Above photo: These affordable units built by ‘Aina Le’a more than a decade ago are still not ready for sale.
What’s been happening recently with ʻAina Leʻa, the development that has been proposed for around 1,000 acres across Queen Kaʻahumanu Highway from the Mauna Lani resort, along the Kohala Coast of Hawaiʻi Island?
Fasten your seat belts. It’s a lot. And you might want to keep a scorecard handy.
A short and admittedly incomplete summation was provided in a Bankruptcy Court filing in late June from the company’s largest creditor, Bridge ʻAina Leʻa, LLC:
“The undisputed facts are that: ʻAina Leʻa remains in material default of its obligations under the [Bankruptcy] Plan; ʻAina Leʻa is losing the Subject Property and neighboring parcels to foreclosure proceedings in State Court; ʻAina Leʻa’s unpaid real property tax bills are ballooning; ʻAina Leʻa has made no discernible progress under the Plan; ʻAina Leʻa lacks any credible way forward under the Plan….
“ʻAina Leʻa’s familiar and empty assurances aside, … the Plan has failed, and there is no real chance of ʻAina Leʻa succeeding.”
And now, barring an angel investor coming up with the capital needed to bail out ʻAina Leʻa, the company will likely lose title to the 38-acre parcel where 12 years ago it began building townhouses to satisfy the affordable housing condition placed on the development. It’s the only parcel of the four owned by the company that has seen any vertical construction at all in the 14 years ʻAina Leʻa has owned the land.
On October 7, Judge Wendy DeWeese will hold a hearing to confirm the foreclosure sale of the parcel to a Canadian company that is owed more than $13 million by ʻAina Leʻa.
Background
For years, ʻAina Leʻa, Inc., has been running on fumes, with promises of big payouts and capital infusions just around the corner.
When it exited Chapter 11 bankruptcy proceedings in August 2019, the company had expectations of a $42 million loan from Summit Financial Resources of Utah. Another lender, Iron Horse Credit, had provided a $5 million loan, maturing in just one year, that was to keep the company afloat until the Summit funds came through.
Terms of the Iron Horse loan were harsh. As ʻAina Leʻa CEO Robert Wessels acknowledged in a Bankruptcy Court hearing, the effective rate of the Iron Horse loan was “22 or 23 percent, all in, I guess.”
Yet the Summit loan never materialized. And the Iron Horse loan went into default well before the note matured.
The ʻAina Leʻa litigation over the last few years may well be remembered as having more court action than the Wimbledon games. There is the ongoing foreclosure litigation in 3rd Circuit Court, including the confirmation of the pending foreclosure sale. There’s ʻAina Leʻa’s appeal of the 3rd Circuit Court’s grant of one foreclosure action now before the Intermediate Court of Appeals, even as others have stalled out in Circuit Court, with a trial date set for next January.
Meanwhile, the federal Bankruptcy Court has been asked, twice now, to reopen the ʻAina Leʻa case, most recently as a result of 3rd Circuit Judge DeWeese’s acknowledged confusion over what the Bankruptcy Plan requires.
Finally, there was the decision by Judge Susan Oki Mollway of the U.S. District Court of Hawaiʻi in late May. Mollway tossed out the company’s claim that the state owed it more than $360 million as a result of the Land Use Commission’s vote a decade earlier to revert the land from the Urban District to the Agricultural – a decision that was reversed on appeal.
With that, Wessels may well have lost his best, last hope of an infusion of capital sufficient to pay off the company’s creditors, collectively owed more than $40 million, to say nothing of the long promised development of more than 2,000 units of housing.
Iron Horse Sues
Well before Judge Mollway’s ruling, the creditors had been circling. From the spring of 2017 until late August 2019, they were kept at bay while ʻAina Leʻa went through Chapter 11 reorganization. When, finally, a reorganization plan was approved, most of the creditors’ claims were stayed for varying periods of time.
But that didn’t prevent Iron Horse, the creditor of last resort, from suing for foreclosure in October 2020. And since Iron Horse’s claims on the secured properties were junior to those of Bridge (owed $20 million plus 10.2 percent per year interest), Romspen Investment Corporation (a Canadian lender owed around $13 million plus interest), and Libo Zhang (a resident of China owed around $6.5 million plus interest accruing at 12 percent per year), all those parties were drawn into the litigation as well.
In December 2021, Judge DeWeese found that ʻAina Leʻa was in default of the Iron Horse loan. ʻAina Leʻa appealed that judgment to the ICA, where it is pending. (Iron Horse has transferred its interest in the litigation to another company, SDCK I, LLC, which is now the appellee in the case.) The appellate court case notwithstanding, Iron Horse/SDCK I is still moving forward with its foreclosure, with a sale date tentatively set for November 30.
