Western District of Pennsylvania | United States District ...

637IN RE SHUBH HOTELS PITTSBURGH, LLCCite as 439 B.R. 637 (Bkrtcy.W.D.Pa. 2010)

[9] Here, in contrast, the equitiesweigh heavily in favor of reopening thecase. First, the refusal to reopen wouldbe unjust to the creditors, as the AccountsReceivable Action is potentially a signifi-cant asset to the three estates. Second,the Trustee purposely closed the bank-ruptcy cases, but he did not intend therebyto abandon the Accounts Receivable Ac-tion. In closing the cases, he apparently(and mistakenly) believed that he couldadminister the assets of ACEI, CCT, andATSCO via the lead ARI bankruptcy case.His continued pursuit of the Accounts Re-ceivable Action demonstrates that he didnot intend to abandon this adversary pro-ceeding. Likewise, the Defendants’ con-tinued participation in discovery after thecases were closed demonstrates that theydid not believe the Trustee had abandonedthe Accounts Receivable Action. Unlike inArboleda, the Accounts Receivable Actionwas commenced prior to closing the ACEI,CCT, and ATSCO cases. The Trusteefiled the original complaint more than ayear before the cases were closed.

Under Rule 15(c)(1)(B) an amendmentrelates back to the date of the originalcomplaint if ‘‘the amendment asserts aclaim or defense that arose out of theconduct, transaction, or occurrence setout—or attempted to be set out—in theoriginal pleading.’’ Clearly, the amendedcomplaint asserts a claim that arose out ofthe same conduct, transactions, or occur-rences set forth in the original complaint.

Accordingly, this Court will sua spontereopen the bankruptcy cases of ACEI,CCT, and ATSCO to permit the Trustee tocontinue pursuit of the Accounts Receiv-able Action.1

Conclusion

For the reasons discussed above, I willorder that the bankruptcy cases for ACEI,CCT, and ATSCO be reopened and I willdeny the Defendants’ motion to dismiss.Furthermore, the three orders that closedthe cases will be vacated.

ORDER

For the reasons set forth in the Court’smemorandum opinion of this date, the De-fendants’ motion to dismiss is denied andthe orders that closed the Chapter 7 casesof Automotive Caliper Exchange Incorpo-rated (Case No. 05–20026, D.I. 8), CarComponent Technologies, Inc. (Case No.05–20027, D.I. 8) and ATSCO Products,Inc. (Case No. 05–20025, D.I. 8) are here-by vacated.

,

In re SHUBH HOTELS PITTSBURGH,LLC, Debtor.

No. 10–26337JAD.

United States Bankruptcy Court,W.D. Pennsylvania.

Nov. 23, 2010.

Background: Chapter 11 debtor-hotelowner moved for authority to execute 15–year franchise agreement with operator oflarge hotel franchise, so as to re-flag hotelfollowing termination of debtor’s previousfranchise. Secured lender objected.

1. The Court will also deny the Defendants’motion to dismiss as to the ‘‘turnover claims,’’‘‘quantum meruit claims,’’ and ‘‘unjust enrich-ment claims,’’ as all of these are the samewith respect to the amounts of accounts re-

ceivable. As such, these additional countswill not likely result in any additional evi-dence being presented at trial, and so thisCourt will refrain from ruling on these countsuntil the conclusion of trial.

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638 439 BANKRUPTCY REPORTER

Holdings: The Bankruptcy Court, JefferyA. Deller, J., held that:

(1) proposed agreement was appropriateexercise of debtor’s business judgment;

(2) approval of franchise agreement wouldnot amount to prohibited sub rosa orde facto plan of reorganization; and

(3) assuming that transaction violated loandocuments, lender was entitled only toadequate protection for transaction.

Motion granted.

1. Bankruptcy O3061, 3070, 3085When debtor seeking to use, sell, or

lease estate property outside ordinarycourse of business establishes a prima fa-cie case supporting contemplated transac-tion, an objector to the proposed transac-tion is required to produce some evidencesupporting its objection; mere argument orconclusory allegation is not enough. 11U.S.C.A. § 363(b)(1).

2. Bankruptcy O3061, 3069, 3085In reviewing debtor’s exercise of its

business judgment, in deciding motion forauthorization to use, sell, or lease estateproperty outside ordinary course of busi-ness, court looks at whether the proposedtransaction (1) represents a business deci-sion, (2) is made with disinterestedness, (3)is made with due care, (4) is made in goodfaith, and (5) does not constitute an abuseof discretion or waste of corporate assets.11 U.S.C.A. § 363(b)(1).

3. Bankruptcy O3061Chapter 11 debtor-hotel owner’s pro-

posed 15-year franchise agreement withlarge hotel franchisor, which would resultin re-flagging of debtor’s hotel followingtermination of its previous franchise, wasappropriate exercise of debtor’s businessjudgment; transaction did not involve self-dealing with any insider of debtor, transac-tion was closely scrutinized by debtor’s

management, creditors committee, UnitedStates Trustee (UST), and court, transac-tion represented good-faith effort to re-flag debtor’s hotel, and transaction was notabuse of discretion or waste of corporateassets, but would benefit estate and reor-ganization efforts. 11 U.S.C.A.§ 363(b)(1).

4. Bankruptcy O3061

Court’s approval of transaction inwhich Chapter 11 debtor-hotel ownersought to enter into 15-year franchiseagreement with operator of large hotelfranchise would not amount to prohibitedsub rosa or de facto plan of reorganization,inasmuch as agreement did not articulateterms for plan of reorganization, agree-ment did not require secured lender orother creditor to vote in favor of any reor-ganization plan, terms of agreement didnot dictate priority scheme or timing andamount of money to be paid to creditors,and adoption of franchise would not re-quire lender or other entities to releasetheir claims against debtor or its officersor directors. 11 U.S.C.A. § 363(b)(1).

5. Bankruptcy O3061

Where a transaction has the effect ofdictating the terms of a prospective Chap-ter 11 plan, it will constitute a prohibitedsub rosa plan.

6. Bankruptcy O3061

Transaction amounts to prohibited subrosa Chapter 11 plan of reorganization if it(1) specifies the terms of any future reor-ganization plan, (2) restructures creditors’rights, and (3) requires that all partiesrelease claims against the debtor, its offi-cers and directors, and its secured credi-tors.

7. Bankruptcy O3061

That a transaction affects Chapter 11debtor’s reorganization does not automati-

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cally convert the contemplated transactioninto prohibited sub rosa plan.

8. Bankruptcy O3062Assuming that Chapter 11 debtor-ho-

tel owner’s entry into proposed franchiseagreement with large hotel franchisor vio-lated secured lender’s loan documents,lender was entitled only to adequate pro-tection for transaction. 11 U.S.C.A.§ 363(b)(1), (e).

9. Bankruptcy O3062Secured lender was adequately pro-

tected with respect to Chapter 11 debtor’sproposed franchise agreement with opera-tor of large hotel franchise by equity cush-ion that existed in value of debtor’s hoteland by debtor’s willingness to make peri-odic interest payments to lender. 11U.S.C.A. § 363(b)(1), (e).

David K. Rudov, Rudov & Stein, ScottM. Hare, Pittsburgh, PA, for Debtor.

Joseph M. Fornari Jr., Norma Hilden-brand, Pittsburgh, PA, for U.S. Trustee.

Christopher A. Boyer, David W. Lampl,John M. Steiner, Leech Tishman Fuscaldo& Lampl, LLC, Pittsburgh, PA, for Credi-tor Committee.

MEMORANDUM OPINION 1

JEFFERY A. DELLER, BankruptcyJudge.

The matter before the Court is ShubhHotels Pittsburgh, LLC’s motion to exe-cute a Franchise Agreement with Wynd-ham Hotels and Resorts, LLC. This mat-ter is a core proceeding over which thisCourt has jurisdiction pursuant to 28

U.S.C. §§ 157(b)(2)(M), 157(b)(2)(O), and1334(b).

Shubh Hotels Pittsburgh, LLC (the‘‘Debtor’’) is the current owner of a 713room hotel located at or near Pittsburgh’sPoint State Park. The Debtor acquired thehotel, which is Pittsburgh’s largest andarguably most recognizable given its loca-tion, in 2006. The hotel had operated asHilton Hotel since the time of its construc-tion in 1959 until September of 2010 whenthe Hilton company terminated the Debt-or’s franchise. Since the termination ofthe Hilton flag, the Debtor has operatedits hotel as an independent hotel with noprominent flag.

By the motion, the Debtor wants toenter into a fifteen year franchise agree-ment with Wyndham Hotels and Resorts,LLC. By this non-ordinary course transac-tion, the Debtor will re-flag the hotel as a‘‘Wyndham Grand,’’ which is a quality fullservice hotel brand sponsored by Wynd-ham.

[1] Section 363(b)(1) of the UnitedStates Bankruptcy Code provides that adebtor ‘‘may use, sell, or lease, other thanin the ordinary course of business, prop-erty of the estate.’’ 11 U.S.C. § 363(b)(1).Courts have held that in determiningwhether to authorize a debtor’s use, saleor lease of property of the estate underSection 363(b)(1), the debtor-in-possessionis required to show that a sound businesspurpose justifies the debtor’s contemplat-ed actions. In re Montgomery WardHolding Corp., 242 B.R. 142, 147 (D.Del.1999); see also In re Lionel Corp., 722F.2d 1063, 1071 (2d Cir.1983); In re Con-tinental Air Lines, Inc., 780 F.2d 1223,1226 (5th Cir.1986); and In re TitusvilleCountry Club, 128 B.R. 396, 399 (Bankr.

1. This Memorandum Opinion constitutes theCourt’s findings of fact and conclusions of law

pursuant to Fed.R.Bankr.P. 7052.

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W.D.Pa.1991). Courts have also held thata court should accept a debtor’s businessjudgment, unless there is evidence of badfaith. In re: Grand Prix Associates, Inc.,No. 09–16545DHS, 2009 WL 1850966, *5(Bankr.D.N.J. June 26, 2009) (citing In reSycom Enterprises, L.P., 310 B.R. 669,675 (Bankr.D.N.J.2004), In re Aerovox,Inc., 269 B.R. 74, 80 (Bankr.D.Mass.2001)and In re Logical Software, Inc., 66 B.R.683, 686 (Bankr.D.Mass.1986)). Ofcourse, when the debtor establishes a pri-ma facie case supporting its contemplatedtransaction, an objector to the proposedtransaction is also required to producesome evidence supporting its objection asmere argument or conclusory allegation isnot enough. See Lionel, supra, at 1071.

The Wyndham transaction proposed bythe Debtor is supported by the OfficialCommittee of Unsecured Creditors. TheDebtor’s secured lender, Carbon CapitalReal Estate II CDO–2005–1 Ltd. throughits servicer Black Rock Financial Manage-ment, Inc. (collectively, the ‘‘Lender’’) hasobjected to the proposed franchise transac-tion. A fair reading of the Lender’s objec-tion is that the secured creditor contendsthat the Wyndham transaction has beenproposed by the Debtor in bad faith and asa litigation tactic to stall the Lender’s fore-closure efforts. The Lender also com-plains that the Wyndham franchise shouldnot be approved because the Lender (pur-suant to its loan documents with the Debt-or) has some sort of veto power over there-flagging of the hotel. The Lender alsocontends that the hotel is better off as aHilton franchise, as opposed to being re-flagged as a Wyndham Grand.

The record reflects that Dr. Kiran Pateldirectly or indirectly owns and controls theDebtor. While the documentation formal-ly turning over control of the Debtor toDr. Patel provides that he acquired hisinterest after the filing of this bankruptcy

for little or no consideration, the recordreflects that Dr. Patel had a fair amount ofinvolvement with the Debtor in the year orso leading up to the Debtor’s bankruptcyfiling. In terms of bad faith, the Lendercontends that the franchise motion is partof a scheme by Dr. Patel and his associates(including Mr. Jai Lalwani and Mr. Lal-wani’s companies known as Black DiamondHospitality, Black Diamond Super Groupand Fuel Group) to ‘‘kill’’ the Lender’sinterests.

The Court has previously noted that theDebtor’s transactions with Dr. Patel andhis affiliates ‘‘raise some eyebrows.’’ Theevidence introduced throughout these pro-ceedings reflects that Dr. Patel and hisassociates appeared to control hotel opera-tions prior to the Debtor’s bankruptcy fil-ing and thereafter as ‘‘one team.’’ Fromtime to time, Dr. Patel and his associatesdiverted hotel revenues away from the ho-tel (and the Lender’s security interest) fortheir own benefit all the while trade ven-dors of the hotel remained unpaid. Thediversion of funds also occurred all thewhile major construction and renovationprojects remained uncompleted and pro-tracted at the hotel (which, in turn, wasone of the reasons why Hilton terminatedthe Debtor’s flag). The record also in-cludes evidence of the fact that hotel reve-nues were improperly diverted to otherPatel/Lalwani projects in other parts ofthe country.

Dr. Patel, however, defended thesetransactions by claiming that he has beenduped by Mr. Lalwani. But, the recordreflects that Dr. Patel has not immediatelydisassociated himself from Mr. Lalwani.In fact, the record reflects that Mr. Lal-wani was permitted to continue to interjecthimself into the Debtor’s affairs post-peti-tion as the hotel sought out a new flag. Inaddition, the record reflects that immedi-ately after the bankruptcy filing, the Debt-

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or remitted unauthorized post-petitionpayments to or for the benefit of Mr.Lalwani or his companies. The Debtoralso remitted funds to Mr. Lalwani’s ‘‘legalquarterback,’’ Jonathan Kamin, Esq.2

All of the questionable transactions pro-vided the Court with ample cause pursuantto 11 U.S.C. § 1104 to both appoint anexaminer in this case to monitor the Debt-or’s receipts and disbursements and to ter-minate the Debtor’s exclusive period topropose a plan of reorganization pursuantto 11 U.S.C. § 1121. Indeed, this Courtdid so by way of bench order on November4, 2010, which was later memorialized byway of written Order dated November 8,2010. But for the fact that this case has avery active Official Committee of Unse-cured Creditors that is represented bycompetent legal counsel,3 the Court mayhave appointed a trustee. Instead, theCourt elected to exercise its discretion anddefer inserting a trustee at this time.Notwithstanding the short shrift given inthe pleadings filed by the Debtor and Dr.Patel with respect to the questionabletransactions, the Court cautions such par-ties that if any more shenanigans occur,the Court will appoint a trustee.

Now, does all of this background meanthat the Wyndham transaction is a badfaith litigation tactic? The Court con-cludes that it is not.

The fact is Hilton terminated the Debt-or’s flag, which in-turn resulted in thisbankruptcy case. By summarizing the

events this way, the Court is not suggest-ing that Hilton’s termination of the Debt-or’s franchise was wrong. That decision(either positively or negatively) is poten-tially left for another day. The recordnonetheless, reflects that the Debtor, itsofficers and its agents have a significantamount of responsibility for the Debtor’sstate of affairs. No matter what has oc-curred, the undisputed record is that thishotel needs a new flag.

In determining whether the Debtor hasexercised its sound business judgment inproposing the Wyndham franchise, thequestion is not whether the Court wouldrather have the hotel be a Hilton (or someother hotel franchise for that matter) or aWyndham Grand. The question also is notwhether the Court or any individual credi-tor (such as the Lender) would make abetter business decision. Rather, thequestion is whether the Debtor, when itchose to enter into the Wyndham transac-tion, appropriately exercised its businessjudgment.

[2, 3] In reviewing the Debtor’s exer-cise of its business judgment, the Courtlooks at whether the proposed transaction(1) represents a business decision, (2) ismade with disinterestedness, (3) is madewith due care, (4) is made in good faith,and (5) does not constitute an abuse ofdiscretion or waste of corporate assets.See e.g. In re Adelphia CommunicationsCorp., No. 02–41729REG, 2004 WL1634538, *2 (Bankr.S.D.N.Y. June 22,2004).4

2. Attorney Kamin had entered his appearancein this bankruptcy case as ‘‘special counsel’’for the Debtor. But, no formal applicationhas ever been filed pursuant to 11 U.S.C.§ 327. Nor has any affidavit of disinterested-ness or disclosure of compensation been filedas required by 11 U.S.C. § 329 and Fed.R.Bankr.P. 2014, 2016 and 2017. The Courtnotes that the Office of the U.S. Trustee hasbeen present at various hearings on this mat-ter. The Court assumes that the Office of the

U.S. Trustee, whose duties include monitoringa debtor’s transactions with attorneys, is un-dertaking whatever investigation it deems ap-propriate with respect to the transactions thathave come to light in these proceedings.

3. See 11 U.S.C. § 1103(c).

4. In the sale context, some courts examine (1)whether there is a sound business purpose forthe sale; (2) whether the proposed sale price

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It is undisputed that the transactionproposed with Wyndham is a business de-cision—so the first factor is met. As tothe second factor—disinterestedness—thiselement is met because there is no evi-dence that the Wyndham transaction con-stitutes any self-dealing with any insider ofthe Debtor. The third criterion—duecare—appears to be challenged by theLender. In this regard, the Lender com-plains that the Wyndham transaction ismoving along with ‘‘light speed.’’ TheLender also complains regarding: (a) thedue diligence, or lack thereof, conductedby Wyndham, and (b) the fact the Dr.Patel never met face-to-face with Wynd-ham executives.

With respect to the speed of the transac-tion, it has not been at light speed. TheMotion was filed on September 20th—more than a month ago. In fact, the delayoccasioned by the intervening litigation hascaused this transaction to be closely scruti-nized not only by the Debtor’s manage-ment, but also by the Official Committee ofUnsecured Creditors, the U.S. Trustee,and all of the professionals involved in thiscase. Of course, the Court has scrutinizedthe transaction closely as well. It there-fore appears that this transaction has hadmore than a sufficient amount of, and timefor, deliberation.

With respect to due diligence, Wynd-ham’s due diligence is irrelevant as thereis no dispute that the transaction is anarm’s length transaction in which Wynd-ham has proceeded in good faith. To theextent Wyndham’s due diligence is rele-vant, the Court would note that Jeff Wag-

oner—the President of Wyndham Hotelsand Resorts—was present at much of thetrial of this matter and counsel of Wynd-ham was present throughout. If Wynd-ham’s eyes were not open at the outset ofthese proceedings, they surely are now.5

As to the Debtor’s deliberations, it alsois not material that Dr. Patel never metMr. Wagoner personally. The record re-flects the Dr. Patel’s surrogates undertookdue diligence on his behalf, and both Dr.Patel and the Debtor are represented bysophisticated counsel. In addition, theCourt is not convinced that Dr. Patel nevermet with Wyndham executives, as bothMr. Wagoner and Dr. Patel spent severaldays together in this Court’s courtroom.

