Macway, et al. v. United States Trustee, Reno
Filing
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ORDER - The bankruptcy court's judgment denying Macway's bankruptcy discharge pursuant to 11 U.S.C. § 727(a)(3) is affirmed Signed by Judge Miranda M. Du on 8/4/2014. (Copies have been distributed pursuant to the NEF - DRM)( Copy mailed to U.S. Bankruptcy Court on 8/4/2014. )
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UNITED STATES DISTRICT COURT
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DISTRICT OF NEVADA
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***
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In re
Case No. 3:12-cv-00519-MMD-WGC
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KENNETH HOWARD MACWAY, and
JOYCE LAMBERT MACWAY,
ORDER
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Debtors.
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KENNETH HOWARD MACWAY,
Appellant,
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v.
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UNITED STATES TRUSTEE,
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Appellee.
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I.
SUMMARY
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This appeal by Appellant Kenneth Howard Macway (“Macway”) challenges the
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denial of a bankruptcy discharge by the United States Bankruptcy Court for the District of
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Nevada. (Dkt. no. 6.) Appellee United States Trustee (“U.S. Trustee”) brought two denial
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of discharge claims pursuant to, respectively, 11 U.S.C. § 727(a)(3) and 11 U.S.C. §
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727(a)(5). Following trial, the bankruptcy court entered judgment granting the U.S.
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Trustee’s claim pursuant to § 727(a)(3), and denying discharge under that section, but
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finding that the U.S. trustee failed to satisfy its burden under § 727(a)(5). For the reasons
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set out below, the bankruptcy court’s Order is affirmed.
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II.
BACKGROUND
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The following factual background is derived largely from the findings of fact
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entered by the bankruptcy court regarding denial of Macway’s discharge. Macway does
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not contest the following facts.
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Macway and his wife filed for voluntary chapter 7 bankruptcy on March 25, 2010.
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(Dkt. no. 6, Ex. A at 2.) The U.S. Trustee filed the Complaint for Denial of Discharge
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(“Complaint”) alleging two claims for denial of discharge, pursuant to 11 U.S.C. §
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727(a)(3) and § 727(a)(5) respectively. (Id.) After two days of trial, the bankruptcy court
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granted the U.S. Trustee’s claim for denial of discharge pursuant to 11 U.S.C. §
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727(a)(3) and denied the U.S. Trustee’s claim for denial of discharge pursuant to 11
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U.S.C. § 727(a)(5). (Id. at 3-4.)
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Macway has an MBA, keeps detailed personal records, and was the Manager of
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Technology & Engineering Evaluation for the Kerr-McGee Corporation for fourteen (14)
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years where he developed a program to manage and track annual capital expenditures.
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(Id. at 5.) He is also an “advantage gambler” who “gambles when the odds are in his
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favor, to obtain money, ‘comps’ from a casino, and entry into tournaments where prizes
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are available.” (Id. at 6.) When gambling, Macway sometimes “rat-holed’ chips, which
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means pocketing them so that they are not countable, and sometimes removed his own
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player tracking card and used his wife’s instead. (Id.) From 2002 to 2009, Macway
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started and ran a gambling partnership called “Advantage Play Combined Syndicate”
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(“Syndicate”). (Id.) Macway received approximately $495,000 from approximately thirty
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(30) investors and lenders for Macway to gamble on behalf of the Syndicate so that the
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profits could be shared. (Id.) A lot of the money given to Macway for the Syndicate was
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in cash. (Id. at 7.)
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Macway also withdrew money from his retirement account, which held $513,708
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after June 1, 2005, and dropped to only $5,000 as of December 31, 2006. (Id. at 8.) This
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withdrawn money was comingled with Syndicate money and not placed in any of
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Macway’s bank accounts. (Id.)
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The money for the Syndicate was not kept in any bank account. (Id. at 7-8.)
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Macway could not produce original records of the money invested or loaned for the
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Syndicate, though he was able to provide a “recreated list of members including
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amounts invested or loaned”. (Id. at 7.) Macway produced few contemporaneously kept
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records, did not produce a gaming diary or log, had no records of any repayments to the
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Syndicate, had no records of money reinvested, and did not produce any W-2Gs or
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1099s. (Id. at 7-8.) Macway had a computer failure in 2006, and subsequent failures,
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which resulted in records being lost. (Id. at 8.)
