Oakhurst Lodge Inc. v. Marshall

• Court: United States Bankruptcy Court, E.D. California
• Decided: March 16, 2021
• Docket: 19-01055
• Status: Unknown

Opinion

1 NOT FOR PUBLICATION 2 3 UNITED STATES BANKRUPTCY COURT 4 EASTERN DISTRICT OF CALIFORNIA 5 6 In re: Case No. 11-17165-A-11

7 OAKHURST LODGE, INC.,

8 9 Debtor. 10

11 JACK PATEL et al., Adv. No. 19-1055-A

12 Plaintiffs, DMS-8

13 V. MEMORANDUM

14 STEVE MARSHALL et al.,

15 Defendants. 16

17 Argued and submitted on March 16, 2021 18 at Sacramento, California 19 Honorable Fredrick E. Clement, Bankruptcy Judge Presiding 20

21 Appearances: Donna M. Standard for Steve Marshall; Sharlene F. Roberts-Caudle, Glenn E. Gates 22 for Jack Patel, Justin D. Harris, Harris Law Firm, PC for Jack Patel, Sam Patel, 23 and Oakhurst Lodge, Inc.; Sheryl D. Noel for Sushila Desai and Shantilal Desai 24 25

26 27 1 A party who fails to respond to Requests for Admission admits

2 them. After the pretrial conference, relief may be granted only to

3 “prevent manifest injustice.” Under Oakhurst Lodge, Inc.’s Chapter 11

4 plan, Steve Marshall retained equity if he made “a $50,000 capital

5 contribution.” Financial reports, signed by Marshall, show that he 6 loaned the debtor $45,000. After trial, Marshall moves to withdraw 7 his deemed admissions about characterization of those funds. Would 8 denying relief cause manifest injustice? 9 I. FACTS 10 Oakhurst Lodge, Inc., corporation, filed chapter 11 bankruptcy 11 and confirmed a plan. As applicable here, the plan provides: 12 6.10.1 Class Description. This class consists of all equity interests in the Debtor. The current holders of 13 equity interests are as follows: Chet Patel-40 shares; Sam Patel-34 shares; Steve Marshall-40 shares. 14 ... 15 6.10.3 Treatment. All Class 4 equity interests shall be 16 extinguished on the Effective Date. Steven Marshall shall make a $50,000 capital contribution on or before the 17 Effective Date and shall be issued 50 shares in the Reorganized Debtor on the Effective Date if the 18 contribution is made on or before the Effective Date. Jack Patel shall make a $50,000 capital contribution on or 19 before the Effective Date and shall be issued 50 shares in the Reorganized Debtor on the Effective Date. 20 21 Plan § 6.10, ECF No. 79, Case No. 11-17165. The effective date of the 22 plan was March 21, 2012. 23 This court previously ruled that Sam Patel did not receive notice 24 of the plan and therefore his rights were not modified by plan 25 confirmation. 26 The Monthly Operating Report for the period ending October 31, 27 2011, signed by Steve Marshall, shows the debtor received a $45,000 1 “loan from shareholder,” ECF No. 88, Case No. 11-17165. Although the

2 Report does not specify who made this payment, the parties agree that

3 the origin of these funds was Steve Marshall (or persons making the

4 payment on his behalf). The Monthly Operating Report for the period

5 ending February 29, 2012, also signed by Steve Marshall, shows that 6 the debtor received a $1,994.12 “shareholder loan repayment,” ECF No. 7 136, Case No. 11-17165. The same Report also shows that Jack Patel 8 advanced $50,000 to the debtor, Id. No filed statement or report 9 indicates that Steve Marshall made the required capital contribution 10 on or before March 21, 2012. 11 II. PROCEDURE 12 Thereafter, Oakhurst Lodge, Inc., Jack Patel and Sam Patel 13 brought this adversary proceeding against Steve Marshall, requesting 14 the following: i) declaratory relief that Jack Patel owns 50 shares, 15 that Sam Patel owns 34 shares and that Steve Marshall retains no 16 interest; ii) declaratory relief as to the identity of the members of 17 the debtor’s board of directors and officers; iii) determination of 18 the interests of judgment creditors Sushila and Shantilal Desai, if 19 any, in the shares of stock and/or proceeds from shares of stock 20 awarded to Marshall, First Amended Complaint, ECF No. 95. Marshall 21 answered. 22 In dispute is whether the $45,000 that Steve Marshall advanced to 23 24 Oakhurst Lodge, Inc. was a capital contribution or a loan. 25 Immediately before the close of discovery and some six months before 26 trial, Jack and Sam Patel’s attorney Justin Harris served Steve 27 Marshall 20 Requests for Admission by mail, Declaration of Justin D. Harris, ECF No. 192. The deadline for Marshall to respond to the 1 Requests for Admission was July 13, 2020.1 Marshall did not respond. As

