[The poll at the bottom of the post is still open to vote.]
Michael J. Fuchs has been living through a Hawaii court process that turned into a reality show nightmare. The Judge in his case owns a lot of stock in the foreclosing bank! And that’s not all…
HBO‘s former CEO and Chairman of the Board, Michael J. Fuchs, invested over $100 million (dollars) in a Big Island Hawaii development that sank like the Titanic with the economy in 2007. The Hawaii scales of justice have not been tipped in Mr. Fuchs’ favor – apparently they haven’t even been balanced.
Hawaii attorney Gary Dubin, discovered a seriously conflicted situation with more than an appearance of impropriety and asked that the Judge, Honorable Bert I. Ayabe, recuse himself from the case because of…stock investments in Bank of Hawaii, campaign donations to a U.S. senatorial candidate… a law firm first representing Fuchs and then representing the opposing parties… whose lead attorneys were law school chums of the judge, the judge’s wife may have performed legal work for the developer… and the list goes on.
The saga reads like a HBO movie and “it pains me,” said Mr. Dubin, “because we’ve been before this Court many times and this judge is fair, but this time there is certainly an appearance of impropriety and my role and my duty is to protect my client.”
When it was initially discovered that Judge Bert I. Ayabe claimed on his April 25, 2011 Supreme Court of Hawaii Certified Financial Disclosure Statement that he “owned between $25,000 and $50,000 worth of stock in the Bank of Hawaii,” which has not only been a principal party to the actions, but its officers were material witnesses to this day in both cases – Dubin wrote a letter to the judge:
Dubin continues: “Rule 2.11 (a)(3) of the Hawaii Revised Code of Judicial Conduct mandates that a judge not have “an economic interest” in “a party to the proceeding,” and stock ownership in a party is universally considered to be grounds within that prohibition for automatic disqualification in every jurisdiction in the United States, also triggering the Rule 1.2 prohibition against the “appearance of impropriety”; see, e.g., White v. Suntrust Bank, 245 Ga. App. 828, 538 S.E.2d 889 (2000) (“a judge who holds stock in a corporation that is a party to a suit should recuse herself from the case”).
It is not considered sufficient for a judge nevertheless to remain in a case by merely claiming that a judge’s stock holding is relatively de minimis; see, e.g., Huffman v. Arkansas Judicial Discipline and Disability Commission, 344 Ark. 274, 281-282,42 S.W.3d 386, 344 (2001) (“While there is little doubt that the action taken by Judge Huffman was unlikely to fundamentally affect the value of his and his wife’s stock, which comprises but a minuscule percentage of the total stock existing in WalMart, this analysis on the de minimis value of an economic interest mentioned in Canon 3E(1)(c) ignores the more basic issue of appearance of impropriety”).
See also, Thomson v. McGonagle, 33 Haw. 565, 566 (1935) (“it is settled that a stockholder of a corporation has a ‘pecuniary interest’ in an action in which the corporation is interested in its individual capacity … and it follows that Mr. Justice Peters is disqualified”). [. . .]
Furthermore, the question of the timeliness of raising such an ethical objection does not arise in such a stock holding context, for not only thankfully is it not a part of the lawyering of Hawaii attorneys to investigate the stock holdings of our Judges, it is an additional ethical requirement of Hawaii Judges to make such disclosures themselves sua sponte.
And, the failure to move for disqualification before the entry of final judgment in a stock holding context such as this, the United States Supreme Court has concluded is grounds — without there nevertheless being any prior objection – to set aside final judgments already entered; Lilieberg v. Health Services Acquisition Corp., 486 U.S. 847, 868 (1988) (“if we focus on fairness to the particular litigants, a careful study of Judge Rubin’s analysis of the merits of the underlying litigation suggests that there is a greater risk of unfairness in upholding the judgment in favor of Liljeberg than there is in allowing a new judge to take a fresh look at the issues”).
See also, Office of Disciplinary Counsel v. Au, 107 Haw. 327, 338, 113 P.3d 203
(2005) (timely where “the matters of disqualification are unknown to the party at the
time of the proceeding and are newly discovered”).”