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III.
DISCUSSION
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11 U.S.C. § 727(a)(3) states that the bankruptcy court shall grant the debtor a
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discharge unless “the debtor has concealed, destroyed, mutilated, falsified, or failed to
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keep or preserve any recorded information, including books, documents, records, and
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papers, from which the debtor's financial condition or business transactions might be
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ascertained, unless such act or failure to act was justified under all of the circumstances
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of the case[.]”
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Macway argues that the bankruptcy court “erred” in denying discharge pursuant to
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§ 727(a)(3) because: (1) Macway “provided sufficient documents to satisfy his chapter 7
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trustee, his investors and his creditors” as evidenced by the fact that these parties did
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not testify or take adversarial action (dkt. no. 6 at 4, 6); (2) the U.S. Trustee “presented
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no comparable syndicate player to testify as to how records should be kept” (id. at 6); (3)
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there was no proof that Macway’s “recreated list of members including amounts invested
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or loaned” was inaccurate (id. at 8); (4) the “win-loss” records kept by the casinos and
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provided by Macway should not have been deemed “less credible” on the basis that they
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were not maintained by Macway (id. at 9); and (5) the bankruptcy court’s denial of the
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U.S. Trustee’s claim pursuant to § 727(a)(5) was sufficient to defeat the U.S. Trustee’s
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claim under § 727(a)(3) as well (id. at 9-11).
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A.
Legal Standard
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“[T]he Ninth Circuit standard of review of a judgment on an objection to discharge
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is that: (1) the court's determinations of the historical facts are reviewed for clear error;
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(2) the selection of the applicable legal rules under § 727 is reviewed de novo; and (3)
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the application of the facts to those rules requiring the exercise of judgments about
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values animating the rules is reviewed de novo.” Searles v. Riley (In re Searles), 317
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B.R. 368, 373 (B.A.P. 9th Cir. 1999) (quoting Beauchamp v. Hoose (In re Beauchamp),
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236 B.R. 727, 729–30 (B.A.P. 9th Cir. 1999)).
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“Because discharge is a matter generally left to the sound discretion of the
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bankruptcy judge, [courts] disturb this determination only if [they] find a gross abuse of
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discretion.” Lansdowne v. Cox (In re Cox), 41 F.3d 1294, 1296 (9th Cir. 1994) (citation
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omitted). Accordingly, district courts “defer to the bankruptcy court's conclusion . . .
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unless its factual findings are clearly erroneous or it applies the incorrect legal standard.”
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Id. “When there are two permissible views of the evidence, the trial judge's choice
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between them cannot be clearly erroneous.” Baldwin Builders v. Gould (In re Baldwin
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Builders), 232 B.R. 406, 410 (B.A.P. 9th Cir. 1999) (citing Anderson v. Bessemer City,
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470 U.S. 564, 574 (1985)).
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A prima facie case under § 727(a)(3) is established by showing that: “(1) the
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debtor failed to maintain and preserve adequate records; and (2) this failure rendered it
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impossible to ascertain the debtor's financial condition and material business
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transactions.” Hussain v. Malik (In re Hussain), 508 B.R. 417, 423-24 (B.A.P. 9th Cir.
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2014) (citing Caneva v. Sun Cmtys. Ltd. P’ship (In re Caneva), 550 F.3d 755, 761 (9th
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Cir. 2008)). Once a prima facie showing is made, the burden shifts to the debtor to
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“justify the inadequacy or nonexistence of records.” Id. (citing Cox v. Lansdowne (In re
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Cox), 904 F.2d 1399, 1401-02 (9th Cir. 1990)).
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B.
Analysis
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Macway argues that the bankruptcy court should not have denied discharge
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because Macway’s “chapter 7 trustee, his investors and his creditors” did not take
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adversarial action against him or testify against him and thus “[o]ne must assume that
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they did not dispute [his] filings.” (Dkt. no. 6 at 4, 5-6.) Though not entirely clear, this
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appears to be an argument that the bankruptcy court applied the wrong legal standard.
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The Court reviews the bankruptcy court’s use of the rules de novo and disagrees. There
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is no explicit requirement that a party advancing a § 727(a)(3) claim prove that an
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investor or creditor actually attempted to ascertain the debtor's financial activity and
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failed to do so, nor does Macway provide any legal authority to support such a
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requirement.
