[00:00:02] Speaker 01:
Chavez Nunez, John Downing, Council for Appellant Alma Angelina Chavez Nunez, Benjamin Taggart, Council for Appellee Kimberly J. Husted, Chapter 7, Trustee.

[00:00:18] Speaker 02:
All right, good morning.

[00:00:20] Speaker 02:
Does the appellant want to reserve any time for rebuttal?

[00:00:24] Speaker 05:
I'm going to reserve three minutes.

[00:00:26] Speaker 02:
All right, please begin.

[00:00:29] Speaker 05:
Yes, Your Honor.

[00:00:31] Speaker 05:
I think I'm gonna start with the point that a denial of discharge should be an exception, not a rule, that there should be, you know, in keeping with the fresh start purposes behind the bankruptcy court, the court should construe section 727 liberally in favor of debtors and strictly against the trustee in this case.

[00:00:58] Speaker 05:
And I think the thing that's unusual

[00:01:01] Speaker 05:
about the court's order that we're appealing from is that the trustee alleged five separate causes of action under section 727.

[00:01:14] Speaker 05:
We won on four of the five.

[00:01:17] Speaker 05:
And I think that there's no basis for a finding of fraudulent intent, which we think is required.

[00:01:23] Speaker 05:
under 727A4D, the fifth cause of action.

[00:01:28] Speaker 03:
Before we get into that, counsel, before we get into that, what's striking about your case is that this is as clear a factual question as there can be, isn't it?

[00:01:39] Speaker 03:
Was there a knowing of fraudulent intent?

[00:01:44] Speaker 05:
I agree that it is a factual inquiry.

[00:01:47] Speaker 05:
I just don't think that the court addressed the statements that were made.

[00:01:52] Speaker 05:
In the Eastern District, we use this alternative direct testimony, which I think is a good thing.

[00:02:00] Speaker 05:
It saves the trial court or saves bankruptcy courts a heck of a lot of time on these trials, which would otherwise go days instead of hours.

[00:02:09] Speaker 05:
But it does create sometimes an issue where

[00:02:13] Speaker 05:
something in the alternative direct testimony is not addressed.

[00:02:18] Speaker 03:
Well, but the evidence, the record clearly shows that the trustee testified that she asked for the Excel spreadsheet and for the backup for the taxes, specifically the expenses that were denied that creates the $6 million debt to the IRS, which both seemed to be fairly reasonable since the Excel spreadsheet by her testimony, and it wasn't really refuted, was it?

[00:02:39] Speaker 03:
the excel spreadsheet was used to document the the income and use for the taxes pre-petition of the four businesses that the debtor was operating right but i think that you're missing i think the court missed that

[00:02:54] Speaker 05:
the finding, I think there still would be, one of the reasons we won on the four causes of action was the absence of any testimony from the certified public account.

[00:03:06] Speaker 03:
Those go to the transfers, which are wholly different rather than giving the documents that the debtor seems to acknowledge existed, but were never given

[00:03:18] Speaker 03:
And the testimony seems to read for a fair inference that it's a trust me, you don't need them kind of defense.

[00:03:27] Speaker 05:
Well, I think that if you look at the court's finding with respect to the fourth claim of relief, which does not have to do with these transfers, quote from it, because I think the same reasoning should be applied to the fifth cause of action.

[00:03:44] Speaker 05:
And I think reading from the excerpts of record

[00:03:47] Speaker 05:
151, starting at line seven, defendant gave plaintiff some financial records with the sum italicized.

[00:03:57] Speaker 05:
Missing, however, is admissible evidence as to how or why the records defendants gave plaintiff were inadequate.

[00:04:03] Speaker 05:
More precisely, there was no testimony from the accountant as the individual who reviewed and analyzed the records defendant gave plaintiff, explaining why the records defendant gave plaintiff were insufficient

[00:04:15] Speaker 05:
or inadequate.

[00:04:16] Speaker 03:
And on that claim... Isn't that different than an existing known document such as the Excel spreadsheet?

[00:04:25] Speaker 03:
Why wasn't it never given over?

[00:04:28] Speaker 03:
And the inference, it seems that the court took is she didn't want to because there could be something incriminating.

[00:04:36] Speaker 05:
Well, I think the inference, I think that there should still be a requirement on the part of the trustee to have established that these were material.

[00:04:46] Speaker 03:
How can you establish it if you don't have the document?

[00:04:48] Speaker 03:
I mean, the testimony was that it's all in the QuickBooks, right?

