Water Quality Services, Inc. v. Dick et al

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
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06/10/06
Water Quality Services, Inc. v. Wayne E. Dick, et al.
04-01020
Findings of Fact and Conclusions of Law From Trial on the Merits; Re: [1-1]
Complaint Objecting to Discharge of Debtors Pursuant to 11 U.S.C. Section 727
(c)(1); NOS 424 Objection To Discharge (727). Conclusion: Court will enter a
judgment for Defendants, dismissing this adversary proceeding with pr
Received on: 2005-01-12 09:12:45.000
2005-01-12 00:00:00.000
2005-01-12 00:00:00.000
James Burke
Case 04-01020-s Doc 15 Filed 01/12/05 Entered 01/12/05 09:38:00 Page 1 of 10

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
WAYNE DICK and
ROSE DICK,
Debtors. No. 7-03-18484 S
WATER QUALITY SERVICES, INC.,
Plaintiff,
v. Adv. No. 04-1020 S
WAYNE E. DICK, et al.,
Defendants.
FINDINGS OF FACT AND CONCLUSIONS
OF LAW FROM TRIAL ON THE MERITS
This matter came before the Court for trial on the merits
of Plaintiff’s Complaint Objecting to discharge under 11
U.S.C. §§ 727(a)(2) and (a)(3). Plaintiff appeared through
its attorneys John Nelson and Barbara Patterson. Defendants
appeared through their attorney Jimmy Craig. This is a core
proceeding. 28 U.S.C. § 157(b)(2)(J).
The Statute
Section 727(a) provides that the Court shall grant a
debtor a discharge, unless–
...
(2) the debtor, with intent to hinder, delay, or
defraud a creditor or an officer of the estate
charged with custody of property under this title,
has transferred, removed, destroyed, mutilated, or
concealed, or has permitted to be transferred,
removed, destroyed, mutilated, or concealed –
(A) property of the debtor, within one year
before the date of the filing of the
petition; or
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(B) property of the estate, after the date
of the filing of the petition;
[or]
(3) 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, unless such act or failure to act
was justified under all of the circumstances of the
case.
11 U.S.C. § 727(a).
Facts
1. Debtor/Defendant Wayne Dick was employed by Plaintiff, a
company involved in the water-treatment business, until
approximately August or September, 2002, when he received
a two week notice of termination.
2. On October 11, 2002, Mr. Dick signed a promissory note
for the purchase of “Aqua Dynamics”, another water
treatment company. The purchase contract provided for a
$15,000 down payment and $1,504 per month for 42 months,
including interest at 8.5% per year. Exhibit 1.
3. On or about October 8, 2002, Debtors opened a bank
account for the business, calling it “Aqua Pro” and the
first transaction recorded on the bank statement was on
October 10, 2002. Exhibit 6.
4. Aqua Pro sales receipts showing work done by Aqua Pro
appear in Exhibit 5. They start October 15, 2002, and
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the last one is dated February 2, 2003. Mr. Dick
testified that each sale generated one of these sales
receipts. He also testified that the last one he
generated was in February, 2003.
5. In December, 2002, Plaintiff sued Mr. Dick in state court
to enforce a noncompete covenant.
6. At this approximate time, Mr. Dick started keeping two
sets of records, one for cash receipts and one for check
receipts. After this time, Mr. Dick also gave cash to
his son, who would write checks on his account for Aqua
Pro expenses. Plaintiff produced no evidence that this
set of records was incomplete or inaccurate.
7. In the state court lawsuit, Plaintiff’s attorneys sought
and obtained some of Aqua Pro’s sales receipts.
Testimony of both parties makes it clear that Plaintiff
contacted at least one of Aqua Pro’s customers.
8. Mr. Dick operated Aqua Pro until the state court judge
told him he could not, which the Debtor believed was
sometime in July, 2003.
9. In August, 2003, Mr. Dick destroyed some of Aqua Pro’s
sales receipts. He testified that because Plaintiff
approached Aqua Pro’s customers after previously
obtaining sales receipts, he wanted to protect the
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customers from further contact by plaintiff. There is no
evidence that the information destroyed was material or
necessary to an understanding of the overall financial
condition of the business or its transactions.
10. Mr. Dick did not destroy any other business records.
11. Although Mr. Dick had a rather crude accounting system
for the business, by combining his books for cash
transactions and check transactions he was able to
account for his business receipts and disbursements, and
in fact filed income tax returns for both 2002 and 2003.
Plaintiff provided no evidence that the returns were
inaccurate, or that Mr. Dick was substantially unable to
account for major transactions. The Court saw no
evidence that would show the financial records provided
were misleading or falsified.