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Further, “[t]he purpose of [§ 717(a)(3)] is to make the privilege of discharge
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dependent on a true presentation of the debtor's financial affairs.” Cox v. Cox (In re
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Cox), 904 F.2d 1399, 1401 (9th Cir. 1990) (emphasis added and internal quotation
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marks and citation omitted). The obligation is thus on the debtor seeking that privilege to
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maintain proper records in order to accurately present his financial affairs. Here, Macway
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sought the privilege of a discharge in bankruptcy court, and the U.S. Trustee brought a
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claim asserting Macway’s records were inadequate under § 727(a)(3). Macway does not
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argue that the U.S. Trustee did not have standing to assert its § 727(a)(3) claim. With the
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matter properly before it, a bankruptcy court is perfectly capable of determining, in its
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discretion and without the assistance of testimony from actual creditors or investors, that
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a debtor “failed to maintain and preserve adequate records,” that said failure “rendered it
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impossible to ascertain the debtor's financial condition and material business
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transactions” and that debtor failed to “justify the inadequacy or nonexistence of
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records.” See Hussain, 508 B.R. at 423-24.
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Similarly, the U.S. Trustee was not required to present a “comparable syndicate
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player to testify as to how records should be kept.” (Dkt. no. 6 at 8.) The Court reviews
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this issue de novo and finds that such a requirement would be a misapplication of the
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relevant legal standard. In support of his position that such testimony is required,
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Macway cites to Gross v. Russo (In re Russo), 3 B.R. 28, 34 (E.D.N.Y. 1980), which
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stated that “justification for a bankrupt's failure to keep or preserve books or records will
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depend on the extent and nature of his transactions and whether others in like
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circumstances would ordinarily keep them.” However, the Russo court was analyzing the
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portion of § 727(a)(3) that asks whether failure to keep or preserve books or records is
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“justified under all of the circumstances of the case[.]” Id. The Russo court had already
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concluded that the debtor “failed to keep or preserve books or records from which his
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financial condition and business transactions might be ascertained” before the court
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even reached Macway’s cited analysis. Id. Under the relevant legal standard in the Ninth
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Circuit, once it is shown that debtor “failed to maintain and preserve adequate records”
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making it “impossible to ascertain the debtor's financial condition and material business
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transactions,” as the Russo court had already determined, the burden is then on the
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debtor to “justify the inadequacy or nonexistence of records.” See Hussain, 508 B.R. at
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423-24. The U.S. Trustee was not obligated, under this legal standard, to affirmatively
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present the testimony of another “syndicate player” that kept better records. Macway
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certainly had the opportunity, and indeed the burden, to justify the inadequacy or
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nonexistence of his records. He decided to rely on his own testimony and not call any
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witnesses. (See dkt. no. 8 at 24.)
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Macway challenges the bankruptcy court’s factual finding that Macway’s
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“recreated list of members including amounts invested or loaned” was inaccurate. (Dkt.
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no. 6 at 8.) Specifically, the bankruptcy court found that it “was not persuaded that this
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list was totally accurate.” (Dkt. no. 6, Exh. A at 6.) The Court determines that this factual
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finding is supported by the record and not clearly erroneous. Macway testified that he
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created the list after bankruptcy was filed, and in large part from his memory. (Dkt. no. 9,
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Exh. F at 34-37.) The time between when he began the Syndicate and when he filed for
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bankruptcy was approximately eight (8) years. (Dkt. no. 6, Exh. A at 2, 6.) He also
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testified that he received a lot of the Syndicate’s money in cash and put it directly into
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gambling without first placing it in a bank account. (Id. at 46-47.) Of approximately thirty
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(30) Syndicate partners on the recreated list, Macway could only produce notes and
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certificates for eight. (Id. at 49-50.) Given the reliance on memory of events that occurred
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up to eight years prior, and the lack of bank records and documentation to support the
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recreated list, it was entirely permissible for the bankruptcy court to find that it was not
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persuaded as to the list’s complete accuracy.