[00:04:52] Speaker 03:
And apparently the trustee did not believe that, nor did the court, which can be refuted by giving the Excel spreadsheet.

[00:05:00] Speaker 05:
No, actually, well, I don't necessarily disagree with you there, but I do disagree with you as far as the only person who could testify as to what was in the QuickBooks and the only person who could testify as to whether there was some fraudulent scheme to hide anything or whether the business should have been valued at a million dollars versus $1,000.

[00:05:25] Speaker 05:
was the cpa and his testimony was completely missing because he was not called as a witness so i think that was the cpa going to testify as to the excel spreadsheet because it doesn't happen the cpa would test would presumably have testified or could have testified if he had been called

[00:05:42] Speaker 05:
that I've reviewed the Quickbook records.

[00:05:45] Speaker 05:
They only go back so far.

[00:05:46] Speaker 05:
Based on the Quickbook records that I've been provided, I cannot make any sort of estimate as to what the value of the business is or whether the business

[00:05:57] Speaker 05:
was affected by these supposed transfers.

[00:06:01] Speaker 02:
So are you saying that they needed the testimony of a third party before they could establish fraudulent intent because the debtor failed to turn over a piece of paper?

[00:06:16] Speaker 05:
Well, I'm saying that based the first, second, third, and fourth causes of action were all denied based on

[00:06:23] Speaker 05:
a finding that without the testimony from the CPA, my client, without the testimony from the CPA, the trustee had not met her burden in establishing fraudulent intent on behalf.

[00:06:37] Speaker 04:
Council, I want to drill down, I want to drill down to the one issue before us.

[00:06:42] Speaker 04:
Those other causes of action, those are not before us.

[00:06:45] Speaker 04:
Your client won on those.

[00:06:47] Speaker 04:
You brought up this other one.

[00:06:49] Speaker 04:
And going through 727,

[00:06:54] Speaker 04:
on this one cause of action, there's no dispute that your client withheld possession of recorded information.

[00:07:00] Speaker 04:
Is that correct?

[00:07:04] Speaker 05:
Well, I think she testified she did not recall, but I would say that, yes, she did not provide the Excel spreadsheet.

[00:07:11] Speaker 04:
And she knew she had Excel spreadsheets, and if they weren't provided, the knowing element is there.

[00:07:18] Speaker 04:
So really,

[00:07:20] Speaker 04:
The fraud that we look at here is did she fraudulently withhold possession of recorded information?

[00:07:27] Speaker 04:
We know she withheld possession of recorded information.

[00:07:30] Speaker 04:
We know that she knowingly did so.

[00:07:34] Speaker 04:
So comment on the remaining piece.

[00:07:37] Speaker 05:
All right.

[00:07:37] Speaker 05:
And I do want to distinguish between the, I mean, I'm focused on the Excel spreadsheet because I think the tax returns

[00:07:43] Speaker 05:
I don't think there's a showing that she knowingly withheld them or had them because I think that was an issue again, where there was some testimony regarding a hearsay statement from an IRS agent that he did or did not have them.

[00:07:57] Speaker 05:
So I mean, I think really this is the spreadsheet because I think with the tax, and I don't want to get too far off track, but the taxes were something that was in her interest to provide.

[00:08:07] Speaker 05:
So I don't see how

[00:08:09] Speaker 05:
that you could ever prove fraudulent intent there.

[00:08:12] Speaker 05:
But with respect to the Excel spreadsheet, our argument is that she provided the QuickBooks and there's no showing that the QuickBooks were not sufficient to establish the condition of her business.

[00:08:25] Speaker 03:
Because you didn't have the Excel spreadsheet.

[00:08:28] Speaker 03:
I mean, you're kind of looping back around, right?

[00:08:31] Speaker 03:
Look at the QuickBooks.

[00:08:32] Speaker 03:
It contains everything because we say so.

[00:08:35] Speaker 03:
And don't look at the Excel spreadsheet because you don't need it.

[00:08:38] Speaker 05:
And that's it?

[00:08:40] Speaker 05:
And again, this sort of goes to the... Well, all right.

[00:08:45] Speaker 05:
So I mean, I think if you look at our brief, I'm not sure we... Our post-trial brief, we barely address the fifth cause of action.

[00:08:55] Speaker 05:
I mean, this is one of the trial court, trial attorneys,

[00:08:58] Speaker 05:
nightmares that you're completely focused on what you think is important, and then there's some little thing that you don't know about or don't really focus on that catches you.

