Mangan v. Patel (In re Cambridge Marine Constr.)

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IN RE: CAMBRIDGE MARINE CONSTRUCTION, INC., Debtor.

BONNIE C. MANGAN, as Chapter 7 Trustee for CAMBRIDGE MARINE CONSTRUCTION, INC., Plaintiff, v. MILAN PATEL and PATEL CONSTRUCTION, LLC, Defendants.

No. 20-20304 (JJT)

Adv. Pro. Case No. 22-02006 (JJT)

United States Bankruptcy Court, D. Connecticut, Hartford Division

January 22, 2024

Chapter 7

MEMORANDUM OF DECISION ON MILAN PATEL AND PATEL CONSTRUCTION, LLC'S MOTION FOR SUMMARY JUDGMENT RE: ECF NOS. 62, 63, 64, 80, 81, 82

JAMES J. TANCREDI, UNITED STATES BANKRUPTCY JUDGE.

I. FACTUAL AND PROCEDURAL BACKGROUND

Before the Court is Defendants' Motion for Summary Judgment (ECF No. 62) (the "Motion"), filed on August 18, 2023. The Motion arises out of a dispute between the parties surrounding a transaction that occurred prior to Cambridge Marine Construction, Inc. (the "Debtor") filing a voluntary petition pursuant to Title 11 of the United States Code (the "Bankruptcy Code") under Chapter 7. The Chapter 7 Trustee, Bonnie C. Mangan, (the "Trustee"), duly appointed on March 2, 2020 brought this adversary proceeding as part of her duties in this case. The Trustee argues that a moderately-convoluted transaction involving Patel Construction, LLC, ("Patel Construction") and its principal, Milan Patel, ("Patel", and with Patel Construction, the "Defendants"), as well as several other creditors, was improper as a fraudulent transfer, a preferential transfer, a breach of fiduciary duty, and/or an unfair trade practice. The Trustee also seeks, via a turnover claim, to recover a debt from Patel Construction.

The Defendants here responded to the assertions of fraudulent transfer and preferential transfer by denying that the Trustee can prove any of the elements of those claims. Additionally, the Defendants assert that several special defenses defeat those claims. Specifically, the Defendants argue that the subject transfers were earmarked such that the transfers fall within an exception, making them non-recoverable. Further, they argue that there is an additional missing element of the Trustee's preference claim-her reasonable due diligence. For the reasons that follow, the Defendants' Motion is denied.

Although there is an extensive factual background to the subject transaction, the Court begins with a brief summary of the factual allegations at the heart of this case, followed by a recitation of the specific undisputed and additional facts reviewed and relied upon by the Court for the purposes of summary judgment.^[1]

A. Summary of Factual Allegations

The Court believes the complexity of the transaction at issue requires a brief, non-exhaustive summary of the core facts alleged by the Plaintiff to properly contextualize the Court's analysis. The following factual summary is based entirely on the Plaintiff's Statement of Opposition Facts and the Plaintiff's Statement of Additional Facts. For the purposes of summary judgment, the Court herein weighs all factual assertions, disputes, and inferences of fact in favor of the Plaintiff. See D. Conn. L. Civ. R. ("Local Rule") 56.

The Debtor was a business that provided marine design and construction services. The Debtor and its principal, Jeffrey Johnson ("Johnson"), had a mentor/protégé relationship with Patel Construction through the Small Business Administration's ("SBA") 8(a) Business Development Program, which required Patel Construction to provide guidance to the Debtor. As part of this relationship, the Defendants served as guarantors for the Debtor on some loans, including various loans and a line of credit provided by Everett Bank. The Defendants also served as the indemnitors to sureties, including on the surety bonds issued by the North American Specialty Insurance Company ("NAS"). Patel Construction had also purchased a 40% equity interest in the Debtor for $75,000 in 2014.

By the second half of 2018, the Debtor was in financial distress. The sureties were paying subcontractor claims and the Defendants were liable on these claims as indemnitors. This situation worsened into 2019, with the Debtor laying off most of its employees and failing to pay payroll taxes when due. In response to the Debtor's mounting financial pressures, Patel arranged a transaction in April 2019 to extinguish or substantially diminish the Defendants' liability as guarantors and indemnitors for the Debtor's debts.

The transaction arranged by Patel involved a complex series of simultaneous transfers. At the core of the transaction is a $2,384,000 loan and a $350,000 line of credit from Avidia Bank. As part of this transfer, Avidia Bank required an appraisal of the Debtor. Patel organized and negotiated the loan and appraisal on the Debtor's behalf. Patel was the source of many of the accounting figures and projections used in the appraisal, as well as the condition and valuation of the Debtor's assets. Allegedly, the values and assertions provided by Patel that induced the loan from Avidia Bank were-at best-material misrepresentations of the state of the Debtor's finances, of which Patel had thorough knowledge. The appraisal determined the value of Patel Construction's interest in the Debtor to be $1,354,000.