With respect to the fourth criterion—good faith—this Court has already deter-mined above that the Wyndham transac-tion has not been proposed for an improp-er purpose. The transaction represents agood faith effort to re-flag the hotel.

As to the fifth criterion, this Court findsthat the contemplated Wyndham transac-tion does not constitute an abuse of discre-tion or waste of corporate assets.Throughout the evidentiary hearing on thismatter, the Debtor has highlighted theimportance of re-flagging the hotel; thatis, re-flagging is key to the Debtor recap-turing of lost revenue and mitigating theconcerns of existing reservation holdersand employees regarding the long-term vi-ability of the hotel. Specifically, the evi-dence shows that re-flagging the hotel as aWyndham Grand will eliminate the con-

is fair; (3) whether the debtor has providedadequate and reasonable notice of the trans-action; and (4) whether the buyer has actedin good faith. See Lionel, 722 F.2d at 1071.There is no dispute that notice of the pro-posed Wyndham transaction has been ade-quate. As to the remaining factors set forthin Lionel, they are subsumed in the five-part

examination set forth above in the body ofthis Memorandum Opinion.

5. Mr. Wagoner also testified that Wyndhamrepresentatives visited the hotel, and as partof its due diligence inspected it, met with thehotel’s manager, and obtained various finan-cial information.

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tinuing harm to the Debtor and this bank-ruptcy estate resulting from continued op-eration of the hotel as an ‘‘independent’’unbranded guest lodging facility. In thisregard, the evidence of record indicates:

(i) The Debtor has been without anational reservation system and hasbeen deprived of 21% to 25% of itshistoric revenue for almost threemonths. That circumstance has signifi-cantly harmed the Debtor. A represen-tative of Wyndham testified that it isprepared to immediately provide the ho-tel with access to its national reservationsystem once the Wyndham FranchiseAgreement is authorized. The Debtor’switnesses testified that participation inthe Wyndham national reservation sys-tem will enhance revenue and profitabili-ty.

(ii) A significant percentage of hotelrevenue is derived from conference/con-vention business; and brand affiliationand resources play a large role in at-tracting that business. The absence of anational flag and the present uncertaintysurrounding the Debtor’s desire to abecome a Wyndham Grand places theDebtor at a disadvantage to compete forthe 2011 conference/convention business.Wyndham’s representative testified attrial about Wyndham’s extensive con-tacts with some of the largest corpora-tions and organizations in both this mar-ket and nationally and further testifiedthat it would immediately provide theDebtor with assistance from Wyndham’sgroup sales team with respect to confer-ence/convention business.

(iii) Since the termination of its for-mer franchise agreement, the Debtorhas gone without significant marketingcampaigns. The absence of marketingtraditionally provided by its franchisorhas harmed the Debtor’s business.Wyndham’s representative has testifiedas to Wyndham’s commitment to imple-

ment a marketing campaign for the ho-tel once the Wyndham Franchise Agree-ment is authorized.

(iv) Additional improvements to thehotel are needed. The Wyndham Fran-chise Agreement contains a list of prop-erty improvements and provides for aloan of up to $1,000,000 by Wyndham tothe Debtor which would fund the agreedupon improvements to the hotel. Wynd-ham’s representatives have also repre-sented that Wyndham is prepared tomake the improvement loan immediatelyavailable to the hotel, pursuant to theterms of the Franchise Agreement andrelated agreements, once same are ap-proved and effectuated.

(v) Since the termination by its for-mer franchisor, the Debtor has operatedwithout: (i) the support of famous trade-marks or copyrights, (ii) access to cus-tomer loyalty or referral programs, or(iii) centralized franchisor support func-tions such as a proprietary propertymanagement system, promotional pro-grams, management and personneltraining and/or operational standards,procedures and techniques. The lack ofthese privileges, which have been tradi-tionally enjoyed by the hotel throughHilton, have been and remain harmful tothe Debtor’s business. Wyndham hasrepresented that it will provide all ofthese benefits to the hotel, as set forthin the Franchise Agreement, once theWyndham Franchise Agreement is au-thorized.

(vi) The hotel is more valuable as aWyndham Grand. The only appraisaland expert value testimony presented tothe Court valued the hotel at $54 millionas of September 7, 2010 and this ap-praisal further valued the hotel at $58million as of December 31, 2010 if theproperty is franchised as a WyndhamGrand.

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(vii) The absence of a national flagand present uncertainty surrounding ap-proval of the Debtor’s business judg-ment to become a Wyndham Grand isjeopardizing existing business and caus-ing instability in the marketplace. TheDebtor contends that concern about theviability of events already planned (or tobe planned) and the drop off in groupsales which has occurred while the hotelhas operated as an independent hotel, islargely attributable to the lack of affilia-tion with a quality national brand. Theevidence submitted by the Debtor sup-ports the conclusion that approval of theWyndham Franchise Agreement wouldrestore confidence, stabilize and improvethis situation.

(viii) Many of the Debtor’s employeeshave expressed concern over the lack ofa quality flag for the hotel. Associationwith one of the largest franchisors in theworld would provide a level of comfortfor over 300 employees of the Debtorand would help the Debtor retain keyemployees due to flag stability.

Based on the record before the Court,the preponderance of the evidence is thatthe Debtor’s reorganization efforts and theestate are benefitted by the Debtor’s elec-tion to enter into the Wyndham FranchiseAgreement. The evidence and testimonypresented throughout the evidentiaryhearing on this matter demonstrates thatWyndham is ‘‘a reputable and experiencedfranchisor.’’ Specifically, the Lender’s ex-pert admitted that Wyndham is not only ‘‘areputable franchisor,’’ but also that Wynd-ham has experience in flagging hotel prop-

erties in similar ‘‘size, scope, use and val-ue’’ as the hotel property in question.6

Based on this admission and the testimonypresented by Wyndham and various ex-perts before the Court, the Debtor’s selec-tion of Wyndham as a franchisor appearsto be neither a waste of corporate assetsnor an abuse of discretion.7

[4] This Court must also reject theLender’s allegation that approval of theWyndham Franchise Agreement wouldamount to a sub rosa or de facto plan ofreorganization.

[5, 6] Where a transaction has the ef-fect of dictating the terms of a prospectivechapter 11 plan, it will constitute a prohib-ited sub rosa plan. See In re CapmarkFin. Group Inc., 438 B.R. 471, 513 (Bankr.D.Del.2010) (citing Official Comm. ofUnsecured Creditors of Tower Auto. v.Debtors & Debtors in Possession (In reTower Auto. Inc.), 241 F.R.D. 162, 168(S.D.N.Y.2006)). As articulated by theUnited States Court of Appeals for theFifth Circuit, a transaction would amountto such a sub rosa plan of reorganization ifit: 1) specifies the terms of any futurereorganization plan; 2) restructures credi-tors’ rights; and 3) requires that all par-ties release claims against the Debtor, itsofficers and directors, and its securedcreditors. Official Comm. of UnsecuredCreditors v. Cajun Elec. Power Coop. by &through Mabey (In re Cajun Elec. PowerCoop.), 119 F.3d 349, 354 (5th Cir.1997)(citing Pension Benefit Guar. Corp. v.Braniff Airways, Inc. (In re Braniff Air-

6. The evidence presented also included testi-mony to the effect that Wyndham has agreedto provide the Debtor with favorable pricingterms under its Franchise Agreement.

7. The Court is not suggesting or holding thatthe Lender has acted unreasonably, arbitrari-ly or capriciously in not approving Wyndhamas a qualified franchisor. At trial, the Lender

articulated a number of justifications as towhy it preferred Hilton over Wyndham as thefranchisor of the Debtor’s hotel. Notwith-standing these justifications, the fact remainsit is the Debtor’s business judgment, and notthe Lender’s business judgment, that is atissue.

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ways, Inc.), 700 F.2d 935, 940 (5th Cir.1983)).

The contemplated Wyndham transactiondoes not appear to be a sub rosa plan.The Court reaches this conclusion becausethe Wyndham Franchise Agreement doesnot articulate terms for a plan of reorgani-zation; nor does it require the Lender (orany other creditor) to vote in favor of anyreorganization plan. Further, the terms ofthe Franchise Agreement do not dictatethe priority scheme or dictate the timingand amount of money to be paid to credi-tors. Finally, adoption of the franchisewould not require the Lender or otherentities to release their claims against theDebtor, or the Debtor’s officers or di-rectors.

[7] All that will be accomplishedthrough the Wyndham transaction is theadoption of a franchise flag for the hotel.While it is true that this transaction affectsthe Debtor’s reorganization, it is also truethat many transactions are done in bank-ruptcy that affect a debtor’s ability to reor-ganize. For example, as the Debtor cor-rectly points out in its legal memoranda,prior to plan confirmation a debtor maychange a marketing strategy, close unprof-

itable locations, open more desirable loca-tions, reduce inventory, or enter intoagreements with different vendors, fran-chisors or suppliers. The fact that atransaction affects a debtor’s reorganiza-tion does not automatically convert thecontemplated transaction into a sub rosaplan.8 To hold otherwise would impede adebtor’s ability to successfully reorganize,keep a bankrupt debtor in a constant stateof limbo, and possibly negatively impactthe going concern value of the bankruptcyestate. All of these consequences are ex-actly what the Bankruptcy Code is de-signed to avoid.

[8, 9] Lastly, the Lender complainsthat the Wyndham transaction violates theLender’s loan documents. This allegationmay be true; however, bankruptcy causescertain provisions of a loan document to besuspended. This is one of those instances.All that Lender is entitled to here is ade-quate protection for the contemplatedtransaction. See 11 U.S.C. § 363(e). Theevidence and testimony presented to dateindicate that the Wyndham transactiondoes not harm the Lender’s collateralizedposition. The record reflects that theLender is owed approximately $50 million

8. The record reflects that the Debtor has aplan of reorganization on file. However, ex-clusivity has been terminated thus enablingcompeting plans to be filed by the Debtor’screditors. To the extent there is a concernthat competing plans would be prejudiced byhaving the Wyndham Franchise Agreementapproved (because a competing plan propo-nent may desire to subsequently reject theFranchise Agreement thereby giving rise to alarge termination claim), the Debtor andCommittee have successfully negotiated withWyndham for the subordination of any termi-nation claim that may be asserted by Wynd-ham in this bankruptcy case. Specifically,while the language of the Wyndham docu-ments may differ to a degree, Counsel to theDebtor and Counsel to the Committee haverepresented to the Court that any terminationclaim that could be asserted by Wyndham

shall be subordinate to any and all allowedunsecured claims in this case (including anyallowed unsecured claim that may be assertedby the Lender). The Court understands thisrepresentation to mean that in essence anytermination charges or debt asserted byWyndham is subordinate to any and all priori-ty claims and administrative expenses, andthat the termination charges or debt of Wynd-ham (if any) would only be senior to both theinterests of equity and creditor claims, if any,that are (under principles of equitable subor-dination) adjudicated to be subordinate.Thus, a competing plan proponent who seeksto place another flag on the hotel will not befaced with an additional multi-million dollaradministrative expense claim which could im-pede reorganization of the hotel assets andbusiness.

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on its pre-petition claim,9 and the collateralis presently worth $54 million.10 Further-more, there is no evidence indicating thatthe collateral is declining in value and theevidence of record suggests that re-brand-ing the hotel as a Wyndham Grand wouldresult in an increase in the value of thehotel to $58 million. Under these circum-stances, the Court finds that the Lender ismore than adequately protected by theequity cushion and by the fact that theDebtor has been agreeable to making peri-odic interest payments to the Lender.11

See Doc. # 13 (Cash Collateral Motion)para. 21(c).

WHEREFORE, for the reasons statedabove, the Court shall approve the Debt-or’s request for authority to execute theproposed Franchise Agreement withWyndham Hotels and Resorts, LLC.

ORDER OF COURTAND NOW, this 23rd day of November,

2010, for the reasons expressed in theaccompanying Memorandum Opinion, thecourt hereby ORDERS, ADJUDGES andDECREES as follows:

1. The Debtor’s request for authorityto execute the proposed FranchiseAgreement with Wyndham Hotelsand Resorts, LLC is GRANTED.

2. To the extent there is a concern thatcompeting plans could be prejudicedby having the Wyndham FranchiseAgreement approved (because a

competing plan proponent may de-sire to subsequently reject the Fran-chise Agreement thereby giving riseto a large termination claim), it ishereby ORDERED that any debt orobligation due Wyndham arising outof, or relating to termination or re-jection of the Franchise Agreementis subordinated. Specifically, anytermination claim, debt or other ob-ligation that could be asserted byWyndham arising out of or relatingto termination at or before plan con-firmation in this bankruptcy caseshall be subordinate to any and allallowed unsecured claims in thiscase (including any allowed unse-cured claim that may be asserted bythe ‘‘Lender’’ as such term is definedin the Memorandum Opinion). Anysuch termination charges, debts orother obligations that could be as-serted by Wyndham as a result ofsuch termination is also subordinateto any and all allowed priority claimsand allowed administrative ex-penses, and that the terminationcharges or termination related debtsor obligations that may become dueto Wyndham (if any) will only besenior to both the interests of equityand creditor claims, if any, that are(under principles of equitable subor-dination) adjudicated to be subor-dinate by the Court.

9. The Lender is also a post-petition lender.The record does not contain the exact amountof post-petition advances made by the Lender,if any. However, it is believed that suchsums, if there are any that are due, are lessthan $2 million.

10. The Lender’s own internal documents sug-gest that the hotel is worth $56 million.

11. The Court recognizes that the Lender con-tends that the Debtor’s proposed plan of reor-ganization does not provide the Lender with

the ‘‘indubitable equivalent’’ of its legal andequitable interests under its loan documents.The Court further recognizes that the Debtor’sproposed plan seeks to re-write many of theother terms and conditions of the Debtor’sloan documents. The Court does not addresstoday whether the provisions of the Debtor’splan of reorganization provides, or fails toprovide, the Lender with the indubitableequivalent of the Lender’s interests. Rather,all that the Court is deciding today is that theLender is adequately protected by the equitycushion that exists in the value of the hotel.

703

647IN RE HILLCite as 439 B.R. 647 (Bkrtcy.W.D.Pa. 2010)

3. Nothing in this Order or the Fran-chise Agreement should be deemedor construed to prevent a competingplan proponent from seeking the re-jection and/or termination of theWyndham Franchise Agreement ator before confirmation of a plan inthis case.

4. To the extent any provisions of theWyndham Franchise Agreement orrelated documents conflict with theterms of this Order, this Order shallcontrol in all respects.

,

In re Sharon Diane HILL, Debtor,

Roberta A. DeAngelis, Acting UnitedStates Trustee for Region 3,

Movant,

v.

Countrywide Home Loans, Inc., Gold-beck, McCafferty and McKeever, andAttorney Leslie Puida, Respondents.

No. 01–22574 JAD.


Nov. 24, 2010.

Background: Order to show cause wasissued against residential mortgage lenderand its attorneys as to why sanctionsshould not be imposed for their allegedmisconduct in failing to properly creditpayments received under Chapter 13 debt-or’s cure-and-maintenance plan, in at-tempting to collect what they should haverealized was a highly doubtful deficiency,and in engaging in allegedly deceptive con-duct in settlement negotiations with debt-

or’s attorney and in their representationsto the bankruptcy court. After the courtdetermined that sufficient cause existed tosanction law firm and attorney, 437 B.R.503, hearing was held regarding whatsanctions would be appropriate.

Holdings: The Bankruptcy Court, Thom-as P. Agresti, Chief Judge, held that:

(1) public reprimand was an appropriatesanction for firm, and

(2) public reprimand also was an appropri-ate sanction for attorney who lied tothe court.

So ordered.

1. Attorney and Client O59.8(1)

Bankruptcy O2187

Public reprimand was appropriatesanction for law firm that represented res-idential mortgage lender, where firm wasfound to have made a false statement in amotion to quash notices of Rule 2004 ex-aminations and to have failed to promptlynotify Chapter 13 debtor’s attorney of thefact that change-in-payment letters werenever sent, while engaging in settlementnegotiations with that attorney, and tohave deliberately or at least recklesslymisrepresented to the bankruptcy courtthat the firm had apprised debtor’s attor-ney of the fact that the letters were nevermailed; monetary sanction was not war-ranted, given magnitude of financial losswhich the firm already had experienced inthe form of attorneys fees and lost clientrevenue and the fact that a further mone-tary sanction was unlikely to have anysignificant deterrent effect, and honestyand truthfulness were matters of characterthat could not be taught through mandato-ry continuing legal education (CLE) orethical training. Fed.Rules Bankr.Proc.Rule 9011, 11 U.S.C.A.

704

In re Shubh Hotels Pittsburgh, LLC, Slip Copy (2011)

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 1

KeyCite Yellow Flag - Negative Treatment

Distinguished by In re Commonwealth Renewable Energy, Inc.,

Bankr.W.D.Pa., April 18, 2016

2011 WL 7145601Only the Westlaw citation is currently available.

NOT FOR PUBLICATIONUnited States Bankruptcy Court,

W.D. Pennsylvania.

In re: SHUBH HOTELSPITTSBURGH, LLC, Debtor.

Carbon Capital II Real Estate CDO 2005–1 Ltd., and Blackrock Financial Management,Inc., as subspecial servicer to Carbon Capital

II Real Estate CDO 2005–1 Ltd's specialservicer, Midland Loan Services, Inc., Movants,

v.Shubh Hotels Pittsburgh, LLC, Respondent.

No. BR 10–26337 JAD, 312.|

Feb. 1, 2011.

ORDER DIRECTING THE APPOINTMENTOF A CHAPTER 11 TRUSTEE

JEFFERY A. DELLER, U.S. Bankruptcy Judge.

Chapter 11

*1 AND NOW, this 1 st day of February, 2011 and forthe reasons set forth in the accompanying MemorandumOpinion, the Court hereby directs that a Chapter 11Trustee be appointed for this bankruptcy estate.

