Saraiya v. Patel, 103113 OHCP, CV 13 812206

Docket Nº:CV 13 812206
Opinion Judge:John P. O'Donnell, J.
Party Name:RAJESH N. SARAIYA, et al., Plaintiffs, v. ATUL PATEL, et al., Defendants
Case Date:October 31, 2013
Court:Court of Common Pleas of Ohio
 
FREE EXCERPT

RAJESH N. SARAIYA, et al., Plaintiffs,

v.

ATUL PATEL, et al., Defendants

No. CV 13 812206

Court of Common Pleas of Ohio, Cuyahoga

October 31, 2013

          JOURNAL ENTRY DENYING MOTION FOR PRELIMINARY INJUNCTION

          John P. O'Donnell, J.

         The plaintiffs claim they are members of a limited liability company formed to acquire and operate a hotel. They allege that two of the defendants, Atul Patel and CLENYJ Hospitality, LLC are acting as managing members when they are, in fact, not members at all. The plaintiffs have asked the court to preliminarily enjoin Atul Patel and CLENYJ from acting as managing members. This entry follows a five-day hearing on that motion.

         STATEMENT OF THE FACTS

         On November 19, 2011, defendant Cleveland West 150th Street, LLC entered into an agreement with Cleveland Hotel, LLC for an option to purchase the Holiday Inn hotel at 4181 West 150 Street in Cleveland.1 The gist of the contract is that Cleveland West would acquire the hotel by an initial payment of $750, 000 and the payment of $1, 150, 000 -- secured by a promissory note -- over five years in $230, 000 annual installments. (Cleveland West was also obligated to assume the seller's payment of about $25, 000 per month on a $3.3 million Small Business Administration mortgage loan and pay the hotel's monthly franchise fee -- a percentage of gross receipts -- to franchisor International Hotel Group.) Defendant Atul Patel personally guaranteed the $1.15 million promissory note. At the same time, Cleveland West and Cleveland Hotel entered into a management agreement that allowed Cleveland West to take over the operation of the hotel and keep all of its profits (or incur its losses).2 Immediately, Cleveland West then made its own management agreement with defendant CLENYJ under which CLENYJ would manage the hotel for 5% of the gross revenue.

         Cleveland West is a limited liability company formed for the specific purpose of acquiring the Holiday Inn. Its operating agreement is also dated November 19, 2011. The operating agreement identifies the members, and their percentage of ownership of the membership units, as Atul Patel with 50%, Fred Hanania, 25%, CLENYJ, 10%, and Kaku USA Hotel, LLC, 15%.3

         The large majority of the down payment came from plaintiffs Rajesh Saraiya, Jayshree Saraiya and Sudha Patel.4 The Saraiyas contributed $325, 000 and Sudha Patel put in another $325, 000. The plaintiffs were brought to the transaction when Ashwani Adya introduced them to Atul Patel, the self-described promoter of the hotel acquisition. In exchange for their total contribution of $650, 000, Atul Patel gave them a security agreement.

         The security agreement was made by Atul Patel personally and refers to the plaintiffs as " Investors." It begins with recitals that include the following:

WHEREAS, A. Patel has arranged for the purchase of certain real property known as the Cleveland Holiday Inn located at 4181 W. 150th St., Cleveland, Ohio (hereinafter " the Property"); and

WHEREAS, Investors are desirous of providing certain funds for the acquisition of the Property; and WHEREAS an Ohio limited liability company known as Cleveland West 150th Street, (" the LLC") has been formed to take title to the Property; and WHEREAS, A. Patel intends to take title to a membership interest in the LLC for the benefit of Investors who are jointly providing funds for the acquisition and operation of the property[.]

         The security agreement was signed on the same date as, but separate from, the operating agreement of Cleveland West and the option. The security agreement does not expressly refer to the " acquisition of the Property" to mean acquiring an option to buy it, and Rajesh Saraiya testified that he and the other plaintiffs were not told before signing the security agreement that the underlying transaction was actually for an option contract and not an outright purchase of the hotel. The three plaintiffs were also not shown Cleveland West's operating agreement before signing, but Atul Patel did assure Rajesh Saraiya in a November 10, 2011, email that the plaintiffs would have half the interest in the " Asset LLC, " i.e. Cleveland West.

         The security agreement goes on to say that the plaintiffs' $650, 000 will be " contributed to the LLC through Patel for the acquisition and operation of the property." Since the money is deemed as contributed through Patel he will " receive title to a 50% membership interest in the LLC" but will hold such title " for the benefit of" the three plaintiffs, and will transfer legal title to the units to them upon request. He also agreed to hold in trust for the plaintiffs all distributions that he would be entitled to as a member of Cleveland West. In addition, Patel promised the plaintiffs a 10% annual return, payable in quarterly installments of $8, 125 each, plus a share of any profit in excess of 10%. Finally, Atul Patel warranted that the plaintiffs " shall have no personal liability for the debts or obligations of the LLC."

         Cleveland West's operating agreement reserves the management of the company to the managing members and names Atul Patel, Hanania and CLENYJ as managing members and Kaku as a non-managing member. The agreement contemplates the admission of other members but makes clear that no member, other than a managing member, has " any right to approve, vote on or otherwise consent to any matter relating to the business, affairs or assets" of Cleveland West. But the agreement goes on to provide that no member -- managing or otherwise -- will be required to undertake personal liability for any loan or similar obligation of the company. In other words, the risk to the managing members was the same as the risk to any other member: the extent of any capital...

To continue reading

FREE SIGN UP