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Patel v. Patel (In re Patel)
Citations: 536 B.R. 1; 2015 Bankr. LEXIS 2797; 2015 WL 5012149Docket: No. 7-10-12627 JA; Adversary No. 10-1200 J
Court: United States Bankruptcy Court, D. New Mexico; August 21, 2015; Us Bankruptcy; United States Bankruptcy Court
Plaintiffs, Usha Patel and Hasmukhbhai K. Patel, filed an adversary complaint against Defendants, alleging fraud and embezzlement through the misappropriation of funds from their jointly owned limited liability company, Roshan Hospitality, LLC. They seek a non-dischargeable judgment totaling $581,473.73 under 11 U.S.C. §§ 523(a)(2)(A) and 523(a)(4). The Court found that Usha Patel is entitled to a non-dischargeable judgment of $35,946 based on her direct claims against Defendants, but ruled that Plaintiffs could not assert a direct claim for amounts linked to the siphoning of company funds. The case's procedural history includes the filing of the complaint in December 2010, the appointment of different legal counsel, extensive discovery, and a protracted trial process that involved multiple adjournments and a failed mediation. The evidentiary phase concluded in December 2014, followed by lengthy closing arguments and post-trial briefings, which concluded in spring 2015. The trial was complicated by conflicting witness testimonies and the introduction of thousands of pages of exhibits, some of which were difficult to interpret. The parties involved are family members, with Usha and Danny being siblings. Roshan Hospitality, LLC, was established in 2002 by Usha, Mina, and Danny to operate a Microtel Inn in Tucumcari, New Mexico, with significant personal guarantees on a loan for the hotel purchase. The ownership stakes were distributed as follows: Danny held a 75% interest, Usha had 15%, and Mina owned 10%. Danny's initial investment of $290,000 in Hospitality included a $57,000 loan from Usha. In late 2004 or early 2005, Usha and Danny acquired Mina’s 10% ownership in Hospitality, with Usha paying Mina $22,000 for an additional 5% and loaning Danny $22,000 for the remaining 5%. Consequently, Danny held an 80% interest in Hospitality, while Usha held 20%. During the same period, they, along with Mina, established Roshan Foods, LLC, which secured a $1,025,000 loan from Tucumcari Federal Savings and Loan Association to purchase a Long John Silvers Restaurant. Hospitality, along with Usha, H.K., and Danny, guaranteed this loan and additional loans from Manifest Funding and Wells Fargo Bank for operational costs. Initially, Danny owned the majority of Foods, but Usha acquired an additional 30% around 2005, leading to equal ownership between Usha and Danny. H.K. was initially designated to operate Foods but never took an active management role. In late 2005, Usha and Danny formed another LLC, Roshan Lodging, LLC, each owning 50%, to construct a Sleep Inn hotel in Tucumcari. To fund the land purchase for the hotel, Hospitality refinanced the Microtel Inn and loaned the proceeds to Lodging. Usha exited her interest in Foods by mid to late 2006. Patty and Danny engaged in preliminary work for the Sleep Inn project but abandoned it around 2008. Patty and H.K. were never members of the Roshan Entities—Hospitality, Foods, and Lodging—holding only community property interests through their spouses. Patty and Danny managed the Roshan Entities, residing in Tucumcari, while Usha and H.K. lived in Houston. Danny managed the Microtel Inn, and Patty maintained records and oversaw financial reporting, including daily and monthly reports for tax preparation. Although there was no formal contract regarding their compensation, Hospitality's Operating Agreement allowed for member compensation, and the parties verbally agreed on Patty and Danny’s salaries, which were initially categorized as compensation and later as 'guaranteed payments to partners.' Hospitality's founding members orally agreed on a combined salary of $3,000 per month for Patty and Danny, which was later increased to $5,000 around 2004-2005 with Usha's consent, granted as part of her purchase of an additional 5% interest from Mina. However, Usha did not agree to any further salary increases thereafter. In addition to their salary, Patty and Danny received $500-$1,000 biweekly in hourly wages for working at the Microtel Inn, although it is unclear if Usha and H.K. were aware of or consented to these additional payments. The Roshan Entities were managed informally, with assets often commingled among Hospitality, Foods, and Lodging, as