Patel v. Patel (In re Patel)

551 B.R. 488

In re: Dipakkumar Vanmalibhai Patel and Padmaben Dipakkumar Patel, Debtors.

Hasmukhbhai K. Patel and Ushaben H. Patel, individually and in their capacity as members of Roshan Hospitality, LLC, Plaintiffs

v.Dipakkumar Vanmalibhai Patel, Padmaben Dipakkumar Patel and Roshan Hospitality, LLC, Defendants.

No. 7–10–12627 JA

Adversary No. 10–1200 J

United States Bankruptcy Court, D. New Mexico.

Signed June 15, 2016

Arin Elizabeth Berkson, Moore, Berkson, Bassan & Behles, P.C., Koo Im Sakayo Tong, Moore, Berkson, & Gandarilla, P.C., Albuquerque, NM, for Debtors/Defendants.

Shay E. Meagle, Meagle Law, P.A., Leslie Montano Thompson, Albuquerque, NM, for Plaintiffs.

MEMORANDUM OPINION

ROBERT H. JACOBVITZ, United States Bankruptcy Judge

Before the Court is the motion to reconsider and amend judgment filed by Defendants. See Docket No. 145 (the “Motion”).

Defendants seek reconsideration of a nondischargeable judgment in which the Court awarded damages in the amount of $35,946 on two claims for embezzlement under 11 U.S.C. § 523(a)(4). After carefully reviewing the motion, the record, and the relevant law, the Court concludes that the judgment should not be altered or amended.

BACKGROUND & PRIOR RULING

Plaintiffs Ushaben (“Usha”) Patel and Hasmukhbhai K. (“H.K.”) Patel filed this adversary proceeding on December 3, 2010. They sought a nondischargeable judgment against Defendants Dipakkumar (“Danny”) Vanmalibhai Patel and Padmaben (“Patty”) Dipakkumar Patel in excess of $500,000 pursuant to 11 U.S.C. §§ 523(a)(2)(A), 523(a)(4), and 523(a)(6). Usha and H.K. asserted such claims in their individual capacities and derivatively on behalf on Roshan Hospitality, LLC (“Hospitality”), Usha and Danny's jointly owned limited liability company.

By a pretrial order entered October 19, 2012 (the “Pretrial Order”), Plaintiffs set forth the general nature of their claims. Among other things, Plaintiffs asserted that Defendants:

(a) Failed to provide accurate and complete information about Hospitality;

(b) Co-mingled the funds and assets of Hospitality with their personal funds and the funds of other separately owned businesses, which resulted in inaccurate financial reporting, divestment of LLC profits, and damages to Usha ...;

(c) Failed to accurately report cash income of Hospitality and falsified reports of cash income to members (including Usha);

(d) Embezzled and diverted cash and assets from Hospitality for personal use; and

(e) Forged Usha's signature on banking documents and checks without her knowledge or consent.

The Pretrial Order provides that only the claims set forth therein were preserved for trial.

The trial spanned about nine days over the course of several years.¹ Plaintiffs presented thousands of pages of exhibits and hours of testimony about various ways in which Defendants embezzled from Usha and from Hospitality. After the trial concluded, the Court set a briefing schedule to crystallize the issues. See Docket No. 134 (the “Order Setting Post–Trial Deadlines). The Court directed that Plaintiffs, in their opening brief, identify each category of alleged damages, whether such category could form the basis for a direct claim,² and the dollar amount in each category. Defendants were given an opportunity to respond, to which Plaintiffs could then reply. The parties were also asked to include a discussion of whether Plaintiffs' bankruptcy case impacted the Court's analysis on causation and damages.

Plaintiffs identified 11 categories of damages stemming from Defendants' alleged embezzlement, totaling $581,473.73. Plaintiffs identified direct claims for, inter alia: (1) “funds taken from Usha Patel line of credit for Defendants' personal use[,]” and (2) “[i]ncome reported on K–1 for [Hospitality] issued to Usha Patel (IRS Form 1065) for 2010 [for dividends not received by Usha Patel].”³ In their response brief, Defendants did not argue that Plaintiffs failed to preserve such claims in the Pretrial Order or that the claims had otherwise been waived. Instead, Defendants argued the facts and evidence in the record were insufficient to support the claims, and that the claims lacked merit as a matter of law.

On August 21, 2015, the Court entered a memorandum opinion (Docket No. 140) and a money judgment in favor of Plaintiffs in the amount of $35,946 (Docket No. 141) (respectively, the “Memorandum Opinion” and the “Judgment”). Even though it appeared Patty and Danny misappropriated a fair amount of money, the Court determined most claims could not be asserted by Usha. Plaintiffs therefore recovered about 6% of their requested damages. The Court made the following findings and conclusions which are relevant to the awarded damages:

(a) Around 2003, Usha obtained a line of credit from Wells Fargo in the amount of $29,000. Wells Fargo issued the line of credit jointly in the name of Usha, individually, and Hospitality as a source of payment of Hospitality's necessary expenses. The line of credit was entrusted to Patty and Danny, who fraudulently misappropriated all of the funds to pay personal expenses rather than Hospitality's operating expenses. Patty and Danny never repaid the funds to Usha.