2 a result, Marshall effectively admitted that Jack Patel had not

3 received notice of the Chapter 11 bankruptcy, that Marshall was not a

4 shareholder and that Jack Patel made a $50,000 capital contribution

5 payment as required under the plan on or before the effective date, 6 ECF No. 193. Marshall continued to not respond to the deemed 7 admissions for 6.5 months. 8 Sam and Jack Patel filed a Motion in Limine on January 29, 2021, 9 ECF No. 190, requesting that the court exclude all evidence that will 10 contradict the deemed admissions. Marshall opposed this motion, ECF 11 No. 201, stating that: i) he was not served the Requests for Admission 12 in compliance with the Scheduling Order because an “additional five 13 days” (sic-FRBP 9006(f) 3 days) was applicable for when his response 14 was due; ii) he sent an objection to the Requests for Admission to 15 Justin Harris but he cannot find a copy of the objection; iii) he did 16 not hear back from Harris and therefore assumed there were no further 17 issues; iv) he alternatively requests permission to withdraw the 18 admissions under Federal Rule of Civil Procedure 36(b). The court 19 denied Marshall’s request and granted Sam and Jack Patel’s Motion in 20 Limine, ECF No. 207. 21 Marshall now brings this motion to: i) set aside the court’s 22 ruling on the Motion in Limine; ii) set aside the Requests for 23 24 Admissions being deemed admitted, or alternatively, to exclude the 25

26 1 Requests for admission must be responded to within 30 days, Fed. R. Civ. P. 36(a)(3), incorporated by Fed. R. Bankr. Proc. 7036. Fed. R. Bankr. Proc. 27 9006(f) allows for an additional three days. The deadline fell on Sunday, July 12, 2020. Thus, the deadline was extended to the next business day July 1 admissions entirely on the basis they were not disclosed in Sam and

2 Jack Patel’s lists of exhibits prior to trial, which were not realized

3 at trial; and iii) set a new trial so that Marshall may bring

4 additional evidence to support his claims, ECF No. 210. Marshall filed

5 voluminous evidence in support of his motion, Exhibits, ECF No. 212. 6 In particular, Marshall filed with his exhibits his responses to the 7 original Requests for Admission, asserting that Marshall alone made a 8 $50,000 capital contribution to the debtor and denying that Jack Patel 9 ever made a $50,000 capital contribution, Id. 10 III. JURISDICTION 11 12 This court has jurisdiction. 28 U.S.C. § 1334; General Order No. 13 182, U.S. District Court for the Eastern District of California. This 14 is a core and non-core proceeding. The first count is core. The second 15 and third counts are non-core. First count: 28 U.S.C. § 157(b)(2)(A), 16 (O); Second and Third counts: 28 U.S.C. § 1367; Status Conference 17 Hr’g, April 13, 2020. The parties have consented to the entry of final 18 orders and judgment by the bankruptcy court. Amended Compl. ¶ 13, 19 March 9, 2020, ECF No. 95; Status Conference Hr’g, April 13, 2020. 20 Venue is proper. 28 U.S.C. § 1409(a). 21 IV. LAW 22 A. Federal Rule of Civil Procedure 16(e) 23 If the motion to withdraw or amend is made after a pretrial order 24 has been entered or during trial, the amendment must be necessary to 25 “prevent manifest injustice,” Fed. R. Civ. P. 16(e), incorporated by 26 Fed. R. Bankr. P. 7016; United Phosphorus, Ltd. v. Midland Fumigant, 27 Inc., 205 F.3d 1219, 1236 (10th Cir. 2000); McLean Contracting Co. v. 1 Waterman Steamship Corp., 277 F.3d 477, 479-480 (4th Cir. 2002). The