SO ORDERED.

MEMORANDUM OPINION

On October 25, 2010, Carbon Capital II Real Estate CDO2005–1 Ltd ., and BlackRock Financial Management,Inc., as subspecial servicer to Carbon Capital II RealEstate CDO 2005–1 Ltd's special servicer, Midland LoanServices, Inc., (“Carbon Capital”) filed an EmergencyMotion for an Order Appointing a Chapter 11 Trustee andfor related relief (the “Trustee Motion”).

After due consideration of the evidence presented overmany days of trial, this Court exercised its discretion and(a) appointed an examiner, (b) held the request for theappointment of trustee in abeyance, and (c) stayed certainlitigation that had been both consuming this Court'sdocket and draining the bankruptcy estate's financialresources (collectively, the “Examiner Appointment”).The findings and conclusions of the Court with respectto the Examiner Appointment are incorporated herein byreference (see Doc.399, 419, 420 at pp. 138–145).

As this Court previously noted, the Debtor's transactionswith Dr. Kiran Patel and his affiliates are cause forconcern. The evidence introduced throughout theseproceedings showed that hotel operations appeared to becontrolled by Dr. Kiran Patel and his affiliates as “oneteam” well before the commencement of this bankruptcycase and thereafter. The evidence also showed that hotelrevenues were diverted from time to time by Dr. Patel andhis associates for their own benefit despite the fact thattrade vendors of the hotel remained unpaid. The diversionof funds also took place while major hotel constructionand renovation projects were incomplete. Hotel revenueswere also diverted to other projects owned or managed byDr. Patel and his associate, Mr. Jai Lalwani, elsewhere inthe country.

Dr. Patel attempted to counter these transactions byalleging to be duped by Mr. Lalwani. Yet, the recordreflected that Mr. Lalwani continued to be a part of thepostpetition affairs of the Debtor as the hotel searchedfor a new “flag” (i.e., a national or international hotelfranchiser for which the Debtor may partner). Indeed,Mr. Lalwani continued to be active in the Debtor's affairseven though the Debtor represented to the Court that Mr.Lalwani had no involvement with the hotel subsequent tothe commencement of this bankruptcy case. Interestingly,despite this clear and convincing evidence with respect toMr. Lalwani's involvement with the Debtor, the Debtorand Dr. Patel continue to this day maintain that Mr.Lalwani occupied no role in the hotel's management. (SeeDkt. # 674, p. 10). Such a statement is simply inaccurateand is refuted by e-mail communications in evidence,which reflect that Mr. Lalwani was intimately involvedin both the Debtor's re-flagging of the hotel and in thelitigation strategy employed by the Debtor and Dr. Patelwith respect to motions filed by the Lender in this case.

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*2 When the Court appointed an Examiner, the Courtdid not take the step of appointing a Chapter 11 Trustee atthat time because the Court was hopeful that an examinerwould (a) operate as a monitor of the Debtor's financesgiven the blatant financial irregularities of the Debtor, and(b) reduce the continuous conflict that has consumed theestate.

The Examiner appointed in this case has performed herjob admirably and competently with respect to monitoringthe Debtor's finances. However, because the powers andduties of an examiner in bankruptcy are limited, it appearsto the Court that a powerless examiner lacks sufficientCourt (and/or Bankruptcy Code) authority to rein-in orcurb the litigation that continues to mount between theDebtor and the Lender. In this regard, and due to nofault of the Examiner, it is obvious that the ExaminerAppointment has not had the salutary effect intended bythe Court.

The distracting nature of the litigation that permeates thiscase can be illustrated by the matters heard on the Court'scalender of January 31, 2011. One motion concerneda settlement of certain union claims in the case. Thebackground of the union claim need not be addressedin length, except to note that the claim related to thediversion of funds from an account created by the Debtorin which employer withheld union dues were placed. The

funds were previously diverted 1 and not remitted to theunion. The settlement motion, filed by the union and notthe Debtor, sought to authorize the Debtor to remit newfunds to the union in satisfaction of certain sums due theunion. The Lender had no opposition to the proposedpayment to the union, but instead made the reasonablerequest that any claim or cause of action that the unionor employees might have as a result of the diversion ofthe funds be assigned to the bankruptcy estate. In thisregard, the Lender even drafted a proposed order to thiseffect, and the union agreed to it. Now, did the debtor-in-possession agree to it or request such relief? No itdid not. The Court inquired the reason why, and theDebtor unconvincingly suggested that the proposed ordersomehow granted the Lender rights it did not have. TheCourt found the Debtor's argument to be unavailing asthe proposed order made no final determination as to therights of the Lender in any funds.

Now, why would the Debtor oppose the order proposedby the union and Lender when the estate clearly benefitted

by it? Is it because the order assigned to the estate andreserved claims against the persons or entities whichcaused the diversion of funds in the first place? TheCourt appreciates that this is a delicate question toask. However, there have been other instances in thiscase where the Court has inquired whether a Dr. Patelcontrolled Debtor is advocating the interests of the estategenerally as opposed to advocating Dr. Patel's own specialinterests.

By way of example, there were many hearings in thiscase regarding debtor-in-possession financing. Dr. Pateldesired to lend the estate funds, but was adamant onobtaining a lien that primed the Lender's equity. Given

the Lender's willingness to provide alternative financing, 2

and the relatively small equity cushion in this case

compared to the size of the Lender's claim, 3 the Courtmade it clear that it would not approve financing by Dr.Patel on a priming basis. Here, did the Debtor ask Dr.Patel to provide financing on a basis that did not prime theLender? No it did not, much to the surprise of the Court.Instead, the Court held numerous hearings on this matterbefore an ultimate resolution could be had.

*3 Similarly, the Court had some concerns with respectto the manner in which the debtor-in-possession adheredto its duties relating to the funding available fromthe Debtor's franchisorWyndhamunder the franchiseagreement approved by the Court. As reflected in thisCourt's prior Memorandum Opinion and Order, Wyndhamhad committed to fund $1 million toward the Debtor'sproperty improvement plan. See In re Shubh HotelsPittsburgh, LLC, 439 B.R. 637 (Bankr.W.D.Pa.2010).Apparently such obligations are guaranteed by Dr. Patel.However, as reported by the Examiner, Dr. Patel failed tocause the Debtor to draw upon such funds even though theDebtor's property improvement plan remains incomplete.According to the Examiner, “When asked about this loan,Dr. Patel's attorney ... explained that since Dr. Patel isguaranteeing the Franchise Agreement, the Debtor haschosen not to use these funds at this time .” See First StatusReport of Examiner Margaret M. Good at p. 10 (Dkt. #

487). 4

The Court's calender of January 31, 2011 also included thecompeting objections to disclosure statements filed by theLender and the Debtor. The objections filed by each partyreflect that these two parties cannot even agree as to the

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basic background facts behind the Debtor's bankruptcy

case. 5 Instead, each party desires to use the disclosurestatement dissemination process to wage a public relationscampaign to advocate the litigation interests of Dr. Pateland the Lender, respectively.

Indicative of this course of action, the disclosure statementproposed by Dr. Patel and the Debtor declined toidentify material information to creditors in the form ofthe identity of which financial institutions would issueletters of credit securing, in part, payment obligationsof the plan proposed by the Debtor and Dr. Patel. Thismaterial information was withheld purportedly out ofa fear of prospective interference by the Lender withsuch letters of credit. When pressed as to why sucha non-disclosure (and averment of an expectation ofinterference) was appropriate in a disclosure statement,the Debtor/Dr. Patel team could offer no explanation thatwas convincing. Instead, when pressed on the issue, theyagreed that the footnote should be deleted in its entirety.Of course, this little tussle over a footnote in a proposeddisclosure statement is indicia of the level of animosity that

exists between these parties. 6

The Court is not confident that the animosity andacrimony between the Lender and a Dr. Patel controlledDebtor will cease anytime soon. The Court reaches thisconclusion because there is no level of trust between a Dr.Patel controlled Debtor and the Lender.

As this Memorandum Opinion is being written, the Courthas received the latest status report filed by the Examiner,which outlines a few of the instances which illuminatethe level of distrust between the parties. In her reportdated February 1, 2011, the Examiner notes that theLender has strong opposition to the management ofthe Debtor's construction projects being handled by Mr.

Frank Amedia, 7 an alleged insider of the Debtor, and

his company MAC Construction. 8 Based on the recordmade in the hearings on the Trustee Motion, the Courtunderstands that the Lender's heartburn in this regardstems not only from the fact that Mr. Amedia is an insider,but also from other factors. The Examiner reports thatthe Debtor's construction project has since been stalled

because each side is firmly entrenched in their positions. 9

*4 The level of animosity and acrimony in this case must

stop. 10 Otherwise, the costs of the estate will continueto skyrocket and the chances of reorganization will godown. This reorganization has already taken its toll onthe morale of the Debtor's employees. In fact, almosttwenty employees appeared in court at the hearings heldon January 31, 2011, with representatives expressing theirconcern over the direction of this case (including the

direction of present management and ownership). 11

In light of all of the circumstances of this case, the record isclear and convincing that a Chapter 11 Trustee should beappointed pursuant to 11 U.S.C. § 1104(a)(1) and (2). Seealso In re Marvel Entertainment Group, Inc., 140 F.3d 463(3d Cir.1998)(appointment of trustee appropriate givenhigh level of acrimony in complicated case). In renderingits decision to direct the appointment of a Chapter 11Trustee, the Court is nonetheless mindful of the costsassociated with the appointment of a trustee. However,without the interjection of a neutral third party, it is clearto the Court that litigation costs will bury this case in theabsence of a change of direction.

For all of the reasons stated above, the Court shall directthat the Office of the U.S. Trustee appoint a Chapter 11Trustee in this case. An appropriate order shall be issued.

All Citations

Slip Copy, 2011 WL 7145601

Footnotes1 The Debtor remitted the funds to the Debtor's “special counsel” who was also described in e-mails as being Mr. Lalwani's

“legal quarterback.” Such funds which were paid post-petition to “special counsel” have purportedly been repaid to theDebtor after these matters came to light.

2 In order to obtain financing, secured by a priming lien pursuant to 11 U.S.C. § 364(d), the debtor must demonstratethat no suitable alternative financing is available from other sources, and that the proposed post-petition arrangementadequately protects the existing lienholders's interests. See e.g., Suntrust Bank v. Den–Mark Construction, Inc., 406 B.R.683, 689 (E.D.N.C.2009).

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3 Courts have held that an equity cushion alone does not per se result in a finding of adequate protection. Suntrust Bank,406 B .R. at fn. 24. In the matter sub judice, the Court would note that while a small equity cushion exists using a goingconcern value for the Debtor's hotel, statements by counsel in this case suggest that if the case were to be convertedto a liquidation, there would be no equity in the Lender's collateral. Cf. In re Phoenix Steel Corp., 39 B.R. 218, 226–27(D.Del.1984)(adopting an intermediate value when there is some probability that the debtor will avoid a forced liquidation).

4 The Court still does not know whether the $1 million property improvement loan was drawn upon.

5 The record also reflects that the parties could not even agree as to whether disputes in this case should be mediated.It was only after the Court overruled the Lender's objection to mediation that mediation became a possibility. Nothingcontained herein should be deemed or construed to preclude the parties from mediating their disputes. In fact, the Courtencourages the parties to try and work out an economic solution to their differences.

6 The Court, of course, recognizes that it takes “two to tango.” As such, it does not place the blame of the state of affairsentirely on the Debtor or Dr. Patel. Rather, the Lender bears some responsibility too.

7 The record reflects that Mr. Lalwani introduced Mr. Amedia to Dr. Patel.

8 The Examiner also noted that the Lender has strong opposition to the hotel employing Mr. Amedia's two daughters.

9 The Examiner recommends that bids for construction manager be sought from qualified firms.

10 The Examiner's latest report states that the competing plan process appears to be working. The Court agrees that acompeting plan process works in that it gives competing plan proponents the incentive to increase consideration to bepaid to creditors. However, that process has not diminished the level of acrimony between the respective parties, and thatacrimony and animosity does come with a cost to the detriment of unsecured creditors and the employees of the Debtor.

11 The employees addressed the Court with no objection by the Debtor or any other parties in interest in attendance. At leastone of the employees raised concerns regarding the Debtor's franchisorWyndham. The Court would note that it previouslyapproved the Debtor's entry into the Wyndham franchise agreement, and nothing contained in this Memorandum Opinionshould be deemed or construed to be a finding or conclusion that Wyndham is not performing its end of the bargainapproved by the Court.

End of Document © 2018 Thomson Reuters. No claim to original U.S. Government Works.

708




Memorandum, it is hereby ORDEREDthat:

1. The Debtor’s Motion is DENIED.

2. NWI’s Motion is DENIED.

,


Dr. Kiran C. Patel, Pittsburgh Grand,LLC and Meridian Financial Advis-ors, Ltd., Trustee of the Shubh HotelCreditor Trust, Objectors,

v.

Shubh Hotels, LLC, Claimant.

No. 10–26337JAD.


July 24, 2012.

Background: Objections were filed toproof of claim filed in Chapter 11 case ofbankrupt limited liability company (LLC)on ground, inter alia, that advances under-lying proof of claim were not in nature ofloans, but equity contributions. Objectorsmoved for summary judgment.

Holding: The Bankruptcy Court, JefferyA. Deller, J., held that alleged loans tobankrupt limited liability company (LLC)underlying proof of claim had to be rechar-acterized as equity contributions, andproof of claim had to be disallowed.

Motions granted; claim disallowed.

1. Bankruptcy O2926

Burden of proof in objecting to proofof claim is shifting one. 11 U.S.C.A.§ 502.

2. Bankruptcy O2926, 2927, 2928

When objection to proof of claim isfiled, objecting party bears initial burdenof producing sufficient evidence to over-come the presumptive validity of properlyfiled claim. Fed.Rules Bankr.Proc.Rule3001(f), 11 U.S.C.A.

3. Corporations and Business Organiza-tions O1285

Expectation of repayment of advanceonly when entity to which advance is madehas cash flow available is the very essenceof investment transaction or equity infu-sion.


Determination as to whether allegedloan should be recharacterized as equitycontribution is appropriately based on in-tent of parties, not on labels ascribed tocertain transactions.


Whether party intended a transfer offunds to constitute a loan or equity contri-bution may be inferred from party’s ac-tions, text of its contracts, and economicreality of surrounding circumstances.


Among factors that courts consider todecide whether alleged loan to corporationshould be recharacterized as equity contri-bution are: (1) names given to instruments,if any, evidencing the indebtedness; (2)presence or absence of fixed maturity dateand schedule of payments; (3) presence orabsence of fixed rate of interest and inter-est payments; (4) source of repayment; (5)adequacy or inadequacy of capitalization;(6) identity of interest between creditorand stockholder; (7) the security, if any,for advances; (8) corporation’s ability to

709


obtain financing from outside lending insti-tutions; (9) extent to which advances weresubordinated to claims of outside creditors;(10) extent to which advances were used toacquire capital assets; and (11) presence orabsence of sinking fund to provide repay-ment.

7. Bankruptcy O2827Alleged loans to bankrupt limited lia-

bility company (LLC) underlying proof ofclaim filed in its Chapter 11 case had to berecharacterized as equity contributions,and proof of claim had to be disallowed,where claimant’s principal admitted thatthere was no interest rate connected toadvances, no definitive repayment sched-ule, and no writing documenting the na-ture of transactions, as well as that theLLC’s obligation to repay advances de-pended on profitability of its hotel proper-ty or whether property could be sold atprofit, and where advances were also listedas equity contributions on the LLC’s ownbooks and records, and only evidence thatloans were intended was conclusory testi-mony of claimant’s principal, characteriz-ing advances as loans in hindsight. 11U.S.C.A. § 502(b).


What is most determinative in distin-guishing between ‘‘equity’’ and ‘‘debt’’ isintent of parties as it existed at time oftransaction.

9. Bankruptcy O2164.1While summary judgment is generally

inappropriate when intent is issue, it maybe granted when all reasonable inferencesdefeat claims of party, or when party hasrested merely on unsupported speculation.

David K. Rudov, Rudov & Stein, Pitts-burgh, PA, James R. Walsh, Spence Cus-

ter Saylor Wolfe & Rose, Johnstown, PA,Scott M. Hare, Pittsburgh, PA, for Debtor.

MEMORANDUM OPINION

JEFFERY A. DELLER, BankruptcyJudge.

The matter before the Court consists oftwo motions for summary judgment on theObjection of Dr. Kiran C. Patel and Pitts-burgh Grand, LLC to Claim of ShubhHotels, LLC. The matter is a core proceed-ing over which this Court has subject mat-ter jurisdiction pursuant to 28 U.S.C.§§ 157(b)(2)(B) and 1334(b). For the rea-sons set forth below, the Court finds thatno genuine issue of material fact exists tomove the issue to trial. Consequently,summary judgment shall be granted andthe claim disallowed.

I.

This Court shall grant a motion for sum-mary judgment only if the moving partyshows that there are no genuine disputesas to material facts and that it is entitledto judgment as a matter of law. See Fed.R.Civ.P. 56 (applicable in bankruptcy pro-ceedings through Fed. R. Bankr.P. 7056);see also Celotex Corp. v. Catrett, 477 U.S.317, 322–23, 106 S.Ct. 2548, 91 L.Ed.2d 265(1986). A factual dispute is genuine ‘‘if theevidence is such that a reasonable jurycould return a verdict for the nonmovingparty.’’ Anderson v. Liberty Lobby, Inc.,477 U.S. 242, 248, 106 S.Ct. 2505, 91L.Ed.2d 202 (1986). When deciding a mo-tion for summary judgment courts mayconsider all materials of record includingdepositions, documents, affidavits or decla-rations, stipulations, admissions and inter-rogatory answers. Fed.R.Civ.P. 56(c).All inferences drawn from underlying factsare to be viewed in the light most favor-able to the nonmoving party. Rosen v.Bezner, 996 F.2d 1527, 1530 (3d Cir.1993)

710


(citing Matsushita Elec. Indus. Co., Ltd. v.Zenith Radio Corp., 475 U.S. 574, 587, 106S.Ct. 1348, 89 L.Ed.2d 538 (1986)). In theinstant matter, the following facts are un-disputed.1

II.Shubh Hotels, LLC (‘‘Shubh Hotels’’) is

a limited liability company that at the di-rection of its sole managing member, AtulBisaria (‘‘Bisaria’’), transferred funds be-tween various hotel entities in which Bisa-ria maintained an interest. (See Doc.# 2148, ¶ 28; see also Doc. # 2193, ¶¶ 3,10).2 At all times relevant to the instantlitigation, Bisaria had full authority to acton behalf of Shubh Hotels and was thedecision maker for Shubh Hotels Pitts-burgh, LLC (the ‘‘Debtor’’). (See Doc.# 2193, ¶¶ 3, 17–18). The Debtor is alimited liability company consisting of twomembers: Shubh Hotels Pittsburgh In-vestments, LLC and Shubh Hotels Pitts-burgh Acquisitions, LLC that formerly op-erated the Pittsburgh Hilton Hotel at 600Commonwealth Place, Pittsburgh, Penn-sylvania. (See id. ¶¶ 3, 14–15).

