‘Aina Le‘a Controversies on Three Fronts: Federal Court, Bankruptcy Court, and County

posted in: May 2018 | 0

In March, a jury in Honolulu federal court decided that Bridge ‘Aina Le‘a, LLC, had suffered damages when the Hawai‘i Land Use Commission voted in 2011 to put land the company owned on the Big Island back into the Agricultural land use district. From the late 1980s until that point, the land – about 1,060 acres just mauka of the Mauna Lani resort, on the Kohala Coast of the Big Island – had been in the Urban district.

Unbeknownst to members of the jury, before their deliberations began, the maximum damage award had been capped at $1 by the judge hearing the case, Susan Oki Mollway.

While the verdict, coming at the conclusion of an eight-day trial, favors the plaintiff, an appeal seems likely. For its part, the state, which lost the case, has no interest in appealing, said William Wynhoff, the deputy attorney general who headed up the litigation team. But if Bridge appeals, the state will have little recourse but to file a counter-appeal, he said.

And so the long history of litigating the LUC decision to revert the ‘Aina Le‘a land, moves into its next phase.

The Federal Case

For about four years, the federal case was on ice. The state had sought removal to federal court of a case Bridge filed in state court just after the LUC decision, but that federal action was put on hold pending a decision by the Hawai‘i Supreme Court on claims Bridge had made of due-process violations and takings. After that ruling was issued in late 2014, the action moved once again to the federal courtroom of Judge Susan Oki Mollway.

In preparation for trial, Bridge retained consultants to justify to the court its claims of monetary damage the company suffered as a result of the LUC’s reversion of the ‘Aina Le‘a land: David Burger, an accountant based in Saipan, Commonwealth of the Northern Mariana Islands, and Stephen Chee, a Honolulu appraiser.

Burger provided estimates of the rate of return on investment that Bridge could have expected to receive, absent the LUC action, arriving at a figure of 10.12 percent. Chee then estimated the difference in value of the property before and after the reversion. According to Chee, the value of the property dropped from $40 million to $6.63 million immediately after the LUC reversion. (Ted Yamamura, an appraiser retained by the state, found the pre-reversion value of $40 million “not supported.”) Altogether, by multiplying the difference in value by the rate of return over the time the loss was in effect (a period that, according to Bridge ran from April 30, 2009, to November 25, 2014, when the state Supreme Court issued its ruling), Bridge came up with a figure close to $40 million.

The state objected to the conclusions of Burger and Chee, but before Judge Mollway could rule on the matter in July 2016, on the eve of the start of the scheduled jury trial, the state and Bridge arrived at a mediated settlement. The state would pay $1 million to Bridge and Bridge would drop the case, with both sides bearing their own attorney fees and costs.

That, of course, was contingent on the state Legislature making an appropriation for the settlement in its 2017 session.

Legislators, however, apparently felt that the state could get a better deal if the case went to trial. Funds for the settlement were not approved. In late 2017, the case was back on track, moving toward a jury trial in early 2018.

Disputed Experts

Once again, the court had to take up the state’s motion to dismiss the expert opinions offered by Bridge that formed the basis for their claim of damages.

Back in May 2016, before the settlement had been reached, Mollway stated her inclination to exclude the reports of Burger and Chee. Burger, she wrote, “states that he ‘relied on audited financial statements [of Bridge Capital and its subsidiaries] for the years ended December 31, 2009 through 2014’ to render his opinion,” yet his report provided none of those documents, “nor any of the underlying calculations that were the basis for his conclusion that the rate should be 10.12 percent.” This violated the Federal Rules of Civil Procedure, she wrote.

“With regard to the Chee report,” she continued, “the court notes that for expert testimony to be admissible it must assist the trier of fact to understand the evidence or to determine a fact in issue. … Given that Bridge Aina is alleging a temporary taking rather than a permanent taking, Bridge Aina is not seeking damages equivalent to the full value of the property. Instead, the purpose of the Chee report is to provide a valuation of the property before and after the Land Use Commission’s April 30 2009, vote to reclassify the property, which can then be applied to the rate of return in Burger’s opinion. … The court is inclined to reason that the Chee report is only helpful to the jury to the extent it can be used in conjunction with the Burger report.”

In the end, the jury did not hear the testimony of Bridge’s experts. Instead, six days after the jury trial began on March 13, the state filed a motion asking Mollway to issue a judgment in the state’s favor “as a matter of law.” And, failing that, it asked that the court not allow the issue of compensation to go to the jury. In the event that the jury determined a taking had been made, it asked the judge to rule that Bridge was entitled to “nominal just compensation of $1.”

