Shcherbakovskiy et al v. Malakhov

UNITED STATES BANKRUPTCY COURT 	NOT FOR PUBLICATION
SOUTHERN DISTRICT OF NEW YORK
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In re:
Chapter 7
ARKADY MALAKHOV,
Case No. 05-47081 (ALG)
Debtor.
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VADIM PRISIVKO,
Plaintiff,
- against - 	Adv. Proc. No. 07-01716 (ALG)
ARKADY MALAKHOV,
Defendant.
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POST-TRIAL MEMORANDUM OF OPINION
A P P E A R A N C E S:
LOWENSTEIN SANDLER PC
Attorney for Plaintiff, Vadim Prisivko
By: 	Steven M. Hecht, Esq.
1251 Avenue of the Americas
New York, NY 10020
SATTERLEE STEPHENS BURKE & BURKE LLP
Attorney for Defendant, Arkady Malakhov
By: 	Howard G. Seitz, Esq.
230 Park Avenue, Suite 1130
New York, NY 10169
ALLAN L. GROPPER
UNITED STATES BANKRUPTCY JUDGE
Grigoriy Shcherbakovskiy (“Shcherbakovskiy”) filed this adversary proceeding
on May 31, 2007 against the above-captioned debtor, Arkady Malakhov (“Defendant”),
seeking a revocation of a discharge previously granted. Vadim Prisivko was substituted
as the plaintiff (“Plaintiff”) on January 14, 2009. 	A trial was held on July 22-23, 2010,
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on two principal issues: 	first, whether the motion to revoke the discharge was timely
filed; and second, whether the discharge should be revoked on the ground that it was
fraudulently obtained. Upon the findings of fact and conclusions of law set forth below,
the Court holds that the motion to revoke the discharge is timely under § 727(e) of the
Bankruptcy Code (the “Bankruptcy Code”) but that revocation of the discharge under §
727(a)(4) should be denied.
Background
On October 14, 2005 (the “Petition Date”), Defendant filed a voluntary petition
(the “Petition”) for bankruptcy under Chapter 7 of the Bankruptcy Code. Defendant filed
the Petition pro se immediately prior to the effective date of the 2005 amendments to the
Bankruptcy Code. Defendant’s schedules listed assets totaling only $1,350 and liabilities
of $325,470. In addition to credit card debt of $181,945, his liabilities included $22,850
to his mother, $15,000 to his aunt, Inna Malakhov, and $7,567 to Shcherbakovskiy. The
case appears to have proceeded as a routine “no asset” case, and Defendant received a
discharge, which was entered on the docket on June 2, 2006.
Approximately one year later, on May 31, 2007, Shcherbakovskiy, in his capacity
as a creditor, moved to re-open Defendant’s bankruptcy case in order to revoke the
discharge on the ground of an alleged violation of § 727(a)(4)(a) of the Bankruptcy Code.
Shcherbakovskiy alleged that Defendant, having failed to provide him with proper notice
of his bankruptcy case, had fraudulently concealed his ownership of shares of Cenergie
Corporation Public Limited Company (“Cenergie PLC”), an Irish company. 1 In October
1 In his Pre-Trial Memorandum dated March 31, 2010, Plaintiff complains of other improprieties in
Defendant’s bankruptcy filings, such as a failure to disclose debt owed to Shcherbakovskiy and ZeTek (as
defined below), and a failure to disclose his managerial positions in his Statement of Financial Affairs. For
the reasons set forth below, these issues were not raised in the complaint, and they are not properly before
this Court in this proceeding.
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2008, Shcherbakovskiy transferred and assigned all of his claims to Plaintiff. 	See Def.
Tr. Ex. D-17.
Defendant has contested Plaintiff’s claims of fraud and further asserts that
Plaintiff’s complaint, filed on May 31, 2007, was time barred because (i) it was not filed
within the one year statutory period, and (ii) Shcherbakovskiy received adequate notice
of the Petition and should have raised his claims before the discharge order was entered.