On September 7, 2010, the Debtor fileda voluntary petition for relief under Chap-ter 11 of the Bankruptcy Code. (See id.¶ 1). Shubh Hotels filed a proof of claim

against the Debtor (the ‘‘Claim’’) on Janu-ary 18, 2011, asserting a general unsecuredclaim in the amount of $15,227,670.09 for‘‘Loans to corporation.’’ (See Doc. # 2148,¶ 4). In support of the Claim, Shubh Ho-tels attached a list of funds transferred inand out of the Debtor’s accounts betweenJanuary 7, 2007 and July 29, 2009 (the‘‘Advances’’). (See id. ¶ 7). No loanagreements, promissory notes, termsheets, payment schedules, bank records,canceled checks, or other documents areattached to the list. (See id.).

On April 6, 2011, Dr. Kiran C. Patel andPittsburgh Grand, LLC (the ‘‘Plan Propo-nents’’) filed a Modified Second AmendedChapter 11 Plan [Doc. # 927] and a Modi-fied Second Amended Disclosure State-ment in Connection with Modified SecondAmended Plan of Reorganization DatedApril 6, 2011 [Doc. # 929]. (See id. ¶ 8).On April 22, 2011, the Plan Proponentsobjected to the Claim. (Doc. # 991). Theobjection asserted that, to the extent thefunds were transferred from Shubh Hotelsto the Debtor, they constituted equity con-tributions and not loans. (See Doc. # 991¶ 15). The objection also asserted a rightof setoff in the Debtor. (See id. ¶ 17).The Official Committee of Unsecured

1. The facts listed represent an amalgam offacts admitted by Shubh Hotels, LLC andalleged in the Statement of Undisputed Factsin Support of Motion for Partial SummaryJudgment on Objection to Claim No 68 ofShubh Hotels, LLC (Doc. # 2148) and theObjectors’ Amended Statement of UndisputedFacts in Support of Motion for Summary Judg-ment on Objection to Claim # 68 of ShubhHotels, LLC (Doc. # 2193). (See Doc.## 2182, 2183, 2212).

2. Dr. Kiran C. Patel and Pittsburgh Grand,LLC originally filed a statement of materialfacts at Doc. # 2152. However, through theClaimants’ Motion to Strike, or Alternative Re-sponse to Objectors’ Statement of UndisputedFacts in Support of Motion for Summary Judg-ment on Objection to Claim # 68 of Shubh

Hotels, LLC, Shubh Hotels requested that thestatement of material facts be stricken forfailure to cite the record in violation of thisCourt’s Amended Scheduling Order enteredat Doc. # 2068. (See Doc. # 2183). Pursuantto an oral directive of the Court at the hearingheld March 27, 2012, Dr. Kiran C. Patel andPittsburgh Grand, LLC filed the Objectors’Amended Statement of Undisputed Facts inSupport of Motion for Summary Judgment onObjection to Claim # 68 of Shubh Hotels, LLC(Doc. # 2193), correcting the technical defi-ciencies present in its previously filed state-ment of material facts. As a housekeepingmatter, this Court shall deny as moot ShubhHotels’ motion to strike as part of the Orderattached to this Memorandum Opinion.

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Creditors of Shubh Hotels Pittsburgh,LLC joined in the Plan Proponents’ objec-tion to the Claim for the limited purpose ofpreventing Shubh Hotels from voting onthe proposed plan. (See Doc. # 1070,¶ 11).

On May 4, 2011, Shubh Hotels filed amotion seeking temporary allowance of itsClaim for voting purposes only. (See Doc.# 1083). Following a hearing held May12, 2011, this Court denied said motion.(See Doc. # 1340). This Court entered anorder confirming the plan on May 20, 2011.(Doc. # 1390).

Through its response to the Plan Propo-nents’ objection to the Claim, Shubh Ho-tels conceded that the amount of its origi-nal claim should be reduced to$13,314,084.42. (See Doc. # 1447, unnum-bered p. 1, n. 1). Shubh Hotels also as-serted that the transfers to the Debtor’saccounts were not investments becauseShubh Hotels was not an equity holder ofthe Debtor and denied any right to setoff.(See Doc. # 1447).

Subsequent to the effective date of theplan (June 9, 2011), a Creditor Trust wascreated that appointed Meridian FinancialAdvisors, Ltd. as trustee. The CreditorTrust filed a supplemental objection to theClaim asserting that as the possible recipi-ent of fraudulent transfers or recoverableproperty, Shubh Hotels’ claim should bedenied pursuant to 11 U.S.C. § 502(d).(See Doc. # 1954).

In February of 2012, both the Plan Pro-ponents and the Creditor Trust (collective-ly, the ‘‘Objectors’’) filed motions for sum-mary judgment. The Motion for PartialSummary Judgment on Objection toClaim No. 68 of Shubh Hotels, LLC filedby the Creditor Trust requests this Courtlimit the allowed amount of Claim to$337,216.11, representing the total amountof Advances sent directly from Shubh Ho-tels to the Debtor, and reserves the right

to assert an objection for complete disal-lowance of the Claim at trial. (See Doc.# 2146, p. 6). The Objectors’ Motion forSummary Judgment on Objection toClaim # 68 of Shubh Hotels, LLC (‘‘Sum-mary Judgment Motion’’), primarily alleg-es that no issue of material fact exists as towhether the Shubh Hotels’ fund transferswere equity contributions as opposed to‘‘loans’’ to the Debtor. (See Doc. # 2153,pp. 15–23). The Summary Judgment Mo-tion also asserts that there is no genuineissue of material fact that the Debtor has acomplete setoff defense against the Claim.(Id. at pp. 23–24). In the alternative, thePlan Proponents joined in the CreditorTrust’s request to limit the Claim to$337,216.11. (Id. at p. 24).

Shubh Hotels objects to both motionsfor summary judgment. Shubh Hotels ar-gues that genuine issues of material factexists as to all three grounds for summaryjudgment asserted through the Objectors’motions. (See Doc. ## 2181, 2184). Pri-marily, Shubh Hotels argues that it isinappropriate for this Court to grant theSummary Judgment Motion as a genuineissue of material fact exists as to whetherthis Court should consider the Advancesloans or equity contributions. (See Doc.# 2184, pp. 2–4; see generally Audio Re-cording of Hearing Held in Courtroom D,March 27, 2012).

III.

The primary question before this Courtis whether the funds transferred to theDebtor that form the basis for the Claim(the Advances) are properly characterizedas either ‘‘loans’’ or ‘‘equity contributions.’’If the Advances are characterized as‘‘loans’’ giving rise to a debt, Shubh Hotelswould have a right to repayment of debt,thereby supporting its Claim. See 11U.S.C. § 101(5) and (12). Conversely, ifthe Advances are characterized as capital

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contributions, or equity interest obli-gations, they will not be considered debtobligations sufficient to support the Claim.Citicorp Real Estate, Inc. v. PWA, Inc. (Inre Georgetown Bldg. Associates, Ltd.P’shp), 240 B.R. 124, 139 (Bankr.D.D.C.1999).

[1, 2] The burden of proof in objectingto a claim is a shifting one. In re Alleghe-ny Int’l, Inc., 954 F.2d 167, 173–74 (3dCir.1992). Once a claimant has allegedfacts sufficient to support its claim, theclaim is prima facie valid. See id.; seealso Fed. R. Bankr.P. 3001(f). When anobjection to a proof of claim is filed, theobjecting party bears the burden of pro-ducing sufficient evidence to overcome thepresumed validity of the filed claim. In reBenninger, 357 B.R. 337, 347 (Bankr.W.D.Pa.2006) (citing Allegheny Int’l, Inc.,at 173–74). To lodge a successful motionfor summary judgment at this stage, theObjectors have the burden of proving thatno genuine issues of material fact existregarding the allowance of the Claim. Inre Planet Hollywood Int’l, 274 B.R. 391,394 (Bankr.D.Del.2001) (citing Matsushita,475 U.S. at 586 n. 10, 106 S.Ct. 1348).

In support of the Summary JudgmentMotion, the Objectors argue that theClaim is not supported by any debt owedby the Debtor because the Advancesshould be ‘‘recharacterized’’ as equity con-tributions. In combination with other au-thority, the Objectors cite the UnitedStates Court of Appeals for the Third Cir-cuit opinion, In re SubMicron Sys. Corp.,432 F.3d 448 (3d Cir.2006), insisting that‘‘recharacterization’’ is appropriate basedon the intent of the parties at the time theAdvances were made.3

To support recharacterization under theinstant circumstances, the Objectors prof-fer testimony from the Chief OperatingOfficer of Shubh Hotels, Harris Mathis(‘‘Mathis’’), that the Advances were record-ed on the Debtor’s books as equity. TheObjectors also cite documentary evidenceincluding: (1) the Debtor’s balance sheetprepared just seven days prior to theDebtor’s petition date that does not showany money owed to Shubh Hotels; and (2)the Debtor’s bankruptcy schedules signedunder penalty of perjury by Bisaria thatdo not show any money owed to ShubhHotels. Finally, the Objectors offer anexpert report, which concludes ‘‘to a rea-sonable degree of accounting and profes-sional certainty, that the transactions be-tween Shubh Hotels, LLC and the Debtorwere appropriately accounted for as equitytransactions.’’ (Doc. # 2152, Exhibit 3, p.9). Citing this evidence in combinationwith the alleged lack of any record evi-dence to the contrary, the Objectors insistthat summary judgment is appropriate.

A.

Since the Objectors have carried theirinitial burden, Shubh Hotels must cite toparticular materials in the record to showthe existence of a genuine factual disputeover the nature of the funds it transferredto the Debtor. Fed.R.Civ.P. 56(c)(1)(A-B).To successfully object to the SummaryJudgment Motion, Shubh Hotels must domore than merely demonstrate that thereis some ‘‘metaphysical doubt as to the ma-terial facts’’ and must present ‘‘specificfacts showing that there is a genuine issuefor trial.’’ Matsushita, 475 U.S. at 586–87,106 S.Ct. 1348 (citations omitted). IfShubh Hotels fails to properly address theObjectors’ assertion that the Advances

3. The term ‘‘recharacterization’’ is actuallysomewhat of a misnomer as the inquiry reallyfocuses on ‘‘the proper characterization in the

first instance of an investment.’’ SubMicron,432 F.3d at 454.

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were equity contributions, this Court mayconsider this alleged fact undisputed andgrant summary judgment if the motionand supporting materials show that theObjectors are entitled to it. Fed.R.Civ.P.56(e).

While Shubh Hotels has consistently ar-gued that the advances were loans (seeDoc. ## 1447, 2181–2184), it has failed tocite any specific facts or materials in sup-port of this argument. Rather, Shubh Ho-tels offers only the self-serving statementsof Bisaria, its managing member, in sup-port of its position.4 (See Doc. # 2184, pp.3–4). Specifically, Bisaria allegedthroughout his deposition that Shubh Ho-tels would ‘‘borrow’’ funds from incomeproducing hotel properties and othersources and in turn ‘‘loan’’ money to theDebtor. (See, e.g., Doc. # 2152, Exhibit# 1, Deposition of Atul Bisaria (hereinaf-ter ‘‘Bisaria Deposition ’’), p. 22:12–19, pp.40:3–42:17, pp. 120:9–121:18). Bisaria alsotestified at his deposition that Shubh Ho-tels often ‘‘lent’’ money to the Debtor indi-rectly through Bisaria’s personal bank ac-count. (Bisaria Deposition, p. 144:10–25).

Much of Bisaria’s deposition testimonywith regard to the Advances is controvert-ed by the deposition testimony of Mathis,the only other corporate designee forShubh Hotels. Mathis testified that he isthe Chief Operating Officer of Shubh Ho-tels, and from 2004 to 2010, was the ChiefOperating Officer of the Debtor. (SeeMathis Deposition, pp. 8:20–9:2, p. 11:12–14, pp. 13:21–14:6, p. 14:15–24, pp. 22:10–23:4). Mathis admits that the Debtor

booked all of the Advances as equity, re-gardless of whether they were transferreddirectly from Shubh Hotels, Bisaria’s per-sonal bank account, or other sources. (Seeid. at p. 32:1–13, p. 91:8–25). Mathis alsoadmits that he was not aware of any docu-ment indicating that the Advances were tobe treated as a loan, and he was not awareof any interest rate or maturity date asso-ciated with the funds Advanced to theDebtor. (See id. at pp. 94:25–96:5).

[3] Bisaria’s attempt to characterizethe Advances as loans is also controvertedby the bankruptcy schedules containingthe list of creditors signed by Bisaria un-der penalty of perjury. Those schedules(at Schedules D, E and F) reflect no out-standing loans of Shubh Hotels to theDebtor. Furthermore, Bisaria’s positionin this case is undermined by his very owntestimony. For example Bisaria testifiedat his deposition that the possibility ofrepayment was directly tied to the finan-cial stability of the Debtor’s hotel proper-ty, or the possible intervention of a thirdparty to purchase the Debtor’s hotel prop-erty. (Bisaria Deposition, pp. 92:20–93:21). This expectation of repaymentfrom the Debtor only ‘‘[w]henever it hadthe cash flow available’’ (id. at p. 91:13) isthe very essence of an investment transac-tion or equity infusion. See, e.g., In reFirst NLC Fin. Services, LLC, 415 B.R.874, 881 (Bankr.S.D.Fla.2009) (‘‘to be con-sidered a debt rather than equity, courthave stressed that a reasonable expecta-tion of repayment must exist which doesnot depend solely on the success of the

4. Shubh Hotels also argues that the list offund transfers attached to its Claim supportsits position that the Advances were loans.(See Doc. # 2211, unnumbered pp. 1–2). Thetransaction list attached to the Claim offersno support to Shubh Hotels’ allegation thatthe Advances were ‘‘loans’’ because it simplydenotes when and in what amount transfersoccurred with no indication of the intent be-

hind the transfers. Indeed, the list actuallyundercuts Shubh Hotels’ position as Mathisexplained that he formed the list by examin-ing the Debtor’s general ledger and listingonly the transactions involving the Debtor’sequity accounts. (Doc. # 2152, Exhibit # 2,Deposition of Harris Mathis (hereinafter‘‘Mathis Deposition ’’), p. 27:1–9, p. 29:2–21).

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borrowers business.’’) (quoting In re Lane,742 F.2d 1311, 1314 (11th Cir.1984)); Offi-cial Comm. of Unsecured Creditors v.Fairchild Dornier GmbH (In re DornierAviation (N. Am.), Inc.), Bankr.No. 02–82003SSM, Adv. No. 02–8199SSM, 2005WL 4781236, *19 (Bankr.E.D.Va. Feb. 8,2005) aff’d 453 F.3d 225 (4th Cir.2006)(‘‘Indeed, the hope of payment out of fu-ture profits is exactly what characterizesan equity investor.’’). Therefore, Bisaria’sown admission as to his intent at the timethe advances were made belies any asser-tion that the advances were intended as‘‘loans.’’ 5

B.

[4] In its opposition to the SummaryJudgment Motion, Shubh Hotels insiststhat this Court must focus on the intent ofShubh Hotels in characterizing the Ad-vances. (See Doc. # 2184, p. 3). It is truethat recharacterization analysis is appro-priately based on the intent of the parties,not the labels ascribed to certain transac-tions (see SubMicron, 432 F.3d at 457);however, Shubh Hotels has not put fortheven a scintilla of evidence to suggest thatthe Advances may be properly ‘‘recharac-terized’’ as loans to the Debtor.

[5, 6] Whether a party intended atransfer of funds to constitute a loan orequity contribution may be inferred fromthe party’s actions, the text of its con-tracts, and ‘‘the economic reality of thesurrounding circumstances.’’ Id. at 456.Courts have generated a number of differ-ent factors to determine whether debtshould be recharacterized as equity. SeeFairchild Dornier GmbH v. Official

Comm. of Unsecured Creditors (In re Offi-cial Committee Of Unsecured CreditorsFor Dornier Aviation (N. Am.) ), 453 F.3d225, 233–34 (4th Cir.2006). Among thesefactors are:

(1) the names given to the instruments,if any, evidencing the indebtedness; (2)the presence or absence of a fixed matu-rity date and schedule of payments; (3)the presence or absence of a fixed rateof interest and interest payments; (4)the source of repayments; (5) the ade-quacy or inadequacy of capitalization;(6) the identity of interest between thecreditor and the stockholder; (7) thesecurity, if any, for the advances; (8)the corporation’s ability to obtain financ-ing from outside lending institutions; (9)the extent to which the advances weresubordinated to the claims of outsidecreditors; (10) the extent to which theadvances were used to acquire capitalassets; and (11) the presence or absenceof a sinking fund to provide repayments.

Id. (quoting In re AutoStyle Plastics, Inc.,269 F.3d 726, 749–50 (6th Cir.2001)).

[7] While the Third Circuit Court ofAppeals has rejected mechanical applica-tion of these factors (see SubMicron, 432F.3d at 456), courts within the Third Cir-cuit have utilized the eleven factors listedabove to determine whether recharacteri-zation is appropriate under a given set ofcircumstances. See, e.g., Neilson v. Agnew(In re Harris Agency, LLC), 465 B.R. 410,421 (Bankr.E.D.Pa.2011); Official Comm.of Unsecured Creditors v. Highland Capi-tal Mgmt., L.P. (In re Moll Indus., Inc.),454 B.R. 574, 581 (Bankr.D.Del.2011).

