Co. at $1,000,000.
Kaplan filed identical three-count creditor complaints on July 16,
2014, against Paul J. Salvador and Walter W. Salvador under 11 U.S.C. §
727(a)(2)(A) – Count I, and 11 U.S.C. § 727(a)(3) – Count II, as exceptions to
the dischargeability of the debts. Judge Feeney held Count III, filed under 11
U.S.C. § 523(a)(2)(B), in abeyance, and ultimately found the claim moot.
operated an insurance agency under the name The Insurance Connection,
Inc., from the Salvador Co.’s former office at 111 Main Street in Bridgewater,
Massachusetts. Paul Salvador admitted soliciting more than 200 of the
Salvador Co.’s customers on behalf of The Insurance Connection, Inc.
On February 3, 2014, Hegarty, visited the premises where the Salvador
Co. had been located, but found the office closed. Hegarty returned the
following day and met with the Salvadors. Hegarty observed the Salvador
Co.’s computers and office equipment in a large pile on the floor. Hegarty
was unable to find any client files or financial records. When questioned by
Hegarty, the Salvadors stated that the agency had gone “paperless” in “2010
or 2011.” Dkt. #13-1, App. at 87, 175. Hegarty returned to the premises on
February 6, 2017, to inspect paper records of Salvador Co. that had been
stored in the basement. After inspecting these files, Hegarty concluded that
they were “stale” and shipped them to a storage facility in Pepperel,
Massachusetts. Hegarty removed two computers from Salvador Co. – the
“main server and a desktop screen.”
Id. at 92. A forensic examiner, Brian
Steen, was hired to “ascertain whether any data or computer programs could
be retrieved from [the computers].” Id. at 93.
Steen spent a total of nine hours examining the computers on February
25, 2014. Id. at 211 (Steen Dep.). He prepared a summary report concluding
that “[a]s of 2/3/2014, there is no data in any user folder, Company folder or
folder designated for scanning. This date is clearly shown on the server as the
last date those folders were modified.” Id. at 224. Steen also determined that
Agency Management Software (AMS) had been uninstalled on the main
server and that the AMS data folder “contained no records of any customers
commissions earned by the Salvador Co.”3
While Steen found that a
Quickbooks program had also been disabled, he was able to determine that
it was last accessed on February 6, 2014, at 8:11 a.m., and that data had been
deleted. The Quickbooks data that remained was from two to three years old.
Steen also testified that there were five “‘users’ who had accessed th[e]
computer work station –‘Bill [Walter Salvador], Christy, Doug, Mark
[debtors’ relatives] and Paul [Salvador] . . . and they had all logged on
between February 3rd of 2014 and February 6th of 2014.’” Id. at 208.
Steen used two data recovery software programs – EaseUS and
GetDataBack – in an attempt to recover missing or deleted files from the
Salvador Co. used AMS to maintain client information, billing, and
coverage files. Walter Salvador, who was responsible for entering client
information into the AMS program and financial information into
Quickbooks, testified at trial that he had stopped payments for AMS access
in December of 2013. App. at 155. Salvador testified that he continued
entering client information into the AMS system until at least November of
2013. Id. at 158.
server and computer work station. Steen concluded that numerous folders
had been deleted from the computer server, and while he was able to recover
the host folders, he was unable to retrieve any of their missing data. Id. at
207. He testified that this was consistent with a “scrubbing:” “It’s quite
possible a program had been used to scrub some files. That would explain
the inability for either software package to recover files themselves.” 4 Id. at
On March 18, 2014, the Bearce Insurance Agency purchased the assets
of Salvador Co. Hegarty turned the office equipment and paper records over
to William Bearce, the new owner. Bearce inspected the paper records and,
as did Hegarty, found them to consist only of “dead” files.
After a trial at which the Debtors 5, Hegarty, Bearse, and Steen testified,
Judge Feeney ruled for the Salvadors on Count I, finding “that the Debtors
Steen testified that “[w]e were able to say that documents had been
deleted. As to the intent, that’s unknown. . . . The files could have been
deleted by accident, but you would have had to select quite a number of files
and done it all at the same time. In the case of the server, you’d have fifty
files underneath the data file and you’d have to delete them all and select
them all.” Id. at 209. He also noted that there were no files in the computer
recycle bin. Id.
