SDCK I LLC v. Aina Le'a, Inc.

• Docket Number: CAAP-22-0000023
• Decision Date: 06 June 2025
• Citation: SDCK I LLC v. Aina Le'a, Inc., CAAP-22-0000023 (Haw. App. Jun 06, 2025)
• Parties: SDCK I LLC, a Delaware limited liability company, Plaintiff/Counterclaim Defendant/Appellee, v. AINA LE'A, INC., a Delaware corporation; LULANA GARDENS LLC, a Delaware limited liability Company; HO'OLEI VILLAGE LLC, a Hawai'i limited liability company; B-1-A D-1-A, LLC, a Hawai'i limited liability company, Defendants/Third-Party Plaintiffs/Cross-Claim Defendants/Appellants, and ROMSPEN INVESTMENT CORPORATION, Defendant/Cross-Claim Defendant/ Counterclaimant/Cross-Claimant/Third-Party Plaintiff/Appellee, and BRIDGE AINA LE'A, LLC, a Hawai'i limited liability company, Defendant/Cross-Claim Defendant/Counterclaimant/ Cross-Claimant/Appellee, and LIBO ZHANG, Defendant/Counterclaimant/Cross-Claimant/ Cross-Claim Defendant/Appellee, and PLANNING DIRECTOR, DEPARTMENT OF PLANNING, County of Hawai'i; COUNTY OF HAWAI'I, a municipal corporation, State of Hawai'i, Third-Party Defendant/Appellee, and ROBERT WESSELS, Third-Party Defendant/Appellee, and JOHN DOES 1-50, JANE DOES 1-50; and DOE ENTITIES 1-50, Defendants.
• Court: Hawaii Court of Appeals

1

SDCK I LLC, a Delaware limited liability company, Plaintiff/CounterclaimDefendant/Appellee, v. AINA LE'A, INC., a Delaware corporation; LULANA GARDENS LLC, a Delaware limited liability Company; HO'OLEI VILLAGE LLC, a Hawai'i limited liability company; B-1-A D-1-A, LLC, a Hawai'i limited liability company, Defendants/Third-Party Plaintiffs/Cross-ClaimDefendants/Appellants, and ROMSPEN INVESTMENT CORPORATION, Defendant/Cross-ClaimDefendant/ Counterclaimant/Cross-Claimant/Third-Party Plaintiff/Appellee, and BRIDGE AINA LE'A, LLC, a Hawai'i limited liability company, Defendant/Cross-ClaimDefendant/Counterclaimant/ Cross-Claimant/Appellee, and LIBO ZHANG, Defendant/Counterclaimant/Cross-Claimant/ Cross-ClaimDefendant/Appellee, and PLANNING DIRECTOR, DEPARTMENT OF PLANNING, County of Hawai'i; COUNTY OF HAWAI'I, a municipal corporation, State of Hawai'i, Third-Party Defendant/Appellee, and ROBERT WESSELS, Third-Party Defendant/Appellee, and JOHN DOES 1-50, JANE DOES 1-50; and DOE ENTITIES 1-50, Defendants.

No. CAAP-22-0000023

Intermediate Court of Appeals of Hawaii

June 6, 2025

NOT FOR PUBLICATION IN WEST'S HAWAIʻI REPORTS AND PACIFIC REPORTER

APPEAL FROM THE CIRCUIT COURT OF THE THIRD CIRCUIT(CIVILNO 3CCV-20-0000375)

Leonard, Acting Chief Judge, Nakasone and McCullen, JJ.

SUMMARY DISPOSITION ORDER

This appeal arises out of a foreclosure summary judgment in favor of the lender, and challenges whether the circuit court erred by declining to exercise equitable discretion.We affirm.

Defendants Third-PartyPlaintiffs/Cross-Claim Defendants/AppellantsAina Le'a, Inc., Lulana Gardens LLC, Ho'olei Village LLC and B-1-A D-1-A, LLC(collectively, Borrowers) appeal from the December 28, 2021"Findings of Fact [(FOFs)], Conclusions of Law [(COLs)], and Order Granting PlaintiffIron Horse Credit LLC's Second Motion for Summary Judgment and Interlocutory Decree of Foreclosure"(Order Granting MSJ) and Judgment, both entered by the Circuit Court of the Third Circuit (Circuit Court).^[1]

On appeal, Borrowers contend that the Circuit Court erred in allowing Plaintiff/Counterclaim Defendant/AppelleeSDCK I LLC(Lender)^[2] to foreclose and not granting it equitable relief from foreclosure.^[3] Upon careful review of the record and the briefs submitted by the parties, and having given due consideration to the arguments advanced and the issues raised by the parties, we resolve Borrowers' contention as follows, and affirm.

