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In re Juzwiak

July 15, 1996

IN THE MATTER OF:

MALEN A. JUZWIAK,

DEBTOR-APPELLANT.



Appeal from the United States District Court for the Western District of Wisconsin. No. 95 C 463 Barbara B. Crabb, Judge.

Before BAUER, ESCHBACH, and FLAUM, Circuit Judges.

FLAUM, Circuit Judge.

ARGUED MARCH 28, 1996

DECIDED JULY 15, 1996

Malen Juzwiak, who filed for bankruptcy in August of 1994, appeals the district court's decision to deny the discharge of a $200,000 debt he owes to Cargill, Inc. The district court, reversing the bankruptcy court, denied the discharge pursuant to 11 U.S.C. sec. 727(a)(3), finding that Juzwiak failed to keep or preserve records adequately disclosing his business transactions. We affirm the district court's decision.

I.

Malen Juzwiak operated a trucking business from 1988 to 1993. He predominantly hauled grain, which he purchased from about five suppliers, including Cargill, and resold to approximately three buyers. At its largest, Juzwiak's business owned three trucks and employed two other drivers. Although Juzwiak did not require many employees, the grain sale transactions he engaged in involved substantial sums of money. The business reported over five million dollars in sales on its 1993 income tax return.

Juzwiak began purchasing grain from Cargill -- on credit -- in January of 1993. At Cargill's request, Juzwiak submitted a financial statement purporting to show the financial condition of Juzwiak Trucking in August of 1993. The figures Juzwiak submitted to Cargill for the business' accounts receivable balance and checking account balance were not substantiated and were apparently significantly higher than the actual balances reflected in the records. In addition, Juzwiak did not disclose on the statement a restitution debt of approximately $87,000 that he owed. By October of 1993, Juzwiak had "bounced" several checks to Cargill due to insufficient funds. When Cargill closed Juzwiak's account in November, the outstanding balance was $203,714.92. Soon after, Juzwiak Trucking went out of business and Juzwiak filed a personal bankruptcy. Juzwiak sought to have his debt to Cargill discharged. Cargill objected on the basis of sec. 727(a)(3), claiming Juzwiak had failed to keep adequate records.

Juzwiak ran his business through a single checking account. He testified that he deposited all grain sale proceeds into the account and made all grain purchases with funds from the account. Juzwiak, however, occasionally used the account for paying personal expenses. Additionally, after writing several bad checks to Cargill in October of 1993, Juzwiak opened a new checking account and ceased depositing any funds into the overdrawn account. Juzwiak testified that he was able to track sales through checking account deposit slips and expenses through duplicate copies of checks. He stated that at the end of each year he would categorize his expenses and income from his canceled checks and deposit slips, summarize the information in a notebook, and turn it all over to his income tax preparer.

The records that were supplied to Juzwiak's creditors during the bankruptcy process consisted of checking account ledgers, canceled checks, deposit slips, bank statements, and a 1993 income tax return. The notebook summaries were not disclosed. Juzwiak's records do not reflect the source of the funds deposited into the account. In other words, the deposit slips do not identify who the money came from, nor do they indicate how much grain was purchased at what price. The documentation also fails to disclose which business supplied the grain sold. In addition, the records do not include substantiation of Juzwiak's business expenses and his checks to grain suppliers do not detail how much grain was purchased at what price. Further, Juzwiak submitted no records documenting employee payroll deductions or payroll taxes.

The bankruptcy court found that there was no evidence refuting Juzwiak's claim that all grain sales and purchases went through the checking account. The district court, however, modified this factual determination to the much more narrow finding that it was Juzwiak's practice to place grain sale proceeds into the account. The district court made this modification after Cargill pointed out on appeal that the amount of gross sales reported on Juzwiak Trucking's 1993 income tax return was almost one million dollars more than the total amount of money deposited into the business checking account. For whatever reason, this discrepancy was not brought to the attention of the bankruptcy court. Although the district court discussed the difference in income, it does not appear that it factored this difference into its analysis, as the court noted that it would have found Juzwiak's records inadequate even without any evidence of a discrepancy.

At the trial before the bankruptcy court, two expert accountants testified regarding the adequacy of Juzwiak's records. Gerald Nelson, Juzwiak's expert and an accountant for twenty-three years for many small businesses and trucking companies, testified that many of his clients keep records in a method similar to that used by Juzwiak. He stated that generally the records produced through this method are sufficient to prepare financial statements and accurate tax returns. He did admit, however, that his trucking clients typically retained invoices of their grain sales and their expenses and that the Internal Revenue Code actually requires such invoices to substantiate expenses and sales.

Frank Gillette, Cargill's expert and an accountant with fifteen years of experience, testified that after reviewing Juzwiak's records, it appeared that the checking account was used for a mix of business and personal expenses. He also noted that Juzwiak's records were deficient in that they did not disclose who purchased the grain, how much was purchased at what price, who supplied the grain at what price, or how much inventory Juzwiak held at any particular time. In addition, he stated that there were no records to substantiate Juzwiak's reported expenses. Gillette also testified, based on his experience, that similar clients kept records substantiating expenses and typically retained invoices of sales. He admitted that he had not spoken with Juzwiak and therefore could not say whether additional information from Juzwiak would cure the defects in the records. Gillette finally commented that in his accounting career, he had never seen such an extensive lack of records.

Testimony at trial also revealed that prior to running his own trucking business, Juzwiak was a manager for five years of an International Harvester dealership, which had ten employees including a full-time bookkeeper. He was also co-owner of a business that sold and installed farm equipment. He kept the books for this business for about one year before reassigning the task to another employee. Immediately after finishing high school and one year of technical training, Juzwiak briefly worked as a ...


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