Bill N. Shepard Trust v. Patel et al, No. 3:2011cv08146 - Document 58 (D. Ariz. 2012)

Court Description: PRELIMINARY INJUNCTION--ORDER denying 31 Motion to Appoint Receiver; granting 31 Motion for Preliminary Injunction. The preliminary injunction is conditioned upon Plaintiff posting a bond in the amount of $5,000.00. See order for full details. Signed by Judge Neil V Wake on 11/26/12.(SJF)
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Bill N. Shepard Trust v. Patel et al 1 Doc. 58 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 Forrest Shepard, as Trustee of the Bill N. Shepard Trust, PRELIMINARY INJUNCTION 10 11 12 No. CV-11-08146-PCT-NVW Plaintiff, AND v. Pishit S. Patel, and Does 1-10, inclusive, 13 FINDINGS OF FACT AND CONCLUSIONS OF LAW Defendants. 14 15 Before the Court is Plaintiff’s Motion to Appoint Receiver or, Alternatively, for 16 Preliminary Injunction (Doc. 31). An evidentiary hearing on this Motion was held on 17 November 6 and 7, 2012. After reviewing all the evidence and the arguments of counsel, 18 the Motion will be denied in part and granted in part, and a preliminary injunction will 19 issue. 20 I. 21 22 23 24 25 26 27 FINDINGS OF FACT A. The Parties 1. Plaintiff, Forrest Shepard, is an individual and the Trustee of the Bill N. Shepard Trust. 2. Plaintiff is the successor-in-interest to Dr. Bill N. Shepard’s one- third (1/3) interest in the Partnerships (defined below). 3. Defendant Pishit S. Patel (“Defendant”) is an individual who owns the remaining two-thirds (2/3) interest in the Partnerships. 28 Dockets.Justia.com B. 1 The Partnerships 4. 2 In or about January 1995, in the City of Needles, County of San 3 Bernardino, State of California, Bill N. Shepard, Rama P. Patel (“Mrs. Patel”), and 4 Defendant jointly purchased certain real property, commonly referred to as 1300 West 5 McCulloch Blvd., Lake Havasu City, Arizona, including improvements thereon, and all 6 fixtures, equipment and personal property thereon, and operating as a motel/hotel 7 business under the name and style of Island Inn Resort. 5. 8 Bill N. Shepard, Mrs. Patel, and Defendant entered into an oral 9 partnership agreement for the Island Inn Resort. Said partnership agreement included, 10 but was not limited to, the following pertinent provisions: for said parties to carry on as a 11 partnership the motel/hotel business, utilizing the Island Inn Resort, including 12 maintaining, repairing, improving and holding for appreciation the Island Inn Resort. 13 The partnership created by this agreement is referred to as the “Island Inn Partnership” 14 herein. 15 6. Bill N. Shepard, Defendant, and Mrs. Patel jointly purchased that 16 certain real property, commonly referred to as 831 North Bill Williams Avenue, 17 Williams, Arizona, including improvements thereon, and all fixtures, equipment and 18 personal property thereon, and operating as a motel/hotel business under the name and 19 style of Motel 6 West. 20 7. In or about June, 1996, in the City of Needles, County of San 21 Bernardino, State of California, Bill N. Shepard, Defendant, and Mrs. Patel entered into 22 an oral partnership agreement for the Motel 6 West (the “Motel 6 West Partnership”). 23 Said partnership agreement included, but was not limited to, the following pertinent 24 provisions: said parties to carry on as a partnership the motel/hotel business, utilizing the 25 Motel 6 West, including maintaining, repairing, improving and holding for appreciation 26 the Motel 6 West. The Motel 6 West Partnership and Island Inn Partnership are referred 27 to collectively as the “Partnerships.” 28 -2- 8. 1 In 1998, Dr. Shepard filed suit against Defendant and Mrs. Patel in 2 California state court for declaratory relief, accounting, dissolution, fraud, and breach of 3 fiduciary duty related to Defendant’s alleged mismanagement of the properties. 9. 4 In 2002, Defendant and Ms. Patel filed for Chapter 11 bankruptcy in 5 Arizona; the then-pending litigation with Dr. Shepard was also removed to the 6 bankruptcy court. 