In re Patel
| Decision Date | 15 October 2020 |
| Docket Number | Dkt. Control No. RPG-1,Case No. 09-39791-C-11 |
| Parties | IN RE: Umesh PATEL and Lee Patel, Debtors. |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Eastern District of California |
Marc C. Forsythe, Robert P. Goe, Goe & Forsythe, LLP, Irvine, CA, for 1332 Broadway Note LLC.
Timothy T. Huber, Law Offices of Timothy T. Huber, El Dorado Hills, CA, for Revested Debtors.
Before: Christopher M. Klein, Bankruptcy Judge
OPINION ON MOTION TO CONVERT OR DISMISS CHAPTER 11 CASE
The individual debtors' chapter 11 plan committed all their "disposable income as defined in 11 U.S.C. § 1129(a)(15)(B)" to pay the unsecured class for 84 months. No such payments were made. At the end of the plan term, an unsecured creditor invoked the plan's default provision to request conversion or dismissal. The question is whether there ever was actual "disposable" income. Who has what burdens governs the outcome.
When a debtor promises all actual "disposable" income in a chapter 11 plan and undertakes to act as plan disbursing agent, the debtor assumes the burden of a duty to account — either by contract or as a fiduciary. Failure to account is a material plan default within the meaning of § 1112(b)(4)(N), hence, § 1112(b)(1) "cause." Here, conversion to chapter 7 is in the best interests of creditors and the estate.
Debtors Umesh and Lee Patel commenced this joint chapter 11 case in 2009 to save from foreclosure their 45-unit motel, the Gold Country Inn in Placerville, California, and confirmed a chapter 11 plan in 2011.2
Wells Fargo Bank, N.A. ("Wells Fargo") held the senior note and deed of trust, which it assigned to movant 1332 Broadway Note, LLC, in 2015.
Until plan confirmation on September 19, 2011, the Debtors leased the motel to their wholly-owned S corporation, Eureka Investment Group, Inc., which employed them. Under the Plan, they terminated the lease and became sole proprietors.3
Deed of trust claims included Wells Fargo for $1,630,061, followed by Resource Capital for $1,124,000.
By agreement, the motel was valued at $1,200,000. Thus, the Wells Fargo claim was bifurcated to $1,200,000 secured and $430,061 unsecured. Resource Capital's $1,124,000 claim was all unsecured. They amount to 82 percent of all unsecured class.
The Plan provides for Wells Fargo to retain its lien, with its $1,200,000 secured claim paid by 84 monthly payments of $9,303.59, at 7.0 percent interest, followed by a balloon payment of $951,214.63 due on September 1, 2018.
The unsecured class would be paid all disposable income as defined in § 1129(a)(15) for the 84 months of the Plan. Payments would be quarterly, commencing January 1, 2012.4
The Debtors represented in their Disclosure Statement that the motel constituted their "only sources of income" and that the means for Plan implementation would be from motel operations.5
The Debtors agreed to restrict themselves to a $30,000/yr, salary together with use of the on-site manager's apartment. They explained they had a wealth of motel management experience and could not hire managers for such a modest amount.6
Upon default, the Plan contemplates a motion to convert or dismiss and, if converted to chapter 7, provides for all remaining property that was property of the estate to revest in the chapter 7 estate and be protected by the automatic stay.7
The Revested Debtors undertook to act as Plan disbursing agent,8 and obliged themselves to make quarterly disbursements and regular 120-day status reports for the 84-month life of the Plan ("120-day Plan reports"), which reports were to be served on the twenty largest unsecured creditors.9 United States trustee quarterly reports were also required while the case was open.
No discharge may be entered before completion of all payments under the Plan.10
Although required every 120 days for the 84-month life of the Plan, the status reports ceased after month 24 (as of September 30, 2013). There has been no explanation why the Revested Debtors stopped making their 120-day Plan reports.
Quarterly post-confirmation status reports required by the United States trustee were filed through September 30, 2014, and ceased when the case was closed subject to being reopened for entry of discharge upon completion of the Plan.
In 2015, Wells Fargo assigned 1332 Broadway Note, LLC, its note and deed of trust, hence its secured and unsecured claims.
Although the 84 monthly payments on account of the Wells Fargo secured claim appear to have been made, the $951,214.63 balloon payment due on September 1, 2018, was not made.11
No payment ever was made to Class V unsecured creditors during the 84-month term of the Plan. The failure to have made any payment on unsecured claims precipitated the instant motion to dismiss or convert on account of Plan default on the premise that there must have been at least some disposable income.
The Debtors' defense to this motion to dismiss or convert is that there never was "disposable income" available to make payments to the unsecured class.
