Savage v. Coastal Capital LLC (In re Savage)
Savage v. Coastal Capital LLC (In re Savage), 25-1249 (1st Cir. Feb. 27, 2026) Retired Bankruptcy Judge Bruce Harwood, is affirmed by the First Circuit.
To deny an individual’s discharge under Section 727(a)(5) for failure “to explain satisfactorily” a loss of assets, the First Circuit held that the missing assets need not be substantial.
Objecting to the debtor’s discharge, a secured creditor established at trial that the debtor had not explained the disappearance of almost $57,000 from a total of about $700,000 that the debtor had received from the corporation he controlled in the year before his chapter 7 filing.
After trial, retired Bankruptcy Judge Bruce A. Harwood of Concord, N.H., denied the debtor’s discharge under Section 727(a)(5). (Note: Judge Harwood is the 2025-26 president of the American Bankruptcy Institute.)
After the district court affirmed, the debtor appealed to the First Circuit.
Substantial Unexplained Loss Not Required
In her February 27 opinion, Circuit Judge O. Rogeriee Thompson began by quoting Section 727(a)(5), which provides that the debtor will be denied a discharge if “the debtor has failed to explain satisfactorily . . . any loss of assets or deficiency of assets to meet the debtor’s liabilities.”
Judge Thompson explained how the burden of proof shifts under Section 727(a)(5):
[T]he party seeking to prevent a discharge must first show that the debtor has not accounted for previously owned assets or income, then, after that showing, the burden shifts to the debtor to satisfactorily explain the deficiency (as in, tell us what happened to the money).
In the case on appeal, Bankruptcy Judge Harwood concluded that the debtor had failed to explain the loss of $57,000 after the burden had shifted to the debtor. Judge Thompson described how the debtor argued in rebuttal that “the statute only permits denial of a discharge when the lost assets at issue are substantial.”
Reviewing a legal question de novo, Judge Thompson began by noting that the word “substantial” does not appear in the statute. She went on to say that the debtor’s reading of the statute “would not only insert a new term (and an elusive new standard for courts to apply) but also render the phrase ‘any loss of assets or deficiency’ superfluous.”
Judge Thompson ruled that Bankruptcy Judge Harwood did not err in interpreting the statute.
A ‘Common Sense’ Interpretation
Focusing on the subsection’s words “to meet the debtor’s liabilities,” the debtor contended, as Judge Thompson said, “that § 727(a)(5) does not require a debtor to satisfactorily explain unaccounted-for funds if the missing funds wouldn’t be enough to pay back the debtor’s outstanding liabilities.” In other words, the debtor took the position that the missing assets didn’t require denial of discharge because the missing assets wouldn’t have been enough to pay claims in full.
In response, Judge Thompson said that the debtor’s statutory “interpretation rapidly falls apart in the context of the statute, caselaw, and common sense.”
The words “to meet the debtor’s liabilities,” Judge Thompson said, mean that that debtor has no “obligation to explain lost assets that otherwise did not belong to the bankruptcy estate and would not have been available to pay creditors.” The words, she said, “merely [refer] to the class of assets available to meet a debtor’s liabilities.” She therefore concluded that the statute itself is contrary to the debtor’s notion that the missing assets must be sufficient to pay claims in full before discharge is denied.
As for caselaw, Judge Thompson found “no support in the caselaw.”
“And third,” Judge Thompson said, “we hasten to add that the [the debtor’s] interpretation of § 727(a)(5) contravenes common sense.” She explained,
Taken to its extreme, under the [the debtor’s] requested interpretation, a debtor with $1,000,000 in outstanding liabilities would not need to satisfactorily explain a $999,999 deficiency because that total unaccounted-for money would be insufficient to meet the debtor’s liabilities.
Discerning “no legal error in the bankruptcy court’s interpretation of § 727(a)(5),” Judge Thompson found no error in Bankruptcy Judge Harwood’s findings of fact. She affirmed the denial of discharge.