If you are a foreclosure defense attorney and have started researching the disclosure statements of your judiciary – you are likely salivating over this information. If you are a property owner in foreclosure you can see how one might be prejudiced by the judge’s investments.
The Fuchs Case Developed Like an Episode from Dallas
The lenders — Bank of Hawaii, Central Pacific Bank and Finance Factors Ltd. – initiated the foreclosure in October 2009, claiming that Fuchs defaulted on loans that matured in 2008. Mr. Fuchs had foreclosure rulings by the judge which benefited Bank of Hawaii that were fortunately appealed prior to learning about Judge Ayabe’s investments.
This wasn’t a small deficiency judgment (not that any of them are small if they are yours and you are forced to pay) – this was $21.6 million. A loss of that amount is enough to affect a small bank’s bottom-line and cause its shareholders to become nervous – which could cause stock values to drop dramatically. Owning $25,000 to $50,000 worth of stock in the Bank of Hawaii that could dry up or significantly reduce overnight [like Enron] would also have a negative impact. You think it’d be easy to see the conflict and reasonable to assume an appearance of impropriety, right?
In his defense, Honorable Judge Bert I. Ayabe stated that the stock has been in a custodial account since 1995 with his wife now serving as the account fiduciary. It had been purchased for $10,102.67 and he believed there to be 600 shares worth $29,334 - and then the Judge refused to recuse himself. Now the decision for recusal will go to a higher court.
$29,334 worth of stock invested in the bank is not considered de minimis to the average individual…
BUT that was only part of the story.
Michael Fuchs came to Hawaii wanting to share and invest his success in one of the most beautiful paradises in the world. He found spectacular property on the Kohala Coast of the Big Island and decided to safely invest it in real estate. It wasn’t a huge sprawling project – just 59 quality homes on 65 acres.
Hawaiiana Development Group LLC, led by Will Beaton helped Fuchs create Ke Kailani, which arose out of a search by Fuchs nearly a decade ago to build himself an oceanfront estate in Hawaii. ”He has close friendships with many well-known entertainers and has let them know about the project,” Beaton said to reporters at the time sharing the limelight.
Fuchs paid a pricey $15.5 million for the parcel in June 2002 and drew up a plan that included 51 homes; condo kitchens designed by Hawaii celebrity chef Alan Wong; a community clubhouse with a saltwater pool overlooking the ocean; and a 5.5-acre inland park with a freshwater pond, pools, a hula mound, jogging trail and courts for basketball, tennis and sand volleyball.
According to property records, Fuchs had early success with sales. In all, Fuchs sold 14 lots and two condos for a combined $38 million, according to property records.
“For me, this is a legacy project that I want to look back on and be proud of,” said Fuchs, who began coming to the resort 20 years ago during his tenure at HBO. ”I’m not a mainstream developer trying to maximize my profits, but instead an individual who believes that I have a personal responsibility to tread lightly on this land; to build something special that will stand the test of time,” he said.
Like many Hawaii homeowners, Fuchs felt investing in real estate was safer and more akamai. However, as the financial force majeure hit Hawaii, sales dwindled and loan payments slowed and crushed Michael Fuchs’ dream.
By 2008, Mr. Fuchs had hired attorney Ed Case to assist with the sale of his company, Ke Kailani Development. Prior to 2007, Mr. Case had been a U.S. Congressman (filing in after the passing of Hawaii’s beloved Patsy Mink). Mr. Case is an attorney “of counsel” with the Bays law firm and is currently running for U.S. Senate from Hawaii.
The plot thickens here, as several members of the Bays law firm, including Ed Case (1981) and Judge Ayabe (1981), attended University of California, Hastings College of the Law.
It appears in an effort to assist Mr. Fuchs in selling the project and releasing his liabilities on the notes as guarantor, Mr. Case and Bays introduced the idea of one of the Bays’ other clients buying out the Ke Kailani project – after the Judge had already ruled on the foreclosure in favor of Bank of Hawaii (the bank where the Ayabe family own a significant amount of stock).