5. Bisaria’s admission regarding a lack of for-mal repayment terms is further supported byShubh Hotels’ admission in its response tothe interrogatories that the books and recordsof the Debtor do not reflect that the Advances‘‘constituted obligations of the Debtor repaya-ble to [Shubh Hotels].’’ (Doc. # 2152, Exhib-

it 1–1, Request for Admission # 8). This char-acterization is also supported by statementsfrom Mathis who explained that in his role ofmonitoring and reviewing the Advances hedid not consider the Debtor to be ‘‘borrow-ing’’ the funds. (See Mathis Deposition, p.24:9–21).

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When using these factors as a frameworkfor evaluating the instant matter, it is clearthat the Advances are properly character-ized as equity contributions and not loans.

The items supporting characterization ofthe Advances as equity contributions spanthe majority of the factors listed. Forexample, Shubh Hotels has not producedany documents supporting its characteriza-tion of the Advances as loans, and counselfor Shubh Hotels admitted that there wasno documentation evidencing a loan obli-gation. (See Bisaria Deposition, pp.35:20–36:7, p. 90:14–23; see also Audio Re-cording of Hearing Held in Courtroom D,March 27, 2012 (11:17–11:18 AM)). Addi-tionally, Bisaria admitted that the Ad-vances were provided interest free (seeBisaria Deposition, p. 91:7–9), and therewas never any allegation by Shubh Hotelsthat the Advances were secured by aninterest in the Debtor’s property.

A review of the Debtor’s balance sheetdated January 31, 2010 shows that theDebtor was not adequately capitalized be-cause if the Advances were considered‘‘debt’’, the Debtor would have had a sub-stantial amount of negative capital. (SeeDoc. # 2152, Exhibit 1–10). Moreover,there was never any allegation by ShubhHotels that the Debtor obtained or evenattempted to obtain funds from an outsidelending source as an alternative to obtain-ing the Advances from Shubh Hotels. Fi-nally, Bisaria testified that repayment ofthe Advances was subordinate in priorityto repayment of the loan obligation to thesecured third-party lender. (Bisaria De-position, pp. 98:14–99:25).

C.Shubh Hotels also argues that because it

did not maintain, and did not receive a

membership or equity interest in the Debt-or as a result of the Advances, this Courtcannot recharacterize the Advances as eq-uity contributions. (See Doc. # 2184, p. 3).Aside from its failure to cite any authorityin support of this position, Shubh Hotels’argument is belied by the sixth factor asBisaria admits that he was in control ofboth the transferor of the Advances(Shubh Hotels) and the recipient transfer-ee (the Debtor).6 Bisaria also testifiedthat he is the majority owner of the twoentities that are the members of the Debt-or. (Bisaria Deposition, pp. 49:8–50:25).Thus, ‘‘consideration’’ or an expansion ofcontrol of the Debtor entity would be oflittle practical effect under the circum-stances. In addition, the undisputed factthat Bisaria maintained in interest in boththe transferor and transferee entities sup-ports a characterization of the Advances asequity. See, e.g., In re Newfound LakeMarina, Inc., Bankr.Nos. 04–12192MWV,04–13727MWV, 2007 WL 2712960, *6(Bankr.D.N.H. Sep. 14, 2007) (unpublishedopinion) (holding that debt was properlyrecharacterized as equity based in part onthe fact that the alleged creditor was alsothe sole principal, officer, and director ofthe debtor) (citing In re Hyperion Enters.,Inc., 158 B.R. 555, 561 (Bankr.D.R.I.1993)); In re Hog Farm, Inc., Bankr No.09–17778, 2012 Bankr.LEXIS 1415, *9–10(Bankr.S.D.Ohio Apr. 2, 2012) (holdingthat debt was properly recharacterized asequity based in part on the fact that theclaimants were also the equity owners ofthe debtor).

[8] Aside from the many factors sup-porting characterization of the Advancesas equity contributions, Shubh Hotels ad-

6. Bisaria refused to disclose the identity ofShubh Hotel’s equity holders. (See Doc.# 2152, Exhibit 1–1, Answers to Interrogato-ries ## 3–4). However, Bisaria admitted

during his deposition that he was in ‘‘control’’of both Shubh Hotels and the Debtor at thetime the Advances were made. (Bisaria De-position, pp. 58:6–59:15).

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mits that the Advances transferred indi-rectly through Bisaria’s bank account tothe Debtor were not intended to qualify asloans. Bisaria explained during his depo-sition, that the purpose of funneling someof the Advances through his personal bankaccount was to avoid violating certain cove-nants in a preexisting loan agreement be-tween the Debtor and a third-party lender,which allegedly capped the amount ofloans it could receive directly from ShubhHotels. (See Bisaria Deposition, pp. 45:3–47:21). This description was confirmed bycounsel for Shubh Hotels at the hearing onthe Summary Judgment Motion, wherecounsel admitted that Bisaria intended tostructure the Advances so that they wouldnot be classified as loans by the securedlender. (See Audio Recording of Hearingheld in Courtroom D, March 27, 2012(11:18–11:20 AM)). Yet, Shubh Hotelsnow asks this Court to characterize theAdvances as loans for the purpose of itsClaim. The Third Circuit Court of Ap-peals holds that what is most determina-tive in distinguishing between ‘‘equity’’ and‘‘debt’’ is the intent of the parties, ‘‘as itexisted at the time of the transaction.’’Machne Menachem, Inc. v. Spritzer, 456Fed.Appx. 163, 165 (3d Cir.2012) (unpub-lished decision) (emphasis added) (quotingSubMicron, 432 F.3d at 457). Allowingthe Shubh Hotels’ hindsight characteriza-tion of the Advances to prevail over itsconfessed intent at the time the Advanceswere made, would run contrary to this wellestablished precedent.

D.

[9] Finally, Shubh Hotels argues thatsummary judgment is not appropriate be-cause the intent of Shubh Hotels regardingthe Advances is at issue. (See Audio Re-cording of Hearing Held in Courtroom D,March 27, 2012 (11:19–11:20)). Thoughsummary judgment is generally inappro-priate when intent is an issue, it may be

granted when all reasonable inferences de-feat the claims of a party, or that partyhas rested merely on unsupported specula-tion. See, e.g., Medina–Munoz v. R.J.Reynolds Tobacco Co., 896 F.2d 5, 8 (1stCir.1990) (‘‘Even in cases where elusiveconcepts such as motive or intent are atissue, summary judgment may be appro-priate if the nonmoving party rests merelyupon conclusory allegations, improbable in-ferences, and unsupported speculation.’’)(citations omitted); Gertsch v. Johnson &Johnson, Fin. Corp. (In re Gertsch), 237B.R. 160, 165 (9th Cir. BAP 1999) (‘‘Whereintent is at issue, summary judgment isseldom granted (citation omitted); howev-er, ‘summary judgment is appropriate if allreasonable inferences defeat the claims ofone side, even when intent is at issue.’ ’’)(citing Newman v. Checkrite California,Inc., 912 F.Supp. 1354, 1380 (E.D.Cal.1995)); Hines v. Marchetti, 436 B.R. 159,169 (M.D.Ala.2010) (‘‘[I]n the bankruptcycontext a summary judgment denying adebtor’s discharge is sometimes appropri-ate even when intent is at issue.’’) (cita-tions omitted).

In the instant case, Shubh Hotels relieson bald assertions of fact made by Bisariain professing that the Advances wereloans. Bisaria has admitted that therewas no interest rate connected to the fundtransfers, no definitive repayment sched-ule, and that he does not recollect anywriting documenting the nature of thefunds. Additionally, Bisaria’s descriptionof repayment of the Advances as depen-dent on profitability of the Debtor’s hotelproperty or its profitable sale, is a blatantadmission that the Advances were intend-ed as equity contributions. The fact thatsuch Advances were intended equity con-tributions is further corroborated by theDebtor’s own books and records, as Mathistestified that he formed the transaction listat issue by examining the Debtor’s general

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ledger and listed only the transactions in-volving the Debtor’s equity accounts. (SeeMathis Deposition, p. 27:1–9, p. 29:2–21).

This Court recognizes that whether theAdvances should be characterized as debtor equity is an issue of fact. SubMicron,432 F.3d at 457. Nevertheless, becausethe Objectors’ Summary Judgment Mo-tion was properly made and supported, theburden to come forward with specific factsshowing that there exists a genuine issuefor trial rested with Shubh Hotels.Anderson, 477 U.S. at 248, 106 S.Ct. 2505.As this Court has previously held, thisstage of the case is the ‘‘put up or shut up’’time for the party opposing a properlysupported motion for summary judgment.In re Figard, 382 B.R. 695, 706 (Bankr.W.D.Pa.2008) (citing Berckeley Inv.Group, Ltd. v. Colkitt, 455 F.3d 195, 201(3d Cir.2006)).

The time for Shubh Hotels to producesomething beyond the self-serving and hol-low characterization of the Advances byBisaria has passed. Bisaria’s unsupportedand oft contradicted testimony concerninghis alleged intent at the time of the Ad-vances is not sufficient to demonstrate thatany genuine issue for trial exists in theinstant matter. See Jersey Cent. Power &Light Co. v. Lacey Twp., 772 F.2d 1103,1109 (3d Cir.1985) (To show the existenceof a genuine issue, ‘‘the evidence mustcreate a fair doubt, and wholly speculativeassertions will not suffice.’’) (citing Ross v.Communications Satellite Corp., 759 F.2d355, 364 (4th Cir.1985)). Without citing suf-ficient evidence on the record to supportits assertion, Shubh Hotels has not met itsburden and summary judgment may beappropriately entered in favor of the Ob-jectors. See Fed.R.Civ.P. 56(e).

E.

As this Court has found a grant of sum-mary judgment based on the lack of a

genuine issue of material fact regardingthe characterization of the Advances sup-porting the Claim as equity contributions,the Court need not reach the othergrounds for summary judgment alleged bythe Plan Proponents. Similarly, becausethis Court will disallow the Claim in itsentirety, this Court need not address thealternative relief requested by the Objec-tors reducing the amount of the Claim to$337,216.11 based on the exclusion of fundstransferred to the Debtor directly fromBisaria or third parties that did not file aproof of claim.

IV.

Having failed to cite any specific mate-rials on the record to convince this Courtthat the Advances were intended as‘‘loans’’ to the Debtor, Shubh Hotels hasfailed to establish that a genuine issue ofmaterial fact exists to move the matter totrial. With no genuine issues of materialfact for trial, this Court grants the Sum-mary Judgment Motion filed by the Ob-jectors, and shall enter an Order disal-lowing the Claim of Shubh Hotels in itsentirety. An appropriate Order shall beentered. An Order shall also be enteredwhich denies the Creditor Trust’s Motionfor Partial Summary Judgment on Ob-jection to Claim No. 68 of Shubh Hotels,LLC as the relief requested therein ismoot because it is subsumed by the Ob-jector’s motion (which, in turn, is beinggranted by the Court).

,

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The Court stated that if Ocwen stillclaimed a defense to the action, the infor-mation was still relevant. Counsel agreedto provide anything that it had not yetproduced. Ocwen has since provided an-swers to the interrogatories. (See Doc.# 56, Ex. A).

Ocwen also indicated that they are cor-recting all the things that need to be cor-rected. Among those things to be cor-rected, in accordance with Ocwen’s ownargument that it is not seeking to collectoutstanding fees and expenses, are thebilling statements sent to the Debtor. IfOcwen is not attempting to collect the feesor expenses as argued, there is no reasonfor those fees and expenses to be includedin any fashion on the monthly billingstatements. Such inclusion only createsconfusion and requires the recipient to in-terpret the intentions of Ocwen.

[9] Accordingly, as a sanction for fail-ure to comply with this Court’s ordersrelated to discovery, Ocwen will be re-quired to revise the monthly billing state-ments sent to the Debtors commensuratewith its own arguments. That is, all fu-ture billing statements commencing forth-with shall not include any reference to feesand expenses that Ocwen is not attemptingto collect. Those sections of the billingstatement reflecting prepetition or unau-thorized postpetition outstanding fees andexpenses shall reflect zero balances toavoid future confusion. In addition,Ocwen shall immediately take whateversteps are required internally to remove allreference to these costs as outstanding.

An appropriate order shall issue.

,


Meridian Financial Advisors, Ltd,Trustee of the Shubh Hotel

Creditor Trust, Plaintiff,

v.

Contract Purchase & Design, Inc.and C & M Installations,

Inc., Defendants.

Bankruptcy No. 10–26337–JAD.Adversary No. 12–02353–JAD.


July 9, 2013.

Background: President and sole share-holder of corporations named as defen-dants in strong-arm fraudulent transferavoidance proceeding moved to intervene,for purposes of seeking indefinite stay ofproceedings while criminal prosecutionagainst him was pending.

Holdings: The Bankruptcy Court, JefferyA. Deller, J., held that:

(1) motion to intervene in strong-armfraudulent transfer avoidance proceed-ing was procedurally deficient;

(2) president could not intervene either asof right or permissively; and

(3) even assuming that president were al-lowed to intervene, bankruptcy courtwould not grant his motion for indefi-nite stay of proceedings.

So ordered.

1. Bankruptcy O2160Motion to intervene in strong-arm

fraudulent transfer avoidance proceedingby sole shareholder, director, and presi-dent of corporate defendants was proce-durally deficient based on movant’s failureto attach copy of pleading to his motion or

719


to set out any claim or defense for whichintervention was sought. 11 U.S.C.A.§ 544; Fed.Rules Civ.Proc.Rule 24(c), 28U.S.C.A.

2. Bankruptcy O2160

Failure to comply with procedural re-quirements of Federal Rule of Civil Proce-dure governing motions to intervene willgenerally result in denial of motion.

3. Bankruptcy O2160It was inappropriate to relieve presi-

dent and sole shareholder of corporationsnamed as defendants in strong-arm fraud-ulent transfer avoidance proceeding of pro-cedural requirements for motion to inter-vene and to excuse his failure to attachcopy of pleading to his motion or to identi-fy claim or defense for which interventionwas sought, where president and soleshareholder had sought to intervene solelyfor purpose of seeking indefinite stay ofproceeding, a stay that would be prejudi-cial to creditor trust pursuing thesestrong-arm claims, while criminal prosecu-tion against him was pending. 11 U.S.C.A.§ 544; Fed.Rules Civ.Proc.Rule 24(c), 28U.S.C.A.

4. Bankruptcy O2160Federal Rule of Civil Procedure gov-

erning motions to intervene is meant toprevent multiplicity of suits. Fed.RulesCiv.Proc.Rule 24, 28 U.S.C.A.

5. Bankruptcy O2160, 2205Parties in interest have absolute right

to intervene in adversary proceedings inChapter 11 case, pursuant to bankruptcystatute granting such parties the right toappear and be heard on any issue. 11U.S.C.A. § 1109(b).

6. Bankruptcy O2205Courts must determine on case-by-

case basis whether prospective party ininterest has a sufficient stake in proceed-

ing to qualify as ‘‘party in interest’’ withright to appear and be heard on any issuein Chapter 11 case. 11 U.S.C.A.§ 1109(b).

7. Bankruptcy O2205

‘‘Party in interest,’’ with right to ap-pear and be heard on any issue in Chapter11 case, is anyone who has legally protect-ed interest that could be affected by bank-ruptcy proceeding. 11 U.S.C.A. § 1109(b).

See publication Words and Phras-es for other judicial constructionsand definitions.

8. Bankruptcy O2205

Mere economic interest in outcome oflitigation is generally insufficient to qualifyindividual as ‘‘party in interest,’’ with rightto appear and be heard on any issue inChapter 11 case. 11 U.S.C.A. § 1109(b).

9. Bankruptcy O2160, 2205

President and sole shareholder of cor-porations named as defendants in strong-arm fraudulent transfer avoidance pro-ceeding, whose only interest in proceedingwas economic one, based on his ownershipinterest in companies, did not qualify as‘‘party in interest,’’ with statutory right tointervene as one authorized to appear andbe heard on any issue in Chapter 11 case.11 U.S.C.A. §§ 544, 1109(b).

10. Bankruptcy O2160

President and sole shareholder of cor-porations named as defendants in strong-arm fraudulent transfer avoidance pro-ceeding could not intervene as of right, forpurpose of seeking indefinite stay thereofwhile criminal prosecution against him waspending, where his interests were closelyaligned with those of corporate defendants,and he failed to demonstrate any adversityof interest, collusion, or nonfeasance. 11U.S.C.A. § 544; Fed.Rules Civ.Proc.Rule24(a)(2), 28 U.S.C.A.

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Applicant is entitled to intervene as ofright under Federal Rule of Civil Proce-dure when: (1) application for interventionis timely; (2) applicant has sufficient inter-est in litigation; (3) that interest may, aspractical matter, be affected or impairedby disposition of litigation; and (4) interestis not adequately represented by existingparty to litigation. Fed.Rules Civ.Proc.Rule 24(a)(2), 28 U.S.C.A.


Applicant bears burden of demon-strating that it has met all four require-ments for intervention as of right pursuantto Federal Rule of Civil Procedure. Fed.Rules Civ.Proc.Rule 24(a)(2), 28 U.S.C.A.


Interest in litigation, of kind requiredto support intervention as of right, must bea legal interest, as opposed to interest of ageneral and indefinite character, and appli-cant must demonstrate that there is tangi-ble threat to that legally cognizable inter-est. Fed.Rules Civ.Proc.Rule 24(a)(2), 28U.S.C.A.


In deciding whether to grant motionfor intervention as of right upon groundthat movant’s interest may be affected orimpaired by litigation, court must assessthe practical consequences of litigation,and may consider any significant legal ef-fect on applicant’s interest. Fed.RulesCiv.Proc.Rule 24(a)(2), 28 U.S.C.A.


To support intervention as of right, itis not sufficient that an interest be inciden-tally affected; rather, there must be tangi-ble threat to applicant’s legal interest.Fed.Rules Civ.Proc.Rule 24(a)(2), 28U.S.C.A.


Burden is on the one seeking to inter-vene as of right to show that his interestsare not adequately represented by existingparties. Fed.Rules Civ.Proc.Rule 24(a)(2),28 U.S.C.A.