7 10. On November 29, 2007, the bankruptcy court issued its judgment, 8 finding Dr. Shepard had a one-third partnership interest in both Motels and entering 9 money judgment for Dr. Shepard against the Patels related to both properties. 11. 10 The bankruptcy court also provided that a third-party management 11 company, American Hospitality, Inc. (“American Hospitality”), would manage the 12 properties until the money judgments for Dr. Shepard were paid, upon which time 13 Defendant’s management company, Rohan Management (“Rohan”), could resume 14 management of the properties. 15 Hospitality charged a management fee of 2.5% of gross revenue plus $400 a month for 16 accounting and payroll services. 17 12. Rohan is owned solely by Defendant. American Bill N. Shepard died on July 3, 2008 and the Plaintiff acquired Bill 18 N. Shepard’s interests in the Island Inn Resort Partnership and the Motel 6 West 19 Partnership. 13. 20 On December 3, 2010, a divorce decree was entered in connection 21 with the dissolution of marriage between Defendant and Mrs. Patel. As part of that 22 divorce decree, Mrs. Patel’s one-third interest in the Island Inn Partnership was awarded 23 to Defendant. 24 25 26 14. On February 15, 2011, a final decree was entered and the administrative case in the bankruptcy matter was closed. 15. Plaintiff and Defendant continued the Partnerships, and Defendant’s 27 management company Rohan resumed managing the Motels following his satisfaction of 28 the adversary proceeding judgment. -3- 1 16. In March 2011, Defendant requested a cash contribution from 2 Plaintiff to allegedly pay property taxes and other expenses related to the properties. 3 Plaintiff did not respond to this request. 4 17. Defendant also requested Plaintiff provide information to a bank for 5 a proposed refinancing of the loan on the Motel 6 West property. Plaintiff did not 6 respond to this request. 7 18. After receiving these requests, Plaintiff, through his representatives, 8 requested and was granted the right to inspect various books and records of the 9 Partnerships and Motels located in Arizona in April 2011. 10 19. Plaintiff filed his complaint on September 16, 2011. 11 20. After the money judgments for Dr. Shepard ordered by the 12 bankruptcy court were paid, Defendant’s company, Rohan Management, began charging 13 the Partnerships a management fee of 5% without Plaintiff’s consent. 14 Management later increased the management fee to 7%, again without Plaintiff’s consent. 15 21. Rohan Defendant entered into a Franchise Agreement with Motel 6 for the 16 Motel 6 West without Plaintiff’s consent—referring to himself alone as the “franchisee” 17 rather than the Motel 6 West Partnership. The Franchise Agreement identifies Defendant 18 as “Pishit Patel, as a sole proprietor” and the “owner” of the Motel 6 property. 19 20 21 22. On October 1, 2011, Defendant entered into a Modification Agreement for a loan encumbering the Motel 6 West property without Plaintiff’s consent. 23. Defendant, without Plaintiff’s consent, has been using Island Inn 22 Partnership assets to lease a 2011 Mercedes S550 for himself, to register that vehicle, to 23 insure that vehicle, and to make repairs to additional Mercedes. 24 24. Island Inn Resort and Motel 6 West, the jointly owned properties 25 managed by the Partnerships, have disbursed funds from the Partnerships to or for the 26 personal benefit of the Defendant, Rohan, or other entities owned by the Defendant 27 between 2008 and 2012 without the consent of Plaintiff. 28 -4- 25. 1 The amount of recorded disbursements made by Island Inn Resort 2 and Motel 6 West to Rohan due to the increase in the monthly management fees charged 3 by Rohan through Island Inn Resort and Motel 6 West without the consent of Plaintiff 4 from 2.5% previously charged by American Hospitality as of May 2008 to 5% charged 5 by Rohan commencing June 2008 is $184,300 and then from 5% to 7% of revenues 6 commencing January 2011 through July 2012 is $54,900, for a combined total of 7 $239,200. 