In the shadow of Chapter 11 bankruptcy proceedings and in another court litigation surrounding the banking troubles of Ada’s Inc. continues. The Superior Court of Guam is where the relationship between Ada’s Inc. and First Hawaiian Bank which turned sour in 2003 has been laid out in detail in court documents.

The Superior Court case crept along largely un-noticed compared to the high- profile bankruptcy case which has lead to the sale of some prime properties to settle estate debt. Ada’s Inc. is fighting for its very existence in that case because the trustee has recommended asset liquidation.

Superior Court Case No. CV0785-02 which lawyers refer to as a lenders liability suit goes back to court for motions sometime in September. Both parties have agreed to a jury trial.

The foundation of the case dates back to May of 1997 when Anthony P. Sgro then president of Ada’s Inc. stated he was contacted by senior First Hawaiian Bank officials for the purpose of soliciting and establishing a customer relationship with Ada’s Inc. In May 1997 in response to First Hawaiian’s active solicitation and in reliance of First Hawaiian’s alleged promises Ada’s Inc. executed a loan agreement with the bank in the amount of $500 000 with an annual interest rate of 8.75%. The funds were to be used in part to begin construction of a health club and gymnasium in Hagåtña — Paradise Fitness Center.

Court documents stated Ada’s Inc. desired to further expand its banking relationship with First Hawaiian and in November 1997 executed a loan agreement in the amount of $4.4 million for the purpose of refinancing pre-existing loans with the Bank of Guam. In May 1998 another loan was consummated with First Hawaiian in the amount of $950 000 — used to refinance existing loans with Guam Savings and Loan Association.

By that time Ada’s Inc. had refinanced all of its loans with other banks through First Hawaiian and had transferred most of its deposit accounts to First Hawaiian. Because of the new relationship Ada’s Inc. was required to execute mortgages of real property and assignments of rent.

In January 1998 serious discussions and agreements for the loan to construct the Hagåtña club got under way. In June 1998 the complaint stated First Hawaiian verbally committed to finance the construction. During 1998 a prefabricated building was purchased and brought to Guam. A loan for construction of a permanent facility was closed on Jan. 21 1999 for $2.3 million.

Just prior to construction the Federal Emergency Management Agency stopped construction of the Paradise Fitness Center building at its present location due to wetlands and flood plain issues. After evaluating the issues Ada’s Inc. in consultation with its engineers and FEMA concluded that it needed to raise the building at a cost of $350 000.

Ada’s Inc. alleged during the months that followed the project halted and expenses continued to mount without a further financial commitment by First Hawaiian. Ada’s Inc. turned to the U.S. Department of Agriculture for a Rural Development Loan to get the stalled project restarted. Ada’s Inc. closed the loan with the Office of Rural development for $350 000 on August 12 1999.

It is during this time that Ada’s Inc. alleged that First Hawaiian made many promises that were not kept forced re-direction of the federal Rural Development Loan and in the end left the company with no choice but bankruptcy protection under Article 11 of the U.S. bankruptcy code.

First Hawaiian Bank denies the allegations in its answer to the complaint filed May 12 with the Superior Court.

Ada’s Inc. filed on May 31 2002 its first complaint and refiled on March 31 2004. The original case was not ruled on until July 7 2003 after Judge Steven S. Unpingco of the Superior Court of Guam recused himself citing “This court has engaged in business with one of the party litigants of this action. Thus impartiality of this court may reasonably be questioned.”

A ruling by Judge Joaquin V.E. Manibusan of the Superior Court of Guam on July 7 2003 saw the Ada’s Inc. claims of breach of loan commitment by First Hawaiian granted. Other elements of its original claims were denied thereby paving the way for a second amended filing on March 31 2004.

Ada’s Inc. stated in its March 31 filing that “First Hawaiian has continued to take petty actions designed to cause embarrassment and a loss of reputation and continued its plan to cause the financial demise of Ada’s Inc. so as to permit foreclosure on Ada’s Inc. and has continued to act intentionally recklessly and maliciously to injure the corporation.”

Several incidents are outlined in the complaint:
• In July 2003 Ada’s Inc. filed a plan in bankruptcy court that reflected an agreement it had reached with one of its creditors Citizen’s Security Bank in which Ada’s Inc. agreed to pay off its debt to CSB on the Dededo Paradise Fitness Center. This property was not subject to a First Hawaiian Bank mortgage. In exchange CSB would provide the money necessary to payoff the Ada’s Inc. mortgage on the Dededo Pay-Less building mortgaged to First Hawaiian.

The complaint alleged that before the bankruptcy court could approve this plan First Hawaiian contacted Citizen’s Security Bank in an attempt to convince it not to make the deal and asked for the payoff amount on the mortgage on the Dededo Paradise Fitness Center. FHB stated it would pay this amount leaving it with complete control and leverage over Ada’s Inc.

CSB responded it would only agree if FHB paid the amount before the federal bankruptcy court agreed to the transaction. FHB did not produce the funds.

• Also in mid-2003 Payless Markets had to decide whether to exercise its three-year option on its lease with Ada’s Inc. for its supermarket property in Dededo. The second allegation further alleged that FHB attempted to convince Payless Markets not to exercise that option but to wait until FHB had gained control over the property and could finance Payless’ purchase of it.

At the heart of the suit is the question raised before the court regarding bad faith on the part of FHB. The suit alleged FHB attempted to force the collapse of Ada’s Inc. by starving it of funds. The complaint asked “Why would First Hawaiian want to see Ada’s Inc. lose an important tenant whose rents under the lease agreement exceeds the debt service payments that need to be made?”

• In further pleadings the law firm of Calvo and Clark LLP representing Ada’s Inc. stated it believed First Hawaiian’s purpose in serving posting notices on other Ada’s Inc. properties of the financial problems of the corporation was a means of gaining control of properties not used as collateral for any First Hawaiian loans.

There are a total of 180 allegations including an alleged intentional infliction of emotional distress in which Anthony P. Sgro suffered physical and psychological damage. The complaint stated “As a result of First Hawaiian’s bad faith and heavy-handed collection efforts Sgro has been hospitalized several times and has had to seek increased psychiatric care and medication.”

Sgro is seeking an injunction against First Hawaiian Bank from collecting any assignment of rents or notes general damages to be proven at trial as well as attorney fees and costs.

First Hawaiian Bank is represented by Thomas C. Moody attorney with Klemm Blair Sterling & Johnson. In the bank’s May 12 answer to the complaint the bank stated it did receive the U.S. Department of Agriculture loan proceeds in the amount of $350 000 on August 12 1999. It was stated those monies were applied to the cost of constructing the health club in Hagåtña with the knowledge and consent of the USDA.

First Hawaiian Bank also denied all allegations that it “had or has any plan to cause the financial demise of Ada’s Inc.” As to notices given to Ada’s Inc. tenants in March 2002 the bank said these “May have been inadvertently posted on collateral not mortgaged to FHB for a very limited time. The bank stated that the apparent mistake was promptly corrected with no resulting damage to Ada’s.”

In a counter-claim for relief filed by the bank’s attorneys First Hawaiian stated that Ada’s Inc. has failed to make payments pursuant to the terms of the promissory notes as secured by the mortgages and had defaulted on its promissory notes which were thereby immediately due and payable.

The case has now been assigned to Presiding Judge Alberto C. Lamorena III of the Superior Court of Guam who on July 5 granted a 60-day extension.

Meanwhile the Chapter 11 bankruptcy reorganization case continues to move forward in U.S. District Court of Guam. (See “Ada’s Inc. sells more properties under Chapter 11 reorganization” in the May 17 edition of the Journal.) MBJ