The relevant facts, as established at trial and in the documentary record, are as
follows.
I. 	Facts Relating to Notice of the Bankruptcy to Shcherbakovskiy
Defendant listed Shcherbakovskiy in the Petition as a creditor in the amount of
$7,567 for a “personal loan” and gave Shcherbakovskiy’s address as 52 Sand Hill Road,
Weatogue (Simsbury), Connecticut 06089 (the “Simsbury Address”). 	The Simsbury
Address is the home of Yelena Malakhov who, in addition to being a creditor in the
Chapter 	7 	case, 	is 	Defendant’s 	mother 	and 	Shcherbakovskiy’s 	aunt. 	Although
Shcherbakovskiy admitted that he had used the Simsbury Address as his U.S. mailing
address in the past, it is uncontroverted that he did not reside at the Simsbury Address at
the time the bankruptcy notices were sent. See Shcherbakovskiy Test., Trial Tr. 126:20–
25, 	127:1-3 	(July 	22, 	2010). 	Defendant 	conceded 	that 	he 	did 	not 	believe 	that
Shcherbakovskiy was physically present at the Simsbury Address at the time he listed the
Simsbury Address in the Petition; he thought that Shcherbakovskiy was living in Russia.
See Malakhov Test., Trial Tr. 19:1–6 (July 22, 2010). Defendant contends, nevertheless,
that providing notice to Shcherbakovskiy at the Simsbury Address was sufficient because
Shcherbakovskiy used that address from time to time, and Defendant believed that
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Yelena Malakhov was forwarding Shcherbakovskiy’s mail to him. See Malakhov Test.,
Trial Tr. 36:13–22 (July 23, 2010).
In addition to providing for notice of the Petition to be sent to the Simsbury
Address, Defendant also claims that notice was sent to Val Mandel (“Mandel”), who had
acted as Shcherbakovskiy’s attorney from time to time, starting in 2002. Mandel testified
that he had no recollection of receipt of the notice, and Defendant did not provide
evidence to the contrary. 	See Mandel Test., Trial Tr. 9:3–8 (July 23, 2010). 	Mandel is
not listed on the Petition or in an affidavit of service.
Shcherbakovskiy 	testified 	that 	he 	did 	not 	receive 	notice 	of 	Defendant’s
bankruptcy until April 2007, ten months after Defendant’s discharge was granted, when
his mother, Inna Malakhov, relocated from the United States to Russia carrying mail that
had been sent to the Simsbury Address. See Shcherbakovskiy Test., Trial Tr. 127:4–13,
128:1-6 (July 22, 2010). 	Upon receipt of the Petition, Shcherbakovskiy contacted
Mandel and filed the instant adversary proceeding.
II. 	Facts Relating to Defendant’s Omission of the Cenergie Shares in the
Petition
On Schedule B-12 of Defendant’s bankruptcy petition, which purports to list all
of Defendant’s property, Defendant did not list his ownership of any shares of Cenergie
PLC, the Irish company. The relevant facts are as follows.
Defendant had been previously employed as the general manager of several
energy companies founded by Nicholas Abson (“Abson”), including ZeTek Power, PLC
(“ZeTek”), located in Russia, and Cenergie Corporation (“Cenergie Corp.”), located in
the United States. 	See Malakhov Test., Trial Tr. 99:10–21 (July 22, 2010). 	After the
demise of ZeTek in 2001, several former ZeTek employees, including Defendant, joined
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Abson’s new venture, Cenergie Corp. 	Around November 2002, Abson created a trust
containing shares of Cenergie Corp. to be held for the benefit of former ZeTek
employees, including Defendant (the so-called “Gift Shares”). See Def. Tr. Ex. 12. The
Gift Shares originally consisted of shares in Cenergie Corp., but, after the formation of
Cenergie PLC, Abson apparently substituted shares of that company, and the Gift Shares
were re-issued as shares in Cenergie PLC.