26. 8 The amount of recorded disbursements made by Island Inn Resort 9 and Motel 6 West to the Defendant for reimbursements to the Defendant for payments he 10 purportedly made on behalf of the Partnerships between 2008 and 2012 without the 11 consent of Plaintiff is at least $537,000. 27. 12 Island Inn Resort and Motel 6 West disbursed funds in the amount of 13 $160,000 from the Partnerships to Rohan for loans made by Rohan to both properties 14 between 2008 and 2012, without the consent of Plaintiff. 28. 15 The amount of recorded disbursements made by Island Inn Resort 16 and Motel 6 West between 2008 and 2012 while under the management of Rohan where 17 no supporting vendor invoices or vendor receipts could be located in the business records 18 of Island Inn Resort and Motel 6 West, contrary to the record retention requirements of 19 the Internal Revenue Service, is at least $177,686. 29. 20 The amount of recorded disbursements made by Island Inn Resort 21 and Motel 6 West between 2008 and 2012 while under the management of Rohan for 22 which the supporting documents do not designate which hotel owed the bill, contrary to 23 the record keeping requirements of the Internal Revenue Service, is at least $12,100. 24 II. CONCLUSIONS OF LAW 25 A. The Appointment of a Receiver is Inappropriate in this Case 26 Plaintiff first seeks appointment of a receiver to manage the Partnerships. 27 “[A]ppointing a receiver is an extraordinary equitable remedy”, which should be applied 28 with caution. Canada Life v. LaPeter, 563 F.3d 837, 844 (9th Cir. 2009) (citing Aviation -5- 1 Supply Corp. v. R.S.B.I. Aerospace, Inc., 999 F.2d 314, 316 (8th Cir. 1993)). The Court 2 has discretion in determining whether to appoint a receiver, it may consider all relevant 3 factors, and no one factor is necessarily dispositive. See, e.g., Canada Life, 563 F.3d at 4 845. Defendant has self-dealt in this case. But depending on the nature of a business, a 5 receiver can also be detrimental to a business requiring proactive skillful management. In 6 this case and in light of the short time between now and the expected dissolution of the 7 Partnerships and/or partition of the real properties, there is greater danger to the value of 8 the Partnerships with the appointment of a receiver than with continued management by 9 Rohan. For these reasons, Plaintiff’s request for the appointment of a receiver will be 10 11 denied. B. A Preliminary Injunction Should Issue to Protect the Partnerships’ Property and Assets 12 13 In the alternative, Plaintiff seeks a preliminary injunction. “The purpose of a 14 preliminary injunction is merely to preserve the relative positions of the parties until a 15 trial on the merits can be held.” University of Texas v. Camenisch, 451 U.S. 390, 395 16 (1981). To obtain a preliminary injunction, a plaintiff must establish (1) a likelihood of 17 success on the merits; (2) a likelihood of irreparable harm in the absence of preliminary 18 relief; (3) that the balance of equity tips in his favor; and (4) the injunction is in the public 19 interest. Winter v. National Resources Defense Counsel, 555 U.S. 7, 20 (2008). In this 20 case, a preliminary injunction is appropriate to bring an end to Defendant’s self-dealing 21 without depriving the Partnerships of the benefit of Rohan’s management. 22 A preliminary injunction properly issues in actions seeking dissolution and 23 accounting of partnerships to maintain the status quo pending adjudication on the merits. 24 See Wind v. Herbert, 186 Cal. App. 2d 276, 8 Cal. Rptr. 817 (1960); Kendall v. Foulks, 25 180 Cal. 171, 173-174, 179 P. 866 (1919). A fiduciary’s commingling of partnership 26 assets with personal assets raises a presumption of impropriety with respect to the 27 commingled sums. See, e.g., Hurst v. Hurst, 1 Ariz. App. 603, 607, 405 P.2d 913, 917 28 (1965). Here, Defendant has made numerous self-interested disbursements of the -6- 1 Partnerships’ assets to or on behalf of himself or to his company, Rohan Management, 2 that were neither disclosed to, nor approved by, Plaintiff. 