When party seeking to intervene as ofright has same ultimate objective as partyto suit, presumption arises that its inter-ests are adequately represented, and inorder to overcome this presumption of ad-equate representation, would-be intervenormust ordinarily demonstrate adversity ofinterest, collusion, or nonfeasance on partof party to suit. Fed.Rules Civ.Proc.Rule24(a)(2), 28 U.S.C.A.


President and sole shareholder of cor-porations named as defendants in strong-arm fraudulent transfer avoidance pro-ceeding would not be allowed to intervenepermissively pursuant to Federal Rule ofCivil Procedure, where intervention wasnot sought to enable president to assertany claim or defense, but merely to seekstay of proceeding while criminal proceed-ings against him were pending, and indefi-nite stay would prejudice other parties.11 U.S.C.A. § 544; Fed.Rules Civ.Proc.Rule 24(b), 28 U.S.C.A.


In exercising its discretion whether toallow permissive intervention, court mustconsider whether intervention will undulydelay or prejudice adjudication of originalparties’ rights. Fed.Rules Civ.Proc.Rule24(b), 28 U.S.C.A.

20. Action O68

Stay of civil case is extraordinaryremedy.

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21. Action O69(5)Stay of civil proceeding during pen-

dency of criminal proceedings against po-tential witness in civil suit is not requiredon Fifth Amendment grounds. U.S.C.A.Const.Amend. 5.

22. Action O68Stay of civil proceeding may be grant-

ed as incident to power inherent in everycourt to control disposition of causes on itsdocket with economy of time and effort foritself, for counsel, and for litigants.

23. Action O68Decision by court whether to exercise

inherent power that it has to control dispo-sition of causes on its docket in order tostay civil proceeding calls for the exerciseof judgment, which must weigh competinginterests and maintain an even balance.

24. Action O69(5)In deciding whether to stay civil case

pending resolution of criminal proceeding,courts often consider the following factors:(1) extent to which issues in civil and crim-inal cases overlap; (2) status of criminalproceedings, including whether any defen-dants have been indicted; (3) plaintiff’s in-terest in expeditious civil proceedingweighed against prejudice to plaintiffcaused by delay; (4) burden on defendants;(5) interests of court; and (6) the publicinterest.

25. Action O69(5)Even assuming that president and

sole shareholder of corporations named asdefendants in strong-arm fraudulent trans-fer avoidance proceeding were allowed tointervene, bankruptcy court would notgrant his motion for indefinite stay of pro-ceeding while criminal proceedings againsthim was pending, though lack of stayforced him to choose between testifying inavoidance proceeding or exercising hisFifth Amendment rights, where indefinite

stay would prejudice other parties, andthere was no showing the president’s testi-mony was crucial to defense of avoidanceclaims, and that there were not other wit-nesses who could testify to relevant events.U.S.C.A. Const.Amend. 5; 11 U.S.C.A.§ 544.

Crystal H. Thornton–Illar, Leech Tish-man Fuscaldo & Lampl, LLC, Pittsburgh,PA, for Plaintiff.

Ronald B. Roteman, The StonechipherLaw Firm, Pittsburgh, PA, for Defen-dants.

MEMORANDUM OPINION

Jeffery A. Deller, Bankruptcy Judge.

The matters before the Court are a Mo-tion to Intervene for the Limited Purposeof Filing a Motion for Stay and a Motionto Stay filed by proposed intervenor, Mr.Steve Lewis (‘‘Mr. Lewis’’). These mat-ters are core proceedings over which theCourt has subject matter jurisdiction pur-suant to 28 U.S.C. §§ 157(b)(2)(A) and1334.

These motions concern a criminal defen-dant’s assertion of his Fifth Amendmentprivilege against self-incrimination and thecourt’s interest in ‘‘secur[ing] the just,speedy, and inexpensive determination ofevery action and proceeding.’’ See Fed.R.Civ.P. 1.

It has been asserted that Mr. Lewis’role as the sole shareholder and presidentof the defendants, Contract Purchase &Design, Inc. and C & M Installations, Inc.(together, the ‘‘Defendants’’), makes him apossible witness in this adversary proceed-ing (the ‘‘Adversary Proceeding’’). Mean-while, it has also been asserted that hisindictment in a pending criminal action in

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the Northern District of Illinois implicateshis privilege against self-incrimination un-der the Fifth Amendment. In essence,Mr. Lewis would like to use his privilegeagainst self-incrimination as a shield pre-venting the prosecution of this civil adver-sary proceeding against his companies allthe while he is under criminal indictmentin the Northern District of Illinois. Forthe reasons set forth more fully below, theCourt denies the motions filed by Mr.Lewis. As such, his intervention requestwill be denied, and the related motion tostay shall also be denied.

I.

The debtor, Shubh Hotels Pittsburgh,LLC (the ‘‘Debtor’’), filed a voluntary peti-tion under chapter 11 of the BankruptcyCode on September 7, 2010 in case number10–26337–JAD (the ‘‘Lead BankruptcyCase’’). The Debtor’s amended chapter 11plan filed April 6, 2011 (the ‘‘Plan’’) wasconfirmed on May 20, 2011. (See Case No.10–26337–JAD, Doc. # 1390). Under thePlan, a creditor trust was to be formedpursuant to a separate trust agreement forthe purpose of, among other things, prose-cuting and settling avoidance actions. (SeeCase No. 10–26337–JAD, Doc. # 927,§ 1.1, p. 12). Pursuant to these provisionsof the confirmed Plan, a creditor trust wascreated on or about June 9, 2011, to whichplaintiff Meridian Financial Advisors, Ltd.was appointed as trustee (the ‘‘CreditorTrust’’). (See Case No. 12–02353–JAD,Doc. # 1, ¶¶ 9–10).1

On September 6, 2012, the CreditorTrust initiated the Adversary Proceedingby filing a complaint (the ‘‘Complaint’’),claiming that the Debtor fraudulentlytransferred estate property to the Defen-dants in connection with proposed renova-

tions to the Pittsburgh Hilton Hotel (the‘‘Hotel’’), which the Debtor operated priorto filing for bankruptcy. (See Doc. # 1).In the Complaint, the Creditor Trust spe-cifically avers that on or about May 19,2006, the Debtor obtained a $42,700,000loan from Column Financial, Inc. to fundrenovations to and the purchase of theHotel from Hilton Hotels Corporation.(See id. at ¶ 18). The Creditor Trust fur-ther asserts that on or about May 2006,the Debtor contracted with the Defendantsto provide goods and/or services related tothe Hotel renovations (see id. at ¶ 21), andbetween June 2006 and November 2007,Contract Purchase & Design, Inc. and/or C& M Installations, Inc. received either di-rectly or indirectly over $13,000,000 forgoods and services allegedly provided tothe Debtor for renovations to the Hotel(see id. at ¶ 22).

Subsequently, on or about August 17,2007, the Debtor refinanced its loan withColumn Financial, Inc., increasing the loanbalance to $49,600,000, of which $4,800,000was earmarked to fund a physical expan-sion of the Hotel (the ‘‘Expansion Re-serve’’). (See id. at ¶¶ 23–24). On orabout October 12, 2007, $2,464,109 fromthe Expansion Reserve was wire trans-ferred directly to Contract Purchase 8bDesign, Inc. and/or C & M Installations,Inc. (the ‘‘Transfer’’). (See id. at ¶ 26).The gravamen of the Creditor Trust’sComplaint is that the Debtor received nogoods or services of value from ContractPurchase & Design, Inc. and/or C & MInstallations, Inc. in exchange for theTransfer. (See id. at ¶ 28). The CreditorTrust alleges that the Defendants havebeen unjustly enriched, and seeks to avoidand recover the value of the Transfer pur-suant to the Pennsylvania Uniform Fraud-

1. All subsequent docket references refer toCase No. 10–02353–JAD unless otherwise spe-

cifically noted.

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ulent Transfer Act, 12 Pa.C.S.A.§§ 5104(a)(1), 5104(a)(2), and 5105.

After the filing of the Complaint, theparties filed a Stipulation to Extend Timefor Defendants to File an Answer to theComplaint on October 9, 2012, and a sec-ond stipulation to further extend the timeon November 7, 2012. (See Doc. ## 6, 8).The Defendants then filed a Motion toExtend Time for Filing a Response to theComplaint on November 29, 2012. (SeeDoc. # 9). On the same day, Mr. Lewisfiled a Motion to Intervene and Motion toStay Adversary Proceedings (see Doc.# 10), which he re-filed at the Court’s re-quest to correctly file as a two-part motionon December 6, 2012 (see Doc. # 13). TheCourt granted the Defendant’s Motion toExtend Time for Filing a Complaint onDecember 4, 2012, extending the deadlineto file a response for a period of thirtydays following the determination on theMotion to Intervene and the Motion toStay the Adversary. (See Doc. # 12).

In Mr. Lewis’ Motion to Intervene andMotion to Stay the Adversary filed onDecember 6, 2012, Mr. Lewis asserts thathis indictment in a pending criminal mat-ter necessitates his intervention in the Ad-versary Proceeding. Mr. Lewis’ requestto intervene is made pursuant to 11 U.S.C.§ 1109(a) and Fed.R.Civ.P. 24 (made appli-cable to the Adversary Proceeding by Fed.R. Bankr.P. 7024), and his stay request ismade pursuant to the Fifth Amendment ofthe United States Constitution and Fed.R.Civ.P. 26 (made applicable to the Adver-sary Proceeding through Fed. R. Bankr.P.7026). (See Doc. # 13, ¶ 4).

On or about October 9, 2012, Mr. Lewisand Mr. Atul Bisaria (‘‘Mr. Bisaria’’) 2 were

indicted in the United States DistrictCourt for the Northern District of Illinoisat Case No. 12–CR–791 (the ‘‘CriminalProceeding’’). (See Doc. # 13, Exhibit C,hereinafter the ‘‘Indictment’’). The Indict-ment includes ten counts against Mr. Lew-is and Mr. Bisaria and a forfeiture allega-tion for wire fraud and bank fraud inviolation of 18 U.S.C. §§ 1343, 1014, and 2.Specifically, the indictment alleges thatMr. Lewis and Mr. Bisaria participated ina scheme to defraud Broadway Bank ofChicago, Illinois and Mutual Bank of Har-vey, Illinois by falsely representing thatloan proceeds from those banks were to beused to pay for renovations at the RamadaPlaza Hotel in Cincinnati, Ohio and theDoubletree Guest Suites in Boca Raton,Florida, when in fact the funds were di-verted for other purposes. (See Indict-ment, ¶ 3, 11, 15, 17, 22, 26, and 33–35).Mr. Lewis asserts that his intervening inand staying of the Adversary Proceedingis necessary because the Criminal Pro-ceeding involves issues ‘‘substantiality re-lated to the claims and defenses in this[A]dversary [P]roceeding,’’ and as such,‘‘will each require Lewis’ presence andparticipation, and involve many of thesame documents, issues, claims and de-fenses.’’ (See Doc. # 13, ¶ 1).

The Creditor Trust filed an Objection tothe motions on January 22, 2013. (SeeDoc. # 20). The Defendants filed a Sup-plemental Response and Joinder to Mr.Lewis’ Motion to Intervene on the sameday. (See Doc. # 21). A hearing was heldJanuary 29, 2013. Parties filed Post–TrialBriefs on February 12, 2013, and Replieson February 19, 2013. (See Doc. ## 24,25, 27, 28).3 The matter is now ripe fordecision.

2. The Creditor Trust also filed a separate ad-versary proceeding within the Lead Bankrupt-cy Case against Mr. Bisaria at Case No. 12–02357–JAD, alleging in its complaint thereinthat Mr. Bisaria, the sole officer and memberof the Debtor, caused the Debtor to fraudu-

lently transfer funds to Bisaria himself and toShubh Hotels, LLC.

3. The Defendants and Mr. Lewis jointly filedtheir Post–Trial Brief and Reply. (See Doc.## 24, 28).

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II.

[1] As a preliminary matter, the Courtwill address the Creditor Trust’s argumentthat Mr. Lewis failed to attach a pleadingand assert a claim or defense, therebyfailing to comply with the requirements ofFed.R.Civ.P. 24(c). Pursuant to Rule24(c), ‘‘[a] motion to intervene TTT muststate the grounds for intervention and beaccompanied by a pleading that sets outthe claim or defense for which interventionis sought.’’ It is undisputed that Mr. Lew-is did not attach a pleading to his motion.Because Mr. Lewis did not attach plead-ing, and also because he has not articulat-ed any claim or defense that relates to theunderlying substance of the Complaint, theCourt denies Mr. Lewis’ Motion to Inter-vene as procedurally deficient.

[2] Failure to comply with the require-ments of Rule 24(c) will generally result inthe denial of a motion to intervene. SeeTownship of S. Fayette v. Allegheny Coun-ty Housing Authority, 183 F.R.D. 451(W.D.Pa.1998), affirmed 185 F.3d 863 (3dCir.1999) (motion to intervene dismissedwhen movants did not submit the requisiteproposed pleading); School Dist. Of Phila-delphia v. Pennsylvania Milk MarketingBd., 160 F.R.D. 66 (E.D.Pa.1995) (motionto intervene denied for failure to attach apleading setting forth the claim or defensefor which intervention was sought). How-ever, courts have not required strict com-pliance with Rule 24(c) in certain circum-stances. See, e.g., William v. Taylor, 465F.Supp.2d 1267, 1273 n. 3 (N.D.Ga.2000)(motion to intervene granted despite fail-ure to attach complaint where intervenor’sclaims were identical to plaintiffs’, inter-vention would not unduly delay or preju-dice rights of original parties, and the in-tervenor attached proposed complaint withexplanation of the claims to a reply brief);McCausland v. Shareholders ManagementCo., 52 F.R.D. 521 (S.D.N.Y.1971) (failure

to attach a pleading to motion to intervenenot fatal when affidavit in support statedthat proposed intervenors would adopt thepresent complaint).

[3] For example, the Defendants andMr. Lewis directed the Court’s attention toU.S. ex rel. Frank M. Sheesley Co. v. St.Paul Fire & Marine Ins. Co., 239 F.R.D.404, 413 (W.D.Pa.2006), where the courtgranted a motion to intervene despite theintervenor’s failure to attach a pleading.The Defendants and Mr. Lewis assert thatthe instant case is similar to that of Shees-ley, where there was a ‘‘sufficient common-ality of law or facts underl[ying] the appli-cant’s claim and the main action.’’ (SeeDoc. # 24, p. 8, citing Sheesley, 239 F.R.D.at 414). However, the Creditor Trust ar-gues that this case is easily distinguishablefrom Sheesley, where ‘‘there was no realprejudice to the [original parties] in waiv-ing the procedural requirements of Rule24(c),’’ since ‘‘the underlying disputemoved forward in another forum, [specifi-cally] arbitration.’’ (See Doc. # 25, p. 5).The Creditor Trust asserts that ‘‘in thismatter, Mr. Lewis seeks to intervene andstay the underlying dispute for an indefi-nite period of time potentially resulting ingreat prejudice to the Creditor Trust.’’(See id.). The Court finds Sheesley distin-guishable from the instant case, becausethere is not a sufficient commonality of lawor facts underlying the Adversary Pro-ceeding and the Criminal Proceeding, andbecause the Creditor Trust would be prej-udiced.

[4] Unlike in Sheesley, here there is nothreat of multiple suits because there is nounity of interest between the two proceed-ings. ‘‘Rule 24 is meant to prevent the TTT

multiplicity of suits.’’ 239 F.R.D. at 415,citing Wash. Elec. Coop., Inc. v. Mass.Mun. Wholesale Elec. Co., 922 F.2d 92, 97(2d Cir.1990) (‘‘The purpose of the ruleallowing intervention is to prevent a multi-

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plicity of suits where common questions oflaw or fact are involved.’’). ‘‘Rather thanhave different tribunals examine these is-sues at different times, notions of judicialeconomy suggest aggregating them in asingle proceeding.’’ 239 F.R.D. at 415.Here, the Court has not been persuadedthat there are common questions of law orfact among the two proceedings.

The movant in Sheesley was asking ‘‘fora stay in [the] litigation and for an ordercompelling [the original plaintiff] to arbi-trate its grievances.’’ 239 F.R.D. at 408.Because ‘‘a plethora of questions to beraised in a potential arbitration proceeding[were] common with the issues in the mainTTT action,’’ and the claims presented inthe complaint in the main action ‘‘share[d]the same factual history’’ with any cross-claim that could be raised in arbitration,the Sheesley court found that ‘‘[i]denticalquestions [would] ground the defensesavailable in [the court] and the claims thatthe [a]pplicant may bring before an arbi-trator.’’ 239 F.R.D. at 414.

Here, the Criminal Proceeding and theAdversary Proceeding do not share com-mon questions of law or fact, and there isno overlap of issues or parties. The Crim-inal Proceeding involves allegations thatMr. Lewis defrauded two banks located inIllinois by falsely representing that loanproceeds from those banks were to beused to pay for renovations at the RamadaPlaza Hotel in Cincinnati, Ohio and theDoubletree Guest Suites in Boca Raton,Florida, when in fact the funds were di-verted for other purposes. (See Indict-ment, ¶ 3, 11, 15, 17, 22, 26, and 33–35).The Adversary Proceeding, meanwhile, in-volves different defendants, a loan from adifferent bank, and renovations to a differ-ent hotel than those in the Criminal Pro-ceeding. Specifically, the Creditor Trust’sComplaint alleges that the Defendantswere unjustly enriched by an alleged

fraudulent transfer of estate property fromthe Debtor in connection with proposedrenovations to the Pittsburgh Hilton Hotel.Mr. Lewis’ actions regarding the Transferin the Adversary Proceeding are not atissue in the Criminal Proceeding, nor arehis actions regarding the fraud allegationswithin the Criminal Proceeding at issue inthe Adversary Proceeding. There is nothreat here of multiplicity of suits, as therewas in Sheesley. The instant case doesnot present the situation that Rule 24 ismeant to prevent.

Furthermore, the Sheesley court ac-knowledged that when courts waive proce-dural defects under Rule 24, such waiver‘‘is often prompted by the merits of themotion itself, the lack of prejudice to theparties, and the principle that Rule 24 isintended simply to notice the parties as tothe applicant’s position and arguments.’’239 F.R.D. at 411. Waiving Mr. Lewis’failure to attach a pleading is not appropri-ate here, where the Court agrees with theCreditor Trust that they would be preju-diced by an indefinite delay.

