Steven and Virginia Savage operated Sky-Skan Incorporated, a company that installed digital planetarium equipment. When the company faced financial trouble, the Savages used personal funds and credit cards to support it. In 2017, Sky-Skan filed for Chapter 11 bankruptcy and disclosed that it had paid the Savages over $700,000 in expense reimbursements and rent in the year prior to filing. The Savages subsequently filed for Chapter 7 bankruptcy but failed to disclose these payments in their own financial schedules. Coastal Capital, LLC, a creditor, objected to the Savages' discharge, arguing they could not account for the funds. A bankruptcy court found that while the Savages explained most of the money, they failed to account for approximately $56,653.50 in unexplained proceeds, including gaps in rent payments and mortgage obligations. The district court upheld this finding, and the First Circuit now reviews the denial of discharge.
The court analyzed the statutory requirements of 11 U.S.C. § 727(a)(5), which allows a court to deny a discharge if a debtor fails to satisfactorily explain any loss of assets or deficiency of assets to meet the debtor's liabilities. The Savages argued that the statute only applies if the unexplained assets are 'substantial' or if the missing funds are insufficient to pay their outstanding liabilities. The court rejected this interpretation, noting that the word 'substantial' does not appear in the text of the statute. The court held that the phrase 'to meet the debtor's liabilities' refers to the class of assets available to the bankruptcy estate to pay creditors, not a threshold requiring the lost assets to cover all debts. The court emphasized that the burden-shifting framework requires the creditor to show a loss of assets, after which the debtor must provide a satisfactory explanation supported by corroboration that eliminates speculation. The court found the bankruptcy court's calculation of unaccounted funds was supported by the record and that the Savages' claim of good faith did not excuse their failure to explain the missing funds. Additionally, the court dismissed the Savages' argument regarding document spoliation by Coastal Capital, finding the issue was waived because it was not properly developed or raised at the trial level.
The decision affirms the denial of the Savages' Chapter 7 discharge, meaning they remain liable for their pre-bankruptcy debts. The ruling clarifies that debtors cannot avoid discharge denial by arguing that unexplained asset losses are too small to matter or insufficient to pay all debts. It reinforces the strict obligation for debtors to fully account for all asset dispositions, regardless of the amount, to obtain a fresh start. The case is remanded to the lower courts with instructions to bear their own costs.
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