The seven 120-day Plan reports that were made each reported no disposable income during the relevant periods and that no problems were anticipated in plan performance.12 No 120–day Plan report was made for any period after September 30, 2013.
The twelve Quarterly Post-confirmation Status Reports to the United States trustee that were filed by the Revested Debtors show receipts and disbursements. Nine of those reports appended more detailed profit and loss statements for motel operations.
Dkt End Date Received Disbursed Net Profit/(Loss)
184 12/31/11 $58,580 $82,938 $(24,358) none provided
186 3/31/12 93,904 74,229 19,675 none provided
195 6/30/12 61,782 72,226 (10,444) none provided
214 9/30/12 99,535 110,376 (10,841) $(20,841)
223 12/31/12 74,538 109,877 (35,339) (35,338)
228 3/31/13 31,439 61,298 (29,859) (29,805)
231 6/30/13 96,904 89,936 6,968 7,002
234 9/30/13 82,581 73,668 8,913 8,916
235 12/31/13 82,032 106,145 (24,113) (24,111)
236 3/31/14 67,320 60,649 6,671 6,930*
237 6/30/14 89,394 74,886 14,508 14,507
240 9/30/14 138,762 74,034 64,728 64,728
Totals: $976,771 $990,262 $(13,491) $(8,512)*
*(3/31/14 Profit/Loss omits $32,500 in receipts)
Between April 1, 2013, and September 30, 2014, receipts exceeded disbursements by $77,675. Profits were $77,972. No quarterly Plan Class V disbursements were made.
Motel operations for 2015, 2016, and 2017 yielded net profits of $286,333, exclusive of depreciation, or, if adjusting for depreciation, $98,121, evidence of which is derived from Umesh Patel's federal tax returns.13 No quarterly Plan Class V disbursements were made.
Those tax returns also reveal income from sources other than motel operations, including ordinary dividend income of $5,056 in 2015 and $4,721 in 2017.
Umesh Patel managed to fund a $50,000 Roth IRA account between 2012 and 2018.
And, he was trading in financial markets. Umesh Patel opened Scottrade brokerage account No. XXXXX995 in 2012. In the "Options Application & Agreement," dated March 12, 2012, he stated: annual income, $80,000; net worth $150,000; and liquid assets $50,000. He had an unreported Scottrade account in 2010, when he was a debtor in possession.14
Scottrade account No. XXXXX995 statement for January 2014 shows credits of $112,206.05 and debits of $66,551.43.
During the Plan period, Umesh Patel opened Ameritrade brokerage account No. XXX-XXX331, to purchase stocks on margin.
The Ameritrade statement for August 2018 shows year-to-date: securities purchases $2,627,970.74; sales $2,912,589.66; dividends $3,958.39; and margin interest $3,589.81.
Investment activity is reflected on the Umesh Patel federal tax Forms 1040, Schedule D, for 2015, 2016, and 2017.15
Umesh Patel admits that between 2011 and 2018 he lost at least $339,000 in the stock market. His expert, Norman Johnson says losses were $372,800.
No investment account was disclosed to the class of unsecured creditors by Umesh Patel during the 84-month Plan.
Umesh and Lee Patel divorced in an action filed June 22, 2012, in El Dorado County Superior Court as No. PFL 20120518. The 120-day Plan reports filed in 2012 noted the existence of the divorce and that Lee Patel intended to quitclaim to Umesh Patel her interest in the motel. She then disappears from the case.16
Umesh Patel soon remarried. In 2013, he was Petitioner in the marital dissolution action, Umesh Patel v. Dipti Patel, No. PFL 20130940, in El Dorado County Superior Court. Umesh Patel next married Suhkwinder K. Randhawa Patel in 2017. In the ensuing marital dissolution action, Umesh claimed that when she left in November 2017, she stole from him gold and diamond jewelry that he valued at $60,000.17 If the schedules filed at the inception of the case are truthful, then this $60,000 is property acquired after commencement of the case.18
On October 10, 2018, Umesh Patel purchased a 2018 Tesla Model 3 for $71,049.50, making a down payment of $11,023.50.
1332 Broadway Note, LLC, as holder of the assigned Wells Fargo $430,061 unsecured claim, invoked the Plan's default provision to prosecute this motion to convert or dismiss under § 1112(b) on the theory that it was a default never to have made a payment to the unsecured class.
At trial, this court listened carefully to the testimony of Umesh Patel defending his financial transactions and did not find it credible. Nor was his expert helpful.
Jurisdiction is founded upon 28 U.S.C. § 1334(a). A motion under 11 U.S.C. § 1112(b) to convert or dismiss a chapter 11 case is a core proceeding that a bankruptcy judge may hear and determine. 28 U.S.C. §§ 157(b)(2)(A) & (L).
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