Bankruptcy Court, Part II
Nudged into action by the Iron Horse lawsuit, in late November 2020, Romspen sought relief from the Bankruptcy Court. With ʻAina Leʻa having defaulted on the Iron Horse loan, Romspen argued, it was clear that ʻAina Leʻa had materially breached terms of the Bankruptcy Plan, which had taken effect in August 2019. The relief Romspen sought was to put ʻAina Leʻa out of business, converting the Chapter 11 relief, which allowed the company to reorganize, to Chapter 7, in which the company would be dissolved.
U.S. Bankruptcy Judge Robert Faris held a hearing on Romspen’s request on February 22, 2021. ʻAina Leʻa’s attorney, Steve Jakubowski of Chicago, argued that in fact, his client’s assets – found almost entirely in the value of the land – approached $100 million, more than sufficient to fully satisfy the creditors.
Judge Faris took note of the several points raised by Jakubowski that favored ʻAina Leʻa, including the change in county administration with the election of Mitch Roth as mayor. But, Faris said, what he “was really hoping to see today, or before today, was the commitment letter from Summit … and there’s still no commitment from Summit.”
The Iron Horse default, Jakubowski acknowledged, was “definitely an issue.” But, he added, “when we negotiated over this plan, nobody – the debtor was certainly not going to agree that a default under the Iron Horse agreement, if it was only one year, would trigger an acceleration of all of the other secured debt. We never would have agreed to that.”
Given the dim prospects of financing, Faris was skeptical about ʻAina Leʻa’s ability to find the capital it needed to satisfy not just the Iron Horse indebtedness, but also that of Romspen, whose note would be coming due a mere six months from the hearing date. In addition, he was concerned over the company’s failure to keep current with property taxes.
Despite his misgivings, Faris denied Romspen’s motion, saying that state court would be the appropriate venue to hear the foreclosure claims. Yet he expressed serious doubts about ʻAina Le’aʻs prospects to become a viable company. “It wouldn’t surprise me anyway to see this debtor and/or its subsidiaries back in Chapter 11 at some point in the next – in the future. It wouldn’t shock me in the slightest. But, you know, given the circumstances of this case, I think that’s actually – that actually may be the only way to get Bankruptcy Court relief for the problems this debtor faces.”
Romspen Prevails
It was a short-lived victory for ʻAina Leʻa. Sure enough, when the Romspen note came due in August 2021, Romspen was back in state circuit court to reopen the foreclosure action that had been on ice since 2017, when ʻAina Leʻa filed for bankruptcy protection.
At a hearing on February 15, not attended by any representative of ʻAina Leʻa, 3rd Circuit Judge Wendy DeWeese found in Romspen’s favor, instructing its attorney, Jordan Kimura, to prepare the order.
On April 6, the court issued the default judgment of foreclosure against Lulana Gardens (the subsidiary holding the “affordable housing” parcel), ʻAina Leʻa, Inc., Emerald Hawaiʻi Services, Inc. (the entity, controlled by ʻAina Leʻa, that manages the interests of the several hundred Asian investors who purchased “undivided land fractions” in the ʻAina Leʻa property), and CEO Wessels himself, as a guarantor of the loan.
George “Rick” Robinson of Kona was appointed commissioner. On August 16, his report was filed with the court.
Robinson stated that he found the property “maintained, gates secured, and a newly delivered sewage treatment plant on site. The existing units are secured and security is provided by Lulana Gardens via a live-on-site caretaker.”
Robinson attempted to obtain a title report for the property “from several title companies with one title company declining the request and the other title company agreeing yet not delivering that report to date.”
Notice was published in West Hawaii Today of open houses, allowing prospective buyers to inspect the property. On August 8, when Robinson held the sale at the flagpole fronting the Kona courthouse, nine people were present, but just one – an agent of Romspen – offered a bid of $13 million. “After repeatedly soliciting higher bids and receiving none,” Robinson wrote, “your commissioner declared the property sold to Romspen for a $13 million credit bid, subject to confirmation thereof by the court.”
As of mid-September, Romspen’s motion to have the court approve the sale was set to be heard October 7.
But even if Romspen does take title to the Lulana Gardens property, that does not mean that its claims against ʻAina Leʻa have been fully satisfied. Attached to the motion seeking court approval of the foreclosure sale is an affidavit from Peter Oelbaum, managing partner of Romspen, that places the full amount owed to Romspen by ʻAina Leʻa entities and Wessels at $18,361,388.89, as of mid-August. Some $13.3 million was owed at the time ʻAina Leʻa emerged from bankruptcy. Since then, under terms of the note, interest at 12.5 percent annually for two years added $5,061,388.89 to that amount, Oelbaum stated.