At trial, Walter Salvador and Paul Salvador testified that they did not
destroy files on Salvador Co.’s computer system or instruct anyone else to do
so. They also testified that they did not access the Salvador Co. computers
on February 3, 4, or 6, 2014.
did not intentionally destroy the value of their 50% ownership interests in
the Insurance Agency.” However, on Count II she found that Kaplan had
sustained his burden of proof, namely that the Debtors failed to
keep or preserve recorded information – information from which
their financial condition or business transactions might be
ascertained. Specifically, the Debtors, who were successful and
sophisticated businessmen, failed to keep and preserve up-todate records in any format.
In re Salvador, 570 B.R. at 476. Judge Feeney further found that the Debtors
had permitted a deliberate scrub of customer and financial information from
[Salvador Co.’s] computers and had turned over to the receiver only “outdated” or “dead files.” Id.
Accordingly, she denied the request for a
discharge. The Salvadors appealed.
This court heard argument on the appeals on September 28, 2017.
Appearing for the Debtors, Attorney Gary Cruickshank stated that he was not
challenging Judge Feeney’s credibility findings with respect to the Salvadors’
trial testimony. Rather, he objected to Judge Feeney’s factual findings that
the computer and server files had been intentionally deleted, and that the
Salvadors were responsible. Cruickshank also argued that Judge Feeney’s
discussion of the law relied on three prior court decisions that on closer
examination are not factually analogous to the Salvadors’ case.
The district court has jurisdiction to hear appeals “from final
judgments, orders, and decrees” of the Bankruptcy Court. 28 U.S.C. §
158(a)(1). The court applies a “clearly erroneous” standard in reviewing a
bankruptcy judge’s findings of fact. Jeffrey v. Desmond, 70 F.3d 183, 185
(1st Cir. 1995); see also Fed. R. Bankr. P. 8013 (the Bankruptcy Court’s
“[f]indings of fact, whether based on oral or documentary evidence, shall not
be set aside unless clearly erroneous, and due regard shall be given to the
opportunity of the bankruptcy court to judge the credibility of the
witnesses.”). “Under the clear error standard, the trier’s findings of fact and
the conclusions drawn therefrom ought not to be set aside ‘unless, on the
whole of the record, we form a strong, unyielding belief that a mistake has
been made.’” In re Carp, 340 F.3d 15, 22 (1st Cir. 2003). The application of
a Bankruptcy Code provision to a particular case poses a mixed question of
law and fact, subject to review for clear error, unless the Bankruptcy Court’s
analysis was based on a mistaken view of the legal principles involved. Id.
The Bankruptcy Code, 11 U.S.C. § 727(a)(3), permits a Bankruptcy
Judge to deny a discharge when a debtor fails to maintain or preserve
adequate records to reasonably ascertain its financial condition. 6 See also In
Section 727(a)(3) of the Bankruptcy Code specifies that a court will
not discharge a debt if “the debtor has concealed, destroyed, mutilated,
falsified, or failed to keep or preserve any recorded information, including
re: Frank Schifano, 378 F.3d 60 (1st Cir. 2004). Judge Feeney, in explaining
her decision to deny the Salvadors a discharge, quoted from In re Simmons,
525 B.R. 543 (1st Cir. BAP 2015), aff’d, 810 F.3d 852 (1st Cir. 2016),
“[t]he purpose of § 727(a)(3) is to give creditors, the trustee and
the bankruptcy court complete and accurate information
concerning the debtor’s affairs and to ensure that dependable
information is provided so that the debtor’s financial history may
be traced.” Canha v. Gubellini (In re Gubellini), 2009 WL
8466789, at *4 (1st Cir. B.A.P. Nov. 23, 2009) (footnote omitted)
(citing Meridian Bank v. Alten, 958 F.2d 1226, 1230 (3d Cir.
1992)). The standard for disclosure of records for purposes of §
727(a)(3) is one of “reasonableness in the particular
circumstances.” Razzaboni v. Schifano (In re Schifano), 378
F.3d 60, 68 (1st Cir. 2004) (internal quotations and citations
omitted). “[A]n impeccable system of bookkeeping” is not
required; however, “the records must sufficiently identify the
transactions [so] that intelligent inquiry can be made of them.”
Id. at 69 (internal quotations and citations omitted). The inquiry
into the reasonableness of records may include several relevant
factors such as “the education, experience, and sophistication of
the debtor; the volume of the debtor’s business; the complexity
of the debtor's business; the amount of credit extended to the
debtor or his business; and any other circumstances that should
be considered in the interest of justice.” Id. at 70 n.3 (internal
quotations and citations omitted).
In re Salvador, 570 B.R. at 476, quoting In re Simmons, 525 B.R. at 547.