3 improper disbursements of partnership assets and to ensure an accurate accounting at the 4 time of trial, a preliminary injunction is appropriate and necessary. To prevent any further 5 C. 6 It is likely that Plaintiff will prevail on his claims of accounting and dissolution 7 and breach of fiduciary duty in this action. It is a near certainty that the Partnerships will 8 be dissolved in this lawsuit, as both Plaintiff and Defendant request this relief. Plaintiff is 9 therefore likely succeed on his claim for accounting and dissolution. 10 Plaintiff Is Likely to Succeed on the Merits Additionally, Plaintiff is likely to succeed on his claim that Defendant has 11 breached his fiduciary duties to the Partnerships. Where a fiduciary commingles 12 partnership assets with personal assets, the entire commingled mass is treated as 13 partnership property except so far as the fiduciary may be able to distinguish what is 14 separately his. Hurst, 1 Ariz. App. at 607, 405 P.2d at 917. Moreover, “absent an 15 express agreement, a partner is not entitled to any compensation for his services to the 16 partnership other than his share of the profits.” Wind, 186 Cal. App. 2d at 286, 8 Cal. 17 Rptr. at 817. 18 partnership affairs, and the commingling of partnership property with a partner’s own 19 property gives rise to a presumption that the entire commingled mass is partnership 20 property. Ohaco Sheep Co., Inc. v. Heirs of Ohaco, 148 Ariz. 142, 145, 713 P.2d 343, 21 346 (1986); Hurst, 1 Ariz. App. at 606-07, 405 P.2d at 916-17. There is no express 22 agreement in the Partnerships for any compensation to Defendant other than his pro rata 23 share of the profits. It is likely that some other agreement for management fees to 24 Defendant will be proven, as the partnerships had a course of performance involving such 25 payments. 26 knowledge of Plaintiff. Some substantial part of those payments are likely self-dealing in 27 breach of Defendant’s fiduciary duty to the Partnerships. In addition, there has not been 28 any fair allocation of the costs of Defendant’s Mercedes to the other properties that he Indeed, a partner must fully disclose all material facts relating to But the amount of such payments was changed by Defendant without -7- 1 manages. Further, with respect to Rohan’s management fee, there has been double 2 payment. Defendant has disbursed the Partnerships’ assets to Rohan through a 7% gross 3 management fee in addition to using the Partnerships’ assets to pay Rohan’s expenses. 4 Under Arizona partnership law, the authorization or ratification of all partners (or 5 a lesser number or percentage only where specified in a partnership agreement, which 6 does not exist in this case) is necessary to “authorize or ratify an act or transaction that 7 otherwise would violate a fiduciary duty of a partner.” A.R.S. § 29-1034(H). Here, 8 Defendant failed to apprise Plaintiff of the self-interested distributions and never obtained 9 Plaintiff’s authorization or consent. Accordingly, Plaintiff is likely to succeed on the 10 11 merits of his claim for breach of fiduciary duty. D. Plaintiff Will Suffer Irreparable Harm in the Absence of Injunctive Relief 12 13 Continued self-dealing by Defendant, through disbursements to himself and 14 related persons and entities, will cause irreparable harm to Plaintiff and the Partnerships 15 in the absence of injunctive relief. This conduct dissipates the Partnerships’ assets to the 16 detriment of an accurate accounting and proper dissolution and wind-up. Defendant is 17 also not maintaining records in compliance with IRS standards, which is a grave threat to 18 the financial interest of all partners. A preliminary injunction is appropriate to avoid 19 irreparable harm to the Partnerships’ assets. 