Robinson also was appointed commissioner for the Iron Horse/SDCK I foreclosure sale, now tentatively set for the end of November.
Bankruptcy Court, Yet Again
Throughout 2021 and into the current year, the foreclosure litigation initiated by Iron Horse continued in the courtroom of Wendy DeWeese, even after the judge had granted Iron Horse its motion to foreclose and as Romspen was pursuing its own foreclosure action in a separate docket. Creditors Bridge and Zhang continued to seek relief from DeWeese in the form of a judgment of foreclosure against ʻAina Leʻa.
But that was not forthcoming. ʻAina Leʻa attorney Michael Matsukawa opposed their motions, arguing, as before, that terms of the Bankruptcy Plan meant that Bridge and Zhang would have to wait until five years after the date the bankruptcy plan took effect – until August 2024, that is – to obtain any relief, including foreclosure.
Earlier this year, Zhang and Bridge filed their second motions for summary judgment, seeking to address concerns that DeWeese had raised in response to their first such motions. But both were frustrated by DeWeese’s apparent hesitancy to make a call on disputed claims as to the meaning of the Bankruptcy Plan.
As the April order denying Bridge’s second motion for summary judgment states, DeWeese allowed as how she “has jurisdiction to interpret” the Bankruptcy Plan, but then went on to say that the plan is ambiguous when it discusses the term “liens,” how that term affects Bridge’s right to foreclose through these proceedings, if at all; what events might allow Bridge to foreclose before the fifth anniversary of the date the plan took effect; and what concessions Bridge might have made in agreeing to the plan, among other things.
Those “ambiguities,” she found, “raised issues of material fact precluding summary judgment in Bridge’s favor.”
In late May, Bridge filed a motion with the Bankruptcy Court, asking it to issue a clarifying order. The Bankruptcy Plan, Bridge argued, did not preclude Bridge from exercising its right to foreclose, especially in light of the Iron Horse grant of foreclosure and the ballooning property taxes on the ʻAina Leʻa property – both of which, Bridge stated, amounted to material defaults of the plan.
“The concerns that this [Bankruptcy] Court expressed more than a year ago over the Plan’s viability and ʻAina Leʻa’s failure to perform its obligations are now full-blown,” Bridge said in its Bankruptcy Court filing. “Since this Court heard the [Romspen] motion to reopen and convert and denied it, ʻAina Leʻa has: (a) continued to fail to pay its real property taxes …; (b) had judgment entered against it and in favor of Iron Horse … (c) had judgment entered against it and in favor of Romspen…
“ʻAina Leʻa has not made any progress on developing the subject property or the neighboring parcels pursuant to the Plan, and ʻAina Leʻa no longer has any means of doing so.”
It was necessary to ask the Bankruptcy Court to make clear the meaning of the Bankruptcy Plan, wrote Bridge attorney John D. Ferry III, because “the State Court’s inability to interpret the Plan is, effectively, an endorsement of ʻAina Leʻa’s misinterpretation of the Plan and its effect on Bridge’s rights. According to ʻAina Leʻa, the Plan stripped Bridge of its substantive rights … and left Bridge with only a priority ‘Lien’ on the subject property and a right to payment by August 14, 2024. … Therefore, ʻAina Leʻa argues, Bridge must wait to seek any relief until August 14, 2024 (when ʻAina Leʻa inevitably defaults on its obligation under the Plan to pay Bridge’s secured claim for $20,000,000 plus interest). In the meantime, ʻAina Leʻa claims that the Plan entitles ʻAina Leʻa to materially breach the Plan with impunity.”
Ferry concluded: “ʻAina Leʻa simply wants to delay the inevitable, for as long as possible, for no good reason. The plan has failed, spectacularly, and has no viable chance of success.”
Faris, the Bankruptcy Court judge, set a hearing date of July 1. On June 24, Bridge filed its reply memorandum to ʻAina Leʻa’s statement of position. In it, Ferry quoted back to Faris a statement Faris had made in the January 2021 hearing on Romspen’s request that he convert ʻAina Leʻa’s bankruptcy into a Chapter 7 proceeding.
“[T]he [Bankruptcy] Plan changed the party’s payment rights and preserved their millions, but it didn’t expressly strip off loan covenants and other obligations,” Ferry quoted from the hearing transcript. “If nothing else, stripping off the covenants would arguably eliminate the right to foreclose on non-payment, and that simply can’t be the result.”
Following that hearing, Judge Faris was to issue a ruling on the question posed by Bridge. The attorney for ʻAina Leʻa, Jakubowski, was instructed to prepare the order. As of mid-September, that order had not been posted. The foreclosure actions of Bridge and Zhang in state court are pretty well on hold until that occurs, or until ʻAina Leʻa returns to Bankruptcy Court, seeking its protection from creditors once again.
