Bankruptcy Court Clarifies Records Retention Rule

What happens when a creditor files a lawsuit demanding that your bankruptcy discharge not be issued?  Can your creditor prevent you from getting a “fresh start” after bankruptcy?  Of course it depends on the facts in each case.  In a case regarding the retention of business records, the Bankruptcy Court made a clear distinction between records that the debtor has or should have, and refuses to turn over, and records that the debtor does not have.

In this case, derived from a landlord tenant relationship, the retention of records for the bankruptcy proceeding became the issue.

Bankruptcy Court Adversary Proceeding

In an Adversary Proceeding in Massachusetts Bankruptcy Court regarding a Chapter 7 debtor Timothy Joslin, decided by Judge Bailey last month, involved a debtor who owned a restaurant known as Boat House Pub in Marshfield.  The landlord, Marina, filed for eviction for nonpayment of rent.  Apparently, there were significant rental arrears.  In the course of the physical eviction, Joslin was not on the premises.  A constable changed the locks and provided Joslin with a copy of the Court Order.  Wherefore, many items, including his business records, were left in the restaurant.  In addition, Joslin’s computer, filing cabinet, credit card receipts, and checkbooks.  Marina’s position, however, was that it was the responsibility of Joslin to regain the records, or obtain them from third parties (banks, etc.).

Creditor Refuses to Return Debtor’s Records

What appears ironic in this case is that the creditor had possession of the very records they want to force the debtor to produce.  Following the eviction, the debtor asked for his records, but the debtor refused.  Perhaps, with $242,101 in back rent owed, the landlord was furious and not willing to put up with any requests by the former tenant.  The Bankruptcy Court found that the “justified under all of the circumstances” in this matter.

The creditor made formal requests for the records in the course of the Bankruptcy Court litigation, and the Court found that “most of the documents requested were not in Joslin’s possession or control.”

What Does the Bankruptcy Court Require for Record Retention

Under 11 U.S.C. Section727(a)(3) the bankruptcy law requires that a bankruptcy discharge shall not be allowed if the debtor conceals, destroys, mutilates, falsified, or fails to keep records regarding the debtor’s financial condition.  The burden of proof is on the creditor objecting to the discharge.

The Bankruptcy Court made it clear that the creditor does not have to prove “intent.”  That is, once the creditor proves that the debtor concealed, destroyed or otherwise prevented the records from being disclosed to the creditor.  The creditor need only prove:  1.  The debtor concealed or otherwise prevented the records from being disclosed and 2. That the records included information “from which the debtor’s financial condition or business transactions might be ascertained.”  Then the burden would shift to the debtor to prove “justification.”

Experienced Bankruptcy Attorney

Whether you own a small business and need information on how to file a bankruptcy, or you have records and you don’t know how to respond to a request by a debtor in bankruptcy proceeding, you should afford yourself the experience of an attorney who has been working for clients in Chapter 7 personal bankruptcy for 28 years.  We pride ourselves on determining prior to filing for a bankruptcy discharge what documents the trustee, or creditors, will demand.  As you can see in this case, carefully litigating this case in the Bankruptcy Court resulted in a full discharge of debts.

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