Mr. Lewis is asking for a stay of thelitigation for an indefinite period, duringwhich time the Creditor Trust would notbe able to pursue its claims against theDefendants in another forum. Not onlywould a stay delay the Adversary Proceed-ing, but also the Lead Bankruptcy Case,which the Creditor Trust avers is ‘‘movingtoward conclusion,’’ as ‘‘most of [the other]adversary proceedings associated with thebankruptcy case have been resolved todate,’’ and ‘‘the [P]lan has been con-firmed.’’ (See Doc. # 20, pp. 12–13, ¶ 57;see also Case No. 10–26337–JAD, Doc.# 1390). The Court also notes that duringa stay of the Adversary Proceeding andBankruptcy Case, the Debtor’s estatewould be required to continue payingquarterly fees to the United States trusteefor each quarter until the case is converted

726


or dismissed. See 28 U.S.C. § 1930(a)(6).The longer the case is stayed, the greaterthe statutory fees that must be paid underthis provision by the estate, thus reducingthe amount of estate funds available forthe Creditor Trust to enforce and prose-cute the Debtor’s obligations. Because theCreditor Trust is prejudiced by an indefi-nite delay of the Adversary Proceeding,waiver of Mr. Lewis’ procedural defect isnot appropriate in the instant case.4

Mr. Lewis’ Motion to Intervene is alsoprocedurally deficient because it does notset out a claim or defense related to theexisting case, as required by Rule 24(c).‘‘The words ‘claim or defense’ manifestlyrefer to the kinds of claims or defensesthat can be raised in courts of law as partof an actual or impending law suit.’’ Dia-mond v. Charles, 476 U.S. 54, 76–77, 106S.Ct. 1697, 1711, 90 L.Ed.2d 48 (1986)(internal citations omitted). Here, Mr.Lewis has simply not raised any claim ordefense; he has only asserted that heseeks to intervene for the limited purposeof staying the proceeding.

Thus, the Court finds that Mr. Lewis’Motion to Intervene is procedurally defi-cient in that if fails to conform with Fed.R.Civ.P. 24(c).

III.

Even if Mr. Lewis’ Motion to Intervenewere proper, it is deficient in substance.Mr. Lewis seeks to intervene under Fed.R.Civ.P. 24(a), which provides:

On timely motion, the court must permitanyone to intervene who: (1) is given anunconditional right to intervene by fed-eral statute; or (2) claims an interestrelating to the property or transactionthat is the subject of the action and is so

situated that disposing of the action mayas a practical matter impair or impedethe movant’s ability to protect its inter-est, unless existing parties adequatelyrepresent that interest.

For the reasons set forth below, theCourt denies Mr. Lewis’ request to inter-vene under both Rule 24(a)(1) and 24(a)(2).

A.

[5] Pursuant to Rule 24(a)(1), courtsmust allow parties to intervene that holdan unconditional right to intervene pursu-ant to federal statute. The Third Circuithas determined that parties in interesthave an absolute right to intervene in ad-versary proceedings pursuant to Rule24(a)(1) and 11 U.S.C. § 1109(b). Phar–Mor, Inc. v. Coopers & Lybrand, 22 F.3d1228 (3d Cir.1994); Official UnsecuredCreditors Comm. v. Michaels (In re MarinMotor Oil, Inc.), 689 F.2d 445 (3d Cir.1982). Mr. Lewis asserts that he has anunconditional right to intervene pursuantto 11 U.S.C. § 1109(b), and thus must bepermitted to intervene under Rule 24(a)(1).Section 1109(b) asserts:

A party in interest, including the debtor,the trustee, a creditors’ committee, anequity security holders’ committee, acreditor, an equity security holder, orany indenture trustee, may raise andmay appear and be heard on any issuein a case under this chapter.

Because the Court finds that Mr. Lewis isnot a ‘‘party in interest’’ under section1109(b), the Court denies his request tointervene under Rule 24(a)(1).

[6] While the term ‘‘party in interest’’is not statutorily defined, section 1109(b)lists several examples of parties that are

4. The Court further notes that the CriminalProceeding was continued on May 7, 2013,when the Honorable John Z. Lee in the Unit-ed States District Court for the Northern Dis-

trict of Illinois granted Mr. Lewis’ oral mo-tion ‘‘for additional time to review extensivediscovery due to the complexity of the case.’’(See Case No. 12–CR–791, Doc. # 37).

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considered ‘‘parties in interest,’’ including‘‘the debtor, the trustee, a creditors’ com-mittee, an equity security holders’ commit-tee, a creditor, an equity security holder,or any indenture trustee.’’ 11 U.S.C.§ 1109(b). It is clear that this is not anexhaustive list of parties that may be ‘‘par-ties in interest.’’ In re Combustion Eng’g,Inc., 391 F.3d 190, 214 n. 21 (3d Cir.2004).‘‘Consequently, courts must determine ona case by case basis whether the prospec-tive party in interest has a sufficient stakein the proceeding so as to require repre-sentation.’’ In re Amatex Corp., 755 F.2d1034, 1042 (3d Cir.1985).

In the instant case, the Defendants andMr. Lewis assert that Mr. Lewis has asufficient stake in the Adversary Proceed-ing which requires representation for thefollowing reasons:

(i) without [Mr.] Lewis’ participation inthe defense of the [Adversary Proceed-ing], [the Defendants] ‘‘are effectivelyand completely defenseless; (ii) in theevent this Court should make any TTT

adverse inferences against [the Defen-dants] as a result of [Mr.] Lewis’ tempo-rary inability to assist in the defense ofthe [Adversary Proceeding], a judgmentwill likely be entered against [the Defen-dants]; and (iii) any such judgment willlikely be in an amount that would cripplethe businesses, resulting in their dissolu-tion and destruction, as well as Lewis’inability to continue to earn a living.

(See Doc. # 24, p. 6).

The Creditor Trust, however, arguesthat Mr. Lewis does not have a sufficientstake in the outcome of the AdversaryProceeding because his interest is ‘‘contin-

gent’’ and solely regards impairment of‘‘his personal rights.’’ (See Doc. # 20, p. 6,¶ 25).5 The Court agrees with the Credi-tor Trust that Mr. Lewis does not have asufficient stake as required under section1109(b), because Mr. Lewis has not per-suaded this Court that his reasons forintervening constitute ‘‘legally protectedinterests’’ that could be affected by theAdversary Proceeding.

[7] In In re Global Industrial Technol-ogies, Inc., the Third Circuit adopted atest set forth by the Seventh Circuit todefine a party in interest as ‘‘anyone whohas a legally protected interest that couldbe affected by a bankruptcy proceeding.’’645 F.3d 201, 210 (3d Cir.2011), citing Inre James Wilson Associates, 965 F.2d 160,169 (7th Cir.1992). Using that definitionof ‘‘party in interest,’’ the Global Industri-al Technologies court held that the debt-or’s insurers, whose policies were to betransferred to a settlement trust under thedebtor’s chapter 11 plan, had standing tochallenge the plan as parties in interestbecause they had legally protected inter-ests which were affected by the debtor’splan. See also In re Combustion Eng’g,Inc., 391 F.3d 190 (3d Cir.2004) (debtor’sinsurers did not have standing to object toconfirmation of debtor’s chapter 11 planwhere a confirmation plan did not materi-ally alter the insurers liability). Mr. Lew-is fails to be a party in interest under thistest.

[8, 9] None of the three argumentspresented by the Defendants and Mr.Lewis assert a legally protected interest

5. The Creditor Trust also argues that Mr.Lewis fails to prove that he has a sufficientstake which requires representation because‘‘any interest Mr. Lewis might have in theAdversary Proceeding is being adequately rep-resented by the Defendants and would notrequire that he be separately represented.’’

(See Doc. # 20, p. 6, ¶ 25). The Court reachesthe issue of adequate representation in itsanalysis of Mr. Lewis’ request to intervenepursuant to Rule 24(a)(2), and finds that anyinterest Mr. Lewis has in the Adversary Pro-ceeding is adequately represented by the De-fendants.

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that could be affected by this proceeding.The first two relate to the Defendants’interest in having Mr. Lewis testify, ratherthan an interest of Mr. Lewis himself. Inas much as the first two arguments couldrelate to Mr. Lewis’ own interest in theAdversary Proceeding, they concern onlyMr. Lewis’ economic interests in his com-panies. ‘‘A mere economic interest in theoutcome of the litigation is [generally] in-sufficient to support a motion to inter-vene.’’ Mountain Top Condominium As-sociation v. Dave Stabbert Master Builder,Inc., 72 F.3d 361, 366 (3d Cir.1995), citingU.S. v. Alcan Aluminum Inc., 25 F.3d1174, 1185 (3d Cir.1994). Because Mr.Lewis’ interest in the financial viability ofhis companies is merely economic, it is nota ‘‘sufficient stake’’ in the Adversary Pro-ceeding to warrant intervening.

Similarly, the third argument, althoughphrased as a personal interest of Mr. Lew-is, also fails to support the Motion toIntervene. Mr. Lewis’ personal interest incontinuing to operate his businesses is aneconomic concern, and does not present alegally protected interest which could beaffected by this proceeding. The Courttherefore finds that Mr. Lewis is not aparty in interest under section 1109(b).

Moreover, Mr. Lewis and the Defen-dants have not presented this Court withany case where a shareholder of a defen-dant was found to have standing to inter-vene in a chapter 11 bankruptcy proceed-ing. The Court finds persuasive the caseof In re WHET, Inc., 33 B.R. 438, wherethe court found that the chief executiveofficer and president of the debtor did nothave standing to be heard in a chapter 11

case. 33 B.R. 438, 442 (Bankr.D.Mass.1983). The In re WHET, Inc. courtlooked to In re O.P.M. Leasing Services,Inc., 21 B.R. 983, for guidance in determin-ing whether officers of a corporation havestanding. The In re O.P.M. Leasing Ser-vices, Inc. court held that a former presi-dent of a chapter 11 debtor and 50% ownerof the company which was the sole share-holder of the debtor was not a party ininterest under section 1109(b); the mov-ant’s former position as an officer of thedebtor did not create any inherent rightsin the bankruptcy case. 33 B.R. 438, 442,citing In re O.P.M. Leasing Services, Inc.,21 B.R. 983 (D.N.Y.1981). The In reWHET, Inc. court extended this reasoningto current officers, finding that the debt-or’s president and chief executive officerdid not have standing in that debtor’sbankruptcy case. Id. Similarly, Mr. Lew-is’ role as a shareholder of the debtor doesnot create any basis for standing in thedebtor’s chapter 11 Bankruptcy Case orthe Adversary Proceeding.6

Thus, the Court denies Mr. Lewis’ re-quest to intervene pursuant to Rule24(a)(1) and section 1109(b).

B.

[10] The Court also denies Mr. Lewis’request to intervene under Rule 24(a)(2),as he fails to satisfy the four part testapplied by courts in the Third Circuit todetermine whether an applicant may inter-vene in an action as of right.

[11, 12] An applicant is entitled to in-tervene under Rule 24(a)(2) when: (1) theapplication for intervention is timely; (2)

6. The Court also notes the similarity of thiscase to In re Refco, Inc., where the SecondCircuit Court of Appeals found that a debtor’sinvestors were not a party in interest undersection 1109(b). 505 F.3d 109, 117 (2nd Cir.2007). The Refco court held that althoughdebtor’s investors ‘‘maintain a financial ‘inter-

est’ in [the debtor entity], they are not a partyin interest within the meaning of the Bank-ruptcy Code’’; rather, ‘‘[t]he party in interestin the bankruptcy sense, representing the in-vestors’ financial interest, is [the debtor enti-ty]’’. Id.

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the applicant has a sufficient interest inthe litigation; (3) the interest may be af-fected or impaired, as a practical matterby the disposition of the action; and (4)the interest is not adequately representedby an existing party in the litigation.Harris v. Pernsley, 820 F.2d 592, 596 (3dCir.1987), cert. denied, 484 U.S. 947, 108S.Ct. 336, 98 L.Ed.2d 363 (1987) (citationomitted). Although these requirementsare intertwined, each must be met to inter-vene as of right. Id. The applicant bearsthe burden of demonstrating that it hasmet all four prongs. Development Fi-nance Corp. v. Alpha Housing & Health,54 F.3d 156, 162 (3d Cir.1995), UnitedStates v. Alcan Aluminum, Inc., 25 F.3d1174, 1181 n. 9 (3d Cir.1994). As the firstfactor, timeliness, is not in dispute, theCourt will analyze factors two throughfour below.

[13] Regarding the second factor, a‘‘sufficient interest in the litigation,’’ theSupreme Court has determined that anintervenor’s interest must be one that is‘‘significantly protectable.’’ Donaldson v.United States, 400 U.S. 517, 531, 91 S.Ct.534, 542, 27 L.Ed.2d 580 (1971). In defin-ing a ‘‘significantly protectable’’ legal in-terest under Rule 24(a)(2), Third Circuitcourts have held that ‘‘the interest must bea legal interest as distinguished from in-terests of a general and indefinite charac-ter,’’ and ‘‘[t]he applicant must demon-strate that there is a tangible threat to alegally cognizable interest to have theright to intervene.’’ Mountain Top Con-dominium Association v. Dave StabbertMaster Builder, Inc., 72 F.3d 361, 366 (3dCir.1995), citing Harris v. Pernsley, 820F.2d at 601 (citations omitted). ‘‘This in-terest is recognized as one belonging to orbeing owned by the proposed intervenor.’’Mountain Top, 72 F.3d at 366, citing Unit-ed States v. Alcan Aluminum, Inc., 25

F.3d 1174, 1185 (3d Cir.1994). The issue iswhether Mr. Lewis is a real party in inter-est. Harris v. Pernsley, 820 F.2d at 596–598. See also United States v. Alcan Alu-minum, Inc., 25 F.3d 1174, 1185 (3d Cir.1994) (‘‘a party has more than an economicinterest where it is the real party in inter-est and where the applicant would havestanding to raise the claim.’’); Mt. HawleyIns. Co. v. Sandy Lake Properties, 425F.3d 1308, 1311 (11th Cir.2005) (‘‘a legallyprotectable interest is something morethan an economic interest TTT [; t]hus, alegally protectable interest is an interestthat derives from a legal right.’’).

The Court notes the similarity of thesecond Harris v. Pernsley factor to therequirements for intervening under section1109(b) and Rule 24(a)(1) discussed above.Just as Mr. Lewis failed to prove to theCourt that he was not a party in interestunder section 1109(b), he again fails topersuade the Court that he is a real partyin interest under Rule 24(a)(2).

Here, the original Defendants are thereal parties in interest, not Mr. Lewis.Because Mr. Lewis has not met his burdenin proving to the Court that his interest inthe outcome of the litigation is not merelyeconomic or that there is a tangible threatto a legally cognizable interest, he fails tosatisfy the second Harris v. Pernsley fac-tor.

Because Mr. Lewis does not have a le-gally protectable interest giving rise to aright to intervene, he also fails to satisfythe third factor, which requires that suchinterest will be impaired by the dispositionof the action. The only non-economic in-terest Mr. Lewis has asserted which isarguably derived from a legal right is thathe must choose between exercising hisFifth Amendment right to avoid self-in-crimination and testifying on behalf of his

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companies.7 But even if the Court were toconsider this choice to invoke the FifthAmendment privilege an ‘‘interest’’ suffi-cient to satisfy the second Harris v. Perns-ley factor, because Mr. Lewis maintainsthe ability to invoke the privilege, theCourt finds that such interest is not im-paired for purposes of 24(a)(2).

[14, 15] In determining whether an in-terest may be affected or impaired withinthe meaning of Rule 24(a)(2), the courtmust assess ‘‘the practical consequences ofthe litigation,’’ and ‘‘may consider any sig-nificant legal effect on the applicant’s in-terest.’’ Brody By and Through Sugzdi-nis v. Spang, 957 F.2d 1108, 1123 (3dCir.1992) (citations and internal quotationsomitted). It is not sufficient that the claimbe incidentally affected; rather, theremust be ‘‘a tangible threat’’ to the appli-cant’s legal interest. Id.; see also Devel-opment Finance Corp. v. Alpha Housingand Health Care, Inc., 54 F.3d at 162.Since Mr. Lewis is still able to assert hisFifth Amendment right, his interest in as-serting his right to avoid self-incriminationis not affected or impaired as a practicalmatter by the disposition of the action forpurposes of Rule 24(a)(2). Thus, even ifthe Court were to determine that Mr.Lewis’ decision between two choices con-stitutes an interest derived by a legalright, Mr. Lewis still could not satisfy thethird Harris v. Pernsley factor.

[16, 17] Lastly, the Court finds thatMr. Lewis’ interests are adequately repre-sented by the original Defendants, becausetheir interests are presumed to be one andthe same. The ‘‘burden TTT is on theapplicant for intervention to show that hisinterests are not adequately representedby the existing parties.’’ In re Sheesley,239 F.R.D. at 409, citing Brody, 957 F.2d

at 1123. Though often minimal, the bur-den can rise when the interests of anexisting party are presumed coincidentwith those of the potential intervenor.‘‘[W]hen the party seeking interventionhas the same ultimate objective as a partyto the suit, a presumption arises that itsinterests are adequately represented.’’ Inre Cmty. Bank of N. Va. & Guar. Nat’lBank of Tallahassee Second MortgageLoan Litig., 418 F.3d 277, 315 (3d Cir.2005). In order to overcome the presump-tion of adequate representation, ‘‘the pro-posed intervenor must ordinarily demon-strate adversity of interest, collusion, ornonfeasance on the part of a party to thesuit.’’ Id. See also Gen. Star Indem. Co. v.V.I. Port Auth., 224 F.R.D. 372, 376 (D.Vi.2004) (‘‘Because any interest [p]roposed[i]ntervenors have or may have is identicalto [the defendant’s], there must be a con-crete showing of circumstances in the par-ticular case that make the representationinadequate.’’ (internal citations omitted)).Here, Mr. Lewis has not asserted anyadversity of interest, collusion, or nonfea-sance which would overcome the presump-tion of adequate representation, and theCourt therefore finds that any interest Mr.Lewis has in the Adversary Proceeding isadequately represented by the existingDefendants.

