Bhatt v. Pragya, Inc. ( 2022 )

IN THE NEBRASKA COURT OF APPEALS
MEMORANDUM OPINION AND JUDGMENT ON APPEAL
(Memorandum Web Opinion)
BHATT V. PRAGYA, INC.
NOTICE: THIS OPINION IS NOT DESIGNATED FOR PERMANENT PUBLICATION
AND MAY NOT BE CITED EXCEPT AS PROVIDED BY NEB. CT. R. APP. P. § 2-102(E).
DHAVAL BHATT AND MEGHA BHATT, FORMERLY KNOWN AS
MEGHAVINI BHATT, HUSBAND AND WIFE, APPELLANTS,
V.
PRAGYA, INC., A NEBRASKA CORPORATION, APPELLEE, AND JAYANTIBHAI PATEL AND
VARSHA PATEL, HUSBAND AND WIFE, THIRD-PARTY PLAINTIFFS, APPELLEES,
AND GREG NEUHAUS, THIRD-PARY DEFENDANT, APPELLEE.
Filed January 4, 2022. No. A-21-153.
Appeal from the District Court for Hall County: MARK J. YOUNG, Judge. Affirmed.
Mark Porto and Ronald Depue, of Wolf, McDermott, Depue, Sabott, Butz & Porto, L.L.C,
for appellants.
Andrew K. Joyce and McKynze P. Works, of Morrow, Poppe, Watermeier & Lonowski,
P.C., L.L.O., for appellees Pragya, Inc., and Jayantibhai Patel and Varsha Patel.
Gregory M. Neuhaus, of Neuhaus Law Office, for appellee Greg Neuhaus.
MOORE, BISHOP, and ARTERBURN, Judges.
MOORE, Judge.
INTRODUCTION
Dhaval Bhatt and Megha Bhatt, formerly known as Meghavini Bhatt (collectively the
Bhatts), appeal from the order of the district court for Hall County, which entered judgment in
favor of Pragya, Inc., a Nebraska Corporation, and Jay and Varsha Patel (collectively the Patels)
in this contract dispute. Finding no error, we affirm.
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STATEMENT OF FACTS
The Bhatts sold a motel located in Grand Island, Nebraska, in 2005 and sought to purchase
another motel in the community. They were acquainted with the Patels and approached them about
investing in a motel.
The parties formed Pragya to purchase the USA Inn located on South Highway 281 near
Grand Island, Nebraska (the motel). On January 13, 2006, articles of incorporation for Pragya were
filed with the Nebraska Secretary of State. The articles authorized Pragya to issue 100 shares of
common stock. On that same date, the Patels and the Bhatts executed and approved Pragya’s
bylaws.
On March 23, 2006, Pragya purchased the motel for $1.2 million. To make the purchase,
Pragya borrowed $800,000 from a bank, secured by a first deed of trust on the property, and
borrowed $100,000 from another source, secured by a second deed of trust on the property. The
Patels paid $340,000 to Pragya, which was applied toward closing costs and the purchase of the
property.
Pragya issued 100 shares of common stock on March 24, 2006 (25 shares to each of the
Bhatts and 25 shares to each of the Patels). All 100 shares represented by the certificates issued on
March 24 remained outstanding at the time of trial, with the Bhatts’ original stock certificates
being held in escrow by Greg Neuhaus, the attorney who drafted the corporate documents for
Pragya, the stock pledge agreement, and the promissory note. Pragya has not issued any additional
shares of stock, and none of the stockholders have transferred any shares. Pragya has held no
annual meetings and no elections of board members or officers since the initial meeting at the time
of incorporation.
The parties also entered into a stock pledge agreement and promissory note, both executed
on March 24, 2006. The promissory note and the stock pledge agreement are the only written
documents confirming any loan transaction between the Bhatts and the Patels, the Bhatts and
Pragya, or the Patels and Pragya. The stock pledge agreement, which pledges all of the Bhatts’
Pragya stock as collateral for the promissory note, reads, in part:
WHEREAS, [the Bhatts] have purchased [50] shares of [Pragya] as authorized by
the Articles of Incorporation and By-Laws; and
WHEREAS, [the Bhatts] have borrowed from [the Patels] and [the Patels] have
loaned to [the Bhatts] the amount of $152,500.00 to purchase said shares of [Pragya] and
have executed a Promissory Note in favor of [the Patels], of even date herewith . . .
