In re Bay Circle Props., LLC

IN RE: BAY CIRCLE PROPERTIES, LLC et al.,¹ Debtors.

CASE NO. 15-58440-WLH

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF GEORGIA ATLANTA DIVISION

April 3, 2020

IT IS ORDERED as set forth below:

(Jointly Administered)

CHAPTER 11

JUDGE WENDY L. HAGENAU

AMENDED AND RESTATED ORDER ON OBJECTION TO SCHEDULED CLAIMS OF NILHAN FINANCIAL, LLC IN EACH OF THE NILHAN DEVELOPERS, LLC AND NRCT, LLC CHAPTER 11 CASES OR IN THE ALTERNATIVE, AMENDED MOTION FOR ORDER AMENDING SCHEDULES

On December 6, 2019, Norcross Hospitality, LLC ("Norcross Hospitality") and Rohan and Niloy Thakkar (collectively with Norcross Hospitality, "Movants"), filed an Objection to Scheduled Claims of Nilhan Financial, LLC in each of the Nilhan Developers, LLC and NRCT, LLC Chapter 11 Cases or in the Alternative, Amended Motion for Order: 1) Amending Schedules; or 2) In the Alternative, Requiring the Trustee to Amend Schedules as Necessary to Reflect Status of Certain Scheduled Claims as Disputed and Subject to Offset [Docket No. 1269] ("Objection").²In the Objection, the Movants sought to disallow or reduce the scheduled claims of Nilhan Financial, LLC ("Nilhan Financial") in the cases of NRCT, LLC ("NRCT") and Nilhan Developers, LLC ("Nilhan Developers" and together with NRCT, "Debtors") or alternatively to require or permit the schedules of Nilhan Developers and NRCT to be amended to show the Nilhan Financial claims as disputed. Responses were filed by the Chapter 11 Trustee in these bankruptcy cases [Docket No. 1294], by SEG Gateway, LLC and Good Gateway, LLC (collectively, "Gateway") [Docket No. 1295], and by Douglas N. Menchise, as Chapter 7 Trustee for Nilhan Financial LLC [Docket No. 1296]. The matter came before the Court for an evidentiary hearing on February 4, 2020. Henry Sewell appeared for the Movants, Frank DeBorde and Lisa Wolgast appeared for the Chapter 11 Trustee in these cases, Walt Jones appeared on behalf of Gateway, and Paul Marr and Lara Fernandez appeared on behalf of the Chapter 7 Trustee for Nilhan Financial. The Court received voluminous exhibits and heard the testimony of Chuck Thakkar and Mr. Menchise, the Chapter 7 Trustee for Nilhan Financial. The Court ruled at the conclusion of the hearing on several arguments, and its oral ruling is incorporated herein. The Court also received and reviewed supplemental briefs on the issues of setoff and recoupment from the parties at Docket Nos. 1330, 1332, 1333 and 1334. The Court has jurisdiction of this matter pursuant to 28 U.S.C. §§ 1334 and 157. This is a core proceeding under 28 U.S.C. §157(b) (2) (B) as it involves the allowance of claims.

The Court entered its Order on Objection to Scheduled Claims of Nilhan Financial, LLC in Each of the Nilhan Developers, LLC and NRCT, LLC Chapter 11 Cases on March 23, 2020 (Doc. No. 1347), requesting the parties to provide the specific amount paid by Nilhan Developers to Bay Point Capital Partners, LP as assignee of Wells Fargo, from the sale of its property duringthis case. On March 26, 2020, the Chapter 11 Trustee filed a notice and supporting documentation showing Nilhan Developers paid $7,200,000 million to the lender in connection with the sale of its property (Doc. No. 1359). Movants and the Chapter 7 Trustee filed responses to the notice (Docs. Nos. 1362 and 1363), but no one disputes Nilhan Developers paid $7,200,000 million on the debt secured by the property.

FACTS

On May 4, 2015, the Jointly Administered Debtors filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code. On May 20, 2015, Nilhan Developers filed its Statement of Financial Affairs and Schedules [Case No. 15-58443, Docket Nos. 18 and 19], which were amended on May 21, 2015 [Case No. 15-58443, Docket No. 24]. Schedule F included debts owed to Nilhan Financial in the following amounts: a claim for a loan in the amount of $9,500,000, a claim for a reimbursement in the amount of $83,672, and a claim in the amount of $15,434.07. On May 20, 2015, NRCT filed its Statement of Financial Affairs and Schedules [Case No. 15-58444, Docket Nos. 18 and19], which were amended on May 21, 2015 [Case No. 15-58444, Docket No. 23]. Schedule F included debts owed to Nilhan Financial as follows: a claim in the amount of $13,953,776 and a claim in the amount of $91,524.

