Debtors May Be Denied Discharge for Inadequate Financial Records

In Harrington v. Simmons (In re Simmons), 513 B.R. 161 (Bankr. D. Mass. 2014), the U.S. Bankruptcy Court for the District of Massachusetts considered the U.S. trustee’s request that a Chapter 7 debtor be denied a discharge for his failure to maintain adequate financial records or satisfactorily explain the loss of his assets. In its decision on the trustee’s motion for summary judgment, the court noted that the debtor was unable to justify his inadequate financial recordkeeping; was remarkably uncooperative in connection with the trustee’s attempts to obtain a satisfactory picture of his financial condition; did not produce an accurate account of various real estate transactions; and provided virtually no detail of his chronic losses. Consequently, the court granted the U.S. trustee’s motion and denied the debtor’s discharge.

Facts

Michael J. Simmons, the debtor in this case, dropped out of college in the 1990s to pursue residential real estate investments with a business partner named Kai Kunz. For a period spanning about 10 years, Simmons turned over to Kunz virtually all of his income from various low-paying jobs in order to help finance Kunz’s purchases of income-producing real property. During a Federal Rule of Bankruptcy Procedure 2004 examination of Simmons by the U.S. trustee, Simmons testified that he did not know how much money he had given to Kunz during this period. In 2006 and 2007, acting on Kunz’s advice, Simmons undertook to acquire 27 of his own residential properties. Based on the opinion, Simmons’ involvement in his own residential real estate business was defined by his lack of financial sophistication and a staggering amount of blind trust in his partner, Kunz, who identified the properties for Simmons to buy, arranged for financing, and retained property managers to handle rents and disburse profits to Simmons. In his Rule 2004 examination, Simmons alluded to his faith in Kunz, who had convinced Simmons to grant second and third liens on various of the properties that Simmons purchased, telling Simmons that “this was the way to go.”