well as with Patty and Danny’s personal assets. For instance, Hospitality sometimes covered debts for Foods and vice versa, and Patty and Danny frequently used their personal credit cards for company expenses without a credit card in the company's name. Usha had access to Hospitality's Wells Fargo account but did not oversee its activities or check on its financial health. Between 2003 and 2007, Usha received distributions from Hospitality and repayments related to loans made to Danny, during which time the siblings maintained a cordial relationship. Starting around 2007, Hospitality and Foods faced financial difficulties, compounded by a failed health inspection at Long John Silvers and a subsequent murder of a front desk clerk at the Microtel Inn, leading to staff resignations and increased workload for Patty and Danny. Additionally, new hotels opened nearby, diminishing the Microtel Inn's market share. By 2008, creditors began collection efforts against Foods and Hospitality, prompting Patty and Danny to engage in inappropriate business practices to shield assets from creditors, including depositing hotel revenues into personal accounts and unilaterally increasing their salaries. Patty and Danny engaged in questionable business practices impacting Hospitality's finances before its financial troubles became apparent. At trial, Usha and H.K. provided expert testimony and a report detailing losses attributed to these practices, categorizing certain transactions as fraud, particularly where Hospitality's funds were used for other entities or unaccounted cash. However, the expert lacked crucial information, including testimony from Patty and Danny and relevant documents, which would have reclassified these transactions as merely suspect rather than fraudulent. Although the expert acknowledged the need for adjustments to his report based on new evidence, he failed to specify these changes in his testimony or amend the report afterward. Nonetheless, the court determined that deficiencies in the expert report did not undermine Usha and H.K.'s claims because misappropriations from these transactions supported a derivative claim against Hospitality. Usha, as a member of Hospitality, could not make a direct claim and had waived any derivative claims. Key issues identified in the complaint included: 1. **Missing Cash**: Prior to 2008, Patty and Danny deposited most cash receipts from the Microtel Inn into Hospitality's account but shifted to their personal account thereafter to protect funds from creditors of Foods, which Hospitality had guaranteed. They deposited at least 70% of receipts from 2008-2011 into their personal account, commingling these funds with their own. In 2009, they began storing cash in a safe to further shield it from creditors, with approximately $84,236.85 unaccounted for by October 2011. 2. **Employee Payments**: Patty and Danny reduced Hospitality’s cash by cashing employee paychecks, leading to double payments—once when deposited into their account and again when cash was given to employees at the front desk. Some employees endorsed their checks to Patty and Danny, who then paid them in cash, exacerbating the financial mismanagement. Patty treated both her personal and Hospitality’s funds as a communal resource for various payments, benefiting herself, Danny, Hospitality, and Usha. Patty and Danny utilized their personal accounts and credit cards to pay for operating expenses and supplies for Hospitality and Foods, which included subsidizing a Long John Silvers owned by Foods. Usha and H.K. allege that they fraudulently misappropriated over $300,000 from the Microtel Inn, a claim deemed substantially exaggerated by the Court. The Court found that while Patty accounted for most missing cash, Usha suffered no harm from this accounting. If any cash went unaccounted for or was not used for Hospitality’s benefit, a claim could be made against Patty and Danny, but Usha and H.K. cannot pursue a direct claim for this loss. From 2003 to 2011, Patty and Danny made various payments from Hospitality’s bank account to vendors, including personal expenses, though most benefitted Hospitality. They used personal credit cards to cover Hospitality’s costs, later reimbursed by Hospitality, covering expenses like cellular bills and transportation. Controversies arose regarding payments made to Shamrock Foods after 2009, especially following a supply dispute. Patty and Danny arranged for their Econolodge to purchase supplies from Shamrock for Hospitality's use, with Danny