580 B.R. 45
Bankr. E.D.N.Y.2018Background
- Debtor Samuel Racer, a formerly practicing attorney, filed Chapter 7 on April 28, 2016, listing $9,500 in assets and ~$2.39 million in liabilities, including nearly $1.5 million in loans incurred 2009–2012.
- Plaintiff Rita Shamshovich is a judgment creditor; she obtained a state-court default-based judgment against Racer for breach of fiduciary duty related to escrowed stock certificates held by Racer as security for loans to a third party.
- Plaintiff sued in this bankruptcy adversary proceeding seeking denial of discharge under 11 U.S.C. §§ 727(a)(2)(A), (3), (4)(A), (5) and exception to discharge under § 523(a)(4); Racer moved to dismiss as to § 523(a)(4).
- Discovery showed Racer produced no bank statements or documentary records evidencing receipt or disposition of the ~$1.5 million loan proceeds; some bank records subpoenaed from entities did not account for those funds.
- Racer asserted the loans were informal (family/friends) and funds were spent on bills, living and medical expenses but provided no corroborating documentation.
- The court found genuine absence of records and an unsatisfactory explanation for the disappearance of $1.5 million and granted summary judgment denying Racer’s discharge under §§ 727(a)(3) and 727(a)(5); other claims were not addressed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether discharge should be denied under § 727(a)(3) for failure to keep/preserve records | Shamshovich: Racer failed to produce books, bank records, checks or other documents to account for $1.5M in loan proceeds | Racer: Loans were informal, old, and records are not available; expenditures were for living/medical expenses | Court: Granted — plaintiff made prima facie showing; Racer failed to justify absence of records; denial under §727(a)(3) warranted |
| Whether discharge should be denied under § 727(a)(5) for failure to satisfactorily explain loss of assets | Shamshovich: Racer received substantial identifiable assets (loan proceeds) that disappeared and no plausible explanation or documentation is provided | Racer: Funds were spent on bills/medical/living expenses (unsubstantiated) | Court: Granted — plaintiff met initial burden; Racer’s vague, undocumented explanation was unsatisfactory; denial under §727(a)(5) warranted |
| Whether plaintiff’s § 523(a)(4) claim (defalcation in fiduciary capacity) should proceed | Shamshovich sought nondischargeability for fiduciary defalcation | Racer moved to dismiss that count | Court: Did not decide §523(a)(4) because discharge was denied on §§727 grounds; Racer’s motion to dismiss denied as moot |
| Whether summary judgment is appropriate on these §727 claims | Shamshovich: No genuine issue of material fact; entitled to judgment as a matter of law | Racer: Opposed; submitted affidavit and argued lack of records justified | Court: Summary judgment appropriate given undisputed record showing lack of records and unsatisfactory explanation |
Key Cases Cited
- Celotex Corp. v. Catrett, 477 U.S. 317 (summary judgment standard)
- D.A.N. Joint Venture v. Cacioli (In re Cacioli), 463 F.3d 229 (2d Cir. 2006) (plaintiff’s initial burden under §727(a)(3) and burden shift)
- State Bank of India v. Chalasani (In re Chalasani), 92 F.3d 1300 (2d Cir. 1996) (denial of discharge construed strictly; discharge reserved for honest debtors)
- Meridian Bank v. Alten, 958 F.2d 1226 (standards for justification of failure to keep records)
- Christy v. Kowalski (In re Kowalski), 316 B.R. 596 (Bankr. E.D.N.Y. 2004) (factors for §727(a)(3) analysis)
- Desiderio v. Devani (In re Devani), 556 B.R. 37 (Bankr. E.D.N.Y. 2016) (caution in granting denial of discharge on summary judgment)