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In re 1250 Oceanside Partners

United States District Court, D. Hawaii

May 25, 2017

In re 1250 OCEANSIDE PARTNERS, Debtor.
ROGER ARNOLD BUCKLES, Individually and as Trustee of the Roger Arnold Buckles and Cindy Kiyono Buckles Revocable Family Trust dated October 29, 1991; CINDY KIYONO BUCKLES, individually and as Trustee of the Roger Arnold Buckles and Cindy Kiyono Buckles Revocable Family Trust dated October 29, 1991, Defendants. 1250 OCEANSIDE, LLC, Plaintiff,


          J. Michael Seabright Chief United States District Judge

         On May 11, 2017, the court issued an “Order Adopting Amended Proposed Findings of Fact and Conclusions of Law on Motions to Dismiss and for Summary Judgment” (“May 11, 2017 Order”). ECF No. 23. On May 23, 2017, Defendants Roger Arnold Buckles and Cindy Kiyono Buckles, individually, and in their capacities as trustees of the Roger Arnold Buckles and Cindy Kiyono Buckles Revocable Family Trust (collectively, “Defendants” or “the Buckles”), submitted pursuant to Hawaii Rule of Professional Conduct 3.3 a “Statement Re: Supreme Court Decisions on Standing in Foreclosure Actions” (“Statement”). ECF No. 24. The court construes this Statement as a Motion for Reconsideration and/or Clarification under Local Rule 60.1 of the May 11, 2017 Order.

         The Statement “submits for consideration a series of recently decided Hawaii State court cases, beginning with Bank of America, N.A. v. Reyes-Toledo, 139 Haw. 361, 390 P.3d 1248 (2017)[.]” ECF No. 24 at 2. Reyes-Toledo reasoned that “a foreclosing plaintiff must establish entitlement to enforce the note at the time the action was commenced, ” 139 Haw. at 368, 390 P.3d at 1255, and is relevant towards the court's discussion of standing in its May 11, 2017 Order. Accordingly, although Reyes-Toledo does not change the result, the court issues this Amended Order that replaces and supersedes the May 11, 2017 Order.


         Defendants object under 28 U.S.C. §157(c)(1) to the September 29, 2016 Amended Proposed Findings of Fact and Conclusions of Law on Motions to Dismiss and for Summary Judgment (the “Amended Findings”) issued by the U.S. Bankruptcy Court for the District of Hawaii. ECF No. 3. Similarly, Plaintiff 1250 Oceanside, LLC (“Plaintiff”) has filed “limited objections” to the Amended Findings. ECF No. 6. Plaintiff was formerly known as 1250 Oceanside Partners (“the Debtor”).

         Based on the following, the court OVERRULES both sets of objections, and ADOPTS the Amended Findings. As recommended by the Bankruptcy Court, a Decree of Foreclosure in favor of Plaintiff shall issue.


         A. Standard of Review

         If a bankruptcy court submits proposed findings of fact and conclusions of law under § 157(c), the district court “review[s] de novo those matters to which any party has timely and specifically objected.” 28 U.S.C. §157(c)(1). “The district judge shall make a de novo review upon the record or, after additional evidence, of any portion of the bankruptcy judge's findings of fact or conclusions of law to which specific written objection has been made in accordance with this rule.” Fed.R.Bankr.P. 9033(d).

         Absent specific objections, the court reviews proposed factual findings for clear error and legal conclusions de novo. See, e.g., In re Preston, 516 B.R. 606, 609 (C.D. Cal. 2014). That is, “[t]he district judge may accept the portions of the findings and recommendation to which the parties have not objected as long as it is satisfied that there is no clear error on the face of the record.” Naehu v. Read, 2017 WL 1162180, at *3 (D. Haw. Mar. 28, 2017) (citations omitted).[1] “The district judge may accept, reject, or modify the proposed findings of fact or conclusions of law, receive further evidence, or recommit the matter to the bankruptcy judge with instructions.” Fed.R.Bankr.P. 9033(d).

         The court thus focuses on the specific objections of the parties. And because the court -- having carefully reviewed the record -- accepts and adopts the other (non-objected-to) findings, the court relies on the Amended Findings for much of the background. In this Order adopting those Findings, the court reiterates many of the facts as found by the Bankruptcy Court, and explains the procedural history as necessary to put the issues into context. The parties are familiar with the extensive history of this case (with an underlying bankruptcy proceeding consisting of over 1, 400 docket entries, and excerpts of record in this court of over 3, 000 pages), which the court need not otherwise set forth in this Order.

         B. Factual Background

         The Debtor was the developer of Hokuli<a, a planned residential subdivision on the Big Island, County of Hawaii. ECF No. 4-1 at 5. On March 6, 2013, the Debtor filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code, and filed the present adversary proceeding in that bankruptcy action. Amended Findings at 5. Among other relief, the adversary proceeding seeks to enforce a promissory note and foreclose a mortgage made by the Buckles. Id. at 1, 5; see also ECF No. 4-1. The proceeding arises out of a February/March 2000 transaction in which the Debtor financed and sold a lot in Hokuli<a to the Buckles. ECF No. 4-1 at 2-3, 5-6.

