United States District Court, D. Hawaii
ORDER GRANTING DEFENDANTS' MOTION TO DISMISS
REFILED FIRST AMENDED COMPLAINT
Derrick K. Watson, United States District Judge
Road and Nakamura initiated this action on November 16, 2016.
See Compl., Dkt. No. 1. On July 20, 2017, they filed
what they termed a “Refiled” First Amended
Complaint (“Second Amended Complaint” or
“SAC”; Dkt. No. 40). Through the SAC, Plaintiffs
seek monetary damages and equitable relief arising out of an
alleged, fraudulently procured loan agreement with Maui Gas
reasons set forth below, the Court GRANTS Defendants'
Motion to Dismiss the SAC. MTD, Dkt. No. 41. Count I of the
SAC is hereby DISMISSED WITHOUT PREJUDICE while all other
counts are DISMISSED WITH PREJUDICE.
about December 9, 2009, American Savings Bank, F.S.B.
(“ASB”) extended a $1, 384, 213 commercial loan
to Dairy Road (“ASB Loan”) that was guaranteed by
Nakamura, Dairy Roads' General Partner. SAC ¶ 8,
Dkt. No. 40. The ASB Loan granted ASB a lien and security
interest in the property located at 380 Dairy Road, Kahului,
Maui, Hawaii, Tax Map Key (2) 3-8-65-27 (“Subject
Property”). SAC ¶¶ 4, 8, Dkt. No. 40.
March 3, 2013, after Dairy Road fell behind on its mortgage
payments under the ASB Loan, ASB filed for foreclosure in the
Second Circuit Court of the State of Hawaii, Civil No.
13-1-0283(3) (“Foreclosure Action”). SAC ¶
12, Dkt. No. 40. Dairy Road also filed for Chapter 11
bankruptcy around that time. SAC ¶ 13 (stating that the
eventual dismissal of the bankruptcy case delayed proceedings
in the Foreclosure Action until December 24, 2014).
Interest in the Subject Property
the Foreclosure Action was pending, Cheng-a
“self-proclaimed investor from Texas” (Mem. in
Opp'n at 2, Dkt. No. 45) who is the “principal and
controlling person” of Maui Gas (SAC ¶ 7, Dkt. No.
40)-allegedly approached Nakamura for advice regarding his
“interest in investing in commercial properties in
Hawaii.” SAC ¶ 11, Dkt. No. 40. Apparently, the
two became friends, Nakamura “acquaint[ed] Cheng with
the Subject Property, ” and based on Cheng's
“promises that Cheng and [Maui Gas] could financially
assist” Plaintiffs with their defaulted ASB Loan,
Cheng, Nakamura and ASB began to negotiate a deal. SAC
¶¶ 11, Dkt. No. 40.
represented to Nakamura and others “that Cheng was
going to buy the ASB Loan on [Plaintiffs'] behalf to help
[Dairy Road] gain some time to refinance or sell” (SAC
¶ 16) and to stop the Foreclosure Action (SAC ¶
14). As discussed further below, in consideration for what
Plaintiffs characterize as Cheng's offer to give
Plaintiffs a chance to repay the note within a certain period
of time, Cheng sought guaranteed rent proceeds from the
various leases of the Subject Property, together with
remediation of identified contamination on the property by
Plaintiffs. Towards these ends, on September 9, 2014, Cheng
emailed Nakamura's son, Garth:
Let's work on Dairy Road. Get me bank contact. Get me ESA
report on contamination. I will just cold call the bank and
say I want to buy the note.
SAC, Ex. 7.3 at 33, Dkt. No. 40-10. On September 17, 2014,
Chuck Choi, Dairy Road's attorney, provided a copy of the
complaint in the Foreclosure Action to Cheng. SAC, Ex. 7.3 at
36, Dkt. No. 40-10. Choi also asked Cheng to send a written
proposal directly to ASB's attorney, Wayne Mau, and
suggested specific language for him to do so:
I understand that [ASB] has a foreclosure case pending
against Dairy Road Partners in Maui Circuit Court. However, I
also understand that Dairy Road Partners' underground
storage tanks have discharge issues that could cost Dairy
Road or any other potentially responsible party significant
sums to remediate. Nevertheless, I am willing to purchase the
bank's Note, Mortgage and related loan documents for
$400, 000, which is approximately 30% of the outstanding
principal balance due on the loan. If an agreement is reached
and documented, I could close the transaction within a week
SAC, Ex. 7.3 at 35-36 [Choi emails dated Sept. 17 and 18,
2014], Dkt. No. 40-10.
Offer to Purchase the ASB Loan
September 20, 2014, Cheng emailed a $300, 000 purchase price
proposal to ASB, with a copy to Choi. SAC ¶¶ 14-15,
Dkt. No. 40; SAC, Ex. 7.4 at 5-8, Dkt. No 40-11). When no
response from the bank was immediately received, Choi
contacted ASB's attorney on September 26, 2014 and was
told “that the bank wanted to review its environmental
consultant's written report, which is expected next
week[, ]” before responding. See SAC, Ex. 7.1
at 5, Dkt. No. 40-8. By October 6, 2014, the negotiations
were in the same posture, with ASB still considering the
environmental reports on the Subject Property before
“putting together a formal written response to Mr.
Cheng.” SAC, Ex. 7.1 at 11, Dkt. No. 40-8.
later, ASB submitted a counter-offer (see SAC, Ex.
7.1 at 22, Dkt. No. 40-8 (writing, “I understand the
bank countered Paul Cheng”)), and on October 15, 2014,
Cheng contacted Choi asking for “an exact list of
collateral securing the Dairy Road Note to ASB, ” and
for various related financial statements and
“underlying ground leases” (SAC, Ex. 7.1 at 21,
Dkt. No. 40-8). At the same time, Choi made his own request,
asking ASB for “a copy of Mr. Nakamura's report so
that he can consider the bank's counter offer.”