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Macway further challenges the bankruptcy court’s finding that “win-loss” records
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kept by the casinos and provided by Macway are “less credible” because they were not
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maintained by Macway. (Dkt. no. 6 at 9.) The bankruptcy court made no such finding of
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credibility. The bankruptcy court found that the win-loss statements, along with the other
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records produced, “do not allow one to ascertain [Macway’s] financial condition or his
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business transactions for a reasonable time” is supported by the record and not clear
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error. (See dkt. no. 6, Exh. A at 9.) The Court determines that this factual finding is
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supported by the record and not clearly erroneous. Macway testified that every casino
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prepares win-loss statements in different ways, (dkt. no. 8, Exh. G at 91), that the win-
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loss statements did not reflect income from tournament wins, (id. at 94-95), and that the
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win-loss statements do not reflect income when he uses his wife’s player tracking card
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(id. at 96). Macway recognized that due to the inaccuracies of the win-loss statements
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resulting from his switching of player tracking cards, he would have to go back and
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amend prior tax returns. (Id. at 136-37.) Joseph Pane, a fellow advantage gambler and
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investor in the Syndicate, also testified that players can “rat-hole” chips so that it appears
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to the casino as though the player is not winning. (See id. at 20; dkt. no. 8 at 20.) He
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testified that Macway would engage in this practice. (Id.) In light of the varying ways in
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which the win-loss statements are prepared and their failure to reflect income earned
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from tournaments, from gambling under a different player tracking card and from rat-
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holing chips, it was permissible for the bankruptcy court to find that these statements
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were insufficient to allow one to ascertain reliable financial information.
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Finally, Macway argues that the bankruptcy court’s denial of the U.S. Trustee’s
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claim pursuant to § 727(a)(5) was sufficient to defeat the U.S. Trustee’s claim under §
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727(a)(3) as well. (Dkt. no. 6 at 9-11.) 11 U.S.C. § 727(a)(5) states that the bankruptcy
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court shall grant a discharge unless “the debtor has failed to explain satisfactorily, before
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determination of denial of discharge under this paragraph, any loss of assets or
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deficiency of assets to meet the debtor's liabilities[.]” The bankruptcy court found
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Macway’s testimony that he gambled the money away to be “probably correct” and
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satisfactory for the purposes of § 727(a)(5). (Dkt. no. 6, Exh. A at 12.) Macway argues,
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without support of legal authority, that it is “conceptually inconsistent” for the bankruptcy
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court to find that Macway’s testimony was “sufficient to convince it that the money had
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been gambled away” but “insufficient for creditors to ascertain [Macway’s] financial
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condition or business transactions.” (Dkt. no. 6 at 11.) The Court disagrees. Macway’s
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testimony that he gambled the money away does not absolve him of his “affirmative
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duty” to keep and preserve records. See Caneva, 550 at 762. As the Court stated
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previously, the “purpose of § 727(a)(3) is to make discharge dependent on the debtor's
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true presentation of his financial affairs.” Cox, 904 F.2d at 1401. The mere fact that he
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lost the Syndicate’s money gambling does not reveal, among many things, the
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transactions through which that money was lost or the amount contributed by each
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creditor and investor. The Court finds this argument is without merit.
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Based on the evidence, the bankruptcy court did not err in concluding that the
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records produced by Macway “do not allow one to ascertain [Macway’s] financial
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condition or his business transactions for a reasonable time. (Dkt. no. 6, Exh. A at 9.)
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Macway is a smart man, with an MBA and a history of keeping personal and financial
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records. (Id. at 5.) Yet with nearly half a million dollars from investors and lenders lost
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though his gambling enterprise, Macway could not produce any original records, a
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gaming diary or log, records of any repayments to the Syndicate, or records of money
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reinvested. (Id. at 7-8.) The best Macway could provide is a list from memory of events
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dating back to eight (8) years and win-loss statements that are prone to inaccuracies.
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Macway failed to present evidence, in order to justify his insufficient records, that
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gamblers conducting a gambling business with others’ money also rely on win-loss
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statements and don not ordinarily keep records. (Id. at 11.)
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IV.
CONCLUSION
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The Court notes that the parties made several arguments and cited to several
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cases not discussed above. The Court has reviewed these arguments and cases and
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determines that they do not warrant discussion or reconsideration as they do not affect
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the outcome of this appeal.
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It is therefore ordered that the bankruptcy court’s judgment denying Macway’s
bankruptcy discharge pursuant to 11 U.S.C. § 727(a)(3) is affirmed.
DATED THIS 4th day of August 2014.
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MIRANDA M. DU
UNITED STATES DISTRICT JUDGE
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