Itria Ventures LLC v. Chadha (In re Chadha)

598 B.R. 710

IN RE: Rakesh K. CHADHA, Debtor.

Itria Ventures LLC, Plaintiff

v.Rakesh K. Chadha, Defendant.

Case No. 17-40590-nhl

Adv. Pro. No. 17-01043-nhl

United States Bankruptcy Court, E.D. New York.

Signed March 30, 2019

Entered March 31, 2019

Edward Weissman, Esq., Jan Marcantonio, Esq., Law Office of Edward Weissman, 60 East 42nd Street, Suite 557, New York, NY 10165, Attorneys for the Plaintiff

Dennis J. O'Sullivan, Esq., Law Office of Dennis J. O'Sullivan, 210-13-35th Avenue, Bayside, NY 11361, Attorney for the Defendant

DECISION AND ORDER AFTER TRIAL

NANCY HERSHEY LORD, UNITED STATES BANKRUPTCY JUDGE

Before this Court is an adversary proceeding commenced by plaintiff Itria Ventures LLC ("Itria" or the "Plaintiff"), seeking a determination that the debt owed by the debtor and defendant herein, Rakesh K. Chadha ("Chadha," the "Debtor," or the "Defendant"), is non-dischargeable pursuant to 11 U.S.C. § 523(a)(2) or, alternatively, seeking to bar the Debtor's discharge pursuant to 11 U.S.C. § 727(a).¹

The Court held a trial on this matter. As explained fully below, the Court finds that Itria failed to establish by a preponderance of the evidence that the Debtor obtained monies from Itria by means of false pretenses; false representations; actual fraud; the use of fraudulent written statements; or through the falsification of financial documents. Consequently, the debt owed to Itria may not be excepted from discharge pursuant to § 523(a)(2), nor is there a basis to deny the Debtor's discharge pursuant to § 727(a).

JURISDICTION

This Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b) and 157(b)(1), and the Eastern District of New York standing order of reference dated August 28, 1986, as amended by order dated December 5, 2012. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). The following are the Court's findings of fact and conclusions of law to the extent required by Rule 52 of the Federal Rules of Civil Procedure, as made applicable by Rule 7052 of the Federal Rules of Bankruptcy Procedure.

FACTS

The facts of this case were developed at trial through the testimony of four witnesses, Ramit Arora, Manprit Chawla, Dev M. Kini, and the Debtor, and certain exhibits admitted into evidence. Following trial, the parties submitted post-trial statements.

Itria is a corporation that provides financing to small businesses. Trial Tr. vol. 1, 17, Feb. 22, 2018. It has been in operation for four years and its President, Ramit Arora ("Arora"), oversees the business's day-to-day operations and performs underwriting functions. Tr. vol. 1, 17–18. Biz2Credit, a company associated with Itria, received and reviewed financial documentation for Itria. Trial Tr. vol. 2, 14–15, Mar. 9, 2018.

The Debtor is a restaurant entrepreneur with professional experience in the hotel and restaurant industries dating back to 1986. Tr. vol. 2, 50–51. The Debtor, through various corporations, operated three eateries in the Roosevelt Field Mall (the "Mall") until February or March of 2017. Tr. vol. 2, 52–53. Two of them—Preesha Operating Corp. d/b/a Ranch One ("Ranch One"), which opened in 1996, and Café Spice Roosevelt Field Mall, LLC d/b/a Café Spice ("Café Spice"), which began operations in 2004—were located in the in the Mall's food court. Tr. vol. 2. 52–53. The third, Viva Roosevelt Field Mall, LLC d/b/a La Bottega ("La Bottega," and, together with Ranch One and Café Spice, the "Restaurants") began operating in 2008 as a full-service restaurant and bar, occupying a stand-alone space of approximately 4,400 square feet. Tr. vol. 2, 53.

In 2015, the Debtor began discussions with Simon Properties, the Mall owner and the Restaurants' landlord (the "Landlord"), for an extension of La Bottega's lease, which was set to expire in June of 2016. Tr. vol. 2, 54, 86. As a condition for a ten-year renewal, the Debtor was required to give La Bottega a "facelift," which entailed, inter alia , the installation of new equipment, furniture, updated signage, digital menus, and an outside kiosk. Tr. vol. 2, 54–55; see also Def.'s Ex. 4. By the end of 2015, the Debtor retained architect Martin A. Passante to design floorplans for La Bottega's facelift. Tr. vol. 2, 57; Def.'s Ex. 1. Passante produced initial designs on November 16, 2015 and revised designs on June 26, 2016, for which he was paid $ 5,000. Tr. vol. 2, 58; Def.'s Ex. 1. Additionally, in March and April of 2016, the Debtor received price quotes in the amounts of $ 55,699.89 and $ 29,789.93, respectively, for restaurant equipment from City Restaurant Supplies. Def.'s Ex. 2. Finally, in July of 2016, the Debtor received price quotes for new signage in the amounts of $ 13,594.42 and $ 15,169.48. Def.'s Ex. 3. Between May and October of 2016, the Debtor was in contact with Kristen Harris, an employee of the Landlord who served as the Senior Tenant Coordinator at the Mall, to seek approval of Passante's designs and to coordinate renovations. Def.'s Ex. 4. La Bottega's lease was ultimately renewed for a ten-year term in June of 2016. Tr. vol. 2, 54.