Defendant concedes that he received the Gift Shares in Cenergie PLC but testified
that, on September 29, 2003, he sold his entire beneficial interest in the Gift Shares to
Sigfurd Hogsbro (“Hogsbro”), another Cenergie PLC shareholder, for $10,000. 	See
Malakhov Test., Trial Tr. p. 33-51 (July 22, 2010). 	Defendant supported the sale by
producing a one-page agreement with Hogsbro providing for the sale of the shares (the
“Gift Share Sale Agreement”), and he also produced a Western Union wire receipt of
$1,000 from Hogsbro, which he asserted was the first installment of the purchase price.
See Def. Tr. Ex. 6; see P. Tr. Ex. 10. Defendant claims that the remaining $9,000 was
paid over time by means of the purchase, by Hogsbro, of meals and plane tickets for him,
but these alleged in-kind payments were not supported by any documentary evidence.
Defendant also admitted that he remained the record owner of the Gift Shares but
testified that Abson did not want the shares to be transferred and that Hogsbro, himself a
former ZeTek employee, and he both agreed not to register the sale of the Gift Shares or
to otherwise alert Abson about the sale. See Malakhov Test., Trial Tr. 54:23 -58:8 (July
22, 2010). 	As a result, Defendant remained the record owner of all of the Gift Shares
despite the sale to Hogsbro.
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Hogsbro did not testify but he did purport to submit a sworn answer to
interrogatories. 	Plaintiff attempted to subpoena him for a deposition in England, but he
failed to appear.
Defendant continued to be employed in Atlanta by Cenergie Corp. until that
company’s failure; it was dissolved on July 9, 2005. 	See Def. Tr. Ex. 10. 	Defendant
testified at trial that Abson had earlier promised to issue him shares of Cenergie Corp. as
compensation for his employment as Cenergie Corp.’s general manager, but that this
never happened. 	See Malakhov Test., Trial Tr. 83:15 -74:19 (July 22, 2010); see also
Def. Tr. Ex. 11. After Cenergie Corp.’s failure, Defendant became unemployed, and his
Chapter 7 petition followed in October 2005.
Discussion
I. 	Timeliness
The complaint alleges that Defendant fraudulently failed to disclose assets in
violation of 11 U.S.C. § 727(a)(4)(A). 	A creditor may request the revocation of a
discharge only within one year after the discharge is granted, see 11 U.S.C. § 727(e)(1),
and only if the “discharge was obtained through the fraud of the debtor, and the
requesting party did not know of such fraud until after the granting of such discharge.”
11 U.S.C. § 727(d)(1). Defendant contends that Plaintiff’s action is time-barred because
Shcherbakovskiy was sent notice of the Petition and therefore knew or should have
known that Defendant had not disclosed ownership of the Gift Shares before the
discharge was granted. Therefore, the Court must first address whether Shcherbakovskiy
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had sufficient notice of the bankruptcy filing so as to be precluded from seeking to
revoke the discharge pursuant to 11 U.S.C. § 727 (d)(1).2
A. Defendant’s Notice to Shcherbakovskiy
In order to ensure that notice is properly served, the Bankruptcy Code and Rules
mandate that a debtor file a schedule listing the names and addresses of known creditors.
11 U.S.C. § 521(1); Fed. R. Bankr. P. 1007(a)(1). In the instant matter, Defendant claims
that 	he 	used 	the 	Simsbury 	Address, 	where 	his 	mother, 	Yelena 	Malakhov—
Shcherbakovskiy’s aunt—lived, because it was Shcherbakovskiy’s “last address of record
known by me.” See Defendant’s Answer at ¶ 6. Defendant further asserted that he “did
not know [Shcherbakovskiy’s] address outside the country at the time of filing the
petition, nor did [Shcherbakovskiy] provide me with any alternative address.” Id. There
is no question that Shcherbakovskiy had used the Simsbury Address for various purposes
through the years.3 Defendant, however, admitted that he believed Shcherbakovskiy
resided in Russia on the Petition Date.
