In re Maharaj

• Decision Date: 09 May 2011
• Docket Number: No. 09–15777–SSM.,09–15777–SSM.
• Citation: 449 B.R. 484
• Court: U.S. Bankruptcy Court — Eastern District of Virginia
• Parties: In re Ganess MAHARAJ, Vena Maharaj, Debtors.

449 B.R. 484

In re Ganess MAHARAJ, Vena Maharaj, Debtors.

No. 09–15777–SSM.

United States Bankruptcy Court, E.D. Virginia,Alexandria Division.

May 9, 2011.

Ann E. Schmitt, Culbert & Schmitt, PLLC, Leesburg, VA, for Debtors.

MEMORANDUM OPINION

STEPHEN S. MITCHELL, Bankruptcy Judge.

Ganess and Vena Maharaj, who operate an auto body business, seek confirmation of a chapter 11 plan. Confirmation is opposed by a nominally secured creditor, DB Structured Products, whose subordinate deed of trust against the debtors' residence would be stripped off. Additionally, the plan has not been accepted by the class of general unsecured creditors, who will receive an estimated 1.7 cents on the dollar over a period of five years. Since the debtors are retaining ownership of their business as well as certain other assets, the question is squarely raised as to whether the absolute priority rule continues to apply in a chapter 11 case of an individual debtor following the amendments made by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). The United States Trustee supports the debtors' position that the absolute priority rule does not apply. A hearing was held on March 17, 2011, at which the court received evidence and heard the contentions of the parties. For the reasons stated, the court determines that the absolute priority rule continues to apply and precludes confirmation of the debtors' plan.

Background

Ganess (“Dave”) Maharaj and Vena Maharaj (“the debtors”) are husband and wife. He is an autobody technician, and she is a receptionist. Since 1988, the debtors have operated an auto body business called D & V, Inc., also known as D & V Autobody (“D & V”). From 1988 through 2007, the debtors operated D & V at their residence located at 25872 Poland Road, Chantilly, Virginia (“Poland Road Property”).

In December, 2004, they entered into a contract with Centex Homes to sell the Poland Road Property for $2,100,000. They then purchased a new home located at 15711 Hunton Lane, Haymarket, Virginia (the “Haymarket Property”) for $1,500,000. Seeking to expand their autobody business, the debtors established D & V Properties, LLC (“DVP”) to acquire real property located at 23550 Overland Drive, Dulles, Virginia (the “Commercial Property”), from which they would operate D & V.

A. Financing and Construction of the Commercial Property

On June 5, 2006, the debtors and DVP executed a $4,345,000 note with Access National Bank (“Access”) to acquire the Commercial Property and expand their autobody business. The note was secured by the Poland Road Property and the Commercial Property. The note required a paydown of $1,000,000 from the proceeds of the sale of the Poland Road Property to Centex.

Unfortunately, in July 2006, the contract between Centex and the debtors fell through, and the debtors were left without the $1,000,000 needed to fulfill their obligation to Access. In February or March of 2007, the debtors contacted Vijay Taneja about the possibility of obtaining the necessary construction funding in the form of a private loan from Financial Mortgage, Inc. (“FMI”). Instead of entering into an agreement for a construction loan, however, at Mr. Taneja's insistence, the debtors executed a residential loan agreement that refinanced their Poland Road Property. On March 17, 2007, the debtors executed what they thought were two deed of trust notes payable to FMI, one in the amount of $613,600, and the other in the amount of $115,050. These funds were used to begin construction of the new D & V facility on the Commercial Property.

Unbeknownst to the debtors, however, Mr. Taneja and FMI were involved in a fraudulent scheme whereby Mr. Taneja induced borrowers to sign multiple promissory notes with each loan closing. These “original” notes were then sold to various secondary market purchasers, each of which believed it had the sole original note, secured by a first deed of trust. Consistent with this scheme, the debtors were tricked into executing on March 17, 2007, three identical notes in the amount of $613,600, and two identical notes in the amount of $115,050.

Following the March 2007 refinancing of the Poland Road Property, the debtors received written notification from FMI that the notes had been sold to Wells Fargo. Wells Fargo sent the debtors monthly billing statements, which they paid. In May, 2007, however, the debtors received mortgage statements from two other lenders. Mr. Taneja told the debtors that these statements were sent in error, and that they were to make payments only to Wells Fargo. In actuality, Mr. Taneja had sold the duplicate notes to other secondary market purchasers.

On May 9, 2007, the debtors executed a $2,300,000 credit line deed of trust note and loan agreement with FMI, also secured by a deed of trust on the Poland Road Property. Over the next nine months, FMI advanced approximately $1,400,000 pursuant to this credit line, all of which was used to fund construction of the new D & V facility.