The primary precipitating event for the filing of the bankruptcy cases was a scheduled foreclosure by Wells Fargo Bank on the assets of the Jointly Administered Debtors. Chuck Thakkar, who is the principal and/or manager of the Jointly Administered Debtors and of Nilhan Financial and Niloy, Inc., has had a long-standing borrowing relationship with Wells Fargo Bank and its predecessors. The last pre-petition iteration was an Amended and Restated Promissory Note dated April 30, 2013 in the original principal amount of $19,750,000 from Niloy, Inc. and Nilhan Financial, and an Amended and Restated and Consolidated Promissory Note dated April30, 2013 in the original principal amount of $12,910,000 from Chuck and Saloni Thakkar. The notes are cross defaulted and cross collateralized. Each of the identified obligors guarantees the other note and each of the Jointly Administered Debtors are guarantors of the two notes. As of the petition date, the total amount owed on both notes, and guaranteed by the Jointly Administered Debtors, exceeded $22,000,000. Substantially all of the Jointly Administered Debtors' assets were pledged to Wells Fargo as collateral. During the course of these bankruptcy cases, the Wells Fargo claim was paid in full through the liquidation of assets of Nilhan Developers and other Jointly Administered Debtors, (but no assets of NRCT were liquidated). The claim of Wells Fargo (which was subsequently assigned to Bay Point Capital Partners, LP) was finally resolved by a settlement agreement approved by the Court on June 10, 2019. Nilhan Developers paid $7,200,000 of this claim by virtue of the sale of its real property in April 2017.

A second precipitating event in the filing of these cases was efforts by Gateway to collect on judgments obtained in Florida against Chuck Thakkar and certain entities which he manages or in which he holds an interest. None of the Jointly Administered Debtors cases was a judgment debtor to Gateway. Gateway's claims were disallowed in all of these cases except for its claim in the Bay Circle Properties, LLC case, which was secured because Chuck Thakkar was a prior owner of the real property transferred to Bay Circle.

On March 20, 2017, an involuntary Chapter 7 petition was filed against Nilhan Financial in the U.S Bankruptcy Court for the Middle District of Florida. In its Schedules, it identified that it owed its affiliates $61,539,000. The Nilhan Financial Schedules also reflected $72,000,000 of notes receivable from the affiliates. The affiliates were not identified, and the specific amounts owed by specific affiliates was not included. The Schedules included the annotation that the amount owed by affiliates was an "approximate amount owed by affiliates, per 2015 records inneed of updating." Ultimately, on December 15, 2017, the bankruptcy case of Nilhan Financial was converted to a case under Chapter 7 of the Bankruptcy Code and Douglas N. Menchise was appointed as Trustee ("Chapter 7 Trustee"). The Chapter 7 Trustee never filed a proof of claim and did not participate in this case until July 31, 2019. By then, Gateway had negotiated a settlement with the Chapter 7 Trustee in the Nilhan Financial case such that Gateway receives 50% of any recovery by Nilhan Financial in these cases.

On December 11, 2018, the Bankruptcy Court in these cases appointed Ronald L. Glass as the Chapter 11 Trustee of the Debtors ("Chapter 11 Trustee").

At the hearing on this matter, counsel for Movants stated that it only objected to the scheduled claim of Nilhan Financial in the Nilhan Developers case in the amount of $9,500,000. It did not object to the claim for reimbursement in the amount of $83,672 or the additional claim in the amount of $15,434.07. Similarly, Movants announced that, as to the NRCT Schedules, they only objected to the claim of Nilhan Financial in the amount of $13,953,776. They did not object to the claim of $91,524.³

OBJECTION TO CLAIMS

Movants objected to the $9,500,000 Nilhan Financial claim scheduled in the Nilhan Developers case in its entirety on several bases.⁴ First, they contend that the $9,500,000 claimlisted on the Schedules was just an allocation of the Wells Fargo debt actually owed by Nilhan Financial to Wells Fargo and not debt owed by Nilhan Developers to Nilhan Financial. Movants contend further that, since all of Wells Fargo's claim has been satisfied in these bankruptcy cases, no further sums are due to Nilhan Financial. Secondly, Movants contend that the money Nilhan Developers received indirectly from the Wells Fargo loan did not come through Nilhan Financial, but instead came through Niloy, Inc. As such, they contend there is no consideration for an obligation by Nilhan Developers to Nilhan Financial. Finally, Movants contend that any claim of Nilhan Financial is subject to reduction through set-off or recoupment or counterclaim, particularly for the amount Nilhan Developers paid on the Wells Fargo debt owed by Nilhan Financial.

Movants objected to the $13,953,776 scheduled claim of Nilhan Financial in the NRCT case in its entirety on the basis that there was no evidence in NRCT's books and records that NRCT ever received any proceeds of the Wells Fargo loan from Nilhan Financial. They contend, therefore, there was no consideration for any obligation to Nilhan Financial. Moreover, to the extent the number reflected on the NRCT Schedules was an allocation of the Wells Fargo debt, the Wells Fargo debt was satisfied. Movants contend therefore that NRCT would have no further obligation to Nilhan Financial.

RESPONSES

The Chapter 11 Trustee, Chapter 7 Trustee, and Gateway ("Respondents") all oppose the Objection on the same basic...