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Dairy Road Partners v. Maui Gas Ventures LLC

United States District Court, D. Hawaii

March 9, 2018

DAIRY ROAD PARTNERS and GLENN NAKAMURA, Plaintiffs,
v.
MAUI GAS VENTURES LLC and PAUL CHENG, Defendants.

          ORDER GRANTING DEFENDANTS' MOTION TO DISMISS REFILED FIRST AMENDED COMPLAINT

          Derrick K. Watson, United States District Judge

         Dairy 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 and Cheng.

         For the 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.

         BACKGROUND

         On or 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”).[1] SAC ¶¶ 4, 8, Dkt. No. 40.

         On 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).

         Cheng's Interest in the Subject Property

         While 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.[2]

         Cheng 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 or two.

SAC, Ex. 7.3 at 35-36 [Choi emails dated Sept. 17 and 18, 2014], Dkt. No. 40-10.

         Cheng's Offer to Purchase the ASB Loan

         On 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[3] before “putting together a formal written response to Mr. Cheng.” SAC, Ex. 7.1 at 11, Dkt. No. 40-8.

         A week 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.[4]

         On 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:

         The 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.

         Cheng's Acceptance of ASB Counter-Offer

         On 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.[5] Cheng offered Choi a few additional details:

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.[6]

         Loan Modification Negotiations

         Upon 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), including:

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 State
6. Insurance Policy and all correspondences on Environmental Issues
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 process
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.

         On 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 ...


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