delivering supplies to the Microtel Inn. Despite claims of inflated operating expenses exceeding $300,000, the Court found that Usha was not harmed by the accounted payments, and again, they could not pursue a direct claim for any losses. In 2007, Patty and Danny raised their combined salary from $5,000 to $10,500 without the consent or knowledge of Usha and H.K. Patty and Danny sought increased compensation due to extended work hours following significant incidents at Long Johns Silvers and the Microtel Inn. They received salaries from Hospitality irrespective of their actual work performed for Hospitality or Foods, with evidence suggesting they collected at least $7,500 monthly from 2007 to likely 2012, though there is ambiguity regarding Patty's salary post-2010 and Danny's salary cessation. The Court determined that Usha and H.K. could not pursue a direct claim for any excess compensation Patty and Danny received. Between 2004 and 2009, Patty and Danny secured multiple loans from Hospitality, with tax returns indicating a total of around $317,000 in loans to Danny for 2009 and 2010, although the figures may be inaccurate. The Court confirmed specific loans of $35,000 in 2005, $65,000 in 2008, and $73,000 in 2009, with a total debt of at least $80,000 owed to Hospitality by May 2010. Hospitality also lent at least $381,000 to Lodging for land acquisition and architectural plans, funded mainly through refinancing the Microtel Inn in 2006, during which Usha held a 50% stake in Lodging. Repayments from Lodging to Hospitality totaled at least $63,000 in 2006 and 2007. The Court found no fraudulent intent by Patty and Danny regarding the loans, asserting they intended to repay them, which were properly recorded on tax returns. A significant portion of the loan proceeds was utilized to support the financially struggling Foods, co-owned by Danny and Usha. Danny’s decision in 2005 to allow Usha a larger stake in Foods was seen as an attempt to address previous loans from Hospitality. Although some loan proceeds may have been effectively converted into distributions, they equally benefited Usha. The Court further established that Usha and H.K. were aware of and accepted the loans made to Lodging. In early 2010, Danny was involved in an accident while driving a truck owned by Hospitality, which was acquired by trading in another vehicle previously owned by him. The truck’s title identified Hospitality and Patty as co-owners. Hospitality's insurer classified the accident as a total loss of the truck and issued a settlement check for $6,116.67, payable jointly to Hospitality and Patty. Patty deposited the check into the Econolodge account to shield the funds from Hospitality's creditors, believing the truck belonged to her and Danny. She subsequently used part of the proceeds to buy a new truck for $11,000, titled in Danny's and their son's names, partially funded by the insurance money. Any misappropriation of these funds caused damage to Hospitality, not Usha. In 2009, Wyndham Hotels acquired the Microtel Inn franchise and mandated upgrades costing approximately $120,000 for the Tucumcari location. Hospitality, unable to afford these upgrades, could terminate the franchise agreement if occupancy fell below 49%. Patty investigated the potential revenue impact of lowering occupancy but ultimately chose not to proceed. Despite this, she unintentionally included pro forma financial reports with documents sent to Hospitality's accountant, leading to erroneous figures in the 2009 tax returns. Although Patty corrected this error, Usha and H.K. were not defrauded or harmed by the pro forma reports. In 2003, Usha obtained a $29,000 line of credit from Wells Fargo, intended for Hospitality’s expenses. However, Patty and Danny withdrew the full amount in 2007 for personal use without Usha's knowledge or consent. Patty claimed they repaid Usha through checks from December 2007 to November 2009, but this testimony lacked credibility due to insufficient supporting records and contradictory check notations. The court determined that Patty and Danny fraudulently misappropriated the funds, which were never reimbursed. Additionally, a 2010 Schedule K-1 indicated a $6,946 distribution to Usha from Hospitality, which she did not receive. The court found that the funds were entrusted to Patty and Danny, who fraudulently misappropriated the distribution for their own use. Between 2003 and 2009, Patty and Danny neglected to pay lodging and gross receipts taxes for Hospitality, ceasing payments entirely in 2010 