Noticing a creditor at an old address without a reasonable attempt to determine
the correct address is not adequate. 	In re Najjar, No. 06-10895 (AJG), 2007 WL
1395399 at *3 (Bankr. S.D.N.Y. 2007). 	Defendant asserted that he believed his mother
was forwarding mail to Shcherbakovskiy in Russia, but he took no steps to verify this,
2 The Defendant also contends that the complaint is untimely because it was brought exactly one calendar
year after the date of Defendant’s discharge, and the statute provides that a complaint seeking to revoke a
discharge under § 727(d)(1) must be brought within one year after such discharge is granted. There is no
substance to this claim. While the order granting the Defendant’s discharge was dated May 31, 2006, the
order was not entered and did not become effective until June 2, 2006. In the instant matter, it is the
effective date, and not the date the order was dated, that is relevant, and the complaint was filed within one
year from the discharge.
3 Shcherbakovskiy’s use of his aunt’s Simsbury Address has figured importantly in other litigation
Shcherbakovskiy has brought in this country. See Shcherbakovskiy v. Da Capo Al Fine, Ltd., 490 F.3d 130
(2d Cir. 2007), vacating on other grounds a default judgment against Shcherbakovskiy by Judge Brieant
and, on remand, the decision of Judge Patterson, dated March 23, 2010, finding that Shcherbakovskiy was a
U.S. citizen domiciled in Connecticut when he filed his complaint in 2003. See Shcherbakovskiy v. Seitz,
No. 03-1220 (RPP), 2010 U.S. Dist. LEXIS 27164, at *11 (S.D.N.Y. 2010).
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and his mother did not in fact forward the mail to Russia for almost a year. Accordingly,
Defendant had no basis for concluding that notice delivered to the Simsbury Address
would reach Shcherbakovskiy in a timely manner, and he was obligated to undertake
additional steps to ensure that Shcherbakovskiy received adequate notice of the Petition.
Defendant also contends that notice was sent to Mandel, Shcherbakovskiy’s
attorney in connection with various matters, and that this was sufficient. 	There is no
evidence that such notice was ever sent, and, at trial, Mandel denied having received it.
In any event, notice served on a creditor’s attorney may impute knowledge to the creditor
only “so long as there is a nexus between the creditor’s retention of the attorney and the
creditor’s claim against the debtor.” In re Najjar, 2007 WL 1395399 at *4 (internal
citations omitted); see also In re Savage, 167 B.R. 22, 26 (Bankr. S.D.N.Y. 1994). Prior
to 	the 	commencement 	of 	this 	adversary 	proceeding, 	Mandel 	did 	not 	represent
Shcherbakovskiy in connection with Defendant’s bankruptcy. 	See Mandel Test., Trial
Tr. 15:1–25, 16:1–2 (July 23, 2010). 	Even assuming, arguendo, that Mandel received
notice of the Petition, a mailing to Mandel would not have been sufficient to put
Shcherbakovskiy on notice in this case.
Since he failed to receive timely notice of the Petition, Shcherbakovskiy’s
complaint was timely because he did not know of the alleged omission before the
discharge was granted. We therefore turn to the question whether Defendant’s failure to
include the Gift Shares in his Statement of Financial Affairs constituted a knowing and
fraudulent false oath or account.
II. 	Debtor’s Bankruptcy Petition
Plaintiff 	contends 	that 	Defendant 	should 	be 	denied 	a 	discharge 	under
§ 727(a)(4)(A) of the Bankruptcy Code based on Defendant’s failure to disclose
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ownership of the Gift Shares in his Chapter 7 filing. Section 727(a)(4)(A) provides that
“[t]he court shall grant the debtor a discharge, unless . . . the debtor knowingly and
fraudulently, in or in connection with the case . . . made a false oath or account.”
Defendant filed the required schedule of assets and liabilities as required by § 521(a)(1).
The Petition and its accompanying schedules are deemed to be statements made under
oath for the purposes of § 727(a)(4)(A). 	In re Gannon, 173 B.R. 313, 320 (Bankr.
