Bill N. Shepard Trust v. Patel et al

Filing 58

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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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Forrest Shepard, as Trustee of the Bill N.
Shepard Trust,

No. CV-11-08146-PCT-NVW
PRELIMINARY INJUNCTION

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Plaintiff,
AND

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v.

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Pishit S. Patel, and Does 1-10, inclusive,

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FINDINGS OF FACT AND
CONCLUSIONS OF LAW

Defendants.

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Before the Court is Plaintiff’s Motion to Appoint Receiver or, Alternatively, for

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Preliminary Injunction (Doc. 31). An evidentiary hearing on this Motion was held on

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November 6 and 7, 2012. After reviewing all the evidence and the arguments of counsel,

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the Motion will be denied in part and granted in part, and a preliminary injunction will

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issue.

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I.

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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.

B.

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The Partnerships
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In or about January 1995, in the City of Needles, County of San

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Bernardino, State of California, Bill N. Shepard, Rama P. Patel (“Mrs. Patel”), and

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Defendant jointly purchased certain real property, commonly referred to as 1300 West

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McCulloch Blvd., Lake Havasu City, Arizona, including improvements thereon, and all

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fixtures, equipment and personal property thereon, and operating as a motel/hotel

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business under the name and style of Island Inn Resort.
5.

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Bill N. Shepard, Mrs. Patel, and Defendant entered into an oral

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partnership agreement for the Island Inn Resort. Said partnership agreement included,

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but was not limited to, the following pertinent provisions: for said parties to carry on as a

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partnership the motel/hotel business, utilizing the Island Inn Resort, including

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maintaining, repairing, improving and holding for appreciation the Island Inn Resort.

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The partnership created by this agreement is referred to as the “Island Inn Partnership”

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herein.

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6.

Bill N. Shepard, Defendant, and Mrs. Patel jointly purchased that

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certain real property, commonly referred to as 831 North Bill Williams Avenue,

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Williams, Arizona, including improvements thereon, and all fixtures, equipment and

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personal property thereon, and operating as a motel/hotel business under the name and

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style of Motel 6 West.

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7.

In or about June, 1996, in the City of Needles, County of San

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Bernardino, State of California, Bill N. Shepard, Defendant, and Mrs. Patel entered into

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an oral partnership agreement for the Motel 6 West (the “Motel 6 West Partnership”).

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Said partnership agreement included, but was not limited to, the following pertinent

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provisions: said parties to carry on as a partnership the motel/hotel business, utilizing the

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Motel 6 West, including maintaining, repairing, improving and holding for appreciation

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the Motel 6 West. The Motel 6 West Partnership and Island Inn Partnership are referred

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to collectively as the “Partnerships.”

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8.

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In 1998, Dr. Shepard filed suit against Defendant and Mrs. Patel in

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California state court for declaratory relief, accounting, dissolution, fraud, and breach of

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fiduciary duty related to Defendant’s alleged mismanagement of the properties.
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In 2002, Defendant and Ms. Patel filed for Chapter 11 bankruptcy in

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Arizona; the then-pending litigation with Dr. Shepard was also removed to the

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bankruptcy court.

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10.

On November 29, 2007, the bankruptcy court issued its judgment,

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finding Dr. Shepard had a one-third partnership interest in both Motels and entering

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money judgment for Dr. Shepard against the Patels related to both properties.
11.

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The bankruptcy court also provided that a third-party management

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company, American Hospitality, Inc. (“American Hospitality”), would manage the

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properties until the money judgments for Dr. Shepard were paid, upon which time

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Defendant’s management company, Rohan Management (“Rohan”), could resume

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management of the properties.

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Hospitality charged a management fee of 2.5% of gross revenue plus $400 a month for

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accounting and payroll services.

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Rohan is owned solely by Defendant.

American

Bill N. Shepard died on July 3, 2008 and the Plaintiff acquired Bill

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N. Shepard’s interests in the Island Inn Resort Partnership and the Motel 6 West

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Partnership.
13.

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On December 3, 2010, a divorce decree was entered in connection

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with the dissolution of marriage between Defendant and Mrs. Patel. As part of that

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divorce decree, Mrs. Patel’s one-third interest in the Island Inn Partnership was awarded

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to Defendant.

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14.