20 E. The Balance of Equities Tips in the Plaintiff’s Favor 21 The balance of equities tips strongly in favor of issuing a preliminary injunction to 22 preserve the status quo in this case. In the context of provisional remedies, such as 23 preliminary injunction, the issue in evaluating the balance of hardships raised “is the 24 degree of harm that will be suffered by the plaintiff or defendant if the injunction is 25 improperly granted or denied.” Scotts Co. v. United Industries Corp., 315 F.3d 264, 284 26 (4th Cir. 2002). Here, an injunction should have little adverse impact on Defendant, as it 27 would ensure only proper, non-self-interested disbursements of the assets of the 28 Partnerships. Conversely, Plaintiff is likely to suffer harm if an injunction is not issued -8- 1 because Defendant would continue to dissipate the Partnerships’ assets pending a final 2 resolution. Accordingly, the balance of equities tips strongly in favor of issuing a 3 preliminary injunction. 4 F. A Preliminary Injunction Is in the Public Interest 5 There is public interest in issuing preliminary injunctions to maintain the status 6 quo for claims of accounting and dissolution of partnerships. See Wind, 186 Cal. App. 2d 7 276, 8 Cal. Rptr. 817. Where an injunction’s reach is narrow and affects only the 8 parties—with no impact on nonparties—“the public interest will be at most a neutral 9 factor in the analysis rather than one that favors granting or denying the preliminary 10 injunction.” Stormans, Inc. v. Selecky, 586 F.3d 1109, 1139 (9th Cir. 2009). The 11 injunction in this case would enjoin only Defendant from making self-interested 12 disbursements, and thus would not affect third parties. As a result, the public interest is 13 either in favor of, or neutral to, enjoining Defendant. 14 III. BOND 15 A preliminary injunction must be conditioned on the plaintiff posting security “in 16 an amount that the court considers proper to pay the costs and damages sustained by any 17 party found to have been wrongfully enjoined or restrained.” Fed. R. Civ. P. 65(c). The 18 amount of the bond is within the Court's discretion. See Save Our Sonoran, Inc. v. 19 Flowers, 408 F.3d 1113, 1126 (9th Cir. 2005). A bond will be required in the amount of 20 $5,000.00. 21 IT IS THEREFORE ORDERED that Plaintiff’s Motion to Appoint Receiver or, 22 Alternatively, for Preliminary Injunction (Doc. 31) is DENIED as to the request for 23 appointment of a Receiver and GRANTED as to the request for a Preliminary Injunction. 24 IT IS FURTHER ORDERED that Defendant, Pishit Patel, is enjoined during the 25 pendency of this litigation, or until further order of this Court, from doing any of the 26 following: 27 28 a. Making payments, in any form, to himself or to Rohan or for the benefit of himself or Rohan from the funds or deposits of the Partnerships without the -9- 1 express prior written consent of Plaintiff, except for a management fee to Rohan up to 5% 2 of gross receipts; b. 3 4 Depositing the receipts of the Partnerships in a new bank account other than any account currently maintained or operated by or for the Partnerships; c. 5 Paying from the Partnerships’ assets any expenses of Rohan or any 6 amounts for wages of persons that are not exclusively working on behalf of the 7 Partnerships. 8 IT IS FURTHER ORDERED that Defendant maintain the records of the 9 Partnerships in accordance with Generally Accepted Accounting Principles and in 10 compliance with the standards of the Internal Revenue Service during the pendency of 11 this matter or until further order of this Court. 12 13 14 This preliminary injunction is conditioned upon Plaintiff posting a bond in the amount of $5,000.00 pursuant to Federal Rule of Civil Procedure 65(c). Dated this 26th day of November, 2012. 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 10 -