....
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained and in consideration of the fulfillment upon the part of [the Bhatts] under
the aforereferenced Promissory Note, the undersigned does hereby pledge to [the Patels],
a total of [50] shares of the common shares of [Pragya] which are now issued and
outstanding to [the Bhatts], as security for the payment of [the Bhatts’] Promissory Notes
[sic] of even date herewith payable to [the Patels.]
This pledge is on the following terms and conditions:
....
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3. In the event that any installment of principal or interest on any of the Promissory
Notes [sic] secured hereby is not received by [the Patels] within [30] days after due date,
whether by acceleration or otherwise, [the Patels] shall immediately notify [the Bhatts] in
writing of the default. If the payment of the installment and interest due has not been made
or other default cured within [15] days after giving said notice, [the Patels] shall have the
right to declare all installments of principal and interest on the Promissory Note
immediately due and payable and shall have the right to immediately foreclose on this
collateral in the manner provided by law.
The stock pledge agreement further provides that the Bhatts’ stock would be delivered to Neuhaus
as escrow agent who would hold the stock until payment in full of the promissory note.
The promissory note provides:
FOR VALUE RECEIVED, the [Bhatts] promise[] to pay to the order of [the Patels]
the principal sum of [$152,500] together with interest at the rate of [7%] per year, in annual
installments as set forth herein on March 24 of each year beginning March 24, 2007 and
continuing thereafter until the full amount is paid. [The Bhatts] agree that all distributions
received by [the Bhatts] from [Pragya] after payment of Federal and State income taxes
due on said distributions, will be applied to the principal and interest of this note. [The
Patels] agree to accept such amounts as full annual payments.
For purposes hereof all payments due and payable herein shall be considered as
timely made if made within [30] days of the date they become due and payable. Should
[the Bhatts] fail to pay any of the installments when due, the unpaid principal balance shall
bear interest at the rate of [10%] per annum during the period of delinquency.
If any one or more of the following events should happen: there should be a default
in the payment of interest or an installment of principal due hereunder, which default
should continue for a period of [5] days, or [the Bhatts] hereunder should make an
assignment for the benefit of creditors, or attachment or garnishment proceedings should
be commenced, or receiver be appointed over any property of [the Bhatts] hereof, or
proceedings be instituted by or against [the Bhatts] hereof under the Bankruptcy Act, as
amended, any legal holder hereof shall have the option, without notice or demand, to
declare this Note immediately due and payable.
....
[The Bhatts] hereof waive[] presentment, demand, notice of dishonor and protest.
This Promissory Note is secured by a Stock Pledge Agreement.
The Bhatts resided at the motel and managed the property from March 2006 through
approximately April 1, 2014. Dhaval had control over the finances of Pragya and the business.
Between June 8, 2006 and July 14, 2009, the Patels received checks written on the Pragya checking
account totaling $200,073.08. Dhaval did not inform the Patels whether these checks represented
distributions as contemplated by the promissory note or were for some other purpose. The Patels
made no inquiry of Dhaval concerning why the checks were being issued. While managing the
motel, Dhaval made numerous purchases of a personal nature using Pragya funds, and he made
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questionable ATM withdrawals at a local keno bar. The Bhatts made no payments to the Patels
from August 2009 onward, through Pragya or otherwise.
After discovering at least some of Dhaval’s actions, the Patels came to Nebraska, and the
Patels took over management of the motel in April 2014. The Patels listed themselves as the sole
shareholders of Pragya on Pragya’s corporate tax returns after taking over operation of the motel
(schedule K-1’s for an amended 2014 tax return show 25-percent ownership by each party;
schedule K-1’s for original 2014 return and returns from 2015 through 2019 show 50-percent
ownership by each of the Patels). On September 4, the Patels sent the Bhatts a notice of default
and acceleration of debt. The Bhatts attempted to convene a special meeting of shareholders by
sending notice to the Patels’ attorney in April 2015, but no meeting was held by Pragya in response
to the request.