[00:09:07] Speaker 05:
So there's not a lot of testimony at the trial.

[00:09:10] Speaker 05:
There's not a lot of briefing or complete absence of briefing on this.

[00:09:16] Speaker 05:
So it was a bit of a gotcha thing that, hey, you want on everything that you think's

[00:09:21] Speaker 05:
important.

[00:09:22] Speaker 05:
There's no fraudulent intent that's been established, yet we're now going to get you on this failure to provide one single document or one

[00:09:29] Speaker 05:
single record.

[00:09:30] Speaker 05:
And our position is that, especially with respect to the findings that were made with respect to the fourth cause of action, which is A4A, and very similar to A4, with respect to the records that she did not provide, I think the same reasoning

[00:09:53] Speaker 05:
it consistently should have been applied to the fifth cause of action, which is this Excel spreadsheet.

[00:10:04] Speaker 05:
And I don't think there's any showing on the part of the trustee that there was something in the QuickBooks that was not in the spreadsheet because they did not call the CPA to testify.

[00:10:17] Speaker 05:
And I think that's missing a point

[00:10:20] Speaker 05:
And I don't think it was otherwise covered.

[00:10:22] Speaker 03:
But ultimately all she had to do was give the Excel.

[00:10:26] Speaker 03:
All right, that's part, I appreciate the gotcha position as a trial matter, I do, but there's never any explanation why the Excel was given other than her medical condition, which has been, didn't prevent her from inputting it apparently all into the QuickBooks.

[00:10:45] Speaker 03:
So isn't that, I mean, I understand you disagree with the inference that the trial court made, but why is that error?

[00:10:55] Speaker 05:
I think it's error because the court made a finding that conflicts with that with respect to the fourth cause of action.

[00:11:02] Speaker 03:
He couldn't find it because he ruled in your favor on the fourth cause of action.

[00:11:10] Speaker 05:
Well, I think it's logically, as a matter of common sense,

[00:11:15] Speaker 05:
He's made inconsistent findings.

[00:11:18] Speaker 05:
I think that the consistent finding he made was without the testimony of the quick book, without the testimony of the CPA with respect to what was in the quick books, they had failed to meet their burden of proof.

[00:11:30] Speaker 03:
And I think that same finding should be made, should have been made with respect to- Did Judge Hyame make any specific findings with the fourth cause of action as to the Excel spreadsheet?

[00:11:41] Speaker 05:
I think if you, let's see.

[00:11:47] Speaker 05:
Well, I think the court was focused on the QuickBooks, because I think the court on its own questioned the trustee as to basically confirming that she did not know what was in the QuickBooks.

[00:12:00] Speaker 05:
So I think that's where the focus was.

[00:12:03] Speaker 05:
And I think the inference, the only reasonable inference that we think is there is that my client, by providing the QuickBooks, believed she had complied.

[00:12:13] Speaker 05:
And I don't, you know, we can't get far from the record

[00:12:17] Speaker 05:
But, you know, I think that was what we believe too.

[00:12:21] Speaker 05:
This was not an issue.

[00:12:22] Speaker 05:
There's no issue that this was, you know, raised in writing.

[00:12:26] Speaker 05:
There's no record of anything, any written requests for it.

[00:12:29] Speaker 05:
And we believed, and I think the court also indicated that, well, without knowing what's in the Quickbook records, you cannot prove

[00:12:41] Speaker 05:
fraudulent intent and intent to withhold.

[00:12:46] Speaker 05:
And I think that that should be applied to the fifth cause of action as well as to the fourth cause of action.

[00:12:58] Speaker 02:
You're within your three minutes.

[00:12:59] Speaker 02:
Did you want to reserve the rest of your time?

[00:13:02] Speaker 05:
I do, Your Honor.

[00:13:03] Speaker 02:
I do.

[00:13:03] Speaker 02:
Thank you.

[00:13:06] Speaker 02:
Mr. Taggart.

[00:13:09] Speaker 00:
I have Benjamin Taggart appearing for appellee trustee, Kimberly Houston, in her capacity as plaintiff and chapter seven trustee for the debtor's bankruptcy estate.

[00:13:23] Speaker 00:
As the court pointed out at the beginning of this, this is a narrow, fairly narrow issue before you.

[00:13:32] Speaker 00:
This is a question of whether or not the court was justified

[00:13:38] Speaker 00:
and making a finding, inferring a finding of fraudulent intent here as it related to the withholding of the tax records and the Excel spreadsheet.