Fuchs filed Chapter 11 a day before a foreclosure auction was scheduled to dispose of the unsold parts of the subdivision.
The Good ‘ol Boys
Bays and Case structured a deal between Mr. Fuchs and the Hunt Companies of El Paso, TX operating in Hawaii as Hawaii Renaissance Builders, LLC who are involved in everything from military housing to Hawaiian Homelands projects… and quite well-connected and generous in their campaign contributions to Ed Case, Sen. Inouye and Gov. Abercrombie.
Does anyone hear the Dallas theme music in the background?
Where’s JR Ewing? It looks like the Hunt’s have their own version of South Fork Ranch.
More Conflict – - -
It’s not unusual for the same attorney (Case) or firm to represent adverse parties as long as there is an acknowledgment between the parties – but having suffered massive losses in the development, Mr. Fuchs was a bit more cautious.
The deal came together in what appears to have been shifts. Hawaii Renaissance Builders, LLC (HRB) was talking to Bank of Hawaii through the attorneys at Bays and then constructing a deal with Fuchs and Ke Kailani Development on the side. HRB had effectively talked the banks into settling for $17.5 million and removing Mr. Fuchs as guarantor of the notes. HRB agreed to escrow $1 million and Fuchs agreed to pay $1.5 million to solidify the deal. The transaction was described in the agreement as “akin to a conveyance in lieu of foreclosure.” Sounds like a plan, yeah?
For some reason, there was an ambiguous catch in the settlement documents drafted by Mr. Case. HRB wanted the funds specifically deposited with Title Guaranty in Honolulu, although the contract read, “[O]wner shall deposit with escrow agent, by letter of credit, wire transfer, or certified check, or other form of immediately available funds.“
If there was a hiccup or the banks changed their minds, Fuchs could lose his funds or have to fight another battle to have them returned. He had already lost a $4 million letter of credit to banks earlier without warning, so Fuchs wanted a “back-to-back escrow” where his money in New York could be wired at within minutes (a “form of immediately available funds”) at the same time with everyone else’s funds – which would have been even faster than a cashier’s check.
By this time, Case appears to have been primarily lawyering for Hunt aka Hawaii Renaissance Builders. Eight days before the deal between HRB and Fuchs was supposed to close and while the acquisition agreement was still in effect, HRB disingenuously entered into a new agreement with the banks – without informing Fuchs. “….[a]t the end of the day,” says Ed Case in a deposition, “HRB’s goal was to aquire the property, free and clear of the claims in foreclosure and of the foreclosure action.” Apparently.
Ed Case’s experience as posted in his bio on the Bays website states that he, “represented hard money lenders in loan negotiation, documentation and securitization in Hawaii properties.” Probably why he hasn’t specifically addressed the foreclosure problems in Hawaii on his campaign trail. [Ed. note: Mr. Case was sent an email inviting him to comment but has not responded]
The court pleadings indicate that Case’s law firm and HRB had taken the position that because Fuchs didn’t want to further expose more of his funds and deposit $1.5 million into Title Guaranty (a Hawaii escrow company) and because he wanted to make funds available by wire from a New York escrow account, that this would allow HRB to come in and make a deal directly with the banks without notice to Mr. Fuchs. Thereby, effectively
stealing taking the property and holding Fuchs up for a $21.6 million deficiency judgment – all done in anticipation – not a confirmation that he would not perform in the deal – and without risking their money.
In the transcripts of the hearing before Judge Ayabe, Mr. Dubin summarizes a logical version of events with emphasis on Mr. Case’s drafting of contractual agreements stating that he [Dubin] suspected Mr. Case “realized he didn’t draft the documents properly. [...] So he was confronted with the situation where, if HRB wanted this deal, [...] they had to put their deposit at risk first because they had a date certain and they had no way out.”
The agreement that was drafted by Mr. Case and his firm allowed for Bank of Hawaii to exit with a slight payment penalty if someone else came in and offered more money. Case’s primary client, HRB, did not fund the escrow with their $1 million either – yet, before the closing date HRB appears to have back-door’d a deal with Bank of Hawaii and then cancelled the agreement with Fuchs impairing his ability to perform and leaving him exposed for a huge deficiency.
