Ali v. Salim A. Merch. & Electro Sales & Serv., Inc. (In re Ali)

• Decision Date: 23 July 2015
• Docket Number: CASE NO. 13-50724-CAG,ADVERSARY NO. 13-05083-CAG
• Court: U.S. Bankruptcy Court — Western District of Texas
• Parties: IN RE: AZIZ ALI and MUMTAZ ALI, Debtors. AZIZ ALI and MUMTAZ ALI, Plaintiffs, v. SALIM A. MERCHANT and ELECTRO SALES & SERVICE, INC., Defendants.

IN RE: AZIZ ALI and MUMTAZ ALI, Debtors.

AZIZ ALI and MUMTAZ ALI, Plaintiffs,
v.
SALIM A. MERCHANT and ELECTRO SALES & SERVICE, INC., Defendants.

CASE NO. 13-50724-CAG
ADVERSARY NO. 13-05083-CAG

UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF TEXAS SAN ANTONIO DIVISION

July 23, 2015

CHAPTER 13

MEMORANDUM OPINION and PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW

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TABLE OF CONTENTS

PROCEDURAL HISTORY ................................................................................ 5

JURISDICTION, CONSTITUTIONAL AUTHORITY AND VENUE ....................................... 6

RELIEF REQUESTED ..................................................................................... 8

EVIDENCE PRESENTED ................................................................................. 9

Trial and Exhibits ............................................................................ 9

Witnesses and Credibility ................................................................... 10

Timeline of Events ............................................................................ 12

i. Events Occurring Prior to April 2010 ................................... 13
ii. The "Falling Out" of April 2010 ....................................... 41
iii. Events Occurring After April 2010 ...................................... 42
iv. Post-Bankruptcy Petition Date Events .................................. 59

Miscellaneous Evidence Presented ........................................................ 60

ANALYSIS OF DEFENDANTS' CLAIMS ............................................................... 60

Bankruptcy Court Jurisdiction and Authority ........................................... 60

Burden of Proof .............................................................................. 61

Proof of Claim No. 7-2 ..................................................................... 63

Proof of Claim No. 8-2 ..................................................................... 67

Proof of Claim No. 9-3 ..................................................................... 71

Proof of Claim No. 10-3 ................................................................... 73

Proof of Claim No. 11-2 ................................................................... 81

Proof of Claim No. 12-2 ................................................................... 83

Proof of Claim No. 13-2 ................................................................... 88

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Proof of Claim No. 14-2 ................................................................... 90

Proof of Claim No. 15-3 ................................................................... 94

Proof of Claim No. 16-1 ................................................................... 97

Proof of Claim No. 17-1 ................................................................... 99

ANALYSIS OF PLAINTIFFS' ADVERSARY CLAIMS ................................................. 101

Breach of Fiduciary Duty ................................................................. 101

Fraud in the Inducement .................................................................. 109

Abuse of Process ........................................................................... 114

Usury ......................................................................................... 122

Breach of Partnership, Accounting of Partnership & Suit to Quiet Title .......... 127

Violation of the Automatic Stay .......................................................... 127

CONCLUSIONS ........................................................................................ 134

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1. This Memorandum Opinion and Proposed Findings of Fact and Conclusions of Law ("Memorandum Opinion") resolves the adversary proceeding of Aziz Ali and Mumtaz Ali v. Salim A. Merchant and Electro Sales & Service, Inc., Adv. No. 13-05083-cag. Additionally, this Memorandum Opinion resolves eleven Objections to Claim¹ filed by Aziz and Mumtaz Ali ("Plaintiffs") in the underlying bankruptcy case.² The claimant in each of the filed Proofs of Claim is Salim Merchant ("Merchant") and/or Electro Sales & Service, Inc. ("Electro") (collectively "Defendants"). As a result of the continuity of involved parties and interrelatedness of the issues, the Adversary Proceeding and all eleven Objections to Claim were consolidated for trial.

2. This Court conducted a six day trial before taking the matter under advisement. Trial was concluded on June 23, 2014. The parties submitted post-trial proposed Findings of Fact and Conclusions of Law as well as Deposition and Transcript Excerpts on July 23-24, 2014.