This loan was obtained for the reacquisition of Patel Construction's equity interest by the Debtor. To that end, approximately $1,045,000 of this loan was used to purchase Patel Construction's equity in the Debtor in a cash exchange. Patel Construction also received a $309,000 promissory note from the Debtor for the balance of the equity interest being repurchased. The Defendants directed Avidia Bank to pay the cash proceeds of the equity sale directly to NAS as payment on the Debtor's obligations under the NAS bonds. The Debtor then also used some of the proceeds of the $2,3840,000 loan from Avidia Bank to repay debts accruing to Everett Bank in the amount of $1,168,488.13. These transfers thereby extinguished a substantial amount of the Defendants' liability to Everett Bank and NAS as guarantor and indemnitor, respectively, for the Debtor's debts. The Defendants were not guarantors of the Avidia Bank loan.

The Defendants contend that these transfers were made out of benevolence: that the transaction was orchestrated as an attempt to save the Debtor, and that Patel Construction functionally relinquished its equity interest to assist in obtaining new loans simply to pay the Debtor's prior debts. The Plaintiff, on the other hand, contends that the transaction involved Patel defrauding a creditor to secure a loan for the Debtor for his sale of Patel Construction's overinflated shares in a failing company to pay debts on which the Defendants were liable as guarantors. The Plaintiff's argument is that the new loan was fraudulent on its face, and that any benefit to the Debtor or the prior creditors was merely incidental to a more than $2,000,000 decrease in the Defendants liability in prior debts that the Debtor was not otherwise paying and would likely be unable to pay in the future.

B. Undisputed Material Facts

Based upon the Defendants' Local Rule 56(a)1 Statement of Undisputed Material Facts (ECF No. 63) and the Plaintiff's Statement of Opposition Facts, the Court has weighed these more-detailed undisputed facts propounded by both the Defendants and the Plaintiff for the purposes of summary judgment:^[2]

1. On March 2, 2020 (the "Petition Date") Cambridge Marine Construction, Inc. filed a voluntary petition under Chapter 7 of the Bankruptcy Code. Bk. Dkt. at ECF No. 1; Plaintiff's Statement of Opposition Facts at ¶ 1.

2. Upon the filing of the Debtor's bankruptcy case, Attorney Bonnie C. Mangan was appointed as the Chapter 7 Trustee of the Debtor's bankruptcy case. Bk. Dkt; Plaintiff's Statement of Opposition Facts at ¶ 2.

3. On February 11, 2022, the Trustee commenced the above-captioned adversary proceeding (the "Adversary Proceeding") by the filing of an Adversary Complaint (the "Complaint") against the Defendants. Adv. Proc. Dkt. at ECF No. 1; Plaintiff's Statement of Opposition Facts at ¶ 3.

4. On July 19, 2023, the Trustee filed an Amended Adversary Complaint (the "Amended Complaint") against the Defendants. Adv. Proc. Dkt. at ECF No. 56; Plaintiff's Statement of Opposition Facts at ¶ 4.

5. Both the Complaint and the Amended Complaint allege that, on April 9, 2019, the Debtor transferred $1,045,000.00 to Patel Construction. Adv. Proc. Dkt. at ECF No. 1, ¶ 46; Adv. Proc. Dkt. at ECF No. 56, ¶ 46; Plaintiff's Statement of Opposition Facts at ¶ 5.

6. On January 12, 2021, NAS filed a proof of claim in the Debtor's bankruptcy case asserting a claim against the Debtor's bankruptcy estate in the total amount of $5,792,278.40 (the "NAS Proof of Claim"). Bk. Dkt. Proof of Claim No. 26-1; Plaintiff's Statement of Opposition Facts at ¶ 10.

7. The Report by the NAS provides that NAS received a payment from Baker Braverman and Barbadoro PC on April 10, 2019 in the amount of $1,008,170.23 for "Seller proceeds - Patel Constructions." Bk. Dkt. Proof of Claim No. 26-1 at 23-28; Bk. Dkt. Proof of Claim No. 26-1 at 27; Plaintiff's Statement of Opposition Facts at ¶¶ 12, 13.

8. Patel Construction operated a general contracting business that was primarily engaged in construction projects for the federal government. Patel Aff. at ¶ 2; Plaintiff's Statement of Opposition Facts at ¶ 18.

9. Patel is the president and sole member of Patel Construction. Patel Aff. at ¶ 1; Plaintiff's Statement of Opposition Facts at ¶ 19.

10. The Debtor's principal, Johnson, was previously employed as an operational manager for Patel Construction in its Connecticut office from approximately 2005 to 2010. Patel Aff. at ¶ 5; Plaintiff's Statement of Opposition Facts at ¶ 22.

11. On November 1, 2011, Johnson formed the Debtor. Patel Aff. at ¶ 6; Plaintiff's Statement of

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