Conflicting Claims
In court filings, ʻAina Leʻa has represented that it will have few problems satisfying its creditors’ claims once it is able to start – or, rather, resume – work on the construction of the townhouses planned for the Lulana Gardens portion of its overall development plan. The first couple of buildings in what is to be a 432-unit townhouse complex were put up more than a decade ago, when ʻAina Leʻa was attempting to demonstrate to the state Land Use Commission that it could comply with conditions relating to satisfaction of its affordable housing requirement. For most of the intervening period, work on the townhouse was stalled as the company faced numerous financial, regulatory, and judicial hurdles.
Despite the mounting legal and financial troubles the company faces, the Hawaiʻi County administration under Mayor Roth has done everything it could to help Wessels out. Within days of Roth taking office in December 2020, Roth’s planning director, Zendo Kern, informed the attorney for ʻAina Leʻa that the county would no longer be insisting that the company prepare a new environmental impact statement for the development.
Since then, Roth himself has appeared in videos promoting the townhouses alongside the real estate agents that have been retained by ʻAina Leʻa to sell at least some of the units.
Susan Kunz, appointed by Roth to head up the county Office of Housing and Community Development despite her earlier tenure in that position when several fraudulent housing agreements were signed, has also touted the Lulana Gardens project in statements to community groups.
In a presentation to a Big Island group, Vibrant Hawaiʻi, in June, however, Kunz herself expressed some skepticism as to the likelihood of the housing ever being developed. In enumerating the various affordable housing projects in the pipeline, Kunz put up a slide depicting an architectural drawing of what the townhouse development might look like. After acknowledging that the project had been on the books for 20 years or more, Kunz said, “I put this slide in here because I’m just being hopeful.”
In April 2021, the county entered into an affordable housing agreement with ʻAina Leʻa that committed the company to building 385 affordable units on the Lulana Gardens parcel, which – at the various specified levels of affordability – would earn the company 219.5 affordable housing credits. In addition to the affordable units, 47 market-rate units would be built. An addendum signed in June of that same year committed ʻAina Leʻa to build 120 units of affordable housing on two more parcels – the 23-acre parcel that ʻAina Leʻa has proposed for the Hoʻolei Village development (encumbered by the Libo Zhang mortgage and secondarily by the Iron Horse mortgage), and the adjoining 383-acre parcel (encumbered by the Bridge mortgage and again Iron Horse as a junior lienholder).
Altogether, should the housing ever be built, the county committed to issuing 367 housing credits to ʻAina Leʻa. (As an aside, the 2021 agreements specify that the credits are to be awarded “only after a unit has been constructed and made available for rental,” thus precluding the possibility the credits could be sold before the housing is built, as occurred in the recently disclosed affordable housing scandal on the Big Island.)
By their terms, both the initial agreement and the addendum are to run with the land and “are binding upon the developer’s successors in title and all subsequent owners and operators of the property.”
After the first affordable housing agreement was signed, in May 2021, Wessels entered into a purchase and sale agreement covering the Lulana Gardens parcel with Lava Rock, LLC, a newly formed company registered in Delaware with an address in Palm Beach, Florida. Signing on behalf of Lava Rock was David Koch, who identified himself as sole member and authorized person of Saxon Holdings LLC, which in turn was the sole member of Lava Rock.
Lava Rock turns up again in the required annual report submitted by Wessels to the Land Use Commission and the county Planning Department at the end of 2021. In discussing the Lulana Gardens development, Wessels states, “Under an agreement with Lava Rock rental fund to provide 384 rental townhomes for 219.5 affordable housing credits, Lulana Gardens, LLC, projects requesting certificates of occupancy for the first 96 homes in the third quarter of 2022. Thereafter Lulana Gardens is committed to deliver 16 townhomes per month until all 384 homes are completed.”
The Taxes
When ʻAina Leʻa exited bankruptcy in August 2019, it was briefly current on county property taxes.
In February last year, as Judge Faris of the Bankruptcy Court considered Romspen’s request to liquidate ʻAina Leʻa’s assets, he expressed concern over the company’s failure to pay property taxes since then.
Jakubowski, ʻAina Leʻa’s attorney, suggested that given the value of the company’s assets – which Wessels had placed at $100 million or more – the tax obligation was a mere bagatelle.
Faris disagreed. “I do think that the failure to pay the taxes is clearly a default,” he opined. “I’m inclined to say that it’s a material default. It’s true that the amount is small relative to the value of the property, but it’s equally true that it is, I would say, infinitely larger than the debtor’s capacity to pay it.”
Since then, the tax burden has only grown. As of the end of September, county records show, it stood at $1,256,326.19.
— Patricia Tummons
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