Treasures London Ltd. v. Keswani (In re Keswani)

In re: POONAM KESWANI a/k/a "PARIS KESWANI"

a/k/a "PARIS POONAM KESWANI", Debtor.

TREASURES LONDON LIMITEDand HARJIT SINGH ATHWAL, Plaintiffs, v. POONAM KESWANI a/k/a "PARIS KESWANI"a/k/a "PARIS POONAM KESWANI," Defendant.

Case No. 20-10315-JLG

Adv. P. No. 20-01084-JLG

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK

Filed: May 13, 2021

May 12, 2021

NOT FOR PUBLICATION

Chapter 7

MEMORANDUM DECISION AND ORDER DENYING PLAINTIFFS' MOTION FOR JUDGMENT BY DEFAULT.

APPEARANCES:

KRAVIS & ASSOCIATES, PLLC

Attorneys for Plaintiffs Treasures London Limited

and Harjit Singh Athwal

31275 Northwestern Hwy., Ste. 145

Farmington Hills, MI 48334

By: Andrew R. Kravis, Esq. JAMES L. GARRITY, JR. United States Bankruptcy Judge:

Introduction¹

Harjit Singh Athwal ("Athwal") and Treasures London Limited ("TLL"), Athwal's wholly owned company (collectively, the "Plaintiffs"), purport to be creditors of Poonam Keswani a/k/a Paris Keswani a/k/a Paris Poonam Keswani (the "Debtor"). In May 2019, they sued the Debtor and Treasures of Prince LLC ("TOP"), an entity that the Debtor controls, in the State Court Action seeking $2,000,000 in damages on account of the Debtor's alleged fraud and breach of her Personal Guaranty of TOP's debts. The commencement of the Debtor's voluntary case under chapter 7 of the Bankruptcy Code automatically stayed prosecution of that action against the Debtor. In this adversary proceeding, the Plaintiffs seek a determination that "the monetary portion of [their] fraud and related claims against the [Debtor] are non-dischargeable" under sections 523(a)(2)(A), (a)(2)(B), (a)(4), (a)(6), and 727(a)(3) of the Bankruptcy Code. They also request that the Court grant them stay relief to prosecute the State Court Action. The pro se Debtor did not respond to the Amended Complaint. The Clerk entered a Clerk's Default against the Debtor and served a Certificate of Default on the Debtor.

The matter before the Court is Plaintiffs' motion for entry of a default judgment (the "Motion")² against the Debtor in this action pursuant to Federal Rule of Civil Procedure 55(b) ("Rule 55(b)").³ The Debtor did not respond to the Motion, and did not appear at the hearings on the Motion.

For the reasons set forth herein, the Court denies the Motion.

Jurisdiction

The Court has jurisdiction over the Motion pursuant to 28 U.S.C. §§ 1334(a) and 157(a) and the Amended Standing Order of Referral of Cases to Bankruptcy Judges of the United States District Court for the Southern District of New York (M-431), dated January 31, 2012 (Preska, C.J.). This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(I).

Background

a. Procedural History

On January 31, 2020 (the "Petition Date"), the Debtor, then represented by counsel, filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code in this Court (the "Petition").⁴ On February 3, 2020, Deborah J. Piazza was appointed chapter 7 trustee for the Debtor's estate and qualified for and accepted that appointment. On February 14, 2020, the Debtor filed her schedules of assets and liabilities and Statement of Financial Affairs (collectively, the "Schedules"); she filed amended and further amended Schedules A/B and C on March 2, 2020, April 17, 2020 and May 10, 2020 respectively.⁵ The Debtor listed each of the claims of the Plaintiffs in her Schedules as disputed, nonpriority unsecured claims arising out of a "Personal guarantee for Treasures of Prince."⁶ On June 9, 2020, the Plaintiffs each filed a claim in the amount of $2,000,000 against the Debtor.⁷

On May 7, 2020, the Plaintiffs commenced this adversary proceeding by filing a complaint asserting claims for relief against the Debtor under sections 523 and 727 of theBankruptcy Code.⁸ On May 8, 2020, the Clerk of the Court (the "Clerk") issued a Summons which was served upon the Debtor.⁹ On June 12, 2020, the Plaintiffs filed an amended complaint (the "Amended Complaint"), also asserting claims for relief under sections 523 and 727 of the Bankruptcy Code, and on June 23, 2020, they served the Debtor with the Amended Complaint.¹⁰

On July 7, 2020, after Debtor failed to answer or otherwise respond to the Amended Complaint, and upon the Plaintiffs' request, the Clerk entered a Default against the Debtor (the "Clerk's Default").¹¹ Thereafter, the Clerk served the Certificate of Default on the Debtor.¹² On January 11, 2021, Plaintiffs filed the Motion seeking entry of a default judgment against the Debtor pursuant to Rule 55(b)(2). On April 1, 2021, the Court held a hearing on the Motion, which the Debtor did not attend. At the hearing, the Court requested supplemental briefing from the Plaintiffs and adjourned the hearing to May 4, 2021.¹³ On or about April 16, 2021, thePlaintiffs timely filed their supplemental brief in support of the Motion (the "Supplemental Brief").¹⁴ The Debtor did not respond to the Supplemental Brief and did not appear at the May 4, 2021 adjourned hearing on the Motion.