On October 13, 2020, Lender filed a Complaint to foreclose on a mortgage, which secured a $5,000,000 loan (Loan) to Borrowers in connection with a development project (Development Project) on former agricultural land in Waikōloa on Hawai'i Island.The loan was secured by a mortgage (Mortgage) on four parcels of real property (collectively, Land) owned by Borrowers.

While Borrowers admitted receiving the Loan and giving the Mortgage as security, Borrowers denied being in default, claiming that a critical component of the Development Project and their ability to satisfy their Loan obligations was the construction of 385 affordable housing units, which was a condition imposed when the State Land Use Commission reclassified the Land from agricultural to urban district.

In 2011, the State Land Use Commission reclassified the Land back to agriculture because the affordable housing requirements had not been satisfied in a timely manner.The reclassification was challenged in court, and a 2014Hawai'i Supreme Court decision agreed that the State Land Use Commission erred in the reclassification back to agriculture, and the ruling allowed construction on the affordable housing units to resume.

On May 16, 2017, however, the Director of the Hawai'i County Planning Department(Planning Director) issued a stop work order halting all construction on the affordable housing units until Borrower Aina Le'a, Inc., as the master developer, completed a supplemental environmental impact statement (EIS) for its proposal to change the zoning on the Land from Urban District to Project District zoning.The Planning Director's stop work order led to Aina Le'a, Inc. filing for bankruptcy.The Loan and Mortgage upon which Lender was seeking to foreclose, was part of the financing necessary for Aina Le'a, Inc.'s bankruptcy reorganization plan.

Borrowers argue the Circuit Court erred by disregarding Section 3.3 of the Loan Agreement and refusing to exercise its equitable discretion.According to Borrowers, Section 3.3"invited the [C]ircuit [C]ourt to intervene and to protect and conserve the parties' respective equities[.]"They argue the Circuit Court erroneously declined to exercise its equitable discretion to prevent forfeiture, making Borrowers solely bear any resulting forfeiture and ignoring Section 3.3; and Borrowers assert that foreclosure is an equitable remedy, and "equity abhors a forfeiture."

Generally, "the construction and legal effect to be given a contract is a question of law freely reviewable by an appellate court."Brown v. KFC Nat'l Mgmt. Co., 82 Hawaiʻi 226, 239, 921 P.2d 146, 159(1996)(citations omitted).Summary judgment is also reviewed de novo.Nozawa v. Operating Engineers Local Union No. 3, 142 Hawaiʻi 331, 338, 418 P.3d 1187, 1194(2018).

Section 3.3 of the Loan Agreement states in part:

ARTICLE III

REPRESENTATIONS AND WARRANTIES

As a material inducement to Lender to enter into this Agreement and the other Loan Documents, and as an express condition to the Loan and all Advances made hereunder each Borrower hereby represents and warrants to Lender, as follows:

. . . .

SECTION 3.3Enforceability.

(a) This Agreement is, and all other Loan Documents executed by Borrower, on the execution and delivery thereof, and in each event on the Closing Date, will be, the legal, valid and binding obligation of Borrower enforceable in accordance with their terms, except to the extent such enforcement may be limited in the future by applicable bankruptcy, insolvency and other similar creditors' rights laws and principles of equity.

(b) This Agreement is, and all other Loan Documents executed by each Borrower Party on behalf of Borrower, on the execution and delivery thereof, and in each event on the Closing Date, will be, the legal, valid and binding obligation of such Borrower Party enforceable in accordance with their terms, except to the extent such enforcement may be limited in the future by applicable bankruptcy, insolvency and other similar creditors' rights laws and principles of equity.

(Emphases added.)

Here, Lender makes no representations in Article III that it was agreeing that Borrower would be excused from making timely repayments under the Loan if it had an equitable excuse.The first paragraph indicates that the representations in Article III are by "each Borrower," who "represents and warrants to Lender" the immediately following recitals in Section 3.3.The Loan Agreement further states in Article IV, that Borrower is responsible for obtaining permits and government approvals necessary for the Development Project.^[4] Borrowers did not introduce any evidence to suggest that Lender was responsible for the State Land Use Commission erroneously reclassifying the Land back to Agriculture District, or for the Hawai'i County Planning Director's stop-work order for the Affordable Housing Project pending completion of a supplemental EIS.

When considering equities in a foreclosure case, the equities affecting both mortgagees and mortgagors must be...