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Union Planters Bank, N.A. v. Connors

March 21, 2002


Appeal from the United States District Court for the Southern District of Illinois. No. 01-C-10-MJR--Michael J. Reagan, Judge.

Before Flaum, Chief Judge, and Harlington Wood, Jr., and Williams, Circuit Judges.

The opinion of the court was delivered by: Flaum, Chief Judge.

Argued February 21, 2002

John and Mary Connors filed for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code listing aggregate debts of over $19 million--more than $12 million of which they owed to Union Planters Bank ("UPB"). On October 5, 2000, the bankruptcy court granted UPB's objection to discharge, holding that the debtors failed to keep adequate records as required by 11 U.S.C. sec.727(a)(3). On June 28, 2001, the district court affirmed the denial of discharge. The Connors now appeal. Because we agree with the bankruptcy and district courts that the records provided were inadequate to allow UPB to ascertain the Connors' financial condition or business transactions, we affirm.

I. Background

In 1994, the Connors took out two lines of credit with Magna Bank (now UPB) in Belleville, Illinois, with a limit of $19 million. Over the course of the next thirteen months, the Connors borrowed an additional $9,002,116.10 from UPB, bringing the approximate total to $28 million. These loans were secured with 2.5 million shares of stock in Agrosy Gaming Corporation, a casino boat partially owned by John Connors before it became a publicly traded company. At its highest, the stock traded at over $36 per share. Because UPB believed that the lines of credit were more than adequately secured, it neither inquired as to how the money was to be used nor placed any restrictions on its application. When the Connors needed money, they would call a UPB officer who would release the requested funds into a personal checking account, wire them directly to one of the Connors' projects, or apply them to pay off outstanding loans. By 1997, the value of the Agrosy stock had fallen to under $3 per share. After selling the stock, UPB obtained a lien on almost all of the Connors' property and demanded repayment of all outstanding loans--approximately $12 million.

The Connors used the large sums of money they borrowed from UPB, as well as that borrowed from two other banks and four individuals, to fund four major ventures: the building of a home in Belleville that cost $4 million; the building of the Kings Point Racquet & Fitness Club, a tennis facility also located in Belleville that cost in excess of $10 million; the purchase of the Alystra, a casino in Las Vegas, Nevada; and the purchase of Crapper Jacks, a casino in Cripple Creek, Colorado. None of these projects was successful. The casinos lost money, and the Connors' plans to sell Crapper Jacks and develop the Alystra property fell through. They both closed due to lack of funds. The tennis club similarly failed to achieve an operating gain. At trial, John Connors testified that he did not recall why he obtained each of the loans specifically, or where the proceeds from each went. Money was shifted among the various ventures in an attempt to keep each above water.

The Connors admittedly did not keep many records of their financial transactions, most of which were handled through their checking accounts at UPB and at West Pointe Bank & Trust. They concede that they disposed of financial records when they moved from their home. They did,however, provide the bankruptcy court with bank statements that recorded deposits and withdrawals to and from their various checking accounts, and cancelled checks. They also provided balance sheets and other income statements of Kings Point. These documents will be further described below, as necessary.

In the four years preceding their bankruptcy, over $16 million of check and other debit activity flowed from the Connors' checking accounts. During the year before the filing, however, the sum equaled only about $5,000. The Kings Point records indicate that they ate some of their meals there, and that the racquet club repaid the Connors a portion of its debt.

II. Discussion

The bankruptcy court denied discharge of debt, pursuant to 11 U.S.C. sec.727(a)(3) which provides that a court may deny such relief if:

The debtor has concealed, 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 . . . .

The provision requires that debtors produce records that provide "enough information to ascertain the debtor's financial condition and track his financial dealings with substantial completeness and accuracy for a reasonable period past to present." In re Martin, 141 B.R. 986, 995 (N.D. Ill. 1992). The bankruptcy court held, and the district court affirmed, that the Connors did not provide a satisfactory record or accounting for their financial condition immediately prior to declaring bankruptcy, or the nature of their business transactions as required by sec.727(a)(3) and Seventh Circuit precedent. We review the courts' legal interpretations de novo; however, we review the bankruptcy court's findings of fact for clear error only. In re Scott, 172 F.3d 959, 966 (7th Cir. 1999). Where both the relevant law and the specific facts are clear, and the job of the bankruptcy court was to apply the law to the facts in the case, we reverse that court's conclusion only if clearly erroneous. In re Rovell, 194 F.3d 867 (7th Cir. 1999); Cook v. City of Chicago, 192 F.3d 693, 696 (7th Cir. 1999).

The Connors contend that the cancelled checks and deposit account statements that they provided to the court, along with the Kings Point financial records, adequately account for their financial transactions and condition for the several years prior to filing for bankruptcy. For example,*fn1 they purport to show that the use of the $225,000 loan from John's brother is easily traced. The West Pointe bank statement dated 7/23/97, they proclaim, shows that the Connors had an overdrawn balance on their priorstatement and that the full loan proceeds were deposited on 6/30/97. The July, August, and September bank statements also show nearly 100 checks and debits depleting the account, and no additional deposits. Therefore, they contend, it is easy to see from these records exactly where the loan proceeds went. Checks or debits were dispersed to Caesars Palace in Las Vegas to pay a gambling debt ...

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