b. Factual Background¹⁵

Prior to 2006, Athwal did not know the Debtor. He contends that sometime in 2006, he encountered her on an online forum and during the period of 2006 through 2010, through online correspondence and telephone calls, he and the Debtor became good friends.¹⁶ The Debtor represented that she made jewelry that she would then sell and retail on the open market both online and via her retail outlets.¹⁷ The Debtor also held herself out to the public and to Athwal as a certified gemologist, who graduated from the Gemology Institute of America.¹⁸ The parties reconnected in 2013. In April 2014 Athwal visited the Debtor in New York City.¹⁹ Thereafter, Athwal and the Debtor visited each other on numerous occasions. Over the course of those visits, they developed a close personal relationship.²⁰ Based on his visits to the Debtor at her residence and business premises, and his receipt of WhatsApp messages from the Debtor purporting to show lucrative jewelry sales, Athwal believed that the Debtor was a successful business person.²¹

In September 2016, the Debtor informed Athwal that she wished to branch out beyond her online and retail jewelry businesses by setting up an international rough diamond business and asked for his advice concerning the opening of a Spanish bank account for one of her business partners.²² In January 2017, the Debtor presented Athwal with a business opportunity, namely de-sourcing, processing and subsequent sale of rough diamonds throughout the U.S. and London to the Debtor's clients.²³ The Debtor proposed that she would conduct this business through TOP and Athwal would do so through TLL.²⁴ The parties agreed that Athwal would provide funding for the enterprise pursuant to a loan from TLL to TOP, and in return, TOP would repay the initial principal to TLL and would distribute a return on the loan to TLL by way of profits accumulated by TOP on its transactions.²⁵ After Athwal expressed concerns that the loan was unsecured, the Debtor said she would have given him diamonds as collateral and would deliver to him a 10-carat diamond ring "worth a lot more than $400,000."²⁶

On January 31, 2017, the Debtor requested Athwal to make an initial disbursement of $400,000.00, which Debtor claimed was required promptly to purchase a parcel of diamonds. On February 2, 2017, Athwal transferred £317,830.62 ($399,980) ("Original Loan") from his personal account to TOP.²⁷ On March 28, 2017, TLL advanced the sum of £60,000.00 ($74,334) to TOP, representing TLL's contribution towards the purchase of another parcel of roughdiamonds.²⁸ On May 18, 2017, TLL advanced the sum of £47,270.30 ($59,964) to TOP, representing TLL's contribution towards an alleged acquisition of 1,000 carats of diamonds.²⁹ June 12, 2017, TLL advanced the sum of £300,000 ($377,400) to TOP, as a contribution towards an alleged purchase of 793 carats of diamonds.³⁰ The sum total of the Original Loan and subsequent loan advances (collectively the "Loan") is approximately $911,678.00.

On October 3, 2017, in an email, the Debtor represented to Athwal that she and her accountant were in the process of submitting a repayment of the Loan in the amount of $1,000,000.00.³¹ When Athwal did not receive the promised payment, he became increasingly concerned about the collectability of the Loan.³² In response to Athwal's concerns, on October 24, 2017, the Debtor executed a Continuing Guarantee, whereby she expressly agreed to personally guaranty the debts owed by TOP to TLL (the "Personal Guaranty").³³

By letter addressed to TLL dated November 10, 2017, TOP confirmed the receipt of $922,000 (£732,000 GBP) from TLL between February 2017 and June 2017 "as part of a joint venture and investments to buy merchandise."³⁴ In that letter, TOP acknowledged it's debt to TLL in the sum of $2,000,000 as of November 10, 2017.³⁵ Further, the letter states that "TOP has agreed to reimburse a minimum sum of $2,000,000 (without any offset or deductions) to TLLwhich shall comprise of both the original capital together with profit share as party of the joint venture."³⁶ Plaintiffs assert that despite numerous subsequent demands for repayment, the Debtor has failed to produce any of the funds that she has acknowledged are due and owing to them.³⁷

On May 6, 2019, Athwal and TLL filed suit against the Debtor in New York State Supreme Court, New York County (the "State Court Action").³⁸ In response to pre-petition discovery demands in the State Court Action, the Debtor produced to Plaintiffs what she represented to be JPMorgan Chase Bank ("Chase") account statements demonstrating application of the funds loaned by TLL to TOP to legitimate business expenses.³⁹ Thereafter, in response to Plaintiffs' subpoena, Chase produced account statements for the same accounts and time periods that were markedly different from those produced by the Debtor, and belied the Debtor's assertion that she used the Loan proceeds for legitimate business purposes.⁴⁰ Plaintiffs contend such acts demonstrate a willful effort to...