On February 15, 2011, a final decree was entered and the

administrative case in the bankruptcy matter was closed.
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Plaintiff and Defendant continued the Partnerships, and Defendant’s

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management company Rohan resumed managing the Motels following his satisfaction of

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the adversary proceeding judgment.
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16.

In March 2011, Defendant requested a cash contribution from

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Plaintiff to allegedly pay property taxes and other expenses related to the properties.

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Plaintiff did not respond to this request.

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Defendant also requested Plaintiff provide information to a bank for

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a proposed refinancing of the loan on the Motel 6 West property. Plaintiff did not

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respond to this request.

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18.

After receiving these requests, Plaintiff, through his representatives,

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requested and was granted the right to inspect various books and records of the

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Partnerships and Motels located in Arizona in April 2011.

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19.

Plaintiff filed his complaint on September 16, 2011.

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20.

After the money judgments for Dr. Shepard ordered by the

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bankruptcy court were paid, Defendant’s company, Rohan Management, began charging

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the Partnerships a management fee of 5% without Plaintiff’s consent.

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Management later increased the management fee to 7%, again without Plaintiff’s consent.

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Rohan

Defendant entered into a Franchise Agreement with Motel 6 for the

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Motel 6 West without Plaintiff’s consent—referring to himself alone as the “franchisee”

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rather than the Motel 6 West Partnership. The Franchise Agreement identifies Defendant

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as “Pishit Patel, as a sole proprietor” and the “owner” of the Motel 6 property.

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On October 1, 2011, Defendant entered into a Modification

Agreement for a loan encumbering the Motel 6 West property without Plaintiff’s consent.
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Defendant, without Plaintiff’s consent, has been using Island Inn

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Partnership assets to lease a 2011 Mercedes S550 for himself, to register that vehicle, to

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insure that vehicle, and to make repairs to additional Mercedes.

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Island Inn Resort and Motel 6 West, the jointly owned properties

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managed by the Partnerships, have disbursed funds from the Partnerships to or for the

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personal benefit of the Defendant, Rohan, or other entities owned by the Defendant

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between 2008 and 2012 without the consent of Plaintiff.

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25.

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The amount of recorded disbursements made by Island Inn Resort

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and Motel 6 West to Rohan due to the increase in the monthly management fees charged

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by Rohan through Island Inn Resort and Motel 6 West without the consent of Plaintiff

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from 2.5% previously charged by American Hospitality as of May 2008 to 5% charged

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by Rohan commencing June 2008 is $184,300 and then from 5% to 7% of revenues

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commencing January 2011 through July 2012 is $54,900, for a combined total of

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$239,200.
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The amount of recorded disbursements made by Island Inn Resort

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and Motel 6 West to the Defendant for reimbursements to the Defendant for payments he

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purportedly made on behalf of the Partnerships between 2008 and 2012 without the

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consent of Plaintiff is at least $537,000.
27.

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Island Inn Resort and Motel 6 West disbursed funds in the amount of

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$160,000 from the Partnerships to Rohan for loans made by Rohan to both properties

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between 2008 and 2012, without the consent of Plaintiff.
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The amount of recorded disbursements made by Island Inn Resort

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and Motel 6 West between 2008 and 2012 while under the management of Rohan where

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no supporting vendor invoices or vendor receipts could be located in the business records

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of Island Inn Resort and Motel 6 West, contrary to the record retention requirements of

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the Internal Revenue Service, is at least $177,686.
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The amount of recorded disbursements made by Island Inn Resort

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and Motel 6 West between 2008 and 2012 while under the management of Rohan for

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which the supporting documents do not designate which hotel owed the bill, contrary to

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the record keeping requirements of the Internal Revenue Service, is at least $12,100.

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II.

CONCLUSIONS OF LAW

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A.

The Appointment of a Receiver is Inappropriate in this Case

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Plaintiff first seeks appointment of a receiver to manage the Partnerships.

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“[A]ppointing a receiver is an extraordinary equitable remedy”, which should be applied

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with caution. Canada Life v. LaPeter, 563 F.3d 837, 844 (9th Cir. 2009) (citing Aviation
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Supply Corp. v. R.S.B.I. Aerospace, Inc., 999 F.2d 314, 316 (8th Cir. 1993)). The Court

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has discretion in determining whether to appoint a receiver, it may consider all relevant

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factors, and no one factor is necessarily dispositive. See, e.g., Canada Life, 563 F.3d at

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845. Defendant has self-dealt in this case. But depending on the nature of a business, a

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receiver can also be detrimental to a business requiring proactive skillful management. In

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this case and in light of the short time between now and the expected dissolution of the

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Partnerships and/or partition of the real properties, there is greater danger to the value of

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the Partnerships with the appointment of a receiver than with continued management by

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Rohan. For these reasons, Plaintiff’s request for the appointment of a receiver will be

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denied.
B.