[00:13:48] Speaker 00:
That ledger, the Excel ledger, and those tax documents go hand in hand because of representations made by the debtor to the trustee and her CPA together and separately.

[00:14:01] Speaker 00:
that those documents supported her contention that the tax claims in excess of $7 million were overstated, grossly overstated.

[00:14:13] Speaker 00:
And the trustee requested the XL ledger in the tax documents multiple times in writing through counsel directly

[00:14:21] Speaker 00:
Before this case, before the underlying adversary was even filed, continued the 341 multiple times, requesting those documents be provided, obtained access to QuickBooks, provided that CPA, and still no Excel spreadsheet despite maintaining their request for that ledger after

[00:14:42] Speaker 00:
the QuickBooks access was provided.

[00:14:44] Speaker 03:
How do you respond to your opposing counsel's argument that the denial of the discharge under the fifth cause of action is contrary and inconsistent with the fourth cause of action?

[00:15:00] Speaker 00:
The fourth and fifth causes of action, the fourth cause of action was

[00:15:08] Speaker 00:
dismissed or denied because of the hearsay objection raised by counsel on the date of trial on the transfer and bank record review provided by the CPA that was relayed to the court through direct testimony by the trustee and the alternative direct testimony declarations.

[00:15:32] Speaker 00:
There were no written objections prior to that.

[00:15:37] Speaker 00:
If this court were to go through the record of the parent case, there has been great leniency and leeway provided to the debtor in council throughout this case and

[00:15:53] Speaker 00:
The fourth and fifth process of action coming down differently in the judge's ruling and Judge Heine's memorandum of decision highlight that the trustee was held to a high standard in maintaining and carrying a burden of proof that wasn't done based on a hearsay objection that ultimately defeated

[00:16:20] Speaker 00:
for the five causes of action brought by the trustee in the discharge.

[00:16:24] Speaker 03:
But if the trustee failed to establish that the financial records that were provided by the debtor were insufficient or inadequate to ascertain the financial condition of the debtor under the fourth cause of action, how does that reconcile with the need for the Excel spreadsheet, which is the basis for the fifth cause of action?

[00:16:46] Speaker 00:
The fourth cause of action was focused on the bank records that were supplied relating to the debtor's business and the financial accounts that were maintained through other PayPal, Zelle, that were maintained by the debtor for the use of her businesses.

[00:17:05] Speaker 00:
Those records were obtained ultimately through third parties.

[00:17:09] Speaker 00:
That is, and the insufficiency of the debtor's participation in producing documents directly was an issue.

[00:17:18] Speaker 00:
And it came down to, was what she provided in terms of bank records sufficient?

[00:17:27] Speaker 00:
That was something that was reviewed by the CPA.

[00:17:29] Speaker 00:
The CPA conducted that review with QuickBooks.

[00:17:32] Speaker 00:
And that is a wholly different issue than what we have

[00:17:40] Speaker 00:
on the tax records and Excel ledger, because we know those weren't provided.

[00:17:45] Speaker 00:
The trustee knows they weren't provided.

[00:17:47] Speaker 00:
She asked for them multiple times.

[00:17:48] Speaker 00:
And as has been noted this morning and was noted at the trial court, it begs the question, why?

[00:17:57] Speaker 00:
If they were contended to be beneficial to her interest, why were those documents not provided?

[00:18:09] Speaker 00:
Just to clarify in the tax documents quickly, we're not talking about tax returns.

[00:18:14] Speaker 00:
The debtor had been appealing the IRS's decisions and trying to deny the IRS claims for years.

[00:18:29] Speaker 00:
and had put together what she represented to be documents supporting that the tax claims asserted by the IRS were grossly overstated.

[00:18:40] Speaker 00:
Those documents were not in the possession of the IRS.

[00:18:43] Speaker 00:
Council made a reference to an IRS agent.

[00:18:46] Speaker 00:
Yes, the trustee made a written request to the IRS through a regional representative asking for those documents.

[00:18:55] Speaker 00:
The IRS said they didn't have them.

[00:18:58] Speaker 00:
So we talk about proving a negative and we focus on what was in the Excel spreadsheet.

[00:19:05] Speaker 00:
We can't know because it was never given over.

[00:19:07] Speaker 00:
There's no dispute that the Excel ledger was never provided.

[00:19:12] Speaker 00:
And the only plausible, well, not the only plausible, but a plausible reason for that is that

[00:19:28] Speaker 00:
The debtor, historically, over the course of the last 13 years, has filed six bankruptcies.