(b) Defendants failed to prove that Usha mitigated any damages stemming from such misappropriation by discharging her debt to Wells Fargo.

(c) Hospitality made a distribution to Usha in 2010 in the amount of $6,946, which was entrusted to Patty and Danny. Based on Usha's testimony, which the Court found credible, Usha did not receive the distribution. Patty and Danny fraudulently misappropriated those funds for their own benefit.

(d) The debts stemming from the line of credit and the 2010 distribution are nondischargeable under 11 U.S.C. § 523(a)(4) (embezzlement).

Fourteen days after entry of the Memorandum Opinion and Judgment, Defendants filed the instant Motion, which has been fully briefed.

DISCUSSION

Defendants ask the Court to amend the Memorandum Opinion and Judgment pursuant to Fed.R.Civ.P. 59(e), made applicable to adversary proceedings by Fed.R.Bankr.P. 9023. Grounds for relief under Rule 59(e) include: “(1) an intervening change in the controlling law, (2) new evidence previously unavailable, and (3) the need to correct clear error or prevent manifest injustice.” U.S. v. Huff, 782 F.3d 1221, 1224 (10th Cir.2015) (quoting Servants of the Paraclete v. Does, 204 F.3d 1005, 1012 (10th Cir.2000) ). Reconsideration may also be warranted when “the court has obviously misapprehended a party's position on the facts or the law, or the court has mistakenly decided issues outside of those the parties presented for determination.” In re Sunflower Racing, Inc ., 223 B.R. 222, 223 (D.Kan.1998).⁴ However, Rule 59 does not afford parties seeking relief an opportunity to raise new arguments, or to rehash issues previously addressed by the Court. Huff, 782 F.3d at 1224.

Defendants assert the Court misapprehended the facts and decided issues that were not presented for determination. Specifically, they argue: (1) Plaintiffs failed to preserve the claims relating to the line of credit and the 2010 distribution (together the “Claims”); (2) the Court's finding that Patty and Danny misappropriated Usha's 2010 distribution is erroneous; and (3) Usha failed to prove she was damaged by Patty and Danny's misuse of the line of credit. Defendants also seek to reopen the evidence to allow them to present additional testimony and exhibits that would allegedly negate all of their liability.

I. Preservation of the Claims

As an initial matter, Defendants assert the Claims were not raised in the complaint, Plaintiffs' discovery responses, the Pretrial Order, or at trial. Defendants also argue that to the extent the line of credit claim was properly preserved, they had no notice Plaintiffs intended to assert it as a direct claim.

The Court disagrees. The complaint and any discovery responses were superseded by the Pretrial Order. See Pretrial Order, ¶ X (“The claims and defenses set forth in the pleadings are superseded by this order.”).⁵ The Pretrial Order is broad enough to include the Claims. It preserves claims in the “general nature” of embezzlement, co-mingling funds, failing to report business income, divestment of profits, and forging Usha's signature on banking documents and checks. Claims relating to the misappropriation of partnership profits and Usha's line of credit serve as specific examples of such misconduct.

The Claims were also raised at trial. Both Usha and her expert testified that Usha never received distributions to which she entitled, including all distributions after 2006.⁶ See January 30, 2013 trial transcript, p. 89, lines 9–14 (Docket No. 118). Counsel questioned both Patty and Usha about the line of credit, including whether it belonged to Usha individually and whether she authorized Patty to make draws. Id. at p. 79–81; Testimony of Patty Patel from December 16, 2014.⁷ The line of credit claim was even used as an example in the Order Setting Post–Trial Deadlines. It states:

In their [opening] brief, Plaintiffs must include a list of the categories of damages sought.... For example, Plaintiffs should identify the amount sought in connection with the insurance proceeds from the truck, the line of credit, the deposit of LLC funds in the individual Defendants' bank account, etc.

(emphasis added).

Finally, even if the Claims were not the primary focus at trial, they were clearly set forth in Plaintiffs' post-trial opening brief. The Court established the briefing procedure, in light of the challenging record, so that all parties were on the same page regarding the exact issues submitted for determination. If Defendants believed Plaintiffs did not preserve one or both of the Claims, or they lacked notice of any direct claims, Defendants needed to object on that basis in their post-trial response brief before the Court made its ruling. Having failed to so, such objection is waived. The Court will therefore not alter the Judgment on the grounds that Plaintif...