On August 31, 2007, Kamran M. Khan, acting on behalf of FMI, asked the debtors to sign some additional papers that were allegedly overlooked at the prior closings. In actuality, the papers consisted of a new $613,000 note and deed of trust. It is unclear whether this note was ever sold, as no lender has ever made demand under the note; however, a deed of trust dated August 31, 2007, remains of record in Loudoun County.

On November 23, 2007, Taneja told debtor Vena Maharaj that she needed to sign additional papers in connection with a requested draw under the Construction Loan. Debtor Vena Maharaj signed the papers, only to find that they, too, supported a promissory note in the amount of $615,000.

By the Spring of 2008, FMI's fraudulent activity was discovered and, in a suit initiated by Wells Fargo, FMI's bank accounts were frozen. Shortly thereafter, FMI and Taneja sought relief under chapter 11 the Bankruptcy Code. The debtors began receiving mortgage billing statements from various lenders, including Wells Fargo, GMAC, MidFirst, and EMC Mortgage, all claiming to hold notes secured by the Poland Road Property. Faced with multiple demands for payment and threats of foreclosure, the debtors filed a declaratory judgment complaint in the FMI bankruptcy, Adversary Proceeding No. 08–1344–SSM, and sought a determination as to which lenders held enforceable notes and deeds of trust on the Poland Road Property (“FMI Litigation”). Discovery in the FMI Litigation established that monthly statements from GMAC, MidFirst, and EMC Mortgage had been addressed to the debtors at FMI's business address, and that FMI made payments on these notes from the account of NRM Investments, Inc., an affiliate of FMI.

As part of the FMI Litigation, the debtors reached a settlement with the FMI trustee, H. Jason Gold, regarding amounts due under the Construction Loan. Funded by Access under an April 9, 2009 note, the debtors paid the FMI bankruptcy estate in full satisfaction of the $1,400,000 owed under the Construction Loan. DVP was the borrower under this note, which was guaranteed by the debtors and D & V.

B. The Haymarket Property

When Centex notified the debtors that it would not close on the purchase of the Poland Road Property, the debtors attempted to sell the Haymarket Property. The property was offered for sale just as the real estate market was beginning its steep decline. The debtors made mortgage payments for some time, but ultimately were unable to carry the cost of this property and the amounts due to Access. They defaulted on the mortgage debt due to Branch Banking & Trust Company (“BB & T”), and in December 2008, BB & T foreclosed on the property.

C. The Debtors' Chapter 11 Filing and Plan of Reorganization

On July 21, 2009, the debtors filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code, and have continued to operate the auto body business as debtors in possession. The FMI Litigation was dismissed by the consent of all parties on the understanding that the various obligations would be addressed in the debtors' chapter 11 case. DB Structured Products filed a timely proof of claim in the amount of $682,086 asserting that it was secured by a deed of trust against the Poland Road property. On August 16, 2010, the debtors filed an adversary proceeding against DB Structured Products and five other deed of trust holders to “strip off” their deeds of trusts against the Poland Road property, which the complaint asserted was worth $497,700, on the ground that their liens were all subordinate to the first-lien deed of trust in favor of Access National Bank, on which $3,540,498 was owed. Complaint, Maharaj v. Wells Fargo Bank, N.A., et al. (In re Maharaj), A.P. No. 10–01322–SSM. Among the allegations in the complaint was that “Debtors intend to file a plan of reorganization which treats the Defendants' claims as unsecured debts and strips those liens from the property.” Id. at ¶ 33. DB Structured Products filed an answer which did not specifically admit or deny the factual allegations of the complaint, but asserted the validity of its lien and “objected” to any strip-off. Response to Debtors' Complaint, Maharaj v. Wells Fargo Bank, N.A., et al. (In re Maharaj), A.P. No. 10–01322–SSM.

On December 15, 2010, the debtors filed the plan that is presently before the court. The final pretrial conference in the adversary proceeding was continued, with the consent of all parties, including DB Structured Products, based on the representation that “Debtors have filed a chapter 11 plan of reorganization, which classifies the Defendants' claims as unsecured, in essence effectuating the same relief sought in the Adversary Proceeding .... [and] [c]onfirmation of the plan may render the Adversary Proceeding ... stay moot.” Joint Motion to Continue Final Pre–Trial Hearing at ¶ 3–4, Maharaj v. Wells Fargo Bank, N.A., et al. (In re Maharaj), A.P. No. 10–01322–SSM.

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