On May 28, 2015, the Bhatts filed a complaint in the district court, seeking dissolution of
the corporation, an accounting for the time period of April 2014 to the present, and appointment
of a receiver. In their subsequent amended complaint, the Bhatts added a request for a monetary
judgment to their claim for an accounting and also added a claim for reformation of the promissory
note.
In their answer to the Bhatts’ amended complaint, the Patels raised a number of equitable
defenses. In a counterclaim, the Patels alleged several causes of action, including requests for an
accounting for a time period ending in April 2014, and for foreclosure of the shares and stock
certificates which were the subject of the stock pledge agreement. They asked the court to
determine the amount due under the promissory note, and they asked that, in the event strict
foreclosure of the shares and stock certificates was not awarded, the court make such other findings
as necessary to fully compensate them for losses suffered due to the Bhatts’ default on the
promissory note. The Patels also brought a third-party complaint against Neuhaus based solely on
his status as an escrow agent with regard to the stocks referred to in the stock pledge agreement.
They asked that he be ordered to make delivery of the stock certificates in his possession to the
Patels.
On January 13, 2016, the Bhatts filed a chapter 7 bankruptcy. The Patels and Pragya were
listed as creditors and received timely notice of the bankruptcy. The Bhatts specifically listed the
debt from the promissory note on the bankruptcy schedule. The bankruptcy trustee took no action
and abandoned all claims between the parties arising out of the Bhatts’ Pragya stock, the
promissory note, and the stock pledge agreement. The Bhatts received a general discharge from
the bankruptcy court at some point prior to trial in the present case.
In October 2017, the Bhatts sought partial summary judgment with regard to the
affirmative defenses asserted by the Patels, as well as to the Patels’ first cause of action in their
counterclaim, for an accounting for a time period ending in April 2014. On March 13, 2018, the
court sustained the Bhatts’ summary judgment motion in part and overruled it in part. The court
found in favor of the Bhatts on some of their arguments as to affirmative defenses raised by the
Patels and dismissed their arguments as to other such defenses. The court further found in favor of
the Bhatts as to the Patels’ first cause of action of their counterclaim. The court determined that as
a result of the bankruptcy discharge, the Bhatts have no personal liability for any deficiency under
the promissory note and stock pledge agreement; it also found that the other claims asserted by the
Patels in their counterclaim were inadmissible to constitute an offset. The court concluded the
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order by stating, “All other relief requested but not discussed is hereby denied.” On March 28, the
Bhatts dismissed without prejudice the claim for an accounting set forth in their amended
complaint. The Patels appealed, and this court dismissed for lack of jurisdiction as the district
court’s order had not disposed of all the claims of all the parties. See Neb. Rev. Stat. § 25-1315(1)
(Reissue 2016). We also note that a previous appeal was filed in this case, see Bhatt v. Pragya,
Inc., case No. A-18-381, which was disposed of without opinion on May 15, 2018.
Trial was held on the parties’ remaining claims on October 1 and 2, 2020. The district court
heard testimony from Dhaval and Varsha, who testified primarily through interpreters in the
Gujarati language. The court also heard testimony from an accountant, hired by the Patels, and
received numerous documentary exhibits offered by the parties. We have summarized the relevant
evidence above. Further details regarding the testimony and reports from the accountant will be
set forth in the analysis section.
On December 17, 2020, the district court entered judgment on the parties’ remaining
claims. With respect to the Bhatts’ claim for corporate dissolution, the court found the evidence
showed that Pragya had continued to fill its corporate function by operating the motel which is its
sole business. It determined that the Patels’ actions in not holding corporate meetings or in
consulting with the Bhatts had not resulted in the corporation being unable to function, and it stated
that the Bhatts had other remedies available to pursue and repair any alleged wrongdoing by the
corporation. The court also denied the relief requested by the Bhatts in their claim for appointment
of a receiver.