The Debtor approached Itria, in either November or December of 2015, to obtain working capital for the Restaurants. Tr. vol. 1, 19–20; Tr. vol. 2, 63–64. After meeting with Arora, the Debtor was assigned to case manager Summit Arora ("Summit") at Biz2Credit, who was charged with overseeing the Debtor's request. Tr. vol. 2, 63–64. Summit emailed the Debtor on December 18, 2015, instructing him to submit the application for financing together with various supporting documentation. Def.'s Ex. 5. Shortly thereafter, the Debtor forwarded this email to his bookkeeper, Manprit Chawla ("Chawla"), and instructed him to complete the application and transmit it together with the documents, all of which were in Chawla's possession or available to him. Tr. vol. 2, 12–16, 64–65; Def.'s Ex. 5. The Debtor did not directly transmit any of the requested documents to Itria or Biz2Credit, "as Mr. Chawla was in direct communication with their case manager, Sumit Aurora [sic ]." Tr. vol. 2, 65. Chawla, who had provided bookkeeping services for the Debtor since November of 1996 by creating profit and loss statements for the Restaurants using QuickBooks software, then transmitted the application together with the requested documents to Biz2Credit. Tr. vol. 2, 8, 10, 14–16.

Itria and Biz2Credit used the information provided by Chawla to create an underwriting file (the "Underwriting File") for the purpose of evaluating the Debtor's application. Tr. vol. 1, 23–24; Pl.'s Ex. A. The Underwriting File contained the following financial documentation: (1) partnership tax returns pertaining to Café Spice, showing losses of $ 595 in 2013 and $ 1,311 in 2014, together with attachments demonstrating that "RSC Group Inc" and "Sushil Malhotra" each owned 50% interests in the entity; (2) Schedule C attachments to the Debtor's individual tax returns pertaining to La Bottega and showing losses of $ 6,029 in 2013 and profits of $ 10,793 in 2014; (3) balance sheets for La Bottega for 2013 and 2014; (4) a corporate tax return for Ranch One showing losses of $ 74,980 in 2014; (5) merchant processing statements for the Restaurants; (6) bank statements for the Restaurants; (7) UCC financing statements for the Restaurants; and (8) a report based on a site visit to the Mall conducted by Biz2Credit. Pl.'s Ex. A; Tr. vol. 1, 23–25. Arora personally reviewed and relied upon the Underwriting File when determining whether to advance monies. Tr. vol. 1, 25, 27. Based on the tax documents relating to the Restaurants, Arora concluded that La Bottega's "revenue was pretty stable," Café Spice "was doing pretty well and ... was growing," and Ranch One had "revenue ... close to about $ 1,300,000." Tr. vol. 1, 25–27. After reviewing the bank statements and the merchant processing statements, Arora determined that the Restaurants were "doing well" and "processing a decent amount of transactions ...." Tr. vol. 1, 28. Based on Biz2Credit's site visit to the Mall, Arora thought that the Restaurants were "in a busy mall ... doing well ... in a good location and ... [appeared to be] legitimate ...." Tr. vol. 1, 29–30. After speaking with the Debtor and evaluating the Underwriting File, Itria "determined that [it] c[ould] advance funds to ... the three restaurants." Tr. vol. 1, 30.

On April 1, 2016, the Debtor received an email from Summit, together with a proposed future receivables sales agreement pursuant to which Itria would provide $ 350,000 in working capital. Def.'s Ex. 7; Tr. vol. 2, 66–67. The Debtor rejected this proposal because he believed the Restaurants needed less money and the "money was not cheap, it was 13 percent interest on it." Tr. vol. 2, 67–68. The Debtor instead sought $ 150,000 from Itria. Tr. vol. 2, 67–68.

Several days thereafter, the Restaurants and Itria came to an agreement and, on April 4, 2016, executed a contract titled "Future Receivables Sale Agreement" (the "April FRSA"), providing that Itria would purchase $ 208,500.00 in future receivables from the Restaurants in exchange for a payment of $ 150,000.00 upon execution of the agreement. Pl.'s Ex. B, Art. 2. In addition, the Restaurants were required to tender weekly payments to Itria equal to four percent of the amount of future receivables purchased or, alternatively, $ 1,447.92. Pl.'s Ex. B. Further, the Restaurants warranted that the funds received from Itria would be used "solely for general working capital purposes in Merchant's business, and for no other purpose"; that all financial information provided to Itria was "true and correct"; that they were "financially solvent"; that "all material information and documents" had been disclosed; and that they would "promptly notify [Itria] of the occurrence of any material breach, or if ... [a] material breach may be likely to occur, or if ... any representation or warranty ... is no longer true and correct or is likely not to be true and correct." Pl.'s Ex. B, Art. 9. The Debtor personally...