Debtor Can't Blame Adversary for Missing Bank Records

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By Stephanie Cumings

Oct. 29 — A patent attorney who couldn't account for $3 million in missing income was rightly denied a bankruptcy discharge when he tried to foist his duty to provide financial records on to his adversary.

Judge Sam Sparks said that even though the debtor's opposing party had been willing to obtain some of the financial records with the debtor's authorization, this didn't absolve the debtor of his duty to make sure that all the relevant documents were provided.

Suspicious Bankruptcy Filing

Attorney Raymond Galasso filed for Chapter 7 bankruptcy shortly after a $505,000 judgment was entered against him in a patent infringement suit. Kevin Imes, the winner in that lawsuit, was suspicious of the bankruptcy filing because he knew that Galasso had recently taken in a significant amount of income, including a $1 million settlement.

When Galasso failed to provide complete bank records, Imes filed a suit arguing that Galasso should be denied a discharge under Section 727(a)(3) and (5) of the Bankruptcy Code for failing to keep financial records and failing to explain lost assets.

Missing $3 Million

During the pendency of the suit, Galasso repeatedly refused to produce bank statements. He argued that he wasn't obligated to because he had given Imes authorization to obtain the documents himself. The bankruptcy court made clear to Galasso that the burden remained on him to provide the relevant documents.

Shortly before the trial, Galasso finally turned over a large number of previously unproduced documents to Imes. But the bankruptcy court refused to let Galasso rely on any of the documents he had turned over after the relevant deadline. After the trial, the bankruptcy court held that Galasso should be denied a discharge for failing to show where $3 million he had collected between 2008 and 2010 had gone.

The bankruptcy court chastised him for his “nearly complete failure to preserve and maintain the books and records that one would ordinarily expect and from which the disposition of all that money could be ascertained.”

Incomplete Record

On appeal, Galasso failed to include a complete transcript of the trial proceedings and Imes argued the appeal should be dismissed in its entirety. An appellant must file certain documents for the record on appeal, including testimony and exhibits relevant to issues the appellant seeks to contest.

The district court found that although the record on appeal was incomplete, it was sufficient for the court to review Galasso's arguments regarding the alleged agreement he had with Imes about providing documents. But the court found the record insufficient to permit a review of the several other issues Galasso raised on appeal.

No Official Agreement

The court found that the bankruptcy court didn't err in finding there was no official agreement that Imes would provide Galasso's financial records. Galasso argued that the agreement was reached at the initial meeting of the creditors, but the court said this meeting took place long before Imes's suit was even filed. The district court also noted that the discussion at that meeting “did not mention or even contemplate the parties' burdens in an adversary proceeding.”

“As the [b]ankruptcy [c]ourt noted, the transcript reflects nothing more than Imes's willingness to obtain some third-party records at his own cost with Galasso's authorization,” the court said.

The court also found that the bankruptcy court properly sanctioned Galasso by refusing to let him use the documents he produced after the deadline. The court said that Galasso knew that “he was required to produce the missing documents despite giving Imes authorizations, confirmed he understood that requirement, and nevertheless failed either to timely produce them or to move for an extension of time to complete discovery.”

To contact the reporter on this story: Stephanie Cumings in Washington at sacree@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com