         “To document the [February/March 2000] transaction, the parties executed four documents at or about the same time: a Purchase Contract, dated February 18, 2000; a warranty deed, dated February 16, 2000; a promissory note by [the] Buckles in favor of [the Debtor], dated March 28, 2000; and a mortgage, dated February 16, 2000.” Amended Findings at 2 (citations omitted); ECF No. 1-1 at 2. This Order refers to the March 28, 2000 promissory note as “the Buckles' note, ” or simply as “the note.” The Buckles borrowed $680, 000 from the Debtor in this transaction. ECF No. 4-1 at 5. “The Purchase Contract incorporated the note, mortgage, and warranty deed as essential parts of the agreement. The Purchase Contract obligated [the Debtor] to make a number of improvements on the lot and in and around the development.” Amended Findings at 2 (citations omitted).

         “Paragraph 17.a of the Purchase Contract requires mediation and arbitration of all disputes relating to the Purchase Agreement, the sale of the lot, or ‘any other aspect of the relationship' between [the Debtor] and [the Buckles].” Amended Findings 2-3 (citation omitted). “Paragraph 17.b, however, provides that, if [the] Buckles default under the note or mortgage, [the Debtor] is not required to arbitrate, but instead ‘has the absolute right' to ‘seek to foreclose on the property covered by the Mortgage by a foreclosure action filed in the Circuit Court of the Third Circuit, State of Hawaii, ' or ‘seek to foreclose on the property covered by the Mortgage by a non-judicial foreclosure[.]” Id. at 3 (citations omitted).[2] “The deed includes dispute resolution provisions that are almost identical to the Purchase contract.” Id. And “[t]he mortgage [also] gives [the Debtor] the right to pursue judicial or nonjudicial foreclosure.” Id.

         “In 2006, Oceanside granted a security interest in [the] Buckles' note and mortgage (along with others') to Textron Financial Corporation (‘Textron') to secure [the Debtor's] obligations under a revolving line of credit.” Id. at 4 (citation omitted). “The security agreement permits [the Debtor] to enforce the Buckles['] note and use the proceeds to pay its debt to Textron (unless [the Debtor] defaulted in its obligations to Textron, in which event Textron could take collection action against [the] Buckles directly).” Id. (citation omitted).

         “[The Debtor] also indorsed [the] Buckles' note and assigned [the] Buckles' mortgage to Textron.” Id. (citation omitted). “Although the endorsement and assignment are absolute on their face, the Textron loan agreement makes it clear that the transfers were intended for security purposes only.” Id. “Later, Textron assigned its interest in the notes and mortgages to Sun Kona Finance II (‘SKF II').” Id. (citation omitted). “SKF II is in possession of the Buckles' note.” Id. (citation omitted).

         The Debtor “failed to complete the Hokuli<a development as promised.” Id. at 5. Presumably because of this failure, the Buckles “ceased payment on the note in 2009.” Id. (citation omitted). “On April 1, 2012, [the] Buckles signed a release, which discharged their claims against [the Debtor].” Id. (citation omitted).[3] “After signing the release, [the] Buckles did not resume payments on the note.” Id. (citation omitted).

         C. Procedural Background

         After the Debtor filed for bankruptcy, it “sent [the] Buckles a demand letter declaring default and requiring [the] Buckles to cure its arrears.” Id. Further, “[the Debtor] and SKF II entered into a stipulation, in which SKF II assigned its interest in the note and mortgage ‘to the extent necessary to allow [the Debtor] to commence and litigate to completion foreclosure actions against non-performing borrowers.'” Id. (citation omitted).

         The Debtor then filed this adversary proceeding, seeking to enforce the note, and to foreclose. Id. It filed similar actions against other non-performing mortgagors, based on similar contractual agreements. See, e.g., 1250 Oceanside Partners v. Maryl Grp., Inc., et al., Civ. No. 13-00613 LEK-KSC (D. Haw. filed Nov. 13, 2013) (reviewing Adversary Proceeding No. 13-90049 in the Debtor's chapter 11 action) (“Maryl Group”).

         To that end, on September 26, 2013, the Debtor filed a Motion for Summary Judgment in the Bankruptcy Court, seeking a finding that the Buckles were in default, and an interlocutory decree of foreclosure. ECF No. 4-4. In response, the Buckles filed a Motion to Dismiss, contending (among other arguments) that contractual language required the foreclosure proceedings to take place in the Third Circuit Court for the State of Hawaii (“State Court”), not in the Bankruptcy Court. ECF No. 4-3.

