In re Shubh Hotels Pittsburgh, Inc., Bankr. No. 10-26337JAD (Bankr. W.D. Pa. July 24, 2012)
The Creditor Trust and Plan Proponents of the debtor’s chapter 11 plan filed motions for summary judgment with respect to claim objection, asserting that the claimant affiliated with the debtor had made equity contributions, rather than loans, to the debtor and, therefore, such claim should be denied. Based upon the lack of documents evidencing loan terms, interest rates, maturity dates, balance sheet entries, or any other support that the cash infusions were loans, as well as contradictory testimony of the claimant, the court granted summary judgment, holding that the "debt" should be recharacterized as an equity contribution and, therefore, did not support the claim.
Shubh Hotels, LLC (SH), at the direction of its sole managing member (Bisaria), transferred funds between various hotel entities in which Bisaria maintained an interest. One such hotel was Shubh Hotels Pittsburgh, LLC, which filed a chapter 11 petition. SH filed a proof of claim in the amount of $15.2 million, asserting that it had a general unsecured claim for "loans to the corporation." No loan agreements or any other type of documentation supporting the claim that SH had loaned money to the debtor was filed or ever presented to the court. Additionally, many of the "loans" were made through Bisaria’s personal bank accounts and were booked on the debtor’s records as equity. Bisaria admitted the transactions were structured this way to avoid triggering covenants in pre-existing loan agreements with other lenders that capped the amount of outstanding debt. Moreover, Bisaria, as the debtor’s manager, had executed the debtor’s schedules that did not list the "loans" as outstanding loans. The court evaluated the well-established set of factors used by courts to determine that the cash infusions were properly characterized as equity, and not debt, and granted the motions for summary judgment.
The moving parties, the Creditor Trust and Plan Proponents, pointed to testimony of the Chief Operating Officer of SH that the cash transfers were entered on the debtor’s books as equity, and that the debtor’s balance sheet (prepared seven days before the petition date) did not show that any money was due to SH. Further, the debtor’s bankruptcy schedules (signed by Bisaria) did not show any money owed to SH. SH was unable to present any evidence that the transfers constituted loans. The court reviewed the actions in light of a list of factors, including: the presence or absence of a fixed maturity date and schedule of payments; the presence or absence of a fixed rate of interest and interest payments; the adequacy or inadequacy of capitalization; and the identity of interest between the creditor and the stockholder. The court found particularly persuasive Bisaria’s testimony that the "loans" would be repaid "whenever it had the cash flow available" as indicative of an equity position rather than a debt. The court readily found that the factors weighed heavily in favor of equity infusions, rather than loans.
SH argued that summary judgment was not appropriate because the intent of SH regarding the transfers was at issue. "Though summary judgment is generally inappropriate when intent is an issue, it may be granted when all reasonable inferences defeat the claims of a party, or that party has rested merely on unsupported speculation." Here, the court found the moving party had met its burden establishing that the advances should be characterized equity, and that the intent of the parties was reflected by the evidence supporting the recharacterization, thereby shifting the burden to SH. Because SH could not produce a scintilla of evidence to prove that its intent was that the advances would be treated as loans (beyond self-serving testimony), the court held that summary judgment was appropriate. As the court noted, "this stage of the case is ‘put up or shut up’ time," and SH failed to put up any evidence to support its claim.
This case highlights the factors used by courts to characterize a claim as debt or equity. It also demonstrates that the stated intent of parties post-transaction may be insufficient to overcome overwhelming evidence in support of contrary assertions. Moreover, questions of intent, although typically factual, may be resolved at the summary judgment stage when a position is without any factual support, aside from self-serving testimony.