With respect to the Patels’ counterclaims, the district court determined that the plain
language of the stock pledge agreement indicated that the parties entered into an agreement for the
Patels to loan the Bhatts funds to purchase stock in Pragya. The court found it “noteworthy that
the Patels and not Pragya are parties to the Note.” The court also found that the promissory note
must be read according to the “plain and ordinary meaning of the words used.” The court rejected
the Bhatts’ argument that the language of the note showed that the parties agreed that payments
from distributions by Pragya were to be the sole method of repaying the note. The court stated,
“Nothing in the plain language used in the Note indicates that the Patels agreed to forego payments
from the Bhatts in the years in which Pragya did not make a distribution.” The court specifically
found Dhaval’s testimony that the Patels agreed to accept payments from Pragya in repayment of
the note as the sole method of repaying the note “not credible.” However, the court also found
“untenable” the Patels’ initial position that none of the funds paid from Pragya to them should be
applied to the note. The court stated that while the finances of Pragya “are murky and as [sic]
corporate governance nonexistent,” the motel made money during the years in question and the
Patels accepted $200,073.08 from Pragya. The court found the “only sensible explanation for the
payments,” which were not questioned by the Patels, was that the funds paid were distributions by
Pragya.
The district court determined that as 50-percent shareholders, the Patels were entitled to 50
percent of the distributions ($100,036.54), as were the Bhatts, and that the Bhatts’ share of
$100,036.54 should be considered as payments made by them to the Patels under the language of
the note. Accordingly, the court reduced the amount owed by that much. The court also determined
that because the promissory note had no due date, it was a demand note. Because the Patels made
demand on the note on September 22, 2014, and the Bhatts failed to pay the balance upon demand
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in full, the court found that the Bhatts are in default and the note accrued interest at the penalty
rate set forth in the note. The court found in favor of the Patels in the amount of $176,804.84 plus
interest at 10 percent per year. The court directed judicial foreclosure and sale of the Bhatts’ stock
certificates of Pragya for the payment of the judgment and fees. Finally, the court ordered
third-party defendant Neuhaus to deliver the Bhatts’ stock certificates to the Patels.
The Patels filed a postjudgment motion seeking attorney fees and asking the district court
to enter an order nunc pro tunc to correct the misstatement of a monetary amount in the court’s
factual findings. The Bhatts also filed a motion to alter or amend, asking the court to amend the
judgment to reverse its finding that the Bhatts are in default on the promissory note and further
reducing the remaining amount due on the note. The court entered an amended judgment correcting
the misstated monetary amount in its factual findings. The court denied the Patels’ motion for
attorney fees and also denied the Bhatts’ motion to alter or amend judgment. The Bhatts
subsequently perfected their appeal to this court.
ASSIGNMENTS OF ERROR
The Bhatts assert that the district court erred in concluding that they were delinquent on
the promissory note, determining the amount due and owing from the Bhatts to the Patels, and
authorizing foreclosure of the note.
STANDARD OF REVIEW
In a bench trial of an action at law, the trial court is the sole judge of the credibility of the
witnesses and the weight to be given their testimony; an appellate court will not reevaluate the
credibility of witnesses or reweigh testimony but will review the evidence for clear error. Benjamin
v. Bierman, 305 Neb. 879, 943 N.W.2d 283 (2020). Similarly, the trial court’s factual findings
have the effect of a jury verdict, and an appellate court will not disturb those findings unless they
are clearly erroneous. See Equestrian Ridge v. Equestrian Ridge Estates II, 308 Neb. 128, 953
N.W.2d 16 (2021).
After a bench trial of a law action, an appellate court does not reweigh evidence, but
considers the evidence in the light most favorable to the successful party and resolves evidentiary
conflicts in favor of the successful party. McGill Restoration v. Lion Place Condo. Assn., 309 Neb.
202, 959 N.W.2d 251 (2021). And, an appellate court resolves a trial court’s determination of law
independently of the lower court’s conclusions. See Equestrian Ridge v. Equestrian Ridge Estates
II, supra.The construction of a contract is a matter of law, in connection with which an appellate
court has an obligation to reach an independent, correct conclusion irrespective of the
determinations made by the court below. Valley Boys v. American Family Ins. Co., 306 Neb. 928,
947 N.W.2d 856 (2020).
ANALYSIS
The Bhatts’ appeal centers on the district court’s determination that they were delinquent
in their obligations under the promissory note and that the Patels were entitled to make demand
pursuant to the acceleration clauses of the promissory note and the stock pledge agreement, at an
increased interest rate from the date of the purported delinquency, and triggering the stock
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foreclosure provision. They argue that the promissory note was not a demand note as determined
by the court. They also argue that they complied with all financial obligations and deadlines set
forth in the note, thus precluding penalties, including foreclosure, pursuant to the terms of the note.