2 burden is on the party seeking modification to establish that

3 “manifest injustice” would result if the pretrial order is not

4 modified, Byrd v. Guess, 137 F.3d 1126, 1132 (9th Cir. 1998)

5 (abrogation on other grounds recognized by Moreland v. Las Vegas 6 Metropolitan Police Dept., 159 F.3d 365, 372-373 (9th Cir. 1998)). 7 B. Federal Rule of Civil Procedure 36(b) 8 When a party serves on any other party a request for admission 9 and the other party fails to respond, “The automatic admission…is a 10 sufficient remedy for the party who made the request.” 8B Charles 11 Alan Wright, Arthur R. Miller, Mary Kay Kane & Richard L. Marcus, 12 Federal Practice & Procedure § 2265 (3d. ed. 2010). A party may be 13 permitted to withdraw or amend an admission only if the court finds, 14 subject to Fed. R. Civ. P. 16(e), “[i] withdrawal will aid in 15 presenting the merits of the case, and [ii] no substantial prejudice 16 to the party who requested the admission will result from allowing the 17 admission to be withdrawn or amended,” Phillips & Stevenson, Federal 18 Civ. Proc Before Trial § 11:2087 (Rutter Group 2020); Fed. R. Civ. P. 19 36(b), incorporated by Fed. R. Bankr. P. 7036. Both elements must be 20 satisfied, see Conlon v. United States, 474 F.3d 616, 625 (9th Cir. 21 2007) (holding that a court must consider both factors in deciding a 22 motion to withdraw or amend); Gutting v. Falstaff Brewing Corp., 710 23 24 F.2d 1309, 1313 (8th Cir. 1983). 25 V. DISCUSSION 26 Steve Marshall requests the court to i) vacate the judgment as to 27 the Motion in Limine, or alternatively, allow him to withdraw his deemed admissions; and ii) to grant him a new trial. In summary, 1 Marshall requests relief from his deemed admissions. Therefore, to

2 decide whether to grant Marshall’s motion, the court will particularly

3 consider whether denying the motion will result in manifest injustice

4 under Fed. R. Civ. P. 16(e), and whether granting the motion will

5 impose substantial prejudice on Sam and Jack Patel under Fed. R. Civ. 6 P. 36(b). 7 A. Federal Rule of Civil Procedure 16(e) - Prevent Manifest Injustice 8

Denying Marshall’s request will not constitute manifest injustice 9 10 under Fed. R. Civ. P. 16(e) if Marshall’s $45,000 payment is a loan 11 and not a capital contribution. Whether Marshall’s advance to the 12 debtor corporation is a debt or equity depends primarily on his intent 13 on the date of the transaction, see In re Daewoo Motor America, Inc., 14 471 B.R. 721 (C.D. Cal. 2012). 15 Oakhurst Lodge, Inc.’s financial reports establish that Marshall 16 intended his $45,000 advancement to be a loan. The October 2011 17 Monthly Operating Report, signed by Marshall, indicates that the 18 $45,000 was a “loan from shareholder,” ECF No. 88, Case No. 11-17165. 19 There are no reports prior to this period or before the plan’s 20 effective date indicating that the debtor received other loans from 21 shareholders. The February 2012 Report, also signed by Marshall, shows 22 a $1,994.12 “shareholder loan repayment,” ECF No. 136, Case No. 11- 23 17165, signaling that the $45,000 was not a capital contribution. No 24 statement indicates that Marshall made any capital contribution on or 25 before March 21, 2012. The evidence presents that Marshall’s $45,000 26 advance was a loan and contradicts Marshall’s statement that he alone 27 made the $50,000 capital contribution on or before the effective date, 1 ECF No. 212.

