Katzenstein v. Sandwich Isles Commc'ns, Inc. (In re Paniolo Cable Co.)

• Decision Date: 03 March 2022
• Docket Number: Civ. 21-00499 JMS-WRP,Civ. No. 21-00499 JMS-WRP
• Citation: 588 F.Supp.3d 1065
• Court: U.S. District Court — District of Hawaii
• Parties: IN RE PANIOLO CABLE COMPANY, LLC, Debtor. Michael Katzenstein, as Chapter 11 Trustee, Plaintiff, v. Sandwich Isles Communications, Inc., Defendant.

In re PANIOLO CABLE COMPANY, LLC, Debtor.

MICHAEL KATZENSTEIN, as Chapter 11 Trustee, Plaintiff, v. SANDWICH ISLES COMMUNICATIONS, INC., Defendant.

Civ. No. 21-00499 JMS-WRP

United States District Court, D. Hawaii

March 3, 2022

ORDER GRANTING THE UNITED STATES' MOTION TO QUASH PAU LOA VENTURES, INC.'S WRIT OF EXECUTION

J Michael Seabright Chief United States District Judge

I. INTRODUCTION

This Order addresses the United States' Motion to Quash Pau Loa Ventures, Inc.'s Writ of Execution (“Motion to Quash”), which was originally filed in the U.S. Bankruptcy Court for the District of Hawaii. See ECF No. 1-3 at PageID ## 16-26 (Motion to Quash filed in Adversary No. 19-90022 in Bankruptcy Court No. 18-01319 RJF). After the Motion to Quash was fully briefed by the United States and Pau Loa Ventures, Inc. (“Pau Loa”), see ECF Nos. 1-2 to 1-6, the Bankruptcy Court recommended that this District Court withdraw the reference under 28 U.S.C. § 157(d) and decide the Motion to Quash. ECF No. 1-1. This court adopted that recommendation on January 31, 2022. ECF No. 4. The court, having reviewed the briefing, decides the matter under Local Rule 7.1(c) without a hearing. The court GRANTS the Motion to Quash.

II. BACKGROUND

In a related case before this court, Civil No. 18-00145 JMS-RT, the United States foreclosed on a series of loans and promissory notes it made with Sandwich Isles Communications (“Sandwich Isles”) from 1997 to 2001. See United States v. Sandwich Isles Commc'ns, 398 F.Supp.3d 757, 764-65 (D. Haw. 2019); ECF No. 1-3 at PageID # 28.^[1] The United States obtained a final order finding Sandwich Isles in default of those loans. See 398 F.Supp.3d at 773; United States v. Sandwich Isles Commc'ns, 2020 WL 544692, at *9 (D. Haw. Feb. 3, 2020) (order granting final partial judgment under Federal Rule of Civil Procedure 54(b)).^[2] A judgment of $138, 557, 635.82 was entered in favor of the United States against Sandwich Isles (the “Judgment”). See ECF No. 225 in United States v. Sandwich Isles Commc'ns, Civ. No. 18-00145 JMS-RT (February 18, 2020 Order Amending Judgment); ECF No. 226 in Civ. No. 18-00145 JMS-RT (February 18, 2020 Amended Partial Judgment of $138, 557, 635.82 in favor of the United States). The United States recorded the Judgment and obtained a writ of execution on May 1, 2020, levying certain property of Sandwich Isles. See ECF No. 260 in Civ. No. 18-00145 JMS-RT. It is undisputed that the assets of Sandwich Isles are insufficient to satisfy that Judgment. See, e.g., ECF No. 1-3 at PageID # 30.

The United States' loans were secured by a March 2, 1998 Mortgage, Security Agreement and Financing Statement (“1998 Mortgage”). See Id. At PageID ## 28-29; Id. at PageID ## 75-77. The 1998 Mortgage pledged as collateral:

All right, title and interest of [Sandwich Isles] in and to the Existing Facilities and buildings, plants, works, improvements, structures, estates, grants, franchises, easements, rights, privileges and properties real, personal and mixed, tangible or intangible, of every kind or description, now owned or leased by [Sandwich Isles] or which may hereafter be owned or leased, constructed or acquired by [Sandwich Isles], wherever located, and in and to all extensions and improvements thereof and additions thereto, including all buildings, plants, works, structures, improvements, fixtures, apparatus, materials, supplies, machinery, tools, implements, poles, posts, crossarms, conduits, ducts, lines, whether underground or overhead or otherwise, wires, cables, exchanges, switches including, without limitation, host switches and remote switches, desks, testboards, frames, racks, motors, generators, batteries and other items of central office equipment, pay stations, protectors, instruments, connections and appliances, office furniture and equipment, work equipment and any and all other property of every kind, nature and description, used, useful or acquired for use by [Sandwich Isles] in connection therewith and including, without limitation, the property described in the following property schedule . . . .

