Ali v. Riverstone Resort, LLC (In re Riverstone Resort, LLC)

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IN RE: RIVERSTONE RESORT, LLC, Debtor.

HAMZAH ALI, Plaintiff, v. RIVERSTONE RESORT, LLC and AZHAR CHAUDHARY and AZHAR CHAUDHARY LAW FIRM, P.C., Defendants.

No. 21-33531

Adversary No. 22-3154

United States Bankruptcy Court, S.D. Texas, Houston Division

March 30, 2023

CHAPTER 7

MEMORANDUM OPINION

Jeffrey Norman, United States Bankruptcy Judge

This memorandum opinion marks this Court's conclusion of both the main bankruptcy case of Riverstone Resort, LLC, which was dismissed the day before the first day of trial in this adversary proceeding and this adversary between Hamzah Ali Riverstone Resort, LLC and its sole owner and member, and his law firm. However, litigation between these two parties will continue over issues which this Court is not able to resolve. The length of this opinion is unusual given the ultimate holding that the Plaintiff's claim of a constructive trust is time barred by the applicable Statue of Limitations however, because its findings may be useful to the parties the Court will continue at length.

Jurisdiction

This adversary proceeding was filed on May 16, 2022. This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(1), (b)(2) and 1334(e). Venue is proper in this district pursuant to 28 U.S.C. § 1409(a). This adversary proceeding relates to the Chapter 11 bankruptcy case, In re Riverstone Resort, LLC, Case No. 21-33531, in the United States Bankruptcy Court for the Southern District of Texas, Houston Division. This Court's jurisdiction exists because this adversary arose out of the bankruptcy of Riverstone Resort, LLC.

On March 20, 2023, the day prior to trial, the underlying bankruptcy proceeding was dismissed. The Fifth Circuit has previously recognized that nothing in the statute governing bankruptcy jurisdiction mandates automatic dismissal of related proceedings upon termination of the underlying bankruptcy case.^[1] The general rule in this Circuit is that "related to" jurisdiction exists so long as the outcome of the litigation could "conceivably affect" the estate's assets or liabilities.^[2] A proceeding filed after a chapter 11 bankruptcy case is closed rarely affects the assets or liabilities of an estate.^[3] Further, the decision to retain jurisdiction in an adversary proceeding after the dismissal of a single asset real estate case is within the discretion of the judge.^[4]

Subject matter jurisdiction is established at the commencement of a case. It is not lost due to a subsequent change in circumstances, although dismissal may be appropriate in favor of another forum.^[5]

The Court specifically limits its jurisdiction in this case to the res^[6] of the debtor, that is the real property, the subject of the single interest real estate bankruptcy case. The ownership of the real estate and the plaintiff's claims of a constructive trust against it are the main issues in this adversary. The Court does not have jurisdiction over the other claims of the non-debtor plaintiff against the non-debtor defendants, or alternatively it abstains from jurisdiction over these claims as issues for a state court determination.^[7]

The Main Bankruptcy Case 21-33531

Riverstone Resort, LLC ("Riverstone") was a single asset real estate case filed on October 29, 2021, under Chapter 11 of the United States Bankruptcy Code with scheduled liabilities of over 2 million dollars and filed claims that exceeded 3 million dollars. Neither of the other two defendants in this case, Azhar Chaudhary Law Firm, PC nor Azhar Chaudhary, were in bankruptcy proceedings and the law firm is not a co-debtor or guarantor of the debtor.

Initially, this case was filed due to adverse litigation regarding its only asset with its primary lender, Prosperity Bank ("Prosperity"). Prosperity was the first lienholder on Riverstone's single asset, its real estate. The underlying debt was also unconditionally guaranteed by Azhar Chaudhary. The main bankruptcy case was a highly litigated case, and it followed additional litigation in state court that began with a default by the debtor and its guarantor of the underlying debt in early 2019. That default led to state court litigation in March of 2019, a settlement, a further default in payment and then further state court litigation. Ultimately, after rulings adverse to the debtor and guarantor in state court, the Chapter 11 bankruptcy case was filed.