and 2011. As a result, the New Mexico Taxation and Revenue Department imposed tax liens totaling approximately $220,000, while the City of Tucumcari added two liens amounting to about $27,000 in 2008 and 2009. Hospitality has not settled its outstanding tax obligations. On February 4, 2008, Holiday Inn Express issued a $20,000 check to Danny Patel, which he and Patty deposited into their personal account. From this, they allocated $14,000 to Hospitality and retained $6,000 for personal use. Usha and H.K. alleged the check was intended for Hospitality, but evidence did not support this claim, and the relationship between the Holiday Inn Express, Hospitality, and Danny was unclear. Patty testified that she borrowed from Holiday Inn Express and repaid part of the loan, with no evidence of fraudulent activity linked to the check. In January 2006, Patty facilitated a $5,000 loan from Hospitality to Daxa Patel, without Usha's consent, who was unavailable at the time. There is no indication that Daxa repaid this loan. By 2009, the Roshan Entities faced severe financial difficulties, leading to Usha and Danny transferring the Long John Silver’s operations to Patty’s brother, Mahendra Patel. After moving to Albuquerque, Patty and Danny's management decisions caused friction with Usha and H.K. In 2009, Foods defaulted on its mortgage, prompting Tucumcari Federal to initiate a foreclosure action, resulting in a judgment against Foods, Hospitality, and the Patels for over $1 million in February 2010. Hospitality subsequently defaulted on its mortgage with Sienna Capital, which began foreclosure proceedings in August 2010. During this time, communication between Patty and Danny and Usha and H.K. deteriorated despite attempts at mediation. On July 18, 2012, a foreclosure judgment was issued by the State Court in favor of HSBC Bank USA against Hospitality, totaling $2,497,103.54 plus daily fees of $511.86 until paid. The extent of any deficiency related to this judgment is uncertain, as is HSBC's credit bid at the foreclosure sale. Additionally, a significant deficiency from a previous 2010 judgment by Tucumcari Federal remains unpaid, with Hospitality unable to fulfill its obligations. Hospitality owes at least $270,000 in back taxes, contributing to a total liability of approximately $3,809,000 from both judgments and unpaid taxes. Financial assessments indicate that Hospitality has about $1,597,000 in assets, primarily from a hotel valued at $1,200,000 (though its value may be overstated), land worth $313,000, and $84,000 in cash. The evidence suggests Hospitality is insolvent by over $400,000, which correlates to Usha’s claim for damages, excluding attorney’s fees. The business failed due to various factors, including competition and a violent incident at the hotel, with no evidence linking the failures to the actions of Patty or Danny. Patty and Danny declared bankruptcy under Chapter 7 on May 24, 2010, followed by Usha and H.K. approximately seven weeks later, receiving their discharge on September 28, 2010. The court determined that the failures of Hospitality and the financial distress of Usha and H.K. were not caused by Patty and Danny, despite Usha and H.K.'s strained relationship with them. Usha and H.K. are pursuing a nondischargeable judgment against Patty and Danny for $581,473.73, alleging fraud and embezzlement under 11 U.S.C. § 523(a)(2)(A) and § 523(a)(4). Their claims include multiple categories of alleged misconduct, such as misappropriation of company funds, personal expenses, insurance proceeds, and unauthorized loans. Usha and H.K. seek attorney’s fees, costs, and sanctions for perjury while waiving all derivative claims on behalf of Hospitality due to the company's significant debt, which would preclude personal financial benefit from any recovery. They assert that their claims should be categorized as direct claims rather than derivative ones. The court must first determine the standing of Usha and H.K. to assert these claims. Patty and Danny argue that any wrongdoing lies with Hospitality and thus Usha and H.K. cannot claim damages. Usha and H.K. contend that under New Mexico law, particularly the Limited Liability Company Act (N.M.S.A. 1978, 53-19-1 et seq.), they have standing for direct claims, as the Act does not mandate derivative actions and provides protections for managing members against liability except in gross negligence or willful misconduct cases. Sections 53-19-58 and 53-19-16(B) of the Act allow members to pursue actions in the company’s name under