2 Due to the presented evidence, Marshall failed to show that

3 granting his motion to withdraw admissions is necessary to prevent

4 manifest injustice under Fed. R. Civ. P. 16(e).

5 B. Federal Rule of Civil Procedure 36(b) – Aids or Promotes Presentation of the Case 6 The first half of the test under Rule 36(b) is satisfied when 7 upholding the admissions at issue would eliminate any presentation of 8 the merits of the case. Here, denying Marshall’s request to set aside 9 the Motion in Limine and the deemed admissions would eliminate a 10 11 determination of the merits. In particular, admissions No. 1 (Sam 12 Patel did not receive notice of the chapter 11 plan filed by Oakhurst 13 Lodge, Inc.), No. 3 (Marshall did not make a $50,000 capital 14 contribution to the debtor on or before the effective date), No. 13 15 (Jack Patel made a $50,000 capital contribution payment to the debtor 16 on or before the effective date) and No. 20 (Marshall has no 17 shareholder interest in Oakhurst Lodge, Inc.) essentially bar Marshall 18 from presenting the merits of this case, Exhibits, ECF No. 193. 19 Allowing Marshall to withdraw his admissions would facilitate his 20 presentation of the merits of this case. For the foregoing reasons, 21 Marshall satisfied the first half of the test under Rule 36(b). 22 C. Federal Rule of Civil Procedure 36(b) – Substantial Prejudice 23

When determining whether a party satisfied the second half of the 24 25 test under Rule 36(b), courts focus on the prejudice that the 26 nonmoving party would suffer at trial, Conlon v. United States, at 623 27 (holding that continuing the case for discovery and resubmission of exhibits after the plaintiffs relied on the deemed admissions for 2.5 1 months for imminent trial constituted clear prejudice); See Sonoda v. 2

Cabrera, 255 F.3d 1035, 1039–40 (9th Cir. 2001); see also Raiser v.

3 Utah County, 409 F.3d 1243, 1247 (10th Cir. 2005) (holding that there

4 was no prejudice when the nonmoving party relied on the deemed

5 admissions for only a two-week period while preparing its summary 6 judgment motion). 7 Marshall states in his motion that the deemed admissions due to 8 his failure to respond by the deadline constitute “manifest 9 injustice,” ECF No. 212. However, this case involves more than a mere 10 failure to comply with the deadlines. This adversary proceeding has 11 been pending for over 1.5 years. Marshall did not file any response 12 regarding the Requests for Admissions until 6.5 months after they were 13 deemed admitted, ECF No. 201. Marshall’s present motion was filed 7 14 months after they were deemed admitted. Sam and Jack Patel have 15 heavily relied on the deemed admissions while persisting through this 16 adversary proceeding. Granting Marshall’s motion would require retrial 17 of the entire action, which would severely prejudice Sam and Jack 18 Patel. 19 The court concludes that Marshall failed to satisfy the second 20 prong of Rule 36(b) and will deny his motion. Therefore, the court 21 will not permit Marshall to withdraw or amend the deemed admissions 22 under Rule 36(b). 23 24 / 25 / 26 / 27 / / 1 VI. CONCLUSION 2 For each of these reasons, Steve Marshall’s motion will be denied 3 as provided herein. The court will issue an order from chambers. 4 Dated: March 16, 2021

7 Fredrick E. Clement United States Bankruptcy Judge 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 10

1 Instructions to Clerk of Court

2 Service List - Not Part of Order/Judgment

3 The Clerk of Court is instructed to send the Order/Judgment or other court generated document transmitted herewith to the parties below. The Clerk of Court will send the document 4 via the BNC or, if checked ____, via the U.S. mail.

6 Attorney for the Plaintiff(s) Attorney for the Defendant(s) (if any)

7 Bankruptcy Trustee (if appointed in the case) Office of the U.S. Trustee 2500 Tulare St, Ste 1401 8 Fresno, CA 93721 9 All Creditors Steve Marshall 32149 Road 416 10 Coarsegold, CA 93614-8932 11 Sheryl Noel 499 W Shaw #116 12 Fresno, CA 93704

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