         Ruling on the Cross-Motions, the Bankruptcy Court issued Proposed Findings of Fact and Conclusions of Law on December 19, 2013 (“December 19, 2013 Findings”). ECF No. 4-18. Among other rulings, the Bankruptcy Court indeed found the Buckles in default and recommended entry of an interlocutory decree of foreclosure. Id. at 2. It also concluded that it had jurisdiction over the matter under 28 U.S.C. § 1334(b), as a proceeding “related to cases under title 11.” Id. at 6. The Bankruptcy Court rejected the Buckles' argument that the foreclosure proceedings must occur in State Court, concluding that the Debtor “may seek judicial foreclosure in any court with jurisdiction to preside over a mortgage foreclosure of the subject property.” Id. at 11. It had ruled identically in a Report and Recommendation of November 13, 2013 in Maryl Group, ECF No. 19-1, and a challenge to that Report and Recommendation was pending at that time before another judge in this District. See Maryl Group (ECF No. 1-1 at 11, in Civ. No. 13-00613 LEK-KSC).

         On January 13, 2014, that District Judge rejected the Report and Recommendation in Maryl Group, and dismissed that adversary proceeding without reaching the merits. ECF No. 20-1. That Judge determined -- contrary to the Bankruptcy Court's view expressed in Maryl Group, and in the December 19, 2013 Findings in the Buckles' adversary proceeding -- that the plain language of the relevant documents required foreclosure proceedings to be held in State Court. Id. at 10. The Debtor appealed that decision to the Ninth Circuit Court of Appeals. See Maryl Group (ECF No. 11 in Civ. No. 13-00613 LEK-KSC). Given the pendency of that appeal in Maryl Group, the Bankruptcy Court stayed the Buckles' adversary proceeding on February 14, 2014 (upon stipulation between the Debtor and the Buckles) to allow the Ninth Circuit to decide the common question regarding venue for the Debtor's foreclosure actions. See ECF No. 1-6 at 6 (Stipulation and Order Staying Proceedings Pending Appeal).

         Meanwhile, the Bankruptcy Court continued to adjudicate the Debtor's chapter 11 action, and on June 2, 2014, confirmed the Debtor's plan of reorganization. ECF Nos. 19-2 & 19-3 (“the Plan”). The 83-page Plan (exclusive of exhibits) included a provision stating that “[a]s of the Effective Date . . . [the Debtor] shall be converted from a Hawaii limited partnership to a Delaware member-managed limited liability company. The name of the reorganized [Debtor] shall be 1250 Oceanside, LLC.” Plan at 46, ECF 19-3 at 4. The Plan also contained a “Retention of Jurisdiction” provision, stating in part:

Notwithstanding the entry of the Confirmation Order or the occurrence of the Effective Date, the Bankruptcy Court shall retain jurisdiction over the Chapter 11 Cases and any of the proceedings related to the Chapter 11 Cases pursuant to section 1142 of the Bankruptcy Code and 28 U.S.C. § 1334 to the fullest extent permitted by the Bankruptcy Code and other applicable law, including, without limitation, such jurisdiction as is necessary to ensure that the purpose and intent of the Plan is carried out. . . . Without limiting the generality of the foregoing, the Bankruptcy Court shall retain jurisdiction for the following purposes: . . . .
(e) decide or resolve any motions, adversary proceedings, contested or litigated matters and any other matters and grant or deny any applications involving the Debtor that may be pending before the Effective Date or that may be commenced thereafter[.]

Plan at 66-67, ECF No. 19-3 at 24-25.

         On March 21, 2015, the Bankruptcy Court issued an Order Approving Final Accounting of Unsecured Creditors' Fund. See In re 1250 Oceanside Partners, (Bankr. D. Haw.), Case No. 13-00353 at ECF No. 1455-1. And on June 22, 2015, the Bankruptcy Court issued a Final Decree, closing the chapter 11 case. Id. at ECF No. 1464.

         Nearly a year later, on June 21, 2016, the Ninth Circuit issued a memorandum disposition in Maryl Group that reversed the district court, reasoning that the contractual documents “lack[ed] language clearly designating [the State Court] as the exclusive forum for [the Debtor's] foreclosure.” 1250 Oceanside Partners v. Maryl Grp., Inc., et al. (In re: 1250 Oceanside Partners), 652 F. App'x 588, 589 (9th Cir. June 21, 2016). The Ninth Circuit agreed with the Bankruptcy Court's original position, holding that the district court erred in preventing the Debtor from bringing a foreclosure action in the Bankruptcy Court. Id.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Given Maryl Group, the Bankruptcy Court lifted the stay in the Buckles&#39; adversary proceeding and revised its December 19, 2013 Findings. Specifically, on September 29, 2016, it issued the Amended Findings, which are substantively identical to the December 19, 2013 Findings, but with appropriate revisions reflecting the subsequent proceedings in Maryl Group. Amended Findings at 9 (“[The] Buckles argue that the Third Circuit Court is the only proper forum for this ...

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