SAC, Ex. 7.1 at 22, Dkt. No. 40-8.
October 15, 2014, Cheng emailed Choi a second time. Cheng
reminded Choi that “health dept sign off” on
remediation of the property was necessary “before I
close” (SAC, Ex. 7.1 at 23, Dkt. No. 40-8) and that
“I will insist on a lockbox control receipts account
structure so I make sure I get monthly [rent] payments”
(SAC, Ex. 7.4 at 12, Dkt. No. 40-11). Cheng followed up with
Garth Nakamura the next day to find out “what is the
best [Plaintiffs] are able to pay on the deal so [Cheng] can
get back to ASB.” SAC, Ex. 7.4 at 13, Dkt. No. 40-11.
Cheng's message included the following deal summary:
general concept I am willing to do is as follows:
$15, 000 to $20, 000 a month depending on how much I have to
pay for the note.
Minimum term 4 years before buyout can take place.
Collateral control in “lockbox” style banking
arrangement of rent receipt from Savers and gas receipts up
to the monthly amount. This entails depositing automatically
all receipts monthly to the lock box and then after I get my
monthly, I release automatically all other amounts above that
back to you/operator.
Buy back from me any time after 4 years for my original
purchase price from ASB be it X or $750, 000.
Otherwise, the deal just goes on for the rest of the length
of the land lease.
Please advise as to your continuing interest.
SAC, Ex. 7.4 at 13, Dkt. No. 40-11. Although the SAC contains
no evidence of a specific response from Plaintiffs, Garth
Nakamura subsequently began communicating with a Department
of Health official regarding an underground storage tank
precision test. See, e.g., SAC, Ex. 7.4 at 23-24;
Dkt. No. 40-11.
Acceptance of ASB Counter-Offer
October 29, 2014, Cheng successfully purchased the ASB Loan,
announcing to Plaintiffs that, “ASB accepted my
offer-$400k, ” and “We are ON.” SAC, Ex.
7.4 at 15, Dkt. No. 40-11. Cheng offered Choi a few additional
Ok. [ASB's attorney] is going to brief me on the
collateral package and where the civil litigation stands. Let
me get my feet on the ground on his legal package and then we
can have a conference call with you[, Nakamura, ] and Garth
to see how we can move the game forward.
I told [Nakamura] to hurry up now and . . . get the
environmental issue resolved be it $80k to clean up the test
wells or whatever.
SAC, Ex. 7.4 at 16-17, Dkt. No. 40-11.
concluding negotiations with ASB over the loan purchase,
Cheng turned to negotiating a loan modification with Dairy
Road. As part of that process, he introduced Choi to both
Alice Wong, his partner in Texas, and Anthony Barbieri, his
attorney. SAC, Ex. 7.1 at 31, Dkt. No. 40-8; see
also SAC ¶ 32, Dkt. No. 40 (referring to Wong as
Cheng's Texas “accountant”); SAC, Ex. 7.4 at
25, Dkt. No. 40-11. Cheng requested “a bunch of
documents from [Plaintiffs] at their earliest convenience,
” to be forwarded to Barbieri and Wong, who would
“be calling Choi to go over all the facts and . . .
structures” (SAC, Ex. 7.1 at 31, Dkt. No. 40-8),
1. Land Lease from HRT and all amendments
2. Lease of C store and office to Waiehu Partners and
amendments if any
3. Antenna Lease and all amendments
4. Savers Lease and all amendments
5. Gasoline Excise Taxes owed recap and correspondences with
6. Insurance Policy and all correspondences on Environmental
7. Property and Casualty liability Insurance policy on C
store and improvements in place
8. Buyout Agreement from Junior Partners
9. Operating Plan from [Nakamura]/Garth going forward and
financial proposal for us
(SAC, Ex. 7.4 at 25, Dkt. No. 40-11). On November 10, 2014,
Cheng followed up with Garth Nakamura, indicating that the
following items were still outstanding:
1. your proforma going forward
2. buyout of your partners
3. regaining control of the C Store
4. tank pressure test
5. final environmental cleanup cost estimate and funding
6. cap ex budget on updating C store
7. Savers building lease extension'
8. Outstanding Land lease payments-NEED RECAP
9. Outstanding bank escrow on #8 above-NEED RECAP
SAC, Ex. 7.1 at 57, Dkt. No. 40-8. On November 17, 2014, Wong
requested five additional documents from Garth Nakamura,
including: “Rent roll, ” “All tenant leases
and amendments, ” “Security deposit schedule,
” “Current insurance policies, ” and
“Mortgage Tax payment status, if applicable.”
SAC, Ex. 7.1 at 61, Dkt. No. 40-8.
November 18, 2014, Cheng wrote an email to Garth Nakamura
entitled, “Proposal to Glenn Nakamura-Dairy Road
Ventures Maui Gas Station”:
Need a plan for:
Remediation costs. I need to know you are all going to
perform the necessary remediation whatever the test results
next month specifies.
C-Store remodel. I need to know that you guys are going to
remodel the store so that you can compete.
Status: Buyout of [Dairy Road.]
SAC, Ex. 7.4 at 33, Dkt. No. 40-11. At the same time, as a
“Counter back to [Plaintiffs], ” Cheng offered to
“Keep present note-we remain as lender only[, ]”
apparently without any modification, or to “Revise
Terms of Note” according to a detailed plan appearing
therein. See SAC, Ex. 7.4 at 34-39 [Revision Plan],
Dkt. No. 40-11. The next day, Cheng offered additional ideas
on how to structure any modification: “[w]e can raise
the buyback price, apply some of the upfront payments towards
the buyback and end up in the same ...