Mollway let the trial proceed, but she did agree with the state on the nominal damages. She then polled attorneys on both sides as to whether the jury should be informed of the cap. Bridge was adamant that it not be. Wrote John Ferry, one of the attorneys on Bridge’s team: “Essentially, the jury cannot know that just compensation has been capped at nominal damages” (boldface and underline emphasis is in the original).

The state agreed: “The effect on decision-making is unpredictable. Maybe the jury will just shrug their shoulders and say – ‘Why bother for a dollar? Let’s just find no taking and get done before lunch.’ Or maybe the jury will say or think: ‘Bridge is only getting a dollar so it won’t hurt anyone for us to find a taking.’ Either way, the $1 introduces a wild card into the process and diminishes the chance of getting a true verdict.”

The trial ended the eighth day. The seven jurors were dismissed for lunch at 12:25 p.m. before beginning their deliberations. By 2:30, they had returned their verdict, agreeing with Bridge that it had suffered damages under two different standards: Lucas (Bridge was deprived of all economically beneficial uses of its land by the LUC action) and Penn Central (the regulation interfered with investment-backed expectations).

What’s Next?

Although Bridge was awarded just $1, Bruce Voss, attorney for Bridge, was pleased with the outcome. “The jury’s prompt verdict shows how strong the evidence was that the Land Use Commission committed a taking,” he told Environment Hawai‘i in an email. “This is one of the first verdicts in the country where a jury has found a taking under both takings analyses approved by the U.S. Supreme Court.”

It was, however, “clear error” for the court to bar Bridge’s expert witnesses, he said, adding that his client “will appeal to the 9th Circuit on that issue.” “If the appeals court agrees with us, the case likely will be sent back for a new jury to determine how much the state Land Use Commission has to pay. We contend the just compensation owing is approximately $20 million.”

The state, of course, disagrees, noting, among other things, that Bridge purchased the property and an additional 2,000 surrounding acres for just $5 million and sold it for around $30 million to DW ‘Aina Le‘a, the company now trying to develop it.

As the prevailing party, on April 13, less than two weeks after the judgment was filed, Bridge submitted a motion requesting attorneys’ fees and costs, totaling about $725,000. Voss said his client is still open to discussions of a settlement with the state.

A week later, the state filed a motion with the court, renewing its request for a judgment in its favor as a matter of law, or, failing that, for a new trial. In support of its request, it argues, among other things, that Bridge “did not possess a valid interest in the 1,060-acre property at the time of the taking” and that if the LUC did make an “erroneous finding of fact” in its quasi-judicial proceeding, that does not support any claim of a take by Bridge.

Any appeal is on hold until the two motions are resolved.

Another Go at an EIS

Since 2013, development of the ‘Aina Le‘a site has been stalled. As a result of a court challenge to a previous environmental impact statement, the Hawai‘i County Planning Department determined that a supplemental environmental impact statement needed to be prepared – not just for the 1,060 acres in the Urban district, but also the 2,000 or so acres in the Agricultural district that surround it on three sides, since so much of the work proposed for the Urban land in previous environmental documents relates to the Agricultural lands as well. In February, it informed the landowners that a supplemental EIS would not do – they would need to prepare an altogether new EIS.

Even before that notice was in the mail, Bridge had retained the engineering firm Belt Collins to develop a document to satisfy environmental disclosure requirements – this despite the fact that nearly all of the Urban land is owned by ‘Aina Le‘a, Inc.

In late March, Belt Collins delivered a draft Environmental Impact State- ment Preparation Notice (EISPN) to the county. Running to more than 50 pages, it anticipates petitioning the LUC to redistrict the Agricultural land into the Rural district, where it would then develop 2,265 “half-acre single-family residential home sites,” arranged in 18 different villages. In the Urban district, there would be 790 single-family units and 1,290 multi-family units, 179 apartment units in the 27-acre parcel (owned still by Bridge) that has been zoned for commercial development, and a 40-unit lodge. Altogether, there would be 4,514 housing units of one or another type. That’s more than 1,300 units over what was proposed in 1989, at the time of the original redistricting petition.

The cost of developing the properties in the manner outlined in the EISPN is estimated at $3 billion to $3.5 billion (in 2016 dollars, the document states).

Meanwhile, in Bankruptcy Court…

As owner of most of the Urban land slated for the densest development, ‘Aina Le‘a had to signal its consent to the plan outlined in the EISPN. A short letter appearing on the very last page of the document from Richard P. Bernstein, the “corp. secretary” of ‘Aina Le‘a, Inc., is apparently intended to satisfy that requirement. (There is no evidence that similar consent has been given for two of the lots included in the project area; these are the lots, with a total area of 61 acres, that are owned by more than a thousand individual Asian investors who purchased so-called “undivided land fractions,” or ULFs, from ‘Aina Le‘a’s predecessor company in 2009 and 2010.)