In an attempt to reorganize under Chapter 11, the debtor sought to sell its single piece of real estate located at 2041 Hagerson Road, Sugar Land, Texas 77479 (the "Property"), and the Court approved the sale with a closing deadline of July 11, 2022. The Property did not sell by that date and Prosperity sought to foreclose on the Property, which the Court ultimately denied.^[8] After an evidentiary hearing held on July 18, 2022, the Court found that the debtor failed to comply with court orders and failed to timely confirm a plan, converted the case to a chapter 7, and appointed Allison D. Byman as the Chapter 7 Trustee.^[9] On August 24, 2022, the eve of a contested hearing in which the Trustee sought turnover of the Property and an application to employ real estate broker, the debtor's principal, Azhar Chaudhary, made payments to every creditor that filed a proof of claim in the case totaling over 3 million dollars, and the debtor requested that the chapter 7 case be dismissed as all claims were paid,^[10] and an administration was no longer necessary.^[11] After an evidentiary hearing, the court denied the motion to dismiss without prejudice.^[12] Although Prosperity's proof of claim was paid in full, there remained a dispute with Prosperity over its payoff amount. As a result, the debtor filed a motion to reconvert the case to a chapter 11 proceeding.^[13] The debtor then sought to again dismiss its case stating that all claims were paid in full, and that it was a solvent debtor.^[14]

On December 15, 2023, this Court entered an Order^[15] determining that as a solvent debtor, there were no reasons for a conversion to a chapter 11, nor any reason to continue with a chapter 7. However, the Court required payment of all administrative claims prior to the dismissal of the case. On March 20, 2023, the eve of this trial of this adversary, it was determined that debtor, Riverstone, had satisfied all its administrative claim obligations and the case was dismissed.^[16]However, the Court made several bad faith findings against the debtor.^[17] It also retained jurisdiction over this adversary in the dismissal order.

The Adversary Case

The plaintiff, Hamzah Ali, brought suit on May 16, 2022, in this adversary proceeding,^[18]against defendants, Riverstone Resort LLC, Azhar Chaudhary and Azhar Chaudhary Law Firm, P.C. seeking a declaratory judgment that Riverstone's single asset is not property of the estate under 11 U.S.C.§ 541(d), and seeking to place the Property in a constructive trust for the benefit of the plaintiff. Azhar Chaudhary ("Chaudhary") is a lawyer, the sole member and owner of the debtor, Riverstone. The plaintiff, Hamzah Ali ("Ali"), is his former client. Ali claimed that Chaudhary charged an unconscionable attorney fee to him and that the funds he paid Chaudhary could be traced to the purchase of Riverstone's single asset, the Property. On June 15, 2022, plaintiff filed an amended complaint.^[19]

On June 16, 2022, Riverstone filed a Motion to Dismiss by counsel David Venable under Federal Rule of Civil Procedure 12(b)(6)^[20]arguing that a claim for constructive trust is not a cause of action, but an equitable remedy. Defendant/Riverstone further argued that the imposition of a constructive trust was at odds with bankruptcy principals and alleged laches as plaintiff waited from June 2017 until May 2022 to request the remedy. The same day, the motion was amended^[21]to address the amended complaint.

Also on the same date, defendants, Chaudhary and Azhar Chaudhary Law Firm, P.C. filed identical motions^[22] to dismiss the adversary stating that no allegations were pled against Chaudhary, individually, and that the proceeding was not a core proceeding. Further, they pled that both causes of action were time barred. On July 14, 2022, this Court entered an Order^[23]granting the motions to dismiss.

Thereafter, the plaintiff filed a second amended complaint,^[24] which is the live pleading before this Court, alleging (1) breach of fiduciary duty by failing to provide promised legal services and retaining funds paid for those services; (2) unjust enrichment by retaining unearned funds and not placing them in a trust account, and requesting a constructive trust in favor of the plaintiff for those funds; (3) seeking a declaratory judgment under 11 U.S.C. § 541 that the Property is not property of the estate since funds were not placed in a trust account, services were not performed, and alleging that plaintiff holds equitable title; and (4) alleging constructive trust as an equitable remedy stating tracing will show plaintiff's funds were used to purchase the Property.

On August 16, 2022, defendant, Riverstone Resort, LLC, filed a motion to dismiss,^[25] again through counsel David Venable. Due to the conversion of the case in the underlying bankruptcy, counsel for Riverstone, David Venable, withdrew the motion to dismiss and filed a motion to substitute attorney,^[26] stating that the interest of Riverstone in the adversary was now represented by the Chapter 7 Trustee, Allison Byman.

On August 18, 2022, defendants, Chaudhary and Azhar Chaudhary Law Firm, P.C again filed identical Motions to Dismiss,^[27] which the Court granted^[28] in part, dismissing the declaratory judgment cause of action, and dismissing the claim for constructive trust as to defendant, Azhar Chaudhary Law Firm.

On October 11, 2022, defendant, Riverstone, filed...