S.D.N.Y. 1994). 4 Therefore, knowingly and fraudulently submitting false information
on these schedules would result in a denial of a discharge under § 727(a)(4).
In order to obtain an order revoking Defendant’s discharge, Plaintiff must prove,
by a preponderance of the evidence, that the “(1) Debtor made a statement under oath, (2)
such statement was false, (3) Debtor knew the statement was false, (4) Debtor made the
statement with the intent to defraud creditors, and (5) the statement related materially to
the bankruptcy case.” In re Gollomp, 198 B.R. 433, 437 (S.D.N.Y. 1996). 	As noted
above, statements made in the schedules of a bankruptcy petition are considered
statements made under oath for purposes of § 727(a)(4)(A), and the first factor has been
satisfied. 	There is also no real dispute that ownership of the shares would be material.
Since Defendant remained the record owner of the Gift Shares, there is a basis to claim
that he should have disclosed this fact and, therefore, that his SOFA contained an
omission and was false. 	An omission as well as a false affirmative statement is
sufficient. See Forrest v. Bressler (In re Bressler), 387 B.R. 446, 460 (Bankr. S.D.N.Y.
2008). The primary issue is whether the Debtor’s omission of the shares was knowingly
false and made with intent to defraud creditors.
4 See also this Court’s opinion in In re Eva Gabor, No. 05-18719, 2009 Lexis 3110, at *21-22 (slip op.)
(Oct. 8, 2009)
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While Defendant admits that he was the record or “nominal owner” of the Gift
Shares, his primary defense is that beneficial ownership had been transferred to Hogsbro.
See Malakhov Test., Trial Tr. 32:1–9 (July 22, 2010). Defendant testified that he did not
list the Gift Shares on his SOFA because he believed that the question required only a
listing of stocks or interests where he had beneficial ownership, and at trial he denied any
intent to defraud his creditors. 	See Malakhov Test., Trial Tr. 32:1–20 (July 22, 2010).
Considering the record as a whole and having had the opportunity to observe Defendant’s
testimony at trial, the Court finds Defendant’s testimony credible. Defendant’s testimony
is also supported by the Gift Share Sale Agreement and evidence that Hogsbro made an
initial cash payment to Defendant at the time the agreement was executed. Moreover, the
failure to transfer record ownership was explained because neither Defendant nor
Hogsbro wanted Abson to learn of the sale. While Hogsbro may have evaded appearing
at a deposition, there is no evidence Defendant procured his unavailability.
Plaintiff 	attempted 	to 	impeach 	Defendant 	through 	the 	use 	of 	Defendant’s
testimony at a pretrial deposition held on December 21, 2004 in connection with
Shcherbakovskiy v. Seitz, 2010 U.S. Dist. LEXIS 27164. In that case, Defendant testified
that he stood to gain from any appreciation in value of his “ownership in Cenergie.” See
Malakhov Test., Trial Tr. 49:4–19 (July 22, 2010). Plaintiff contends that this statement,
made after the Gift Share Sale Agreement was executed, was an acknowledgement by the
Defendant that he retained a beneficial interest in the Gift Shares. 	It is clear, however,
that Defendant’s 2004 testimony related to his expectation that he would receive shares in
Cenergie Corp., which he believed were owed to him as compensation for his services on
behalf of that company, an expectancy unrelated to the Gift Shares. 	See Transcript of
Deposition; P. Tr. Ex. 13, p.17-line 3-22; see also Malakhov Test., Trial Tr. 51:15–23
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(July 22, 2010). 5 The (non-gift) shares in Cenergie Corp. were never received, and
Cenergie Corp. had failed by the Petition Date, in October 2005. See P. Tr. Ex. 11:140.
In order to show that the omission of assets in Defendant’s schedules was made
with fraudulent intent, Plaintiff would have to demonstrate that Defendant’s omission
was for the specific purpose of perpetrating a fraud and not due to his carelessness. See
In re Gollomp, 198 B.R. at 438. Actual common law fraud must be shown. See Baron v.
