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In re San Jose Airport Hotel, LLC

United States District Court, N.D. California, San Jose Division

June 17, 2016

CHANDRAKANT SHAH, Defendant-Appellant. MOHAMED POONJA, Trustee, Plaintiff-Appellee,

         Appeal from Poonja v. Sevak & Sons, L.P. et al. (In re San Jose Airport Hotel, LLC), Bankr. N.D. Cal. (San Jose) Case No. 09-51045, Adv. No. 11-5236)



         After holding a two-day trial, the United States Bankruptcy Court for the Northern District of California found Appellant Chandrakant Shah ("Appellant") liable to Appellee Mohamed Poonja ("Appellee"), the Chapter 7 trustee for Debtor San Jose Airport Hotel, LLC ("Debtor"), for breach of contract. Concluding that Appellant had failed to fulfill its promise to serve as a guaranty for the purchase of a hotel that Debtor owned, the bankruptcy court awarded Appellee nearly $12 million. Appellant now appeals the judgment to this Court, which has jurisdiction under 28 U.S.C. § 158. For the following reasons, the Court affirms in part and reverses in part the judgment of the bankruptcy court and remands for further proceedings.

         I. BACKGROUND

         A. Factual Background

         A number of basic facts are undisputed, and the bankruptcy court set them forth in its Order Following Trial. See Dkt No. 18 ("Order"). Debtor purchased the San Jose Airport Hotel ("Hotel") in 1998 for $13 million, financed by a loan from the General Electric Capital Corporation ("GECC"). Debtor renewed the loan twice over the following decade. By the time a third renewal was necessary, the Hotel was suffering financial problems and the GECC loan was delinquent. In an effort to extend the loan, Debtor filed for bankruptcy on February 18, 2009.

         With the help of a real estate broker, Debtor arranged to sell the Hotel to Appellant. On September 4, 2009, after months of negotiations and preliminary agreements, Debtor and Appellant executed a Purchase and Sale Agreement ("PSA"). See Dkt. No. 23 at 1. The PSA specified that an entity named Sevak & Sons, L.P. ("Sevak") would purchase the hotel for $46.2 million, consisting of $750, 000 in cash and a secured promissory note for $45.45 million. The promissory note was to be secured by all the property of the Hotel and a franchise agreement with Holiday Inn. In the PSA, Sevak warranted that it was a "legally and properly formed entity existing under the laws of the State of California, and has full power and authority to execute, deliver, and perform its obligations under this Agreement." Id. at § 6.2.1. Sevak also promised that it would:

actively and fully assist Seller [Debtor] in obtaining Bankruptcy Court approval, as required by Seller, including without limitation by providing complete financial, experiential and strategic information and testimony that will support adequate assurance of future performance under the Holiday Inn Agreement, the qualifications of Buyer [Sevak] and [Appellant] as operator and owner of the Holiday Inn Property and as a franchisee from IHG (by assignment), and the adequacy of protection of the interests of GECC.

Id. at § 6.2.4. The sale was conditioned on the approval of the bankruptcy court and contained an integration clause. Id. at §§ 4.2.5, 9.10.

         Because the bulk of the consideration for the sale was a promissory note, Appellant agreed to guaranty the PSA. He signed an agreement in which he guaranteed "the payment and prompt performance of each and every covenant, warranty, representation, provision, obligation, term and condition made or to be kept or performed by [Sevak]" under the PSA. Id., Ex. C at 1. The guaranty agreement limited Appellant's liability to $20 million.

         On October 9, 2009, the parties executed amended sale documents with changes to several provisions not relevant here. Appellant signed another guaranty agreement in connection with that contract. Appellant also executed a declaration representing that he had a personal net worth of approximately $24 million. On October 14, 2009, Debtor filed a motion asking the bankruptcy court to approve the sale to Sevak. GECC objected, raising concerns about the sale's viability.

         In an effort to address GECC's concerns and obtain the bankruptcy court's approval, the parties decided to modify the proposed sale a second time. On November 10, 2009, they executed a Second Amendment to the Purchase and Sale Agreement (the "Second Amended PSA"), which increased the cash down payment to $2 million and reduced the promissory note to $44.2 million. See Dkt. No. 23 at 56. Although the Second Amended PSA did not say so explicitly, Debtor intended to assign the promissory note to GECC in order to sell the Hotel free and clear of GECC's lien. GECC therefore remained interested in the sale and in particular in Shah's guaranty. At the initial hearing on the motion to sell on November 16, 2009, the bankruptcy court indicated that it would need evidence to support Appellant's claimed financial wherewithal. Debtor and GECC stipulated to continue the hearing on the motion until December 16, 2009. Afterwards, Debtor asked Appellant to obtain appraisals of his own property holdings, which were the basis of much of Appellant's claimed net worth.

         Appellant, however, refused to provide any more financial information. He also declined to execute another amended PSA in which he would agree to pay for the requested appraisals. By that time, Appellant explained at trial, providing that information would be pointless; the value of his properties had declined significantly, and he was no longer worth anywhere near $24 million. He offered no further evidence of his situation. Ultimately, GECC foreclosed on the Hotel, and Debtor's estate received nothing from the foreclosure proceeds.

         B. Procedural Background

         Appellee filed an adversary complaint against Sevak, Appellant, and his wife on August 11, 2011. See App. to Appellant's Brief, Vol. I at 1. Appellee later filed an amended adversary complaint against Appellant and Sevak. See Dkt. No. 19 at 45 ("Compl."). Appellee alleged five claims: (1) breach of contract against Sevak; (2) breach of limited guaranty against Shah; (3) intentional interference with contractual relationship against Shah; (4) fraud against Shah; and (5) negligent misrepresentation against Shah. Compl. ¶¶s 41-77.

         The bankruptcy court held a trial on May 6 and 7, 2013. Order at 1. After trial, it issued an order with its findings of fact and conclusions of law. See id. The bankruptcy court found for Appellee only on the claim that Appellant had breached the ...

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