Lastly, Mr. Lewis asserts that withouthis ‘‘direct involvement in the litigation inhis capacity as [the Defendant’s] soleshareholder and director, president, andthe person most familiar with the day today operations of the corporate entities,TTT [the Defendants] TTT cannot adequate-ly protect [Mr.] Lewis without his directand intimate involvement in the [Adver-sary Proceeding].’’ (See Doc. # 24, p. 7).

7. The Court considers this issue as a potentialargument for a legal interest for purposes ofintervention under Rule 24(a)(2), although

Mr. Lewis does not argue this point directlyin support of his Motion to Intervene, butrather in support of his Motion to Stay.

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While the Court appreciates the Defen-dants’ interest in Mr. Lewis’ ability totestify freely to bolster their case, theCourt does not find persuasive the argu-ment that the Defendants cannot defendthe Adversary Proceeding without Mr.Lewis’ testimony. A transfer of funds inexchange for a service generally requiresboth a transferor and a transferee. It islogical to conclude that persons other thansolely Mr. Lewis must have been involvedin the Hotel’s expansion project, such asemployees of the Hotel, employees of theDefendants, and employees of the Debtor.As such, the Court is not convinced thatMr. Lewis is the only person capable ofbeing called as a witness to testify to thecircumstances surrounding the Transfer atissue in the Adversary Proceeding.

For these reasons, the Court finds thatMr. Lewis’ interests are adequately repre-sented without allowing him to intervenein the Adversary Proceeding. The Courtdenies Mr. Lewis’ request to intervenepursuant to Rule 24(a)(2).

IV.

[18] Mr. Lewis also seeks to interveneunder Rule 24(b), under which courts maypermit anyone to intervene who ‘‘(A) isgiven a conditional right to intervene by afederal statute; or (B) has a claim ordefense that shares with the main action acommon question of law or fact.’’ Fed.R.Civ.P. 24(b)(1).8 The Court finds inter-vening pursuant to Rule 24(b) is inappro-priate in the instant case.

Mr. Lewis asserts section 1109 provideshim with a conditional right to intervene

under Rule 24(b)(1)(A). The Court firstfinds Rule 24(b)(1)(A) inapplicable, as theCourt determined in its analysis underRule 24(a)(1) that Mr. Lewis is not a partyin interest under section 1109; thus, suchstatute does not provide Mr. Lewis a right,either conditionally or unconditionally, tointervene.

Mr. Lewis’ intervening is also inappro-priate under Rule 24(b)(1)(B), under which‘‘the movant must have a ‘claim or defense’against the defendants with questions offact or law in common with the main ac-tion-not just a general interest in its sub-ject matter or outcome.’’ Abney v. I.T.T.Diversified Credit Corp. (In re Environ-mental Electronics Systems, Inc.), 11 B.R.962, 964 (Bankr.N.D.Ga.1981), citing 3BMOORES FEDERAL PRACTICE P 24.10(2) at p.24–352 (1977). As discussed within theCourt’s analysis of Mr. Lewis’ failure tocomply with Rule 24(c)’s pleading require-ments, Mr. Lewis has not presented anyclaim or defense, but merely seeks to in-tervene for the limited purpose of stayingthe Adversary Proceeding. As such, Mr.Lewis has not asserted a claim or defenseagainst the Creditor Trust which has ques-tions of law or fact in common with themain action for purposes of interveningunder Rule 24(b)(1)(B). (See Doc. # 27, p.5).

[19] Furthermore, pursuant to Rule24(b)(3), in exercising the discretion afford-ed to the courts under Rule 24(b), ‘‘a courtmust consider whether the interventionwill unduly delay or prejudice the adjudi-cation of the original parties’ rights.’’ TheCourt has determined that allowing Mr.Lewis to intervene for the sole purpose of

8. The Creditor Trust points out that the De-fendants’ and Mr. Lewis’ jointly-filed post-trial brief ‘‘was the first time [they] assertedthat Mr. Lewis should be permitted to inter-vene pursuant to Rule 24(b) as no mention ofintervention pursuant to Rule 24(b) was setforth in the [m]otion’’ and ‘‘[t]hat, alone, is

enough to deny this request for interventionpursuant to Rule 24(b).’’ (See Doc. # 27, p.4). The Court will address the request tointervene pursuant to Rule 24(b) notwith-standing the failure to include such request inthe Motion to Intervene.

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pursuing a stay of the proceeding wouldunduly delay both the Adversary Proceed-ing and the Lead Bankruptcy Case, result-ing in prejudice to the Creditor Trust. Inthe interest of encouraging judicial effi-ciency and in light of Rule 24(c), the Courtdenies Mr. Lewis’ request to intervenepursuant to Rule 24(b).

V.

Finally, Mr. Lewis requests a stay of theAdversary Proceeding under Fed.R.Civ.P.26(c),9 which provides:

A party or any person from whom dis-covery is sought may move for a protec-tive order in the court where the actionis pending—or as an alternative on mat-ters relating to a deposition, in the courtfor the district where the deposition willbe taken.

Even if the Court were to find that Mr.Lewis has the right to and is permitted tointervene, it would deny Mr. Lewis’ re-quest to stay the Adversary Proceeding.

[20–23] ‘‘A stay of a civil case is anextraordinary remedy.’’ Walsh Sec., Inc.v. Cristo Prop. Mgmt., Ltd., 7 F.Supp.2d523, 526 (D.N.J.1998) (internal citationsomitted). Furthermore ‘‘[a] stay of a civilproceeding during the pendency of a crimi-nal proceeding is not constitutionally re-quired.’’ DeVita v. Sills, 422 F.2d 1172,1181 (3d Cir.1970). Rather, a stay may begranted as ‘‘incidental to the power inher-ent in every court to control the disposi-tion of the causes on its docket with theeconomy of time and effort for itself, forcounsel and for litigants. How this canbest be done calls for the exercise of judg-ment, which must weigh competing inter-ests and maintain an even balance.’’ Lan-dis v. North American Co., 299 U.S. 248,

254–55, 57 S.Ct. 163, 166, 81 L.Ed. 153(1936).

Mr. Lewis asserts that ‘‘[a] stay of theAdversary Proceeding is necessary (A) toprotect [his] right against self-incrimina-tion under the Fifth Amendment of theUnited States Constitution, and (B) toavoid confusion and the consumption ofjudicial resources associated with resolvinglogistical and legal questions arising fromthe simultaneous progression of thesecases and the consequences associatedwith the invocation of the Fifth Amend-ment.’’ (See Doc. # 13, ¶ 2). The Courtdisagrees with Mr. Lewis that a stay of theAdversary Proceeding is necessary in thisinstance.

First, Mr. Lewis’ Fifth Amendmentright against self-incrimination is not im-paired, as he is able to assert it in theAdversary Proceeding. See Paul Harri-gan & Sons, Inc. v. Enterprise Animal OilCo., 14 F.R.D. 333, 334 (E.D.Pa.1953)(while corporations do not have FifthAmendment privileges, a witness called totestify regarding the conduct of a corpora-tion or on its behalf may be entitled toinvoke the Fifth Amendment privilege forhimself).

[24, 25] Further, application of the fac-tors commonly used by courts to decidewhether to grant a stay in similar circum-stances mitigates against granting the re-quested relief. Both parties direct theCourt to In re Adelphia, which held:

In deciding whether to stay a civil casepending the resolution of a criminalcase, courts often consider the followingfactors: (1) the extent to which the is-sues in the civil and criminal cases ov-erlap; (2) the status of the criminal

9. The Creditor Trust asserts that Rule 26 isnot yet applicable to the instant case, since‘‘this matter has not reached the discoveryphase because the Defendants have not yet

filed a response to the Complaint.’’ TheCourt agrees, but nonetheless includes itsanalysis of Mr. Lewis’ request to stay theproceedings.

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proceedings, including whether any de-fendants have been indicted; (3) theplaintiffs interest in the expeditious civilproceedings weighed against the preju-dice to the plaintiff caused by delay; (4)the burden on the defendants; (5) theinterests of the court; and (6) the pub-lic interest.

In re Adelphia Communs. Sec. Litig., 2003WL 22358819, at *3, 2003 U.S. Dist. LEX-IS 9736, *7 (E.D.P.a May 14, 2003), citingWalsh Securities Inc. v. Cristo Prop.Mgmt., Ltd., 7 F.Supp.2d 523 (D.N.J.1998).See also Golden Quality Ice Cream Co.,Inc. v. Deerfield Specialty Papers, Inc., 87F.R.D. 53, 56 (E.D.Pa.1980) (presentingsimilar factors). Mr. Lewis has failed tosatisfy these factors to sufficiently compelthe Court to stay the Adversary Proceed-ing pending the outcome of the CriminalProceeding.

Most significantly, the Court finds thatthe extent to which the issues in the civiland criminal cases overlap is minimal. SeeIn re Adelphia, 2003 WL 22358819, at *3,2003 U.S. Dist. LEXIS 9736 at *8, citingWalsh Securities, 7 F.Supp.2d at 527(‘‘The similarity of issues underlying thecivil and criminal actions is considered themost important threshold issue in deter-mining whether or not to grant a stay.’’).Mr. Lewis and the Defendants assert that‘‘[s]imilar to the allegations against [theDefendants] in the [Adversary Proceed-ing], the basis for liability against Lewis inthe [C]riminal [P]roceeding involves thealleged transfer of bank loan proceeds toentities controlled by Atul Bisaria.’’ (SeeDoc. # 24, p. 2). The Court, however,agrees with the Creditor Trust, who ‘‘sub-mits that the issues in the Adversary Pro-ceeding are distinguishable from those inthe Criminal Proceeding in that the Trans-fer at issue is a different transaction thanthat in the Criminal Proceeding and in-volved different parties.’’ (See Doc. # 20,p. 12, ¶ 52).

As discussed above, the Criminal Pro-ceeding and the Adversary Proceeding in-volve different defendants, different banks,and different hotels. Mr. Lewis’ actionsregarding the Transfer in the AdversaryProceeding are not at issue in the CriminalProceeding, nor are his actions regardingthe fraud allegations within the CriminalProceeding at issue in the Adversary Pro-ceeding. Therefore, the Court finds thefirst Adelphia factor is not satisfied, as theoverlap of issues among the proceedings isinsufficient to warrant a stay.

Mr. Lewis also cannot satisfy the secondfactor, under which courts are to considerthe status of the criminal proceedings, in-cluding whether any defendants have beenindicted. Generally, stays are issued incivil proceedings against defendants alsofacing criminal charges. ‘‘If criminal in-dictments are returned against the civildefendants, then a court should stronglyconsider staying the civil proceedings untilthe related criminal proceedings are re-solved.’’ In re Adelphia, 2003 WL22358819, at *3, 2003 U.S. Dist. LEXIS9736 at *9, citing Parallel Civil and Crim-inal Proceedings, 129 F.R.D. 201, 203(1989). This scenario does not apply tothis instant case, where a criminal indict-ment was brought against Mr. Lewis, whois not a defendant in the Adversary Pro-ceeding. Therefore, the Court agrees withthe Creditor Trust that ‘‘this factor weighsagainst instituting a stay in the AdversaryProceeding.’’ (See Doc. # 20, p. 13, ¶ 55).

In evaluating the third factor, the plain-tiffs burden resulting from the stay,‘‘courts may insist that the plaintiff estab-lish more prejudice than simply a delay inhis right to expeditiously pursue his claimTTT Instead, the plaintiff should demon-strate a particular unique injury, such asthe dissipation of assets or an attempt togain an unfair advantage from the stay.’’

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In re Adelphia, 2003 WL 22358819, a *4,2003 U.S. Dist. LEXIS 9736 at *10–11(internal citations omitted).

The Creditor Trust argues that thereexists a potential for dissipation of assetsin this case (see Doc. # 20, p. 14, ¶ 58),although Mr. Lewis and the Defendantsassert a willingness to stipulate to an order‘‘mandating that there be no such dissipa-tion of assets, expenditures or encum-brances outside the ordinary course ofbusiness going forward’’ (see Doc. # 28, p.2). While the Court realizes that such astipulation is not a strict guarantee againstthe dissipation of assets, it does mitigateagainst weighing this factor towards deny-ing the stay.

The Creditor Trust also argues thatthey would be further prejudiced by astay, as they could potentially ‘‘have to getin line behind any judgment and/or forfei-ture obtained against [Contract Purchase8b Design, Inc.] in the [C]riminal [Pro-ceeding].’’ (See Doc. # 20, ¶ 58). Howev-er, the Indictment is against Mr. Lewis,not the Defendants, and does not includeany claim against the Defendants nor anygrounds to pursue a judgment therefrom.Further, the forfeiture allegation is basedon 18 U.S.C. § 982(a)(2)(A) and 21 U.S.C.§ 853(p), which provide, in part, for forfei-ture of ‘‘substitute property’’ of the nameddefendant, but not from a third-party re-cipient of such property. Thus, the Courtfinds this argument unsupportive of thethird Adelphia factor in this case.

However, as discussed above, the Credi-tor Trust convincingly argues that a staywill not simply delay its right to expedi-tiously pursue its claim in the AdversaryProceeding, but will also delay the LeadBankruptcy Case itself, resulting in in-creased trustee and administrative fees.Thus, the Court finds this third factor doesweigh in the Creditor Trust’s favor, basedon the Creditor Trust’s interest in seeing

both the Adversary Proceeding and theLead Bankruptcy Case to timely resolu-tions.

Mr. Lewis also fails to satisfy fourthAdelphia factor, which considers the bur-den on the defendants. The Adelphiacourt found this factor satisfied since thedefendants in the civil case were ‘‘alreadyunder criminal indictment in a case con-cerning identical allegations and issues,’’and so ‘‘they face[d] substantial risks ofself-incrimination.’’ In re Adelphia, 2003WL 22358819, at *5, 2003 U.S. Dist. LEX-IS 9736 at *14. Here, as the Court hasstressed throughout this MemorandumOpinion, Mr. Lewis is only a defendant inthe Criminal Proceeding, which does notconcern allegations and issues identical tothose in the Adversary Proceeding.

Mr. Lewis and the Defendants also as-sert that ‘‘[t]he request for a stay isneeded not just to protect Lewis’ inter-ests,’’ but also ‘‘in order to preserve [theDefendant’s] ability to competently de-fend the [Adversary Proceeding] and en-sure the absence of any substantial preju-dice of their rights.’’ (See Doc. # 24, p.12). However, the fact remains that theCriminal Proceeding and the AdversaryProceeding do not involve the same de-fendants, and therefore the Court is notpresented with the usual concern courtsconsider when analyzing the burden ondefendants in denying a stay. See alsoChorches v. Ogden (In re Bolin & Co.,LLC), 2012 WL 3730410, at *3, 2012 U.S.Dist. LEXIS 128446, *7–8 (D.Conn. June27, 2012) (‘‘In the usual case, the concernis that a defendant in a civil action who isalso the subject of criminal charges willface the ‘Hobson’s choice’ of making po-tentially incriminating admissions duringdiscovery or asserting his Fifth Amend-ment rights and losing his case,’’ but awitness choosing between testifying andasserting his Fifth Amendment privilege

735

291IN RE SMITHCite as 495 B.R. 291 (Bkrtcy.N.D.Miss. 2013)

present a different concern, no more‘‘dire of unfair than that of any otherparty who cannot find witnesses to testifyon his behalf.’’).

Additionally, as discussed above, the De-fendants and Mr. Lewis have not con-vinced this Court that the Defendantscould not call any other witness to testifyon their behalf regarding whether theDebtor received value in exchange theTransfer at issue in the Adversary Pro-ceeding. Furthermore, as noted at thehearing, other options exist to protect Mr.Lewis outside of the extraordinary remedyof staying the proceedings. For example,the Court can place Mr. Lewis’ testimonyunder seal, or order a bond to protect theplaintiffs. (See Hearing Held in Court-room D, January 29, 2013 (11:31 AM)).For the foregoing reasons, the Court findsthis factor weighs against the granting of astay.

The Court also finds that considerationof both the fifth and sixth Adelphia fac-tors, the interests of the Court and thepublic, weigh against the Court’s grantinga stay. As expressed in Adelphia, ‘‘[t]heCourt has an interest in efficiently manag-ing its caseload.’’ Adelphia, 2003 WL22358819, at *5, 2003 U.S. Dist. LEXIS9736 at *5, citing State Farm Mutual Au-tomobile Ins. Co. v. Beckham–Easley, 2002U.S. Dist. LEXIS 17896, 2002 WL31111766 at *3. The Court agrees with theCreditor Trust that ‘‘[g]enerally allowing acase to proceed in the normal course ofthat docket will promote the interests ofthe court.’’ (See Doc. # 20, p. 15, ¶ 63).

This is not to say that the ‘‘public inter-est involved in Creditor Trust’s pursuit ofclaims on behalf of the Debtor in the Ad-versary Proceeding’’ is any greater thanthe ‘‘public interest advanced in the Crimi-nal Proceeding.’’ (See Doc. # 13, p. 14).The proceedings involve different defen-dants, and ‘‘[t]here are few overlapping

parties, documents, issues, claims, and de-fenses among the two proceedings.’’ (SeeDoc. # 20, p. 15, ¶¶ 63–64). There is apublic interest in advancing both proceed-ings, and no public harm in allowing bothcases to proceed simultaneously.

Thus, after careful consideration of theabove factors, the Court finds Mr. Lewis’argument for a stay of the Adversary Pro-ceedings without merit.

VI.

In conclusion, Mr. Lewis’ Motion to In-tervene is both procedurally and substan-tively deficient, and as such is denied.Further, even if the Court granted Mr.Lewis’ Motion to Intervene, it would denyhis Motion to Stay the Adversary Proceed-ing. If, after discovery begins, some otheraction may be appropriate to further pro-tect Mr. Lewis’ Fifth Amendment rightagainst self-incrimination, the Court willconsider any timely requests for such. Anappropriate order will be entered here-with.

,

In re Michael R. SMITH, Sr., Debtor.

Estate of Maggie Mae Smith, Plaintiff

v.

Michael R. Smith, Sr., Defendant.

Bankruptcy No. 08–10080–JDW.Adversary No. 08–01181–JDW.

United States Bankruptcy Court,N.D. Mississippi.

July 9, 2013.

Background: Estate of debtor’s deceasedmother, through debtor’s brother as execu-

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