3. The Court has reviewed the entire record before it; including all admitted exhibits and the weight of the testimony and credibility of all witnesses. Additionally, the Court has carefully considered all evidentiary objections raised and sustained in making its findings of fact.

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PROCEDURAL HISTORY

4. The various claims in this Adversary Proceeding and allegations raised in the Objections to Claim arise from a long history of personal and business connections between Plaintiffs and Defendants.

5. Plaintiffs filed the underlying Chapter 13 bankruptcy case on March 20, 2013 (the "Petition Date").

6. Defendants filed eleven proofs of claim on May 15, 2013 (Claims Register Nos. 7-17), to which Plaintiffs filed, and subsequently amended, objections to each of Defendants' claims, disputing their amount and validity. On September 16, 2013, Defendants responded to each of Plaintiffs' Objections.³

7. Plaintiffs commenced the Adversary Proceeding by the filing of their Complaint on October 16, 2013. (Adv. ECF No. 1).⁴ Defendants filed their Answer on November 15, 2013. (Adv. ECF No. 3). Thereafter, Plaintiffs twice amended their Complaint on January 31, 2014 and March 4, 2014. (Adv. ECF Nos. 9 & 20).

8. Prior to filing their Answer to the Second Amended Complaint, however, Defendants filed a Motion for Partial Summary Judgment and for Judgment on Plaintiffs' Pleadings/Failure to state a Claim (hereinafter "Summary Judgment Motion") on March 12, 2014, to which Plaintiffs responded on March 28, 2014. (Adv. ECF Nos. 27 & 29). Defendants also filed a Reply in support of the Summary Judgment Motion on April 11, 2014, (Adv. ECF No. 39), and Plaintiffs filed a Surreply on April 30, 2014. (Adv. ECF No. 47).

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9. The parties agreed to submit the Summary Judgment Motion to the Court for a ruling on the pleadings without the need for a hearing. On June 10, 2014, the Court delivered its oral ruling on the record and entered the Order granting, in part and denying, in part the Summary Judgment Motion. (Adv. ECF No. 52). Pursuant to the Court's oral ruling and Order, the Court dismissed Plaintiffs' claims for intentional infliction of emotional distress for lack of statutory authority. The Court also dismissed Plaintiffs' claim for breach of contract due to Plaintiffs' lack of standing. Additionally, the Court dismissed, without prejudice, Plaintiffs' claims for violations of the Texas Deceptive Trade Practices Act, violations of the Texas Debt Collections Act, conversion, and malpractice so that the parties could proceed on those claims in state courts where identical claims were already asserted.

10. The Court ordered the parties to proceed to trial on the following remaining claims: (1) breach of fiduciary duty, (2) fraud in the inducement, (3) abuse of process, (4) usury, (5) breach of partnership, (6) accounting of partnership, (7) suit to quiet title, and (8) violations of the automatic stay. Additionally, the Court ordered the parties to proceed to trial on Plaintiffs' Objections to Claim for Proofs of Claim numbers 7 through 17.

11. This Court conducted a six day trial before taking the matters under advisement.⁵ Trial was concluded on June 23, 2014, and the Court allowed the parties to submit post-trial proposed Findings of Fact and Conclusions of Law as well as Deposition and Transcript Excerpts.

JURISDICTION, AUTHORITY AND VENUE

12. As a preliminary matter, it is necessary for this Court to examine its subject-matter jurisdiction and constitutional authority to enter a final order in any of Plaintiffs' claims. Federal courts have an ongoing duty to examine their subject matter jurisdiction, whether the issue is

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raised by the parties or sua sponte by the court. MCG, Inc. v. Great W. Energy Corp., 896 F.2d 170, 173 (5th Cir. 1990).

13. In Stern v. Marshall, the United States Supreme Court held that a bankruptcy court must have both statutory and constitutional authority to enter final judgment on certain state law claims. Stern v. Marshall, 131 S. Ct. 2594, 2611 (2011) (finding that the bankruptcy court lacked the "judicial Power of the United States" under Article III of the United States Constitution to enter final judgment on a state law counterclaim).

14. The United States Supreme Court again weighed in on the issue of constitutional authority of the bankruptcy...