All of this is being argued before a Judge who has a significant family investment in the bank at the heart of the foreclosure, who admits to supporting Mr. Case’s political campaign and to hailing from the same class and alma mater as Mr. Case and a number of his associates in his law firm.
Is there an appearance of impropriety here?
Would you be comfortable if you were Michael Fuchs? You are invited to participate in the poll at the end of the post.
As Mr. Dubin argues on behalf of Mr. Fuchs in his Motion to disqualify the Honorable Bert I. Ayabe from all proceedings in this case and for the HRCP Rule 60(b) relief in both this action and simultaneously in related Civil No. 09-1-2523-10:
“Judge Ayabe knew of his family’s stock ownership, but failed to disclose it, which is an independent ground for disqualification.
As the Supreme Court of New Hampshire held in Blaisdell v. City of Rochester, 135
N.H. 598, 593-594, 609 A.2d 388 (1992), ”it is the judge’s responsibility to disclose, sua sponte, all information of any potential conflict between himself and the parties or their attorneys when his impartiality might reasonably be questioned…. Neither the client nor his attorney have any obligation to investigate the judge’s impartiality; * * * * we hold that a judge’s failure to disclose to the parties the basis for his or her disqualification under Canon 3C ["appearance of impropriety"] will result in a disqualification of the judge.”“
“At the May 17, 2011 status conference, Judge Ayabe concluded that he was confident that he could judge the cases fairly, but the test for the appearance of impropriety is an objective, not a subjective one – what a reasonable person in Mr. Fuchs’ position would think:
- Mr. Fuchs is a resident of the State of New York, who was already arguably
double-crossed by his own former Hawaii law firm which the evidence now shows stole his contractual arrangement with the Bank of Hawaii out from under him for the Hunt Group from Texas.
- Mr. Fuchs then learned that Judge Ayabe admitted that he went to law school with members of that law firm (Defendant Bays Law Firm) who he considers his friends.
- Mr. Fuchs meanwhile is suing those friends of Judge Ayabe for upwards of $21,600,000 for fraud and for indemnification, and who are material witnesses in the cases before Judge Ayabe.
- Mr. Fuchs faces a potential $21,600,000 deficiency judgment based on personal guaranties that were supposed to have been released, but for the wrongful acts of Mr. Ed Case, Judge Ayabe’s law school classmate and admitted friend who Judge Ayabe has also admitted supporting in his political campaign.
- Mr. Fuchs now suddenly learns that Judge Ayabe’s family all the time while presiding over the Bank of Hawaii’s foreclosure action against him had an undisclosed 600-share stock ownership interest in the Bank of Hawaii despite the fact that he is the First Circuit Court Foreclosure Judge presiding over foreclosure cases, including not only his, but others brought often by the Bank of Hawaii.
“An objective observer” in such circumstances surely “reasonably could have questioned the judge’s impartiality,” which is the governing ethical test and not what Judge Ayabe mistakenly may have thought, which is the objective standard in every jurisdiction in the United States, Joyner v. Commissioner of Corrections, 55 Conn. App. 602, 609, 618-619, 740 A.2d 424 (1999) (“the appearance and the existence of impartiality are both essential elements of a fair trial … Canon 3(c)(1) of the Code of Judicial Conduct requires a judge to disqualify himself in any proceeding in which judicial impartiality might reasonably be doubted”).
This case belongs to every single homeowner facing foreclosure because Mr. Fuchs is fighting a fundamentally important issue, not just for himself – but for all American homeowners so that justice will be reminded that it must be fair and balanced -
without even a remote appearance of impropriety.
DeadlyClear will be following this case and your opinions and comments do count.
STAY TUNED – and SUBSCRIBE SO YOU DON’T MISS OUT ON…
Coming up next will be where and how to look up the state and federal judicial disclosure statements to see where your judge has invested his/her money.