ECF No. 1-3 at PageID # 80 (RUS-0000189). As described by the United States in its Motion, the 1998 Mortgage also pledged:

“grants, privileges, rights of way and easements, ” “any and all licenses, franchises, ordinances, privileges and permits, ” “any and all contracts, ” “any and all other accounts, contract rights, and general intangibles . . ., and all stock, bonds, notes, debentures, commercial paper, subordinated capital certificates, securities, obligations of or beneficial interests or investments, ” and “all other property, real or personal, tangible or intangible, of every kind, nature, and description, ” including “rents, income, revenues, proceeds, profits and benefits, ” with an exclusion for “automobiles, trucks, trailers, tractors or other vehicles.”

Id. at PageID # 18 (quoting ECF No. 1-3 at PageID ## 80-82 (RUS-0000189-0000191)). Mortgage supplements and amendments were filed “indicating that the collateral secured six notes for debt owed to [the United States] in an aggregate principal amount of $166, 749, 150.00.” Id. (citing ECF No. 1-3 at PageID # 162 (RUS-0000241)).

The United States perfected its security interest on October 7, 1998 by filing and recording the 1998 Mortgage with the Hawaii Bureau of Conveyances (“Bureau”) as a financing statement of a transmitting utility. Id. at PageID ## 75-77. It also recorded the mortgage supplements in 1999 and 2001 as financing statements of a transmitting utility. Id. at PageID ## 122, 124; ECF No. 1-4 at PageID ## 152-53.

Meanwhile, Michael Katzenstein, as the bankruptcy trustee of Paniolo Cable Company, LLC (“Paniolo”)-which was in chapter 11 bankruptcy proceedings, and was owed substantial amounts from Sandwich Isles-obtained an Order and Judgment of $256, 552, 854.00 plus interest (the “Katzenstein Judgment”) against Sandwich Isles in Bankruptcy Court adversary proceeding 19-90022 in Paniolo's bankruptcy case. See ECF No. 1-5 at PageID ## 278-79. The Katzenstein Judgment was recorded with the Bureau on January 2, 2020-which was before the United States had obtained its $138, 557, 635.82 Judgment against Sandwich Isles (obtained on February 18, 2020)-and Katzenstein assigned it to Pau Loa on June 17, 2020. Id. at PageID # 281.

On October 25, 2021, the Clerk of the Bankruptcy Court issued a Writ of Execution in favor of Pau Loa, directing the U.S. Marshal to levy property of Sandwich Isles in an attempt to satisfy the Katzenstein Judgment. Id. at PageID # 287. The property to be levied was described as:

All fixtures, including: infrastructure facilities, conduits, manholes, handholes, and towers; and equipment, including copper and fiber optic and telecommunication cables, copper and fiber optic transmission, multiplexing, circuit switching, circuit transport equipment, IP routing and switching equipment, test equipment, power systems, cooling systems, security systems, network management systems, cross connects and cross connect panels, fixed and located in or under buildings or buried in the land upon all of the real property locations described hereinafter . . . .

Id. at PageID # 288.

On November 1, 2021, the United States filed its Motion to Quash, ECF Nos. 1-3 and 1-4, seeking to prevent enforcement of Pau Loa's Writ of Execution. Pau Loa filed its Opposition on December 3, 2021, ECF No. 1-5, and the United States filed its Reply on December 10, 2021, ECF No. 1-6. As set forth earlier, this court withdrew the reference from the Bankruptcy Court on January 31, 2022. ECF No. 4.

III. ANALYSIS

The Motion to Quash argues, among other points, that the property identified in Pau Loa's Writ of Execution is fully encumbered by the United States' senior lien and that Sandwich Isles has no remaining equity in the property. ECF No. 1-3 at PageID # 17. The Motion contends that the United States' “lien has been perfected since the recording of [the United States'] Mortgage on October 7, 1998, as supplemented and recorded on July 2, 2001, as against the property of a transmitting utility.” Id. at PageID # 22. And it points out that any execution sale “on the piecemeal Sandwich Isles assets Pau Loa attempts to levy upon . . . must occur subject to and without disturbing [the United States'] superior lien.” Id. at PageID # 20.

In its Opposition, Pau Loa argues that the United States' security interest was not perfected because “the great majority of [Sandwich Isles'] real estate interests and any fixtures affixed to them” were “acquired . . . after the [United States'] mortgage was signed, and neither the real estate nor the fixtures are described in any recorded amendment to the mortgage.” ECF No. 1-5 at PageID # 272. It relies on Hawaii Revised Statutes (“HRS”) § 506-3, which is titled “After-acquired real property and fixtures, ” and provides in part that “[t]he mortgage shall operate only as a contract between the parties with respect to, and shall not create a lien upon real property or fixtures acquired in any manner by the mortgagor subsequent to the execution of the mortgage . . . .” Pau Loa thus contends that its lien, based on the Katzenstein Judgment recorded prior to the United States' Judgment, is first in priority. ECF No. 1-5 at PageID # 273.

But, as the United States points out, HRS § 506-3 does not apply to Pau Loa's Writ of Execution. See ECF No. 1-6 at PageID ## 293, 298. The property at issue is “[a]ll fixtures, including: infrastructure facilities, conduits manholes, handholes, and towers; and equipment, ” etc., at specified locations. ECF No. 1-5 at PageID # 288. The priority of security interests in “fixtures” is governed by HRS §§ 490:9-334 and 490:9-604-not HRS § 506-3-in accordance with specific...