12. Aqua Pro was not a sophisticated business and did not
need a sophisticated accounting system. Total revenues
in 2002 were $2,375, and in 2003 were $44,024. Both
years resulted in net losses. It did not have many
customers, did not carry an inventory, and apparently the
only debt associated with Aqua Pro was Mr. Dick’s
purchase obligation for the business.
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13. Mr. Dick was a believable, but financially
unsophisticated, witness.
14. Rose Dick was not involved with Aqua Pro. She never
participated in the business or its management. She
played no role in the destruction of the sales receipts.
15. In September, 2003, Mr. Dick transferred Aqua Pro to his
son for no consideration. Mr. Dick testified that he
made this transfer because the state court judge told him
to get out of the business. Mr. Dick first offered to
return the business to the seller, but he did not want
it. Mr. Dick testified that the assets transferred were
of minimal value, consisting mostly of used water
conditioning equipment and accounts with questionable
value. Mr. Dick testified that the business did have
customers at the time, and his son was going to take care
of these customers. The Court finds that Mr. Dick did
not transfer Aqua Pro with the intent to hinder, delay,
or defraud anyone. The Court also finds that the value
transferred was de minimus. There is no evidence that
Ms. Dick was involved in the transfer of Aqua Pro.
16. On November 7, 2003, Mr. and Ms. Dick filed a voluntary
chapter 7 petition. On their statement of financial
affairs they disclosed the transfer of Aqua Pro to their
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son as a “gift” and stated “Court ordered that Debtor
divest himself of water conditioning business - value
unknown.”
17. There is no evidence that Mr. Dick retained any
continuing interest in Aqua Pro after the transfer.
There was evidence that the son paid $200 per month to
Mr. Dick, but that payment was for space rental.
Discussion
1. To deny a discharge under § 727(a)(2)(A) the objector
must show by a preponderance of the evidence that (1) the
debtor transferred, removed, concealed, destroyed, or
mutilated, (2) property of the estate, (3) within one
year prior to the bankruptcy filing, (4) with the intent
to hinder, delay, or defraud a creditor. Gullickson v.
Brown (In re Brown), 108 F.3d 1290, 1293 (10th Cir. 1997).
The Court has found that the transfer of Aqua Pro in this
case was not made with the intent to hinder, delay, or
defraud a creditor. Rather, Mr. Dick was complying with
a state court order to divest himself of the property.
The full disclosure of the transfer on Debtors’ Statement
of Financial Affairs further supports the lack of any
intent to hinder, delay, or defraud creditors. See Cadle
Co. v. Stewart (In re Stewart), 263 B.R. 608, 613 (10th
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Cir. B.A.P. 2001)(Full disclosure demonstrates lack of
fraudulent intent.) There is also no evidence of a
concealed, continuing interest in the business.
Discharge will not be denied under § 727(a)(2)(A).
2. To state a prima facie case under § 727(a)(3), the
objector must demonstrate that the debtor failed to
maintain and preserve adequate records and that the
failure made it impossible to ascertain his financial
condition and material business transactions. In re
Brown, 108 F.3d at 1295; In re Stewart, 263 B.R. at 615.
Records need not be so complete that they state
in detail all or substantially all of the
transactions taking place in the course of the
business. It is enough if they sufficiently
identify the transactions that intelligent
inquiry can be made respecting them.
Id. (citing Hedges v. Bushnell, 106 F.2d 979, 982 (10th
Cir. 1939).
3. The Court finds that 1) due to the small nature of Aqua
Pro’s business only minimal records were required, and 2)
Mr. Dick’s records, while unconventional, did allow the
Court to ascertain the business’ overall financial
condition and material transactions. The evidence
contains bank statements, ledgers of cash receipts,
ledgers of check receipts, indications of expenses, and
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1 The record before this Court does not indicate whether
Mr. Dick destroyed the sales receipts after an Order by the
state court, or after receipt of a discovery request, or
simply on a whim. Although the Court is entering a discharge
in this bankruptcy, and the Dicks’ liability to Plaintiff will
be discharged, this Opinion should not be construed as any
limitation whatsoever on the state court’s inherent ability to
deal with any issues related to the admitted destruction of
potential evidence in the lawsuit that was pending before it.
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filed tax returns. Therefore, Mr. Dick’s ill-advised1
destruction of certain records, in the long run, was not
such a material factor that the Court should deny
discharge. Discharge will not be denied under §
727(a)(3).
Conclusion
The Court will enter a judgment for the Defendants,
dismissing this adversary proceeding with prejudice, and
ordering the Clerk to enter discharge for the Debtors.
Honorable James S. Starzynski
United States Bankruptcy Judge
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I hereby certify that on January 12, 2005, a true and correct
copy of the foregoing was electronically transmitted, faxed,
delivered, or mailed to the listed counsel and/or parties.
John Nelson
PO Box 700
Roswell, NM 88201-0700
Marion J Craig, III
PO Box 1436
Roswell, NM 88202-1436
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