In re Hussain, 4.15.14

Case: In re Hussain

Summary: Personal income tax records may be insufficient to allow discharge in a business owner's  Chapter 7 Bankruptcy, where such discharge is objected to under U.S.C. 727(a)(3).  A bounced check, even signed without an amount payable and without naming a payee, is a negotiable instrument that  can confer Creditor status on the eventual payee.


Material and Procedural Facts:
For consideration of $162,000.00 Creditors believed they were purchasing a 25% interest in a partnership which, in turn, was to purchase and operate a gas station.  Debtor was purported to be another 25% interest holder in the same partnership.  In reality, the partnership never purchased or gained title to the gas station, as Debtor purchased the gas station himself.  Creditors sought repayment of their funds directly from Debtor.  Debtor issued two blank checks to a third party, who made them payable to Creditors in the total amount of $162,000.00.  Said checks were returned for insufficient funds.

Debtor filed Ch. 7 Bankruptcy.  Creditors filed an adversary complaint, objecting to Debtor's discharge under 727(a)(3), and seeking to except the above debt from discharge under 523(a). The Bankruptcy court found that Debtor failed to maintain adequate records, and thus found for the Creditors on their 727(a)(3) claim.

Debtor appealed, arguing 1) that Creditors did not have standing, 2)  Creditors did not make a prima facie case under 727(a)(3), and 3) that Debtor had met Debtor's burden of proof justifying lack of records.

The BAP Held:

1) The Creditors had standing:  The checks were negotiable instruments.  Being signed by the Debtor without a payee, they were payable to the bearer, and enforceable by anyone in possession.  Under California law, the returned checks created a "quasi-contractual" relationship between Debtor and Creditors, giving Creditors a claim against Debtor.  This claim conferred Creditor status on Creditors, which in turn gave them standing to object to discharge.

2) Creditors did make a prima facie case under 727(a)(3): The only relevant records of the business's transactions produced by the Debtor were Debtor's own personal tax returns, which debtor claimed were based on information regarding the gross profits of the business, given to Debtor's accountant.  This failed to reasonably present Debtor's financial condition or transactions relating to the business:  "where a business is involved, simply producing a bottom line number as to income earned, expenses incurred, or losses suffered during a calendar year may be insufficient.... This is particularly true in the context of a cash intensive business where creditors cannot easily identify possible preferences or fraudulent transfers without more detail."

3) Debtor failed to meet burden of proof justifying the lack of records: Debtor's arguments that Debtor lacked business sophistication and had limited proficiency in English were not raised in the Bankruptcy court, and so were not considered here.  Despite the business being a "mom and pop" business Debtor had a duty to maintain more than personal income tax statements.  Further, handing over all financial information to Debtor's accountant neither fufilled that duty nor justifiably  excused its non-performance.

 Interesting:

Debtor brought up the standing issue only on appeal, and Creditors claimed it was too late to raise that issue.  The Court stated that standing was a jurisdictional issue, and so had an independent obligation to consider it.

The Court paused in that prudential standing analysis though, citing Lexmark Int’l, Inc. v. Static Control Components, Inc. , explaining that the Supreme Court "stated that whether a plaintiff falls within a class legislatively authorized to sue under a federal statute is not a question of standing, but one of statutory interpretation," and that "limiting adjudication of a statutory claim, which otherwise presents a case or controversy, based on prudential grounds" was improper.

The Court found that here, the analysis was inconsequential, even if Appellees' status as Creditor were cast as an issue of statutory interpretation and not standing, the Court could exercise its discretion and address a "pure legal issue" central to the case, even if brought up for the first time on appeal.