The letter, dated September 13, 2017, is addressed to Michael Yee, the county planning director, and states that ‘Aina Le‘a “consents to the submission of the Supplemental Environmental Impact Statement (‘SEIS’) Preparation Notice … prepared by Belt Collins.” In yellow highlighter at the top of the page, however, there’s the notation: “REPLACE WITH ONE FOR EISPN, NOT SEISPN.”

That replacement has not been made. And the reason for that may be found in filings made in a separate arena: bankruptcy court.

‘Aina Le‘a filed for bankruptcy nearly a year ago, as several creditors were threatening to foreclose on ‘Aina Le‘a land that had been put up as security for mortgages. Bridge, which is one of the company’s chief creditors, having self-financed ‘Aina Le‘a’s purchase of most of the Urban land, was not among the parties pursuing ‘Aina Le‘a in court. But after the bankruptcy filing, it has vigorously represented its own interests, often objecting to the proposals ‘Aina Le‘a has made for spending the relatively small amount of funds it has raised while in bankruptcy.

Early on in the proceedings, ‘Aina Le‘a made a proposal to borrow up to $5 million from existing shareholders. Funds raised in this fashion would be used to pay for “maintenance and preservation of the property of the Debtor’s estate, salaries, rent, insurance, utility services, operating expenses,” and other charges that the bankruptcy court might approve.

On September 1, the court approved a modified proposal allowing ‘Aina Le‘a to borrow up to $500,000 – but also requiring that it raise at least $250,000 by November 29. On that date, the company had raised just half that amount, with the largest single investor identified as Ng Chuntian of Singapore ($50,000).

In March, ‘Aina Le‘a sought approval from the court to spend part of the funds raised “to retain a land use lawyer to advise the Debtor of its options in addressing the county’s change of position,” referring to the planning director’s notice in February that ‘Aina Le‘a and Bridge would need to prepare de novo an environmental impact statement for all 3,000 acres of their combined lands.

In support of the request, ‘Aina Le‘a stated: “Particularly crucial for the Debtor at this juncture of the case is the advice of land use counsel. Bridge has prepared an EISPN and urged the Debtor to sign onto it. However, the Debtor believes it would be prudent to obtain separate land use counsel’s advice and has made the funding of land use counsel’s … retainer (subject to court approval) a priority.”

A budget that proposes spending all $125,000 raised by ‘Aina Le‘a last fall shows $25,000 would be spent on a retainer for “land use counsel.”

Bridge and other secured creditors objected to the plan. In their filed objections, they noted that ‘Aina Le‘a is in arrears, to the tune of more than $200,000, on tax bills for property that secures their interests.

As Romspen, one of the secured creditors, explained: “First, if new funds are made available to ‘Aina Le‘a, it should be made a priority that all, if not a substantial portion, of such funds should be budgeted and allocated towards the payment of the outstanding and delinquent real property taxes owed to the county of Hawai‘i, as these real property taxes are a paramount lien on the real property, the bankruptcy estate’s sole asset.”

Bankruptcy Judge Robert Faris held a hearing on the matter April 9. He consented to ‘Aina Le‘a’s request to retain the land use lawyer at $25,000 and also approved a pay- ment of $6,000 to Architects Hawai‘i.

A Plea from China

The difference between equity investors and lenders is fundamental in bankruptcy proceedings as well as other fields of financial play. Investors have no claim on any of the debtor’s holdings and stand to lose everything, while lenders can expect some settlement, however small. Investors get their payout, if at all, when the company successfully emerges from bankruptcy proceedings and turns a profit, which is distributed to investors as dividends.

In short, in bankruptcy court, investors have no standing.

Yet that didn’t stop one Chinese investor from writing a pleading letter on February 12 to Judge Faris, seeking Faris’s “understanding and supporting” [sic].

“My company, Zhongyou [Real Estate Group Ltd.], is one of the important shareholders and I feel really sorry for the difficulties which ‘Aina Le‘a, Inc., is having.”

In December 2014, he notes, “Zhongyou invested $16 million into ‘Aina Le‘a, Inc.,” acquiring 1.28 million shares of common stock.

“As the president of Zhongyou, I also need to be responsible for Zhongyou’s shareholders. Zhongyou’s shareholders have invested a lot, and now their investment is facing huge risks that probably will be unrecoverable. If ‘Aina Le`a Inc. does not succeed the re-organization, not only Zhongyou’s shareholders will have a major loss in investment, but also there may be negative effects on the enthusiasm of Chinese entrepreneurs investing in the United States. …

“Therefore, I request that my dear Judge Faris could allow ‘Aina Le‘a Inc., and Mr. Robert Wessels [its CEO] a little more time and provide more opportunities within the scope of the law to help ‘Aina Le‘a Inc. to succeed into reorganization.”

— Patricia Tummons

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