certain conditions but remain silent on the direct versus derivative claim distinction. They do not alter the common law principles governing derivative actions. Thus, Usha and H.K. argue that the nature of their claims should be recognized as direct based on these statutory provisions and the unique circumstances of their closely held LLC. Section 53-19-65 states that principles of law and equity, including those related to corporations and their owners, supplement the NMLLCA unless otherwise specified. The Court will apply New Mexico common law to assess whether Usha and H.K's claims are direct or derivative. Generally, New Mexico law permits shareholders to assert derivative claims but not direct claims for injuries to the corporation, as established in Marchman v. NCNB Texas Nat. Bank. Shareholders may only pursue direct actions if they suffer a separate and distinct injury from that of other shareholders or if a special duty exists between the wrongdoer and the shareholder. The New Mexico Court of Appeals has clarified the distinction between direct and derivative claims with a two-part test: identifying who suffered the harm (the corporation or the shareholder) and who would benefit from any recovery. Applying these principles, the Court determines that Usha's claims of embezzlement and misappropriation of corporate assets are derivative. The harm is inflicted on the company, not directly on its members, as any recovered funds would go to the company, and all members share in the loss of value. The prevailing legal authority supports this conclusion, categorizing misappropriation and corporate waste as derivative claims. Minority stockholders are entitled to protection against fraud or breaches of trust by corporate officers or directors, with the ability to seek relief through derivative actions for mismanagement or abuse of discretion. Embezzlement is recognized as a derivative claim, meaning that damages incurred are owed to the company rather than individual shareholders. Various case precedents support this principle, indicating that claims for defalcation and embezzlement must be pursued by the company, not individual members. In this context, Usha claims damages of 20% related to embezzlement or misappropriation of corporate assets, reflecting her ownership stake in Hospitality. Specific categories of misconduct underpin her claims, including the misappropriation of personal expenses, cash, bank funds, insurance proceeds, loan proceeds, and unauthorized loans. However, Usha lacks standing for direct claims based on most categories since they pertain to the company, not her individually, with exceptions for Category 6 (funds from a line of credit she co-owned) and Category 7 (her 2010 distribution, which became her personal property upon distribution). Claims for attorney’s fees and sanctions related to perjury are also deemed direct as they arise from the litigation process. Lastly, Usha and H.K. propose that the court consider relaxing the traditional standards that distinguish between derivative and direct claims due to the unique circumstances of their case. Usha and H.K. contend that the policy justifications for derivative actions do not apply to closely held companies, particularly when the only members involved are the litigants. New Mexico courts, as established in *Clark v. Sims*, have indicated that the strict enforcement of derivative suits may not be necessary in closely held corporations. The court recognized that the distinction between derivative and direct actions can become a technicality when only two parties are involved, especially when one is in control and the other is not. The *Clark* decision highlighted that traditional reasons for requiring derivative suits—such as preventing multiple lawsuits, protecting corporate creditors, safeguarding shareholder interests, and compensating injured shareholders—were not relevant in the context of closely held corporations. It noted that in such cases, the risks of multiple suits or creditor harm are minimal, and any recovery from a derivative suit would likely return to the control of the defendant rather than benefit the injured party. However, in this instance, allowing Usha to bring a direct claim would unfairly prejudice third-party creditors and violate the distribution scheme outlined in the New Mexico Limited Liability Company Act (NMLLCA). Usha's claims for damages are based on her 20% equity interest in Hospitality, which she calculates from the total misappropriated funds. According to the