Hong Kong and Shanghai Banking Corporation Ltd v Kallingal [2005] GUSC 13; 2005 Guam 13 (30 August 2005)

IN THE SUPREME COURT OF GUAM

THE HONGKONG and SHANGHAI
BANKING CORPORATION, LTD.,
Plaintiff-Appellant,

vs.

DR. GEORGE KALLINGAL and
DR. MATILDA KALLINGAL,
Defendants-Appellees.

Supreme Court Case No.: CVA04-001
Superior Court Case No.: CV0089-03

OPINION

Filed: August 30, 2005

Cite as: 2005 Guam 13

Appeal from the Superior Court of Guam
Argued and submitted on October 29, 2004
Hagåtña, Guam

Appearing for the Plaintiff-Appellant: Joyce C.H. Tang, Esq., Civille & Tang, PLLC fka Teker Civille Torres & Tang PLLC 330 Hernan Cortez Avenue Suite 200 Hagåtña, Guam 96910

Appearing for the Defendants-Appellees: Ronald P. Moroni, Esq., Tarpley & Moroni, LLP Bank of Hawaii Building 134 West Soledad Avenue Suite 402 Hagåtña, Guam 96910

BEFORE: F. PHILIP CARBULLIDO, Chief Justice; FRANCES M. TYDINGCO-GATEWOOD, Associate Justice; ROBERT J. TORRES, Jr., Associate Justice

CARBULLIDO, C.J.:

[1] This case arises from an agreement made during the pendency of a bankruptcy case and a lawsuit on personal guaranties of the assets held by the bankrupt estate. The issue on appeal is whether the Superior Court erred in granting a preliminary injunction stopping a private foreclosure sale on the basis of irreparable harm and likelihood of success on the merits. We find no error in the ruling of the Superior Court and we affirm.

I.

[2] George and Matilda Kallingal together own Kallingal P.C. (“Kallingal P.C.” or “the P.C.”) The P.C. was one partner of a joint venture that borrowed $1.4 million from the HongKong and Shanghai Banking Corporation Ltd. (“HSBC” or “the Bank”) in 1995. The apparent purpose of the joint venture was to acquire a sublease of land and develop a commercial property adjacent to the Tamuning Cost-U-Less known as Monticello Plaza. The joint venture entered into a sublease with the lessee of the land, originally Tamuning Capital Investment. After many more unrelated transactions, the Baptist Foundation of Arizona (“BFA”) succeeded to the Tamuning Capital Investment leasehold interest and became Kallingal P.C.’s landlord.

[3] HSBC lent the $1.4 million to the joint venture and it received mortgages on two of the Kallingal P.C. assets to secure the loan: (1) an apartment complex in Barrigada near Bello Road owned by Kallingal P.C., and (2) the joint venture’s lease on the Monticello Plaza land. In addition, George and Matilda Kallingal executed personal guaranties of the loans.

[4] On January 24, 2001, BFA filed unlawful detainer against Kallingal PC because the PC had not been paying rent. Kallingal did not pay rent, however, because there emerged a sinkhole in the parking lot that caused financial loss to the PC. Kallingal wanted to litigate the liability for the parking problem. Around this time, however, BFA itself went into bankruptcy in Arizona, so any claims Kallingal P.C. would have brought against BFA were stayed. Kallingal P.C. could not litigate against BFA, and also fell behind on its payments due to HSBC on its $1.4 million loan. HSBC therefore began pursuing its remedies under the loan documents, including foreclosing on its security.

[5] While HSBC pursued its remedies against the Kallingals, and BFA sued Kallingal P.C. for back rent, Kallingal P.C. itself filed for Chapter 11 reorganization in the District Court of Guam Bankruptcy Division in Bankruptcy Case No. 01-00161. HSBC’s foreclosure proceedings against the P.C. were thus stayed, but HSBC noticed signs of possible preferential transfers prior to the bankruptcy. Therefore, HSBC asked the bankruptcy judge to appoint a Chapter 11 trustee to operate Kallingal P.C.’s businesses, to protect against further loss to creditors. The bankruptcy judge appointed Robert Steffy, C.P.A., a panel trustee, as the Chapter 11 case trustee. Attorney George Butler represented BFA and had been their Guam counsel throughout the Arizona reorganization as well. The day-to-day affairs of Kallingal P.C. were managed by Mr. Steffy, and the creditors’ efforts were spearheaded by the attorney for the largest creditor, who in this case was BFA.

[6] Immediately after Steffy was appointed trustee, the issue arose whether to assume or reject the lease. Under 11 U.S.C. § 365, a debtor has 60 days after the order for relief in which to assume the lease, or it is deemed rejected. The Kallingals had not attended to this after filing, so the trustee immediately asked for an extension of time within which to reject or deny the lease. Ultimately, the estate rejected the lease, however, before the lease was rejected, the bankruptcy judge ordered that post-petition rent due to BFA under the lease was to become an administrative claim of the estate. At some point after the bankruptcy filing, the P.C. lost the benefit of counsel and the P.C. was unrepresented in the bankruptcy proceeding for some time. As trustee, Steffy collected approximately $120,000 in rents and other assets of the P.C.

[7] During the bankruptcy, no plan of reorganization was ever put forth. HSBC could still not proceed against its security for the loan because both parcels were tied up in bankruptcy, so it was left with only the personal guaranties of the $1.4 million loan executed by the Kallingals.

[8] In December of 2001, HSBC proposed a settlement with the Kallingals. Under this proposed settlement, the Kallingals would mortgage their personal residence over to HSBC and dismiss the P.C.’s bankruptcy. The Kallingals were agreeable to this and it became known as the “first workout agreement.” Although the first workout agreement contemplated that the bankruptcy would be dismissed, the bankruptcy judge denied the dismissal because the problem of preferential transfers had not been resolved. Thus, the first workout agreement between HSBC and the Kallingals failed.

[9]