A Preliminary Injunction Should Issue to Protect the Partnerships’
Property and Assets

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In the alternative, Plaintiff seeks a preliminary injunction. “The purpose of a

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preliminary injunction is merely to preserve the relative positions of the parties until a

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trial on the merits can be held.” University of Texas v. Camenisch, 451 U.S. 390, 395

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(1981). To obtain a preliminary injunction, a plaintiff must establish (1) a likelihood of

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success on the merits; (2) a likelihood of irreparable harm in the absence of preliminary

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relief; (3) that the balance of equity tips in his favor; and (4) the injunction is in the public

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interest. Winter v. National Resources Defense Counsel, 555 U.S. 7, 20 (2008). In this

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case, a preliminary injunction is appropriate to bring an end to Defendant’s self-dealing

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without depriving the Partnerships of the benefit of Rohan’s management.

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A preliminary injunction properly issues in actions seeking dissolution and

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accounting of partnerships to maintain the status quo pending adjudication on the merits.

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See Wind v. Herbert, 186 Cal. App. 2d 276, 8 Cal. Rptr. 817 (1960); Kendall v. Foulks,

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180 Cal. 171, 173-174, 179 P. 866 (1919). A fiduciary’s commingling of partnership

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assets with personal assets raises a presumption of impropriety with respect to the

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commingled sums. See, e.g., Hurst v. Hurst, 1 Ariz. App. 603, 607, 405 P.2d 913, 917

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(1965).

Here, Defendant has made numerous self-interested disbursements of the
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Partnerships’ assets to or on behalf of himself or to his company, Rohan Management,

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that were neither disclosed to, nor approved by, Plaintiff.

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improper disbursements of partnership assets and to ensure an accurate accounting at the

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time of trial, a preliminary injunction is appropriate and necessary.

To prevent any further

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C.

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It is likely that Plaintiff will prevail on his claims of accounting and dissolution

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and breach of fiduciary duty in this action. It is a near certainty that the Partnerships will

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be dissolved in this lawsuit, as both Plaintiff and Defendant request this relief. Plaintiff is

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therefore likely succeed on his claim for accounting and dissolution.

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Plaintiff Is Likely to Succeed on the Merits

Additionally, Plaintiff is likely to succeed on his claim that Defendant has

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breached his fiduciary duties to the Partnerships.

Where a fiduciary commingles

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partnership assets with personal assets, the entire commingled mass is treated as

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partnership property except so far as the fiduciary may be able to distinguish what is

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separately his. Hurst, 1 Ariz. App. at 607, 405 P.2d at 917. Moreover, “absent an

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express agreement, a partner is not entitled to any compensation for his services to the

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partnership other than his share of the profits.” Wind, 186 Cal. App. 2d at 286, 8 Cal.

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Rptr. at 817.

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partnership affairs, and the commingling of partnership property with a partner’s own

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property gives rise to a presumption that the entire commingled mass is partnership

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property. Ohaco Sheep Co., Inc. v. Heirs of Ohaco, 148 Ariz. 142, 145, 713 P.2d 343,

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346 (1986); Hurst, 1 Ariz. App. at 606-07, 405 P.2d at 916-17. There is no express

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agreement in the Partnerships for any compensation to Defendant other than his pro rata

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share of the profits. It is likely that some other agreement for management fees to

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Defendant will be proven, as the partnerships had a course of performance involving such

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payments.

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knowledge of Plaintiff. Some substantial part of those payments are likely self-dealing in

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breach of Defendant’s fiduciary duty to the Partnerships. In addition, there has not been

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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

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manages. Further, with respect to Rohan’s management fee, there has been double

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payment. Defendant has disbursed the Partnerships’ assets to Rohan through a 7% gross

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management fee in addition to using the Partnerships’ assets to pay Rohan’s expenses.