[00:19:36] Speaker 00:
And across those bankruptcies, she has consistently been discovered to have not scheduled pre-petition transfers to insider family members.

[00:19:46] Speaker 00:
And she has continued to make those transfers post-petition.

[00:19:49] Speaker 00:
It's resulted in the dismissal of five bankruptcies and the conversion of this bankruptcy from an 11 to a seven.

[00:19:58] Speaker 00:
And if we are looking at the Excel ledger and it is what she has claimed it to be, which is a complete review of what her business has coming in and out, then, and she is aware of the trustee's investigation into avoidable transfers, one transfer avoidance case is currently pending in the bankruptcy court, stands to reason that that is the rationale for not providing that document.

[00:20:24] Speaker 00:
is because it either has, as this court noted this morning, incriminating evidence, or it discloses additional avoidable transfers that she doesn't want to disclose.

[00:20:37] Speaker 00:
And the court heard this evidence, heard the evidence on the car accident, heard the competing evidence, and the debtor could not provide a reason at trial why the documents weren't provided to the trustee.

[00:20:52] Speaker 00:
Could not or would not.

[00:20:54] Speaker 00:
And the court made a credibility determination based on the evidence that was put forth that there was fraudulent intent here.

[00:21:06] Speaker 00:
And that is it.

[00:21:07] Speaker 00:
It is an open and shut issue.

[00:21:08] Speaker 00:
And this court has not been provided with evidence in the record that shows that there was clear error that would allow it to reverse that determination.

[00:21:25] Speaker 00:
And with that, I would submit, unless there's further questions.

[00:21:30] Speaker 02:
Thank you.

[00:21:32] Speaker 02:
All right.

[00:21:32] Speaker 02:
Mr. Downing?

[00:21:35] Speaker 05:
Yes.

[00:21:38] Speaker 05:
So there was a lot in that presentation, which was not part of the appellate record.

[00:21:43] Speaker 05:
All these communications between supposedly between the IRS and the trustee, that was not

[00:21:49] Speaker 05:
testified to, if it was, it would have been inadmissible as hearsay.

[00:21:53] Speaker 05:
And I think, and again, a whole lot of stuff about whatever her past conduct was.

[00:22:01] Speaker 05:
And we know that her past conduct did not result

[00:22:05] Speaker 05:
in a denial of discharge based on the first four causes of action.

[00:22:09] Speaker 05:
The first four causes of action as well as the fifth cause of action are all based on paragraph 16 in the complaint, which lists A through I,

[00:22:25] Speaker 05:
the documents which the trustee believed that my client failed to turn over.

[00:22:31] Speaker 05:
So I don't see how you can separate out or failure to provide the Excel spreadsheet from these other issues which were insufficient based on a finding of fact by the court that the CPA's testimony was necessary to establish the materiality

[00:22:50] Speaker 05:
and the fraudulent intent which were required.

[00:22:54] Speaker 03:
There's a difference isn't there between failing to establish the actual affirmative obligation as to the financial condition versus giving this document or those documents.

[00:23:08] Speaker 05:
I think the final point I would make is that I don't think that this fifth cause of action, it almost becomes strict liability if you think in that way that, hey, you did not provide this document, therefore you do not get a discharge.

[00:23:27] Speaker 03:
I think- Well, I think underlying that, I take your point, but I think underlying that is, is there that document?

[00:23:32] Speaker 03:
And that's what's so damaging here is that there is no dispute as to the Excel.

[00:23:38] Speaker 03:
And we can quibble about the tax documents, but the debtor has said repeatedly, there's all these documents that show that I do not owe $7 million in taxes to the state of California and the IRS, and nothing was given.

[00:23:52] Speaker 03:
So part of this rests on the debtor's doorstep, doesn't it?

[00:24:01] Speaker 05:
I mean, I would say, yes, I wish she'd provided these documents from my perspective.

[00:24:06] Speaker 05:
But number two, I still think it's the trustee's obligation to prove the materiality and the importance of those documents.

[00:24:15] Speaker 05:
And if it was insufficient for the fourth cause of action, it's insufficient for the fifth cause of action.

[00:24:21] Speaker 02:
Thank you.

[00:24:22] Speaker 02:
Thank you very much.

[00:24:24] Speaker 02:
This matter is submitted.

[00:24:26] Speaker 02:
Madam Clerk, please call the next case.