United States District Court, D. Massachusetts
In re PAUL J. SALVADOR In re WALTER SALVADOR
MEMORANDUM AND ORDER ON CONSOLIDATED APPEALS FROM THE
BANKRUPTCY COURT'S JUDGMENT OF DEBTORS' CHAPTER 7
RICHARD G. STEARNS UNITED STATES DISTRICT JUDGE
pivotal issue on appeal is whether the Bankruptcy Judge erred
in finding that the failure of Paul Salvador and Walter
Salvador (Debtors) to comply with the records-keeping
provision of the Bankruptcy Code, 11 U.S.C. § 727(a)(3),
disqualified them from a Chapter 7 discharge. After a trial,
Judge Feeney found that “Debtors [had] failed to
preserve recorded information from which their financial
information and business transactions could be ascertained,
and, at worst, permitted their agents or children to
deliberately destroy and appropriate recorded information
from which their financial condition might be
ascertained.” In re Salvador, 570 B.R. 460,
476 (Bankr. D. Mass. 2017). Consequently, she allowed the
exception brought by creditor Andrew Kaplan and denied the
discharge. On appeal, Debtors challenge Judge Feeney's
determination that they (or someone acting on their behalf)
“scrubbed” the computers of their insurance
business by erasing critical files. According to Debtors,
Judge Feeney based her finding on the “unequivocal
testimony” of a forensic expert “that files were
intentionally removed from the server . . . .”
Id. Debtors contend that this was error because
“there was no such testimony from [the expert] Mr.
Steen.” Appellant Br. at 4. The Salvadors also make a
“spoliation” argument - that “[t]he
Bankruptcy Court should not have allowed any information
relative to the destroyed evidence to be admitted at
trial” because the purchaser of the insurance business
“destroy[ed] the server.” Reply Br. at 3. I will
affirm the Bankruptcy Court essentially for the reasons
stated by Judge Feeney.
relevant facts are undisputed.
2008, David B. Kaplan made two loans to Paul and Walter
Salvador in conjunction with their various businesses - $100,
000 on April 30, 2008, and $120, 000 on October 29, 2008.
Among the Salvadors' pledged assets was a family-owned
insurance agency, Salvador & Company Insurance Agency
(Salvador Co.) in which each Debtor held a 50%
share. When the Salvadors defaulted on the loans,
Kaplan brought a collection action in the Norfolk Superior
Court. Salvador Co. was named as a reach and apply defendant.
Eventually, a judgment entered against the Salvadors in the
amount of $744, 764. In aid of execution, a judge of the
Superior Court appointed a special commissioner to sell the
stock and assets of Salvador Co. The Superior Court also
ordered the Salvadors to turn the books and records of
Salvador Co. over to a court-appointed receiver, John F.
Salvadors filed for a discharge under Chapter 7 of the
Bankruptcy Act on February 11, 2014. Judgment
creditor/appellee Andrew Kaplan, as the personal
representative of the estate of David Kaplan, opposed the
Salvadors' requests for a discharge.
Co. operated as an insurance agency from 1983 until February
1, 2014. App. at 169. After the Salvadors relinquished the
company, Mark Salvador (Paul's son) and Christy Robbins
(his niece) operated an insurance agency under the name The
Insurance Connection, Inc., from the Salvador Co.'s
former office at 111 Main Street in Bridgewater,
Massachusetts. Paul Salvador admitted soliciting more than
200 of the Salvador Co.'s customers on behalf of The
Insurance Connection, Inc.
February 3, 2014, Hegarty, visited the premises where the
Salvador Co. had been located, but found the office closed.
Hegarty returned the following day and met with the
Salvadors. Hegarty observed the Salvador Co.'s computers
and office equipment in a large pile on the floor. Hegarty
was unable to find any client files or financial records.
When questioned by Hegarty, the Salvadors stated that the
agency had gone “paperless” in “2010 or
2011.” Dkt. #13-1, App. at 87, 175. Hegarty returned to
the premises on February 6, 2017, to inspect paper records of
Salvador Co. that had been stored in the basement. After
inspecting these files, Hegarty concluded that they were
“stale” and shipped them to a storage facility in
Pepperel, Massachusetts. Hegarty removed two computers from
Salvador Co. - the “main server and a desktop
screen.” Id. at 92. A forensic examiner, Brian
Steen, was hired to “ascertain whether any data or
computer programs could be retrieved from [the
computers].” Id. at 93.
spent a total of nine hours examining the computers on
February 25, 2014. Id. at 211 (Steen Dep.). He
prepared a summary report concluding that “[a]s of
2/3/2014, there is no data in any user folder, Company folder
or folder designated for scanning. This date is clearly shown
on the server as the last date those folders were
modified.” Id. at 224. Steen also determined
that Agency Management Software (AMS) had been uninstalled on
the main server and that the AMS data folder “contained
no records of any customers and no information concerning
insurance policies, payments or commissions earned by the
Salvador Co.” While Steen found that a
Quickbooks program had also been disabled, he was
able to determine that it was last accessed on February 6,
2014, at 8:11 a.m., and that data had been deleted. The
Quickbooks data that remained was from two to three
years old. Steen also testified that there were five
“‘users' who had accessed th[e] computer work
station -‘Bill [Walter Salvador], Christy, Doug, Mark
[debtors' relatives] and Paul [Salvador] . . . and they
had all logged on between February 3rd of 2014 and February
6th of 2014.'” Id. at 208.
used two data recovery software programs - EaseUS
and GetDataBack - in an attempt to recover missing
or deleted files from the server and computer work station.
Steen concluded that numerous folders had been deleted from
the computer server, and while he was able to recover the
host folders, he was unable to retrieve any of their missing
data. Id. at 207. He testified that this was
consistent with a “scrubbing:” “It's
quite possible a program had been used to scrub some files.
That would explain the inability for either software package
to recover files themselves.” Id. at 209-210.
March 18, 2014, the Bearce Insurance Agency purchased the
assets of Salvador Co. Hegarty turned the office equipment
and paper records over to William Bearce, the new owner.
Bearce inspected the paper records and, as did Hegarty, found
them to consist only of “dead” files.
trial at which the Debtors, Hegarty, Bearse, and Steen testified,
Judge Feeney ruled for the Salvadors on Count I, finding
“that the Debtors did not intentionally destroy the
value of their 50% ownership interests in the Insurance
Agency.” However, on Count II she found that Kaplan had
sustained his burden of proof, namely that the Debtors failed
to keep or preserve recorded information - information from
which their financial condition or business transactions
might be ascertained. Specifically, the Debtors, who were
successful and sophisticated businessmen, failed to keep and
preserve up-to-date records in any format.
In re Salvador, 570 B.R. at 476. Judge Feeney
further found that the Debtors had permitted a deliberate
scrub of customer and financial information from [Salvador
Co.'s] computers and had turned over to the receiver only
“outdated” or “dead files.”
Id. Accordingly, ...