The district court determined that because the promissory note between the parties has no
due date, it is a demand note, citing Erickson v. Newell, 183 Neb. 641, 163 N.W.2d 286 (1968).
The Bhatts argue that the promissory note was not a demand note because (1) the note was not due
and payable immediately upon its execution (given that the note provided the first installment was
to be paid on March 24, 2007, 1 year after execution of the note, and annually on March 24
thereafter), (2) the note contained an acceleration clause, and (3) the court’s interpretation of the
note as a demand note rendered meaningless the language providing for payment from corporate
distributions.
We need not determine whether the promissory note at issue is a demand note such that it
was immediately payable upon demand. The evidence supports the district court’s conclusion that
the Bhatts were in default after July 2009, and the Patels were entitled to make demand pursuant
to the acceleration clauses of the promissory note and the stock pledge agreement.
The evidence at trial showed that between 2006 and 2009, payments from Pragya to the
Patels were made totaling $200,077.08. No such payments were made after 2009. The district court
determined that these payments were corporate distributions and half of the amount should be
applied to the Bhatts’ obligation under the promissory note since they were 50-percent owners of
the corporation. The Bhatts do not contest this finding on appeal. They argue, however, that there
were no other corporate distributions made and the note did not contemplate any source of funds
for the Bhatts’ repayment obligation other than the Bhatts’ share of any corporate distributions.
Stated otherwise, the Bhatts argue that the promissory note provided that their share of
distributions from Pragya was the “sole source of funds that were to be used to pay down the note.”
Brief for appellants at 17. Thus, they argue that they were not in default, and the district court erred
in finding otherwise and ordering foreclosure of the stock.
In interpreting a contract, a court must first determine, as a matter of law, whether the
contract is ambiguous. Facilities Cost Mgmt. Group v. Otoe Cty. Sch. Dist., 291 Neb. 642, 868
N.W.2d 67 (2015). A contract written in clear and unambiguous language is not subject to
interpretation or construction and must be enforced according to its terms. Id. When the terms of
a contract are clear, an appellate court interprets the contract according to its terms’ plain meaning.
Equestrian Ridge v. Equestrian Ridge Estates II, 308 Neb. 128, 953 N.W.2d 16 (2021). Terms of
a contract that are clear are given their plain and ordinary meaning as a reasonable person would
understand them. Id. A contract must receive a reasonable construction and must be construed as
a whole. Id. If possible, effect must be given to every part of a contract. Id.The Nebraska Supreme Court has held that a promissory note and a security agreement,
which were executed contemporaneously, were to be construed together. See State Security
Savings Co. v. Pelster, 207 Neb. 158, 296 N.W.2d 702 (1980). That case also provides that an
acceleration provision in a security agreement securing a promissory note enters into and becomes
a part of the note so that the maturity of the note is advanced in the same manner as the maturity
of the security agreement. Id.Here, the district court rejected the Bhatts’ argument that the promissory note provided the
sole method of repayment of the note was to be from corporate distributions to the Bhatts. The
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district court determined that nothing in the plain language of the promissory note indicated that
the Patels agreed to forego payments during years in which Pragya did not make distributions.
According to the promissory note, the Bhatts agreed to pay the Patels $152,000 plus interest
accruing at a rate of 7 percent per year, in annual installments “on March 24 of each year beginning
March 24, 2007 and continuing until the full amount is paid.” The note further provided, “[The
Bhatts] agree that all distributions received by [the Bhatts] from [Pragya] after payment of Federal
and State income taxes due on said distributions, will be applied to the principal and interest of
this note. [The Patels] agree to accept such amounts as full annual payments.” The stock pledge
agreement allowed the Patels to notify the Bhatts of default if installments under the promissory
note were not received within 30 days after their due date. It further allowed the Patels to foreclose
the promissory note if payment was not made or the default cured within 15 days of giving notice.