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Under Arizona partnership law, the authorization or ratification of all partners (or

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a lesser number or percentage only where specified in a partnership agreement, which

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does not exist in this case) is necessary to “authorize or ratify an act or transaction that

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otherwise would violate a fiduciary duty of a partner.” A.R.S. § 29-1034(H). Here,

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Defendant failed to apprise Plaintiff of the self-interested distributions and never obtained

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Plaintiff’s authorization or consent. Accordingly, Plaintiff is likely to succeed on the

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merits of his claim for breach of fiduciary duty.
D.

Plaintiff Will Suffer Irreparable Harm in the Absence of Injunctive
Relief

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Continued self-dealing by Defendant, through disbursements to himself and

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related persons and entities, will cause irreparable harm to Plaintiff and the Partnerships

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in the absence of injunctive relief. This conduct dissipates the Partnerships’ assets to the

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detriment of an accurate accounting and proper dissolution and wind-up. Defendant is

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also not maintaining records in compliance with IRS standards, which is a grave threat to

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the financial interest of all partners. A preliminary injunction is appropriate to avoid

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irreparable harm to the Partnerships’ assets.

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E.

The Balance of Equities Tips in the Plaintiff’s Favor

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The balance of equities tips strongly in favor of issuing a preliminary injunction to

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preserve the status quo in this case. In the context of provisional remedies, such as

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preliminary injunction, the issue in evaluating the balance of hardships raised “is the

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degree of harm that will be suffered by the plaintiff or defendant if the injunction is

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improperly granted or denied.” Scotts Co. v. United Industries Corp., 315 F.3d 264, 284

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(4th Cir. 2002). Here, an injunction should have little adverse impact on Defendant, as it

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would ensure only proper, non-self-interested disbursements of the assets of the

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Partnerships. Conversely, Plaintiff is likely to suffer harm if an injunction is not issued
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because Defendant would continue to dissipate the Partnerships’ assets pending a final

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resolution. Accordingly, the balance of equities tips strongly in favor of issuing a

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preliminary injunction.

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F.

A Preliminary Injunction Is in the Public Interest

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There is public interest in issuing preliminary injunctions to maintain the status

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quo for claims of accounting and dissolution of partnerships. See Wind, 186 Cal. App. 2d

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276, 8 Cal. Rptr. 817. Where an injunction’s reach is narrow and affects only the

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parties—with no impact on nonparties—“the public interest will be at most a neutral

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factor in the analysis rather than one that favors granting or denying the preliminary

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injunction.” Stormans, Inc. v. Selecky, 586 F.3d 1109, 1139 (9th Cir. 2009). The

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injunction in this case would enjoin only Defendant from making self-interested

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disbursements, and thus would not affect third parties. As a result, the public interest is

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either in favor of, or neutral to, enjoining Defendant.

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III.

BOND

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A preliminary injunction must be conditioned on the plaintiff posting security “in

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an amount that the court considers proper to pay the costs and damages sustained by any

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party found to have been wrongfully enjoined or restrained.” Fed. R. Civ. P. 65(c). The

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amount of the bond is within the Court's discretion. See Save Our Sonoran, Inc. v.

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Flowers, 408 F.3d 1113, 1126 (9th Cir. 2005). A bond will be required in the amount of

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$5,000.00.

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IT IS THEREFORE ORDERED that Plaintiff’s Motion to Appoint Receiver or,

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Alternatively, for Preliminary Injunction (Doc. 31) is DENIED as to the request for

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appointment of a Receiver and GRANTED as to the request for a Preliminary Injunction.

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IT IS FURTHER ORDERED that Defendant, Pishit Patel, is enjoined during the

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pendency of this litigation, or until further order of this Court, from doing any of the

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following:

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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
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express prior written consent of Plaintiff, except for a management fee to Rohan up to 5%

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of gross receipts;
b.

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Depositing the receipts of the Partnerships in a new bank account

other than any account currently maintained or operated by or for the Partnerships;
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Paying from the Partnerships’ assets any expenses of Rohan or any

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amounts for wages of persons that are not exclusively working on behalf of the

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Partnerships.

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IT IS FURTHER ORDERED that Defendant maintain the records of the

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Partnerships in accordance with Generally Accepted Accounting Principles and in

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compliance with the standards of the Internal Revenue Service during the pendency of

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this matter or until further order of this Court.

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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.

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