Klutchko (In re Klutchko), 338 B.R. 554, 567 (Bankr. S.D.N.Y. 2005)). “The elements of
a common law fraud claim are (1) a false representation, (2) fraudulent intent, or scienter,
(3) intent to induce reliance, (4) justifiable reliance and (5) damage.” Weiss v. Alicea, 230
B.R. 492, 500 (Bankr. S.D.N.Y. 1999). 	Moreover, in determining whether a discharge
should be denied under § 727, the record “must be construed strictly against those who
object to the debtor’s discharge and liberally in favor of the bankrupt.” In re Cacioli, 463
F.3d 229, 234 (2d Cir. 2006). Upon consideration of the record as a whole, and the high
burden of proof imposed on those who seek to revoke a debtor’s discharge, the Court
credits the testimony of Defendant and finds that Plaintiff has not carried his burden of
establishing that Defendant knowingly made a false statement under oath. See also In re
Gollomp, 198 B.R. at 437 (finding no instance of fraud when a debtor failed to list
ownership of a boat due to erroneous belief that it had been repossessed).
III. 	Other Issues
Defendant submitted a letter on September 30, 2010 requesting that the Court
order Shcherbakovskiy or Plaintiff’s attorney to pay Defendant’s legal fees because
Plaintiff’s legal claims are allegedly frivolous and champertous. With respect to the issue
5 Indeed, the passage in the deposition followed a question relating to Defendant’s salary at the “company.”
As he was still working for Cenergie Corp. at the time of the deposition and never worked for Cenergie
PLC, the record is clear that the testimony did not concern the Gift Shares.
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of legal fees, there is no basis for departing from the “American Rule,” which obligates
each party to pay its own counsel fees and litigation expenses. See e.g., Oscar Gruss &
Son, Inc. v. Hollander, 337 F.3d 186, 199 (2d Cir. 2003) (noting that the “English Rule”
on shifting attorneys' fees does not apply in U.S. court proceedings absent a clear
contractual agreement by the parties). 	Section 523(d) allows the court to award
reasonable attorney’s fees when a creditor, who has challenged the dischargeability of a
consumer debt, was not substantially justified, but this provision does not apply to instant
matter. 11 U.S.C. § 523(d).
The claim of champerty in the transfer of the claim is also of no substance.
Shcherbakovskiy testified that the claim was transferred for consideration, and there was
no evidence to the contrary. 	New York law provides that the transfer of a claim is
champertous only in narrow circumstances where a party purchases a claim “merely as a
vehicle for obtaining costs.” 	Trust for Certificate of Holders of the Merrill Lynch
Mortgage Investors, Inc. v. Love Funding Corp., 591 F.3d 116, 120 (2d Cir. 2010),
quoting Trust v. Love Funding, 13 N.Y.3d 190, 199, 890 N.Y.S. 2d 377, 918 N.E.2d 889
(2009). No substantial evidence was adduced that the transfer in this case was made for
this purpose.
Finally, at trial Shcherbakovskiy claimed that Defendant had failed to list in the
schedules a debt to him in excess of $760,000, which was in addition to the $7,567 debt
actually listed in the schedules. 	Defendant testified credibly that he believed that this
additional liability had been satisfied by the surrender of collateral that had secured the
debt. 	In any event, although the alleged debt clearly preceded the Chapter 7 filing,
Shcherbakovskiy never raised this issue in the complaint and never moved to amend the
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complaint to assert the additional claim, and therefore the issue is not properly before the
Court. See Wright v. Ernst & Young LLP, 152 F.3d 169, 178 (2d Cir. 1998).
CONCLUSION
Defendant shall settle a judgment in his favor on five days’ notice.
Dated: New York, New York
January 7, 2011
/s/ Allan L. Gropper 	__________
UNITED STATES BANKRUPTCY JUDGE
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