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.”
Judge Feeney then set out the elements and allocation of the burdens
of proof that she drew on in reaching her decision, citing In re Mahfouz, 529
B.R. 431, 445 (Bankr. D. Mass. 2015).
Section 727(a)(3) involves a shift in the burden of proof. “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.’” Lassman v. Keefe (In re Keefe), 380 B.R.
116, 120 (Bankr. D. Mass. 2007). Once the objecting party has
met its initial burden, the burden then shifts to the debtor to
establish either that the debtor maintained adequate books and
records from which his financial condition can be ascertained or
that the failure to keep adequate books and records can be
justified under the circumstances. Cohen Steel Supply, Inc. v.
Fagnant (In re Fagnant), 2005 WL 1244866, at *3 (Bankr. D.
N.H. Apr. 14, 2005) (citations omitted), aff’d, 337 B.R. 729 (1st
Cir. BAP 2006). Intent to conceal a debtor’s financial
condition is not a necessary element to support an
objection to discharge for failure to keep books and
records. Thaler v. Erdheim (In re Erdheim), 197 B.R. 23, 29
(Bankr. E.D.N.Y. 1996) (emphasis added).
In re Salvador, 570 B.R. at 476. As the Supreme Court has held, a creditor
is ultimately held to proof by a preponderance of the evidence in opposing a
discharge. See Grogan v. Garner, 498 U.S. 654, 659 (1991).
Judge Feeney’s application of the law is unassailable. As did Judge
Feeney, I read the statute in the disjunctive, see Loughrin v. U.S., 134 S. Ct.
2384, 2390 (2014) (“As we have recognized, [or]’s ordinary use is almost
always disjunctive, that is, the words it connects are to be given separate
meanings.”), (quoting United States v. Woods, 134 S. Ct. 557, 567 (2013)) –
“that 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.” (Emphasis added). The evidence amply
supported Judge Feeney’s finding that the Salvadors had failed to maintain
and preserve paper and electronic records from which the financial condition
of Salvador Co. could have been ascertained. The testimony of Steen, Bearce,
and Hegarty supported the finding, as did that of John Horan, the Salvadors’
personal tax accountant. The Salvadors’ trial testimony was not to the
contrary, at least as to the failure to maintain and preserve the Salvador Co.
At oral argument on appeal, Attorney Cruikshank maintained that
Judge Feeney misapplied the law in denying a discharge without “significant
evidence of a blatant disregard of maintaining books and records.” Counsel
argued that the cases cited by Judge Feeney – Lassman, In re Simmons, and
In re Manfredonia – presented far more egregious instances of misbehavior
than anything attributed to the Salvadors.
That may be true in some
respects, but section 727(a)(3) does not incorporate an “egregiousness”
standard, only a requirement of reasonable conduct. While Judge Feeney
did not find conclusively that the Salvadors had intentionally scrubbed the
files (although if they did not, she found strong evidence that relatives did so
at their behest), her finding, see In re Salavador, 570 B.R. at 476, that the
Salvadors, who were “successful and sophisticated businessmen,” had failed
to reasonably maintain and preserve the required records has overwhelming
support in the record. 7
For the foregoing reasons, the order denying the Salvadors discharge
under 11 U.S.C. § 727(a)(3) is AFFIRMED.
/s/ Richard G. Stearns
The Salvadors’ spoliation “defense” never gets past the starting line
for two reasons. First, as the court noted at the hearing on the appeal, the
defense does not apply “to evidence which is not in the litigant’s possession
or custody and over which the litigant [in this case Kaplan] has no control.”
Hofer v. Gap, Inc., 516 F. Supp. 2d 161, 170-171 (D. Mass. 2007), quoting
Townsend v. Am. Insulated Panel Co., 174 F.R.D. 1, 4 (D. Mass. 1997).
Moreover, the adverse inference typically requires a finding of bad faith, see
United States v. Laurent, 607 F.3d 895, 902-903 (1st Cir. 2010), and there
is no evidence of bad faith here. (Bearce testified that Salvador Co.’s records,
paper and electronic, had been shredded in order to protect former clients’
personal information. App. at 125. Second (as Kaplan notes), the Salvadors
failed to request the drawing of an adverse inference at trial and therefore
waived any appellate argument on the subject. The court agrees that simply
“elicit[ing] testimony from Mr. Bearce [at trial] that the evidence had been
destroyed”, Kaplan Reply Br. at 3, was inadequate to preserve the issue.
UNITED STATES DISTRICT JUDGE
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