NMLLCA, upon the winding up of a company, assets must first be distributed to creditors, then to members, emphasizing the principle that creditors should be paid before shareholders. Permitting Usha to assert a direct claim for misappropriation and embezzlement against Patty and Danny, while Hospitality is no longer operational, would allow her to bypass this statutory distribution scheme and receive funds before settling creditor claims. Therefore, it is deemed inappropriate for Usha and H.K. to pursue these claims as direct actions based on the relaxed standards from *Clark*. The degree of insolvency influences whether the traditional distinction between direct and derivative claims should be adjusted for closely held corporations. If a member asserts both claim types against another member based on the same conduct and the LLC recovers enough through a derivative claim to fully satisfy creditor debts, that member may then pursue a direct claim for any remaining amounts. However, in this case, the Court determined that Usha and H.K. cannot recover enough to pay Hospitality’s creditors in full due to the extent of Hospitality's insolvency exceeding their claims, excluding attorney's fees. Usha and H.K. also lack a valid claim for attorney's fees. Consequently, they do not have standing to assert claims in certain categories because those claims are derivative. The Court will separately analyze Usha and H.K.'s potential success on their direct claims related to misappropriation of funds from the line of credit and a distribution from 2010, as well as their entitlement to damages for attorney's fees and possible sanctions for perjury. Regarding nondischargeability under 11 U.S.C. § 523(a)(2)(A) and § 523(a)(4), Usha and H.K. allege that Patty and Danny obtained funds through fraud and embezzlement and that Danny breached his fiduciary duties to Usha. For § 523(a)(4), which addresses debts arising from fraud or defalcation in a fiduciary capacity, the Court noted that a fiduciary relationship must exist prior to any wrongdoing, which the NMLLCA does not establish between members. Therefore, Usha and H.K. could not support their claims under this section. Nevertheless, they successfully proved their direct claims of embezzlement regarding the line of credit and the 2010 distribution, defined as the fraudulent appropriation of property entrusted to someone. A creditor must demonstrate three elements to establish embezzlement under 11 U.S.C. § 523(a)(4): 1) the creditor's property was entrusted to the debtor; 2) the debtor appropriated the property for an unauthorized use; and 3) the circumstances suggest fraud. In this case, Usha entrusted her jointly owned line of credit to Patty and Danny for Hospitality's expenses. Instead, they withdrew $29,000 from the credit line and used it for personal expenses, contrary to the intended purpose and without Usha’s consent, indicating fraudulent intent. Patty claimed to have repaid Usha, but records showed the payments were for unrelated expenses. Usha also demonstrated that Patty and Danny misappropriated a 2010 distribution of $6,946 intended for her, which was entrusted to Danny as the managing member of Hospitality. Instead of forwarding the funds to Usha, they kept the money for personal use. The court concluded that Patty and Danny embezzled a total of $35,946, which is nondischargeable under § 523(a)(4). The court did not need to address Usha and H.K.'s claims under § 523(a)(2)(A) as the embezzlement claim sufficed. In addition to actual damages, Usha and H.K. sought attorney’s fees, costs, and sanctions for perjury. Patty and Danny contested the appropriateness of these damages, arguing that Usha and H.K. suffered no actual damages due to a prior Chapter 7 discharge. Usha and H.K. cited *Cohen v. de la Cruz*, which supports that debts obtained through fraud can include liabilities such as attorney’s fees and costs, potentially exceeding the value obtained by the debtor. While *Cohen* addressed § 523(a)(2), its reasoning has been applied to other nondischargeable debts. However, the ruling does not automatically entitle claimants to attorney’s fees simply because the claim is deemed nondischargeable. Cohen does not establish an independent right to attorney’s fees for parties prevailing in Section 523 dischargeability proceedings. Instead, it indicates that attorney’s fees mandated by statute can be included in debts deemed non-dischargeable. A party can recover attorney’s fees related to a non-dischargeable debt only if there is an independent