The plain language of the note shows that the parties agreed to apply the Bhatts’ share of
distributions from Pragya toward the Bhatts’ obligations under the note. Although there is nothing
in the note stating that this is the sole method of repayment or that no payments are due on the note
if there is not an annual distribution, the Bhatts argue that this is the only logical interpretation of
the note.
The Bhatts argue that because the promissory note did not provide an annual installment
figure to be paid by the Bhatts in years when Pragya did not make shareholder distributions, “it
stands to reason that the parties did not intend for there to be one.” Brief for appellant at 19. The
district court found that Dhaval’s testimony that the parties intended that repayment was to be
made only in the years in which corporate distributions were made was not credible.
We recognize that the promissory note did not specify an amount of the annual installment
to be paid. Nor did the note explicitly state that the Bhatts’ shares of Pragya distributions was their
sole source of funds for their repayment obligation. The Patels argue, however, that even if the
promissory note is interpreted as the Bhatts argue (requiring only payments in years when there
were shareholder distributions), the Bhatts were nevertheless delinquent as a result of their failure
to make payments on the note from distributions they received from Pragya. We agree. As detailed
below, the record contains evidence that the Bhatts used corporate money for the payment of
personal expenses and that such use of corporate money should be considered distributions.
The accountant testified about his review, at the Patels’ request, of financial records from
Pragya including tax returns and bank and credit card statements from 2006 through 2013, looking
for “unusual activities, possible personal expenditures.” Based on his review of the documents and
his training and experience, the accountant testified to his belief that there were personal
transactions by the Bhatts paid with corporate funds from 2006 to 2013. The accountant’s report,
identifying over $500,000 of such possible personal transactions, transactions that he could not
specifically verify as reflecting legitimate business activity, was admitted into evidence. The
accountant observed that the majority of the credit cards were in Dhaval’s name personally
(although he thought there might have been one in both Dhaval’s name and the corporation’s
name). The accountant expressed concern about payments being made from a company bank
account to a personal credit card, stating that such payments would be deemed either a shareholder
distribution, a wage or some other type of personal compensation. He testified further that if
payments to a personal credit card were not for salary or other compensation, then they would be
classified as either a shareholder distribution or a note receivable from the corporation to that
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particular shareholder that would need to be repaid eventually. The accountant was unable to state
an opinion to a reasonable degree of certainty as to what amount of Pragya funds was spent for the
Bhatts’ personal use. We also note that Dhaval’s testimony reflects that personal expenses were
made using Pragya funds, although it is not possible to determine the exact amount of such
personal expenditures based on his testimony.
Neither the Pragya funds used by Dhaval for personal expenses nor the payments directly
from Pragya to the Patels were included in the tax returns as shareholder distributions. However,
the failure to do so with regard to Dhaval’s use of Pragya funds does not change our conclusion
that the Bhatts received distributions that should have gone toward the payment of the promissory
note. Treatment of the payments from Pragya to the Bhatts as corporate distributions is consistent
with the treatment of the payments to the Patels as corporate distributions. Although the record
does not allow us to determine how much of Pragya’s funds were used by the Bhatts for personal
expenses, the record supports a conclusion that some such personal usage occurred between 2009
and 2013 and that these payments to the Bhatts should be treated as shareholder distributions. The
record also shows that no payments were made on the promissory note by the Bhatts after 2009.
Accordingly, they were in default, and the district court’s decision was correct. Although our
reasoning differs from that of the district court, it reached the correct result, and we affirm the
judgment in favor of the Patels. An appellate court may affirm a lower court’s ruling that reaches
the correct result, albeit based on different reasoning. State ex rel. Peterson v. Shively, 310 Neb. 1,
963 N.W.2d 508 (2021). The district court did not err in concluding that the Bhatts were delinquent
on the promissory note, determining the amount due and owing from the Bhatts to the Patels, and
authorizing judicial foreclosure and sale of the Bhatts’ stock certificates. The Bhatts’ arguments
to the contrary fail.
CONCLUSION
For the reasons set forth above, we affirm the judgment of the district court.
AFFIRMED.
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