legal basis for such recovery. Usha and H.K. lack evidence of any contract or law entitling them to attorney’s fees related to the non-dischargeable judgment, leading the Court to deny their request for fees. However, they may pursue an award of costs by timely filing a motion to tax costs as per N.M. Local Rule 7054-1. Regarding sanctions, Usha and H.K. requested $50,000, claiming Patty lied under oath. The Court denied this request, stating that if Patty's testimony warranted sanctions, the same would apply to Usha and H.K. due to inconsistencies in their testimonies. Additionally, the lengthy trial process and the nature of the testimonies did not meet the threshold for sanctionable conduct. Lastly, Patty and Danny argued that Usha and H.K. mitigated damages by obtaining a Chapter 7 discharge, which is an affirmative defense requiring proof from the defendant. The Court found this argument inapplicable to the misappropriated 2010 distribution, as the bankruptcy discharge did not affect that amount. However, for the $29,000 line of credit debt, if Usha discharged her obligation and incurred no damages from the misappropriation, she would not qualify for a non-dischargeable judgment. The Court noted that Usha filed for bankruptcy three years after the wrongful actions regarding the line of credit, with insufficient evidence on whether she repaid her debt to Wells Fargo before filing. Usha has debts totaling $81,368.19, including $16,743 to Wells Fargo Business Direct Operations, $55,371 to Wells Fargo Business Direct, and $9,254.19 to Wells Fargo Financial Leasing. The court found uncertainty regarding whether Usha discharged a $29,000 line of credit, leading to the conclusion that Patty and Danny did not demonstrate that Usha suffered no damages from her Chapter 7 discharge. Usha is awarded a nondischargeable judgment of $35,946 for direct claims under 11 U.S.C. § 523(a)(4) regarding embezzlement by Patty and Danny. Other claims (Categories 1-5, 8) are deemed derivative, and Usha lacks standing to assert them. The court denied Usha's request for attorney's fees and rejected motions for sanctions against witnesses for perjury. Conflicting testimonies regarding the timing of Danny's acquisition of Usha's interest in a property prevented definitive findings on that matter. Usha's counsel confirmed that her claims were direct, as Usha would not financially benefit from derivative claims. Evidence regarding the fate of funds related to a loan was inconclusive. The court determined that a salary increase for Danny occurred in 2007, based on Patty's testimony. While the exact deficiency amount on the Foods loan after foreclosure was unclear, it was substantial, with estimates ranging from $1,046,000 to $1,086,000. The court discounted various worthless assets when assessing Hospitality's financial situation. The legal framework for analyzing claims involves determining whether the plaintiff's injury is primarily an indirect harm resulting from an injury to another party. Analysis centers on whether the Plaintiff's damages, attributed to the decline in value of Lovelace’s stock due to impaired corporate assets, allow for standing to sue. If it is determined that the Plaintiff's damages are valid, standing is contingent on proving that Defendants owed a special duty to the Plaintiff or that the Plaintiff experienced a unique injury compared to other shareholders. The Court finds that the claim fails because there is no evidence that the proceeds in question belonged to Usha, H.K., or Hospitality. The Court does not need to consider Usha and H.K.’s argument regarding direct claims based on specific categories since it determined that supposed loans from Patty and Danny to Hospitality were not disguised distributions, countering Usha and H.K.’s assertions. The Court established that Patty and Danny intended to repay these loans. Citing the American Law Institute, the Court notes that in closely held corporations, a derivative claim may be treated as a direct action if it does not unfairly burden the corporation or defendants, harm creditors, or disrupt equitable recovery for interested parties. It references prior cases which reinforce the principle that creditors must be prioritized over shareholders in bankruptcy situations. Furthermore, the Court emphasizes that fiduciary duties must exist prior to any alleged wrongdoing to establish a trust relationship, as supported by various legal precedents. The Court examined Usha and H.K.'s bankruptcy schedules with all parties' consent.